Q3 2022 Tapestry Inc Earnings Call
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If you need audio assistance during todays conference. Please press Star zero.
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Good day and welcome to this tapestry conference call today's call is being recorded at this time all participants are in a listen only mode. Later, you will have an opportunity to ask questions. During the question and answer session. You May Register to ask a question at any time by pressing the star and one on your Touchtone phone.
I will be standing by if you should need any assistance.
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.
Good morning, Thank you for joining us with me today to discuss our third quarter results as well as our strategies and outlook our Joanna for boys here at Tapestry, Chief Executive Officer, and Scott Rowe tapestries, 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 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 for a full reconciliation to corresponding GAAP financial information. Please visit our website www Dot Tampa St Dot Com forward Slash investors and then view the earnings release and the presentation slides posted today.
Now, let me outline the speakers and topics for this conference call Joanne will begin with third 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 of coach after Q&A Joanne will conclude with brief closing remarks.
I'd now like to turn it over to Joanne for voice or at tapestry CEO .
Thank you Christina and welcome everyone.
Our third quarter results were well ahead of our expectations. Despite the challenging environment, we do.
Drove increased customer demand across our portfolio, resulting in double digit topline growth at coach Kate Spade, and Stuart Weitzman and EPS well ahead of our outlook.
Our continued outperformance demonstrates the vibrancy of our brand the power of our digitally enabled platform and the successful execution of our strategy by our talented teams around the world.
Importantly, our progress reinforces the significant runway we have ahead of us as we harness our unique blend of magic and logic.
The combination of iconic brands amplified by an agile and data rich operating model creates tremendous opportunity. Our brands are at the heart of our company they occupy distinct positions in the attractive and resilient accessories market.
Each of the rich heritage and substantial potential for growth. This is evidenced by the strengthening brand heat, we're seeing for meaningful new customer acquisition as well as growth with existing customers across our portfolio.
We are focused on building lasting relationships with our customers to increase lifetime value through continuous innovation in both our product and the experiences we offer throughout the purchase journey.
The opportunities for our brands are enhanced by our platform, which has been transformed to power them to move at the speed of the consumer.
We are leaning into our digital leadership meeting consumers, where they want to shop and providing exceptional experiences when they get there.
We're also leveraging our rich consumer data and sophisticated analytics to establish and enrich our customer connections augmenting our creative processes with a deep understanding of our customers, while bringing faster and more consistent execution to bear.
Fits of investments in digital and data analytics are highlighted by our results over the last two years and we're still in early innings in terms of unlocking this potential.
Our platform also affords the benefits of scale shared learnings and talent mobility.
These advantages are increasingly important in today's rapidly evolving landscape and allow us to have a greater positive impact on our customers our people and the world at large.
Before moving to our recent highlights I want to recognize those that are being impacted by conflict in Ukraine and by the ongoing ravages of COVID-19 in China and elsewhere, our Hearts go out to them. During this turbulent time.
Now turning to tapestry as performance in the third quarter.
First we maintained a consumer centric lens by leveraging the magic of our brands and our powerful customer data and analytics capabilities to drive improvements in key customer metrics.
We acquired over one 4 million, new customers, who transacted with our brands across channels in North America, a mid teens increase compared to the prior year with continued growth in both stores and.
Since the start of the acceleration program 21 months ago, we have brought in nearly 13 million new customers to our brand.
Importantly, these customers purchased at higher AUR and have already returned to shop again at a higher frequency than the average.
At the same time, we continue to effectively reactivate lapsed customers, while realizing increased average spend highlighting our focus on driving lifetime value to fuel sustained growth.
Overall, the underlying momentum across customer metrics drove our standout performance in North America in the quarter.
Second we continued to lead in digital driven by the investments we've made in our capabilities online.
In the quarter, we delivered sales growth of over 20% in the channel, which represented approximately 30% of our total business.
Consumers remain extremely engaged in shopping online we continue to expect to achieve $2 billion in revenue in digital in fiscal 'twenty two with further runway ahead.
Third we continued to see pricing power across the portfolio and realized another quarter of global AUR gains in each brand's core category.
Importantly, we have seen no negative impact on customer demand from these price increases highlighting our value proposition brand relevance and the increasing traction of our product offering.
And for us touching on China, our business was impacted by Covid related restrictions in the quarter.
Although we expect these headwinds to continue in the near term we remain optimistic given the proven resilience of the Chinese consumer and the long term opportunity for growth overall.
Overall brand awareness and handbag purchase intent in China remains high reflecting the quality of our efforts to build brand equity with Chinese consumers.
In summary, we continued to make meaningful progress supported by the acceleration program and we're confident in our ability to drive sustainable growth going forward.
I will now touch on third quarter highlights for each of our brands starting with coach.
We drove another quarter of top and bottom line outperformance, achieving a sales increase of 11% compared to prior year, including a nearly 20% gain in North America.
This continued growth reflects our consumer centric strategy and agile execution and underscores the significant potential ahead for the brand.
During the quarter coach continued to advance its strategic initiatives.
First we delivered a focused and compelling product assortment across categories.
Our iconic leather goods families are the foundation of our assortment and fuel consistent growth.
Tabby Roe field, and Willow, where our top selling groups in the quarter driving half of retail handbag revenue to.
To continue to spark consumer interest with animated these families with new color ways fabrics and embellishments.
Outside of our core styles the studio bag, featuring a push locks the closure resonated with consumers while the launch of the new hero shoulder bag, boasting a horse and carriage snap closure outpaced our expectations.
In our lifestyle categories, we're driving outsized growth yet remain underpenetrated versus market in both footwear and ready to wear customers are embracing our highly branded pieces reinforcing coaches desirability and the incremental commercial opportunities. These categories represent currently and over the long term.
Second we continued to build brand awareness within men and delivered over 20% growth in the quarter led by strength across backpacks ready to wear and footwear.
Accordingly, given the success, we expect to approach $950 million in revenue this fiscal year closing in on our near term target to reach $1 billion in sales.
Third our product offering was further enhanced by the use of data, which provides customer insights and analytics to support new more agile ways of working and higher SKU productivity.
Together this supported a significant pullback in promotions and drove full price selling resulting in an increase in global handbag AUR.
In North America handbag, AUR rose at a high single digit pace, marking 12 consecutive quarters of gains.
Our momentum in the customers' response to the style and craftsmanship of our products reinforces coaches pricing power and a further opportunity to increase prices to offset inflationary cost pressures.
While we have raised prices selectively over the last quarter. The majority of the benefit will be realized at coach beginning in fiscal year 'twenty three.
Fourth we drove customer engagement through 360 degree marketing Activations.
We amplified our spring product introductions on social platforms, notably Tictoc targeting Gen Z and millennial consumers.
Additionally building on the success of the brands February fashion show themed somewhere in America, we created localized immersive experiences through collection of top ups across the globe, including a coach laundromat convenience store and bagel shop.
These fun and unexpected venues enabled us to attract new customers and expand the way our brand is perceived.
We also emphasized our values through the coach reload the program and opportunity to engage with the customer in different ways by offering circular pathways for our product whether through up crafting restoring remaking.
Given the success of the program, thus far we've expanded its reach across our North America retail stores.
Overall, the combination of these actions drove further improvements in customer metrics, including the acquisition of over 800000, new customers transacting in North America channels.
At the same time purchase frequency again rose and we reactivated lapsed customers and an increasing rate.
Fifth and finally, we again drove outsized revenue growth in the digital channel, which rose nearly 25% compared to last year or more than five times, where we were three years ago.
In the quarter e-commerce represented nearly 30% of sales.
In closing coaches consistently building momentum, reflecting the new and innovative ways, we're engaging with consumers.
Based on our underlying growth we continue to expect the brand to approach $5 billion in revenue this fiscal year, while maintaining exceptional margins. Despite the COVID-19 related challenges we're facing.
Looking ahead, we have significant runway to drive growth across our product offerings by enhancing our leadership position in leather goods and delivering outsized gains in men's and our lifestyle categories.
Additionally, we see meaningful long term potential across high growth channels and geographies such as digital in China, given consumer demand in the brands value proposition.
Taken together, we remain confident in coaches ability to gain market share given increasing brand heat and the relationships, we're fostering with our growing customer base.
Now moving to Kate Spade sales and operating income significantly outperformed expectations once again this quarter.
Revenue rose, 19%, which included a 25% increase in our North America business.
The brand continues to gain momentum as we forge connections with our customers by leaning into Kate Spade unique positioning within the market overall, our strong results year to date speak to the relevance and clarity of our brand purpose and underscore that we have the right strategy in place to drive sustainable growth over the long term.
Turning to progress against our strategic priorities in the third quarter.
First we amplified key platforms as we continued to build and innovate our core product offering while infusing newness in our novelty platforms.
Within handbags success was balanced across our core styles and new introductions.
Not remains our number one collection, which we expanded to include a cross body tote at.
At the same time recently launched style such as the Carlisle and Avenue outperformed expectations.
Further we invested in novelty introductions that demonstrate the brand's unique personality and play a key role in storytelling to drive interest and engagement with consumers.
This quarter's offering featured handbags shaped as flowers tennis balls and butterflies. These styles, one with our highest value customers and they carry AUR well ahead of the average.
Importantly, the strong performance as well as deliberate actions to decreased promotional activity and strategically raised prices resulted in nearly 20% global handbag AUR growth.
Second we drove brand heat by engaging the consumer through emotional storytelling in a community driven approach in keeping with our DNA.
Our floral focused spring campaign reinforced our brand purpose by evoking the color enjoy that Kate spade is known for.
We delighted our community with the opening of an experiential Kate Spade townhouse in New York City, which was met with a line of enthusiast nearly two city blocks along.
This pop up and body of the full brand expression. If we offered customer experience is pulled from the pages of our new Kate Spade book and also included a preview of our upcoming fall collection.
Digitally we increased our reach on social channels, notably Tictoc, we're engaging with a younger and more diverse audience importantly.
Importantly, our successful execution of these brand building activities is underscored by a three point sequential increase in brand awareness for survey is hosted in the U S. By you Gov.
Third we strengthened the foundation of our lifestyle positioning through a focused assortment across ready to wear footwear and jewelry.
These categories helped boost customer acquisition and engagement and they remain an important driver of purchase frequency lifestyle.
<unk> currently represents over 20% of total sale and looking forward, we see opportunity to grow these categories to serve all customers, whose lifetime value and fuel global expansion.
Fourth we drove strong trends in our E Commerce business building on Kate Spade already solid digital presence.
Recently, we've implemented live streaming across social platforms to gain further reach for our pop ups and events, including the Kate Spade townhouse experience.
Through continued digital innovation, we fueled mid teens growth in E Commerce, which was nearly double pre pandemic fiscal year 19 levels.
Fifth and finally, we maintained a consumer centric approach and utilize data to gain a deeper understanding of customer preferences and purchase drivers.
Our performance in the quarter was led by higher spend among our existing customer base, including those deeply lapsed at.
At the same time, our investments in the brand have resulted in continued customer acquisition, adding nearly 600000, new customers this quarter in our North America direct channels.
Back during the initial phase of Kate Spade transformation, we focused on rebuilding the brands Foundation and clarifying our purpose.
We kept our brand vision at the forefront of our strategy as we set out to reestablish our core product and customer base.
Today as a result of these efforts, we are clear and our positioning within the market with consistent results that indicate our increasing traction.
Looking ahead, our next phase is to waive the why of Kate spade into our mission expression and execution to connect more deeply with our community.
We're harnessing the power of the brand to drive growth enabled by diversified categories and a balanced global distribution.
We also continue to be laser focused on delivering higher AUR building on our recent success.
It will be a key element of capturing the significant margin potential we see in front of us.
Overall, we remain incredibly excited for the opportunity ahead and remain confident in our ability to achieve $2 billion in revenue and a high teens operating margin over the planning horizon.
Turning to Stuart Weitzman.
During the quarter the brand continued to make progress against its growth strategies.
First we delivered significant operating margin expansion, reflecting the bold and nimble execution by the Stuart Weitzman team in the face of a challenging environment.
Importantly, despite the deterioration in trends in China due to Covid, we remain confident in our ability to return to profitability this fiscal year.
We're leaning into the strength, we're seeing in North America, notably in the wholesale channel, which is helping to offset the pressures in China.
Second we maintained our consumer centric strategy by leveraging our data analytics capabilities to deliver a compelling assortment for our customers as we capitalized on the recent market shift toward occasion wear.
Sandals fueled the quarter's demand as iconic styles, including the nearly nude as well as new introductions, such as the writer platform in summer wedged resonated with customers specifically millennials.
In addition, we introduced the versatile and timeless Stewart pump, which exceeded expectations and has been well received for return to work.
Our streamlined and relevant offering coupled with lower promotional activity and select price increases drove AUR growth in the quarter and in fact AUR rose over 20% in North America. Looking ahead, we see further opportunity to increase prices, while maintaining our positioning within the overall market.
Yeah.
Third we fueled brand heat through focused narrative backed by emotional and relevant marketing our spring campaign, featuring the mother, daughter duo of Kate Hudson and Goldie Hawn wearing the Helena Cisco platform and Stuart pump all of which became a top 10 style following the launch.
We're engaging messaging helped to drive recruitment of new customers at a double digit rate, while continuing to reengage and reactivate clients.
We gained momentum in the wholesale channel at Stuart Weitzman has now reestablished our presence in all Nordstrom full price stores in North America, representing significant progress from where we were just one year ago.
At the same time, we've added depth within our international luxury accounts across Europe .
Fifth and finally, we continued to invest in digital and delivered a double digit increase in demand while digital now represents 20% of global sales an increase of five points compared to fiscal year 19 pre pandemic levels, we still see runway ahead.
Overall, Stuart Weitzman remains on track to deliver a profitable year in fiscal year 'twenty, two fueled by better than expected performance in North America.
<unk> product and marketing initiatives, coupled with solid execution continue to drive results. We are confident in our ability to achieve significant top and bottom line improvements long term as we build brand awareness globally and capitalize on the recovery in China, where Stuart Weitzman has a strong position.
In closing tapestry is a powerful combination of iconic brands that offer tremendous value for our customers and a platform that has been transformed to drive.
Customer engagement, our foundation is solid and our brands are poised for growth.
Further we participate in advantaged categories that have increased at mid to high single digit rate over time and have proven resilient in the face of macroeconomic shocks and global crises.
These category serve an important emotional and functional need for consumers, which is as relevant today as ever before.
The resilient nature of our categories the attractive positioning of our brands and the emotional connections. We are building with our customers. We are confident in the significant runway ahead we.
We look forward to discussing each of these elements in more detail along with our roadmap for continued growth at our upcoming Investor day in September .
With that I'll turn it over to Scott, who will discuss our financial results capital priorities in fiscal 'twenty two outlook Scott.
Joanne and good morning, everyone.
Our third quarter performance beat our expectations fueled by our North American business. In addition, we utilized our free cash flow returned over $550 million to shareholders through share repurchases and our dividend payment.
While the external environment remains difficult our teams are continuing to effectively navigate the backdrop by focusing on the factors within our control.
Turning to the details of the quarter revenue rose, 13% compared to prior year, including double digit growth at each of our brands.
<unk> North America fueled our results delivering a 22% growth amid a strong consumer backdrop.
Sales in greater China declined at a low teens rate. This included a mid teens decline in mainland China.
<unk> represented a 20% increase in revenue compared to FY 19 pre pandemic levels.
And to give more color on China, while the quarter started off with year over year growth trends weakened due to pressures from COVID-19 related restrictions, including declines in traffic with lockdown cities as well as throughout the balance of the region.
We ended March over 40% of our mainland store base was closed or operating on modified hours and a regional distribution center located in Shanghai temporarily shut down.
Digital sales growth of over 20% was not sufficient to offset pressure to our stores and wholesale businesses.
Continuing to navigate these near term headwinds and believe in the resiliency of the Chinese consumers.
And Japan, excluding the headwind from currency revenue increased mid single digits compared to the prior year as Covid Lockdowns and cases eased in the region.
And in Europe sales rose nearly 60% against last year.
Year over year trends have improved in both Japan and Europe from an increased focus on the domestic consumer revenue remains below FY 19, pre pandemic levels due to the continued lack of tourist inflows.
And the balance of Asia trends accelerated sequentially rising over 45% driven by Malaysia and Singapore.
My channel topline results were led by continued outperformance in the margin accretive digital channel, which grew over 20% in the quarter. In addition, we saw further strengthen wholesale and growth in stores compared to the prior year.
Moving down the P&L gross margin was better than expected due primarily to higher full price sell throughs and lower discounting as a reminder, while our results included 440 basis points or $63 million of pressure from incremental freight or underlying trends remained strong given our better use of data analytics to it.
Prove assortment planning and marketing messages as well as strategic price increases at each of our brands.
SG&A rose, 14% compared to the prior year, reflecting a 260 basis point increase in our marketing spend as we continue to invest in brand building activities, while leveraging across the balance of our expense base overall SG&A was in line with our expectations, even with the topline.
So taken together operating income was better than forecasted due to revenue outperformance favorable gross margin and well control of SG&A.
Earnings per diluted share for the quarter was 51 in line with prior year and well ahead of our expectations.
Now turning to our balance sheet and cash flows we ended the quarter in a strong position with $1.07 billion in cash and investments and total borrowings of $1 five $9 billion inventory at quarter end was 30% above prior year, primarily due to in transit which remained elevated.
In light of continued industry wide supply chain and logistics challenges to this point on hand inventory was up low single digits. As a reminder, we've adjusted the timing of our buys in recognition of elongated lead times supported by investments in core styles.
Overall, we're pleased with the makeup of our current inventory, which supports our future growth expectations.
Moving to our capital allocation priorities.
Based on our strong results year to date significant free cash flow generation robust balance sheet and the outlook for growth. We're now on track to return approximately $1 9 billion to shareholders in fiscal 2022, an increase from the prior outlook of over $1 $5 billion.
We've raised our share buyback expectations for the fiscal year and now anticipate the repurchase of $1 $6 billion in common stock, which includes $1 $5 billion bought back through Q3, our shareholder return plans continue to assume approximately $270 million through our dividend program.
In addition, our board of Directors has approved a new $1 $5 billion share repurchase program, which we expect to begin utilizing in fiscal 2023, highlighting our confidence in the company's trajectory for growth.
These 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 touching on.
Our capital structure subsequent to quarter end, we refinanced our existing credit facility by entering into a new credit facility, which extends maturity upsize the revolver to $1 $25 billion.
And includes a 500 million dollar five year term with the proceeds from this term loan will be utilized to repay our July 2022 bonds totaling $400 million by the end of the fiscal year and for general corporate purposes. These actions support the company's incremental share repurchase activity.
<unk> in a strong liquidity position and financial flexibility.
Now moving to our fiscal 2022 outlook, which replaces all previously issued guidance.
We noted in our release, we're modifying our outlook for the fiscal year, let's Peel back the layers and associated EPS impacts first escalating COVID-19 related headwinds in greater China have had a greater impact than previously anticipated representing approximately 25 to 30.
Sure.
Second due to uncertain legislative timing, we've now removed the assumption that GSP would be reinstated with retroactive benefit in the fiscal year from our outlook. This translates to a negative impact of approximately <unk> 17.
On the other hand, we're reflecting 25 to 30 tailwind primarily due to the healthy underlying momentum across the rest of the world, notably in North America, and inclusive of a <unk> contribution from higher share repurchase activity.
Turning to the details of our guidance. Please note that all growth rates compared to prior year on a comparable 52 week basis, excluding the impact of our 50 <unk> week last year.
We expect revenue to be approximately $6 7 billion, which would mark a record for the company. This represents a high teens increase compared to fiscal 'twenty, one with double digit increases in each brand for.
For the fourth quarter, specifically, we would expect continued strength in North America, and Europe with accelerating growth in the rest of Asia, which is helping to partially offset the near term COVID-19 related disruption in China.
In greater China, we're now anticipating a revenue decline of approximately 35% in the fourth quarter on the mainland specifically, we're assuming that Shanghai lockdowns will be lifted at the beginning of June followed by gradual improvements thereafter.
Edition, our guidance incorporates the expectation that our regional distribution center will reopen in mid May have note, we've not assumed full lockdowns and other major cities.
For the year, we've anticipated a gross margin declined compared to the prior year, assuming first a headwind of approximately $175 million or 260 basis points of margin associated with increased freight expense. This includes the expectation for a moderating impact in the fourth quarter and into the next fiscal year.
<unk>.
Second geographic mix pressure due to China, a high margin business. These impacts are being partially offset by AUR growth across brands through lower promotions supported by enhanced SKU productivity as well as select price increases thus far the AUR gains we've realized have largely been driven by lower promotional activity.
Expect to see further benefits from pricing actions beginning in fiscal year 'twenty. Three finally, as I mentioned, we have removed the retroactive benefit associated with the reinstatement of GSP from our outlook and now anticipate P&A associated duties in the fourth quarter as we have in the previous five quarters.
Turning to SG&A, we continue to anticipate modest leverage for the fiscal year. This incorporates the expectation for $300 million in structural growth run rate expense savings from the acceleration program.
Importantly, we're continuing to utilize these savings to reinvest in areas of the business to fuel long term growth, notably digital and marketing.
So taken together, we now expect operating margin to decline over 70 basis points compared to the prior year.
Net interest expense for the year is anticipated to be approximately $62 million in.
Our guidance contemplates a fiscal year tax rate of 18%, assuming a continuation of current tax laws.
We expect weighted average diluted share count to be in the area of 271 million shares. This reflects the $350 million increase to our share buyback expectations, we anticipate EPS to be in the area of $3 45, representing nearly 20% growth compared to the prior year for the fourth quarter.
This guidance implies high teens earnings growth outpacing the high single digit revenue increase on a 13 week basis.
Finally, we now plan to deploy approximately $180 million towards capital expenditures and cloud computing implementation costs in the fiscal year.
We continue to leverage the benefits of our transformed and diversified business model and strong underlying trends, notably in North America. The opportunity ahead for tapestry in each of our brands is meaningful and we remain focused on driving sustainable growth and total shareholder return. In addition, we're generating cigna.
Free cash flow and now plan to return approximately $1 9 billion to shareholders in this fiscal year alone further demonstrating our financial strength and confidence in the future.
I would now like to open it up to Q&A.
And as a reminder, if you would like to ask a question today. Please press star and one on your Touchtone phone. If your question is answered you may remove yourself from the queue by pressing the pound Keith again that is star one if you would like to ask a question today. We will go first to Bob <unk> with Guggenheim. Your line is open.
Hi, good morning.
I was wondering could you talk a little bit more just about the headwinds that youre facing in China, and I guess, Conversely can you talk about more of the positive trends that youre seeing from the rest of the world.
Yes, Thank you Bob and good morning.
Overall, I'm seeing strength and momentum across our business and our third quarter, we delivered strong growth in all regions outside of China more than offsetting the headwinds we saw in China.
We talked about on our prepared remarks with strong growth in North America, 22%. We also saw strength in Europe, and Japan, and rest of Asia, which again more than offset the temporary headwinds, we're seeing in China due to COVID-19 and really showing the resilience of our model, we delivered double digit global growth and coach Kate Spade.
And Stuart Weitzman and the quarter.
Tapestry is a powerful combination of iconic brands and we have transformed platform thats driving innovation and customer engagement and I see us gaining traction across our brands. We're continuing to acquire new customers. We are driving growth and increased spending from our existing customer base and our Q3 performance really highlights the strength in the <unk>.
Underlying trends, we're seeing in the business.
Our outlook for the year reflects continued headwinds in China, mostly offset with continued outperformance across the rest of our regions, mainly North America and our outlook also represents record topline sales for the year for tapestry at $6 7 billion.
Alright, Thank you very much.
We will take our next question from Ike <unk> with Wells Fargo. Your line is open.
Hey, good morning, everyone.
Just it's a pretty dynamic world, we're in clearly I guess Joanna or Scott.
When I think about the potential for GSP to hit next fiscal year and this renewed authorization of $1 5 billion.
It seems like you have the.
The dry powder to drive another 10% earnings growth next fiscal year.
You, probably don't want to give explicit but could you give us some guardrails on the on how to think about.
After we get through Q4, just how to think about the next 12 months given all the puts and takes in the business right now.
Well I'll kick us off.
So Scott maybe the dynamics of the financials, but what I can tell you is that our business continues to gain strength and we're seeing that in all of our brand metrics and in our consumer metrics and our focus has been on throughout the acceleration program really transforming our company and strengthening our <unk>.
And we're seeing increasing traction that provide.
Our confidence and underpins our confidence in the potential for further growth as we move forward, but I'll talk I'll talk with this class of give you a little bit of the dynamics in the dimensions of our of the P&L.
Yes, hi.
You are right of course, we're not going to give guidance, but if I think about just some of the factors listen we've got really strong brands that have momentum better positioned well against really resilient categories and we've seen this over a long period of time.
Very volatile environments in the past as well and we know our consumers engaged and continues to respond.
We also have pricing power and we've talked a lot about that AUR, which gives me confidence in our ability to maintain margins over time.
Combination of.
Brands well positioned in the ability to maintain margins means we can continue to invest in driving our business and our digital capabilities at our marketing we transformed this P&L over the last couple of years and that gives me confidence in our ability to continue to drive top and bottom line and the last thing I'd say is.
This is the case.
It's really been re made over the last two years and you saw that in.
And our guidance today than we were.
Actively returning that cash to shareholders. So that's another.
Driver or lever in terms of earnings as we look forward.
Great. Thanks.
We'll take our next question from Oliver Chen with Cowen Your line is open.
The average unit retail momentum has been really impressive.
Whats the head with the promotional activity profile, what should we assume in our models there and also regarding pricing actions specifically at coach brand with love further detail on what you see as opportunity ahead, and how you're balancing this against the consumer environment, which sounds quite robust in the U S.
Thank you.
Yeah.
Oliver we are seeing pricing power across all of our brands.
Okay.
You bet.
We're delivering beautiful product at great prices and consumers continue to recognize the value we're delivering.
No consumer pushback on the price increases and we've spent time to make sure we're keeping the consumer at the center and through our transformation efforts using data to improve our assortment. So this combination of magic and logic, that's coming to bear and enabling us.
To take price and again seeing no pushback.
No coach I'll, let Todd talk about what we're seeing but almost.
Almost three years.
Continued AUR growth, but at Kate and Stuart we're really just beginning the journey and we see further opportunity, particularly because we see pinnacle luxury driving price increases there's more white space for our brands and the customer continues to recognize the value that we represent in the market.
Yes, just building on what Joanne said.
First thinking about the new customers that come into the brand.
In the last two and a half three years and even in this last quarter. We saw 800000, new customers coming to the branch so they're experiencing coach at elevated prices and that's what you see with the AUR growth, we feel really good about where we're at and how much room, we have.
First of all we built our iconic style.
We'll find those styles, we're making.
Building stories around them, we're creating a value proposition and as Julian alluded to when you think about where coach's position today relative to traditional European luxury there is more white space out there.
As ever.
And I, just see that as tremendous opportunity for continued growth on our AUR.
Our initial pricing and we will continue to maintain the discipline of not going back to periods, where.
The brand was highly discounted.
Very helpful. Just a follow up on the cloud investment regarding customer data platforms as well as.
Hi, DSA and privacy are there thoughts on why the cloud makes sense now and how that may plug into agility in managing speed as well as the personal advisor personalization efforts.
Well is there.
Can I just jump in Jo Anne just one clarification, we've always been in the cloud right and so there is some accounting changes.
<unk>.
Geography differences from a reporting standpoint, but we've started talking more overtly about the cloud, but just to know that's not necessarily a change in direction. That's just a change in geography based on some of the.
More recent pronouncements that have come out and just being in line with that sorry Joanne.
Right.
Oliver to your point is a good one however, the.
The technology infrastructure that we've invested in over time is critical in allowing us the agility to take advantage of the rich data that we have and again.
We're at 90% direct to consumer company, we have rich data.
But that is our data we understand our customers and we're able to leverage that with tools and technology and innovation in this space is happening very quickly. So it is critical for us to have a platform a technology platform that allows us to take advantage of the data that we have to turn that data into insight.
Put that in the hands of decision makers in our organization and move with speed to adopt a new technology innovations.
Innovations are happening in the space. So that's been our focus is it's Scott mentioned it.
It's been our focus for a while but it is a critical underpinning of our ability to.
To drive.
Thank you best regards.
Thank you.
And once again that is star and one for your questions today and the interest of time, we do ask that you limit yourself to one question. We will go next to Mark <unk> with Baird. Your line is open.
Good morning, Thank you.
I mean, it sounds like momentum in North America.
Very healthy, but I'm just curious I mean are you seeing any indications of.
The deceleration in demand in North America over the last couple of months.
I mean, your brands target a wide range of consumers any differences in the trajectory of some of the higher price points at retail versus outlet.
And then.
It looks like your SG&A outlook for modest Leverages unchanged. Despite some of the global sales headwinds.
Understanding the macro is out of your control just curious how we should think about your ability to protect margin should a slowdown presented itself.
The coming months. Thank you.
Yes, let me kick it off with what we're seeing on the consumer.
And what I can tell you is that we're seeing a strong consumer.
That's increasing their engagement with our category and with our brands you can see that in the numbers, we're putting up but where we're continuing to see strong growth in customer acquisition $1 4 million customers in the third quarter alone that's 13 million new customers over the last 21 months since we've.
Launched our acceleration program and we see that that consumer is increasingly younger a younger consumer and us and transacting at higher AUR and Theyre coming back to our brands more frequently and I think that lead you to handbags in our category of handbags and footwear have.
Remain an.
And emotional purchase both emotional intelligence.
For our consumer and as the World has reopened and consumers are increasing.
Their connection in the real world and occasions and returned to work, we see that driving demand.
Across our categories and across our brands.
We're driving increasing brand heat and as I said, the emotional connection with our consumers is growing so we feel well positioned moving forward.
As it relates to SG&A.
I'll, let Scott maybe talk a little bit about what we're seeing there but.
I'd also say that we are seeing pricing power in our across our brands. So consumers are engaging with our brands and the brands that have established pricing power and we see white space in the market given the value that we represent.
And that we believe is.
And we feel confident.
We'll be offsetting inflationary pressures as we move forward.
Yes, the only thing I would add mark is.
First of all we continue we're playing a long game right.
We're seeing the benefits of the investments that we've been making over the last couple of years payoffs in terms of consumer acquisition brand momentum et cetera.
Our understanding of that consumers through data and analytics in meeting her where she wants to be from a digital and Omnichannel, where we're seeing that that works.
Just a reminder, though on the other hand, we have horizon, then we see the same matrix.
<unk> issues, but right now our consumer is engaged in.
And responding.
One thing also to remember is.
About 8% of our investments are around marketing right. So those are truly variable as we see the dynamic.
Change, but honestly right now, it's driving our business and we see a healthy consumer and we continue to lean in so right now our posture is more offensive and defensive.
And just to add for coach.
Very specifically, we've come off of a very strong and I know our sister brands have as well mother's day that gives us a lot of.
Confidence in the future and even in Japan Golden week was very strong for US and one question you asked about AUR growth, we've had AUR growth across all of our channels.
So it isn't just concentrated at the bottom or at the top and we're taking it up across all of our price points. So that's really powerful for us.
That's great. Thank you for all the detail.
Youre welcome.
Please go ahead.
Our next question comes from Michael Binetti with Credit Suisse. Your line is open.
Hey, guys. Thanks for all the detail and thanks for taking our question here Scott just a few housekeeping little ones quickly and then a bigger question bigger picture question you mentioned, the Shanghai DC reopening in mid May I think that's pretty quick here. It sounds like you have some pretty clear indications there just what youre seeing that in your ability to open that soon.
And then.
The comment that you expect freight to improve in fourth quarter and then into <unk>.
Fiscal 'twenty three I know it was a little worse than you were initially thinking in third quarter. So just the moving parts that you see there.
But then I guess I guess backing up.
To go off Ike's question, a little bit earlier, I think you guys are controlling the controllable so well I don't I don't really think what's going on in China in GSP really have much to do with you margins are great and Scott you've obviously got the treasury buying a lot of stock here I think that where the stock is the market's very hungry for any kind of downside support to what fiscal 'twenty three could be is there anything that you can.
For us to just help us think about.
Whats the minimum that the business can deliver in a reasonable scenario next year.
Yes.
Yes, excuse me, let me start Michael.
I think generally my comment is I think you've got a pretty pretty much right in terms of the way you characterize that.
The D C.
This is a slow reopening and we do have some line of sight. We actually are open on a very limited basis.
Without getting too far in the weeds, where.
We're getting approvals from local authorities to do.
A slow restart and that gives us confidence that.
It will continue of course, we don't have absolute knowledge of that but sides.
Signs are positive.
And likewise, the reopening at the beginning of Jan I would say it this way Michael.
Have taken.
Best information that we know today and giving you the best indication of what we believe that slow reopening will look like.
Of course, it's out of our control, but it's the best it's the best information that we have today and I think it's a reasonable estimate based on what our line of sight is.
I'm guessing Joanne I'll make a broader comment but just just a reminder, we really can't give you 23.
Guidance at this point, but 90 days from now we will right we will come back and we'll give our guidance and then forward.
Early September by an Investor day to give you a longer term view.
I would just refer back to earlier comments I think it was from.
Maybe if I ask question earlier.
Listen we're in great categories strong brands is well positioned in brasilia great categories.
<unk> has proven to be.
A good indicator of topline growth and we have pricing power and our ability to maintain margins and to me, that's where our whole model together and gives us confidence in the future.
Yeah, and I'll just repeat that.
I'll just reiterate that we are optimistic about the about the future Michael.
We're driving both the brand health metrics and the consumer metrics.
And are gaining traction and our strategies in terms of leveraging those.
Our data, bringing magic in logic, together and driving our business forward and Scott alluded to earlier, we've invested and will continue to invest in brand building.
We have made substantial investments and they're working they're paying off and we see that continuing we've acquired 13 million new customers across our brands in the last 21 months, we see those customers engaging with our brands through the innovation in product and innovation and marketing and Theyre coming back to our brands more frequently and we will.
To leverage that for growth going forward and we are looking forward to providing more more discreet detail.
At our year end call on what 23 looks like but our brands are in our company are poised for growth.
Hey, Michael I first I forgot to cover one point, you asked about which was the freight.
<unk>.
Picture has really not changed overall little little pluses and minuses here and there, but 260 basis points about $175 million for the full year. If you recall last quarter I said, it's a little bit hard to exactly know when it's going to turn into the P&L because it attaches to the underlying inventory I mean, the business is strong.
Sell through in the quarter right, but if we look at the overall picture are we've really curtailed our expedited freight or airfreight already.
A while for that too.
Move through the P&L, if you do the math that says there is about $35 million.
In the fourth quarter of additional freight that's about 210 basis points.
Yeah, a little less than half of what we saw in the third quarter. So it's following that same curve that we laid out.
In the past and Theres really no new news there in terms of what we're seeing in freight.
Okay. So it's visible on this already in inventory you can see it moving through okay.
I appreciate it that's right yep, thanks, guys.
We will go next to Brook Roche with Goldman Sachs. Your line is open.
Hey, good morning, and thank you so much for taking the question can you provide a little bit more context on your philosophy on capital allocation and how youre thinking about that balance between reinvesting in the business to drive that future growth versus returning capital via repurchases.
As you look over the course of the next one to three years what are the most important internal areas of investments that we should be planning for and where have you pulled forward those investments since the inception of the acceleration program that should provide support if a downside scenario does materialize. Thank you.
Yes, let me kick it off and maybe talk to Scott.
Add any more details, but you know we you know we've been aggressive and rigorous about allocating capital and we believe as our first priority and investing in our business and the good news is we're seeing really strong returns on those investments.
We're investing in brand building capabilities across our company and we've transformed.
Our company over the last couple of years, we're a different company than we were two years ago based on these investments.
We're leaning into our digital capabilities, and our data and analytics capabilities and developing not only it's not only system. It's process. It's the ways of working it's the investments we've made in talent.
That are helping to drive our business.
And we're as I said, we're seeing really strong returns again those are primarily the investments we're making are in digital and then.
And in marketing you see that you've seen us invest in fulfillment, we broke ground on our fulfillment center on the West coast of the U S.
We're adding automation to that fulfillment center, we're engaging consumers more and more on digital channels and those capabilities have been driven by the investments to be very intentional investments we've made.
So that is our first priority we also oh.
We're optimistic about tapestry future and you've also.
<unk> seen us.
You know make a substantial increase in our buyback program, including the new authorization and we're confident that that over time, we'll continue to drive growth through our brand building investment and return cash to shareholders I don't know Scot if there's any more detail that you want to you want to provide.
No. The only thing I would say is capital allocation priorities just to restate or invest in the business dividend growing faster than earnings and then returning excess cash to remember Kevin from the early days of the pandemic, we're able to actually spend more and to return more than our than our annual cash flow because we had.
Our maintenance capital in light of the early days of Covid. So we had the good fortune of being able to be.
Really strong.
Relatively low leverage cash position and at the same time saw the intrinsic value of our shares.
Dislocated from what the market realities, where he said we have leaned in right.
I think the way I would say about it is it's not a change in priorities, but this is a cash generative machine its cash free cash flow is about <unk>. What it was pre pandemic and you should think of us as.
Disciplined.
Capital Allocators, so as we continue to generate this free cash flow, we're going to invest first in our business, we're going to grow our dividend.
And you should think about returning cash through share repurchases programmatically over over a period of time this will be another lever for price appreciation over the long term.
Thank you.
We'll take our next question from Omar Saad with Evercore. Your line is open.
Thanks for taking my question I appreciate all the information wanted to dive a little bit deeper on the handbags handbags trends kind of across the brands in the industry. It feels like you guys have <unk>.
Up a lot.
Especially on a multi year basis for the coach brand. We're hearing that from other players in the marketplace is it fair to assume that's kind of unit volumes in the handbag category versus let's say 2019 are substantially down industry wide in the kind of aspirational category.
And is there a chance for meaningful unit growth even in this kind of inflationary environment kind of going forward.
Yes.
Yeah, Let me, let me start off and then I'll talk.
Paul from what was considered.
At coach, but we are seeing pricing power across our brands, which is a really good thing for our business, we've been focused on driving higher AUR.
I have a healthy business.
And.
And that's been working our focus on the consumer bringing data to bear managing inventories better leveraging data and analytics to drive SKU productivity are all helping us drive higher AUR than it is priced at this point that is driving our results versus versus units and again, we think that's a good thing and healthy for.
Our business, but.
But we continue to see opportunities to drive growth and we're doing that by attracting more customers to our brands and engaging more customers in our brands and that gives us a platform to continue to drive lifetime value I mentioned earlier that the new customers that we're acquiring.
Well younger consumers, which is great for our brands and Theyre coming back and transacting with our brands with higher frequency. So we see opportunities there, we see opportunities geographically to continue to drive growth.
And so a lot of levers, we can pull including driving higher lifetime value across our customer base, but but Todd I'll talk to you for a little more color on coach.
Thank you Joanne.
We are.
We have not hit our unit counts from 19, but the Delta has shrunk pretty dramatically and I see that as an opportunity for us.
All of the things that Joanne mentioned, the lifetime value of the increased AUR the.
Overall complexion of our customers' changing and beyond women, we're very excited about the opportunity in mens.
We're about a year ahead of our goal of getting to a billion dollar men's business and what we like about that is it add new customers to our mix and the brand and when you think about it we merchandising we call than men often it's at all gender program, but what.
I also am very excited about it in the last year, we've added $1 5 million.
Male customers into the brand and when you think about opportunities and.
Our growth there, particularly in those categories. There is some of our highest AUR in the company. So I feel really good about the room, we have the new customers. The frequency of purchase will eventually get us to both AUR growth from pricing, but also unit growth.
Got it thanks.
Youre welcome.
And we will take our final question today from Adrienne <unk> with Barclays. Your line is open.
Good morning, and congrats on the progress.
You can see it in the frontline stores in particular no promise.
Scott My question is for you can you give us an update sort of on what the state of the China market looks like.
Some color on digital versus stores, obviously E. Commerce was enabled to deliver are you seeing any improvement in that front.
The distribution of stores in tier one cities just like anything.
That can give us with regard to what the current state of affairs is.
Are you seeing any signs of improvement current day to get to that kind of June reopening target. Thank.
Thank you.
Yes, sure Adrian maybe I'll start and one of my colleagues jump in too.
Listen.
I think I already mentioned.
Yes.
ADC, our Asian distribution center that we're starting to see some modest reopening we are seeing some stores coming back online here and there, but I would say by and large not a major change in condition.
And that's been reflected in the outlook that we just gave just for.
Some numbers on it.
Our China expectation for the fourth quarter is down about 35%.
Which is baked into our outlook and that again.
This slow reopening starting in June is our expectation.
And then just a quick reminder, the tier one cities or are you primarily in the tier one cities right now I know there were some stores in Q2, but not a lot. So should we assume 80% is in tier one.
And the Lockdown cities yeah.
Yes, we have.
Our broad woodprint across across China. So we're not just in tier one cities.
And to Scott's point.
We are seeing impact across broadly across the region.
Yeah.
But our business with strong entering the third quarter.
And prior to the Covid disruptions and as we saw the Covid disruptions rolling.
Through the region.
We saw traffic declines in the lockdown areas, but also more broadly across the regions as traffic was curtailed.
You know I think it's also important to note that the strength coming into the quarter pre disruption.
And the research we've done in the market continue to confirm that our brand health and the market is strong and consumer sentiment continues to be strong. So we're navigating the near term headwinds, but we feel well positioned as you know as China recovers to continue to drive growth both during the recovery period and long.
Term in the market.
I liked it.
Just to add for the coach brand first and it's all of our cap or stay in place we have an incredibly fantastic team on the ground in China. The resilience that they have shown through this.
And the creativity is.
I am and all of what they are able to do even in pretty tough conditions.
In the last month or so we've seen a real increase in virtual selling.
And that is something that could be really interesting.
As an and not an or when the stores reopen so again our teams are incredibly creative they're resilient and it gives us that much more confident that when these events and.
We'll have an even greater runway and connectivity.
With our clients there.
Thank you very much best of luck.
Thank you.
Thank you that concludes our Q&A.
Well, Thanks, I'll say, a few words just to wrap up first to build on what Todd was just talking about I want to thank first and foremost our teams around the world for their relentless focus on the customer. This is continuing to drive our strong results and our thoughts are especially with our teams in China, who aren't.
Navigating COVID-19 and supporting each other during this difficult time as you've seen in our results our business is performing and I'm, even more confident in orange.
In a rapidly changing environment tapestry has tremendous runway for growth with a positioning that is both unique and advantaged our powerful iconic brands are United Magic and logic to deliver compelling product.
We play in attractive category that has proven durable high growth, we have a diversified direct to consumer business model and we've transformed our platform with digitally leadership, that's fueling customer engagement.
Our strong underlying momentum is particularly evident in the customer metrics. We highlighted today long term, we're playing offense and leaning in our conviction is reflected in our capital allocation actions, we're investing in brand building as well as accelerating and increasing our share repurchase given the significant growth potential ahead.
Thanks 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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