Q2 2022 Tapestry Inc Earnings Call
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Good day and welcome to this tapestry conference call today's call is being recorded at this time for opening remarks, and introductions I would like to turn the call over to the global head of Investor Relations Christina Cologne.
Yeah.
Good morning, Thank you for joining us with me today to discuss our second quarter results as well as our strategies and outlook Argo improvised threat catheters, Chief Executive Officer, and Scott Brown, <unk>, Chief Financial Officer, and head of strategy.
Hey.
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 statements.
Please refer to our annual report on Form 10-K . The press release, we issued this morning, and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance.
non-GAAP financial measures are included in our comments today and in our presentation slides. In addition, as we continue to anniversary the onset of the COVID-19 pandemic, we will again be providing financial information compared to FY 'twenty or pre pandemic in FY 'twenty, one where applicable for.
The reconciliation to corresponding GAAP financial information. Please visit our website www dot tapestry dot com powered class investors and then do the earnings release and the presentation posted today.
Now, let me outline the speakers and topics for this conference call. So and we will begin with our second quarter highlights for tapestry and our brands Scott will 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.
Coach after Q&A Joanne will conclude with brief closing remarks, I'd now like to turn it over to Joanne <unk> <unk> CEO .
Good morning, Thank you Christina and welcome everyone. We delivered record sales and adjusted earnings in the holiday quarter highlighted by an inflection at Kate Spade ongoing momentum at coach and a return to pre pandemic revenue levels at Stuart Weitzman Importantly, we realized a significant acceleration in sales trends driving strong double digit growth.
Pre pandemic level and well outpacing our expectations across brands, we took bold and deliberate actions to deliver for our customers and effectively navigated industry wide challenges to meet increasing demand for our brands. These results are a testament to the significant transformation of our business the strong consumer backdrop and engagement with.
Our category and the ingenuity and agility of our teams across the globe.
We are a different company than we were just 18 months ago backed by the strength of our unique brands and the benefit of our multi brand platform.
Now turning to the highlights from the second 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 working with speed and agility.
First we maintained a consumer centric lens by utilizing our customer data and analytics capabilities to enhance engagement, resulting in improvements to key customer metrics.
We acquired nearly 3 million, new customers, who transacted with our brands across channels in North America, a low double digit increase compared to the prior year with growth in both stores and online.
This brings total new customer acquisition to over $11 million over the past 18 months.
Importantly at each brand, we're increasing retention rates and reactivating lapsed customers effectively as we continue to prioritize driving customer lifetime value to fuel sustained growth.
Second we advanced our digital capabilities through significant investments in the channel to improve the customer experience and drive conversion, we realized another quarter of outperformance with sales up approximately 30% versus last year, nearly three times pre pandemic levels.
Digital sales represented one third of our total business as customers continue to shop online even as in store traffic trends improve.
Given strong consumer engagement in this channel and the power of our platform, we expect digital to reach $2 billion in revenue in this fiscal year with further runway ahead.
Third we again increased global AUR at each of our brands, reflecting the power of our brand the traction of our compelling product assortment and our innovative marketing. In addition, we benefited from the infusion of data into our decision making.
To streamline our offering and tailor our messaging to consumers.
This has resulted in lower promotion and higher SKU productivity, while also helping to identify opportunities to strategically raise prices to offset inflation and fourth we invested further in our China platform to foster distinctive connections and engagement with Chinese consumers in.
In the quarter revenue on the mainland rose mid single digits, representing an increase of over 35% compared to fiscal year 'twenty, despite disruption associated with COVID-19 , including travel restrictions traffic pressure and lockdowns in certain cities.
Greater China revenue Rose high single digits in the quarter Importantly, we continued to resonate with the Chinese consumer globally as sales for this cohort rose low single digits against pre pandemic levels.
In the quarter sales growth in China was fueled by digital as we continue to innovate and meet consumers, where they want to shop at.
As such we've expanded our presence on social media platform, while maintaining leadership positions on Tmall and Tictoc, even as new brands have launched on the platform highlighting our prominence in the market and strong brand engagement, specifically with younger consumers and.
In fact, we achieved record sales during 11 11 on Tmall luxury pavilion with coach is the number one ranked brand in the handbag luggage and leather goods category and Stuart Weitzman as the number one ranked footwear brand.
Looking forward, while we anticipate volatility in the near term due to the pandemic, we remain confident that China represents a meaningful long term opportunity across our brands. This was reinforced by a recent China brand tracking survey results, which showed handbags and small leather goods as a category where consumers intend to spend more over the next 12 months.
I will now touch on second quarter highlights for each of our brands starting with coach we again outperformed expectations delivering 24% sales growth compared to last year revenue trends accelerated on a two year basis, increasing 20% above pre pandemic levels. This strong growth was enabled by the foundational chain.
As we have made to ensure the consumer remains at the forefront of our strategy as a result coach achieved its highest quarter revenue and profitability in nearly 10 years.
The brand continues to gain traction with consumers globally across categories and genders further increasing our confidence in the runway ahead.
During the quarter coach made progress against our strategic initiatives.
First we remain focused on building iconic families to create a foundation for our product pipeline in future seasons.
Our core assortment, notably the tabby Willow and field continued to drive our performance at the same time newly launched styles, including the studio bag and reinvigorated icons such as the row resonated with our customer base.
Second we further infused data into our decision making to more effectively address the functional and emotional needs of our clients. This.
This enabled a significant pullback in promotion and drove full price selling resulting in an increase in global handbag AUR in North America handbag, AUR rose low double digits, marking the regions 11th consecutive quarter of game.
Our momentum in the customers' response to the style and craftsmanship of our products reinforces coaches pricing power and the further opportunity to increase prices to offset inflationary cost pressures.
Third we emphasize the brand's values you are approachable messaging highlighted by our inclusive holiday campaign. In addition, we connected with all audiences through the authentic recreation of Jennifer Lopez's iconic all I have music video, which resulted in strong social engagement.
Our marketing initiatives were rounded out by the unique storytelling moment created by our successful ski capsule, including pop up cabins at Rockefeller Center, a custom branded virtual game and our first foray into the NFC World featuring characters from the collection, which were claimed in seconds.
Overall these actions helped to drive strong customer metrics, including the acquisition of over one 5 million new customers transacting in North America.
At the same time purchase frequency again rose and we reactivated lapsed customers at an increasing rate.
Fourth we again drove strong revenue growth in the digital channel, which rose over 30% compared to last year and has nearly quadrupled since fiscal year 'twenty. We maintained this momentum even as store trends improved underscoring the long term opportunity for our online business.
We delivered mid single digit sales growth in China, or an increase of nearly 45% against pre pandemic levels.
This improvement was led by outperformance in digital at the same time, we continued to invest in our physical presence in keeping with our focus on growing the brand with the emerging middle class, we're adding approximately 10, new coach stores in the region. This year on a net basis, primarily in tier three and four cities.
We're also renovating key storefront and expanding our footprint to non traditional locations to build awareness, particularly with younger consumers.
Sixth and finally, we drove double digit growth in our men's business with notable success in our horse and carriage pattern.
We believe men's has runway in bags and small leather goods as well as in broader lifestyle categories, increasing our conviction in reaching $1 billion in revenue at high margins over the planning horizon.
In summary, we're combining coaches iconic history of quality and craftsmanship with new and innovative initiatives to engage with consumers. The continued outperformance of the brand is a direct reflection of the advantages of the tapestry platform the benefits of the strategic investments, we're making in marketing and our ability to meet the consumer.
<unk>, where they want to shop.
We're driving sustainable power.
The coach approaching $5 billion in sales in fiscal year, 'twenty, two while maintaining exceptional margins.
Now moving to Kate Spade.
Before I turn to the details of the second quarter I'd like to take a step back to acknowledge the significant transformation and tangible improvements. The team has made through the acceleration program.
Over the last 18 months, we've returned Kate spade to the brand our customers know and love.
We've rebuilt our product foundation through the introduction and amplification of brand codes, which will serve as the platform for future icon.
At the same time, we are maintaining a consumer centric lens and infusing data into assortment planning and marketing.
In North America, we acquired nearly 5 million new customers and have improved brand awareness. We've also reactivated over 2 million customers. During this timeframe.
In addition, we increased overall digital sales penetration to over 35% as of the most recent quarter as we focus on meeting the customer where they want to shop.
And in keeping with the progress we've made to deliver great products, we've grown the brand's global handbag AUR highlighting pricing power for the future.
Our work is fueled increasing momentum, giving us further confidence in the long term opportunity for meaningful sales and market share growth.
Moving to our second quarter, Kate Spade sales grew 33% compared to last year importantly, we drove a significant inflection against pre pandemic levels and realized an 18 point sequential acceleration.
At the same time the brand delivered operating margin expansion ahead of both prior year and pre pandemic levels.
These results were fueled by the successful execution of our strategic priorities.
First we maintained our consumer centric approach, resulting in approximately $1 3 million new customers purchasing with the brand across North America direct channel.
At the same time, we continued to drive strong double digit growth in both existing and reactivated customers by utilizing data to gain a deeper understanding of customer preferences and purchase drivers.
Second we amplified key platforms as we continued to build and innovate our core product offering, notably our not in spade flower jacquard again outperformed expectations.
In addition, newly introduced core styles resonated with the consumer including our Carlisle family in our house to pattern, which brought in a new and younger customer importantly, the strong performance of the core offering as well as deliberate actions to decreased promotional activity resulted in low double digit global handbag AUR growth.
Third we drove brand heat through activities centered around increasing engagement with the consumer while reinforcing our brand values to surprise and delight customers.
This include a new and exciting experiential initiatives such as opening of disco truck in downtown Manhattan, offering an exclusive jacquard handbag at a pop up in Tokyo, and wrapping some of London's cab and our signature spade flower.
Further in keeping with our brand heritage, we continued to invest in novelty platform to maximize our emotional connection with shoppers.
The sequent embellished slice pizza bag at an EUR of over $300 was a top novelty performer and ahead across our social media accounts. Overall these activities to increase brand heat are paying off with growing brand awareness for our most recent U S brand tracking survey.
Fourth we maximized our lifestyle positioning through a focused assortment, including occasion options across ready to wear footwear and jewelry that were embellished with emotional details such as pearls and rhinestone Boes.
Overall, these categories outperformed expectations and helped to boost customer acquisition and engagement as lifestyle remains an important driver of purchase frequency.
Finally, we are building on the brand's already strong digital presence, we've continued to test and learn new ways to foster consumer engagement, such as the infusion of <unk> content through key social media platforms.
Our innovative online approach backed by the passionate community helped to drive approximately 30% revenue growth in the channel compared to last year or double pre pandemic levels.
Over the past year, we've rebuilt the brands Foundation. These fundamental adjustments are taking hold and unlocking the next phase of growth for Kate Spade. We're.
We're continuing to lean into our iconic routes infusing, our recently introduced brand codes and delivering strong marketing aligned with our product and values.
We are incredibly excited for the opportunity ahead and remain confident in our ability to achieve $2 billion in revenue and high teens operating margin over the planning horizon.
Turning to Stuart Weitzman brand drove significant trend improvements in the holiday quarter highlighted by 37% revenue growth compared to last year and a return to pre pandemic sales level.
In addition, we delivered improving operating profit with operating margin expanding over 250 basis points.
We continue to advance our overall growth strategies in the second quarter first and importantly, the Stuart Weitzman team delivered the brand's highest quarter of operating income since fiscal year 2018.
This progress was fueled by the strategic actions, we've taken through the acceleration program, notably optimizing our fleet globally, improving our digital foundation and reestablishing our presence with wholesale partners.
Second we remain focused on digital and China areas that represent significant long term growth opportunities in.
In the quarter digital sales rose over 35%, representing an increase of approximately 70% compared to two years ago at attractive margins for mainland China, we delivered growth on both a one and two year basis.
Third we maintain a consumer centric strategy by infusing data analytics into our assortment planning and capitalizing on market shifts to buy now wear now styles and dress an occasion, where this drove the recruitment of new customers at an increasing rate, while continuing to reengage and reactivate clients.
Fourth we drove brand heat by sparking desire through our product assortment backed by engaging marketing, which featured Kate Hudson for the holiday campaign.
We built upon our authority in boots, and booties without performance and the Nora and Stuart We also infuse newness into our icons, including updated constructions of the lift and the introduction of our newest curve.
Our compelling assortment, coupled with higher full price sell throughs and a reduction in promotional activity drove our second consecutive quarter of AUR growth going forward, we see continued opportunity to increase prices, while maintaining our positioning within the overall market and fifth the brand continued to regain momentum in the wholesale channel, notably with <unk>.
Key domestic full price partners.
Overall, we're making continued progress at Stuart Weitzman and remain on track to drive strong revenue growth with a return to profitability this fiscal year.
In closing our strong holiday results across each of our brands support the higher revenue and earnings outlook provided today importantly.
Importantly, the outperformance we have delivered is a direct reflection of our consumer centric strategy as we continue to grow our data and consumer insights capabilities to enable an increasingly powerful customer engagement.
Our momentum also highlights the incredible execution of our team and the agility of our platform as we've successfully navigated the volatile backdrop, we're continuing to offer compelling and innovative product underscored by the increased traction in pricing power of each of our brands I'm confident in the long term potential of our multi brand portfolio and look for.
Forward to sharing our continued progress as we move forward.
With that I'll turn it over to Scott, who will discuss our financial results capital deployment priorities in fiscal 'twenty two outlook Scott.
Thanks, Joanne and good morning, everyone. We delivered another quarter of high quality results, including sales outpacing last year pre pandemic levels and expectations. Despite a difficult backdrop at the same time, we utilized our strong free cash flow to return over $550 million to shareholders in the quarter through a combination.
Nation of share repurchases and dividends.
Through the acceleration program, we're a fundamentally different company as evidenced by our better use of data higher digital penetration and stronger margins compared to pre pandemic levels, we're increasingly building momentum across our portfolio of brands.
Turning now to the details of the second quarter.
Revenue increased 27% compared to prior year outpacing expectations at each brand against pre pandemic levels sales rose, 18%, a nine point sequential acceleration driven by better trends in stores, along with continued strength in the digital channel.
By region, North America delivered over 35% revenue growth compared to last year.
The region accelerated to 25% growth on a two year basis amid a strong consumer backdrop with increasing demand for all of our brands.
Sales in greater China Rose high single digits, including a mid single digit increase in mainland China compared to two years ago. The region grew nearly 35%.
Trends in both Europe , and the balance of Asia improved versus the prior quarter on a one year basis, but will remain below pre pandemic levels largely due to the lack of tourist inflows and COVID-19 resurgence.
Moving down the P&L as anticipated gross margin contracted in the quarter, reflecting our early and deliberate actions to invest in incremental freight to maintain product flow and.
In spite of a 320 basis point headwind from these freight investments. The gross margin was still nearly a 150 basis points ahead of where we were just two years ago. This is a testament to the better use of data analytics to improve the assortment planning and marketing messaging driving lower promotional activity increased SKU productivity.
And higher full price sell through.
SG&A growth slightly outpaced the sales increase that was anticipated given last year's unusual compare is associated with the pandemic, including wage subsidies and rent concessions as well as the gain from the deferred purchase price of the Kate Spade, China joint venture.
Excluding these nonrecurring items in the prior year, we drove leverage in the business, while making continued investments in digital marketing and talent.
So taken together operating income grew double digits in each brand and while operating margin was impacted by free quarter was still nearly two points ahead of where we were just two years ago.
Earnings per diluted share for the quarter was $1 33, an increase of 15% compared to the prior year and over 20% versus FY 'twenty.
Now turning to our balance sheet and cash flows we ended the quarter in a strong position with $1 $65 billion in cash and investments and total borrowings of $1 6 billion inventory at quarter end was 19% above prior year, including a significant increase in in transit.
While our actions to aggressively secure goods positioned us well for the holiday period topline sales.
In excess of our expectations, notably of Kate Spade resulted in lower than projected inventory balances.
Touching on capital allocation and cash management based on the strong results of our second quarter significant free cash flow generation robust balance sheet and our outlook for growth. We now expect to return over one $5 billion to shareholders in fiscal 'twenty two an increase from the prior outlook of 135 billion.
We now anticipate the repurchase of $1 $25 billion in common stock, which includes $750 million bought back through Q2.
In addition, our shareholder return plans continue to assume approximately $270 million through our dividend program.
Our capital deployment plans underscore our commitment to our shareholders and our confidence in the momentum of our business overall, our capital allocation priorities remain unchanged first we're investing in the business to drive long term profitable growth and second we're returning capital to shareholders through dividends and share repurchases.
Separately during the quarter, we completed a $500 million tender offer on our notes due in 2025 and 2027 funded by a $500 million 2032 bond offerings, a leverage neutral transaction that allowed for effective debt maturity management and a modest benefit to our interest expense.
In addition, we still intend to repay our July 2022 bonds totaling $400 million.
By the end of this fiscal year.
Now turning to our fiscal 'twenty two outlook before we move into the details of our guidance I'll touch on the current external environment.
Across the world the backdrop continues to be volatile.
Tumor demand in the United States remains high while near term headwinds associated with the pandemic exist in China, which I'll expand upon shortly further supply chain constraints persists throughout the industry.
We're continuing to act boldly to mitigate these headwinds and deliver for our customers.
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.
We now expect revenue to be approximately $6 75 billion, which would mark a record for the company. This represents an increase of nearly 20% compared to fiscal 'twenty, one with strong double digit growth at each brand or.
Our guidance contemplates ongoing strong momentum in North America in the second half, which is helping to offset the expected near term COVID-19 related disruptions in China. This is proof of the benefits of our globally diversified platform. Our guidance also incorporates lower than expected on hand inventory due to the revenue outperformance in the first.
Half as well as higher levels of in transit these longer lead times from ongoing supply chain disruptions are expected to limit our ability to chase stronger underlying demand in the second half of the year specifically in Q3.
We continue to expect modest operating margin expansion for the fiscal year, maintaining our gross margin and SG&A rate expectations.
As previously shared we expect gross margin to contract modestly due to incremental cost pressures associated with freight.
Pressure is now expected to be approximately $170 million in the fiscal year. Excluding this impact of 250 basis points underlying gross margin continues to expand through lower discounting and improved SKU productivity. In addition, we're capitalizing on the pricing power exhibited by each of our brands by increasing.
Prices selectively going forward. In addition, modest SG&A leverage as anticipated for the fiscal year. We continue to expect about $300 million in structural gross run rate expense savings as a result of the acceleration program.
We're committed to reinvesting in the business to fuel long term growth.
Net interest expense for the year is now anticipated to be between 60 and $65 million. In addition, our guidance contemplates a fiscal year tax rate of 18, 5%, assuming a continuation of current tax laws.
We are now expecting weighted average diluted share count to be in the area of 274 million shares. This lower guidance largely reflects our more aggressive posture in the second quarter, along with the previously mentioned $250 million increase to the buyback expectation for the year. So taken together, we now expect EP.
To be $3 60 to.
To $3 65 above our prior guidance of $3 45.
The $3 50.
Finally, we now anticipate capex to be about $200 million for the year.
Turning to the second half we continue to contemplate double digit revenue operating income and EPS growth with particular strength in the fourth quarter.
So to provide some more guardrails on Q3, specifically.
Revenue is expected to increase low double digits, which contemplates the inventory constraints previously mentioned.
While these pressures are being realized across the portfolio, we anticipate an outside financial impact on our smaller brands given their relative size.
Looking at the bottom line third quarter operating margin is expected to contract largely due to incremental freight expense in the area of $55 million as well as increases in SG&A, primarily due to marketing and investments. In addition, while we're continuing to incorporate a 50 basis point benefit to gross margin from the reinstatement of GSP for the fiscal year.
<unk>, we're now reflecting the positive impact in the fourth quarter overall.
Overall EPS is expected to decline approximately 20% in the third quarter, an increase over 60% in the fourth quarter, which has been contemplated in todays higher outlook for the year.
So in closing we're further leveraging the benefits of the acceleration program and our transformed business model evidenced by increasing momentum at each of our brands are strong holiday results underscore our confidence in the benefits of our multi brand platform and direct to consumer business model, which supported the increase in the fish.
Full year outlook.
In addition, we're generating significant free cash flow and now plan to return over one 5 billion to shareholders. In this fiscal year alone overall, we remain confident in our long term ability to drive continued revenue and operating income gains I'd now like to open it up for your questions.
At this time, if you would like to ask a question. Please press star and one on your Touchtone phone again that is star one if you would like to ask a question you can remove yourself from the queue at any time by pressing the pound Keith we'll take our first question today from Bob <unk> with Guggenheim. Your line is open hi.
Good morning.
Yes, Joanna can you elaborate a little bit more on the inflection that you are seeing at Kate Spade and I guess, maybe if you could just give us an update in terms of where you think this brand can go over the longer term either both on top line, but also on.
Operating margin profitability. Thanks.
Certainly in good morning, Bob.
We delivered standout results in a significant inflection in Kate spade in the second quarter that was driven by product people and our focus on the consumer and Q2 has strengthened our confidence in the long term opportunity, we see to return to.
Builds Kate spade to be a $2 billion brand.
And I do want to recognize the team for the work over the past 18 months.
They leveraged our tapestry platform and the acceleration program to rebuild the foundation of the brand returning Kate Spade to the brand our customers love.
Just a few highlights on our second quarter sales growth of 33% in the second quarter, 16% above pre pandemic levels that was an 18 point sequential improvement so a significant inflection.
And we're doing that with stronger operating margins ahead of both last year and pre pandemic levels.
We're continuing to build on the digital strength in the brand with 30% growth there nearly double III pre pandemic levels, we're acquiring new customers, one 3 million new customers in the quarter and we're reactivating importantly, reactivating lapsed customers back to the brand.
And also importantly, we saw low double digit increase in global handbag, AUR, which shows the power of the of the product offering that we're building. The team has been focused on building an amplifying key platforms, we called out the knot and spade flower.
Which continue to perform and new styles like the Carlyle that are bringing in new customers.
These are resonating and we're seeing higher full price selling across our assortments and our.
I'd also add importantly, we're also seeing growing brand awareness in our and our consumer research.
So a lot to be excited about at Kate Spade.
<unk> has a unique position in the market and we are confident in the ability to achieve 2 billion $2 billion in revenue at high teens margins over our planning horizon.
Thank you very much.
Okay.
The next question comes from Ike <unk> with Wells Fargo. Your line is open.
Hey, thanks, everyone.
Scott maybe for you just on the inventory dynamics is it possible to give us a little bit more color on the inventory shortfall this quarter.
What exactly is the revenue headwind to the total business and specifically to Kate Spade and <unk>.
But just because it's important I think for us to understand the trajectory of that brand because it looks like you guys are making some big improvements there.
And then are you in your forecast is there anything that you are expecting these headwinds linger into the fourth quarter.
Okay.
I think you're on mute.
Let me you got it.
Can you hear me.
Yes, we can hear you now.
Yes, Okay I am sure that Im sure that was my error sorry, yes. So hey, this is a good story right.
We checked bold and early actions from an inventory standpoint to position ourselves well for holiday and as you can see by the strong quarter. We had it worked in.
<unk> and K so.
Message here that we're trying to convey is that we sold through a lot of inventory.
And we wish we had a little more because the demand is really strong and continues into the third quarter. So this is going to.
Put some pressure on our ability to chase the demand in the short term, but over time, we have.
<unk> seen that our production is back in line, we talked about that last quarter, we still have some issues on the logistics side of elongated lead times. So the message here is is that fair.
First of all the demand is strong we've had a really strong quarter. We wish we had a little more inventory, particularly in Kate spade and thats going to put a little.
Hamper on our ability to chase that strong demand, but we will be back in shape by the end of the year and we will see that.
This is not going to be a lingering issue from our standpoint, the other thing I'd just briefly mentioned.
As we as we brought in this inventory at cost we talked about that that's not new right. So that that cost as you see it in our gross margin in the short term be importantly, though because our flow of inventory is now back to approaching normal levels, which significantly moderated the amount of.
Airfreight and expedited freight on a go forward basis, so thats largely behind us it will take a while for that to work its way through the P&L and you will see some of those impacts in the third quarter, but on an ongoing basis, we have significantly curtail the amount of excess freight to get that inventory back in.
And shape.
So how are you able to quantify the headwind there Kate spade, specifically in the third quarter.
Yes.
Put a number on that just know that the demand is stronger than our ability to supply. It in the short term and we will see some moderation in the third quarter and the growth rate at <unk> that is not a reflection of the underlying demand or the strength of the brand it's more of a supply.
Supply demand match in the short term.
Okay. Thank you.
And I'll add to that.
That are our outlook raised our our sales expectations for the year, we still expect double digit increases in the back half of the year and strong double digits across the board across brands for the year.
In 'twenty, two delivering record sales level levels at $6 $75 billion. So continue to expect top line to perform.
Sure.
Mhm.
We will go now to Erinn Murphy with Piper Sandler Your line is open.
Morning. My question is around digital it has just continued to be a really strong focal point and so two parts as you think about the $2 billion guide for digital this year, how does that breakdown across concepts and then longer term has that.
It will get bigger it has that led you to reevaluate core fleet from here, either an outlet or full priced thanks. So much.
Yes.
We have fundamentally transformed our business to strengthen our engagement with the consumer in this channel and you can see that in our results. We are meeting our customers, where they choose to engage and shop and that's that's really been delivering results we've invested in capabilities, including in talent. The power of the work here and drive better consumer experiences across.
Our digital platforms as you mentioned, we're approaching $2 billion in business we reached.
A third of our business in the holiday quarter, which is triple pre pandemic level. So seeing a lot of traction here and we continue to see new customer growth in these channels. So we feel great about the growth both from the revenue stand point, but also from the customer profiles and new customers are younger custom.
<unk> that we're increasingly attracting to.
To our brands and we're also seeing.
This digital business is accretive to our margins as digital margins are higher than their respective brick and mortar so that $2 billion represents.
Margin benefit to us, but also represents an opportunity because at $2 billion, it's less than a third of our business on an annualized basis and we think it can go higher from here. So.
So we feel very optimistic about our digital business and continue to invest in those capabilities.
And then to your question about stores.
We also believe that stores represented an important touch point for our brands.
And consumers are shopping across channels, we did see improvement in store trends. This quarter at the same time, we continued to deliver strong growth in digital so as customer shopping behaviors are changing we're investing behind those experiences in those omnichannel experiences that make that a <unk>.
<unk>.
Touch point for our for our customers and it's an important touch point for our brands.
We have been focused on driving higher productivity and profitability across our store fleet.
And even though our traffic levels in store business overall hasn't exceeded pre pandemic levels, our margins and our store fleets have exceeded pre pandemic levels. So we've done the work to ensure we're driving more profitability and more productivity out of our store fleet and we continue to invest in great experiences for our consumers.
Across all channels.
Super helpful. Thank you so much.
Yeah.
The next question comes from Lorraine Hutchinson with Bank of America. Your line is open.
Good morning.
Can you talk to the current environment in China, and then from a longer term perspective, how big of a driver is it China in achieving its $2 billion revenue goal.
Well, let me start with China, and then I'll touch on the opportunity for Kate, but we did deliver growth in China in the second quarter on both a one and a two year basis and we remain confident in the long term potential that market represents we see lots of runway ahead in that market.
Q2, we delivered growth, 35% ahead of pre pandemic levels, and we delivered growth with Chinese consumers globally.
And that's been fueled by digital significant innovation on existing and new platforms, and we see strong engagement with a particularly with a younger consumer in the market.
So continued innovation strong strong business continued growth fueled by digital in the market we.
We do expect some COVID-19 related pressure in the near term we are seeing pockets of Covid pressure now and we expect pressure in the near term, including some of the travel restrictions and Lockdowns, we mentioned in certain cities, but we continue to believe that China represents that compelling long term growth opportunity for tapestry and all of our brands and.
A couple of data points, the Chinese consumer has proven to be incredibly resilient throughout this pandemic.
And the research that we've done in the market and indicates strong brand affinity with our brands. We delivered record sales with a number one ranking on tmall for both coach and Stuart Weitzman in their respective categories.
We also see strong purchase intent and our category over the next 12 months.
And our brands are well positioned we're targeting the fast growing and emerging middle class and we're executing strategies to drive sustainable growth and we see that opportunity across all brands I would say Kate Spade right now is very small in China. Our focus has been on the North America and Japan markets.
Our core markets for Kate Spade, and as we get that brand moving we see opportunity to drive growth in China in the future.
But to give a little more color I may toss it to Todd to give a little more color about what we're seeing in China with the coach brand, where we're having continue to have success.
Thanks, Joanne as most of you.
Good morning, as most of you know the coach brand has been in China for over 20 years.
Deep deep roots in the country and in our recent brand perception study two thing we're very noteworthy.
One the majority of the coach customers in China have a positive economic outlook for the next 12 months.
And that gives us a lot of energy around.
Our clients and our customers there to the coach brand as the beloved brands that.
Successfully compete with traditional European luxury brands, and we love that positioning and were going to continue to invest and grow in China. For example, last summer we held the major fashion show in Shanghai showcasing our winter collection that showcase led to the sales of the ski capsule that we show.
<unk> showed its sold in our stores in the second quarter.
We will return this summer with another winter show in China, continuing to build on the momentum and really focusing on both the emotional and functional needs of our Chinese clients. So again, both our mid and long term expectations and growth in China are very robust and.
We're really excited about what the coach brand is going to deliver under the tapestry platform embedded in that area.
Thank you.
We'll go now to Oliver Chen with Cowen Your line is open.
The average unit retail increases of the coach brand of them really impressive what's ahead with maintaining that anniversarying that in terms of sustaining that momentum.
And as a follow up on Ftes and the mother births have been increasingly embrace but buy luxury brands. What are your thoughts on the strategy there and how that may be executed as well as the different question ESG and supply chain just key priorities that you have for ESG and supply chain as well. Thank you.
Thanks, Oliver there's a lot there.
Start with pricing and move to the <unk> and then the ESG.
So on pricing across brands, we represent compelling value in the market.
We deliver beautiful quality product at great prices.
We do see the market moving higher and we've had success in driving AUR, we see AUR as an opportunity.
Across across our brands.
We saw that in.
In the second quarter, where we drove AUR higher across all of our brands.
And we've had sustainable growth at coach which is notable.
And we're driving AUR increases through product innovation with this disciplined promotion promotional activity and.
Really through our transformation efforts that I've called out.
Consumers continue to recognize the value we are delivering we do see further runway. We think it's sustainable we see runway to leverage price increases to offset inflation.
While maintaining our market positioning and delivering compelling value for our customers, which is our overarching goal.
And we've talked about the transformation efforts and the sustainability of these results that we are using data to improve our assortment planning, we're seeing increased SKU productivity lower discounting.
Not relying on promotion.
We're we're seeing the pricing power happen across brands.
Maybe I'll pass it to Todd to talk a little bit about.
What are you seeing at coach where we've had.
An amazing track record of success, but continue to see runway and then I'll pick up the the ESG and <unk> questions.
Todd.
Thank you Joanne.
Over you know coach at its best balances logic, and magic and the tapestry platform has enhanced the logic side, particularly with our digital center of excellence at our consumer insight work on the magic side over the last two years, we have created an environment, where our creative team.
Led by Steward Vivers can thrive. This combination has resulted in 11 quarters of increased handbag AUR in North America, our second quarter Villa, resulting in the highest revenue and profitability in 10 years.
Our sustainable topline approaching $5 billion in this fiscal year.
Oh to substantially greater SKU productivity.
Over one 5 million new customers transacting with the brand in North America, just this last quarter.
Meaningful growth.
Ken.
Ready to wear and footwear and all men's categories.
Finally, our inclusive authentic and fund storytelling that our marketing.
These are foundational changes for our brand and what this allows us to do is to continue to push and get price in our product and when when when I've been asked over and over again many quarters now about how much more room is there an AUR I look at where the coach.
<unk> sits today relative to traditional European luxury.
White space between where we transact and where traditional European luxury transact is that the greatest delta in 20 years that gives us a lot of confidence and a lot of room to grow our price positioning so I'm very optimistic about our future.
I know Joanne I'll talk about sustainability on the MSG, we dipped our toes in the water last quarter.
We.
Are going to look at it.
Unlike selling.
Physical real product.
Our consumers like the touch and feel but I do think thats an opportunity to explore as we really.
Get close or particularly to a younger consumer so youll see more of a more of that overtime and then I'll kick it back to Joanna to talk about sustainability.
Yes.
And the work we're doing.
With NFC is right now is in.
An example of how we think about innovation, we're always testing new ways to engage with consumers, we're testing and learning how they engage with NSP, how it drives consumer loyalty. So we're experimenting and we'll see where the customer takes it as.
As we learn more about about NFC.
And on ESG I appreciate the question.
<unk> is important to our company in all of our brands.
We have a program called our social fabric, that's been part of the fabric of our company and it's focused on three pillars. It's focused on our people our planet and our communities and we continue to drive progress. We've stated goals and we continue to drive progress behind goals in all of those categories.
I am pleased to report that we just released our corporate responsibility report just published I think it goes into a lot of detail at some of the progress we've been making across all three I'll just hit a couple of highlights.
We announced a bold commitment to tie 10% of our leadership incentive comp to our progress on <unk>, we are committed to making progress on these objectives and we are making progress.
I know you know we established the $50 million Tapestry foundation to support some of those initiatives and we recently launched.
Our founding partner with F T and their social Justice Center to also improve <unk> in our industry. So what we're focused on in our company, but also in our industry.
On the planet.
Recently announced partnership with Fabry Institute on regenerative leather supporting our biodiversity objectives.
We signed on to the science based target initiatives to with the goal of net zero by 2050 at the latest and we're making progress on our renewable energy goals as well as <unk>.
Our sourcing and traceability. So that continues to be a strong focus of the company and then within our communities.
I am very proud of the volunteer work and the service that we are doing all of our associates are super engaged.
And Thats, we provided one paid volunteer day for our associates to get involved with their communities.
With an objective of meeting our $100000 volunteer 100000 volunteer service our goal.
And we are we are far along in its driving a lot of pride across our teams our teams really.
I appreciate the fact that we support their efforts to focus on the community and they are proud to work for a company and be working towards not only the improvement of our business, but something much bigger than that so.
ESG is very important for our company and we're making progress.
Thank you best regards.
Thanks to all of them.
It does a reminder to our participants status star and one on your Touchtone phone if he would like to ask a question in the interest of time, we do ask that you limit yourself to one question today, We'll go next to Mark <unk> with Baird. Your line is open.
Good morning, Thanks for taking my question I'm.
I wanted to follow up on the digital front <unk> been accelerating your investments there and was hoping you could just unpack that a little bit.
I guess first I think part of that is marketing, which clearly appears to be contributing to the momentum today and and I think you're also investing in teams and capabilities, which might still be in the earlier innings. So I guess I'm curious one what were the learnings from the investments over the holiday quarter, which channels are you seeing that the greatest success and then.
Just kind of medium term here, how should we think about the leverage point on SG&A as you continue leaning into digital thank you.
So thanks, Mark we have seen a lot of success in digital and we're seeing strong returns on the investments we are making there is a technology component.
To this and it combines both our digital and our data and analytics capabilities, we have a strong technology Foundation.
That allows us to adopt new tech new technologies, and new innovations quickly, so embedding data and analytics into our processes.
And a more robust way is helping drive conversion is helping drive our marketing as well.
The platform and foundation, we're investing in and that's that's helping us.
<unk>.
And we've seen improvement this holiday quarter, our digital business grew 30%.
Call it strength on strength, but we did that and we we delivered a much better experience for our consumers and we saw our customer satisfaction scores increased significantly across the holiday quarter with the changes we're making so it is impacting the experience it's impacting our results in conversion.
But I also the talent that we're building and to your point.
Those investments are increasingly in talent and having the teams that are helping drive this innovation and they're doing great work.
I would say innovation is this is the is the final piece that is powering our business and we're very focused on moving with speed to be where our customers are and you can see the innovation, we're delivering on those spaces being on new platforms.
And.
Innovating quickly we were in China, we were the first fashion brand to be.
Have a commercial site on Tic Toc, we remain number one on tick tock and Tmall there.
We have <unk> content across social media platforms.
And even the Nf team that we talked about earlier is a sign of how we think about innovation testing and learning and moving quickly to be with our customer and stay close to our customer.
So.
That is the that is the focus of the of the investments and we're seeing strong returns.
Yes, Marc maybe I'll just build two on part of your question was around leverage and how we see that.
Yeah.
Just first of all I'll say the power of these platforms is really impressive and you heard Todd mentioned, how the logic side of the business is really power in all of our brands and I think it's obvious the results that youre seeing and I can tell you as someone who is relatively new to the story.
This company go from a technology deficit to technology really driving the business in a really short period of time through the acceleration program is really really impressive and encouraging and I'll just remind you in the prepared remarks, I talked about $300 million of structural run rate savings.
<unk> came through the acceleration program over the last couple of years, that's not really about saving money to save money. That's that's reallocating money into our digital and consumer data experience and again building those platforms, which have leverage so that's how we can have.
<unk> investments in some of the what I would argue the points of difference that are really driving our business and at the same time, having leverage in other parts of the SG&A structure allow us to continue to.
Grow our operating margins over time, so that's kind of the flywheel or the secret sauce here I think as you look at this transformed business model.
Unlock future growth.
Our next question comes from Michael Binetti with Credit Suisse. Your line is open.
Hey, guys. Thanks for getting us in here congrats on a nice start to look out here this quarter.
Can you just.
Zero in maybe on the coach gross margin.
Just a second here I'm on it maybe the two year trend we were looking at slowed a little bit from first quarter, but any components. There between I know you gave us free for the whole company, but freight for that brand versus the impact of the AUR work Youre doing just so we understand a little bit better what impacts that are durable versus transitory as we rollover. The next few quarters here and then Scott wouldn't be.
Our conversation with you and I, mostly talked about the SG&A across the company.
It looks like.
If youre doing that youre consistent trends.
Yeah.
I guess, just a bit of a dovetail off of <unk> question as we look at.
And we look at some of the flow through on the revenue upside in this quarter versus the plan really nice revenue upside.
The SG&A seen the flow through rate looks a little bit more like what we saw last fiscal year than last fiscal quarter, maybe just how to think about flow through on SG&A to the extent that you do find upside in the revenues in the next the next couple of quarters here.
Yes, maybe I'll start and.
And then Todd maybe I'll build a little bit as you think about margins in AUR, but listen in terms of the.
The.
I think your question was around what we're seeing in freight on coach and the impact on margins.
Really not it's not a big difference overall the overall guidance I gave you Michael is is not so different by brand in terms of how it's allocated.
As you try to think about the ongoing margin structure. There is nothing that I would call out. This particular unique one brand or the other we took these bold actions pretty much across the board.
Because a lot of the issues, we're seeing where universal.
And our supply chain and then again I think youll see the results in Q2 some of those actions that we have made remember my earlier comments, though.
Sure.
Did the expedited freight and air freight so a very specific reason, we saw Vietnam, which at the time was about 40% of our production was down and we had a hole in our supply that we've made up for it through those expedited <unk>.
Airfreight actions again to repeat we now see the flow more normalized that's largely in the rearview mirror it'll take a little while to work through the P&L because it attaches to the inventory and as that inventory sells through you'll start to see that particularly in the third quarter, but on an ongoing basis, we do see elevated ocean rates, but a lot of this.
<unk> expedited freight is going to go back to more normal levels and already that's happened. It just takes a while to go through the P&L and we also have pricing action on an ongoing basis I don't know Todd if you want to build on that what youre seeing in the coach brand.
Sure Scott Thank you.
As you've seen our AUR has grown each and every quarter and part of what allows us to do that is to focus on our iconic product and really elongated in the family.
Our product and our offering.
And that has provided us the ability to discount less to raise prices. So bill.
I believe over the next year Youll continue to see us do more of that you'll continue to see us.
Absorb any inflation through pricing.
Obviously, you can't do that in one quarter when you hit with freight and I think you can coaches and perhaps maybe a slightly better inventory position than our sister company is not that our merchants don't want the newest greatest product as well. It's just we've been on the journey a little longer.
Developing iconic product that allows us to stay in and a slightly better inventory position. So I feel very good about our pricing power I feel very good about our ability to absorb the input costs.
And I will enjoy not airing goods in in the future.
To the same level.
Michael Let me just take your SG&A.
Question real quick too.
I would say listen there is there is some timing quarter by quarter as we think about different marketing action stopped with the final actions.
I would just point you to the Big picture here right, we have taken up our top and bottom line guidance for the year. We have maintained our gross margin SG&A shaping and we still intend to increase our operating margin for the full year. So is there some timing quarter by quarter, yes.
I think the bigger picture here is we had a strong quarter and we've taken up our guidance and we still maintain the fundamental metrics that we talked about even despite a volatile volatile backdrop as I mentioned before so I think that from my standpoint is the big picture here.
We'll go now to Brooke Roach with Goldman Sachs. Your line is open.
Thank you good morning.
So all I would love a little bit deeper into the 3 million new customers across channels that you acquired in North America. This quarter, which is a strong result against a tougher year on year compare.
Talk a little bit more about what specifically you're seeing that are driving those new customer acquisitions and a sequential improvement you saw in this quarter and then on the forward would love to hear a little bit more about the specific marketing efforts do you have plans to keep that momentum going into the back half of this fiscal year. Thank you.
Thanks Brook, we continue to see strong customer acquisition across all of our brands. So the 3 million new customers.
Cross all of our brands, that's 811 million new customers over the last 18 months.
We have been focused on a consumer customer acquisition as part of our brand building activities again structurally transformed our business to focus on improving our ability to engage consumers and we see it paying off there.
We're doing that with innovative marketing, we're showing up on the platforms, where our customers are so first it's getting to know.
And getting closer to our target consumers, knowing where they are and making sure we're speaking to them.
And connecting with them. These are customers, who are transacting with us. So we know these are customers who are we've not only seen our marketing and our product, but there they are buying from us.
And purchasing so it's it's.
It's a combination of knowing our consumers.
Understanding and delivering great product that delivers on both their emotional and functional needs.
So we're better embedding data in that side of the process and then in marketing we've been much more innovative and in our marketing. We've we've connected with this test and learn.
Process, where we have cross functional teams in the business Ideating and testing consistently against hypothesis, but the things that work are being scaled and that's how we're driving all of this traction with with customer acquisition and frankly, we're applying the same to retention and repurchase rate.
And repeat rates and reactivation. So we can we are a data rich company over 90% direct to consumer.
And we're leveraging that data user.
Using new tools and technology that we've invested in again, we continue to invest in talent that are driving both the creative side of the equation as well as the technical side.
Two to be in front of customers, where they are and connect with them.
And speak to their values and the things that will be purchase drivers. So those are the drivers the new customers that we're seeing are increasingly younger across our brands and we think it provides a strong foundation for future growth.
And I can just add on the coat side, the new customers, we're seeing are.
We're seeing higher AUR from those new customers and one of the things we've developed which we're very proud of.
It gives us.
A lot of runway in this area of retention.
Is the coach Insider program.
We have seen that our insiders transact, 20% more frequently as compared to non members.
And their baskets are higher so.
So we see that across both our retail and.
Our value channels so.
We're excited about this and what's really.
<unk> unique.
Unique to the coach Insider program, it's not a discount.
Program, it's about early access it's about being truly an insider and thats what the customers. So engaged with we've heard stories from our clients about their being featured on the inside or program and how much joy and pleasure they get out of that so.
You'll see us continue to develop these programs and the benefits of being a coach insider too.
Create that connectivity.
With our customer in a much deeper and provide underway than just transacting.
The next question comes from Paul <unk> with Citi. Your line is open.
Thanks, guys, it's Tracy Kogan filling in for Paul I was wondering if you could talk about your factory outlet strategy for Kate.
How many stores you guys have there currently and what's your ultimate target and I'm wondering if you have the same AUR strategy at the factory outlet channel for Kate as you do with coach. Thank you.
Well I can't.
We've seen tremendous traction and we do have a specialty and outlet stores we're seeing.
Traction across both but the growth we're seeing is really been driven by our full price.
And we are very excited about what we're seeing there.
We expect to too.
Raise AUR and we're seeing AUR growth across channels.
But and we have a high digital penetration. So I think if you look at the Kate Spade business in aggregate.
We see.
Compelling value in the marketplace delivering great product.
The unique positioning in the market and we see customers responding across channels, but our growth and.
The.
The growth that we're seeing and the traction that we're seeing is increasingly in the in the specialty channel and retail a lot of the <unk>.
Engagement and the.
Novelty that we're seeing across social media channels as well as driving that emotional connection to the Kate spade consumer So Kate Spade has a tremendous runway ahead for growth we are seeing traction across channels, particularly in our specialty channel and and we're very confident and see a lot of opportunity for growth.
Had both an absolute and in AUR.
Great. Thank you.
Mhm.
Thank you that concludes our Q&A I would now like to turn the program back to Joe <unk> for any additional or closing remarks.
Well I want to thank you all for joining us this morning through our acceleration program, we have radically transformed our business model and it's delivering we drove record sales and adjusted earnings during the holiday quarter with outperformance across each brand.
We've increased our outlook for the year, which includes raising fiscal 'twenty. Two R 22 revenue outlook to a record at $6 75 billion with coach approaching $5 billion, an inflection at Kate Spade digital revenue, reaching $2 billion and our fiscal 'twenty two outlook that is for.
50% above pre pandemic levels. These results also support our strong returns we expect to return over one $5 billion to shareholders. This year.
And our teams are powering. These result, they are our competitive advantage and I want to recognize and thank them for the standout performance.
Their relentless drive an unwavering focus on the consumer will build on our strong foundation and deliver sustainable growth into the future.
Thank you.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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