Q2 2020 Earnings Call
[music].
Good day and welcome to this topic Street Conference call. Today's call is being recorded all lines have been placed on mute to prevent any background.
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After the speaker's remarks, there will be a question and answer session. If you wish to ask a question. During this time. Please press Star then the number one on your telephone keypad. If your question have been answered and you wish to remove yourself from the Q press the pound key.
At this time for opening.
Our remarks and introductions I would like to turn the call over to the global head of Investor Relations and corporate communications at top of Street, Andrea Shaw Bresnik.
Good morning, and thank you for joining us with me today to discuss our quarterly results are a few days idling tapestries, chairman and Chief Executive Officer and your.
When cobots are at temperatures Chief Financial Officer before we begin we must point out that this conference call will involve certain forward looking statements within the meaning of the private Securities Litigation Reform Act, including projections for 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 an important factors that could impact our future results.
Felton performance.
Non-GAAP financial measures included in our comments today and in our presentation slides you may find the corresponding GAAP financial information as well as the rent related reconciliations on our website www dot tapestry dot com forward slash investors and then dealing the earnings release.
And the presentation slides posted today.
Now, let me outline the speakers and topics for this conference call do they will provide an overall summary of our fiscal second quarter twentytwenty without for tapestry as well as our three brands Joanne will continue with details on the financial and operational results of the quarter as well as our outlook for <unk>.
Slide 20, following that we will hold the question and answer session, where we will be joined by Todd Cohen tapestries, President and Chief administrative officer, and Chief Legal Officer, and Josh Showman, CEO and brand president of coach falling today, we will conclude with some brief summary remarks I'd now like to turn it over did you days Island tapestries.
Chairman and CEO.
Good morning, Thank you Andrea and thank you to all of you for joining our earnings call. This morning, we reported our fiscal second quarter results, which exceeded our plan. Our outperformance was driven by continued momentum at coach and a significant sequential improvement at Kate.
Fade. In addition, we exited the quarter in a good inventory position.
We also entered our third fiscal quarter with strong underlying trends, notably a coach and sales growth accelerated for the holiday period. Therefore, we had originally anticipated maintaining our fiscal year 20 guidance.
Despite continuing headwinds in Hong Kong and challenges at Stuart Weitzman. However, the escalating I'm krona virus outbreak in China is now impacting our business, resulting in both significant traffic declines and the closure of the majority of our stores on the mainland.
As a result.
We now expect that the second half of our fiscal year could be impacted by approximately $200 million to $250 million in sales and 35 to 45 cents in earnings per diluted share given the current trends in China, if the situation further deteriorates worthy.
Further affects demand outside the country this impact could be worse.
Our primary concern is the health and wellbeing of our team their families and their local communities. We're dealing with the daily realities that this situation, we believe and the resilience of the Chinese people and our view the China represents.
A significant opportunity for our brands is unchanged.
We are confident in our ability to effectively operate through this period of uncertainty. It is worth noting that during our 20 years as a public company, we successfully faced myriad macro and geopolitical dislocations from the great recession in 2000.
Nine to 911 to Sars and to the Fukushima earthquake and tsunami in 2011, we have consistently emerge from such turbulent period, a stronger company, our strong balance sheet cash position and diversified sourcing base and supply chain afford us the flexibility.
Who operate our company for the long term and to emerge stronger as we have many times in the past.
Let me turn to the second quarter results by brand, we achieved another quarter of solid and consistent performance a coach. This was our ninth consecutive quarter of positive comps one that was driven by.
By increases in handbags average unit retail, where a you ours in both outlet and retail.
This speaks to how innovation and brand strength drives value as as our products resonated with consumers around the world.
Coach's global digital channels led growth this quarter while.
Certainly North America outpaced our international business is in the aggregate.
Turning to Kate Spade revenue was better than expected, we realized a mid single digit declining comparable store sales versus expectations for high single digit deep or high single digit decreases as we actively work to.
Yes, merchandising and product challenges. In addition, we moved through excess in her inventory using higher levels or promotions. During this typically markdown heavy holiday period.
That Stuart Weitzman sales declined despite strong growth in mainland China demand was soft in North America and across.
Other regions that said the gross margin expanded significantly and resulted in operating income in line with the prior year.
During the quarter, we completed the comprehensive review of our brands and business that I described on our on our last earnings call. This diagnostic work has provided.
An important insights into where we need to focus to build sustainable brand health and growth.
There is no silver bullet rather there are a handful of important changes that when aggregated will prove transformational we will change key aspects of how we work.
There are three major areas weve.
Densified that we'll have the biggest impact on our business consumer Centricity data driven decision, making and how we work to drive the successful development and implementation of changed business practices, we're forming a project management office, which will ensure that our objectives are clear that internal.
He might have the resources to succeed and the multiple activities are coordinated.
While we're not ready to share the specific plans at this time, we do have increasing clarity as to the opportunities. We intend to go after and we look forward to sharing our plants in detail at an analyst and Investor day. This summer.
Before I mentioned additional details about our holiday performance I want to touch on our leadership announcement. This morning, which detailed a number of changes to the company's senior management team.
First I'm pleased to announce lives Frazier as CEO, and Brad and President of Kate Spade lives brings over 30 years of industry.
Variance and leadership to tapestry, having served as president of Lafayette, 148, CEO of and Cline and before that president of Mark by Marc Jacobs, where she built out business into a multi channel multicategory global lifestyle brand as CEO and brand President.
This will lead all aspects of the brand globally working closely with creative director nickel, a glass and the brands leadership team.
I'm confident the loses leadership style combined with our strong track record of getting things done will translate into great outcomes for our Kate spade team and business.
Or.
Oh Plateau, CEO and brand President of Stuart Weitzman recently informed us of his decision to leave the company I'm grateful to enter although for the enthusiasm and dedication he brought to Stuart Weitzman and I wish him every success in the future at Aldo will depart on March 1st and I'm pleased to promote an internal.
Successor.
Giorgio Saar Nay currently President Tapestry Asia, and President and CEO coach, Japan, and Asia has been promoted to CEO and brand President of Stuart Weitzman.
Partnering closely with head of product design, and Mundo Castillo Giorgio will be responsible for all.
All aspects of Stuart Weitzman globally.
George you join coach in 2013 in New York and since 2016 has done an excellent job leading coach in Japan, and overseeing operations in Korea and other markets in Southeast Asia. He is a passionate and strategic leader, who I have great confidence.
Since will lead Stuart weitzman into a new future.
Emmanuel grew law and currently Vice President General manager Tapestry Southeast Asia, and Oceana will succeed Giorgio as President of coach Asia, which includes Japan Korea, Southeast Asia, Australia, and New Zealand.
I'm also pleased to announce the Yon Boesak currently president tapestry, China, and President and CEO coach China will take on the tapestry leadership role across Asia Pacific. In addition to his existing responsibilities yon join coach Japan in 2008 and has been instrumental in the.
Ends development and growth in the Asia region, notably its success in China. Most recently he guided the integration of both Kate Spade answer Weitzman's, China operations onto the tapestry platform.
This organization has the opportunity to capitalize on the significant opportunities that exist for each of our.
Hands and I'm delighted to have Liz Giorgio add yon join our tapestry Executive Committee.
Now, let us discuss results by brand in greater detail starting with coach.
Global comparable store sales rose, 2% in the second quarter led by outperformance in North America and more Gener.
Earlier cross our ecommerce platforms in aggregate our international businesses were even with prior year with strong comp growth and other Asia, Europe and mainland China offsetting continued weakness in Hong Kong.
As anticipated the Japan comp decline slightly reflecting the consumer tax increase which.
Went into effect on October Onest.
Excluding Hong Kong Global comps were up roughly 3%.
The driver of our global bricks and mortar comparable store sales was ticket or a DT, reflecting our a you are increases achieved through new product development successful launches at higher price points and outlet.
And lower levels or promotional activity.
In addition, while our north American wholesale shipments were slightly below prior year, our business at POS remained strong despite fewer promotional event days were particularly proud of the brands performance in North America in light of the weaker mall traffic.
Trends.
Importantly coaches momentum in North America was evidenced by our U.S. brand tracking survey fielded in December which showed strength in positive brand affinities. Among the broad premium market. We're pleased to see the perception of coach has a brand on the way up increased significantly.
And match fiscal year, Thirteens, all time high making it a standout within our panel.
Now looking at our second 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 the introductions of additional colors and seasonal materials of tabby and the launch of our Horsing carriage logo platform alongside newness in signature in outlet. We successfully drove a you are with a relaunch of our top five bags styles.
Each style received fresh design details and.
The increased functionality such that we were able to command, a 10% to 15% premium versus their previous counterparts.
With these new courses in place, we layered on new fashion introductions to drive silhouette newness and to respond to market trends.
Access of this initiative gives us the confidence to further.
Our lean into the opportunity to reduce promotional activity drive higher prices and protect gross margins in the outlet channel.
In addition, during the quarter, we continue to drive disproportionate 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 and created brand moments around key global events specific examples tailored to local markets. This quarter included our participation in the Macy's Thanksgiving Day Parade in fact, the coach float was the first for a luxury fashion company and.
Featured singer an actor Billy Porter.
In China, we celebrated double 11 previously known as singles day with compelling digital content featuring local talent.
Overall, we generated a very positive response for our global digital content, including our holiday campaign, featuring Cree boss.
Eric Shahidi and a diverse mix of personalities. The garnered nearly 1 billion impressions as you likely noticed in mid November we announced Jennifer Lopez as a global phase of coach while her official partnership with the brand begins now in the spring 2020 season, she began posting during the second.
Order driving significant pause around the brand.
Third we injected excitement into stores, bringing both creativity and convenience into the shopping experience. We continue to drive traffic through our store takeover and pop up strategy involving nearly 80 installations during the quarter, including.
Many dedicated to the launch of the coach X, Mike will be Jordan capsule collection in October and the horse encouraged collection in December in outlet, we kicked off preholiday excitement in November with disruptive Activations round, our Star Wars collaboration.
On the digital innovation and ecommerce front.
We piloted the loves scan save in store digital tool in over 50, North America outlet stores during the quarter.
This tool allows the customer to use their smartphone to scan product to instantly see the out the door price at favorite items to their bag and skip the line for very.
Faster checkout, we're encouraged by early results and customer feedback.
And in China, we built on the momentum from our soft launch on T Mall earlier this year with our official Grand opening in December where we ranked highest amongst global brands in the handbag category, while continuing to see growth across.
<unk> other E commerce platforms, including our own coach Dot Com and on we chat we estimate the nearly 90% of team all customers were new to coach.
We're looking forward to spring with our first campaign, featuring Jennifer Lopez, while we continue to partner with Mike will be Jordan as.
As the face of coach mens in retail we will launch two new handbag families and we will showcase coach's heritage with the global rollout of coach originals grounded in Leathercraft reintroducing archival shapes with a nod to the past through a modern aesthetic.
Outside of handbags, we're very excited.
Sided about the launch of the dual gender city sole sneaker collection that mergers coaches fashion authority with technology to increase comfort and flexibility and to minimize impact and weight.
For the first time and over three years, we're dedicating significant marketing investment to the footwear category with out of home.
Digital content and pop ups.
In summary, we remain optimistic about our ability to accelerate coaches growth over the long term.
Moving to Kate Spade total sales were even with last year on both reported and constant currency with a mid single digit comp decline.
Offset by new store distribution.
Comparable store sales were ahead of our expectations and improved sequentially declining 4% in aggregate as we move through excess inventory and began to take key product and merchandising actions to optimize our assortment and to enhance the brands novelty offering.
And our bricks and mortar business conversion was positive for the quarter helped in part by higher levels of promotion, while traffic comp remained under significant pressure.
Our international markets continue to outpace our domestic business with positive comps in mainland China, Europe, and other Asia, while our global.
Dot com channels, we're also positive.
Turning to product and brand strategy, a Kate spade as mentioned on our last call our strategy for holiday was to broaden the product assortment in retail to satisfy more usage occasions and to add backs fun color and novelty as a result, we saw.
Strong performance in our expanded satchel offering as well as an holiday giftables and jewelry.
Collaborations, particularly many mouse in outlet and Tom and Jerry in both channels resonated strongly with customers, our cats group and novelty tiny elephant bag additive touch of whimsey over the holiday.
In marketing our objective was to establish the brand as a global gifting destination through compelling and impactful content and collaborations with a focus on digital.
Post Black Friday, we increase our spend on digital to drive traffic to our dotcom site and generated significant growth in new and.
This in customers in December our holiday gift Guide was also a notable wins in North America with significant gains in spend year over year.
In outlet as we've discussed we've been increasing the overall level of innovation and we'll have a focus on prince novelty and fashion in the second half.
Looking ahead to spring in retail, we will continue to add newness and satchels, while expanding our cross body offering in keeping with the hands free trend in the market in both channels were excited about the footwear opportunity as it comes in house with the first designs having arrived with the February floor set we've developed.
Writing initiatives for both Valentine's day, and mother's day, adding new brand spokespeople in the marketing mix, such as the artist and Poland poet, Cleo Wade and the Japanese comedienne, an icon Naomi watts and Abhi.
In aggregate, we expect these actions to support an improvement in comps in the.
Second half the year versus the first half as a brand should be less impacted by the Corona virus outbreak given Kate spade relatively modest exposure to the Chinese consumer globally.
As mentioned, we've recently completed an intensive review of our business our intensive Kate spade.
Is to Reengage, our core consumer and attract new customers by building. The next generation platform for women self expression empowering individuality, we recognize the multi dimensional nature of our customer we will return to being the brand that enables her deliver life to the fullest from celebrating her own.
Drill style to creating a positive and enriching community to implement this strategy, we need to balance sophistication emotion wit novelty and color all across all aspects of Kate our customers still has a wealth of goodwill towards the brand, but we must ensure that we have product that is compelling and.
All of inter her lifestyle supported by marketing them more effectively connects or emotionally with the brand.
With Liz Frazier at the helm, leading to strong team in place, we will crystallize our brand pillars define clear brand territories and create an action plan to drive growth.
Turning to Stuart Weitzman.
Appliance sales remain weak we continue to experience soft wholesale demand, while our direct business also underperformed our expectations as we were unable to fully offset traffic challenges through increased conversion China did continue to outperform with positive comps. We also generated a significant improvement in gross margin.
Margin, which enabled operating income to match prior year levels.
In product, we lack distinctive newness in our heritage booed offering to drive an improvement in sales. However, we were encouraged by the consumer response to our key introductions, such as the Mckenzie boot and the Nietzsche a pump out.
Side of footwear, we drove handbag sales with the new 50, 50 bucket bag and nod to the iconic boot of the same name.
In marketing, we continue to build our awareness globally with our first ever Stuart Weitzman holiday campaign, which featured Misty Copeland total impressions reached nearly.
One of the half billion globally as we entered the third quarter, we gained unprecedented exposure from our time square Billboard on New year's Eve with one and a half million people in times square and over 1 billion Global live broadcast viewers.
Looking forward, we have built on these learnings that are reinvigorating our footwear.
Hi cause through extensions in colors materials and hardware, while injecting innovation into the overall assortment in keeping with market trends for spring we've concentrated on sandal innovation beyond the new does family with an expanded assortment of last wedges and meals.
Stuart Weitzman.
As always represented a fusion a fashion and fit a key differentiator for the brand one that is highly valued by our customers. Our diagnostic review has reaffirmed the store Weitzman has a strong and distinct brand proposition at the gateway to luxury with considerable whites with considerable white space above it.
It has a distinctive heritage and DNA melding European luxurious Fedex and craftsmanship with American practicality and comfort.
We're now addressing our challenges through investment in talent operational process improvements and a focus on the fashion sensibility of the core design aesthetic.
I'm confident that under Georgios leadership, we can leverage the brands core equities to drive revenue growth and improved profitability long term.
To recap we've delivered aggregates second quarter results. There were ahead of our plan and entered Q3 in a position of strength, we're very confident in our ability.
He to successfully navigate where we expect to be a time limited dislocation, resulting from the Corona virus outbreak underscored by our successful track record in managing through similar challenging periods in years past.
Importantly, our teams are focused on creating action plans and strategies based on.
On the insights from our diagnostic review, we are both a sense of urgency and a willingness to objective we face our challenges as we bring data evidence and logic to our work. We're stewards of three powerful brands and have the means to affect significant positive change across our operating model to define the next.
Chapter of sustainable growth at our company.
With that let's turn to Joanne for the financial review of the quarter and our outlook Joanne.
Thanks, Jay and good morning, everyone.
As GE day has just taken you through the highlights and strategies I will cover some of the important financial details of the quarter.
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.
Turning to our second quarter financial results.
Total sales increased 1% and both reported and constant currency basis.
Led by continued momentum at coach with global comp growth of 2%.
Kate Spade comps declined 4%, representing a sequential improvement on a one and two year basis, while total sales were inline with last year driven by distribution.
Stuart Weitzman sales were pressured down.
7% versus prior year, reflecting generally softer than anticipated demand across channels.
Gross margin decreased 30 basis points compared to prior year with divergent trends by brand.
Kate Spade as projected gross margin declined 320 basis points versus prior year due primarily to.
A higher level promotional activities, we made progress moving through excess inventory.
Conversely, gross margin at coach expanded 20 basis points over prior year. This expansion was driven by higher handbag aurs that outlet, a lower level of promotions and product cost benefits.
Partially offset by FX pressure and.
I think mix headwinds, resulting in part from the lower penetration of our business in Hong Kong.
Stuart Weitzman gross margins rose 370 basis points over prior year, driven by channel mix due to the relative outperformance of the direct business led by mainland China and benefits from FX.
SGN a for the quarter rose approximately 4% inclusive of the anticipated shift in timing of expenses from the first quarter ended the second quarter as well as a higher level of marketing spend year over year at Kate Spade.
Therefore for the first half of the fiscal year SDMA rose, 2% over prior year, driven by new store distribution and.
Original buybacks as well as a higher level of depreciation associated with our ERP implementation.
Taken together for the second quarter tapestries operating income declined 6% well earnings per diluted share of $1.10 was 3% above last year benefiting from a lower tax rate and lower share count year over year.
During the quarter as highlighted in our press release, we added a net of 31 locations across tapestry driven primarily by net openings at Kate Spade and Stuart Weitzman.
We ended the quarter with 1500 75 directly operated stores globally.
Turning to our balance sheet and cash flows.
At the ended the quarter cash and short term investments were nearly $1.2 billion, while borrowings outstanding were $1.6 billion, consisting primarily of senior notes.
Inventory ended the quarter at $748 million up only 2% versus last year in part due to receipt timing shifts.
Q3.
Importantly, we exited the holiday quarter with inventories and a good position.
For the second quarter net cash from operating activities was an inflow of $556 million versus $618 million a year ago.
Capex spending was $50 million versus 61.
Million dollars last year.
Free cash flow for the quarter was an inflow of $506 million versus $557 million last year.
Now turning to capital allocation as previously announced this year, we're dedicating more resources to driving organic growth rather than pursuing strategic.
Dziedzic acquisitions, while returning capital to shareholders.
We remain on track to return approximately $700 million to shareholders. This fiscal year through our share repurchase program and current annual dividend payment payout, representing the vast majority of our free cash flow.
Moving.
Adding to our 2020 outlook.
Consistent with our prior practice the following guidance is presented on a non-GAAP basis and replaces our previous guidance.
As Jay mentioned and as noted in our press release, we've updated our outlook to incorporate an estimated impact the corona virus outbreak in China have a.
Thanks, Emily $200 million to $250 million in sales and 35 to 45 cents and diluted earnings per share.
Given the dynamic nature of the situation the potential financial impact to our business could be materially different.
Therefore, we now expect revenues for fiscal 2022 approximate.
$5.9 billion.
In addition, we're now projecting earnings per diluted share to be in the area of $2.15 to $2.25.
In closing and to reiterate we had a strong second quarter and outperformed our plan.
We entered our fiscal third quarter with strong underlying.
Trends, notably at coach with comps accelerating from second quarter low levels.
If we're not facing the impact of the Corrado virus outbreak to our business I'm confident that we would be reiterating our fiscal year 20 guidance.
Our teams are focused on identifying actions to mitigate this impact on top and bottom line results.
We have successfully navigated similar disruptions to our business many times in the past.
Most importantly, our view of the long term opportunities for our brands in China and globally is unchanged and our strategic intent to drive organic growth and profitability is unwavering.
I'd now like to open it up today.
Thank you at this time I would like to remind everyone to ask your question. Please press Star then the number one on your telephone keypad. If 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 Journal of Guggenheim Securities.
Hi, good morning.
I was wondering.
Good day can you provide more details on the learnings from the endeavor to review of the business in sort of where you see opportunities and risks and then just a couple of parts to this actually.
What kind of investment do you currently think business.
Siri to drive the business forward after the review and I guess the third part of the one part question is how would you expect flight 21 to be in investment year do you have to shrink to grow that those are my questions. Thanks.
Good morning, Bob and thank you for that things question.
Let me maybe take the latter part of your question of your question first.
To be clear as we look at transforming tapestry, it's not about shrinking our total revenue or earnings to drive future growth.
We're focused on sustained growth in returns from here.
Will grow from fiscal year 20 results, excluding any impact.
Impact of the chronic virus situation so to speak to be doubly clear, we're not going to be satisfied with another flat here, we're committed to drawing the line under current results.
So to turn really to the meat of your.
Question.
Yes coming out of the diagnostic work we've done in recent months here, we're focused on by or opportunities.
One is becoming truly consumer centric.
The second is to create a culture here at half the street and across our three brands that enables faster.
Visions that are more responsive to consumer desires.
The third is to use data to inform forward decisions.
Fourth is better aligning our operating model with our product positioning.
And then the fifth it's a more clearly define the purpose.
Of each of our brands.
I know as much as I'd love to expand on each one of those now it's not the time to do so I'll leave that to the investor and analyst day that I mentioned earlier.
However, why don't I, just maybe take a moment here and give you a couple of examples of.
What it is we have in mind.
And perhaps the first one would be around consumer centricity and I know that a lot of companies are focused are becoming more consumer centric, but let me just talk about what that means here for us the tapestry.
And for us it means.
Proving our skills and asking.
End of and listening to consumers and adopting a very rapid test and learn set a process east that feed real time insights back into our business the informed decision, making and to inform results.
Our objective is to leverage data and insights anticipate where consumers are traveling.
And to be there when they arise.
And is this really even when the things that really came out of our diagnostic work is that this compares to today, where in many instances, we directed barriers to even meeting consumers, where they currently are much less where they're traveling to.
Perhaps just to make it.
Okay.
I'll give you an example of what I'd say that weve erected barriers.
Weve historically discouraged marketing to consumers in certain of our distribution channels, which is ultimately limited our ability to acquire new consumers.
Yes, so so as we look at integrating.
Rating consumer century city in how we work.
It will have an impact and very tangible ways, whether in the product development process, whether in our marketing as I alluded to just a moment ago, certainly in our pricing and promotion decisions.
And so across a number of very tangible aspects.
Of our business.
Other example, I might use in terms of.
Areas of opportunity coming out of our diagnostic work.
Is using data to inform or decisions and so today, we are very data heavy company, we largely use data.
To assess passive and rather than to drive predictive fact based forward looking decision making.
I would characterize it as we are reactive rather than being proactive and I think we have a tremendous opportunity to leverage technology and data to drive faster more insightful decisions across.
Just the enterprise and that'll impact everything from supply chain to demand planning to product allocation.
Thank decisions.
So so without without kind of going on at more like.
Very much look forward to this summer when we'll have an opportunity to much more and have a much more in depth discussion.
These we see across the five areas that I highlighted a moment ago, which we think will truly transform our operating model, allowing our operations and our organization better anticipate and to become more responsive to changing consumer desires in doing so in ways that will add.
Material I.
I believe you know revenue margin and balance sheet implications for our business.
Great. Thank you.
Ladies and gentlemen, and the interest the time, we ask that you. Please limit yourself to one question only your next question comes more urban Boruchow.
Wells Fargo.
Hi, Good morning, everyone Hello, Good morning, Congrats on the good holiday.
I just wanted to focus on China.
This is projected Joanne.
So understanding the guidance revision for two age and assuming the majority of these revenues are located in the coach brand.
You help us.
I understand visibility is very low but in modeling the coach comps in the back half.
Should we be thinking about high single digit declines into h., and possibly even down maybe double digits in the third quarter and then just any color on how this kind of revenue decline in that region should impact the coach gross margin would be helpful.
I will jump into that and explain.
Take you through how we arrive at our assumption and you know as you mentioned, we're monitoring the developments Barry.
Very closely the situation is still unfolding in as you know, it's very dynamic we are providing transparency based on what were.
We're seeing today, so let me take you through the assumptions and how we arrived at these numbers.
And then I'll address the specific questions around the brands.
The assumptions are based on what today, we see a low to mid teens percent of our business in mainland China across all brands.
With the predominance and coach brand.
[music].
Where the outlook is an expectation of a 70% to 80% decrease in those sales through the rest of the year.
And we arrived at the EPS estimate with an expectation of over 50% flow through.
Given the high margin profile of that region, China, specifically and certain fixed cost that we know will continue.
In terms of breaking it out by brand we have not provided.
Visibility by brand at this time.
As we said the situation is dynamic and it's still playing out that based on our store.
And our penetration in on mainland China. It is predominantly impacting the coach brand.
Has has an also has an impact on Stuart weitzman, but to a lesser much lesser Ics and Kate spade.
I would also add that we have as it relates to China much lower exposure in our supply chain.
So I wanted to touch on that as well we've already migrated the vast majority of our production outside of the country less than 10% of our finished goods production.
As in mainland China across all brands.
More broadly we're looking at different scenarios as you can imagine as well as mitigating actions to drive topline and.
Control or reduce expenses in light of and in light of this news.
Josh anything you would that yes, what I would add or when it to your specific question around.
Guidance.
Right now, it's hard hard to estimate the impact.
China on comp given that our store closures are typically removed.
From the comp calculation, which I believe is common practice.
So to that hard to estimate.
What I'd like to emphasize though.
Is that the health of our business.
In Maine.
Land China.
Prior.
Two prior to this.
Very unfortunate.
If circumstances.
In seeing strong comp store sales in China in Q2 and.
Importantly in the first.
Few weeks of Q3, leading up.
To the Chinese new year period.
And we're seeing that both in our we were seeing that.
Both in our directly operated store channels, which make up the vast majority.
Our business, but also in our emerging digital channels.
As you as you know.
We.
We launched with T Mall had a series of soft opening let grand opening in December and immediately we saw that.
And.
Became.
The top.
And that a brand on T mall.
During that period, leading up.
To chew Chinese new year.
So yes, we believe in the resilience.
The Chinese consumer and what we've seen it.
Previous crises.
Is that.
Whether it's a sars or.
Or.
Different types of geopolitical.
Situations that these have deep impacts for a time limited period.
And then we.
The normal.
Your next question comes from the line of Erinn Murphy of Piper Sandler.
Great.
Good morning.
My question is around the coach brand last quarter AG Workgroup outlet for the first time in several years and based on your comment today.
Definitely sounds like there's some.
You know inflection here that could continue I guess can you share, but that's how far below peak or is that outlet and then they suddenly you're diagnostic work are there further opportunities in pricing and then I apologize, but a clarification on the guidance Joanne are you, including any impact.
From lackluster Chinese tourism here into the U.S. Thank you.
I'm, sorry, I didn't hear part of your question here when you said, how far below and that we didn't here.
Oh apology, so I guess on the coach brand how far below is a you are today in outlet or is this by now.
And then based on your diagnostic work.
Just curious on if there is any further opportunity in pricing.
Okay, So why not give.
Why don't I get.
Context.
Around the you our growth I really appreciate the question.
Because as you.
You know we've been talking about that.
For several quarters at both externally in a huge focus for us.
Internally and so.
This was an important milestone order for us.
Yeah.
You are in both channels.
Significantly.
The.
In outlet in outlet. Our age you are went up 4% globally I percent in North America, driven by eight 7% increase in the eight you are handbag in in north.
Erica.
And so I'd like to just take a few minutes to explain how we went about that.
We achieved that.
Through a really holistic approach.
Listening to the customers.
In fact GJ.
Referenced.
I guess.
In North America outlet, which frankly had in the top five for a long period.
Of time, and we did very deep consumer insights.
Involving kind of a Manhattan project within the company.
Bringing together.
Sure the chief merchant edit North America outlet and doing a roadshow and really listening to what customers love about those bags.
And.
And what features and functionality.
They would be willing to pay more.
Our core and so there was a lot of focus on those.
I Tonight.
Very proud of what what the team did there so going into going into the holiday quarter.
This assortment allowed us to be much.
Shallower and were surgical on the types of promotions that we all.
The product development work.
With.
With learnings from our data loud.
About where we need to be more promotional and where we need to be.
Less promotional so clearly.
There's been a.
Significant.
Our gross margin E U ours in in North America outlet over.
Sustained period of time.
Nearly 50%.
From.
The peak.
We see the actions of the last few quarters and specifically the holiday quarter.
That being a milestone that turns in the other direction and even more importantly gives us.
Very tangible.
Curio example.
Where we can start looking at increasing prices.
In the outlet channel.
Yes, and Aaron I'll I'll take the.
The second part of your question regarding our guidance our guidance reflects what we're seeing today.
Which is.
And impact to our business in mainland China, if the if the you know as we as we've mentioned the situation is dynamic and unfolding if it impacts more broadly across the Globe. Then then our results.
May be different.
And maybe worse however.
Specifically on North America, we do not anticipate or we have not in our guidance anticipated to corona buyers impact.
On the Chinese tourists in North America, having said that over the past few quarters and years, we and we've been seeing it downtrend in the Chinese tourists, which has been offset by.
The domestic business and particularly in our outlet stores.
Your next question comes from the lineup Alex Wall Best of Goldman Sachs.
Good morning, Thanks, so much for taking my questions.
So I wanted to ask a few questions about coach as well maybe first off his two I wanted to clarify a comment you made.
In response to the prior questions I think he said that you are at the.
Coach brand in North America outlets was 50% lower than it had been historically did I hear that accurately and then perhaps you know any thoughts on how.
Oh, we could go back to the prior.
Hi, guys that.
How much progress I suppose you can make from here already strong progress.
But you know the environment in that channel is a little different than it was a few few years ago and then.
One further question on coach out you know any comment on how the logo product is performing and what percentage of.
The assortment that account for today.
Yes, let me clarify the comment because I, let me clarify that comment on.
The and AG eight you are.
In our North America outlet channel I was speaking specifically around handbag.
You are.
Versus the peak.
It is.
Turning 50% off of peak so there is an erosion.
Overt.
Over a long period of time as the channel dynamics have changed but to your underlying point, Alex we do.
I believe that that that represent substantial opportunity to regain back a much of what it is that we that we have over extended period of time, given given back and so maybe you want to talk about signature or logo, yes, absolutely.
So.
To your question about signature.
Mr remain.
A very important part of our assortments in our retail assortment.
It is approximately 25%.
Our.
Our retail business, we are finding that it continues to.
She generate.
A higher you are actually and then leather showing the.
Showing the demand.
For the brand the other thing that you'll notice in this past quarter, we launched a new or think erivedge.
Logo farm and this was something again from our archive.
And I think it gives us.
Second branded platform.
Because.
We are very careful that we don't want to go back to an over exposed late and we want to keep.
The branded platform.
Relevant.
And current and achieving these higher eurs.
And Josh maybe where it just.
Saying something that may have been implicit outlets in your question.
Even at current penetration signature is materially below where it was in the last cycle.
Your next question comes small I know Oliver.
Chen of Cowen and company.
Hi, Thank you regarding Kate Spade would love your latest thoughts on timing of optimization and your thoughts on how this may involve with conversion relative to traffic the new CEO lives and comments around the self expression as you continue to tick.
Recalibrate, the brands with novelty and other thoughts.
City told names like a big deal.
City, so it seems like a big deal.
Maybe.
Sorry go ahead.
Hi, just you've made strides and attempts in footwear in the past love your your.
Context on what's different then it would also be interesting to get your views on how big that could be.
Responsive lightweight flexible looks like it's in touch with the way the customers really moving.
Great. So maybe let's flip back as there's a lot there may be Josh will talk about cities goal Joann as.
You all know has been as in the interim leader of Kate So maybe you can talk about the.
Some of the Kate brand specific comment that al I'll close out by talking about lives Frazier the new president there the new brand CEO.
Good morning Oliver.
For noticing.
The emphasis on city.
All of which is the particularly prominent this week.
As we are launching it.
As you know and you followed for a long time.
Coach.
Hi coach has a long history in footwear and in fact back in 2000 2006 in.
I'm ways coach invented.
Fashion branded.
Sneaker category.
Coming from a leather goods brand with struck with strong branding.
So over time.
We let that position of road.
And at that time the.
And.
With producing shoes under license.
See bringing the shoe collection.
Under direct control a few years ago, we've really been focused on.
I'm getting the price of value Ashton ill equation right.
And.
And we know to break through here that we needed to do something very special and unique in terms of both product and marketing.
We work.
On this project for some time really thinking about where the customer is going in.
Turns of the increasing casualization.
And how to create a sneaker franchise that will last.
For more than one season and that could really be a catalyst for the overall footwear category as we've mentioned on previous calls as shoes around.
4%.
And our ambition is to is that this should be business with double digit penetration.
And.
We couldn't be more excited about the reaction to the marketing with J. Lo.
And Michael Jordan.
I hope to see you wearing a fair next.
Yes.
Hi, Oliver its Joanne I'm going to jump into the Kate Spade question. She they mentioned.
Did jump into help lead the brand through December and January and.
No as I as I entered.
The brand the team was very engaged and focused on the improvements to the assortment and really managing through the important holiday quarter.
We did see sequential improvement as we implemented key product, we took key product actions and merchandising actions I'm really to balance our assortment, we talked a little bit last quarter about the assortment architecture.
The changes we made did gain traction in the in the second quarter, we did see strong performance in our expanded satchel offering.
We talked a little bit about holiday giftables, but that expression was strong and the customer responded very well to that assortment as well as jewelry, which is.
Not a high penetration category for us but.
We see opportunity moving forward.
We also enhance the novelty offering that was.
Void in our assortment coming into the second quarter, we added some fun and novelty back with collaborations like Tom and Jerry and the cat collaboration as well as the novelty.
Elephant bag tiny.
Adding some fun back into the into the mix.
We also focused on moving through excess inventory, so that we could cleanup our inventory and these these merchandising changes would be more evident and apparently the customer we moved our marketing focus forward, we increased spend in digital.
And did see some traction there we leverage new tactics. So we saw a nice growth in that digital channel, particularly in December and.
Green shoots with new customer acquisition, there as well.
So lots of work going on right now in the brand on the current assortment, but we're also doing foundational work and we've made.
Progress on sharpening our brand position that is work that we began as we spoke to last quarter. We began last quarter and the team has move that forward. We're also doing deeper customer segmentation work that truly understand the Kate spade customer.
We're really looking forward to having lives join us in March to continue to move that.
Forward with the team.
And today I don't know if you have other comments slowly so just Oliver to your question about Liz.
She is the right person at the right time for Kate Spade and that this is somebody who has 30 years of relevant industry experience and she has run the gamut.
From merchant merchant roles to supply chain roles to.
For the last the better part of the last decade, and a half real leadership roles.
She is clearly in her last two incarnations.
Knows knows the ready to wear and the handbag accessory business well and then.
Most relevant for 14 years she was.
A key player in building a marked by Marc Jacobs business from roughly 20 million in revenues to well over 750 million in revenues. So yeah. This is a person who get things done ism is as built.
Businesses, and and and has and has very good relationships with her with her internal teams and external teams.
Followed her now for over for over a decade and really pleased that she is going to be joining us and joining joining the Kate spade team.
Your next question comes small enough Mark Altschwager of Baird.
Good morning, Thanks for taking my question.
As you dig into the uptick in brand perception that coach Im curious what you think is having the biggest impact there in terms of driving that inflection and any insight on the trends you're seeing with your more mature customers.
As versus maybe some newer younger customers in terms of driving that improved brand perception.
And then separately for for bridge you day I was hoping you quickly touch on Stuart Weitzman, just given the management change announced today any updated thoughts you could share on the pace and magnitude of margin recovery, we should be looking for.
Over the next several years thanks.
Yes. Thanks for the question I mean, we were very pleased.
To see the.
To to see the brand tracking report this quarter and particularly to see the inflection.
In.
The number of customers in the broad premium market, who consider to be a brand on the way up and I think it's a few things you know we have been talking about.
Building.
Cash and relevancy.
For some time.
I think that continues into the.
Work that Stuart has been doing and his team but also coupled.
With.
Coupled with a lot of the marketing.
Approach that we've taken.
In fact, the mix of.
Very high profile celebrities like a Jennifer Lopez and Michael Jordan clearly have residents.
In the North American market, but also coupled with emerging.
Laboratories.
Like Yara shahidi.
And really moving.
The vast majority of marketing into the.
Eat into the digital space and becoming significantly more active.
On the various social channel.
And so.
And so we are very encouraging.
Hi, what we're seeing and it's really across the demographic.
With a focus on the millennial.
Yes.
And with respect to Stuart Weitzman.
A couple of comments first of all and particularly.
On the back end here of our diagnostic work.
We are quite confident in terms of the strength of that brand brand that basically has a unique proposition as a gateway to a luxury and where we think that there's a fair amount of white space above us.
Visits distinctive heritage and yet.
DNA as you've heard us talk about before in terms of melding or this fusion of European lunch Lux with static and craftsmanship.
Merged with their combined with an American practicality and comfort. So fundamentally the brand. We think is and is a powerful.
And.
The we've talked in the past about some of the challenges we had.
In their group in earlier days on design and supply chain, which are working their way through the system and so our focus now is.
Very firmly on on the product line and.
As I mentioned in my opening comments, we've lacked innovation to just be very blunt about it particularly in our core heritage food offering.
As well as just real distinctive newness.
And yes, more broadly across across the product architecture to two to drive.
Topline sales the team has been very focused on that and that takes that takes some time to just work its way through the pipeline, but we believe that that we are making progress on that front and I'm really excited about Giorgio because he is somebody who has had a tremendous impact at every business.
In our organization that he has been a part of and I'm confident that coming together with the existing team at Stuart Weitzman, He's going to have a really big impact, particularly as as as we look to both have a very strong base as well as to periodically have key items that we lean very heavily into.
So so.
It's on the right track within Georgia will help accelerate moving it further forward and.
It's a business that we continue to feel very good about particularly frankly coming out of the diagnostic work.
Your next question comes from the line of Lorraine Hutchinson.
Because America Securities.
Thank you good morning.
As you think about the evolution of the business in China as it relates to the virus. How are you thinking about managing inventory and making sure that when that demand does return you're presenting a full price offering I guess I guess, what happens to that excess.
Story from the lost sales in China, and how are you thinking about managing it.
Yes, there and this is Joanna I'll take that the.
The situation is very dynamic and the teams are.
You know working on mitigating actions first day that we have globally shippable product.
So we're not constrained as to where our product. So as the teams are responding they're actively managing inventory that and make sure. It's in the right location to match demand and you know we may see different trends in the digital side of that business versus brick and mortar, particularly as we work our way through.
This event as well as different.
Demand trends globally. So the teams are working very hard to make sure that we've got the inventory in the right location, we have the flexibility.
And we're also evaluating future order flows based on what we're seeing front man.
Ladies and gentlemen, we do have one time.
One final question. Your next question comes from Michael Binetti of Credit Suisse.
Hey, guys. Good morning, my congrats on a on a really nice quarter.
Thank you Peter and I guess I'm trying to calibrate the model a little bit from your comments on Kate and second quarter.
The comps are quite a bit better than planned, but it looks like you took opportunity to clear some inventory.
We have traffic in the stores.
So I guess, the gross margins a little below that on total Kate much better than we thought.
You sound like that you feel like inventories in better shape on the brand you gave some guidance on second half comps improving the previously did suggest the Kay comps would improve sequentially in each quarter.
This comparison on Kate changes a lot in third quarter I just want to.
See if you still see it accelerating, especially if you drew down the inventory quite a bit on the holiday when you had the opportunity.
And then I just wanted to ask if.
It sounds like if I had to characterize the plan you laid out kitchen co came in coach and Kate sorry came in a little bit above the plan.
And I know you have to deal with Corona and.
In Asia, but it sounds like US are in North America is a lot better I'm wondering if you look at your internal plan did you move up the North America coach assumptions in your internal plan for same store sales in the back half.
Yes, let me let me start.
Particularly with the Cape business, we had an expectation.
Pre corona virus.
Outbreak that expected inflection in the second half.
And that we continue to expect to improve.
In the second half for Kate we haven't called for it to be sequential each each quarter, but for the second half we expect.
To see.
And we you know and second quarter, we did move to some inventory.
And we and we still have some excess inventory in the Cape brand that we will be working through as we move through the second half, but we're also seeing some traction with the assortment changes, we're making and the marketing actions, we're taking as well as adding new brand spokes people to the.
Brand so.
We continue to expect particularly in North America improved results in the second half versus the first half and Kate Spade.
Thank you.
It does I was just going to just say on the question with regard to coach in the second half we.
Don't this aggregate hour.
We don't just aggregate the.
Growth.
Thank you operator, we're going to conclude today now with some brief closing remarks from GE day to day whenever you're already absolutely. So first I just want to underscore.
Score.
The comments that we've made that I know a lot of our industry peers have made in terms of just our focus on.
And our team in China on their families and on their community.
But also just much more broadly to the Chinese people.
We are those of us that live in.
In New York many of US went through 911, and we understand just how deeply unsettling.
A situation such as this can be and we've got clearly immense competence in the Chinese people go in there character and in their resilience.
And and.
Believed that clearly the fear that is evident in a day to day basis. There is one that will abate and look look forward to doing everything we can as a corporate citizen to be a part of helping.
China more broadly returned to a greater sense of normalcy.
As we.
All this global citizens have seen in so many other other crises in the world overtime. So just wanted to say that say that very clearly and heartfelt.
The second comment I would just making closing.
Which is.
One where I'd like to just call out.
One of one of our many colleagues in this in our organization, who I had the privilege of spending time with last week and this is a gentleman named Aireon Lewis who is the store manager for coaches Chicago premium outlet store.
And or.
For dairy and had me show up on historic step a week ago.
As as basically one of the members of his team I worked as a sales associate on the floor.
Much again to the chagrin of dairy and his team and I'm almost certainly to the surprise the most customers who wondered why the usual.
Standard of both hiring at coach.
We have dropped.
But one of the things that I that I learnt through that day, which was really humbling frankly is first of all as we talk about as we talk about consumer Centricity. When you got to stand in front of a customer and figure out what she.
Wants and try to anticipate where she is going you learn something about consumer centricity and that what I also learned was just how amazing the teamwork is.
Whether it's a coach whether it's a Kate spade, whether it's it's Stuart Weitzman in terms of how that our team support each other how they work so well together.
And how they create a remarkable experience in store.
For for our customers.
Parents adequately we smashed the sales target for that day in that store.
Okay.
Yes, so at least that part of the second half of the second half growth that we will we will this aggregated.
No.
Let me did well.
I just wanted to say thank you everyone within tapestry across our fleet across all of our three brands.
Everything you do because really it's the opportunity to work with such a remarkable leadership team that makes me most proud.
To be up.
To beat your at tapestry. So thank you all for your confidence and your interest in tapestry and we look forward to continuing the conversation, particularly as we navigate through these these these challenging times.
Thanks, everyone.
Thank you that does conclude this tapestry.
Conference call you May now disconnect your lines and have a wonderful day.
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