Q1 2021 Tapestry Inc Earnings Call

[music].

Good day and welcome to the Tapestry conference call.

Today's call is being recorded.

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After the speakers remarks, there will be a question and answer session.

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At this time for opening remarks, and introductions I would like to turn the call over to the Vice President of Investor Relations at Tapestry Kristina Cologne.

Good morning, Thank you for joining us with me today to discuss our first quarter results as follows our strategies and outlook our Joanne Crevoiserat.

Tapestry, CEO and Andrea Shaw Resnick tapestries interim CFO.

Worrying again, we must point out that this conference call will involve certain forward looking statements within the meaning of the private Securities Litigation Reform Act. This includes projections for our business and the current or future quarters or fiscal year forward looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward looking statements. Please.

I refer to our annual report on form 10-K, the press release issued this morning, and our other filings with the Securities and Exchange Commission for a complete list of resi another 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 studies.

Www dot tapestry dotcom or splash investor and then viewing the earnings release and the presentation posted today.

Now, let me outline the speakers and topics for this conference call Joanne will begin with a brief recap of our first quarter results for tapestry and each of our brands.

She will also provide an overview of the progress we've made on our acceleration program Andrea will continue with our financial results and our priorities going forward. Following that we will hold a question and answer session, where we will be joined by Todd Cohen, President and interim CEO and brand President of coach after Q name Joanne will conclude with brief.

Thing remarks, I'd now like to turn it over to Joanne Crevoiserat tapestry CEO.

Good morning, Thank you Christine and welcome everyone. It's a pleasure to be with you today and a distinct honored to be leading this great company, it's such an important time in our history.

Incredibly proud of the momentum our teams are driving across the organization I'm confident that together, we can both create and capture significant opportunities ahead.

Now turning to our results as.

As you read in our press release, our first quarter, well exceeded our expectations across brands demonstrating the bold actions, we're taking as part of our acceleration program.

We drove a meaningful sequential improvement in top line trends supported by strength in digital and China.

We successfully raised you are by offering customers compelling high quality products that delivered exceptional value.

This resulted in reduced promotional activity and significant gross margin expansion for the quarter at the same time, we continue to tightly control cost.

Taken together despite the challenging backdrop, we achieve significant increases in operating income and EPS on a year over year basis <unk>.

Importantly, we also generated strong positive free cash flow and ended the quarter with $1.5 billion in cash and equivalents in a clean inventory position heading into the holiday season.

This performance underscores the power of our brands with leadership and the attractive premium handbags accessories and footwear categories.

It also reinforces the competitive advantages of tapestries, enabling platform.

Polluting first and foremost our talented teams around the world, So Sean tremendous agility and passion in delivering a great experience for our customers.

Second our consumer insights resources across brands and regions, providing the tools and deep consumer knowledge to unlock value.

Third our diversified supply chain and scalable global operations, which has proven invaluable, especially during these volatile times and.

And fourth our technology infrastructure and robust digital capabilities accessible across the globe.

In addition, leveraging these strengths we've made meaningful progress on our acceleration program, which is defined by sharpening our focus on the consumer leveraging data, leading with digital and transforming into a leaner and more responsive organization.

Some key highlights of the quarter include first we continue to drive triple digit growth on our digital channels leaning into our global capabilities to offer immersive customer experiences.

In the quarter E Commerce represented nearly 25% of total revenue as compared to a high single digit percent last year.

These outside gains were led by the recruitment of nearly 800000, new customers across brands in North America.

Importantly, we are successfully driving repeat purchases among these customers at a higher frequency and we're capturing a growing number of millennial and Jens he customers online.

Further the growth in online sales is driving profit growth as well as our digital businesses carry higher operating margins than their respective bricks and mortar channel.

We believe that the consumer shift to online is a trend that is here to stay and we're excited by the traction we're seeing in this area of the business.

Second we also delivered significant growth in China in the quarter through innovative product assortments enhanced marketing and expanded reach across direct channels and third party online distribution.

Fact coach is now the number one ranked handbag brand on T Mall, just one year after our soft opening on the platform.

Our digital business in China, while growing rapidly is still quite nation underscoring the enormous runway, we have particularly as Chinese consumers are highly digitally engaged third.

Third as Weve shared we're committed to building industry, leading data and analytics capabilities to drive decision, making in the quarter, we leverage data and analytics to optimize our marketing messaging assortment planning and promotional levels to support higher you are the same.

Successful outcome of these initiatives together with our innovative product offering in inventory management is evident in our strong gross margin expansion in the quarter.

Fourth we made further progress in creating an agile and scalable operating model risk.

We're streamlining our organization structure and empowering our teams as part of this work Rerate, we reduced our global corporate head count cost by 20% on a run rate basis.

As a result, we are emerging as a more agile organization that will drive faster decision, making.

In the near term this better aligns our cost base with the current demand environment and over the long term it supports operating leverage and profitable growth.

We're also driving efficiencies through the optimization of our global fleet, our focus is to improve profitability across our store network, while delivering a consistent brand experience for our increasingly omni channel consumer.

Overall for our acceleration program, we are better meeting the needs of our customers, while creating a strong foundation for profitable expansion.

Now I'd like to touch on some of the overarching strategies for the holiday season and actions underway across tapestry to navigate the dynamic backdrop.

We will continue to focus on the factors within our control with an eye towards best in class execution.

We're putting the consumer first with each of our brands delivering newness throughout the quarter.

We will provide our customers with a seamless shopping experiences by offering curbside pickup in contact with payment options and the opportunity to make virtual appointments were.

Also testing new technology to offer virtual queues and select North America outlet stores, allowing guests to bypass line and instead receive an alert text one of their time to enter the store.

Importantly, given social distancing requirements and related capacity constraints, we're implementing strategies to elongate the holiday shopping period pulling forward demand ahead of the peak Thanksgiving week by offering customers the opportunity to start their holiday shopping earlier in the season.

We will also continue to lean into digital with ecommerce sales expected to represent nearly half of holiday sales in North America. This year.

And we will remain disciplined in our management of promotions inventory and cost.

Overall, we have a comprehensive plan with the opportunity to leverage our scale expertise in retail operations and best practices across brands to deliver exceptional customer experiences during this important and unprecedented holiday season.

Turning to specific results and strategies by brand, starting with coach which delivered an impressive quarter.

Revenue surpassed our expectations with sales down only 9% versus prior year, reflecting a significant sequential improvement.

We also continue to expand gross margin, while leveraging SGN, a generating a 710 basis point increase in operating margin there.

There were many highlights from the first quarter and keeping with our strategic priorities, we delivered compelling product innovating across styles silhouettes and price points in retail we continue to fuel signature and proprietary brand codes are a variety of new iterations, while evolving our top families such as tabby and Hutton.

In September we launched our coach by John Michel Basquiat collection, which outperformed globally across categories and.

In outlet, we offered newness that balanced fashion and function, including the town bucket shoulder bag, It's arena Satchel and the Mali tote.

Importantly, we continue to be disciplined in our approach to promotions consistent with our strategy. We're shifting the customers focus to the value attributes and quality of coaches product.

In fact, our global handbag AIU are again rose over 25%, including over 20% growth in North America.

In the digital channel, we again realized triple digit revenue growth as we expanded our capabilities and services to drive sales and engagement.

We recruited over 500000, new customers through our North America ecommerce channel, representing a significant increase compared to last year.

Turning to China, our growth was fueled by a nearly 40% increase on the mainland.

In addition, we recaptured tourist demand through the China duty free channel as consumers increasingly shift the two domestic travel.

For holiday more broadly, we're sharpening our product strategy, delivering innovative and emotionally compelling product to excite the consumer across.

Across channels, we will focus on gifting options throughout the extended holiday season.

In retail as previously announced we partnered with our global Ambassador Jennifer Lopez on a coach Vijay low designed Hutton bag, which was introduced globally. This month.

In outlet, our recently launched Marvel collaboration is driving strong customer engagement.

At the same time, we will offer exceptional value to our customers, while continuing to reduce promotional activity.

One of the key elements of the strategy is the planned SKU reduction, which is key to driving greater productivity and clear brand messaging to the consumer we expect these actions to support gross margin expansion in the second quarter.

Touching on marketing you will see messaging that is inviting and inclusive in our holiday campaign, we were highlighting our global brand ambassadors, including Jennifer Lopez, Michael B., Jordan, Kikumura, Yang Z and Jeremy when.

The campaign celebrate stories of togetherness relationships that indoor and the power of modern families. Those that we are born into and those we choose overtime.

In summary, we are delighted with the brands performance in the first quarter and remain confident and coaches ability to capture market share and drive long term growth.

Now moving to Kate Spade.

We're very pleased that the brand's top and bottom line results exceeded expectations for the quarter.

Revenue improved sequentially declining 21% year over year. This included a seven point impact from the strategic pulled back of the low margin wholesale disposition business.

Gross margin expanded 100 basis points, primarily due to channel mix, partially offset by the negative impact of taking the footwear business in house.

We also tightly controlled cost and leveraged expenses resulted in resulting in a 380 basis point increase in operating margin.

In addition to these solid financial results. There are many key strategic milestones for the quarter as we focused on leaning into the fundamental elements of the brand we know our customers value.

We made progress in re energizing the leather goods offering through our new signature platform. The spade flower is.

This collection has been a global success with both new and existing customers.

Cargo remain the top selling family and customers continue to respond to our novelty offering including the FFO for a remedy bag in the specialty channel.

Outside of handbags, we saw relative strength across jewelry footwear and tech accessories. These categories, which are foundational to the brand's unique lifestyle positioning are also important for customer recruitment and cross selling.

Turning to digital Keith.

He's been has a well established ecommerce business with the highest digital sales penetration within our house of brands during the quarter. We continue to drive momentum online achieving strong double digit revenue growth through engaging brand experiences across our platforms.

In fact, we attracted over 250000, new customers to the brand through our ecommerce channels in North America meaningful increase compared to last year.

Additionally, we reactivated over 100000 customers through our digital channels, an increase of 100% compared to last year.

This is an important green shoots it demonstrates the traction, we're making and strengthening our relationships with our core customer base.

Turning to Kate Spade priorities for holiday. Most importantly, we will position the brand as the destination for gifting Joy and celebration.

Specialty we're building upon the successes of speed flower assortment with our new coded canvas launch. In addition, we're excited to launch the all day Tote and we will debut a collaboration with brand Ambassador Naomi Watts, and Nabil, which will roll out globally starting in Japan.

In outlet, we will offer an array of festive holiday products that are in keeping with the brand's DNA.

We're increasing the breadth and depth of box gift sets, while also offering exclusive product drops over key weekends throughout the holiday season. We're.

We're also launching a new core handbag collection Natalia during the quarter.

Across channels, we are more fully integrating novelty into our assortment offering fine and witty shapes to excite the customer.

At the same time, our teams are continuing to evolve the customer experience from leveraging digital and social media platforms to opening select pop up stores in order to engage consumers in new and innovative ways. These are great. Examples of the team's agility and responsiveness to adapt to the current landscape by putting the consumer first.

And our holiday marketing campaigns will be both celebrate Tory and playful as we continue to lean into our strength as a storytelling bran.

We're also testing new digital platforms, such as tick Tock is a way to amplifier messages and connect with consumers in relevant ways.

In closing I'm incredibly optimistic about the long term potential for Kate Spade, we're making significant progress and while there's still work ahead of US we are confident that we're on the right track.

Turning now to Stuart Weitzman, we are encouraged by the progress we made during the quarter sales declined 35% versus prior year, improving from the previous quarter and exceeding our expectations. As a result of momentum in the direct business led by China and E Commerce, while wholesale results benefited from shipment timing with the second quarter.

Further our focused strategic actions, notably tight expense control unprofitable market exits in store closures supported a significant narrowing of the brands operating loss year over year.

During the quarter, we delivered relevant and compelling product capitalizing on the shift to casualization in the marketplace. We.

We drove innovation across key classifications, including our iconic 50 50 inland family.

We delivered strong performance across our casual combat offering led by our Pearl embellished Sondra boot. We also leaned into the lungs sold trend with launches of the Colby Wenda, an Ivy booties.

In keeping with our focus on the consumer we relaunched extended sizes in with based on feedback from our customers through a series of in person and virtual trunk shows.

This drove retention and reactivation among our most loyal customers, who love the brand for its fusion of fashion and fit.

Additionally, through our U.S. ecommerce channel, we recruited over 40% more new customers compared to last year.

Establishing a more robust digital presence is an ongoing opportunity for the brand.

Touching on marketing, we drove cultural relevance through our fall campaign, featuring Serena Williams, our global spokeswoman and Alain John our new local ambassador in China.

In addition, we launched the 50 50 boat campaign showcasing a limited edition design of our 50, 50 boot, which sold out within the first week. This campaign has generated over 1.5 billion press impressions to date, we also strengthen partnerships with key wholesale accounts supported by consistent execution and on time deliveries.

Looking ahead to spring, we're beginning to reestablish an expanded presence in these retailers.

As mentioned consistent with our strategy, we are focusing distribution on those markets and channels of greatest opportunity, notably China building on existing brand momentum at the same time, we closed underperforming stores in markets as planned.

Moving onto strategies for holiday, it's Stuart Weitzman.

In product, we are emphasizing key classifications boots, booties and sneakers, while balancing buy now wear now styles with transitional product.

We will also continue to build momentum in our casual offering featuring our lift loves all across the assortment.

From a marketing perspective, we will continue to feature our brand ambassadors and immersive 360 degree campaigns focused on lifting women up in high fashion high function boots, and booties for the winter season.

In closing, we have a clear vision for the brand and we're seeing promising green shoots in the business I'm confident we will return Stuart weitzman to profitable growth over our planning horizon.

Looking forward to building on the strength of the first quarter, we are increasingly optimistic in our ability to accelerate growth across our portfolio.

With three powerful brands each with a unique purpose and leadership position in attractive categories. We have a strong foundation and are well positioned as we enter holiday and beyond like.

By continuing to sharpen our focus on the consumer and more fully leveraging the power of the tapestry platform, we will fuel desire for our brands and better meet the needs of our customers through innovative and relevant product a seamless shopping journey and immersive customer experiences.

These efforts in combination with the work underway to transform tapestry into a leaner more responsive organization will not only accelerate the growth of our portfolio, but enhance the profitability and cash generation of our overall business driving sustainable top and bottom line growth over our planning horizon.

With that I'll turn it over to Andrea for a detailed discussion of our financial results and outlook Andrea.

Thanks, Joanne and good morning, everyone I hope, it's fine to all safe and well 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 as Joanne mentioned, our first quarter results exceeded expectations from it.

Top and bottom line perspective across our portfolio of brands total sales declined 14% from prior year, representing a significant sequential improvement from the prior quarter across all brands regions and channels by region, we delivered double digit revenue growth in China, including double digit bricks and mortar gross.

Outside of China, while revenue trends remained under pressure every region showed substantial progress from the prior quarter by channel performance was led.

By continued strength in E Commerce, where we once again drove triple digit growth at the same time, we continue to drive improvement in our global store sales trends are.

Holiday season has started off well with a continuation of momentum in China and across all digital channels globally.

Of course, the vast majority of the quarters ahead of us and the variables are many.

Moving down the TNL gross margin expanded 320 basis points year over year, driven by significant by a significant 350 basis point improvement and coach. This expansion was primarily due to lower levels of promotion as we successfully execute our strategy to maintain price discipline and raised.

<unk> along with the continued tailwind from geographic mix at Kate Spade gross margin rose by 100 basis points fueled by channel mix benefits, notably a strategic pulled back in the low margin wholesale disposition channel for Stuart Weitzman as expected gross margin declined modestly year over year as a result of actions.

To clear through inventory in advance of planned market exit.

S Genie declined 20% year over year, primarily reflecting effective expense management and the previously announced actions to transform our operating model, which included a 20% reduction in run rate corporate head count costs in.

In addition, we realized a benefit from the sale of our Hong Kong office as well as from temporary compensation reductions for our board management team and employees, which we expect to restore beginning November onest. We also realize variable cost savings on the lower level of sales and benefited from retail furloughs, notably early.

In the quarter taken together, despite lower sales in the quarter, we delivered operating income growth of 37% and operating margin expansion of 720 basis points.

You may recall, we anticipated that F Y 21 would be a year of efficiency led profit growth and that our ability to drive increases in gross margin and reductions in as she name would be the initial indicators of progress along our multi year growth journey. Therefore, we are particularly pleased with our strong operating margin expansion in the quarter.

<unk>, which reflects the foundational changes underway and the potential to drive long term profitable growth under our acceleration program.

Earnings per diluted share for the quarter was 58 cents compared to 40 cents a year ago, representing an increase of 45%.

Now moving to distribution for tapestry, we closed a net of 15 locations globally as compared to the prior quarter and they need a 50 closures over the past year as we continue to optimize our global fleet.

Turning to a discussion of our balance sheet and cash flows we ended the quarter in a strong position with 1.5 billion in cash and equivalents total borrowings outstanding at the end of the quarter were $2.3 billion, including the 700 million, we drew down on our $900 million revolver total inventory ended the quarter down, 8%, which was better than.

Our expectation due to better than anticipated revenue result, while the backdrop remains uncertain. We believe our inventories are well positioned into the holiday season and beyond as an organization. We are managing to tighter inventory turn goal, while expanding gross margins.

Capex for the quarter was 26 million a decline of 64% versus prior year as we continue to prioritize investments in high return projects, notably in digital while tightly controlling overall spend in reducing our outlay for new stores. We continue to expect capex to be in the area of $150 million for F.

Slide 21, which would be a decline of approximately 125 million compared to our normal annual spend free cash flow for the quarter was $64 million well ahead of both our expectations and an outflow of 66 million in the prior year period. This achievement underscores the resilience and effective management of our brands and bids.

Now touching on our capital allocation priorities in the near term our priority is to preserve our cash on hand, and utilize free cash flow for revolver pay down in F. Y 21, we will start this pay down in Q2.

Longer term, our strategic intent is to return to sustainable top and bottom line growth and strong free cash flow generation, which we intend to utilize for debt pay downs as well as capital return to shareholders turning.

Turning to our outlook as noted in our release, we are not providing detailed guidance for the fiscal year at this time due to lack of visibility given our strong performance in the first quarter and assuming a continuation of the slow and steady recovery from the pandemic, We now project revenue doing.

To increase at a mid single digit rate over prior year for the full year fiscal 21 on both a 52 week and 53 week basis.

This includes the expectation for a low double digit sales decline in the second quarter as we are planning realistically given the uncertain backdrop. However, we are well positioned should demand remain stronger importantly, we're continuing to project a significant topline inflection in the second.

Half of the fiscal year, we remain focused on controlling the Controllables and are building a strong foundation for profitable expansion over our planning horizon. This includes continuing to take deliberate action to lower promotional activity increased AIU ours across brands as demonstrated once again in the first quarter.

To drive gross margin expansion for the fiscal year as previously announced we're taking steps to aggressively control our SGN ate spend implement structural changes to drive increased efficiencies through these initiatives. We continue to estimate that we will realize approximately 300 million in gross run rate.

Savings expense saving including approximately 200 million in gross savings in F. Y 21 alone however, with a higher level of variable costs associated with the higher sales forecast, we would naturally expect our net savings dollars to be somewhat lower than originally expected.

Looking ahead, we are creating a virtuous cycle or flywheel that should as revenues inflect drive bottom line growth well in excess of topline gain over our planning horizon.

In closing.

We're confident in our ability to create long term value for our stakeholders. We are committed to strengthening our brands and organization by focusing first and foremost on the consumer leveraging digital and data more fully and transforming into a leaner more responsive organization. Our teams continue to focus on the factors we.

In our control and the successful execution of our acceleration program during the holiday season and beyond.

Importantly, our view of the long term opportunities for our brands is unchanged and our strategic intent to drive organic growth and profitability is unwavering.

Further as Joanne mentioned, we firmly believe that together benefiting from tapestries, enabling platform.

Our brands can achieve greater size and share then they put on their own we look forward to keeping you posted on our progress as we move forward I'd now like to open it up to <unk>.

Thank you the floor is now open for questions to ask a question at this time simply press Star then the number one on your telephone keypad. If at any point. Your question has been answered and you wish to remove yourself from the queue press the pound key.

Our first question comes from one of Bob Dribble of Guggenheim.

Good morning, and Joanne congratulations on the the new official role best of luck.

Thanks, Bob.

Congratulations on a.

Great first quarter I was wondering if you could just address maybe elaborate a little bit more in terms of how you feel your position for the holidays. I was just wondering if you could share any of the trends you've seen thus far.

In Q2 for us thanks.

Thanks, Bob and thanks for getting up early with US this quarter, we did deliver a strong quarter in the first quarter and our Q1 performance really reinforces the potential of our acceleration program as well as the agility of our teams. We're really pleased with the progress we're making across all of our brands.

Fit it in the foundation, we're building and the opportunity to drive long term growth and value.

I mean, it is uncertain in the near term and we're staying focused on being close to the consumer and as Andrea said controlling the controllables.

We have a comprehensive strategy around holiday, meaning into digital we have initiatives to elongate the holiday shopping period, we're leveraging technology, such as virtual queues or appointment shopping, which we're seeing customers increasingly adopt.

And and omni channel capabilities like buy online pickup in store become more important.

October has started out well we've continued our momentum from the first quarter and we're well positioned to flex should demand further improve.

Thank you very much good luck.

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Our next question comes from line of Ike Boruchow of Wells Fargo.

Hey, good morning, everyone I'm glad to see the improvement Joanne I'll add my congratulations its great news just just a high level since Bob kind of kind of went through the holiday stuff on.

You are the past couple of years I feel like you guys have talked about shift to lower or lower price handbags cross bodies things that have added some of your pressure for for the category in your business and it seems like some of that stuff might be reversing you know maybe a shift to larger bags, you know women need to carry you know gloves.

And Sanitizes a mask so I'm kind of curious if you're seeing any of that is if that's had some feel to it and then within North America.

Improvements rate, but can you talk about market share are you gaining share or is the category just kind of kicking off on the left us little people thought. Thank you so much.

Thanks Ike.

Our.

Performance has been quite intentional and I'm really not related to product mix. We've been on this journey for a while even pre co bid sorry.

Starting to get traction in growing or you are.

I'll make a few comments, but but toss it over to Tom to talk about the specific successes were seeing it coach, but where we are focused on driving a you are being close to our consumer and delivering value that that that our consumers value.

And we're also embedding data and analytics better into our decision making processes to better inform the assortments are the assortment breadth or.

How we allocate that assortment, where we put allocate inventory buy at a store level and how we price our product.

And I think you're seeing all of those things come to bear in the a word expansion, but it does start with understanding our consumer and delivering beautiful products that they value and we're doing that so while it coach I'll pass it to Todd for his comments.

Thank you Joanne yeah.

That's exactly right, what we've seen and what we started in the fourth quarter demonstrated in the first quarter and will continue and our future is really deliver compelling product and with great intention, we have taken down the promotional cadence and the problem and and that has really impact.

Good already you are and we see that trend going forward also we benefit slightly from mix. So as you know China is more and more important in our mix and that's adding to our you are but again it is a very intentional process and.

As we've always said it coach we use.

Magic and logic I think now more than ever this consumer centricity that we are embedding in the actual design and the grief that our merchants and designers get.

Create much better success rate going forward or you'll see that into reduced SKU count that will also enhance our ability to maintain higher eurs.

And I want to come back on your question around market share in North America, We're really pleased with the progress, we're making and the trends in North America across our channels.

And you know we believe that we are we have tremendous growth potential in the market and were seeing.

Seeing more in recruiting more new customers to the brands, so and that's across all of our brands.

So we are pleased with our performance in North America, and the growth, we're seeing across the across the market.

Great. Thank you.

Our next question comes from line of Erinn Murphy of Piper Sandler.

Great. Thanks, Good morning, Joanne Congratulations to you and to the team as well I guess my question is around the influx of new customers that you were just speaking to can you talk a little bit more about where these customers are coming from are they switching from other brands or just you know following up on <unk> questions that just broader interests in the handbag category and then maybe if you can share a little bit more.

About your strategies to retain these customers and think about them, it's more repeat customers over time. Thank you.

Where we spent a lot of time.

Proving our marketing capabilities and and understanding our consumer when we say, it's part of our acceleration program that we want to focus on our consumers, it's really developing a deeper understanding of our consumers and how to reach them. We talked a lot about some of the test and learn capabilities that we've added to our marketing.

Teams are leveraging analytics, not only to know them better and develop deeper insights, but also test how to reach our consumers at a better level and that has helped us unlock some of this new customer recruitment that we're seeing but also a we believe will help us reach these customers and retain customers are there.

So many things that we have underway across our brands to drive.

Not only recruitment, but retention of our customers.

And were seeing traction and we talked about recruitment at coach, but we're also seeing it at Kate spade as well, including Reengagement of lapsed customers and we're also rolling out loyalty programs to continue to better engage our consumers.

So we have a comprehensive strategy not just in marketing as Todd mentioned, it's knowing our consumers leveraging those insights building it into our product also building it into our marketing capabilities. So we can continue to reach and engage those consumers.

Yeah, and just building on.

Joanne said for the coach brand this quarter, we attracted 500000, new customers over 40% of them were Gen Z and millennials and we see it continue.

Hi, purchase intent and one of the things early days, but we're seeing them their repeat purchase at an accelerated rate so that bodes really well for the program and our offering and as.

Joanne mentioned, we launched October 1st in North America, or coaching fighter program, which is an omni program for both digital and brick and mortar to really further engage and create a sense of community among the coach customers.

Great. Thank you all.

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

Good morning, Thanks for taking my question.

And my congratulations as well.

Thanks.

I wanted to follow up on gross margin.

Maybe just help us understand the magnitude of some of the geographic mix benefits versus you are in some of the other factors.

Looking ahead gross margin comparisons ease over the next couple of quarters, but you know as North America recovers, perhaps that's a bit of a headwind to gross margin, but I guess as you put this all together are you do you think you could sustain gross margins near this 70% level that you've achieved over the past couple of quarters. Thanks.

Mark we are targeting gross margin expansion for the year and we are making systemic changes to how we how we manage our business and that is driving our margin improvement as well as we have seen some channel mix benefit as well.

In the gross margin, but we're also seeing product margins increased from the actions specific actions, we're taking I touched on them earlier, but you.

You know driving a you are includes embedding data and analytics into how we're managing the business.

I'm really knowing our customer and delivering product that resonates with them and.

Living a great value.

That has allowed us to step away from promotional activity and and that has been a real a real win in terms of driving a you are I'll toss. It Andrew she can give you some statistics about the splits between channel mix and product mix, but the you know the answer. Your question is we expect to continue to drive.

Our growth and margin expansion this year.

Thanks, Mark Thanks, Joanne yes, absolutely in the in the first quarter, we saw obviously very strong gross margin expansion.

At coach that gross margin expansion was primarily driven by a reduction in promotional activity and higher IMU, while channel Nick did help given our growth in China, which as you know Mark International markets do.

You have a higher overall gross margin and of course, having a very low exposure at coach to a wholesale also helps its gross margin the overriding.

Library, there was on the promotional the reduction in promotional activity in a higher AIU art at Kate Spade, we saw the primary driver be channel mix and as I spoke to in the prepared remarks, we saw a significant decline in year over year wholesale disposition, which of course.

As a low margin business for us as we look ahead in our second quarter, we would expect that gross margin at coach would continue to be significantly expanding on a year over year basis, driven again by that promotional activity and a new or.

At Kate Spade, we would not expect gross margin to increase and that will not have that if you will that channel mix a driver in the second quarter, our though we would not expect promotional activity to be up year over year as it was not up in in Q1, and we would expect.

Gross margin at as double you to be down so in the second quarter promotional actively activity at coach and hiring you are that coach will be the primary driver and for the full year. We would expect gross margin for tapestry to be overall up obviously in the fourth quarter of the year just filling out.

Out a little bit we will have a very difficult comparison, given the significant growth in gross margin in the fourth quarter of 20.

That's all really helpful. Thank you.

Sure.

Our next question comes from the line of Jamie American of Bernstein.

Thanks, very much I'm too when you talk about data and analytics initiatives and the ability of that help drive.

You know her and her lower promotional levels and help.

Reengaged some of your lapsed customers, but can you talk a little bit about how you're building that capability that being done and how are you partnering with third parties and then where do you see that they get opportunities to leverage that data thing I'd say is that in terms of actually driving accelerated revenue and that you know so.

Laying the blame reducing promotions over the long term. Thanks.

Thank you and you know, it's it's all of the above you.

Part of our acceleration programs really focused on leveraging data and analytic capabilities and we have over over a time built a very sophisticated data analytics capabilities and our focus through the acceleration program is really embedding those capabilities into our decision making process. So we have a very robust capable.

Realty and the right architecture, and a lot of data and our focus now is how to unlock that data and the insights and really drive decision making.

And we're seeing that benefit across several areas of our business and up the value chain. If you think about it from how we assort product, we talked about a SKU reductions we've taken significant reductions in our SKU count informed by.

The analytics that we're seeing so the teams the merchants and the and the product teams are understanding the performance of our of our assortment and leveraging those analytics balancing that with their intuition, but leveraging analytics to understand.

What the right assortment architecture is I talked about the the work we're doing to allocate to our stores. The right product based on you know the customers in those stores and what their voting for and what they what resonates with them. So knowing customers more deeply in each of our locations and then.

Building, our assortments in our stores to reflect their preferences were getting much sharper at that that's driving improvement you know the pricing piece of it in the promo.

Analytics is about just aggregating our promotional data and understanding at a consumer level, you know, what what resonates with which consumers and then leveraging that to our marketing capability.

Leveraging analytics to make sure we're reaching the right customers with the right messages. So.

So it's really throughout the value chain and it it's an opportunity we found the opportunity to really bad the analytics into our decision, making processes and it it does impact revenue growth overall, because all of those things drive higher eight you are faster turnover of our inventory and.

And lower promotional activity, which drives higher sales.

Great. Thank you.

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

Thanks, Good morning.

I was encouraged to hear that you will begin paying them revolver down in the second quarter can you talk a little bit about what it will take to reinstate the dividend is it is that.

Debt leverage ratio or sales and margin returning to positive territory or maybe just give us a little bit of your thought process behind that.

Yeah, I would say I appreciate that question Lorraine because you know as we entered and have been navigating through the disruption our focus was to ensure the stability of our business and that's sustainable generation of free cash flow. So it's we're having this conversation about paying down the debt and capital allocation in the future.

It does show that we're making progress and generating stable free cash flow I'll toss it but the environment and visibility does remain.

Certainly environments dynamic so we're managing through that but all thought that they agree to give you.

An understanding of our capital allocation priorities.

Yeah, you know Joanne I think you you really touched on it we're really prioritizing liquidity and financial flexibility and 21 to navigate the current environment. You know we made the decision to suspend our dividend and share repurchase program that saves us about 700 million a year on an annualized basis compared.

Until last year, and our intent is to return to sustainable top and bottom line growth and strong free cash flow generation, which we're going to use for debt pay down in fact, our first pay down on the revolver should be tomorrow and so.

So we're going to begin <unk>.

In Q2, a 21, but but I just know that during our covenant period, we are restricted from paying dividends or repurchasing shares and Lori and I think you know that I think we just got that but longer term. We are going to of course evaluate shareholder returns as part of our priorities for cash through dividends and share.

Your repurchase and we're going to be prudent before were restating reinstating our shareholder return program, we have to consider the near term liquidity needs of the business and credit metrics to maintain our investment grade rating and we know what it takes to maintain that and that's important to us.

Thank you.

Our next question comes from one of Oliver Chen of Cowen.

Hi, Thank you reverting coach outlet in marketing to the coach outlet customers. What do you see as the roadmap ahead and plans there to continue to innovate and.

Capture customers and engage them there.

I would also love your thoughts on and creativity, and creative innovation and Magic plus logic.

In the context of the consumer data and the machine learning and your thoughts on the coach brand and where that should go next how how do you. How we you harness that to just maintain fashion credibility as you continue to make progress. Thank you.

Oh, Thanks, Oliver I'll make a couple of comments, but then pass it over to Todd.

In terms of.

Outlet business, we're really thrilled with the response, we've we've seen from our consumers in the outlet channel, we continue to deliver really tremendous value and beautiful high quality product consumers in that channel and we're learning how to engage consumers in a more relevant way you know through.

Through all channels in the outlet and it's not just the outlet. It's also across the space across all channels and it's as we think about I love. The question about creativity in magic in logic I tend to talk a lot about data and analytics, but our company has always.

Prized that balance of magic in logic, and I think you can see from the Assortments that we're delivering that that creative balance that's critically important to deliver products that consumers value and our teams continue to do a great job delivering beautiful product and great value for consumers and that's it.

Key element I think if you've seen the boss collection at coach and Todd I don't want to steal all your Thunder [laughter].

[laughter].

It is.

You know as well as the novelty product and the speed flower that where we've introduced the Kate spade. So it's across our brands, but I'll kick it over to Todd.

It is the Ceos prerogative to steal a little funded that's okay, but but.

George It did hit on really key issues first machine learning is absolutely something we're looking at and all of this data, particularly to help inform the briefs and the merchants, but I think you hit it on the head. It's the balance of the magic of logic and that is so key a machine as sophisticated and I hope my.

Did analytics people don't get too offended by this are not going to design the handbag that definitively we put out there and so they will help inform the design of the handbag and what you see with what Joe had mentioned by Scott That's a full price opportunity, we hit amazing AIU ours in the first quarter for handbags over.

Were $745 with that collection. It just shows when its emotional it it really trumps price and trumps than anything else and that was emotional.

Similarly in.

In October we launched the marble collection for outlet again incredibly you are very compelling very emotional so we see those opportunities.

Continued and even what we've done with Bosqi out is for the first time, we seeded a bag the beat back in that collection and now that's a major bag for our holiday season going forward. So I think it is constantly re imagining that blend and then finally on outlet we're just.

Getting started what we understand and recognize is the outlet consumer isn't on the consumer and limiting that value customer who by the way tends to be a little younger limiting them only to brick and mortar was a mistake I had the opportunity could be.

The expansive and to allow them to shop, where they want to shop is a huge unlock that I see us accomplishing our goal of capturing market share through all of these channels.

Thank you best regards sounds very innovative.

Thanks Oliver.

Our next question comes from line of Paul Trussell of Deutsche Bank.

Good morning, and I too want to share my congratulations both for the performance and one of the announcement drawer.

And also I can personally speak to the men's basketball collection being quite compelling.

So I wanted to go back and touch one to digital growth.

You're obviously driving really strong gains there maybe just speak in more detail on the success, you're having across the geography on the digital platform and it maybe in China, specifically, how should we think about your direct business versus the third party.

Online distribution mix.

And just the overall impact that these digital games or having to the TNL off from a channel mix perspective, and then just to sneak in and just separately you know coach has really been the focus of investor conversations that we've had so I would just want to make sure that we have.

Should be that the major take away Oh learning for investors from this quarter as it relates to <unk> and Stuart specifically.

I'll start with a digital.

Business. Paul you know, we saw the second quarter in a row triple digit growth across our digital channels, and we're leveraging and leaning into our digital capabilities.

Not only to serve the customer in that channel, but also with the recruitment vehicle for new customers. Todd Just mentioned you know the success, we're having in the coach brand, but across all of our brands and recruiting new new customers across brands through that channel significant growth in North America, but also.

Globally, and we have the capabilities to serve our customers through the digital channel globally.

Simultaneously. However, you know we saw that triple digit growth, while we continue to drive a sequential improvement in the stores business. So in the first quarter. So encouraged that we continue to see the consumer adopt and lean into digital as the stores businesses improve a to your point.

On the personnel or digital margins are accretive and you know we are structurally from a piano perspective I'm leaning into digital is a is a benefit to our to our PML. Our business you know as I said structurally.

Is is favorable and the digital business. We have high you are in high order values as well as high margin and because our businesses you know not size, we have a relatively lower returns right, which drives higher overall operating margin in the channel work, we're capturing new custom.

Emerged as I mentioned and expect to continue to invest in this channel both in marketing, but also new capability. So we're incredibly optimistic about what we see the road. We see ahead and digital and continue to expect the penetration to increase and were doing that across regions to your question you know again cigna.

If it can't growth in North America, but also significant in China, where.

And in Europe, but in China, you know.

Interestingly.

The coach brand is the number one ranked brand on on the T Mall platform. So we are we are reaching consumers through that channel and that's obviously an important channel to reach a number of consumers in that market.

So you know we're very encouraged by the work that we're doing and our ability to engage consumers recruit consumers and retain consumers through that channel and what it means for our piano, we are seeing that across our brands and you mentioned Kate Spade, we made progress across all of our brands this quarter and I don't want you know coach had such.

Just standout performance I don't want it to be loss that we also drove topline and bottom line ahead of expectations.

In both Kate Spade and Stuart Weitzman, we are making progress in those brands.

And an important progress.

And particularly as it relates to digital Kate Spade is our most digitally highest digitally penetrated brand already and we're having success, reaching consumers through that channel and the Kate Spade brand recruiting new customers Reengaging lapsed customers. The team is working very hard to really lean into the fundamental Ellen.

The brand we talked about the speed flower introduction from a product perspective.

Which has been very well received and that it will become the new icon that we can build off of for the brand I'm. So we're making progress in the product as well as in the way we're engaging consumers in the Kate Spade brand I continue to have and we continue to be confident in the long term potential there and I'll touch on Stuart Weitzman also.

Oh, promising green shoots in the quarter you know, we improved revenue we narrowed our operating loss during the quarter with focused actions. The team was very bold to make sure that we were focusing on the most profitable unproductive distribution and that you can see the results of that you can see in the progress we made.

In Stuart Weitzman in the quarter, so progress across our portfolio.

For the first quarter.

Thank you for the color best of luck.

Thank you.

Our next question comes from one of more Saad of Evercore.

The.

[noise], especially maybe give us kind of a historical evolution of the digital channel for the outlet business I think a couple of management teams. So it was more of a flash sale operate.

Question, and maybe you can kind of describe iterations of where you are now with coach outlet dot com or what the vision is for coach outlet Dot com and how that's different for its for that's obviously very important part of the customer base. Thanks.

I think that you cut out on the first part of your question Omar but you know.

Digital and how we think about the digital business now versus historically.

Historically the.

The consumer and the channel with leveraged for in a completely different way and now as we think about you know.

You're right historically, we didnt mean into the flash sale element of of the digital business, but today as we get closer to our consumers the digital channel and understand how they shop. The digital channel is an important way that consumers discover brands engage with brands on a number of.

Not just that you have to do to transact, but also to engage across across different platforms and you know the way we think about engaging consumers today is really putting the consumer first and being available for that consumer wherever and however, they want.

[noise] me a lot of success.

In terms of growing growing sales through the channel, but we're also having a lot of success through digital channels and engaging our consumers through our marketing activities, even with our store associates are engaging our consumers on social media platforms from stopping parties [noise] I'd really developing community.

Behind our brands and so the digital space is quite a bit different today than it than it was even a few years ago. The consumer shopping behaviors are changing rapidly, we're staying very close or consumers.

To meet them, where they are.

It's hard to talk about some specifics around the coach brand.

Yes, Thank you Joanna and I you know I was here in the days when we launch deal last and this is not your father's Pos This our digital platform that is so different it before it was a closed idea where we kept going the same customer base over and over and over again and try and.

Talking about price price price.

This is an expansive channel recognizing where the consumers, how she's shopping and talking about value and b and the learnings, we're getting and the frequency of purchase and the marketing that we're putting behind it that's measurable I'm in the digital performance marketing it's completely different.

And as I mentioned, a little earlier, we are talking about the coach insider launch this.

It's a huge opportunity to create a sense of community across both the digital and the physical platforms and what we're seeing is great.

Greater purchase intent higher frequency and really just deeper engagement with the brand. So I see this as a tremendous opportunity and the learnings with that were gaining from North America will transcend this market and you will see us do that in other markets overall.

Planning horizon.

[noise]. Thank you that's very clear sorry about the tech issues and congratulations Joanne on the great opportunity. Thank you.

Sure.

To continue to expand gross margin as we move forward not only for this year, but beyond this year across all of our brands and.

I can let Todd touch on the specific coach who are.

Yes, all right.

You are as you saw grew over 25%, including.

Including 20% in North America. So we're really just with these they you ours and again our intention through.

Creation through SKU reduction through lack reduction in promotion, we want to hold on to hire a new ours and we think we have that opportunity.

Great. Thanks, so much best of luck for the rest of year.

Thank you thanks Simeon.

Thank you so much everyone for your time I will now turn it over to Joanne for some closing remarks.

Yes, Thanks again, everybody for joining us today, a little bit earlier than normal. It is an honor to be leading this organization, we have such talented global teams with great brands and tapestry as an enabling platform very pleased with the results. We delivered in the first quarter against a very uncertain backdrop and we're confident in.

The long term strategy and potential to create value.

Going forward to keeping you all posted on our progress moving forward thanks very much.

Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.

Right.