Q3 2023 Tapestry Inc Earnings Call
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Good day and welcome to this tapestry conference call.
Today's call is being recorded.
If you'd like to ask a question today you may registered to ask a question by pressing star one on your telephone keypad to withdraw yourself from the queue. You May press the pound Kate I'll be standing by should you need any assistance. Please note. This call may be recorded at this time for opening remarks, and introductions I would like to turn the conference call over to the global head of.
Relations Christina Callout.
Good morning, Thank you for joining us with me today to discuss our third quarter results as well as our strategies and outlook are doing pretty much right tapestries, Chief Executive Officer, and Scott Rowe tapestries, Chief Financial Officer, and Chief operating Officer.
Before we begin we must point out that this conference call will involve certain forward looking statements within the meaning of the private Securities Litigation Reform Act. This includes projections for our business in the current or future quarters or fiscal years.
Forward looking statements are not guarantees and our app.
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 by for a full reconciliation to corresponding GAAP financial information. Please visit our website www dot tapestry dotcom forward Slash investors and then view the earnings release and the presentation posted today.
Now, let me outline the speakers and topics for this conference call Joanne will begin with highlights for tapestry and our brands Scott will continue with our financial results capital allocation priorities and our 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 our Q&A Joanne will conclude with brief closing remarks, I'd now like to turn it over to Joanne currently Surat tapestry CEO .
Thank you Christina and welcome everyone.
Noted in our press release, we delivered strong revenue margin and earnings growth in the third quarter significantly outpacing expectations. This demonstrates the power of brand building customer Centricity and our agile operating model.
Importantly, we continued to advance our long term strategic agenda, creating lasting customer relationships around the world through product innovation and compelling omni channel experiences.
Testament to the ingenuity of our talented global teams, who continue to drive our results.
Touching on the strategic and financial highlights of the quarter.
First we powered global growth, achieving 9% constant currency revenue gains meaningfully surpassing our outlook.
These topline results were led by our international businesses, which grew nearly 20% excluding FX.
This included a greater than anticipated inflection in greater China, where sales increased 20% supported by a strong rebound in traffic and returning to growth compared to the region's peak fiscal 'twenty one levels.
Importantly, given our history in the market and the brand building investments. We've made our brands are well positioned to capture the opportunity with the Chinese consumer both in greater China and around the world.
In the quarter. We also drove continued momentum in Japan, and other Asia with sales growth of over 20% as well as a mid single digit increase in Europe .
In North America sales rose low single digits against an increasingly challenging consumer backdrop.
Of note. These results benefited from growth in January as we Anniversaried more acute COVID-19 related disruptions in the prior year.
Taken together, we delivered strong sales growth globally, while driving higher gross and operating margins compared to prior year underscoring our commitment to being disciplined stewards of our brands and business.
Second we continued to build lasting customer relationships during the quarter, we acquired over $1 2 million new customers in North America alone importantly.
Importantly, these new customers transacted at higher AUR than the balance of our customer base and approximately half of these customers were millennial and Gen Z consistent with our strategy to attract younger consumers to our brands at.
At the same time, we reactivated lapsed customers across the portfolio.
Third we delivered seamless omnichannel experiences harnessing the power of our direct to consumer business model and highlighting our ability to meet consumers where they are shopping.
We drove 10% growth in direct to consumer sales on a constant currency basis. This was led by low teens growth in brick and mortar sales as we welcome an increasing number of consumers to our stores. In addition, digital sales rose mid single digits and remained over three times ahead of pre pandemic levels.
Fourth we fueled fashion innovation and product excellence informed by data analytics and consumer research.
To this end, we drove handbag AUR growth globally, and in North America, which supported our gross margin increases in the quarter.
We also delivered outsized gain in our small leather goods and lifestyle offerings key to enhancing brand relevance and fueling customer value over time.
Taken together, we generated third quarter earnings well above our expectations rising over 50% compared to the prior year, which we accomplished despite a volatile demand backdrop and currency headwinds.
Based on this performance, we are raising our outlook for the fiscal year underscoring our ability to drive sustainable profitable growth.
Now turning to the highlights across each of our brands starting with coach.
We outperformed expectations in the third quarter as we continued to build strength on strength.
We drove an 11% revenue increase at constant currency, while delivering over 300 basis points of operating margin expansion fueled by gross margin gains.
Throughout the quarter, we advanced our strategic initiatives, bringing expressive luxury to life.
First we built on the momentum of our leather goods offering extending our iconic families to drive consumer engagement.
Tabby was again, a top performer resonating with both new and existing customers with notable success in the core shoulder bag during the quarter, we launched new styles, including the tabby box bag, which provided silhouette diversification as well as the fun and establish a jelly tabby, which drove strong sell through specifically with the younger consumer.
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And the Rogue family, our top handled silhouette gained momentum becoming the number one style within the collection at.
At the same time Willow drove significant volume, while bandit outperformed expectations at elevated price points.
In addition, we're creating compelling and emotional small leather goods assortment as a result, we drove outsized growth in the category aided by success across wallets and micro bags in keeping with current trends.
Overall, our product innovation supported by the use of data and consumer insights throughout the product creation process fueled a high single digit global handbag AUR growth at constant currency.
Including gains in North America.
Second we focused our marketing investments on brand building activities connecting emotionally with customers through the unique purpose of the brand.
Building on coach is courage to be real mission, we debuted our latest marketing that connects product and purpose.
Our in my Tabby campaign, featuring little mass X alongside a cast of global brand ambassadors redefines, what we carry not just in terms of physical objects, but the experiences journeys and aspirations that shape, who we are.
Importantly, our 360 degree activation efforts supported the acquisition of approximately 800000, new customers in North America alone with over half being millennial or Gen Z.
We also drove strong engagement with existing clientele and reactivated lapsed customers reaffirming our ability to attract new customers, while retaining our existing customer base.
And in China, we drove strong growth and brand momentum capitalizing on coaches leadership positioning and track record of success since entering the market two decades ago.
During the quarter, we were pleased with the performance of our collaboration with the nostalgic White Rabbit Kandi brand, which debuted in celebration of lunar new year.
This collection successfully drove the acquisition of new customers with over half of its purchasers being new to the brand.
Third we drove a strong top line increase in our lifestyle offering an area of long term opportunity for the brand and.
In ready to wear we delivered outsized growth with success across genders as we leaned into the key branding elements. This performance was led by our compelling outerwear selection anchored by the brand's iconic trench.
And men double digit constant currency gains were fueled by our leather goods offering aided by the continued strength of our <unk> family as well as the successful launch of the <unk> tote offered in a range of colors and featuring coach New York graphics.
Fourth we created omnichannel experiences that resonate with consumers by communicating our brand purpose of self expression.
We tested new experiential and immersive retail concepts across the globe, creating opportunities for customers to engage their senses throughout their brand and product discovery journeys.
In Chicago, we launched coach play the first in a series of concept stores encouraging customers to play in coach spaces.
He is highly interactive locations, which we have since opened in Japan, and Singapore are bespoke balancing design elements of the brand's heritage with local elements to connect with each store's community.
Further we leaned into the success of our cabbie family to create tabby shops in select stores around the world. These compelling environments utilized existing store architecture, and we're inspired by traditional ice cream shops to celebrate the different flavors of this iconic handbag collection.
We also showcased these pop ups across our digital channels, allowing the brand to scale the experience to a broader audience.
And just last month, we were excited to officially launch coach Topeka.
Brand created with the goal of re imagining and disrupting the fashion industry.
By working with the community of partners, including Gen Z, we kept circularity as our north star delivering a line of products crafted from reuse leather bags and recycled materials.
While a small assortment today, we are extremely pleased with the response to the product and purpose and see further opportunity ahead.
In closing coach continues to differentiate both in its brand positioning and its financial performance.
This success is rooted in the brands magic its unique DNA and iconic product offering blended with the logic of deep customer understanding.
Importantly through expressive luxury we're riding coach his next chapter by connecting our history and purpose with innovative products and experiences enabling self expression for modern consumers around the world. We are confident in our strategy and the opportunity to deliver continued healthy growth for years to come.
Now moving to Kate Spade, our third quarter results outpaced expectations supported by revenue gains on a constant currency basis and gross margin expansion at.
At the same time, we made further foundational investments that are supporting our long term strategic growth agenda positioning the brand to be more emotional more lifestyle and more global in order to drive customer connectivity and deliver profitable growth.
Touching on the details of the quarter.
First we remain focused on delivering an innovative and distinctive core handbag offering.
So not remained the top global handbag group, while the recently introduced Hudson, which features wear to work styles with our recruitment driver for younger consumers.
In addition, the Iconix sandbag offered in recycled nylon drove strong growth. The success of this family highlights the opportunity to engage consumers by leaning into the brand's heritage and innovation.
We also amplified our novelty offering bringing heightened emotion and newness to the brand the sheep dog collection resonated with both new and existing customers. In fact this was the number one full price novelty style in the quarter priced at nearly $500.
Overall, our product initiatives, coupled with our use of data to deepen our.
Tumor preferences supported low single digit handbag AUR growth at constant currency, both globally and in North America.
Next we advanced our strategy to become more lifestyle delivering strong revenue growth in the assortment led by momentum in ready to wear footwear and jewelry importantly.
Importantly, we continue to see the customers who shop across categories are our highest value customers demonstrating the importance of the brand's lifestyle offering as a long term growth driver.
Now touching on marketing, we expressed the world of Kate Spade through unique storytelling.
In celebration of the brand's 30th anniversary, we leaned into its DNA is a beloved lifestyle brand that Sparks joy.
To do this we increased our top of funnel marketing spend targeting millennial and Gen Z consumers to support the re imagination of our heritage codes stripes dots and Kate Spade Green, which we launched in partnership with Pantone.
This signature shade, which was featured an exclusive capsule across categories as well as updated recyclable and reusable packaging has been particularly successful with the brands loyal fan base.
Taken together, our impactful marketing helped fuel the recruitment of approximately 400000, new customers in North America. Additionally.
Additionally, we saw strong lapsed customer reactivation and an overall increase in spend per customer.
And finally in keeping with our priority of becoming more global we remain focused on meeting our target consumer where they shop around the world to.
To this end, we continue to rollout our new store concept, which began with Marina Bay Sands in Singapore in October .
Since then we have expanded the concept further to more than 15 doors across the globe, creating a compelling brand experience.
And in greater China and area of opportunity for the brand.
We launched lunar new year capsule collections pop ups, and Wechat Activations, featuring a rabbit novelty offering which drove strong engagement. In addition, we collaborated with Starbucks China on a series of limited time, only merchandize to help build Kate Spade brand awareness and excitement.
The capsule had strong sell throughs with more than half of the assortment selling out in just two days signaling the brand's appeal to a broad base of Chinese consumers.
In summary, we continue to make progress in advancing the brand's strategic growth agenda and see further opportunity ahead Kate.
Kate Spade is a unique lifestyle brand with global relevance and we're making key investments to deepen consumer engagement through compelling product marketing and experiences to drive sustainable growth and margin improvement over the long term.
Turning to Stuart Weitzman.
In the third quarter, we delivered 10% revenue growth in constant currency supported by double digit growth in North America, and a mid single digit increase in greater China.
Importantly, we achieved this top line performance, while significantly expanding margins with higher full price selling driving gross margin gains.
Turning to the details of the quarter, we made further progress on our strategy to win with heat and improved brand awareness first we curated a highly relevant assortment of emotional product to spark desire.
Our newer iconic families led our results with notable outperformance in pumps booties and low first.
Soho was again, a top collection anchored by the on trend Lug-soled, which saw a strong performance with millennial and Gen Z customers, while the Stuart family continued to grow and resonated across age groups.
And our handbag collection, while still a small portion of the assortment drove engagement with both new and existing clients at high AUR and accretive margins.
Second we focused on creating compelling shopping experiences across the globe. As a result, we drove revenue growth in our global direct business led by increases in North America, which included significant growth in digital.
We also continued to strengthen our wholesale partnerships specifically in North America, we saw an increase in sales at full price accounts, while continuing to reduce off price exposure as we focus on brand elevation.
And internationally, we delivered continued growth as we increased our presence across key accounts.
Third we fueled brand heat by leveraging new marketing tactics to increase Buzz inorganic awareness. This included an influencer back campaign with a compelling styling series to highlight our spring collection.
In addition, we were pleased with the performance of our limited edition collection with Kids Super in New York City based Streetwear brand and creative studio, which featured artistic plays on our icons that reached new customers across the globe at higher than average AUR.
As a result of our focus on connecting with consumers in new ways. We drove an increase in the number of active customers in the quarter fueled by engagement with our existing client base, including growth in reactivated customers.
Overall, we continue to advance our strategic initiatives to drive brand heat and awareness, while maintaining financial and operational rigor to further support profitable growth.
In closing our third quarter results reinforce our progress in differentiating our brands and business.
Although the environment remains uncertain, we operate in attractive durable categories from a position of strength with iconic brands amplified by a digitally enabled platform that powers them to move at the speed of the consumer.
We remain steadfast in our commitment to building enduring brands and relationships with consumers and we're investing behind these priorities at the same time, we're being agile and disciplined financial operators controlling what we can control to successfully navigate the near term while advancing our long term strategic growth agenda.
<unk> is significant and we have a relentless drive to deliver sustainable growth and value for all stakeholders.
With that I'll turn it over to Scott, who will discuss our financial results capital priorities in fiscal 'twenty three outlook Scott.
Thanks, Joanne and good morning, everyone.
As Joanne mentioned, we delivered significant top and bottom line outperformance in the quarter, we drove revenue growth of 9% on a constant currency basis, including 20% growth internationally.
We expanded operating margin by approximately 280 basis points versus last year led by gross margin gains and grew earnings per share by over 50%. Importantly, we also returned $270 million to shareholders, demonstrating our commitment to enhancing long term value.
Turning to the details of the quarter I'll begin with revenue, which will be shared on a constant currency basis sales rose, 9% well ahead of our expectations for an increase of 3% to 5% fueled by gains both internationally and in North America, and greater China, We returned to revenue growth in the quarter driven by an.
And traffic sales increased 20% with double digit gains across stores digital and wholesale.
At the same time, we've started to see an uptick in domestic Chinese travel, including significant gains in our Hong Kong and Macau businesses as well as a pickup in hi, Matt.
Importantly, although these initial reads have been encouraging global Chinese tourists trends still remain well below pre pandemic levels, representing an area of further opportunity.
In Japan sales rose approximately 23%, while other Asia grew 22% driven by strength across Malaysia, Singapore, Australia, and New Zealand and Thailand with notable traction among local consumers.
Sales to tourists also improved versus the prior year, although remained well below pre pandemic levels.
In Europe sales increased 4% fueled by gains with international tourists, notably from the Middle East.
And in North America sales rose, 3% driven by growth in January against last year's atypical comparisons related to Covid for.
For the balance of the quarter and into April trends in the region softened amid an increasingly challenging consumer backdrop.
Such we've incorporated a mid single digit decline in sales in North America into our fourth quarter outlook.
By channel our direct to consumer business grew 10% led by a low teens gain in stores as well as a mid single digit increase in digital.
Importantly, we delivered higher operating margin in both channels relative to last year.
Wholesale revenue was 7% below the prior year, reflecting growth in the international markets. So we offset by a decline in North America, which included a strategic reduction in off price shipments.
Moving down the P&L, we delivered gross margin ahead of our projection and 290 basis points above prior year.
This year over year expansion included approximately 360 basis points of favorable freight expense, partially offset by a 120 basis points of FX headwinds. Therefore, excluding these impacts gross margin was still ahead of the prior year fuelled by operational outperformance based on AUR increases.
Notional discipline and a tailwind related to the increased penetration of higher margin China business.
SG&A rose, 5% compared to the prior year and included approximately $10 million of timing benefit with the fourth quarter.
Throughout the quarter, we continued to prioritize high return initiatives, including platform investments and brand building activities.
As a result, our third quarter EPS was approximately <unk> <unk> ahead of our forecast primarily due to 10 cents of operational outperformance as well as a favorable timing shift of <unk> with the fourth quarter and roughly five cents associated with below the line benefits overall, we delivered earnings growth of <unk>.
Over 50% despite 10.
Now turning to our balance sheet and cash flows we ended the quarter with $652 million in cash and investments and total borrowings of $1 $67 billion.
There were no borrowings outstanding under our $1 5 billion revolver free.
Free cash flow for the quarter was an inflow of $71 million, including Capex and implementation costs related to cloud computing $57 million.
Inventory levels for the quarter ended 2% ahead of prior year favorable to our expectations on higher sales and tight inventory control. Given this performance. We are now well positioned to end the fiscal year with inventory approximately flat to last year as we continue to focus on higher inventory turn.
While delivering gross margin expansion.
Moving to our capital allocation priorities, we continue to plan for approximately $1 billion in shareholder returns in fiscal 2023, which consist of share repurchases of $700 million, including $500 million repurchased fiscal year to date as planned and dividend payments.
It's totaling approximately $300 million.
This is based on an annual dividend rate of $1 20 per share, which represents a 20% increase over the prior year.
Our 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 in the future. We believe our platform is scalable and we would evaluate M&A that is accretive to our organic CSR plan.
So moving to guidance, we're raising our fiscal year 2023 revenue and earnings outlook, which reflects our outperformance in the third quarter of 2015.
Excluding the impact of timing.
Touch on the details of this outlook, which replaces all previous guidance for.
For the fiscal year, we expect constant currency revenue growth of approximately 3% on a reported basis, we anticipate sales to approach $6 $7 billion, which is in the area of prior year and includes roughly 320 basis points of FX pressure.
This implies constant currency revenue growth of approximately low single digits in the fourth quarter, excluding FX headwind of approximately 150 basis points.
Touching on the sales details by region at constant currency.
In North America, our guidance continues to contemplate a low single digit decline for the year.
As previously noted this implies a mid single digit sales decline in the fourth quarter based on the increasingly challenging backdrop. We're seeing this also reflects our commitment to maintaining promotional discipline and higher margins as we manage our brands and our business for the long term.
In greater China, given the third quarter's outperformance, we anticipate a mid single digit gain for the fiscal year, which includes an increase of approximately 50% in the fourth quarter.
In Japan, we expect to grow mid teens, while other Asia is forecasted to grow 40% and.
And in Europe , we anticipate a high single digit sales increase.
In addition, our outlook includes a year over year operating margin decline in the area of 50 basis points, which assumes FX pressure of roughly a 115 basis points. We expect the majority of this FX headwind to flow through the gross margin line.
We anticipate gross margin to be approximately 100 basis points ahead of the prior year, largely reflecting the operational beat in the third quarter and the expectation for continued margin expansion in the fourth quarter for the full year. Our gross margin forecast incorporates the benefit of moderating freight costs of 140 basis points.
As well as AUR growth, which is being partially offset by the previously anticipated rising input cost for materials as well as the negative impact of FX as mentioned.
On SG&A expenses, we anticipate deleverage for the year, reflecting growth driving initiatives, including increased marketing expenses to fuel long term customer value investments in digital and the opening of our new fulfillment center in Las Vegas, partially offset by proactive actions, we've taken to reduce our expense base.
Moving to below the line items net interest expense for the year is anticipated to be approximately $30 million a significant decline versus fiscal 'twenty, two reflecting the benefit of our cross currency swap agreements. The tax rate is expected to be approximately 19%, which is below our prior forecast given the law.
Sure Actualization in the third quarter due primarily to geographic mix.
Weighted average diluted share count is expected to be in the area of 242 million shares. This reflects approximately $700 million in share repurchases expected in the fiscal year as noted.
Taken together, we project EPS of $3 85 to $3 90.
Representing a low double digit growth rate compared with the prior year, which includes a year over year currency headwind of approximately 40.
For the fourth quarter. This guidance implies earnings of 92 to 97.
Inclusive of the <unk> timing impact with the third quarter.
Finally, we now forecast capex in cloud computing costs to be in the area of $280 million, we expect approximately 30% of the spend to be related to openings in renovations with the majority of the balanced dedicated to our ongoing digital and it initiatives, including investments related to our new fulfillment center.
In Las Vegas.
In closing, we delivered strong third quarter results with sales margin and earnings growth all outpacing expectations.
<unk> us to raise our top and bottom line outlook for the fiscal year.
In addition, we remain on track to return $1 billion to shareholders in fiscal 'twenty, three highlighting the power of our balance sheet and significant free cash flow generation.
Importantly, our performance underscores our competitive advantages and reinforces our strategic agenda. As we look forward, we remain focused on staying agile and discipline to deliver against our long term priorities to drive sustainable profitable growth and shareholder returns I'd now like to open it up and take your questions.
At this time, if you would like to ask a question. Please press star one now on your telephone keypad to withdraw yourself from the queue. You May press the pound key we'll take our first question from Bob durable of Guggenheim.
Hi, good morning, congratulations on a great quarter.
Can you discuss a little more in detail the demand backdrop that you are facing in North America and in China, and how this impacts your view of the opportunity from here.
Yeah.
Well good morning, Bob.
We did deliver a solid quarter, which reinforces our confidence in our strategy and showcases the benefits of our globally diversified business.
And our direct to consumer business model and I want to take a minute before I start to recognize our teams around the world who continue to drive our results. We are pleased not only in our topline growth, but the significant gross margin expansion, we delivered and we are deliberately managing our brands and our business for the long term.
In North America results in the third quarter were better than expected, although the trends did soften as the quarter progressed and that continued into April the backdrop is increasingly challenging and we are seeing a more cautious consumer we've incorporated this trend into our guidance for Q4.
What you've seen in the third quarters, we're committed to being disciplined financial operators with a focus on driving healthy growth.
Both with a focus on margins and brand health Con.
And I think another important fact is that we're building momentum with strong growth across the balance of Asia and that business is now also about 15% of our total business and I just got back from being in China, Southeast Asia, and I am so impressed with our teams and how they've navigated the challenges in the environment.
We've been in China with coach as you know for two decades and our teams are a differentiator I saw this clearly during our travels and it's a real competitive advantage for us at setting our brands apart they are delivering innovation and connecting with our customers.
And the confidence we have.
In our performance gives us long term confidence over the last three years, we've proven our ability to drive earnings growth in the face of a dynamic environment and headwinds in the market. The third quarter was no different our performance I think highlights our strength the strength of our globally diversified business again in our direct to consumer.
This model and it showcases the strength of our brands around the world will continue to build on that strength that we see tremendous runway ahead across our portfolio.
Thank you.
And we'll take our next question from Ike <unk> of Wells Fargo.
Hey, good morning, everyone I guess, maybe for Julien and then Scott I wanted to ask you you've had several quarters under your belt now since your analyst day.
You have the $8 billion target with five plus dollars of earnings by 25 can you maybe just comment on your thoughts on those targets at this point clearly the revenue run rate has been below where you guys had hoped for or even though it is accelerating which is great, but the margins seem like they've been better. So just trying to see confidence on both those top and bottom line expectations that you guys laid out.
Multiyear.
Well I'll, let I'll, let Scott unpack the numbers for you, but we are gaining confidence in our strategy every quarter, we deliver and over the last three years, but certainly since our since our Investor day. Our teams continued to deliver on the priorities. We laid out and you know you can see by our results in the beat and raise we delivered today that those strategies are working.
But I'll pass it to Scott.
Targets, yes sure. Thanks, Thanks, Joanne Yeah I quit.
We recently made comments around our confidence in the $5 plus EPS.
Our target that we laid out.
Our Investor day in and let me tell you a little bit why why do we have that confidence you are right, it's been a volatile and uncertain.
<unk> environment, and we're really focused on the things we can control and there are certain things we can't but we said it repeatedly we're not chasing the last dollar where we're being disciplined and I think.
You know this year is a great Testament to that is certainly develop different differently than we thought but when we look at the way in which we're operating the strong gross margin performance, coupled with our inventories being in great shape.
Evidence of strong discipline in the pricing power of the brands and we continue to invest in growth longer term and at the same time using the great insight, we have been at 90% direct to consumer and that data.
We're really rigorous on the returns on those investments and making sure that they are paying off and that they're driving future quality credits. So you put these things together and you're right. It's hard to it's hard to see what the demand is going to look like but we're gaining more and more confidence in our ability to deliver earnings just as we did this year.
And we see that discipline being an even more important differentiator going forward now a little bit about maybe the shape of that just to help you you're probably doing some modeling here. Many of you are and we would expect our past $5 to be a little more weighted to 'twenty five versus 24 and the reason for that is we have.
Seen moderated.
North American performance, but we're a global diversified model and we're seeing an acceleration in China. So so you put those together, we see a little more back weighted in.
And 25.
Thanks, guys.
We'll move next to Lorraine Hutchinson of Bank of America.
Yeah.
Thank you good morning.
Promotional stance changed at all as trends slowed in North America, and what is your outlook for AUR and price increases over the next several quarters.
Well Lorraine the promotional environment exists. It always exists I think we see you know an active promotional environment in the context of doing business in North America.
But we have been very disciplined in terms of how we think about our brands and our how we go to market. We continue to see pricing power across our portfolio, we delivered AUR gains and gross margin increases across the portfolio and we expect that to continue it really starts with.
Great product and our teams are innovating and delivering compelling products that consumers desire we're.
We're achieving and exceeding our revenue targets on higher gross margins again across the portfolio.
Which is evidence that being closer to the consumer and delivering this product it's working.
We're going to remain agile, we did see further opportunity for AUR gain and gross margin growth I think you know I'll, probably take it to Todd who as you know coach brand, which is further further on the journey here too to driving.
Our gains in really understanding the customer and managing the business extremely well so Todd I'll, let you add some color.
About I haven't yet seen it.
You know what what we have seen in the last three years, we've increased our AUR by 30%.
And I'm optimistic about the continued growth of our AUR at coach for four main reasons.
First our innovation and storytelling, particularly when we talk about handbags and S. L. Geez I think what you saw this last year since we've.
But created expressive luxury is taking our purpose campaign and tying it to actual product and that is a differentiator from us.
Maybe are closer in competitors.
Something we've talked about quite a bit of emotion always trumps price.
When you look at the small back phenomenon that we've experienced some of our highest Bayer are particularly at our value channel commands some of our or the smallest bags commanding the highest AUR. So we feel very good about that.
Third the white space that exists today between traditional European luxury of where coach play is the largest we've ever experienced so that gives us a lot of room to continue to show the consumer the value of our products and finally, something that both Joanne and.
Scott talk about quite a bit as our tight inventory control since we started our.
Innovation and our transformation three years ago, we cut out about 50% almost 50% of our SKU count that allows us to focus meaningfully on key family, which reduces the liability that we had historically had to carry so I think those four things come by.
Fine.
A lot of confidence that we still have a way to go on AUR growth.
And as Scott said, we're not chasing top line we are.
Securing our margin building.
Thank you.
We'll take our next question from Matthew Boss of Jpmorgan.
Great. Thanks, and congrats on a really nice quarter in a tough backdrop.
Thanks, Matt so.
Joanne how would you assess if we take a step back overall health of the handbags and accessories category globally today and can you help walk through the functional drivers of the sustainable category growth that we've seen if you look back historically and then Scott maybe could you just speak to the profitability balance.
With investments that you are clearly striking or any constraints that you see to executing against our multiyear double digit earnings growth targets that you've laid out.
Yeah, Let me, let me start with the handbag category. It is a it is a resilient and durable category and.
You know there are consumers have an emotional connection to this category and we continue to.
Get closer and closer to our consumers, particularly new and younger consumers coming into the market to understand their needs and to appeal to both the emotional drivers.
That category as well as the functional drivers of the category.
There's a lot written about our goods and services and where consumers are spending their money, but but the handbags and leather goods category is a category that consumers use in all aspects of their lives. We saw demand even when people were locked in at home and their words.
Our stores were closed and people were going nowhere and then is the the world's reopened and people were calling the social occasion than traveling more going back to work, we saw a resurgence in demand and the resilience as people bring our products with them on those occasions. So I think the durability of the category speaks to.
<unk>.
Both the emotional connection that consumers have as well as the functional need that we support across all aspects of their life and the journey that we've been on in terms of brand building, it's really understanding the consumer journey and we continue to leverage data to get deeper and deeper into those use occasions in their journeys.
And their needs emotionally and functionally and that's how we continue to deliver and deliver with pricing power as.
As we look forward, we do a lot of research there is still strong intensive spend in the category as we go forward.
So we expect the trends to continue.
And then the second question.
Yeah, Great Ausberry building on this sector.
Building on the second part I think you know just going back to what Todd said earlier, it's a you know.
Our our model right now and how do we think about the trade offs.
Profit in investment, we're not getting profit through.
SG&A cuts right, we're getting it through quality growth and.
Just a comment about leaning into engagement versus price and the discipline that goes around that getting price increases driving those gross margin. That's why we're so focused on gross margins because that allows us to both continue to invest in the business and drive that emotional connection and at the same time deliver profitability and just finally Lincoln.
Back to what I said before we're being really.
Rigorous about making sure we're getting these investments and some things work and we leaned in some things don't work and we were quick to cut them off and I think that's just evidence since when we say disciplined operators. We're really looking at this with a lot of rigor right now.
We will take our next question from Brooke Roach of Goldman Sachs.
Good morning, and thank you for taking our question Joanne I was wondering if you could elaborate a bit more on the changes that you saw in the North American consumer and their engagement with our brands in the back half of the quarter. What did you see in terms of traffic and conversion among various demographic cohorts and then perhaps as a.
A follow up how is customer acquisition and retention trending for coach brand among the consumers that have been acquired since the acceleration strategy began.
Yeah.
So in terms of what we're seeing in North America, where we're seeing the trends and the softness really more broad based so we're not seeing it targeted to any one specific consumer group as we look across our our our business and as you may know our brands and our customer average household.
Income is around that $100000, Mark and that's true across channels.
And so.
You know what we saw in the quarter was just a generally more cautious consumer.
And we are managing our business responsibly and to drive brand helps so continue to see pricing power within that context.
But just a more cautious consumer overall and that's what we've embedded in our guidance as we go forward. So that we have realistic expectations about what what you know the market is providing we're managing a global business. So we are seeing strength and in other parts of our business we have the agility.
To respond to those differing demand trends and continue to manage our business.
In a healthy way so our outlook you know and we raised our outlook.
Shows that in our expectation for increased margin continuing gross margins.
Continuing in Q4.
So that that's how we're thinking about the consumer and how we're managing our business.
On consumer acquisition at coach Yeah, I'll pass it to Todd maybe to give you some color on that.
Yes, hi.
Hi, Brooks.
What we said this last quarter, we acquired over 800000, new customers in North America alone and if you look back at the last you know almost a year or.
Our customer acquisition is really doing quite well and what we're seeing is our strategy of focusing in on the younger.
Millennial and Gen Z consumer is working but half of the new customers are that younger cohort interestingly. They are transacting at higher AUR. So it is a self fulfilling benefit to us.
Additionally, what is important is worried attaining our existing customers, where we're not firing are our current customers. So we welcome everyone in the coach family, but what I love to hear is not only is it my brand for my mom at the bread for me now and that's what we're hearing more and more.
That's what's exciting and that's what gives us confidence that our strategy is working.
Appreciate it thank you very much.
We will take our next question from Oliver Chen of TD Cowen.
Hi, everybody great quarter.
Hope you have a lot of great underpinnings, there would love your thoughts on materials innovation and sustainability and how this.
This may scale to coach at large in any deep telephone cost of goods sold or longer and near term implications for margin.
Margin profile, there and then as you speak to North America, if you could speak to outlet relative to full price and any trends we should know about it also.
Outlet channel continues to seem very bright but.
By Brentwood.
The newness as well as utilizing personalization and the customer data platform to drive differentiation and innovation, just what's the head with thinking about outlet and maintaining bad and how youll balance.
The execution, there relative to coal pricing thanks, a lot.
I was worried I wasn't going to get my quota question for coach but clearly.
You guys know based on that Joe and I guess I'll take this thing.
And then Todd, yes, give some views that everything else.
Oliver.
You're right about coach Topeka, it's been an overnight success two years in the making and we are very proud of what we've accomplished with coach Tokyo and what we started off with this idea that both coach and tapestry do incredible work on the sustainability, but we weren't always getting full credit for it so we work.
Wanted to create a sub brand that highlighted those efforts. We also recognize there was an opportunity to co create with Gen Z and millennials.
And today, we are a community over a community of over 120 coach to opiates, who are inspiring and providing key input on the development of the product.
We will be scaling coach told me I like to say this is not a vanity project, but we will be but it will become a large and profitable business.
And you're exactly right in calling out that the concept of coach coach is to take learning.
That we've developed in product and material and usage of waste and applying those into coach and over the long term that will have an absolute benefit in reducing our cogs and so we're excited by that opportunity.
In outlet in and in North America.
It's key that we must and will continue to innovate.
<unk> offerings and ideas to all of our channels.
And we're seeing that we're seeing great.
Great results in both brick and mortar outlet and outlet dot com in North America as well as our full price business in one of the things we've talked about in the past is our most valued customers and their lifetime value are those who shop in all four quadrants of our business. So we'll continue to use data.
We've experimented as Joanne said.
Both of US just came back from Asia, one of the things we're doing so well in Asia.
The outlet stores are some of the most beautiful.
Compelling stores in our fleet.
Put in tabby product full price no discounting and it's driving real sales. There. So we're taking some of those learnings and applying them in the U S. One of the opportunities that we are growing both our coach.
Coach Dotcom and coach outlet Dot com is that we see the consumer cross shopping.
Beneficial way so this opportunity.
Client of ours comes into a coach outlook looking for tapping we wanted to satisfy that demand. So it's very exciting I think theres a lot of opportunity for us to.
It continued to grow both channels very profitably.
Hey, Todd.
To.
Yeah, just just to build on that Oliver to just.
Asked a little bit about differentiation in channels, if I understood. It right, we don't really see any material trend differences between retailer outlet.
Across tapestry just for your information.
Thank you just a quick follow up on China, There's a lot of momentum there but.
There's also some retail or some conversion issue. So what do you see happening.
As you know of mainland consumption versus abroad, and there are certain limitations with visa and slight capacity. So would love your thoughts about what's embedded in guidance and.
Perhaps the risk factors that may or may not be out of your control.
Well let.
Let me kick it off here, but we are winning in China, and we are seeing and able to capture the momentum in the domestic market in China and again, you know we talked about double digit increase across all channels.
We have a very strong brick and mortar presence in the market and two decades of experience.
In the market with understanding consumers, we've built a digital business and are on multiple platforms as we follow the consumer in the market. So we feel very well positioned to meet and and deliver meet that demand and deliver for customers in the market to your point we're seeing.
<unk> some shifts as they come out of the Covid restrictions, we're seeing more domestic travel. So we're capturing more business in Hong Kong, Macau and in Hainan, which is a strong businesses for us.
We have yet to see a resumption of international travel at the levels that it was pre pandemic.
But again you know, we're driving significant growth in southeast Asia, which is a market that you know that the Chinese consumer used to travel to quite a bit we're seeing and delivering significant growth today with a more domestic consumer and.
Well positioned in that market to capture the international inbound Chinese consumer as that.
<unk> as well as in Europe , and in North America. So those trends have changed we're not back to pre pandemic levels of travel we're capturing the demand we see in the mainland based on our deep experience there.
And we are well positioned in the rest of the world.
As those are international travel trends improve.
And we will take our final question from Mark all Schwager of Baird.
Thank you good morning.
A couple of quick ones for me just first with respect to real estate was hoping you could touch on the outlook for the portfolio. There I think he had some net closures in the quarter, probably some seasonality, but just in the context of the ongoing strength youre seeing in digital channels, how should we be thinking about.
The runway there.
And then separately with respect to gross margin Scott.
It looks like Youre going to be approaching fiscal 'twenty one's high watermark. This year, maybe touch on some of the gross margin puts and takes beyond fiscal 'twenty three.
Seems like freight is still an opportunity you might be seeing some geographic mix benefit just wonder if there's any headwinds to be mindful of as we update our models. Thank you.
We were pleased actually to see that brick and mortar sales continue to grow we drove low teens.
Growth in brick and mortar.
I continue to say, we have the best teams in the business and having customers and welcoming customers back to our stores gives us an opportunity to have our associates connect our customers more deeply with our brands in it it's a terrific experience if you've been in our stores.
Hopefully you know that but we also have digital capabilities to meet the customer where they are and you know that's proved to be a really strong invest and we continue to improve the experience, we're delivering both in brick and mortar, but as well as online and as we evaluate our fleet we continue to prune.
And make sure that we have high profitability and productivity thresholds for our stores and that's a constant evolution. So you will see us make changes to our fleet, but we see opportunities to grow overall in stores and as we laid out at our Investor day, we see the opportunity to grow our store fleet I think we said.
Hundreds of stores.
You know 50 to 100 stores of growth over that time period.
And most of that store growth, we see happening in Asia. So on in the other markets, you'll see US open some and maybe quote some relocate remodel, but maybe I'll toss it to Scott. He can give you the actual numbers, but that's how we think about strategically think about that the fleets and managing it.
Yeah, you have it you have it Joanna.
Right around 100.
I think.
Christine is telling me 70 so.
Yeah.
[laughter] thing as you know, we're managing our lease terms.
Lee.
Yeah.
We can turn the entire fleet, we have about a four year average term and underneath that we're always finding certain areas that are trending down and we're moving out of those and we're finding new areas that makes sense, given our insight into the consumer where they're at and where they want to shop. So there's there's what I call the normal hygiene, let's go.
And underneath that but no huge changes in the fleet size just to growth, which is mostly outside of the U S.
As it relates to gross margin just a quick comment we're obviously not going to give any guidance or specifics, but if you think about it you know there's there's puts and takes that are always.
Happening.
We see leather prices moderating, we continue to see hardware and in some of the other componentry, having upward pressure labor is a continued upward pressure, but to me. The most important thing is what Todd said earlier.
My son.
But with the customer the insights that we have and increases our batting average to make good decisions, we're investing behind the brands and ultimately that means pricing power. So why do I have confidence in our gross margin thats its pricing power and the insights that we have.
The shape of the business will help us a little bit as we go forward to the recovery of China in our Asia business is generally.
Our higher margin too so from a mix standpoint that that will benefit us over time.
Thank you.
Thank you that concludes our question and answer session I will now turn it over to Joanne for some concluding remarks.
Thank you for joining us today and for your interest in our story today, we reported a strong third quarter and raised our outlook for the full year. This is a testament to our incredible global teams, who continue to drive our results.
Our performance also reinforces the power of our brands and our globally diversified direct to consumer business model. These competitive advantages are clearly differentiated results were.
Were confident and in our strategy and our runway is significant we remain focused on driving sustainable growth and shareholder returns into the future. Thanks, again and have a great day.
Yeah.
This concludes tapestries earnings conference call. We thank you for your participation.
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