Q2 2021 Tapestry Inc Earnings Call

[music].

Good day and welcome to this tapestry conference call.

Today's call is being recorded.

Later, we will conduct 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 Vice President of Investor Relations at Tapestry Christina Cologne.

Good morning, Thank you for joining us with me today to discuss our second quarter results as one of their strategies and outlook or Dwayne for threat tapestry as Chief Executive Officer, and Andrea Shaw Resnick Tapestry interim Chief Financial Officer.

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

Please refer to our annual report on form 10-K. The press release, we issued this morning, and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance.

Non-GAAP financial measures are included in our comments today.

And in our presentation slides you may sign of corresponding GAAP financial information as well as the related reconciliations on our website www dot tapestry dotcom forward Slash Investor and then viewing the earnings release and the presentation posted today.

Now, let me outline of the speakers and topics for this conference call Joanne will begin with a brief recap of the second part of the tapestry and each of our brand. He will also provide an overview of the progress we've made on our exploration program Andrea will continue with our financial results in priority of go forward.

Following that we will hold a question and answer session, where we will be joined by Todd Kahn, <unk>, President and interim CEO and brand president of coach.

After Q&A Joanne will conclude with brief closing remarks, I'd now like to turn it over to Joanne for voice or at tapestry E M.

Good morning, Thank you Christina and welcome everyone.

As you read in our press release tapestry second quarter results significantly outpaced our expectations driven by the successful execution of our acceleration program.

Our sharpened focus on of consumer fueled new customer acquisition across all brands supporting notable sales gains in digital in China.

For the second consecutive quarter, we generated strong operating income growth both compared to prior year end of fiscal year 19 supported by a reduction in promotional activity and higher AUR as well as disciplined inventory and expense management.

I'm, particularly proud that we delivered this profit growth in the face of unprecedented COVID-19 related external headwinds, including pressured at bricks and mortar traffic store closures and capacity limit as well as higher freight costs and shipping constraints.

This success clearly underscores the talent and resilience of our teams around the world. It also reinforces the power of our brands and the competitive advantages of tapestry of enabling platform at.

Importantly, our outperformance in the quarter also highlights the progress we've made under our acceleration program.

First we continued to drive our global digital business, which reached $1 $3 billion in revenue on a trailing 12 month basis more than doubling in size from a year ago.

During the quarter, we once again generated triple digit E commerce growth, bringing digital sales to approximately one third of total revenue as compared to a low teens percentage last year.

And in North America as expected at the penetration was even higher with E commerce, representing nearly half of our sales in the holiday quarter up from a high teens percentage last year.

This outcome is a testament to our companywide focus on leading with a digital first mindset and our success in creating immersive customer experiences across our E commerce and social channels.

To deliver these outsized gains we leveraged tapestry scale and agility to support increased digital demand.

Specifically, we moved quickly to add fulfillment capacity, including expanding distribution centers by nearly 350000 square feet heading into holiday Inn.

In addition, anticipating outbound shipping challenges in the U S. We were able to successfully diversify our parcel carrier partnerships, increasing flexibility and enabling us to avoid bottlenecks and limit disruption as much as possible.

These are critical elements of our holiday preparedness strategy.

Importantly, our online growth was led by the recruitment of over one and a half million new customers across brands in North America, where we're continuing to capture a growing number of millennial and Gen Z customers online.

Overall, we're incredibly excited by the traction we're seeing in digital as our focus on this channel touches several of our key strategic priorities, including increased customer centricity better use of data and evolving the way we work to address the rapidly changing environment.

We see tremendous opportunity to drive continued customer recruitment and engagement online supporting not only revenue growth, but profit growth as well as our digital sales channels carry higher operating margins than their respective brick and mortar counterparts.

Therefore digital growth is a key enabler as we transition from a period of efficiency led profit games two of sustainable demand driven flywheel.

Second our ongoing efforts to sharpen our focus on the Chinese consumer once again led to meaningful growth in China with benefits from innovative product assortments enhanced marketing and expanded reach across both direct channel and third party online distribution.

To this end we achieved record sales during 11 11 on Tmall luxury pavilion with coach at the number one ranked brand in the handbags luggage and leather goods category and Stuart Weitzman is the number one ranked footwear brand.

Over the holiday period, our brands offered exclusive products virtual store pop ups and live streaming events with Influencers, such as Austin Lee elevating the customer experience to meet the needs of the highly digitally and fashion engaged Chinese consumer.

In fact, the strength of our results in mainland China more than offset continued pressure from lower Chinese tourist spend with our sales to Chinese consumers globally, increasing for the quarter.

Third as we've shared we're committed to building industry, leading data and analytics capabilities at tapestry, enabling each brand to leverage the shared resource to drive more effective decision making in.

In the quarter, we deployed new data and analytics tools to optimize marketing messaging assortment planning and promotional levels. This is helping to improve AUR and conversion and support the strong gross margin expansion, we achieved in the quarter.

In addition, we rolled out of new data platform to support our loyalty and acquisition programs. This is creating a foundation for ongoing customer recruitment and retention.

Fourth we leveraged the power of our leaner and more responsive operating model.

Cool element of these changes of cultural and centers on empowering our teams to allow for faster decision making at.

Our organization was nimble sharing best practices across brand to develop and execute our highly effective holiday strategy, we put the customer first and adopted strategies to elongate. The shopping period end utilize new innovative approaches to safely connect with customers, including virtual appointments in line queues.

We also continued to drive 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 I'm very pleased with the headway, we are making 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.

We are listening closely to consumer in responding to changes in their values shopping behaviors and brand engagement.

We're leaning into the competitive advantages of our platform, bringing innovation to both product and how we connect with customers as a result, we're driving demand and desire for our categories and stretching what's possible for our brands.

Now, let me touch on our results and strategies for coach Kate Spade and Stuart Weitzman.

Starting with coach.

Revenue exceeded our expectations with sales down only 4% versus prior year, reflecting a significant sequential improvement.

We also continue to expand gross margin, while leveraging SG&A generating of 400 basis point increase in operating margin to 34%. The brand's profit growth was impressive, particularly in light of the current backdrop.

There were many highlights from the second quarter guided by our strategic priorities, which drove our positive results.

First we delivered compelling product innovating across styles silhouettes and price points.

In retail we continued to fuel signature in proprietary brand codes through a variety of new iterations with notable success in our horse and carriage platform.

We also introduced the beat family, which features exceptional functionality and beautiful hardware detail across a range of silhouettes.

The beat collection resonated, particularly well with our Chinese customers.

In outlet, we offered newness throughout the season, beginning with our successful Marvel collaboration are.

Our recent introductions the Georgia Indemnity families were also top selling collections in the quarter.

And at both retail and outlet, we had compelling gifting options throughout the extended holiday season.

As anticipated we significantly reduced the number of skus in our offering across channels, providing more focused impactful assortments and clearer messages to consumers.

Importantly, we also continued to be disciplined at our approach to promotions.

Consistent with our strategy, we're shifting the customers focus to the value attributes and quality of the coach product in fact, our handbag AUR rose approximately 15% both globally and in North America. During this traditionally promotional season.

Taken together these actions supported the strong gross margin expansion, we achieved in the quarter.

Turning to marketing our holiday campaign, featuring Coach's Global brand Ambassadors, Jennifer Lopez, Michael B, Jordan, He goldman's of horror Yang Z and Jeremy Lynn resonated with consumers and reinforced the brand's authentic and inclusive positioning.

In the digital channel coach again realized triple digit revenue growth.

We recruited roughly 1 million new customers through our North America digital channels, representing a significant increase compared to last year. These new customers, who are increasingly younger are helping to fuel the strong growth we're delivering online.

Moving to China revenue rose approximately 35% on the mainland. In addition, we recaptured tourist demand through the China duty free channel as consumers increasingly shift to domestic travel.

As mentioned a highlight of the quarter was the brand outperformance on Tmall luxury pavilion. During the 11 11 shopping festival. This was particularly exciting given the brand only officially launched on the side of about a year ago.

Another key milestone was the multi platform live streaming of our 400 drone 15 minute performance on the bond in Shanghai.

We were the first fashion brand to utilize this format and it highlights how we're driving brand heat through interactive digital experiences and finding innovative ways to engage with Chinese consumers.

We were also excited for the opening of Coach's first fully immersive digital store in Shanghai as Premier I E. P. M Mall in December.

The store has Florida stealing video walls that feature bespoke digital art, combining some of our favorite coach mascots with archival images to create a unique experience for consumers.

Controlled by gaming technology consumers can interact and play with the digital art to curate their own experience.

In January we were thrilled to be the first luxury brand to launch E. Commerce on Valeant, the tick tock of China as we continue to expand our reach particularly with millennial and Gen Z consumers by offering immersive omnichannel experiences across E commerce and social platforms.

Now looking ahead of spring, we are sharpening, our merchandising strategy delivering innovative and emotionally compelling product to excite the consumer.

In retail we will build out the beat family through new introductions, while evolving core bags, such as the tabby, which will feature a new lightweight fabrication.

We're also expanding our jacquard signature offering to include a variety of color ways.

In addition, we've launched new collaborations, including Disney by Keith Haring, which is driving strong customer engagement in our outerwear anchored coach by champion collection, which dropped just this week.

In outlet, we are launching of coach original capsule and of case collaboration both of which are aimed at patients of successful retail assortments from previous seasons.

At the same time, we will continue to create exceptional value for our customers, while reducing promotional activity.

Touching on marketing you will see purpose led messaging the connects community fashion and heritage our coach at forward campaign features of our global brand ambassador of sharing personal messages, which focus on the power of positivity collective action in the importance of everyday recognition for the people in our lives who help move our world's forward.

Yeah.

To bring the campaigns of life of castle call on all viewers to coach at forwards and leave messages of gratitude for loved ones, creating a ripple effect of optimism around the world.

We also just launched coach conversations are monthly Youtube series designed to create a two way dialogue about culture community and creativity among global thought leaders the debut of episodes kicked off with Jennifer Lopez and Jay Shetty of former monk turned to purpose coach and has already received over 700000 views since <unk>.

Launching in late January.

In summary, we are extremely pleased with the brand continued momentum and solid financial results as we grow our customer base, while driving increasing profitability.

This year, we are celebrating coach's 18th anniversary as we look back on our history. We are proud of the brand Rich heritage as America's original house of leather goods and just as importantly, as we look forward, we're confident in our future.

Now moving to Kate Spade, we're very pleased with the brand's outperformance compared to our expectations from both the top and bottom line perspective, highlighting our team's excellent execution in a challenging environment.

Revenue improved sequentially declining 13% year over year, which included a four point impact from the strategic pullback of the low margin wholesale disposition business.

We delivered gross margin expansion of 110 basis points, well outpacing our internal projections, while also reducing SG&A.

Taken together, Kate Spade delivered operating margin growth versus last year.

We achieved several key strategic milestones during the quarter as we leaned into the fundamental elements of the brand that we know our customers value.

Starting with product in retail we remain focused on rebuilding our core collection, while bringing newness to the assortment Margaret.

Margo remain the top selling handbag group, while newness, notably the all day towed performed well in the quarter.

Our customer also responded to novelty elements integrated within our assortment, including product featuring our well loved cat and handbags adorned with ofer, both of which were showcased in our holiday campaign.

In outlet, we increased the breadth and depth of our box gift sets, which were top sellers over the holiday season. We also added to our core handbag collection through the introductions of key shoulder bag families Natalia and Marty.

Importantly, we were disciplined in our promotion specifically in our value channels, driving global handbag AUR growth versus last year.

Outside of handbags, we saw relative strength in jewelry and footwear across channels and tech accessories, where Kate Spade has a leadership position among fashion brand the glitter Airpods case significantly outperformed expectations.

In addition, I'm excited to announce our new fragrance collection, which launched in January has been overwhelmingly positive results in both our own channels as well as in department stores.

These categories, which are foundational to the brand unique lifestyle positioning are also important for customer recruitment and cross selling.

During the holiday season, we highlighted Kate Spade is of destination for gifting Joy and celebration and example of the brand's innovative approach to social selling was its collaboration with Starbucks in Asia. This partnership initiated by their APAC division drove tremendous traffic to the Starbucks site.

And it was so successful is of the products sold out in just day in Japan.

This example, underscores the consumer's desire for Kate Spade and its relevance as a lifestyle brand.

Turning to digital Kate Spade has a well established E commerce business with the highest digital sales penetration within our house of brands.

During the quarter, we continued to drive momentum online achieving strong double digit revenue growth through a combination of engagement with existing customers and the recruitment of new consumers.

In fact, we attracted approximately 500000, new consumers to the brand through our E commerce channels in North America, a meaningful increase compared to last year.

Importantly, these customers are entering the brand for the first time and purchasing at a higher AUR compared to the balance highlighting that when we meet customers, where they want to shop with emotional and compelling product innovations supersedes price.

Additionally, we reactivated over 200000 customers through our digital channel an increase of approximately 40% compared to last year. This is an important green shoots of demonstrates the traction we're making in strengthening our relationships with our core customer base.

Turning to Kate Spade priorities for spring and specialty we're continuing to re energize the leather goods offering with the launch of the not Satchel. In addition, we will expand our signature platform. The spade flower with new color introductions in the well received jacquard fabric.

In outlet, we will launch Layla our core Pebbled leather group will also offer newness in backpacks and cross bodies in keeping with the consumer's desire for hands free styles.

Across channels, we will continue to integrate novelty into our assortment with a playful nautical themed focus for the spring season.

In marketing our campaigns of joyful and colorful grounded in our brand purpose and understanding of the customer our approach is multi dimensional utilizing a wide range of digital platforms and influencers to amplify our brand and product stories to engage with consumers and our community.

In fact last month, our pink loves Shaq Heart Cross body went viral on tick tock.

The excitement began with an enthusiastic customer who shared of posts about her recent purchase of the bag is quickly gained further momentum after one of our store associates created of video and response, which inform the community that the bag with now sold out across the United States.

Taken together these posts garnered over 1 million views.

As a result, we worked quickly partnering with these micro influencers to create new marketing content to announce the products restock. This is one of my favorite examples of how the brand emotional connection to its customers has the potential to drive organic engagement within its loyal and passionate following.

This is also a bit of a key learning for our teams who are exploring new opportunities to harness the power of the Kate Spade community.

In closing I'm encouraged with the progress, we're making and the increasing number of green shoots we're seeing that highlight the strength of the brand I remain optimistic about the potential for Kate spade at as a unique lifestyle brand with meaningful runway to accelerate revenue and profit growth long term.

Turning now to Stuart Weitzman the brand demonstrated continued progress this holiday season sales sequentially improved from the previous quarter and exceeded our expectations. As a result of the momentum in the direct business led by China and E commerce as well as wholesale.

In addition, as previously announced these revenue results include the impact from exiting unprofitable markets, which represented a nine point headwind in the quarter.

Importantly, our focused strategic actions resulted in significant operating margin expansion for the brand.

During the quarter, we delivered compelling products with a focus on key categories of boots and booties.

We grew our core classifications, while balancing buy now wear now styles with transitional product.

In keeping with the market shift of Casuals nation and building upon the strong performance of the lung sold 50 50 lift in the first quarter, we expanded our assortment of boots and booties featuring this on trend soul, including the top selling Colby Beauty, Inc.

Importantly, our icons continued to resonate with customers specifically are 50, 50 and land families.

In digital we realize the double digit increase in revenue compared to prior year.

This performance was led by a new customer recruitment, which includes a growing number of Gen Z and millennials entering the brand.

Notably, we also drove roughly 30% increase in reactivated customers in the quarter as we sharpened our focus on creating relevant assortments to engage with our core consumers.

In China as mentioned Stuart Weitzman was the number one footwear brand on Tmall luxury pavilion on 11, 11, a key indicator of the brand strength and momentum in this important market.

During the quarter, we also introduced Elaine Zhang as our brand ambassador, which helped to further solidify our luxury positioning in the market.

In addition to our brand campaigns, we are continuing of key strategy of live streaming featuring local influencers for the 12 12 holiday, we partnered with Austin, Lee, which drove significant engagement.

Touching on marketing our winter being your element of pain, which featured our global brand ambassadors Serena Williams strengthened our positioning in boots and occasion, where this campaign culminated with a Billboard in times square featured prominently during the televised new year's Eve celebration, which reached an estimated 1 billion viewers.

Globally.

In wholesale we continued to strengthen our partnerships with key accounts supported by consistent execution and on time deliveries. We're pleased with our continued progress and the positive reactions, we received coming out of our recent market week.

Looking ahead of spring and product, we're continuing to innovate by infusing our elevated take on Casuals Asian across the assortment.

We're launching the goal of the family, which features Pearl embellished styles across sneakers flats, and sandals, combining casual silhouettes with the brand signature of polished sophistication and comfort.

In January we introduced limited edition collections, including the lunar new year capsule and Valentine's day at at <unk>.

These collections feature our new Ali and Debbie sneakers, which had been strong performer since the launch.

Importantly, as vaccine distribution increases in 'twenty and 'twenty. One we expect continued improvement in demand for key categories, particularly occasion wear and bridal as a result, we will rebalance of our assortment to include sandals in pumps for when our customer is ready to go out and celebrate while continuing to focus on elevated.

Casual styles.

In marketing for our spring 'twenty 'twenty. One campaign, we are very excited to once again featured Serena Williams. This time with a very special guests, who will be announced in the coming weeks.

We're also finding new ways to engage our customers based on direct feedback we have received from them. A great example of this is our launch of the 'twenty 'twenty, one edit on Instagram and our web site, which utilizes a range of diverse influencers, including our own associates to highlight ways, our shoes can be styled to drive conversion.

Overall Stuart Weitzman's first half results were stronger than expected as we continue to make steady progress towards our goal of restoring the brand's profitability over our planning horizon.

In closing as we enter the second half of our fiscal year, while we do expect COVID-19 related headwinds to persist in the near term our first half performance.

The resilience and agility of our team and the strength of our portfolio of brands.

The consumer is changing rapidly and their values shopping behaviors in connection to brand and these changes have highlighted opportunities for our brands and our business. We've taken the opportunity to crystallize the unique purpose of our brands and company and we fully embraced the opportunity to innovate the ways, we engage with our customers and evolved.

We operate as an organization.

It's also reinforced the opportunity to leverage tapestry is enabling platform and competitive advantages to stretch what's possible for our brands.

These changes are foundational to our success, both today and in the future.

Importantly, I'm confident the tapestry will emerge from the pandemic stronger well positioned to capture market share at higher levels of profitability, creating opportunities for reinvestment in the business and in turn unlocking the flywheel of sustainable growth.

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 find dwell safe and well before I begin. Please keep in mind at my comments are based on non-GAAP results corresponding GAAP results and the rest of late and reconciliation can be found in the earnings release posted on our website today.

As Joanne mentioned, our holiday quarter results were well ahead of our expectations as we continue to drive operating income growth at an unprecedented environment total sales declined 7% from prior year, representing a significant sequential improvement across all brands importantly, we successfully implemented.

At our strategy to elongate the holiday shopping period pulling forward demand.

The total of Thanksgiving week to allow the customer to start their shopping experience earlier by region North America, there's still pressure at worst of last year led the sequential improvement driven by better at all store trends at a higher penetration of the fast growing digital business and Asia growth remained.

Positive aided by 30% plus revenue gains in mainland China, along with of our charge year over year of growth in Korea.

The balance of Asia sales remained below last year, specifically in Japan, and Malaysia as Lockdown measures were reinstated.

Europe, though a small portion of our total sales experienced a material slowdown in the business given the significant increase of lockdown acquaintance with local government restrictions.

By channel as Joanne noted performance was driven by another quarter of triple digit growth in digital as we landed at the opportunity to most of the customer where they want to shop.

In our global bricks and mortar channel revenue continue to decline due to a materially lower traffic compared to last year, partially offset by increases in AUR and conversion.

Wholesale while the channel remained below prior year, reflecting in part of significant growth in our duty free business and China's Hainan Province.

Shortly topline trends in the month of January met our internal projections reflect any further sequential improvement from Q2 as we remain on track for sales to inflect in the third quarter.

Moving down the P&L, we realized another quarter of excellent gross margin expansion compared to prior year with all brands exceeding our expectations tap of strange gross margin rose 200 of 90 basis points year over year as we successfully executed our strategy to maintain price discipline of leveraged.

Data analytics at scale of our product assortment and marketing messaging to the consumer.

Coach drove the increase in the quarter with gross margin expanding 340 basis points compared to last year, driven by lower levels of promotion, resulting in higher AUR along with the reduction in at Ku counts as planned.

At Kate Spade gross margin increased 110 basis points, which included a benefit from channel mix, reflecting of strategic pullback at lower margin disposition sales at <unk>.

Partially offset by the final quarter of negative impact related to bringing the brand footwear business in house.

I'd say at the gross margin was significantly ahead of expectations due to lower levels of promotional activity in the North America value channels. In addition, SKU counts began to decline.

For Stuart Weitzman, the brands gross margin rose 40 basis points due to a benefit from FX.

SG&A declined 9% year over year, primarily reflecting effective expense management and the previously announced actions to transform the company's operating model. In addition, and as projected SG&A in the quarter benefited from wage subsidies were at between sessions and a gain associated with the deferred purchase price.

Of the Kate Spade, China joint venture.

The items were partially offset by reinvestments in the business, notably higher marketing spend and an increase in accrued annual incentive plan expense given our outperformance year to date.

Overall, we drove strong operating income and margin expansion compared to both FY 'twenty at.

FY 19 of the second consecutive quarter, we're extremely proud of the standout results, which we delivered in the face of unprecedented at.

Covid related external headwinds as you will recall, we anticipated FY 'twenty, one would be a year of at efficiency led profit growth and that our ability to drive increases in gross margin and reductions in SG&A would be the initial indicators of progress along our multiyear growth journey further as expected.

The performance of our margin accretive businesses, notably digital across brands and China are supporting our significant margin expansion.

The strength of the first half is a clear indication that our foundational changes and the strategies of our of like acceleration program are taking hold reflective of the potential to fully unlock the flywheel and drive sustainable long term gross.

Earnings per diluted share for the quarter was $1 15 as of compared to $1 10, a year ago, representing an increase of 5% as anticipated. These results included the negative impact from a higher tax rate compared to last year due to the geographic mix of earnings along with an increase in interest expense primarily associated with the draw down on our road.

Oliver.

Now moving to distributions.

For tapestry, we closed end yet at the inflow of locations globally in the first half, including three net closures in Q2, representing a net of eight foreclosure as compared to the prior year as we continue to optimize our global fleet.

Turning to a discussion of our balance sheet and cash flows we ended the quarter at in a strong position with $1 $6 billion in cash of equivalents and total borrowings of $1 8 billion.

First at the way, they're consistent with our stated near term priorities, we utilized free cash flow to pay down 500 million of the 700 million dollar revolver draw down during the quarter with of 200 million dollar balance pulled down just last week.

Therefore at this time, there are no longer any borrowings under our revolver.

Total inventory ended the quarter of 16% below last year, reflecting in part deliberate actions to reduce SKU counts and prioritize inventory turn.

Ending inventory balance was below our expectations due to our sales outperformance in the quarter.

Good day like many other was across all industries, we are experiencing some distribution network disruption related to COVID-19, resulting in shifting capacity constraints and port congestion globally. As a result, we anticipate longer lead times, which will delay the timing of receipts and limit our ability to chase higher.

All of the demand kind of.

Materialise.

In addition, we expect the Kate spade business to be affected by the widely reported net S N and one apus cargo ship incidents, which will impact the brand spring deliveries.

These factors have been contemplated in our outlook, which I will address shortly.

Capex for the quarter was $24 million of decline of 52% versus prior year as we continue to prioritize investments in high return projects, notably in digital while tightly controlling overall spend and reducing our outlay for new stores. We now expect capex to be in the area of 135 million for FY 'twenty one.

Based on our favorable first half actualization.

Free cash flow for the quarter was an inflow of $633 million as opposed to $506 million last year on a year to day basis free cash flow with any inflow of 697 million.

Our strong cash flow generation of underscores the resilience and effective management of our brands.

Yeah. It was touching on our capital allocation priority as noted the strength of our business end, resulting free cash flow generation positioned us to fully pay down our revolver as of January in the near term. We will continue to preserve our cash on hand, while we ended up at that thing in the business longer term our objectives remain unchanged.

Our strategic intent is to return to sustainable top and bottom line growth driving continued strong free cash flow generation, which will enable us to pay down debt as well as return capital to shareholders.

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. However, given our strong performance in the first half and assuming a continuation of the recovery from the pandemic and at the second half. We are now projecting revenue to increase at a high single digit rate on at 52 weeks.

Basis and in the area of 10% on of 53 week basis, but at fiscal year.

We continue to expect revenue to inflect in the second half as we begin to anniversary the meaningful headwinds associated with the start of the global pandemic last year. This includes the expectation for sales to increase at a low double digit rate in the third quarter.

We are planning realistically as we continue to monitor the external environment in light of the wisdom of resurgence of cases across the globe and the notice of supply chain and logistics challenges impacting we see.

We remain focused on controlling the controllable and are building a strong foundation for profitable expansion over the planning horizon.

Continuing to take deliberate actions to lower promotional activity increased AUR across brands as demonstrated in the first half and to drive gross margin expansion for the fiscal year.

As previously announced we're taking steps to aggressively control, our SG&A spend to implement structural changes to drive increased efficiency.

One of these initiatives, we continue to estimate that we will realize approximately $300 million in gross run rate expense savings, including approximately 200 million in gross savings in FY 'twenty. One alone however, with a higher level of variable costs associated with the higher sales forecast and reinvestments in our business, we would naturally expect our.

Net savings dollars can be somewhat lower than originally anticipated.

Looking ahead, we believe that we are creating a virtuous cycle of a flywheel that should as revenues and flash drive bottomline growth well in excess of topline gains over our planning horizon.

In closing, we're very pleased with our strong half results, which demonstrate the bold actions. We are taking under our acceleration program the strength of our iconic brand and the resilience of our teams around the world and tap of strange long term potential to create value for all stakeholders.

Looking ahead, we will continue to focus on those factors within our control as we navigate the uncertain environment in the near term.

Importantly, our view of the long term opportunities for coach Kate Spade and Stuart Weitzman is unchanged our brands continue to get benefit from cap of strength, enabling platform with the potential to achieve greater size and share than they could on their own we remain steadfast in our strategic intent to drive organic growth and profit.

Ability and look forward to keeping you posted on our progress I'd now like to open it up to Q&A.

Hey.

Thank you the floor is now open for questions. As a reminder, in order to ask a question simply press Star then the number one on your telephone keypad.

Again, if your question has been answered or you wish to remove yourself from the queue press the pound key.

Our first question comes from the line of Bob Dribble of Guggenheim Securities.

Hi, good morning congratulations.

Good morning, Bob.

Oh thanks.

Thanks.

Two questions for you at the first one how sustainable are these strong profit margin results and and then the second one is one.

When do you expect the EPS to return to pre pandemic levels. Thanks.

Thanks, Bob I'll take those one at a time two great questions first.

At first on the sustainability of the results.

When we developed our acceleration program. It was with an eye on foundational changes that we needed to make to be ready for what we were calling at the time, the new world of retailing and the trends that we saw over a year ago have only accelerated with Covid as you know and that's given a stronger conviction to move quickly. These are foundational changes.

They're embedded in our business. Some of those changes include having a sharper focus on the customer we're using more consumer data and research to inform our plans and our execution, we're leaning into digital really leveraging the tapestry platform to engage customers in a different way, we're making real headway here with triple digit growth in digital over the past.

Two quarters.

We're maximizing the opportunity with the Chinese consumer as evidenced by the 30% growth we showed in mainland China This past quarter.

And we're leveraging data for decision, making and that means really embedding. These tools in our decision, making framework and our processes, which is supporting our approach to things like disciplined promotions, our SKU reductions inventory control.

And we're also delivering gross SG&A savings as Andrea mentioned, which is about streamlining our operating model, it's about taking layers out and empowering our teams. So that we can drive agility and speed and at the same time, we're investing in capabilities to reach customers in new ways.

And I would say finally, we're focused on driving more productivity and profitability from our fleet any of these are sustainable actions and they're embedded in our operating model as we move forward and we expect to drive accelerated revenue and profit growth across brands I.

I think of year to date, our performance shows the actions are taking hold we achieved strong operating income growth and operating margin expansion. Despite the pressured revenue year to date.

To the second part of your question with our first half outperformance our fiscal year 'twenty, one outlook implies a return to high teens operating margin. Despite the external environment and it also implies that in this fiscal year will be approaching pre COVID-19 earnings at a 52 week basis. Despite the lower sales. So it really speaks to the success of our access.

Elevation program and honestly the strength of our teams execution.

Thank you.

As a reminder, ladies and gentlemen in the interest of time, we please ask that you limit yourself to one question.

Our next question comes from the line of Ike for child of Wells Fargo.

Hey, good morning, everyone I just wanted to good morning Irwin.

Good morning.

On the on a quarter of debate in the third quarter our outlook for revenue growth was really strong, especially in light of some of some peers of yours of what they've guided just curious if you could kind of dig into that at a little bit more I'm curious, what's going on and China, we've heard or travel restrictions of caseload. So curious if youre seeing volatility there than in the north.

America market specifically for coach how are you doing here is there a chance of your back of the culture.

So maybe what I'll do is I'll start off with the China month to date comment obviously as we spoke to on the call. We had very strong results in China during the quarter up 30% across brands up 35% of mainland China for the coach brand.

And Todd can get into that a little bit more quarter to date in northern China. We've seen some resurgence in COVID-19 cases, and we have a few temporary store closure was literally a handful of at.

And we've seen some impacts of traffic, but they do appear to be easing as we move into the important China new year at Chinese new year holiday, which I think you know probably starts on February 12th. So we're monitoring the trends are but as I said things appear to be getting better and.

We recognize that this is a near term dynamic we're still as bullish as ever on the long term prospects for our brands and business in China, especially in light of our second quarter results at Todd I'll turn it around to you of what you're seeing in coach.

Thank you Andrea.

We were really pleased with our second quarter results and in fact in North America. The coach brand was we did comp positively and.

In North America, So we're coming off of that.

We're pleased with where we are quarter to date.

As you can as you know for the brand comp in the next two months gets very wonky as we have closures in China and then we of closures in the U S. But in terms of where were at again, we had positive comp in the quarter end, we like where we're what we're seeing in the future.

Thank you.

Welcome.

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

Great. Thanks. Good morning. My question is around digital I think it's been three consecutive quarters that you've seen triple digit growth can you just share with us at the World Reopens, where do you see that digital mix settling out and if you can kind of help us through the P&L of that I believe it's margin accretive, but any other kind of details on them you know kind of day longer term impacts do you see.

Matt on the P&L. Thank you.

Yes. Good morning, Erinn, we are really pleased with our with our digital business.

Another quarter of Triple digit growth as you said.

And as we look at it we're in the middle of our fiscal year, but if we look kind of trailing 12 month basis, our digital business has grown to $1 $3 billion. So we're achieving significant scale, it's more than double where we were a year ago. At this time, we've ramped up quite quickly and we're getting much better at engaging consumers.

On these platforms through a through E commerce and social platforms. In fact, our digital business has been a great source of recruitment we recruited over a million of half of new customers in North America through digital channels. Just this last quarter alone across all of our brands it.

It is a it is an important channel we do see at continuing to grow. These digital shopping behaviors, we think will be sticky and we're well positioned to continue to invest in and engage consumers here.

And you know to your point, our digital margins are accretive.

Versus their brick and mortar counterpart. So you know as we grow this and continue to grow this channel and meet our customers where they want to shop. At also is a tailwind from an operating margin perspective, as we move forward.

Great. Thank you.

And just to add a little bit of context on that and I are and I think you know this but we have at relatively high AUR compared to your average retailer or E. Tailers should I say and we have at fairly low rate of return because we don't have tied inventory for the most part most of our.

Our goods are a leather goods so at that at take that and then understand that we have the lower cost structure.

You know having been in to filling orders since we were at coach with a catalog company digital digital Margaret margins are well higher than those of the D. N M channel bricks and mortar channel and therefore as we continue to grow gross in digital that is going to support both the higher level of sales and the tailwind.

The operating margin.

Alright, that's great.

All right. Thank you.

Yeah.

Yeah.

Our next question comes from the line of Alexandra <unk> of Goldman Sachs.

Good morning, everyone. Thanks, so much for all of the color so far and thanks for taking my question I had a question about new customers at you could you shed a few details on those new customers. I think you mentioned they were younger I think he mentioned they spent more I wonder if you could go to that end a little bit more detail of those customers at this thing from the customers that were shopping in your stores previously what sort of age.

Range All day, and then you know how are they spending as the as the highest spending rate because of buying more expensive product because it because they're buying more product.

Further comments on that would be super interesting. Thank you.

Yeah, I'll take the Big picture and then toss at the top of could give you some input on what we're seeing at coach specifically, but you know overall, our focus through our acceleration program is to to sharpen the focus on the consumer and as we do that we're looking at ways that we can engage consumers with our brand some of that is on digital and so.

Channels, and we're building the tools and capabilities to be able to engage more consumers and our brands.

We're gaining a lot of traction we've added a lot of customers to our brands when when I talk about recruiting one and a half million new customers. These are customers who are new to the brand. Overall. So these are not customers who are just migrating from brick and mortar into digital we are seeing some of that behavior naturally with the with the lower traffic to our stores.

But these are new to brand customers and as you mentioned they are increasingly younger.

We're where we're.

Acquiring younger customers at an increasing rate as we engage in ecommerce channels and digital channels and through social media, which is great for the long term health of our brands.

And I'll kick it to Tom to give you a little bit more color on what he's seeing at coach.

Thank you Joanne we are so pleased with this download of degree half of million new customers in the quarter, but if you think about year to date, we added two and a half million new customers to the brand.

All of mostly through digital so that's exciting we are seeing them.

You're almost half of being younger Gen Z and millennials.

We're not seeing them buy necessarily higher priced product, but since the brand overall is less promotional.

And we're seeing that lift of AUR.

Winning across every demographic.

Lastly, it's early days, but we're seeing a fairly high repeat purchase rate.

So that's very exciting to see that maintaining a relatively high repeat purchase rate at such a higher base.

Is very exciting end. So we see this continuing we're really looking at our data.

All of the consumer insight to understand what's going to appeal to them, what's the medium what's the messaging.

That we're going to continue to use and it influences. Our design. So again I think you've heard Joanne talk about the benefits of the flywheel of this is <unk>.

Where it comes into life.

Thanks for all of the color.

Youre welcome.

Our next question comes from the line of Mark Ultra trigger of Baird.

Good morning, guys. Thanks for taking my question kind of Doug Congrats on the progress so far.

I was hoping to dig into the performance of Kate Spade, a bit more and really your assessment of the progress with the strategic changes that Youre, making is asked another way of trying to get a better sense of debt. The cyclical recovery that may be emerging here versus some of the of course corrections of.

The brand missteps in the recent past.

And then separate but also related to Kate you called out of reduction in wholesale disposition of a headwind there maybe just debt.

Where are you in terms of your level of exposure to that channel versus where you plan to be on a go forward basis. Thank you.

Hey, Mark good morning regarding Kate Spade as we mentioned you know we are.

Really pleased with the progress, we're making in that brand and we have a number of promising green shoots.

I would say you know we're still early days and in terms of the the actions we're taking to restore the brand of health and drive the brand to its fullest potential and you know we are really encouraged by the green shoots that the team is taking you know where were seeing operating margin expansion improved.

And in the top line and that's being driven by our focus on our Assortments and the product is resonating with our consumer.

You know, we've talked about a bag of assortment and stabilizing and re energizing our core handbag assortment, we're seeing traction behind key elements of that assortment and talked about the space that flower and the all day told that we released in the last quarter.

All performing so that's that's a green shoot.

Recruiting new customers, which is important to the brand.

So that we can continue to expand the Kate Spade community.

But we're also increasingly reactivating lapsed customers, which says that as we get back to the fundamental elements of the brand, we're resonating with with our our core customer base.

So that was another green shoot in the quarter end I would say finally, our global handbag AUR grew in the quarter.

Which is you know has been really nice progress and I think speaks to the relevance of the product as we're delivering at so we feel really good about the progress we're making in the Kate Spade brand.

As it relates to dispel.

Obviously, maybe not obviously that is a channel that where we're trying to minimize and we've made tremendous progress on that.

Over the past few quarters. So we continue to focus on driving our business through our value channels to our consumers as well as through specialty end and we're making as I said really good progress and really the great news for us at that we're only just beginning we see a tremendous amount of potential for the Kate Spade brand as we move forward.

And I would just add to that.

Mark that we are very pleased at our inventory position, there very clean Ah across tapestry and at at Kate Spade in particular.

Great.

Great Best of luck.

Thank you. Thank you.

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

I think good morning of the shifting to digital has been pretty sharp are there any big investments you need to support the strong growth and then how does this shift change you're thinking about the size of the fleet.

Hi, Larry and thanks for that question, yeah, but the shift in digital has been rapid and we've seen that at.

<unk> more than doubled in the last 12 months of our total digital like I mentioned earlier, but one $3 billion now of business has reached sizable scale as well.

And we have reacted quite quickly too.

To to support that business. We've added distributions were footage we've added a carrier partnerships.

And we continue to make the investments required to support that business on the distribution of fulfillment side as well as investing in the platform and the data and technology of tools that we need to manage that business. Other teams have done a great job moving inventory around the world to ensure we're supporting demand where we see at.

So we feel great about our position of our tapestry platform and the scale that we bring to our digital business.

And as it relates to the fleet.

Our first of all cases to sharp is on the customer right. We want to follow where the customers. We want to meet the customer where they are and end are shifting to digital this year of is really been to serve our customer where they and how they want to be served.

And as we think about the fleet, we think about it through that same lens you know we've talked about over the last couple of quarters, raising the thresholds of profitability at our expectations for the productivity and profitability for our fleet and we continue to manage our fleet with those expectations higher expectations for productivity and higher expectations for those.

Our brick and mortar stores to be profitable, having said that we also believe that there is a need for physical touch point of the brand stores matter and we're investing in and ensuring that that physical touch point is the right experience for our consumer and a great example of that is is the store that we opened up in Shanghai in the I P. M Mall.

It's a it's a fully immersive digital store with Florida ceiling of video walls that engage our consumer and let them engage with the with the video on the wall. So it's about the experience but are what are from a financial perspective, and how we manage our business in our fleet.

Is with an eye on productivity and profitability.

Thank you and the store that Joanne referred to I have to take a little pride is of coach stores. So.

We love what we're seeing their end and it is something that I think we can.

Adopt and have learnings across the fleet.

But obviously for coach Inc. As well as the rest of our tapestry of breads.

Yeah, Thanks, Todd didn't mean to still you're selling.

No problem.

Our next question comes from the line of Oliver Chen of Cowen.

Hi, Thank you you've made encouraging an innovative progress at coach outlet and then also broadcasting to that customer and being inclusive of an offering value could you update us on that strategy and where it is and how it may synergize with your greater ecosystem and also as we look think about outlet.

How is outlet running with respect of promotions in traffic it sounds like you've had really encouraging AUR gains there as well. Thank you.

Yeah.

I guess I'll take that I mean, you you hit it at unit.

You read our playbook of it is all about innovation about messaging beyond just the product. So we see that the consumer really cares they are value and value.

So and we're going to continue to double down on debt and we see at resonate not just north America, but globally.

In North America traffic is down we see that and that's.

Good day continue to be a headwind until we get to true Covid relief and vaccination.

We're optimistic that we'll see a return.

And as Joanne just mentioned there is going to be at continue to be a strong brick and mortar business at co.

Coach of both in full price and in outlet.

In terms of.

Coach outlet Dotcom, our strategy remains we being very responsive to the consumer providing the consumer with really innovative product debt.

Both has there satisfies their emotional needs and their social DS and Wii.

Youre going to see continue really accelerated innovation in all channels for coach. So we're very pleased.

We are going to be very very rigid out of the promotion of <unk> of the brand and continue to provide.

Provide value and promote value versus pure price.

Thank you and Joanne sustainability and ESG, our big priorities for us in our research product.

In other words, what are your thoughts in terms of key priorities for the organization of what would you highlight of.

All of your focus areas as you approach. These topics. Thank you.

Yeah. Thanks, Oliver that's of Great question in ESG and sustainability overall, there's something that has been very important and it's important to each of our brands and it's important to tapestry as a company. In fact, you know as we were forming tapestry as a company of few years ago, we talked about how.

E S G needed to be part of the fabric of our company and we created our social fabric, which encompasses our ESG program. If you will our goals and they're around people can.

<unk> and in our environment and end so all three of those areas our focus areas of ours as it relates to our people goals, it's about having more representation across our organization and leadership and we continue to hold our teams accountable for progress there's definitely more work we need to do there, but we remain very focused.

On it and as it relates to community, it's about how we impact our communities as a company end and that's through our foundation and the work of our foundation stupid also through volunteering efforts from our teams and I would say lastly on the environment, we're very focused on of our carbon footprint and the impact of <unk>.

The ability of our supply chain. So so those are some of the areas of focus it.

It is a very important element of our strategy going forward and we're holding ourselves accountable to making progress on our goals.

Thank you very much best regards.

All of them.

Our next question comes from the line of Matthew Boss of JP Morgan.

Great Thanks, and congrats on the improvements.

Thanks for that maybe.

On the top line inflection that you cited for the back half could you speak to lead indicators that provide your confidence and accessories category growth coming out of the pandemic versus pre pandemic and then on the bottom line model flow through to exceed topline growth as you cited.

Just speak to the sustainability of coach brand operating margins here in the low thirties.

Yeah, Let me talk about Oh, I'll take the category more broadly and then Todd and Andrea can can talk about the sustainability of our margins.

But as we think about the category.

We put that handbags small leather goods has been a strong category pre COVID-19.

Four years, leading into the pandemic the category was growing at.

Mid to high single digits, we've been incredibly pleased with the level of engagement at customers that have had with the category as we've moved through that the pandemic you know that's evidenced by our digital business, but also in areas in China, where the recovery is further along are seeing strong growth. So.

Continue to see consumers engage with the category and we continue to hear that handbags. At these categories are our emotional categories that that consumers love and they and they continue to purchase to treat themselves. They considered the purchase of a treat.

And so you know we've also done some research in the middle of Covid about purchase intent going forward and what we what we've heard from consumers is that there continues to be strong purchase intent.

For our categories at ranked one of the highest categories for purchase intent of coming 12 months. So you know what.

Pleased with the engagement in the category during the pandemic, we expect the category to continue to grow at post pandemic and as I think about it you know as the vaccine rolls out in the world opens up again and people begin to connect them of physical world We.

We expect people to be going to events again and going out to eat and we are very excited to be able to continue to grow our business as we as we outfit our consumers as they're at their habits change going forward. So you know we see a lot of growth ahead as well.

Todd in terms of sustainability of margins I addressed that a little bit in our in our my first and the first question today, but are the changes we're making in our organization are embedded in the organization and we do think they're sustainable, but I'll I'll pass at the top to take us to take the space.

Thanks, Joanne Yeah, we do see significant potential to grow top line.

We said and we've said this now repeatedly over a number of quarters. Our goal is to capture market share at.

We think we can do that at higher levels of profitability.

You see.

Some of the key drivers are.

Digital obviously, China.

And just driving higher gross margin and reducing our fixed cost space, particularly with the discipline of promotions and the increase in AUR. So.

We're pleased where we're at and we see a lot of runway.

And just to round it out on total on total tapestry of Joanne mentioned based on our FY 'twenty one outlook.

You know you can imply a return to high teens operating margin even on a 52 week basis, which is above our prior peak at tapestry at 17% of despite the external environment, you know and it at as Joanne mentioned it does imply that E. P. S will hit Oh.

Approach I should say pre Covid FY 19 type of level, but importantly, we see continued opportunity for year.

Courted by continued revenue growth and operating expansion across brands I think we have significant opportunity at both.

Kate Spade and at Stuart Weitzman to improve their gross margins and obviously they will see the flow through on the higher level of <unk>.

Revenues and if you look you know in the next couple of quarters, obviously third quarter, we'll still see of very good increase in gross margin led by coach of fourth quarter will be slightly pressured in terms of gross margin at.

And then in terms of S. T. At all we would expect SG&A dollar growth to be down in the third quarter slightly even though we'll have that nice gain of low double digit in sales and then in the fourth quarter. We would expect SG&A dollar growth to be up significantly on a year to year of year over year basis of.

You know given last year's closures et cetera, et cetera going forward, we still think there's significant opportunity for tapestry its overall operating margin.

Congrats again.

Thanks, Matt Thank you.

And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Omar Saad of Evercore.

Thanks for squeezing me in and thanks for all of information.

Really I just wanted to ask.

At the digital outlet strategy.

You know what youre seeing there any updates around that at obviously your ecommerce business is doing well so I assume that's doing well.

Are you seeing new customers come in through that channel are you seeing people cross shop that channel as you see.

More gauge more digitally in that channel I'd love to see what you're learning about the customers there. Thanks.

Yeah.

Thank you Oliver we are seeing a new customer and as we said it is.

Both in digital both in outlet and at full price, it's a younger customer.

There are value oriented end.

We see potential for a lot of crossover. So we're excited about this again.

We recognize that the value customer is an omni customer and so we want to be there for that customer. So again early days, we're going to see a lot of growth here.

At a lean at on this opportunity.

<unk> the globe. So this is not just the north American opportunity I see this opportunity present itself in a lot of our.

Territories of the future.

Thanks best of wishes.

Thank you.

Sure.

And before we close at all.

I'll turn it over to Joanne for some closing remarks.

Thank you Christina I just wanted to thank everyone for joining US today, we are pleased with our outperformance to date and a uniquely challenging environment.

And it underscores the progress we're making through our acceleration program I do want to take a moment to thank our talented teams around the world who moved mountains to deliver for our customers. This past quarter of the challenges, we're seeing with their passion energy and ingenuity made these results possible.

Our performance this quarter reinforces our competitive advantages of our talented global teams, our great brands and tapestry of enabling platform at and gives us confidence in our long term strategy and ability to create value and I believe we are positioned to emerge from the pandemic stronger with the ability to capture market share at higher levels of profitability and I look forward to.

Keeping you posted on our progress in the coming quarters. Thank you.

Thank you ladies at every level of them.

This does conclude today's conference call you may now disconnect.

Okay.

Okay.

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