Q1 2022 Tapestry Inc Earnings Call
[music].
Good day and welcome to this tapestry conference call today's call is being recorded after the Speakers' opening remarks, there will be a question and answer period. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please.
What's the pound key on your telephone keypad at this time for opening remarks, and introductions I would like to turn the call over to the director of Investor Relations at tapestry calcium ULA.
Good morning, Thank you for joining us with me today to discuss our first quarter results of all of our strategies and outlook, our Joanna right Tapestry, Chief Executive Officer, and Scott Rowe Tapestry, Chief Financial Officer, and head of strategy 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.
This includes projections for 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 statement.
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.
In addition, as we continue to anniversary the onset of the COVID-19, pandemic, we will be providing financial information compared to FY 'twenty, our pre pandemic and FY 'twenty, one where applicable.
For a full reconciliation to corresponding GAAP financial information. Please visit our website www dot tapestry Dot com Alright class investors and then use the earnings release and the presentations today.
Now, let me outline the speakers and topics for this conference call Joanne will begin with first quarter highlights for tapestry and her brand along with an update on our strategies for the holiday season.
We'll continue with our financial results capital allocation priorities and outlook going forward. Following that we will hold a question and answer session, where we will be joined by Todd Kahn, CEO and brand president of coach.
After Q&A Joanne I'll conclude with brief closing remarks.
I'd now like to turn it over to Joann Horne.
Tapestry CEO.
Good morning, Thank you Kelsey and welcome everyone I'm pleased to report that the strong momentum we saw throughout last year. He has accelerated further in the first quarter with our sales now 9% above pre pandemic level.
Our operating margin has improved eight and a half point compared to fiscal year 'twenty, even as we've reinvested in key growth drivers for our business.
The fundamental changes we've made to the acceleration program to transform tapestry and our brand have enabled our teams to act with agility to drive highly effective customer engagement and support increasing demand.
This performance also reaffirms our confidence in our differentiated platform. Our three unique brands are enabled by our talented teams technology infrastructure globally diversified supply chain and a 90% direct to consumer model.
These assets, coupled with our growing data and consumer insights capabilities have fueled more targeted product development more efficient pricing and more effective marketing all of which support accelerating revenue higher gross margin improving profitability and most importantly stronger connections with our customers now turn.
To the highlights from the first quarter, we continued to make meaningful progress against the acceleration program by sharpening our focus on the consumer leveraging data to lead with a digital first mindset and transforming tapestry into a more responsive organization.
First we kept the consumer at the forefront of our strategy, which drove further increases in customer recruitment. In fact, we acquired approximately one 6 million new customers across our direct channels in North America, an increase of over 20% with growth in both stores and online.
Second we leveraged our unique data and analytics capabilities to enhance engagement with our consumers as a result retention improved year over year in each brand, including strong reengagement with the 4 million customers acquired last year in our North America Digital channel.
In addition, we drove a higher number of repeat transactions and reactivated lapsed customers at an increasing rate.
These examples highlight the advancements we've made to utilize customer insights to increase engagement with our brands and drive higher lifetime value.
Third we enhanced our expertise in the digital channel a margin accretive business across brand.
We've made significant investments, including in talent to improve the customer experience and drive conversion.
As a result, we realized a sequential acceleration in e-commerce revenue trends in the quarter, a meaningful achievement as we lapped difficult online comparisons from last year.
Sales rose close to 50% with digital penetration now nearly four times pre pandemic level.
At the same time trends across our global store fleet again improved with operating margins that continue to exceed pre pandemic level.
Fourth we further strengthened our positioning in China, a region that represents significant long term opportunity supported by the rising middle class.
I'll cover the resurgence as during the quarter impacted traffic across the industry, we delivered sales growth of over 25%.
Compared to pre pandemic levels sales increased roughly 65% accelerating versus the prior quarter and.
And importantly, we grew on both the mainland and with Chinese consumers globally, which increased at a low double digit rate versus fiscal year 'twenty.
And fifth we increased global AUR at each of our brands, reflecting traction with our customer base and the deliberate structural changes we've made to reduce promotional activity and improved assortment productivity.
Now, let me touch on our first quarter highlights for each of our brand.
Coach delivered another exceptional quarter accelerating further after an already strong base.
Revenue rose, 27%, representing an increase of 15% compared to pre pandemic levels or a 13 point sequential improvement.
Operating margin expanded fueled by gross margin, which reached nearly 75% the highest rate in any quarter in the last 10 years. These results are a testament to the increasing brand heat and strong customer demand and engagement. We are seeing a coach highlighting progress against the brand fiscal year 'twenty to grow.
Strategies.
First we drove another quarter of AUR gains as we benefited from strengthening pricing power and our deliberate actions to improve scheme productivity and lower promotional activity.
Globally coaches handbag AUR increased high single digits in both the retail and outlet channels. In addition, we achieved the 10th consecutive quarter of AUR improvements in North America, which rose low double digits.
This continued improvement reflects our pricing power and strong engagement with consumers as we focus on enhancing customer lifetime value.
In the quarter, we acquired over 900000, new customers across our North American Channel Ah Ha.
High teens increase compared to the prior year at the same time purchase frequency rose versus last year.
Second we continued to develop our iconic families to create a foundation for our product pipeline in future seasons with notable strength in key families such as tabby and road.
In addition, we are led by Stuart Vivers Creative vision, who is building on 80 years of iconic coach codes, notably the signature C and horse and carriage.
Both of which have supported increasing sales across all channels.
Third we increased investments and drove stronger returns and marketing leveraging our data capabilities to drive outsized growth in our digital business.
In the first quarter e-commerce increased over 60%, representing a sequential improvement on a on both a one and two year basis underscoring the significant opportunity that this channel represents.
Fourth we again drove growth in China sales rose over 25% compared to last year with improvements across stores and ecommerce as we diversify our approach to meet the customer where they want to shop.
This includes better leveraging existing platforms and establishing relationships with new online forums.
As we build on our strength of our brand and our positioning with the emerging middle class, we continue to see tremendous long term potential in China.
And fifth we outperformed in the men's business in keeping with our ambition to deliver $1 billion in sales in the category over our planning horizon.
In the quarter, we reinvigorated some of our iconic leather goods silhouette infused in camo print and retail in the basket out collaboration and outlet.
In summary coach continues to stand out even amid external pressures customer.
Customers are engaging with the brand at an increasing rate given the traction of our product and marketing we're driving continued momentum as we enter the important holiday quarter. The brand has proven that the foundational changes. We've made are working and our results are sustainable we are increasingly confident in our ability to drive both revenue and profit gain.
<unk> for fiscal 'twenty, two and beyond.
Now moving to Kate Spade.
The brand continued to make steady progress against its strategic priorities and outperformed internal expectations across the P&L.
We built on the increasing traction, we're seeing with consumers, which drove top line improvement during the quarter.
Importantly, direct sales, excluding wholesale increased mid single digits versus pre pandemic levels, a sequential improvement compared to the fourth quarter. These.
These results confirm that the growth strategies, we're executing to return Kate spade to its roots and improve the underlying foundation of the brand are taking hold.
In the quarter, we maintained our consumer centric approach and our execution acquiring over 650000, new customers across channels in North America, a significant increase over last year.
At the same time, we reactivated lapsed customers with outsized growth among those customers left over three years, reflecting a renewed connection with our core customers and confirming the efforts to clarify the brand positioning are gaining traction.
Second we continued to build out our core product offering by amplifying key platforms.
Most notably but not in spade flower again outperformed expectations and act as strong foundations for future growth the.
The strength of these recent introductions, coupled with deliberate actions to improve full price selling and pulled back on promotional activity fueled another quarter of global handbag, AUR growth, which rose low double digits. The progress. We've made has increased our confidence in Kate spade pricing power as we deepen our connection with consumers and execute on our.
Strategic agenda.
Third we drove brand heat by deploying marketing centered on our Kate Spade community and leaning into our DNA as a best in class storytelling brand.
We employed new ways of reaching our customers, including a variety of social media platforms, and a re imagined and uniquely Kate Spade approach to New York fashion week, which featured a pop up Apple Orchard in downtown Manhattan, incorporating our I Heart, New York collection.
Fourth we maximized our lifestyle positioning by continuing to strengthen the foundation of ready to wear footwear and jewelry all of which outperformed our expectations overall, the brand's differentiated and broad offering supports our goal to increase lifetime value as those customers buying lifestyle products.
<unk> tend to purchase more frequently and spend more.
And fifth we utilized our already strong digital platform to continue to grow ecommerce sales, which rose over 15% in the quarter as we test learn and scale innovative and new ways to engage the consumer online.
In closing, we're leading with our values to strengthen the emotional connection with our passionate Kate Spade community.
We are excited by the brand progress and our solid performance underscores that we have the right strategy in place.
We have significant right.
And our ability to achieve $2 billion in revenue at high teens operating margins over the planning horizon.
Yeah.
Turning now.
The brand has made continued progress towards achieving our overarching goal of restoring profitability in the current fiscal year to achieve this we advanced our growth strategies in the quarter.
First we improved operating margin compared to prior year further increasing our confidence in a return to profitability this year.
This was driven by continued outperformance in high growth areas, including digital in China, Our e-commerce channels rose over 30% globally, driven by customer experience upgrades to improve conversion and.
And in China, a market that remains a significant opportunity for the brand revenue increased over 25%.
Second we recruited an increasing number of new customers compared to last year and drove higher retention rates overall.
The consumer remains at the forefront of our strategy as we capitalize on shifting market trends, most notably the return to in person socialization and the growing need for occasion in dressy footwear.
At the same time, our iconic collections continue to resonate, notably the nudist family, which brought an increasing number of new and younger customers to the brand.
Third we drove brand heat through a tailored offerings supported by marketing actions to engage the consumer Stuart Weitzman momentum was evidenced by a return to AUR growth, which rose low double digits compared to prior year, reflecting deliberate actions to lower promotional activity as well as select price increases.
We intend to continue on a strategic basis.
This was a key driver of the gross margin expansion of over 250 basis points.
Fourth we strengthened our wholesale partnerships, specifically with key domestic full price partners, resulting in high teens growth in the channel.
Overall, our solid execution as evidenced by our improving financial performance, we're laser focused on the consumer by offering compelling products and marketing to enhance customer engagement and increase our productivity in key regions and channels.
This in turn will support our goal to restore profitability in fiscal 'twenty two.
Now turning to the overarching strategies for the holiday quarter. The consumer backdrop is healthy and our recent internal survey work in North America highlights the demand for the handbag and footwear categories remained strong.
We are remaining nimble and keeping the customer at the center of our priorities.
First we are controlling the factors within our control and playing offense.
We've moved quickly and taken bold and deliberate actions to mitigate industry wide inventory constrained.
We're also messaging to customers earlier in the holiday season to elongate the shopping period and capture demand early.
Importantly, we will be maintaining our discipline around discounting and selectively increasing prices as we lead with messaging on innovation and values overpriced.
Separately, we are creating engaging omnichannel customer experiences as in store traffic continues to improve and online engagement increases.
Across brands, we are employing exciting initiatives to surprise and delight consumers. During this important shopping period at coach we've kicked off the holiday season, and a truly iconic fashion with our recreation of Jennifer Lopez is all I have video nearly two decades after the original featuring our signature codes.
At Kate Spade, we're creating magical holiday moments with our two all sparkly night collection, which captures the sense that the littlest things can be life's biggest indulgences.
And at Stuart Weitzman, Our recently launched campaign featuring Kate Hudson arrived just in time for the start of the holiday season, as well as celebrations for our 35th anniversary.
Overall, our first quarter results and the momentum we are delivering are evidence that our strategy led by the acceleration program is working.
We've radically transformed our company realizing material operating margin improvement, while fueling investments in key growth areas of our business.
We're largely a direct to consumer business with a digital first mindset building a deeper understanding of our customers.
We're utilizing these capabilities along with the additional benefits of our multi brand platform to drive even further growth at coach and accelerate the trajectory of both Kate Spade and Stuart Weitzman over our planning horizon.
I'm encouraged by the growing vibrancy of each of our brands and the strengthening engagement with consumers backed by the work of our talented and passionate teams our confidence is underscored by the stronger outlook for fiscal year 'twenty, two and additional shareholder return plans announced today.
We've entered the second quarter with momentum and have proactively put in place plans to deliver for our customers. This holiday season and into the new year, we are well positioned to capture market share at structurally higher operating margin in the years to come creating significant value for all our stakeholders.
With that I'll turn it over to Scott, who will discuss our financial results capital deployment priorities in fiscal year 'twenty two outlook Scott.
Thanks, Joanne and good morning, everyone. We delivered another quarter of high quality earnings results outpacing last year pre pandemic levels and expectations. We continued to execute against the strategies of our acceleration program building upon the foundational changes made in fiscal year 'twenty one.
Against the difficult backdrop, we drove continued topline momentum and improved operating margin meaningfully fueled by gross margin expansion.
Turning to the details of the first quarter.
Total sales increased 26% versus prior year, and outperformed expectations compared to pre pandemic levels revenue rose, 9%, representing an eight point acceleration compared to the prior quarter fueled by improvements across all channels stores digital and wholesale buyer.
<unk> revenue rose double digits versus last year in mainland, China, North America, and Europe Importantly, these regions improved on a two year basis, including relative outperformance with North America, which rose at a high teens percentage compared to pre pandemic levels in mainland China, while there were pockets of proven increases.
Overall momentum continues and in Europe, we realized improving trends as lockdown measures are lifted moving down the P&L, we expanded gross margin at each brand during the quarter. These results reflect the continuation of the successful execution of our strategy as we maintained price discipline.
<unk> SKU productivity and leverage our data analytics capabilities to more effectively tailor, our product assortment and marketing messaging to the consumer.
SG&A rose relatively in line with sales given the reinvestment of cost savings into the organic business. The prior year as atypical comparison due to COVID-19, and the impact from higher sales.
Taken together, we achieved operating income growth and margin expansion, both companywide and at each individual brand.
Earnings per diluted share for the quarter was 82, an increase of 42% compared to the prior year and more than doubling pre pandemic levels.
Now turning to our balance sheet and cash flows as well as an update to our capital deployment plans.
We ended the quarter in a strong position with $1 7 billion in cash and investments and total borrowings of $1 6 billion.
Therefore, given the strong results of our first quarter, our robust balance sheet significant free cash flow generation and outlook for growth.
Announcing an incremental $1 billion share repurchase program as highlighted in our press release.
Such we now expect to return approximately $1 two $5 billion to shareholders in the fiscal year, a meaningful increase compared to our previous outlook to return $750 million to shareholders in fiscal 'twenty two.
This return reflects approximately $1 billion of share repurchases in the fiscal year, which consists of $600 million to complete our existing program inclusive of the $250 million of shares already repurchased in the first quarter and we expect to utilize approximately $400 million under our new program in fiscal 'twenty two.
In addition, our shareholder return plans continue to forecast approximately $250 million returned through our dividend program.
Overall, the organic business momentum and the actions announced today underscore our commitment to capital allocation priorities first investing in the business to drive long term profitable growth and second returning capital to shareholders through dividends and share repurchases.
In addition, we still intend to repay our July 2022 bonds totaling $400 million by the end of the fiscal year. These actions highlight our confidence in the strength of our brand our ability to drive sustainable growth and our commitment to returning capital to shareholders now moving to our fiscal year 'twenty two.
Outlook before turning to the specific details I wanted to touch on the current state of the industry. The external environment continues to be dynamic as consumer demand remains solid with supply chain headwinds are constricting inventory availability, we certainly see the same dynamic within our business as demand for our brands remains robust.
As Joanne mentioned, we've acted early and boldly to maintain the momentum we're seeing across each of our brands, while we're not immune to external factors nor can we predict future challenges that may come the bold actions, we've taken to secure supply along with our experienced at reacting with agility to a constantly changing landscape over the last 18 months.
Or so gives us confidence to increase our annual guidance.
Please note that all growth rates compared to prior year are on a comparable 52 week basis, excluding the impact of our 50 <unk> week last year.
So let's unpack this increase in outlook, we now expect revenue to approach $6 6 billion.
Which would mark a record for the company. This represents a mid teens increase compared to fiscal 'twenty one.
Our outlook for operating income is now expected to grow at the high end of our previous growth expectation for a mid teens increase compared to prior year, resulting in modest operating margin expansion.
This contemplates modest gross margin pressure due entirely to the incremental freight investments in order to maintain product flow to meet strong consumer demand.
This pressure is expected to be most acute in Q2 and Q3 exclude.
Excluding this additional freight impact of approximately 200 basis points. We are driving continued underlying gross margin expansion through lower discounting improved SKU productivity, along with price increases that will be implemented for the balance of the year across brands. In addition, we now expect modest SG&A leverage for the fiscal year.
<unk>.
We continue to expect about $300 million in structural gross run rate expense savings as a result of the acceleration program. As previously shared we are reinvesting these benefits to fuel growth, including $90 million and higher marketing spend or approximately three percentage points higher than fiscal 19.
We're also investing further in our digital talent and capabilities.
Net interest expense for the year is expected to be $65 million and a tax rate is estimated at 18, 5% assuming a continuation of current tax laws.
We're now forecasting weighted average diluted share count to be in the area of 278 million shares.
<unk> and a planned $1 billion and share repurchases.
So taken together, we now expect EPS to be in the range of $3 45 to $3 50.
Incorporating the first quarter's outperformance and an approximate <unk> <unk> benefit from additional share repurchases.
We continue to expect capex to be about $220 million for the year.
Of this spend we anticipate approximately 45% of it related to store development, primarily in China with a balanced dedicated to our digital and it initiatives. This also includes initial investments related to the Buildout of our new fulfillment center to support both growth and speed to market.
Finally, we expect inventory levels to be up meaningfully during the balance of this year as we pull forward receipts to match strong demand and phased elongated lead times from supply chain pressures due to COVID-19 disruptions.
As mentioned, we're taking deliberate steps to accelerate inventory growth and we feel comfortable in our inventory positioning to meet demand.
Given the dynamic environment and last year's atypical comparisons, we expect variability by quarter to provide some guardrails on Q2, specifically revenue is forecasted to grow high teens, reflecting continued momentum on a two year basis operating income is projected to be in the area of prior year levels, which.
Contemplates incremental airfreight of approximately $70 million in the quarter or roughly 350 basis points. In addition, we have shifted the benefit from the reinstatement of DSP into the second half of the fiscal year.
As a reminder, GSP is expected to benefit the full year by almost 50 basis points. So taken together while margin pressure is anticipated in the second quarter, our full year operating margin outlook remains unchanged as our underlying business momentum and price increases are estimated to offset cost and inflationary pressures.
As a result EPS in Q2 is expected to be relatively in line with prior year and closing we entered the fiscal year with strong momentum, reflecting the benefits of the deliberate and decisive actions we have made under our acceleration program.
We're continuing to focus on what's in our control as we navigate a dynamic operating environment.
And we're taking bold steps to ensure that we can meet robust underlying demand for our brands without compromising our long term operating margins that are already up significantly we're increasing both our fiscal year revenue and EPS guidance as well as our expected return of cash to shareholders. Overall, our strategy is working I am confident.
That we're in a position to create significant value for all our stakeholders in the years to come.
I'd now like to open up the call for your questions.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key on your telephone keypad. We will go first to Bob <unk> with Guggenheim. Your line is open.
Hi, good morning.
Joanne can you talk about whats actually giving you the confidence that you can maintain the strong momentum you've seen heading into an inventory constrained holiday quarter for us. Please.
Good morning, Bob.
Our confidence is really driven by three factors our acceleration program initiatives are gaining traction and driving brand heat, we're seeing a strong consumer backdrop, and we're taking bold actions to manage the environment.
We're pleased with the momentum we're seeing across brands. The actions we've taken through our acceleration program have transformed our company and our.
Driving strong and sustainable results, we see brand heat building as evidenced with the AUR growth that we're delivering in each of our brand.
We're also seeing acceleration in top line trends in the first quarter, we delivered growth of 9% above pre pandemic levels, which was an eight point acceleration from the fourth quarter.
We're delivering that with significant gross margin expansion, which is allowing us to deliver structurally higher operating margin. While also reinvesting in the key growth drivers of the business.
And we're seeing continued strength in digital in China, which are two areas that we've talked about represent long term opportunity for tapestry.
As I mentioned as we look at the landscape consumer spending is healthy and demand for our categories remains very strong. So although the environment continues to be dynamic we've moved aggressively to manage the supply side of the equation to protect the strong trends that we're seeing and serve our customers really keeping the customer at the center of our strategy and of our execution.
And our teams have a proven track record of managing these dynamics and we are very confident in our ability to deliver for our customers This holiday and beyond.
That confidence Bob is really evidenced by the increased guidance and incremental share repurchase programs that we announced today.
Thank you.
And in the interest of time, we do ask that you limit yourself to one question and we can go now to Ike <unk> with Wells Fargo. Your line is open.
Hey, good morning, everyone. Congrats.
I guess, Scott I wanted to ask about I understand III.
A lot of us on top line, we are looking at the cost of cotton and then it looks like that but for you guys NOL.
Can you talk to us about key inputs for you guys, maybe leather specifically is there anything inflationary.
On the cost side is the cost side that pops out to you guys.
Thats at all a tactful.
Yes, good morning, Nick sure we've seen we've seen elevated input costs.
Not really.
A new dynamic for us and also as we've said we've seen.
<unk> and higher prices right. So as we as we look at the overall structural.
Gross margin and operating margin picture.
We've got confidence in our ability to maintain our margins even in the face of elevated costs that we see being with us.
For some period of time.
Got it thanks.
We'll go now to Erinn Murphy with Piper Sandler Your line is open.
Great. Thank you good morning, and nice job on the quarter. My question is around Kate Spade. The sales for the business are still not back at pre pandemic levels, but the profitability has clearly improved a bit some of the actions you've taken so can you share a little bit more about your sales outlook for the brand that's embedded in your guidance. This year and then Scott I do have a clarification just on freight you.
<unk> talked about higher freight in Q2, and Q3, you called out the $70 million in airfreight, specifically in Q2 should we expect a similar level in the third quarter or is Q2 for airfreight peak. Thank you.
Let me jump into the Kate Spade comments Aaron.
So we are making steady progress at Kate Spade, and we do have the right strategy.
We are clarifying our brand positioning and we're seeing traction across the P&L and in fact direct sales for the quarter increased mid single digits versus pre pandemic levels. So on a direct basis, we are growing above pre pandemic levels, and then and that improves quarter over quarter and we are focused on.
Returning the brand to its roots and driving.
Stronger consumer engagement, we acquired over 650000, new customers across North America channels to the brand at this past quarter alone and we're reactivating lapsed customers at an increasing rate which gives us.
Confidence that that strategy is working that we're reaching the core Kate spade consumer and we've worked hard to improve the product assortment. There we talked about new platforms like the knot and spade flower, which continue to perform in those represent.
Courtney platforms for future growth and we're seeing increased global handbag AUR AUR is grew low double digits. So all signs that Kate spade is on the right path on the direct business growing against pre pandemic levels and it reinforces our confidence that the.
That brand can achieve $2 billion in revenue and at a high teens operating margin as we move forward.
Yes, good morning, Erinn I'll jump in on your freight question as well, maybe just a little bit of perspective before I get into their quarter by quarter details remember the last time, we spoke to you all we talked about reopening and our largest single supply source, Vietnam, which is about 40 per se.
Out of our supply base, we expected that to start reopening in August and in fact that occurred about seven weeks later.
So what we decided to just build on <unk> comments early and boldly. So we did secure air freight.
Can I give you that perspective, because it's important as you think not only about the flow by quarter, but also at this point.
I'll say that we're approaching normalized level of production, we see goods flowing we have much better visibility than we did the last time, we spoke even at the SKU level. So we can merchandise against the product flow that we see so the result of that is the exceptional air freight that we have used to bridge that gap and lead this really strong consumer demand.
Man that we see.
That's starting to moderate as you get into back half of the year. So as you think about gross margin shaping.
Gross margin in Q1 up 450 basis points from two years ago Youre going to see.
Said elevated Eric.
Airfreight in Q2 and Q3, we gave you our best estimate obviously it matters.
As we see what exact what exact products.
Sell through and there could be a little timing between Q2, and Q3, but think about that as roughly equal.
From an airfreight standpoint, but remember in the second half we start to see the increase in prices.
Making a meaningful impact we talked about the change in GSV from a timing standpoint. So what that means is gross margins will be up in the second half and specifically in the fourth quarter. So that's one of the reasons, we speak with confidence about our ability to maintain operating margins every time, we're exiting this year coming out of the fourth quarter.
Strong gross margins in the kind of the kind of increases that you're used to seeing from us on an overall basis.
Super helpful. Thank you so much.
Sure.
The next question comes from Mark <unk> with Baird. Your line is open.
Good morning, and congrats on the continued momentum here.
So encouraging to see the handbag AUR momentum both at coach and Kate can you speak a bit more to the AUR opportunity you see outside of the handbag category with the healthy demand backdrop and inventory challenges out there, but I'm wondering to what extent can you take price and other accessories and lifestyle.
<unk> to help offset the elevated cost pressures.
Yeah, Let me, let me start and then I'll pass it to Todd who can can give you an update on coach specifically, but across all of our categories.
We see the opportunity to take price and we.
As a brand as brands in the portfolio are gaining pricing power and.
Were structurally positioned to be able to improve our <unk>.
With the data and analytics applications and the structural changes that we've made across our assortments. It's not just the handbags effort, we're looking across our assortments were understanding what our consumers are.
We're looking for and expecting from our brand.
And we're getting better and better at leveraging that data to tailor, our assortments appropriately tailor, our messaging and evaluate pricing across so we feel good about the progress we've made but we see tremendous runway really just getting started we have a data rich company and we're learning to use that data and <unk>.
And better wage and that you are seeing throughout the P&L, including in gross margin and AUR increases, but Todd I'll pass it to you and to talk about what youre seeing and doing at coach.
Thank you Joe Ed, Yes, I think what Youre seeing is Joanne indicated we are seeing AUR expansion across every category.
What gives us so much confidence is the quality of our product.
The values that we bring and we're seeing that across footwear, we're seeing that in ready to wear.
And when you think about the coach brand and you think about historic norms, where political luxury sits we have more white space today than any time in our history.
I think thats going to give us.
Real opportunity to increase our pricing and as we celebrate now coach is $80 per year, we are seeing.
Real credibility on our lifestyle component and Thats very exciting and.
I think you'll see over the next couple of years penetrating even higher in elements of the lifestyle.
Thank you.
Yes.
Our next question comes from Lorraine Hutchinson with Bank of America. Your line is open.
Thank you good morning.
I just wanted to focus for a minute on the new customer acquisition.
Both coach and Kate can you talk a little bit about what strategies are working best for you almost there.
The areas that you need to lean on to from an investment perspective.
Yeah.
Thanks Lorraine.
<unk> are gaining traction and that has been a big focus of our acceleration program as we say were getting closer to our consumer its understanding of the consumer at a deeper level and we're leveraging those insights and applying them.
Two the work, we're doing and bringing great product to market.
And then leveraging those insights to understand how and where to reach customers.
We're increasingly reaching customers through digital channels, we've talked about that as a as a place that we think there is tremendous runway ahead, but we've we've added over $1 billion to that business in two years.
We're testing and learning more.
We've changed the way, we work and we're investing more in marketing even as we're delivering structural operating margin improvements, we've really tilted the P&L to invest in those places.
That allow us to reach more customers and reach them in different ways.
Those efforts are paying off we acquired 4 million customers through digital channels in North America last year, and $1 6 million in the first quarter across North America across channels.
We expect to continue as we learned because we're really just getting started on leveraging these insights.
New ways of working and targeted in targeting our investments more into the places that will allow our brands to grow.
And I'll just add for coach in the last quarter as you saw we increased 900000.
New customers and what we're seeing is increased frequency, we're seeing over 40% of the new customers are Gen Z and millennials, so that bodes well for our future and.
Couldn't be more excited about the opportunity and even as we invest in digital we see a true omni opportunity here and there is a synergistic.
Opportunity between our brick and mortar and our digital and they feed off each other in a really great way.
The acceleration program and leaning in on understanding the data.
It helps us.
Create better store experiences and even helps us determine where to put stores into the future.
And one point I want to add that I didn't mention but it's about acquiring customers, but then it's about driving lifetime value and I.
I did want to make sure I have mentioned, we are focused on re engaging the consumers after we acquire them and driving higher lifetime value all of our brands have.
A broad array of and Assortments that we can engage our customers, we're seeing those customers come back and transact more frequently.
And so we're really building the foundation for future growth.
Okay.
We will go now to Michael Binetti with Credit Suisse. Your line is open.
Guys. Thanks for taking our questions here and congrats on a great quarter, and obviously a tough environment.
Thank you I guess Joanna let me can you just run me through China in a little bit of detail on the quarter.
And third quarter, you said it was up 40% on a two year basis fourth quarter up 40 also and I think that might have included an extra week. So maybe it's a little lower than that and now we're at 65.
On a two year basis this quarter it was.
It was pretty unexpected for us just considering all the headlines coming out of that market with lockdowns and disruptions in the quarter, that's a meaningful acceleration in what looks to be a tough quarter. If you wouldn't mind.
Running us through that and then I.
I guess, Scott how should we think about margins for the coach brand as we kind of jump over some of the cost impacts here in <unk> and into the second half and the margins for the brand continued to increase in the second half.
Yeah. So let me jump on the China question, we were pleased with our growth in China. As you mentioned, we accelerated on a two year basis, and although we did experienced pockets of COVID-19 related disruption, we delivered growth we grew greater than 25% on the year, but to your point 65.
5% on a two year basis.
And we are seeing continued strong engagement with customers in the market and brand sentiment remains strong.
You know, particularly in the coach brand.
And we're seeing growth I guess and I would say at coach and Stuart Weitzman, our two biggest.
Brands with the highest penetration in the market and.
As you know remains.
Relatively smaller.
But we see tremendous runway ahead of course, we are monitoring the developments in the market environment remains dynamic, but we're staying very close to the customer.
And we're well positioned all of our brands are well positioned against the growing middle class.
So as we stay close to the customer and deliver the products and the experiences.
And show up where the customers are increasingly innovating in places like Dallas and the Tic Tac of.
China, and putting our brands, where our customers are and being very relevant to that customer, we expect and and we continue to see we have tremendous runway in the market.
Yes.
Maybe maybe it's now take this from different angles to your second part of the question, Yes, we see we see margins up in the second half I mean, what I mentioned earlier.
Regarding the shape of the overall tapestry picture is obviously law of big numbers largely driven by coach. So so we would see that same general dynamic plan for coach So Todd maybe a little color.
Yes. Thank you Scott the one thing I'd like to add is as we maintain these really.
Fabulous margin if you look at the first quarter coach captured market share in our primary category of handbags, we looked at the handbag growth.
Globally between 15, and 20% and you saw coaches results are way above that so the combination of being able to capture market share while maintaining these margins we're not buying the market. We are maintaining a really healthy business and I think that is one of the key differentials between us.
And where maybe we historically were.
Hello.
Okay.
Our next question comes from Adrienne <unk> with Barclays. Your line is open.
Good morning congratulations.
The second just seems right for multi year multiple years of healthy growth.
So my first question is Joanne or Todd can you talk about the penetration of sales in the coach brand over 400 versus under 400 versus last year is she buying higher end goods as well as buying them more frequently and then Scott I would imagine that prior to that.
Basically everything was on the ocean and so I'm just wondering what percent is air freighted into Q, what's expected to be air freighted into the queue, but as a percent of what you normally do thank you.
Scott you want to take the Airfreight first and then I'll come back sure. Yes, that's probably a simple one so so adrian we're not we haven't given the exact percentages I guess historically, we've seen about a 90 10 split ocean versus.
Airfreight and expedited freight and obviously were at an elevated level at this point.
So I guess the thing I would really point you to though is my earlier comments around that based on our visibility to normalizing production flows we're really seeing that moderate in the back half of the year.
And getting back to I'll say, maybe not exactly normal, but certainly an improved.
The environment as we as we move through the balance of the year.
Great.
Yeah.
When you look at our business overall.
No we're very defined by different channels, what we're really pleased with is the increase in AUR across all of our channels.
And that is the most important thing for us. So we will have bags for $1000 that we will have bags for $149. What we're doing is driving all of them up and that's how we look at the business and one of the things we've done differently now when we design a bag, we actually think about the market.
With that back we'll do the best and we price accordingly, so in the past we might have priced at the lowest common denominator now we priced the highest common denominator.
And so I think very helpful best of luck.
Thank you.
Yeah.
We'll go now to Matthew boss with Jpmorgan. Your line is open.
Great. Thanks, Joanne on the continued outperformance of the coach brand I guess, how best to triangulate the outsized strength that youre seeing from the digital channel to potential market share that you believe you're taking across categories exiting the pandemic and Scott any way to size up the multiyear mark.
An opportunity from the structural model channel shifts to digital over time.
Yeah.
Yeah, I'll kick it off.
As we embarked on our acceleration program, we saw a huge opportunity to better understand and serve our customers where they wanted to shop and that really had us leaning into investments, we had made historically, but leaning into our capabilities in digital and data.
As we said you know 90% direct to consumer business, we know a lot about our customers and we knew we had an opportunity to better engage our customers and meet customers at their shopping behaviors are changing so we you know we have invested quite a bit and we've grown that business tremendously we are seeing.
Continued engagement at coach where we have runway, but across all of our brand. We're seeing you know continued engagement customer acquisition through digital channels.
That's not to say that's our only focus we you know the omnichannel customer and customer shopping behaviors are changing.
To change rapidly so we're staying close to the customer and we want to be available with our brand.
To our customers, where they want to shop and how they want to shop.
We're staying close to that we're making the investments we need to make and we're seeing really high returns on those investments leveraging data.
And getting closer to our consumers leaning into those those digital capabilities has been paying off and it's not just acquisition as I mentioned earlier, it's really once we acquire our consumers driving.
And to drive higher lifetime value and that's engaging them across our broad array of categories in each of our brand I'm. So proud of the work. The teams are doing as I mentioned, it's early days for US, we're happy and very pleased with the with the traction we're seeing but a long runway ahead.
Maybe I'll, just take and bridge from Joanne comment to the longer term structural margin I guess.
The first thing I need to remind you of is we have given the guidance beyond our current outlook. So.
That.
There is we're not we're not at a point, where we're ready to have that conversation, but I would point you to a few things so you're exactly right as we as we grow our digital business. It's one of our most profitable.
Channel is actually our most profitable and as Joanne said its penetration is now four times what it was just two years ago.
And the data and analytics that Jo Ann just outlined in some of the things broad chatter around pricing and our opportunity we see that absolutely we're using data better understanding our consumer to mark.
At a more intimate level and all of that gives us confidence that we can we can maintain our margins on the other hand don't forget we are in an elevated cost environment. So.
That's not new we've been seeing this for a while and input costs are up great.
Great News is we've got visibility to it.
We see that we have the pricing power and that gives us confidence to maintain those margins over time, so more to come as we get closer into next year, but.
I think what what I hope you would take away from that is.
The things that we're seeing are demonstrating this year and our outlook.
Structurally favorable for us as we as we look to the future.
Great color best of luck.
Mhm.
Okay.
Well go now to Brooke Roach with Goldman Sachs. Your line is open.
Good morning, and thank you so much for taking the question Joanne I wanted to follow up on the prior question on customer acquisition and retention and you highlighted the customer reengagement and transaction levels. Among those existing customers are really building a strong foundation and improving here could you possibly share some additional insight on what strategies.
Have proven to be most effective in getting that customer to continue to come back and repeat and reengage with that brand and then Scott maybe as a follow up.
Some other companies have talked a lot about labor supply as being a big focus recently can you talk to the impact of your recent employee initiatives on your staffing levels, maybe what youre seeing in terms of wage rates at retail and in distribution centers going forward. Thank you.
So let me let me jump on the first part of your question.
Consumer acquisition retention and repeat rates.
Seeing that across all of our brand and we've deployed strategies really across our value chain. Its not one thing it's really through the work of our acceleration program.
It starts with getting to know our customers and being clear on who our target customers are for each of our brand and and then serving those customers understanding them and then serving them with with great creative product and then making sure. We've got the right assortment in the right places.
So, we're leveraging data and analytics plus the creativity of our of our Tam.
Talented creative teams to put.
The right Assortments in the right places and manage inventory in the right way and then the marketing investments that we've made as we've structurally changed the the the pitch of our P&L to invest more in those things that will drive acquisition retention those investments in the growth drivers in digital.
And in marketing at the same time, we're doing that we're increasing our improving our capabilities to understand and reach customers. So we have specific strategies that we're executing we've got a test and learn framework that our teams are executing under and we're innovating constantly as we learn how to better engage our consumers.
Bring them back more frequently and serve them better messaging and those are the things that are working and again, that's the power of the tapestry platform. We're applying these capabilities across our brand and we're seeing traction across our brand.
Yes, so just the coach brand I just can add tunes.
0.1 is and I think there's just too for all our brands we are leaning into values.
And sense of community and <unk>.
That is resonating and one of the things that has worked.
Streaming well for us as the coach Insider program, if we can get our new clients to join us coach insiders their frequency of purchase their lifetime value increases many fold and the coach Insider program is not a discount program. It's not a points program. It's about community it's about access.
That has created.
A really terrific basis too.
Invest have the one and done scenario, but instead create multiple purchases over a lifetime.
And Brook I'll address the second part of your question around Labor supply you know, we're not immune to the challenges that everybody sees out there, but I guess.
I look at it the good news here is.
We're not just beginning to address this issue this has been a multiyear journey.
Not just on wages you might recall earlier in the year, we talked about raising wages in the $15.
Minimum and things that we have done on to be competitive from from a cost or a wage dollar amount standpoint, but I think maybe even more important is the focus on engagement of the employees as someone who is relatively new to the story here.
As I've come in and I've been very impressed with how high the engagement scores are on.
Our retail employees and distribution centers.
This is this is an area that's been a long term focus it's a people centered approach and that double prong of focusing on the people and also making sure. We're competitive so far has been a pretty.
Good formula for us in terms of getting the getting the labor that we need of course, we're not immune to the situations that are going on.
Thank you very much.
Thank you that concludes our Q&A I will now turn the call over to management for some concluding remarks.
Thank you Catherine.
Well Q1 was a strong quarter for tapestry without performance across all brands, we are building momentum and our confidence and the tremendous runway ahead for our brand is underscored by the increased guidance and shareholder returns we announced today.
We've moved quickly and decisively and navigating industry wide head wins to meet rising demand for our brand.
As always our results are driven by our passionate teams who are moving with greater agility and are ready to deliver for our customers. This holiday and beyond thanks, everyone for joining us this morning and have a great day.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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