Q3 2021 Tapestry Inc Earnings Call

Good day and welcome to this tapestry conference call.

Today's call is being recorded.

After the speaker's presentation, there will be a question and answer session.

To ask a question at that time simply press Star then the number one on your telephone keypad.

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 Christina Cologne.

Good morning, Thank you for joining us with me today to discuss our third quarter results, along with our strategies and outlook, our Joanne for voice right Tapestry Chief Executive Officer.

And Andrea Shaw Resnick tapestry interim Chief Financial Officer.

Before we begin we must point out that this conference call will involve certain forward looking statements within the meaning of the private Securities Litigation Reform Act.

Well its 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 refer to our annual report on form 10-K.

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 find the corresponding GAAP financial information as well as the related reconciliations on our website www dot tapestry Dot Com Inc.

Slash and Doctor and then viewing the earnings release and the presentation posted day separately and we are starting to anniversary the onset of the COVID-19 pandemic last year, we believe year over year comparisons are not fully indicative of business performance.

Therefore, we will be providing financial information compared to both FY 19, a pre pandemic and FY 'twenty, where applicable now let me outline and speakers and topics for this conference call Joanne.

Joanne will begin with a brief recap of the third quarter for tapestry and each of our brand and she will also provide an overview of the progress we've made on our acceleration program, Andrea and well continue with our financial results and our priorities going forward.

Knowing that we will hold a question and answer session, where we will be joined by Todd Kahn, CEO and brand President and approach. After a Q&A Joanne will conclude with brief closing remarks, I'd now like to turn it over to Joanne for Weiser at tapestry CEO.

Good morning, Thank you Christina and welcome everyone. As you read in our press release tapestry reported a standout quarter, which once again outpaced expectations, reflecting the successful execution of our acceleration program and the power of our brands.

Our sharpened focus on the consumer fueled new customer acquisition and coach and Kate Spade and Stuart Weitzman and contributing to a continued sequential improvement and overall topline trends.

Revenue growth and the quarter was led by robust increases in digital and China, two areas of meaningful long term opportunity.

In addition for the third consecutive quarter, we achieved operating income and EPS gains both compared to prior year and to pre pandemic fiscal year 19 supported by a reduction in promotional activity and higher AUR as well as disciplined expense management.

We also generated significant free cash flow and the quarter, demonstrating our financial strength and flexibility.

This performance is a testament to our talented teams around the world their creativity agility and resilience have enabled us to effectively navigate a challenging backdrop and deliver for our customers while positioning tapestry to emerge from the pandemic stronger and build on our recent momentum to drive sustainable growth.

Before turning to a discussion of our strategic pillars, and I want to touch on the leadership changes we've announced in recent weeks I'm delighted with the team that we brought together, which combines deep knowledge of our company with fresh perspectives as we position tapestry to win and the dynamic retail and consumer environment.

Todd Kahn, who was appointed coach C. E. O has a unique balance of brand stewardship and commercial capabilities and has done a tremendous job leading coach and delivering exceptional results and.

And our Resnick is a proven leader who ensured that we successfully executed on our acceleration program as interim CFO.

And we're excited that she will now assume a new role as Chief Communications Officer, where we know she will continue to make important contributions to our company.

And as such Christina Cologne, who has tremendous credibility and experience with the investment community has been promoted to global head of Investor Relations.

Finally, I'm thrilled to have Scott Rowe join Us in June as Chief Financial Officer, and head of strategy.

And with his extensive experience and consumer retail and apparel businesses as well as his deep expertise developing best in class Global multi brand platforms. I am confident he is the right strategic business partner to further enhance our strategy and financial performance.

With this strong leadership team now in place we are galvanized around our shared commitment to fully realize tapestries growth potential across brands as well as our passion for building a purpose led organization with empowered inclusive and highly collaborative teams.

Now I'll discuss the important progress we've made advancing our acceleration program during the third quarter.

First we continued to create immersive customer experiences across our e-commerce, and social channels driving our global digital business to over $1.5 billion and revenue on a trailing 12 month basis more than doubling in size from a year ago.

During the quarter, we generated triple digit e-commerce growth, bringing digital sales to approximately 30% of total revenue as compared to a mid teens percentage last year.

This growth was led by the recruitment of approximately 700000, new customers across brands through our ecommerce channels in North America, where we're continuing to capture a growing number of millennial and Gen Z customers.

And not only did we successfully recruit new customers. We also drove a higher purchase frequency versus prior year across brands.

We also continued to reactivate lapsed customers across the portfolio.

This reflects the work we've done to crystallize the unique positioning of our brands, while strengthening our platform to better utilize data to support more targeted marketing campaigns.

Overall, we remain incredibly excited by the digital opportunity and the scalable tapestry Omni channel platform we're building.

Digital is a key competitive advantage and a growth enabler for us long term supporting both revenue growth and profit gains, particularly given that our digital business is accretive to our operating margin.

Second our ongoing efforts to sharpen our focus on the Chinese consumer led to significant growth in China, and as compared to both prior year and pre pandemic levels and in fact, the strength of our results and mainland China more than offset continued pressure from lower Chinese tourist spend with our sales to Chinese consumers globally, increasing it.

High single digit rate compared to pre pandemic levels.

These results benefited from the integrated comprehensive brand building strategies, which drove innovative product marketing and experiences.

Third we're strengthening our platform and changing the way, we work to increase our agility and responsiveness and <unk>.

Key element of the strategy is embedding data across the organization, allowing each brand to leverage the shared resource to drive more effective decision making.

In the quarter, we utilize these capabilities to deepen our understanding of customer preferences and behaviors. This enhanced our processes and ultimately driving significant gross margin expansion and higher AUR, specifically by supporting optimized assortment planning, which helped to effect a 30% to 50% reduction.

And SKU counts across brands, resulting in higher productivity per SKU, driving inventory turn and providing clear messaging to the consumer.

And we leverage data analytics to drive more dynamic and informed pricing decisions supporting lower levels of promotional activity.

Overall, we believe the use of data is powering a shift and our culture, creating a robust test and learn environment that empowers our team to move quickly to respond to changes in consumer preferences and demand.

Fourth we continued to drive operational efficiencies and our business we.

We further enhance the flexibility of our operating model through the optimization of our global fleet.

And you know our focus is to improve profitability across our store network. We've made substantial progress and in fact, the operating margin for our global bricks and mortar business exceeded pre pandemic fiscal year 19 levels. Despite the challenging backdrop.

We see further opportunity going forward as we remain focused on delivering compelling omni channel experiences with both digital and stores contributing to our success.

This is clearly evidenced by the ongoing strength, we're seeing and our digital channels, even as our brick and mortar business improves.

Overall I'm very pleased with the continued improvements we've realized under our acceleration program base.

Based on our results to date and assuming a continued recovery emerging from the pandemic. We now expect to exceed pre pandemic levels of operating income and EPS for the fiscal year far surpassing our original expectations provided in August.

Importantly, the changes we've made are foundational.

As we embed a consumer centric approach into our organization unlock new ways of working and distort our focus to high return initiatives, we're establishing sustainable growth drivers for tapestry and our brands.

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

Starting with coach where results were once again impressive.

Revenue exceeded our expectations with sales improving sequentially, increasing 25% as compared to last year and returning to pre pandemic levels and important milestone for the brand and.

In addition, we continued to significantly expand gross margin and leverage SG&A, resulting in strong operating margin expansion and substantial profit gains.

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

First we delivered compelling and innovative products with a focus on reinvigorating key families that are foundational to the brand.

And retail we successfully built on our core icons infusing newness that is resonating with consumers.

We introduced pillow tabby, a fresh take on our best selling family, which was very well received particularly with new younger customers.

We also launched extensions within the beat and Willow families, which outperformed plan.

And outlet, we expanded the top selling Georgia and Dempsey families to include new styles, and fabrics, which performed well at higher Aur's.

Overall, we are building enduring icons, which respond to the emotional and functional needs of our target consumers and helped to create a strong foundation for our product pipeline and future seasons.

We also continued to deliver strong gross margin expansion through deliberate actions.

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

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

Consistent with our strategy, we're shifting the customers focus to the value attributes and quality of the coach product and.

In fact, our handbag AUR rose over 25% both globally and in North America.

These results are not possible without great product and want to take a minute to recognize our talented design and merchandising teams, who understood vivers creative direction continue to deliver product innovation with a focus on quality that is infused energy and excitement into our assortments and delivered exceptional value to customers across.

Ross all channels.

Turning to marketing, we continued to build deeper customer relationships leaning into our values of inclusivity and authenticity through our campaigns and digital content, which are driving increased engagement recruitment and reactivation.

Two key examples are coach it forward, which featured our global ambassador sharing personal messages of gratitude and our Youtube series coach conversations, which provided a forum to discuss culture community and creativity and engage audiences through authentic dialogue.

These campaigns increased engaged and creating buzz across social media platforms.

And digital coach again realized triple digit revenue growth.

We recruited roughly 400000, new customers through on 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.

In addition to customer acquisition, we also focused on driving retention and lifetime value through a number of actions, including the recent launch of the coach outlet loyalty program.

Overall, we see significant runway to realize continued digital growth, while improving our brick and mortar productivity. This is reinforced by the trends, we're seeing and the business as stores have reopened.

Specifically in the U S. We've seen continued strong demand online, even amid easing restrictions and improving brick and mortar traffic.

Moving on to China revenue on the mainland rose significantly compared to last year, and approximately 40% compared to pre pandemic levels in.

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

To celebrate the Chinese new year, we featured a playful ox across our limited edition collection, which drove ecommerce growth including on Tmall.

As we previously shared in February we were the first luxury brand to launch and ecommerce platform on Dahlia and the tick tock of China. Our results, thus far have well outpaced our expectations with the majority of customers transacting with us entering the brand for the first time.

Now looking ahead to summer.

We are building on our momentum into the fourth quarter with key product launches, while continuing to sharpen our merchandising strategy to deliver innovative and emotionally compelling collections.

And retail we are expanding our signature offering into new and bright color waves of jacquard to infuse optimism into the assortment.

We're also excited for new combination of our signature C and horse and carriage logos, bringing together two icons on our best selling beat and field families.

In addition to capitalize on trends and the market, we are introducing our coach originals and a new quilted version and coach Quilty East, which will be offered and seasonal colors.

Separately following the success of our pillow tabby, we recently introduced the mini version, which is already off to a promising start and.

In fact over the last three months, we've seen an increase and viral user generated content on tictoc featuring the pillow tabby.

And outlet, we launched a Disney princesses collaboration and April which is outperforming our expectations and for mother's day, we plan to deliver a floral focused collection for the important holiday.

Turning to marketing we are excited to host a winter twenty-one collection runway show in Shanghai in June we believe this will support our growth ambitions, both in China and globally by driving desire for the coach brand and broadening our reach through partnerships with a diversified group of ambassador celebrities and key opinion.

And you and leaders.

The collection will feature exclusive products for the Chinese market and we will amplify the show through integrated guest experiences including live streaming.

In summary, we believe coaches returned to pre pandemic levels of sales and significant profit growth is a standout achievement, particularly given the challenging backdrop.

We are building on this momentum and the foundational changes we've made this year as we head into the fourth quarter and beyond we're proud to celebrate the brands 18th anniversary this year and are confident in the future.

Now moving to Kate Spade.

The brand again outperformed expectations and the quarter from both a top and bottom line perspective, highlighting the progress we've made through strong execution.

Revenue improved sequentially, increasing 1% compared to fiscal year, 'twenty, which included a six point impact from the wholesale business inclusive of the strategic pull back and the disposition channel.

We delivered gross margin expansion of 150 basis points, well ahead of our projections.

While also reducing SG&A, resulting in operating income growth and operating margin expansion versus last year.

There are many key strategic milestones of the quarter highlighting the traction we're making as we continue to fulfill the brand's promise and build stronger connections with consumers.

Starting with product.

In retail and we made further progress on rebuilding our core as exemplified through the strength of our recently launched families.

The not collection, which featured new color ways was particularly well received by our younger customer.

We also expanded our signature platform the spade flower with jacquard fabric continuing to outperform expectations.

The success of these introductions supports our momentum and reinforces our ability to sustain higher AUR is by offering differentiated innovative designs.

Additionally, our novelty assortment, which reflects a return to our routes continue to resonate with our customers, notably our mailbox crab and strawberry milk carton bags.

And outlet, we saw continued traction and sofie on a leather styles. We also brought on new cross body options and keeping with the hands free trend.

Importantly, we leveraged data to inform our assortment breadth and pricing strategies, reducing our SKU counts by over 40% and remaining disciplined and our promotions, which drove an increase and global handbag AUR and both our specialty and outlet channels compared to last year.

Outside of handbags, we saw strength and footwear across channels and in fact footwear delivered positive growth driven by casual flats and sneakers as we continue to build momentum into the summer selling season.

In addition tech accessories continued to outperform while the launch of our new fragrance and North America outpaced expectations.

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

Turning to marketing, we drove brand heat both through our lifestyle campaigns as well as organically on social media through our passionate and Kate Spade community.

To that and we continue to drive organic engagement and the quarter with two more handbags going viral on tick tock from customer created content.

Following videos created post purchase the Strawberry handbag and the butterfly wing Cross body have garnered approximately 12 million views to date on the platform with excitement spreading to other social channels. As a result, we saw increased site searches for these products driving significant uptick in sales.

This highlights the importance of social selling through the loyal and passionate members of the Kate Spade community.

We also saw success with our first ever mailed gifting campaign, which featured NBA Star, Kevin Love for Valentine's Day, and field and increase in conversion among male shoppers.

We're excited by these green shoots and are taking these learnings into our mothers day campaign, which I'll touch on shortly.

Turning to digital during the quarter, we continued to drive momentum on line, achieving approximately 50% revenue growth through a combination of engagement with existing customers and the recruitment of new consumers and.

Fact, we attracted nearly 300000 new customers through our e-commerce channels in North America, a meaningful increase compared to last year importantly, these customers entering the brand for the first time, our purchasing at a higher AUR compared to the balance highlighting the brand's compelling value proposition along with a meaningful opportunity to build.

Customer lifetime value.

Additionally, we again reengage lapsed customers and an increasing rate during Q3, we reactivated over 100000 customers through our North American digital channels up approximately 40% compared to last year. This demonstrates our continued progress and strengthening relationships with our core customer.

Turning to Kate Spade and priorities for summer first our focus is on delivering product that supports our brand promise and anchors the assortment to our brand codes.

And specialty we're continuing to reenergize the core leather goods offering through animations within the not family. We will also feature newness and the Sam nylon bag and icon of the brand.

And outlet, we will continue to expand our core sofie on O assortment. We will also focus on fun storytelling groups, such as the Strawberry collection and the butterfly bag, which as mentioned are off to a solid start and generating excitement and social media.

Across channels, we will continue to evolve our novelty offering with playful picnic theme product aimed to drive emotional purchasing.

And marketing our approach remains multi dimensional utilizing a wide range of digital platforms and influencers to tell our brand and product stories to engage with consumers and our community as.

As I mentioned, we were pleased with the results from our first male gifting campaign and the third quarter. Therefore, we're applying the learnings to our mothers day marketing, which features celebrities and athletes, including Rob her and Koski, Steven Twitch boss and Leslie Odom Junior and.

In addition, we are returning to marketing infused with storytelling, which is at the core of the brand's DNA and fact, the summer campaign will feature joyful videos highlighted by a spontaneous dance taking place and the middle of New York City.

Content is dynamic and optimistic well timed with consumers increasing focus on celebrating the impending returned to normalcy.

Importantly, as announced in March we redesigned Kate Spade and creative structure and the team is energized by this new way of working we believe these changes will help to sharpen our focus on the consumer drive innovation and increase collaboration this builds on the brand's heritage and strength as a storytelling brand with marketing and product.

Designing developing and lockstep.

In closing I'm very encouraged by Kate Spade and results in the quarter, which reinforced the progress we're making to increase clarity of the brands positioning and enhancements to our product and marketing underpinned by a powerful platform of data analytics and digital capabilities.

This is evidenced by new customer recruitment and lapsed customer reactivation as well as increasing handbag, AUR and improving top and bottom line trends.

I remain excited for the brand's future and the meaningful opportunity, we have to accelerate revenue and profit growth.

Turning now to Stuart Weitzman.

The brand demonstrated continued progress through the execution of the acceleration program total revenue rose, 13% compared to prior year led by growth in China.

This growth was partially offset by softness and wholesale which included the negative impact of shipment timing into the fourth quarter as well as headwinds related to market exits and and unprofitable store closures.

Importantly, our strategic actions resulted in significant operating margin expansion compared to both fiscal year 'twenty and fiscal year 19, as we continue to focus on restoring the brand's profitability.

During the quarter, we remained focused on building relevance within the assortment.

And keeping with market trends elevated casual products represented the majority of our offering.

And we expanded on proven successful product families and brand codes, namely the evolution of the 50 50 boot the return of the jelly with the Sawyer sandal and the expansion of our signature Pearl embellishments with the goal of the family.

At the same time, we reduced SKU count by over 50% globally, driving higher productivity and clear messaging to our consumers.

In digital revenue increased over 50% compared to prior year as we leveraged the tapestry platform and sharpened our focus on creating relevant assortments to engage with our core consumers.

As mentioned, China remained a significant area of growth for the brand increasing over 130% compared to fiscal year, 'twenty and approximately 45% versus pre pandemic levels. This performance was driven by strong growth and new and younger customers, which supports our confidence and the long term potential for the Stuart Weitzman brand and.

Anna.

Touching on global marketing, we generated brand heat with optimistic marketing messages, most notably our campaign featuring Serena Williams and her daughter Olympia was a huge success garnering over 8 billion impressions, making it the most impactful campaign and the brand's history.

And wholesale we continued to strengthen our partnerships with key accounts, we were pleased with our reentry into 90, Nordstrom doors and the quarter, including an expanded assortment and the top 20 locations.

Looking ahead, the summer and product, we are well positioned with a focused assortment, which will emphasize dress styles, including a range of sandals and pumps along with our bridal collection as we have shared we expect an increase and vaccine distribution to drive an improvement and demand for these key categories and we have adjusted our offering to reflect this shift.

And at the same time, we will continue to provide balance with newness and our casual assortment to address the ongoing trend and the market.

And marketing our upcoming campaigns are focused on key product messages, including our Espadrilles bridal and limited edition capsules. We are also prioritizing investment and upper funnel activities aimed to recruit new customers into our full price channels.

And in China, we are continuing our successful live streams with daily events planned, which will feature an array of hosts including our sales associates and kols, such as Austin Lee to build emotional connections with our customers.

Overall, we've made important progress at Stuart Weitzman, and we remain focused on restoring the brand's profitability.

In closing a tapestry we are increasingly optimistic about our ability to generate sustainable top and bottom line growth building on our performance to date Lew.

Looking forward, while the environment remains volatile, we see encouraging signs of recovery as vaccination efforts progress, resulting and increased consumer confidence strong demand for our categories and improving in store traffic trends.

And this context, we remain focused on driving brand relevance and customer engagement through product innovation and compelling marketing supported by data driven insights.

We will also continue to lean into our competitive advantages, including our globally diversified direct to consumer model and distort investments to high growth opportunities.

We're confident that our clear consumer centric strategy powerful brands and differentiated scalable platform uniquely position us to capture market share at higher levels of profitability.

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 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 and the earnings release posted on our website today.

And as Joanne mentioned, our performance and the third quarter and year to date was well ahead of our expectations. As we drove operating income growth ahead of both FY 'twenty and FY 19 levels. Despite the volatile backdrop.

Total sales increased 19% from the prior year and well outpaced our projections compared to FY 19 revenue declined 4%, representing a sequential improvement from the prior quarter. Importantly, we were pleased with coach's returned to pre pandemic levels of sales in the quarter by.

By region, North America drove the import improvement compared to the prior quarter on a two year basis as trends accelerated across stores and ecommerce and wholesale channels. In addition, the region achieved sales in line with FY 19, Despite continued store traffic pressures and Asia direct sales increased approximately 40 person.

<unk> compared to FY 'twenty and were in line with that 2019 fueled by significant gains and greater China across the balance of Asia sales remained below pre pandemic levels with notable pressure and Japan, given the declaration of a state of emergency during the quarter Europe, while a small portion of our total sales.

<unk> experienced a material slowdown and the business given a significant increase and lockdowns in accordance with government regulations.

By channel performance was driven by another quarter of triple digit growth and ecommerce as we continue to build our digital platform and capabilities, which enable us to lean into the opportunity to meet the consumer wherever they want to shop.

And and leverage data analytics to tailor, a product assortment and marketing messaging to the consumer.

Coach drove the total company margin increase and the third quarter realize and gross margin 490 basis points above last year, driven by lower levels and promotion and higher I am used resulting and hire a U R and Kate Spade gross margin rose 150 basis points and two concluded and benefit from the strategic pull back and lower.

[noise] margin disposition sales, along with lower levels of too emotional activity and North America for Stuart Weitzman. The brand squarish margin was 420 basis points, reflecting a tailwind from F X as well as a geographic mixed benefit due to the strong growth and the high Martin China business.

S G and a decline 3% year over year, and 6% compared to F. Y 19, primarily reflecting effective expense management and the previously announced actions to transform the companies operating model the savings from the structural changes were partially offset by reinvestments and the business, notably higher marketing spend and and increase in there.

Our annual incentive plan expense accrual given our outperformance here to day taken.

Taken together, we delivered the third consecutive quarter of operating income growth and margin expansion compared to pre pandemic levels and the face of the challenging backdrop are outperformance and both the third quarter and year to date reflect the foundational changes and strategies. We have made as part of our acceleration program highlighted by efficiency led <unk>.

Rocket growth through increases and gross margin and reductions and S. G. Net looking forward. We believe we can fuel continued momentum across our brands and are well positioned to transition the company to a period of demand driven gains fully unlocking the flywheel of sustainable longterm growth and.

Things per diluted share for the quarter was 51 cents, a significant increase compared to a loss and the prior year and 21% ahead of pre pandemic EPS levels.

Full year to date actualization, and the timing of capital projects free cash flow for the quarter was an inflow of $179 million as compared to an outflow of $166 million last year on a year to date basis free cash flow was an inflow of $876 million versus $273 million during the same period, a year ago and four.

Hundred $18 million year to date in F 2019, our strong cash flow generation underscores the resilience and effective management of our brands and business now.

Now touching on our capital allocation priorities as noted the strength of our business and resulting free cash flow generation positioned us to pay down our revolver as of January and the near term. We will continue to preserve our cash on hand, while reinvesting in the business longer term our objectives remain unchanged our strategic intent is to return to sustainable.

<unk> and Bottomline growth driving continued strong free cash flow generation, which will enable us to pay down debt as well as return capital to shareholders.

Now turning to our outlook as noted in our release given our strong performance year to date and assuming a continuation of the recovery from the pandemic. We now project revenue to increase at a mid teens rate on both a 52 week and 53 week basis for the fiscal year. This includes the expectation for fiscal fourth quarter to sales.

And the result of COVID-19, which included the benefit from the cancellation of the company's annual incentive plan taken together, we are now expecting EPS to exceed pre pandemic levels on a 52 week basis. This reflects our outperformance here to date as well as a more favorable outlook for the balance of the year, given our confidence and the ongoing <unk>.

Benefits of our acceleration program, the improving consumer backdrop as well as the traction we're seeing and the business today.

And closing we're proud of the results we have achieved despite the volatile environment demonstrating strength of our iconic brands and the bold and deliberate actions, we're taking as part of air acceleration program. Throughout this year of results have been driven by efficiency led games.

As we turned the corner and look towards recovery from the pandemic, we have an opportunity to fully unlocked the flywheel to drive bought online growth and excess of topline gains over a planning horizon. We're confident that the foundational changes we have made during this fiscal year will benefit our platform over the long term and we remain steadfast and our strategic.

And tend to drive both organic growth and profitability.

Thank you and now like to open it up for Q&A.

Thank you the floors and I'll open for questions. If you wish to ask a question on this time simply press star and the number one on your telephone keypad.

Is that 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 Security.

Hi, good morning.

Morning, Bob.

Uhm just got a couple of questions you mentioned signs of a recovery you what are you seeing and the backdrop that does give you the increased confidence generally and then on a related point.

How's your digital business performing now that'd be and store Tropic transient fooling are you seeing any signs of cannibalization.

<unk>.

Yeah. Thanks, Bob a couple of points I'll cover their and your question first and is around our confidence.

I'll also touch on what we see and the backdrop and then how we share digital business evolving, but starting with confidence that you know, we have increased and confidence and our tapestry platform. We see it as a competitive advantage. What we're also gaining confidence and the power of our brands and the potential that we see and the acceleration program, including.

And the execution from our talented teams around around the globe and.

And then has fueled our strong digital growth in fact, as Joanne mentioned in the quarter. We added another 400000, new customers from our e-commerce platforms, bringing the year to date and number of new customers from these channels to $2 million and North America and what.

It was really encouraging of these 2 million approximately half our gen Z and millennials and then when I returned to brick and mortar if I take Texas as an example, we experienced a significant acceleration and our store sales trends.

While at the same time, we see the restrictions being lifted and while those restrictions are being lifted our digital traffic and demand trends remained strong. So this bodes really well for our future as we see a return to traffic in North America brick and mortar.

Thank you.

Yeah.

Our next question comes from the line of Ike parts out of Wells Fargo.

Hi, good morning, everyone. Congrats on another great quarter I guess my question was on profitability and ecommerce Joanne you talked about.

Digital being accretive to the operating margin, which is pretty unique and a great sign for the business and as digital continues to increase where do you see penetration rates moving and then what does that ultimately mean for the margin structure of both coach and Kate Spade businesses overtime.

Yeah. Thanks, Thanks for the question.

And we do see the digital business being accretive to our operating margins. Currently you know our digital business is it's quite profitable and structurally more.

More profitable than the respective bricks and mortar channels and it's really a function of the fact that we have you know structurally higher and.

You are a high margin and and relatively low returns and.

And in that channel.

So we we consistently deliver higher margins through our digital performance and I think it's also important to Kim mentioned that where as Todd said recruiting new customers and engaging new customers through our digital channel. So that makes the channel accretive.

And as well and you know in terms of where we see the penetration going.

And ultimately the customer will decide we're very focused on meeting the customer where they are and you know I think we've been innovating quite well and in terms of our ability to engage consumers both digitally and on social channel with real innovation on on tick Tock as an example.

And capturing.

And capturing customers, where they are today and we're committed to staying close to the close to the customer and and seeing how that unfolds, having said that our brick and mortar business and also you know were re.

Really pleased to see that the operating margins of our brick and mortar business this quarter.

<unk> achieved pre pandemic levels exceed pre pandemic level this quarter.

So that also bodes well for our business are really driven by the gross margin gains that we've seen and you know we expect that as traffic builds back those numbers will also improve so we see digital is accretive and where it lands in terms of penetration and ultimately the customer will decide and we're focused on driving improved profitability.

City.

And our brick and mortar channel as well.

Thank you.

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

Great. Thanks, and good morning, and congratulations to all of the promotions there Joanne I was hoping you could go a little bit deeper and the comment you made about the lapsed consumer coming back which brands are currently or are you seeing the biggest and flex of our lapsed consumer and then what strategies do you have it placed to keep them.

Yeah.

Yeah. Thanks Erin.

The work that we're doing to stay closer to our consumer and the work and data and analytics is really helping us unlock on not only the recruitment, which we are seeing across brands, but also on the reengagement of lapsed consumers and we're while we're seeing that across all of our brands. We have a you know and.

[noise] and focus, particularly and Kate Spade and Stuart Weitzman and to ensure we reengage as we've as we clarify the positioning of those acquired brands to Reengage that lapsed customer. It is critically important and it and it shows that we're making traction and speaking to our core customer.

And we've been really pleased with the with the work that's happening there and the traction we're seeing but also as we and <unk>.

We get better at recruiting and better leverage data and implementing some of the tools and technologies and and marketing. It really is about taking our customer database and driving more active consumers.

Recruiting more retaining more bringing them back with higher frequency, which you heard us talk about we're very focused on on driving that activity, increasing retention and ultimately increasing lifetime value.

And I just can add for the coach brand one of the tools that we're so pleased with is our launch of the coach and cider program, our loyalty program and what we're seeing is that.

And most of the program there.

And their frequency is 25% higher than non members, so that really bodes well as a tool as Joanne says to get closer to the customer understand what customer needs are and provide them with reasons to keep coming back to the brand.

Excellent. Thank you so much.

Youre welcome.

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

Alright, Thank you and you made a lot of progress and coach outlet as you anniversary the direct marketing with respect to the coach outlet customer and and broadcasting that what are your thoughts on innovation.

And every year and in terms of what you're doing and the rationale for the outlet loyalty program.

I would also like you love your thoughts on sustainability and the metrics you're focused on as well as what youre seeing from a customer point of view.

As you as you think about them continuing to make progress there. Thank you.

I think I'll take that Joanne.

So your first question, we're really pleased as we anniversary sort of our re imagine coach outlet dotcom and we continued to see strong demand and as we.

As I indicated and the last question one of the tools is our ability to.

Bring them into the coach loyalty program and I think that will bode really well.

On sustainability.

Joanne can you talk about the tapestry sustainability, but I see this is a really interesting opportunity for the coach brand as an 80 year old brand, particularly one grounded and leather we have opportunities to talk and are really authentic way about sustainability and we've done some interesting things on earth.

Day, we brought forward a handful of bags, which we called re loved which were bags that were literally returned unusable over many years, we couldnt repair them and what we did was our designers and our workshop.

We reconstructed them basically and the bags that we put up online on Earth day sold out in and our and.

The demand for them, where it is incredibly strong so as we start thinking about and talking about sustainability and what it means for each of our brands, particularly at the coach brand I see opportunities in this we love concept in the something else, we've done which is basically taking scraps and turning it into a weave that crew.

And entirely new handbag, so I think youre going to see us do some really interesting and innovative opportunities I think.

Turn it back to Joanne for tapestry and sustainability issues.

Sure. Thanks, Thanks, Todd and and I appreciate the question Oliver.

We are very focused on sustainability is part of the fabric of our company we call our sustainability program, our social fabric and it really incorporates three.

Three pillars are around our people our communities and our planet and and some of the metrics that we're we're driving and focused on under our people very focused on representation across the organization and and and leadership.

And fostering an inclusive environment, one that's equitable inclusive and diverse we have goals internally our focus on those and those actions.

And and also around our communities and we're working to drive meaningful positive change and our community through our empowerment programs through financial donations and product donations and also volunteering and an increasingly impact that we can have around the world and the communities, where we live and work and then finally on our plan.

And we are focused on reducing our impact on the environment Todd mentioned, some initiatives within the brands, but across our supply chain.

We're focused on reducing our carbon footprint, increasing traceability theres. Some interesting work that the team is doing around traceability and.

And increasing our use of environmentally preferred materials. So we're we're we're making progress we're incredibly focused on it and it is important and and are fundamentally important part of our company.

Thank you best regards.

Thank you.

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

Great Thanks, and congrats on a nice quarter.

Thanks, Matt and thank you.

Could you maybe help break down the overall AUR AUR opportunity remaining from here, meaning where do we where do we stand today relative to maybe the prior peak and what inning do you see each of the brands and today as we think about SKU reduction and promotional activity and overall pricing power remains.

From here.

And let me let me kick this off and then and then pass it to Todd.

And kick more color on the coach brand, but across our brand we've made progress and AUR and it's really a function of our acceleration program and and how were and how effective we are and getting closer to our consumer and delivering product that resonates with them and and also some of the work that we're doing.

And foundational either better leverage data and our AR and our decision, making so are our streamlined assortments are improvements and inventory turns and our ability to and allocate.

Kate those assortments, where their adult and most productive those are all contributing to our AUR growth.

We do see opportunities across all of our brands and we're encouraged by the AUR growth that we posted it at Kate Spade.

Last quarter as well on both at retail and at outlet showing that the product that we're delivering is resonating with our consumers.

But I'll, let Todd I'll pass it decided to talk about such products as well.

Thank you, yes, we are very focused on that you are and and we're pleased with the progress we've made and this quarter and and the progress we've shown all year.

In the third quarter, our handbag AUR rose approximately 25% both globally and in North America and.

<unk> has joined dedicated so much of this is deliberate actions that we've taken about how we're looking at things differently first it starts with incredibly strong innovative product.

Led by Stuart Weaver's creative direction. We then couple that with using data to inform our decision, making and really really put the consumer at the center and the SKU reduction is helping driving AUR and and let me give you. A quick example, if you take tabby, which right now is our number one.

John.

Family in our retail fleet Tabby originally launched in July of 19 in prior years, what would have happened by the time, we got to February of 'twenty, one we would've been bored with it and tired and moved on.

Instead, we recognize what an incredible family iconic family, we have and we relaunched it with pillow tabby, bringing the entire kabi families back to the number one position and our fleet. So this elongation and of the lifecycle of an iconic family.

And helps us raise our aur's helps us reduce our SKU count and helps create greater gross margin and profitability and I think youre going to see us do that over and over again.

That's great color best of luck.

Thank you.

Okay.

Our next question comes from the line of Mark <unk> of Baird.

Yeah.

Thank you good morning, and congrats on the strong quarter and I guess.

A couple of questions for me on on margins I guess first how should we be thinking about the sustainability of the low thirty's EBIT margin at coach and what opportunities do you see for a greater level of Reinvestments in.

In 2022.

And then similarly, Kate Spade, just with where you are with the recovery there their creative changes near term and your thoughts on a reasonable range of expectations for 2022, and just longer term structurally what do you think that branch and look like relative to what coach has achieved here recently thank you.

Sure Mark and I'll take that I I've got to say, we were thrilled with the progress we've made in 'twenty, one and as you know based on our outlook, we're projecting a heightened and operating margin for cabinetry.

Which was above our previous peak as they are as a house of brands. If you will.

Despite this volatile backdrop, and that's really been accomplished with the focus on the consumer leveraging digital and data and transformation into a leaner organization.

And we feel were exiting the pandemic, even stronger position to take market.

Market share at higher levels of profitability, we're not providing detailed guidance by by brand, but to your point coach and this year will already be at a best in class, our op margin and in and around 30 ish percent.

And we still think that you know that will have digital and China being the revenue driver. So are our opportunities at coach are really around the opportunity to grow the top line and maintain attractive margins. You know these are excellent margins already Kate Spade, where we've Claire.

Refined our brand position and better execution to deliver for our customers. We have an opportunity to drive both top and bottom line growth I think we're at and I would say early innings and this will be a meaningful tapestry growth driver over the planning horizon and then lastly, when we look at.

And at Stuart Weitzman.

Our priority there has and continues to be a return to profitability and we're making great progress we're leaning into our strengths in China, which obviously has very strong margins, we've exited quite a number of our unprofitable doors and geography, and we've strengthened our position in North America, including in.

And in wholesale so as we've said, we expect to achieve higher margins or bottom line to exceed topline over our planning horizon and feel very good about that.

And Mark I'll, just I'll, just add to Kate Spade, and we still have tremendous confidence and the long term potential of the Kate Spade brand.

And you asked about the the product changes and I think Liz and team are doing a fantastic job and the creative team is really energized by this new way and working they're focused on the Kate Spade consumer there driving innovation and increased collaboration across design and product development and marketing and it really.

On the storytelling heritage and the brand. So we're excited to see that continue to develop both and in Q4 and beyond and continue to have confidence and the long term potential of Kate spade.

Thank you.

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

And the marketing tools to reach our customers and new ways is allowing us to drive healthy growth and and at four all of our brands and I I would say that the focus but I'll pop at the Andrea to go for some of the puts and takes.

Thanks, Joanne and I think when you're looking at our overall gross margin and and Joanne and Todd alluded to this we see where we are at at coach as a sustainable gross margin given the ability for us to reduce promotions, we've control the SKU count et.

Cetera, So when we look at all of those factors taken together, we feel that that coaches gross margin, which we used to say what's gonna be in the area of 69% to 70% AD in Tonight and can stay at these higher level I think you're absolutely right. You know when you were looking at it Lorraine at the upside.

To the gross margin will primarily now com from Kate Spade, where we're as I mentioned in and early innings. You. We do have the benefit of China growing for all of our brand on and having that the is gross margin anywhere in the world and that will continue so.

I think the combination of both the focus on lower promo hire a U R. A cross brands as well as the change and the geographic mix will help overall tapestry gross margin and sustain and and perhaps rise, but again I think where we are with coach is is definite.

<unk> dust and class and we do believe it sustainable.

Thank you.

And ladies and gentlemen, and we have time for one more question. Our last question will come from the one of Michael Binetti of credit Suisse.

Hey, guys. Thanks for all the detail and congrats on a nice quarter Uhm, I guess, just to Joanne and I guess to kind of dovetail off the crutches are on gross margins as you look up to.

Next fiscal year, I mean, maybe Andrea it you know it was safe to assume that.

And that only our business forward and these margins, but also continue to drive lifetime value for our customers over and over time.

Okay, well that's very helpful.

Okay.

Thank you that concludes our Q&A on I'll turn the call over to join and crossed that for any concluding remarks.

Well, thanks, everyone for joining us today, our our stand out results for the third quarter reinforced the deliberate actions, we're taking under our acceleration program and the strength of our global teams were demonstrating meaningful progress and have a clear strategy and a differentiated platform and were emerging from the pandemic stronger.

And increasingly confidence that the foundational changes underway are focused on the consumer use a day and and analytics and optimize structure and ways of working can support stronger connections with our customers and sustainable growth for tapestry and our brand again I'd like to thank our teams around the world for their contributions and delivering a strong third quarter results.

And all of you for your continued interest and our story. Thank you and have a great day.

Thank you everyone. Just does conclude today's conference call and you may now disconnect.

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