Q1 2020 Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time Airlines will again be placed on music cold. Thank you for your patience.
Good day and welcome to this tapestry conference call today's call is being recorded.
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After the speaker's remarks, there will be a question and answer session. If he would like to ask a question. During this time. Please press Star then the number one the on your telephone keypad. If your question has been answered and you wish to remove yourself from the Q press. The pound key we ask that you. Please pick up your handset to allow opt.
Well sound quality.
At this time for opening remarks, and introductions I would like to turn the call over to the global head of Investor Relations and corporate communications that tapestry Andrea Shaw Red snack.
Good morning, and thank you for joining us with me today to discuss our quarterly results actually dacite Lynn tapestries, Chairman and Chief Executive Officer, and Joanne Crevoiserat tapestries, Chief Financial Officer before we begin we must point out that this conference call will involve certain forward looking statements with.
Then the meaning of the private Securities Litigation Reform Act, including projections for a business in the current or future quarters for 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.
We'll 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 dot tapestry dot com forward slash investors and then viewing the earnings release and the price.
I think patient slides posted today.
Now, let me outline the speakers and topics for this conference call JJ 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 F. Why 20 following that.
We will hold a question and answer session, where we will be joined by Todd Con tapestries, President and Chief administrative officer, and Chief Legal Officer, and Josh Woman CEO and brand President of coach. Following Q today, we will conclude with some brief summary remarks, I'd now like to turn it over to GE days I.
When tapestries chairman and CEO .
Good morning.
Thank you Andrea and thank you to each of you for joining our earnings call. Although this is my first as CEO . This is tapestries 77 call since coaches IPO in 2000, I still remember how exciting a was to listen to that first call 19 years ago. When I joined the call as an advisor to the company.
Having seen this journey progress over the years my principal take away relates to the resilience of this remarkable organization. The combination of a powerful brand with exceptional people and culture has enabled this company to reinvent itself to fix historical mistakes and to address new competitors and evolving consumer desires.
I've approach my first two months as CEO with an optimism born of our history and an appreciation that this history has been defined by innovation and change.
Immerse myself and day to day operations and key decision, making my experience. During this period of time has deepened my conviction that our three brands have powerful equities, the connect meaningfully with significant and distinct consumer segments globally I believed that each brand benefits from our shared set of resources the drive efficiencies and allow for.
Sharing best practices across divisions.
Excited by the work ahead of us to reignite growth by bringing on more consumer centric focus to our investment decisions and by improving our execution.
While our first quarter EPS was better than the forecast we shared with you in August embedded in our results, our external and internal challenges ranging from the situation in Hong Kong too competitive pressures to self induced mistakes, we will touch on a number of these headwinds throughout the course of this call now let me turn to results fiber.
And.
We achieved solid and consistent performance at coach this was our eighth consecutive quarters of positive comps, which speaks to how our product resonated with consumers globally, driven by brand interest and vibrancy coaches digital and international channels again led growth this quarter in fact, I recently returned from China, where all.
Coaches International store managers gathered including those from London to Tokyo to Sydney and many points in between this group and the store associates. They work with our exceptional although I am admittedly biased I believe that they are the best store team at scale in all of retail.
Turning to Kate Spade revenue performed in line with expectations the business realized a mid teens decline in comparable store sales, which reflected the product and merchandising channel challenges. We've previously identified and are actively working to address Kate Spade geographic mix is also more skewed to North America.
Then coach thus, leaving the brand more exposed or domestic market that is facing greater traffic and promotional challenges than many of our key international markets.
At Stuart Weitzman sales were negatively impacted by softer wholesale demand, which offset growth in the brands direct business that said gross margin expansion resulted in an operating loss equal to plan and to the prior year quarter.
As we look ahead, we're maintaining our total tapestry outlook for fiscal year 20, we understand that to meet this guidance, we need to continue to drive growth a coach while simultaneously improving trends from current levels, a Kate spade and Stuart Weitzman.
Our imperative is to fuel desire for our brands and make investment decisions through our consumer centric Lance we're focused on becoming more agile continuously leveraging data and technology to increase our productivity and speed to market. These improvements will enable us to fund additional brand building initiatives and to return.
Well to shareholders to this end we've commenced an in depth comprehensive and efficient review of our business to address both near term and long term opportunities.
Let us now turn now discuss results by brand in greater detail, starting with coach global comparable store sales rose, 1% in the first quarter led by outperformance in our international channels and across our ecommerce platforms, excluding the pressures from Hong Kong, which intensified over the period.
Comps were up roughly 2% the drivers of our global bricks and mortar comparable store sales were conversion, reflecting our strong product offering as well as traffic coach delivered overall positive comps across most international regions, including Europe and Asia as anticipated results in Japan research.
Wrong benefiting from a pull forward of demand in advance of the consumption tax increase which was affected on October onest are greater China business was constrained by the situation in Hong Kong. However, we continue to drive positive same store sales on the mainland as well as in Taiwan, Our international wholesale business.
Also rose on a Pos basis in the quarter.
Comps in North America were flat to prior year. Despite the negative impact of lower tourist spent in addition, while our North America wholesale shipments were below prior year in part due to timing our business at Pos increased despite fewer promotional event days were particularly proud of the brands performance in North America.
In light of the weaker mall traffic trends in both outlet and full price retail.
Looking at our first quarter progress against coaches brand strategies for fiscal year 20.
First we accelerated product innovation and disruption across our good better best price architecture in retail with introductions of tabby troop and Hadley, an outlet with the Disney collaboration along with several new styles, both sporty and functional we comped the comp and signature and both channels, particularly.
Citing was an increase in global and North America outlet handbag. A you are against a highly promotional back drop. In addition, we drove outsize growth beyond bags and are less developed women's and men's footwear and ready to wear categories.
Second we drove fashion authority through cultural relevance. Examples. This quarter include our September New York Fashion week runway show on the high line attended by Global Influencers, and a number celebrities, including actor producer and face of coach mens Michael be Jordan. In addition, we release.
Just a new dream it real campaign, which featured a global cast, including M., BJ, Yara Shahidi and Kiko Meizu horror.
More recently since quarter end, we launch a collaboration with M. BJ, featuring the enemy franchise, not ruto, which generated strong excitement and sell throughs in the men's category.
Third we injected excitement into the store experience one of the highlights of this quarter was an art of signature pop up next to the vessel at Hudson yards. We also had a coach original store takeover in New York during fashion week set to coincide with our spring 2020 show on the high line.
Coach original celebrated the heritage as a brand in a modern way with distinctive product stories, including restored vintage bags remade updates of archival styles and remix bags, which are individually hand crafted combinations of vintage coach bags. These activations not only drove strong sales in their respective locations.
But just as importantly drove significant digital engagement based on the positive reaction to coach originals and it's linked to the spring collection, we will roll out coach originals pop ops in high profile locations globally.
We're looking forward to holiday, where we can we will continue to innovate in our core families. While disrupting with new drops that include the tabby shop, the tabby shop drops to show the full breadth of this best selling style across new novelty iterations as well as our new take on our original icon the horse and carriage logo.
In outlet, we'll be launching a star wars collaboration and in both channels. We're excited about our robust gifting assortments in summary, we're optimistic about the holiday season, and the balance of fiscal year 24, our largest brand we remain confident about the opportunity for continued growth as we look to accelerate innovation and.
Relevance globally.
Moving to Kate Spade total sales declined 6% on both a reported basis and in constant currency with a mid teens comp decline offset by in part by new store distribution as well as the acquisition of the brands operations in Singapore, Malaysia, and Australia, which we have now.
Not yet anniversary.
Comparable store sales matched our expectations declining 16% on an aggregate basis impacted by the brands exposure to the difficult North American market as well as a product boyds and merchandising challenge as discussed on our August call and our bricks and mortar business average ticket was positive for the quarter, which together with the Brad.
Is relatively stable gross margin speaks to our deliberate management of in store promotions traffic comp remained under significant pressure and was a primary cause of the decrease in comp store sales on the other hand international markets continue to outpace our domestic business with positive comps in mainland China and Japan.
Turning to product and brand strategy, a Kate spade. The team has begun to address initial learnings, including broadening the product assortment in retail through increased breadth of key silhouettes and the diversity of materials in order to more fully satisfy consumer usage occasions. We're also bringing in more color a novelty for her.
Good day and beyond these are playful elements that are the hallmark of the brands unique personality and that we believe drive direct and indirect demand isn't in addition, we're evolving our marketing with a nod to the past, which we saw in the first quarter with our campaign featured Alcan Kendrick our beloved brand ambassador.
Further our spring runway show in New York Fashion week featured a diverse caster women. This show, notably the product was well received as feminine optimistic Democratic and related both in outlet as we've discussed we're heightening the overall level of innovation, including our first ever collaboration design.
And for the channel.
We expected. These actions we expect these actions to support sequential progress in comps as we move through the year.
As mentioned, we're currently in the process of an intensive review of our business. A key focus is the Kate Spade brand. Our intent is to Reengage, our core consumer and attract new customers, we need to find the right balance between sophistication witty novelty and color across all aspects of the brand our internal.
Research has shown that the consumer continues to have an admiration and affection for the brand, but we must ensure that we have product that is compelling and relevant to her lifestyle supporting supported by marketing the more effectively connects or emotionally with the brand.
Turning to Stuart Weitzman, while top line sales results were weak we did make progress on a number of key strategic initiatives in the quarter in product, we broaden our footwear offerings beyond boots, and sandals, notably with growth in sneakers in keeping with market trends, we continue to build our awareness globally.
Our fall campaign, the featured Kendall Jenner and young me garnered over 1 billion impressions. We also drove local buzz and editorial coverage in China. Following the Plaza 66 pop up launch in Shanghai and landing to cover a vote China.
As we look forward, we're working to improve our execution from concept to market simply put this means offering fashion innovation, while ensuring that we meet our high quality expectations and delivery commitments.
Stuart Weitzman has always represented a fusion of fashion and fit a key differentiator for the brand one that is highly valued by our customers. Therefore, we're addressing our challenges through investment in talent operational process improvements and a focus on the fashion sensibility of the core design aesthetic.
Then we can leverage the brands core equities to drive revenue growth and improved profitability.
To recap we delivered first quarter results that were inline with our plan and our teams are now focused on the holiday season.
These are exciting times, the tapestry and there's continued opportunity to better connect consumers with our brands each of our brands have powerful equities that resonate meaningfully with distinct consumer segments, bringing diversification to our portfolio each brand leverages tapestries infrastructure and core capabilities, including local mark.
Knowledge and a wealth of talent to drive significant benefits with that let's turn to Joanne for their financial review of the quarter and our outlook Joanne.
Thanks, Jay and good morning, everyone.
DTA 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 20.
Before I begin please keep in mind that my comments are based on non-GAAP results corresponding GAAP results and the related reconciliation can be found in the earnings release posted on our website today.
In addition, as noted in our press release beginning in fiscal year 20, we're presenting the impact of foreign currency gains and losses within other expense in 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 Jay mentioned coach showed continued momentum with global comps increasing 1%.
Kate Spade revenue declined by 6% with comps decreasing 16% inline with our projection well Stuart Weitzman sales decreased 9%, reflecting softer wholesale demand.
Gross margin was down 20 basis points in the quarter, primarily due to FX headwinds that coach.
In addition, gross margin results reflected incremental pressure related the terrorists.
Principally at Kate Spade, given the brands higher penetration of ready to wear and jewelry, which are primarily manufactured in China.
It's Stuart Weitzman gross margin expanded significantly driven by channel mix with the growth and direct sale.
Asked DNA for the quarter was even with 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 cost originally planned for Q1 now shifting into the second quarter.
Favorability and ask DNA was partially offset by an FX loss in the quarter, primarily related to the devaluation of the RMB.
Earnings per share 40 cents was ahead of our guidance of 35 to 37 cents.
During the quarter as highlighted in our press release across tapestry.
We added a metaphor locations driven by international expansion at Kate Spade and Stuart Weitzman.
We ended the quarter with 1500 44 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 and 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 $75 million last year.
Now turning to capital allocation.
And 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 inconsistent 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 prior year.
This guidance incorporates continued low single digit comp growth at coach.
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 and gross margin as well as mid single digit increase in SGN a growth, including the shift in timing of expenses from the first quarter.
We expect earnings per share to be 95 cents to one dollar 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.
Gross margin for projection now also incorporates the impact of known U.S. tariffs on imports from China, including the 30% tariff on handbags and small leather goods enacted on October onest as well as the 15% tariff.
For categories, such as footwear ready to wear and jewelry.
For context, we have a diversified manufacturing base in our exposure to China is relatively limited for handbags, and small leather goods, where we've migrated our progress 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 SGN 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.
Cross 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.
Stuart Weitzman, we expect to open a net of 15 to 20 locations globally.
And it Kate Spade, we're projecting 30 to 40 net openings in this fiscal year.
In closing, we're focused on sharpening our execution and delivering our financial plan with the important holiday season underway.
As GE. They discussed we're working to address both near term and long term opportunities with the consumer centric mindset.
We're 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 QNX.
Thank you once again, if you'd like to ask a question. Please press Star then the number one on your telephone keypad did your question has been answered and you wish to remove yourself from the Q press. The pound key our first question comes from the line of Bob Dribble of Guggenheim.
Hi, good morning.
I guess my first question Judy 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 youre.
Terrific Good morning, Bob and thank you for your question.
Let me address it graphs, both through a rear view mirror perspective, as well as one that is forward looking.
So as noted 60 days in.
And my perspective, I believe it's Alan somewhere between realism.
We take a look backwards for just a moment we did what we told you we would do we delivered and inline quarter and the starts 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 dividends and this represents an increase of 40% year on year and underscores our commitment to returning capital to our owners and then lastly backwards looking.
Maintained our outlook for fiscal year 20, even in the face of internal and external headwinds such as Hong Kong.
That said you know looking forward, we need to sharpen our focus on execution and as such we're asking a lot of hard questions here internally.
Principles for us our focus on driving organic growth and you heard me say a number of times in my prepared comments and you heard Joann also reiterated.
Very focused on being consumer centric and what we mean by that.
Really mean that we need to ensure that our core consumer is at the heart of everything we do.
The marketing to store design.
And 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.
Tell relevant brand stories that really nexstar consumers with the values of our brands.
The second real area of focus is on as you drive growth How'd, you really ensure that you got operating leverage in the business. So how is it that we can become more agile more efficient and really do believe that there's an opportunity to better leverage data and technology to increase our speed to market.
We also need to be more efficient frankly.
And yes, and productive across many different areas from market strategies.
In terms of concept the 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 and that we can distort in terms of investing more in brand building at the same time is returning capital to our shareholders.
More specifically to your two part of your question on our multi brand strategy. What are the things that clearly we're very focused on how to unlock even further benefits of our multi brand model and I very much believed that our brands are stronger together as a result of our shared platform.
This said, yes, let's let's acknowledge it tapestry is a relatively young multi brand company and we're doing a lot of work better define.
Once between corporate and brand functions and do so in a way that's appropriate to our brands into our culture.
So that agnostic work has just begun.
It's one that we're moving forward with quite rapidly and we want it we want it included relatively soon so that we're in a position to address both near term and long term opportunities.
Clear that we face a number challenges and were clear about those challenges.
Same time, frankly, we're confident.
These challenges are fixable.
Yes.
The solutions are largely within our control. So as we go forward, we're committed to being transparent in our communications and we will openly acknowledge where we see issues.
At the same time are going to move very swiftly apply the learnings from the work we've done in the learnings from just the deep experience in this Oregon.
Thank you Bob.
And if I could just second question.
I think the guidance is for sequential Kate spade improvement in comps.
Quarter I'm, just wondering if you could just give us a read in terms of your confidence in there or what are the key drivers that you're seeing within that business you know on the sequential improvement expected. Thanks.
Absolutely Bob and hopefully.
Nothing of not consistent on that front in terms of being very focused on our product architecture in terms of broadening that being very focused on our merchandising. So introducing more color for example, an outlet.
Really working to find that right balance between sophistication and equal witty elements in our product and in our marketing and in our store environment that are consistent with the brand. So it's a lot of.
Yes, very fundamental steps in terms just broadening the reach of that.
The brand in of the product the business.
In the interest of time, we ask that you. Please limit yourself to one question only your next question comes lineup for child of Wells Fargo.
Hey, good morning, everyone.
So my one question will be regarding the progress Kate Spade, So 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're trying to think about the inflection in the business that is going to loom at some point.
Did you would you expect to see comps inflict the positive before we're able to see kate's margins stabilize or could EBIT margin actually begin to improve head of comp growth just trying to understand the cost side the pricing side, just basically what's what's going on at the brand overall.
I think you cut out just a moment you mind repeating the second half of your question I got the first half in terms of.
Do you mind repeating the second.
Yes, I was just basically asking is it possible that we could see the Kate Spade EBIT margins stabilize ahead of comp growth I'm, just trying to understand on the cost side and pricing like how do we think about EBIT margin inflection in relation to comp inflection.
Understood. So a couple of things first of all.
We are we are calling for a sequential improvement.
At the year unfolds, and particularly in the second half of the.
The year.
Footwear will be additive to the business as we brought in license in the second half for the year.
And in terms of.
Calling specifically positive comp or.
We're calling margin enhancement, that's not something that.
Hard to do at this moment.
And I can jump in.
Our guidance does reflect sequential improvement indicate business as we see those merchandising actions really gained traction as we move through the year.
We expect some gross margin challenges.
Good.
Hair pressure, which is more exacerbated indicates they ran based on the penetration of ready to wear and and footwear and jewelry, which are manufactured in China. Although we are working on diversifying our sourcing.
And that brand there there are near term pressures related terrorists.
Well, it's where in house, although it will have a top line.
It will have.
Versus a license agreement.
Margins.
And then.
Some heightened promotional activity as we cleared through some inventory levels at Kate So that's the near term story.
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, it's on the coach brand and it can be there.
Referenced the North American business, but flat could you share kind of what you thought between full price and outlet during the quarter and then what did tourism into the North American market look like that quarter in context relative to the prior thank you so much.
Thank you, Josh, Yes, I'll take that one.
Turning Aaron.
Yes.
As we said.
The North America market was flat this quarter and.
Given the.
Trends in.
Retail an outlet mall traffic, we were pleased with our ability to.
Form the mall traffic in both of those relevant factors and we did that through.
A variety of.
Yes.
You can see the there was an acceleration in our strategy around collaboration and we saw that when we do those.
Those tend to drive.
Inflection in traffic, particularly in the outlet mall, we saw that.
Disney.
In July we had.
Yes.
So in August .
And so we've been getting better at executing those and we see the traffic comp.
Yes.
Also mentioned something on the horizon.
Our Big Star Wars collaboration.
Which will be hitting in advance of Black Friday. This year. So that's something to look forward to on that front.
Your question about tourism tourism has been up.
For all of fiscal 19 and that trend continued into Q1 to the traction that we've seen.
In North America retail an outlet.
Primarily through the domestic customer.
Your next question comes from the line of Alex Wallace 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 the coach brand continues to deliver solid results in North America. Despite challenges seen elsewhere can you comment on the backdrops consumer spending and overall retail traffic, you know where OE versus where we are three 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 plate.
However, the traffic has been challenging consistently.
True.
Fiscal 19 and into Q1 and whether that retail.
Or the outlet malls, the traffic has been tough and so that really speaks to the execution of the team.
In how they are driving excitement so that we get an outsize share of the traffic that is coming to them all.
And increasingly.
Summer shopping.
In an omni channel ecosystem and engaging.
Line, where we're seeing very robust growth and yeah. When we talk about the digital growth out.
And international growth outpacing a lot of that digital growth is happening in North America.
Your next question comes from the line of Oliver Chen of Cowen and company.
Hi, good morning.
Today regarding.
Regarding to the.
The brand architecture, Kate Spade, what's your hypothesis regarding balance and thinking about product for them and entity novelty and as we seek to understand the opportunity ahead at Kate Spade would love your thoughts.
One thing that change.
'cause it's different things that are happening you know whether it be silhouette.
Option.
Looking about.
The speed of execution.
Thoughts on how how this one full than how you're thinking about timing and what should come or winner versus later.
You also test read and react in the marketplace. Thank you.
Thank you.
So let me let me just make and overall comment about Kate because your questions come up a number of times and and we talk a lot about and you know you've heard us in both Joanne and be talking our opening comments and Josh.
Last response about kind of brand equities.
Connecting consumers emotionally with these values.
As you know that's a process that is part science in part art.
It's also a 100% experience and it's one where when you look at a premium fashion brand you do not turn it on a dime and so if you go back six or seven years, when we had over extended the coach brand the process of rebuilding the health of that critical brand did not happen overnight.
And I saw personally remember how there was a period of time after we've taken some dramatic steps to reconnect the brand with its core consumer when we did not immediately see green shoots. So we had two at that time have confidence in the relevance of our brand values and experience of brand building.
And in many ways Oliver This is where we are met today with with Kate Spade.
Since acquiring the brand we changed both accretive in commercial leadership of the brand.
We understand what the process is for for building brand health and growing the business and we also as part of that we understand that it's not a straight line, but it's one that we believe will you know we will get right. It's just it's part of our DNA and I got.
We really believe we're not selling ourselves stories, we're not telling you stories when we look at the core pillars of this brand and we see a lot of white space a lot of alignment with the values. The desires of a large group of consumers globally. So the brand work we've done.
And more recently done with the help of some outside consultants since I became CEO is only.
Firmed and deepened our internal analysis in terms of just the the size of potential market.
That really has a alignment with the Kate Spade brand pillars. So you know as I said earlier, we're working with premium fashion brand positioning yourself for sustained growth has not happened in a straight line.
Process, it's a process that we know well and it's a process that we're confident that we will get right.
There are number of near term tactical steps that we're taking including adding more novelty to the product line broadening the assortment in specialty, particularly around satchels more innovation in outlet, but all of those RCR or steps are durations, along the way towards a process that we've been through before.
And that we're confident we will will ultimately get right.
Your next question comes from the line of Mark Altschwager of Baird.
Great. Good morning. Thank you wanted to ask a question on coach. So recently the coach comp has been led by international.
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. It's overall I'm just trying to better understand your level of confidence in 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 and we understand that there will be puts and takes.
Given.
The macro.
But we're confident in our guidance.
Your next question comes from the line of Paul Trussell of Deutsche Bank.
Good morning, Thanks for taking on question I wanted to ask about gross margins.
Perhaps first starting with.
Just reported quarter, maybe break down for us some of the puts and takes across FX product sourcing costs.
Six and days of promotion.
In terms of the overall companies and specifically the coach.
Banners GPM and how should we think about those same puts and takes looking forward.
Yes.
Paul jump on that the the gross margin. It makes sense I think this aggregate by brand to talk about what happened in Q1.
In the coach brand gross margin performance was primarily driven by FX. So the decreased gross margin.
Pramac promo activity was up a little bit, but much less than what we saw in Q4.
And Kate Spade.
Gross margin performance.
It was fairly stable year over year.
Far less promotional than we had been in Q4, we were very focused on carefully balancing promotional activity and brand health and the Kate Spade Brandon that continues to be a focus as we look forward.
Stuart Weitzman, we saw significant increase in gross margin, primarily due to the channel mix with the increase in direct business due to the impact of the distributor buybacks that we've invested in a new store openings.
That we've seen there so that was the story for.
First quarter as we look to gross margin for the year.
You know 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 case, they we continue to see.
Pressures as we right sized inventory, so there'll be some promotional pressures and some pressures related to Paris, as I mentioned before and related to bring footwear in house, which you know again.
The change from being a license business to bringing in house.
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.
Good day as a follow up to the multi brand question and maybe you could talk about your assessment of some of that kind of 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 technology 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.
A couple of comments there.
First in terms of broadly some of the benefit for the multi brand and then we'll talk to more specifically to digitally but.
As as you've likely heard us talk about before first it's just a diversified earnings stream reduces the pressure on.
Just to be overly reliant on any one brand.
To stronger were stronger when dealing with landlords.
Whether buying marketing.
Advertising.
And as well as creating or more robust platform for top tier talent to want to be on.
And so that that is those are some of the benefit as as you've heard us talk about in earlier calls. We've also talked extensively about our data labs capability that we built now over time that allows us to both take a very deep database.
And leverage the insights from that database everywhere from marketing to two promotional cadence.
To to really thinking through our brand alignment in terms of products.
As well as well as well as.
Store environment.
Our new Chief Digital officer.
You know is really brought a lot of capacity to bear.
In terms of thinking through an enterprise plan that allows us to drive.
Of efficiency across the platform. So so we're actually one of that one of the key aspects of the work we're doing right now in terms.
Gnostic work is very focused on how to better leverage our digital.
Capability.
And that literally everything from thinking about strategic partners with people such.
Entities, such as T mall, and how do we deepen that just thinking about other ways. So in an omni channel world a meeting our customer where she or he.
Most most looks to to engage with products and there's some I think one of the benefits of this combination that we talked about have experienced management with new leaders coming in is that there have been certain.
Certain aspects of digital.
I have spent a little bit more.
Out of.
One.
Organization was less willing to engage with that we're very much open to thinking about how whether or not it makes sense for us to engage with leverage as part of driving driving the topline growth of this business.
Building on what.
What Judy mentioned I think a great example of this is our work with T Mall.
As we've mentioned we recently launch.
On T. mall with Oh.
Launch.
In September .
And and we've seen a terrific.
Results.
With.
90% of the customers being new customers to the brand and.
With Knowns partnership.
We're going to be able to.
More quickly.
Leverage should those learnings across not just but the other brands.
So yes.
There's a lot of work.
Here on how we can.
Leverage insight from each other's digital activities for the greater good.
Your next question comes from the line of Michael Binetti of Credit Suisse.
Hey, guys. Thanks for taking all of our questions here.
Let me just sq on.
I'd love to know if you'd be willing to share whether the brands are trending today inline with your outlook for the quarter.
The low single digit for coach in high singles for Kate.
And whether that includes the.
The negative snap back in Japan that you guys as seen in the past after some of the change the spike and the change in the tax rate.
But I guess, but bigger picture point, though on on coach on the coach brand in the leverage point, there I have to say with that brand spend remarkably consistent through good times and bad.
As the leverage point on that brand now you've done a nice job growing same store sales for the past few years in that low single digit rate, but the margins have been up every year, how do you think about the.
Sustainability of that dynamic given some of the natural inflation in that business.
Absolutely. So why don't I started and then Josh you may want to jump in.
Our first it's early days in the quarter and our guidance that we've given the terms of full year guidance is predicated on our current view in terms outlook for the quarter and beyond so.
I wouldn't say a lot more than that but want one comment I'll make in terms of just coach and the opportunity there.
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.
To to drive organic growth there to even more closely align the the core brand values with where we believe consumers are today and where consumers are going so if anything up some of the early days of the work that we're doing would suggest that there is greater.
Opportunity there as opposed to I think was implicit in your question in terms of the opposite of that.
So all comments actually on both aspects of the question just a few thing 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 coaches appearance as the first option or luxury brand in the Macy's Thanksgiving Day parade.
And.
All of that we'll be watching on Thanksgiving warning as our math resi.
A slow down.
Broadway and I think that's an example of.
The power of coach.
Which is a powerful brand is always stood for inclusivity.
And how we can even more fully own that.
In the culturally relevant way, we're we're pleased with coach.
The eighth we start with is a well run machine.
27% operating margins today, and as we think about.
That 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 best right.
This quarter.
We specifically called out our handbag a you are in the outlet channel. We know a lot of you hit the journey with US here, particularly in North America, and we're so pleased with.
Progress.
Our teams are making on introducing new differentiated product.
But also leveraging some of the insights from our data lab.
In terms of announcing their promotional strategies to drive.
Hey, you ours, so innovation or is key because leather goods are today and will always be.
Our of coach.
Secondly, I 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 drive a lot of traffic and sales or.
She day mentioned in his prepared remarks.
A collaboration with Michael Jordan into rudow, 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 in product our acceleration categories.
And we've said that there are.
Opportunities for us in footwear.
In mens and to a lesser than he ready to wear all of which are important focuses for us and you'll be hearing more about.
Our important.
Footwear launch of the city soul.
A family.
Which will launch in spring.
So diesel is a new.
Sneaker and hybrid.
Category to be clear.
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.
Change relative to last year.
Yes.
I'll I'll say this.
We.
We don't we don't anticipate any significant shifts in our marketing spend.
As we go forward.
And although we are one of the conversations that we have had lot of discussion on internally in the mix of performance versus brand building.
And and.
If you.
Take a look at at last year second quarter, we didnt 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.
So my one question bigger picture.
Today and over the last few quarters, we've been discussing the.
The weakness and you've got a really nice job outlining the initiatives. Your ticket you undertaken to drive better results exceeded the even coach but it's good question I have is if we step back.
How much of the weakness in the bags and again this is mostly Cape even to research and coach do you think is a function of.
Internal missteps versus some shifts.
In the competitive landscape then the other question on top of that is is there still within the context, if youre multi Brad.
Strategy is there still enough differentiation between.
It should peak that they're not cannibalizing one another thank you.
Thank you and in many ways. Both both questions are I think asking the same question in two different ways, but.
The work that we are doing.
Is really intended to make sure. It first Pete part of it is to really make sure we get underneath the brand equities and that we have real clarity as to the distinct consumer basis for each of the brands and the work we've done so far built on top of internal work. That's been done does underscore that they are distinct.
Umer basis, and as such we think as we act as we execute against against those consumer bases that you will see.
Even probably greater distinction between the positioning of the products in the brands.
Between each of the brands.
That said inherent in that is a view that the Kate spade brand and sorry to repeat myself, but the Kate Spade brand.
Does speak very clearly to a substantial core consumer if somebody who is looking for fashion looking for fun who's looking for feminine product and we think that there is a reasonable amount of white space around that positioning.
It's real opportunity for that brand. So so we're optimistic but also mindful of the the real work ahead of us to more fully achieved them potential.
We have time for one more question. Your final question will come from the line of Paul Lashway of Citi.
Hey, Thanks, Gary you guys have talked about some industry headwinds facing the business I'm curious, which you consider to be the greatest pressure points.
In that North America business, maybe talk about by brand them. If any of those headwinds are actually showing some signs of improvement or are they potent against you even further thanks.
Right. So why don't we the big the big headwind that we talked about is traffic here domestically and largely driven by a falloff in tourist tourism.
But why do we perhaps start with coach and then we can you can talk as appropriate about the other brands, yes, I think we touched on it earlier.
You know we are over all were geographically agnostic.
In terms of.
Where were where we're recognizing the revenue so you know traffic at or tourist traffic trends.
And flow over time.
Thirdly, they have impacted North America now.
For a ongoing period.
And that really just forces us to be sharper on our focus for the domestic customer.
And how and how do we get better serving the domestic customer I think.
You know historically.
We may have had.
Stores.
That were more.
Tourist centric and those ones are are being challenged at the most but even in those locations.
How do we focus most on the domestic customer and what we find that her.
Shopping habits are changing so.
When it's a domestic customer she is more often to start or shopping journey online and wants to continue that in the store channel. So how do we become more symbiotic between those channels.
In catering to the evolving needs of the domestic customer really is one of our biggest focuses.
And just very briefly in terms of Kate spade traffic trends are consistent there. So nothing really different to say there and on Stuart Weitzman that challenges the historical one coming out of our supply chain.
Lunges, which had an impact on our order book with at wholesale which were very very much focused on on addressing.
Thank you for the question.
That will conclude our Q, an A.J. turn it over to you for some brief closing comments terrific. Thank you Andrea I wanted just take a moment to bank our shareholders. We're 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.
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.
Grateful for the opportunity to work with each of you.
Thank you.
Thank you for participating and this tapestry conference call. You may now disconnect your lines and have a wonderful today.
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