Q1 2025 Tapestry Inc Earnings Call
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Speaker Change: Good day and welcome to this Tapestry Conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations, Christina Colone.
Christina Colone: Good morning. Thank you for joining us with me today to discuss our first quarter results as well as our strategies and outlook are Joanne Crevoiserat, Tapestry's Chief Executive Officer, and Scott Roe, Tapestry's Chief Financial Officer and Chief Operating Officer.
Christina Colone: 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.
Christina Colone: This includes projections for our business in the current or future quarters or fiscal years.
Christina Colone: Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statement. 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.
Christina Colone: 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.tapestry.com forward slash investors and then view the earnings release and presentation posted today.
Christina Colone: Now, let me outline the speakers and topics for this conference call.
Christina Colone: Joanne will begin with highlights for Tapestry and our brand. 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.
Christina Colone: After Q&A, Joanne will conclude with brief closing remarks. I'd now like to turn it over to Joanne Crevoiserat, Tapestry CEO.
Good morning. Thank you, Christina, and welcome, everyone.
Christina Colone: As noted in our press release, our first quarter results exceeded expectations, showcasing the brand magic and operational excellence that are the foundation of our strategic growth agenda.
Christina Colone: Importantly, our strong and consistent performance is a credit to our exceptional global teams who continue to navigate the dynamic backdrop with focus and agility while positioning our brands and business for the future.
Christina Colone: Touching on the highlights of the quarter. First, we achieved total revenue in line with prior year on a constant currency basis, outpacing our outlook and reflecting the benefits of our globally diversified business model with continued solid growth at Coach.
Christina Colone: By geography, we achieved international revenue gains of 2% at constant currency, which included an increase of 27% in Europe and a 2% decline in the total APAC region.
Christina Colone: In Greater China specifically, sales declined 5%, consistent with the top end of our guidance range and ahead of the industry, which included a sequential trend improvement throughout the quarter.
Christina Colone: Importantly, we are delivering a high level of innovation, relevance, and value to consumers while continuing to invest in our brands, teams, and platforms to support long-term growth in the region and with this important consumer cohort.
Christina Colone: And in North America, revenue declined 1% compared to last year, including an anticipated decrease in wholesale, while profit rose, driven by growth and operating margin expansion.
Christina Colone: Second, we remain focused on building new and lasting relationships with consumers across our portfolio.
Christina Colone: During the quarter, we acquired approximately 1.4 million new customers in North America alone, with increases across all brands.
Christina Colone: Over half of these customers were Gen Z and Millennials, consistent with our strategy to recruit younger consumers to our brands. And they continue to transact at a higher AUR than the balance of our customer base.
Christina Colone: At the same time, we improved lapsed customer reactivation in North America, which highlights our ability to successfully engage our existing customer base as we welcome new consumers to our brands.
Christina Colone: Third, we delivered compelling omnichannel experiences, engaging our customers wherever they choose to shop our brands. To this end, we maintained strength in digital, which grew high single digits versus prior year and represented over 25% of revenue at accretive margins.
Christina Colone: Our digital business is underpinned by Tapestry's leading capabilities, which have enabled us to enhance the customer experience across their purchase journey.
Christina Colone: Fourth, we fueled fashion innovation and product excellence, as we remain focused on bringing creativity, quality, and compelling value to consumers around the world.
Christina Colone: This is clearly on display at Coach where we delivered continued growth in handbags with AUR gains underscoring the vibrancy of the brand and product offering.
Christina Colone: Our success is also reflected in our strong gross margin, as we achieved a record first quarter gross margin, with further opportunity for expansion long term.
Christina Colone: Importantly, underpinning our margin gains is our agile supply chain, a key competitive advantage which enables us to deliver craftsmanship and value globally while effectively adapting to the rapidly evolving landscape.
Christina Colone: Overall, we generated record earnings per share, which exceeded our expectations, increasing at a double-digit pace compared to the prior year, while making strategic investments in our brands and business.
Christina Colone: Importantly, this outperformance enabled us to raise our guidance for the full year consistent with our commitment to driving growth and shareholder value.
Christina Colone: Before turning to a discussion of our results in more detail, I'd like to briefly address the pending acquisition of Capri.
Christina Colone: Two weeks ago, the U.S. District Court granted the FTC's preliminary injunction, which we believe is incorrect on the law and facts.
Christina Colone: We appeal the decision consistent with our obligations under the merger agreement. While we await that outcome, it's important to reiterate that we are in a position of strength and continue to focus on our compelling organic growth plan, building powerful brands and delivering for our consumers.
Christina Colone: Now moving to our results and strategies by brand. Coach continued to deliver standout results, highlighting the enduring power and relevance of the brand and its distinctive expressive luxury positioning.
Christina Colone: Importantly, our teams are driving strong consumer engagement through innovative product, storytelling, and experiences, fueling our brand heat and growth.
Christina Colone: To this end, during the quarter, we achieved 2% constant currency revenue gains at exceptional margins, highlighted by 330 basis points of gross margin expansion and a 90 basis point lift in operating margin, with meaningful runway for growth ahead.
Christina Colone: Now, touching on our progress in the first quarter, centered on our focus to deepen our connection with consumers to fuel continued desire for the brand.
Christina Colone: First, we grew our leather goods offering, led by our iconic handbag platforms and the success of new product introductions.
Christina Colone: The Tabby family once again outperformed, over-indexing with new and younger consumers and nearly doubling versus last year.
Christina Colone: The Tabby Shoulder Bag 26 continued to anchor the offering and we further expanded the family with the introduction of Times Square Tabby.
Christina Colone: As we shared last quarter, based on the power of Tabby and in keeping with our commitment to put the consumer at the heart of all we do, we launched a test that brought the Tabby 26 to our outlet channel at full price.
Christina Colone: This test continues to exceed plan and as a result, we rolled it out to more locations with Tabby now available in over 200 outlet stores globally, again, at full price.
Christina Colone: Importantly, the learnings from this test continue to inform our broader strategies for Fiscal 25 and beyond as we explore additional opportunities to scale innovative products and marketing campaigns across channels.
Christina Colone: In addition, during the quarter we launched the New York family, featuring the Brooklyn and Empire bags, which surpassed our expectations globally and cemented their place as new pillars for the brand.
Christina Colone: The Brooklyn Shoulder Bag 20 at $295 was the top recruitment driver of Gen Z consumers.
Christina Colone: while the soft Empire Carryall 40 at an AUR of $695 was a viral sensation on TikTok.
Christina Colone: Importantly, the New York family is incremental and differentiated with new minimalist branding and soft leather that's clearly resonating with consumers globally.
Christina Colone: In fact, the early success of Brooklyn earned it a spot on the list, ranking second among the ten hottest products.
Christina Colone: Overall, Coach's growth in handbags and accessories continued to outpace the industry, which included mid-single-digit AUR gains globally, led by North America. And we see further runway longer term, given our innovation pipeline and brand heat.
Christina Colone: Next, we remain focused on fueling lifestyle, expanding the brand's reach and categories including footwear, ready-to-wear, and men's, where we are underpenetrated and have a right to win by driving customer recruitment, purchase frequency, and lifetime value.
Christina Colone: We have a strong pipeline of innovation notably in footwear with the launch of the new highline sneaker in the current quarter
Christina Colone: Turning to marketing, we continue to have meaningful conversations with consumers through purpose-led marketing, driving cultural relevance and engagement with our brand.
Christina Colone: This fall, we launched a new campaign, Unlock Your Courage, featuring coach ambassadors Elle Fanning, Naza, Young-G, and Charles Melton in a series of short films designed to inspire authentic self-expression, consistent with our brand mission.
Christina Colone: Importantly, because of our efforts, we've seen significant gains in unaided awareness, share of search and purchase intent among Gen Z consumers in the U.S. and globally, reinforcing brand momentum and that our strategies are working.
Christina Colone: In addition, our campaigns and brand-building efforts are breaking through globally. To this end, during the quarter, we made the strategic decision to increase our top-of-funnel marketing investments across international markets, notably in China.
Christina Colone: This reinforces the confidence we have in our brand and product offering, driving greater consumer engagement and helping to drive out-performance versus the industry in China specifically.
In addition, we also drove brand desire through unique experiences.
Christina Colone: We connected with younger consumers in the world of gaming with a collaboration with Roblox and Zepeto.
Christina Colone: Since the launch, more than 12 million unique users interacted with our content, and we've seen an increase in brand consideration and purchase intent from consumers on the platform.
Christina Colone: Overall, our holistic brand building activities helped to drive increases in new customer acquisition as we welcomed approximately 930,000 new customers to coach in North America, a strong increase versus prior year.
Christina Colone: Of these new customers, approximately 60% were Gen Z and Millennials, consistent with our strategy to recruit younger customers.
Christina Colone: Looking ahead to holiday, we will continue to focus on brand building through customer engagement, executing our strategies with discipline.
Christina Colone: We are confident in our product pipeline, building on the traction we're driving in the business.
Christina Colone: through the continuing success of Tabby, expansion of the New York family, the launch of newness within our Coach Originals collection, and a compelling assortment of seasonal novelty reinforced by emotional marketing campaigns that amplify our brand, purpose, and product.
Christina Colone: In closing, Coach is a storied brand driving modern relevance, fueled by a strong team methodically building sustainable growth.
Christina Colone: With customer understanding at the heart of our work, we continue to bring to life the brand's unique creativity, purpose, and value to a new generation of consumers with significant runway ahead.
Christina Colone: Now, moving to Kate Spade. During the quarter, we continued to reinforce our foundation for the future. While revenue declined, as expected, profit margins again expanded versus prior year, led by continued gross margin expansion and diligent expense management.
Christina Colone: Moving forward, we have a clear imperative for growth. Last month, we welcomed new brand CEO Ava Erdman to the organization. Ava brings a strong track record of leading global consumer luxury brands and driving consistent profitable growth.
Christina Colone: Ava and I share confidence in the meaningful opportunities at Kate Spade by bringing a sharpened focus on brand building and enhanced execution.
Christina Colone: Importantly, under AVA's leadership, the team is working with intention to advance our long-term strategies while acting with urgency to address the things we can immediately improve in support of this vision.
Now touching on our results for the quarter.
Christina Colone: First, we remain focused on strengthening the brand's core handbag offering, key to our growth agenda.
Christina Colone: In September, we launched the Deco collection and specialty, which is over-indexing with new, younger consumers at strong AUR and margins, while the Phoebe and Spadeflower programs and outlet remain foundational.
Christina Colone: At the same time, we also recognize that we need to amplify this progress through more holistic brand-building initiatives, ensuring that we are distorting our efforts to telling more focused, cohesive, and relevant brand and product stories to drive consumer engagement. And that work remains underway.
Christina Colone: Turning to Kate Spade's lifestyle offering, during the quarter, we delivered strong growth in jewelry in keeping with our strategic intent.
Christina Colone: This growth was driven by millennial and Gen Z recruitment, and we see continued opportunity ahead.
Christina Colone: Next, we remain focused on maximizing the omni-channel opportunity to drive customer engagement and grow the brand.
Christina Colone: In keeping with this focus in October, we launched a trial on Amazon with a range of products including an emphasis on gifting.
Christina Colone: The initial learnings are promising and we see an opportunity to leverage the platform's broad consumer reach, specifically with younger cohorts, as we've successfully done with Coach over the last year.
Christina Colone: Turning to marketing, we are committed to fueling brand heat to drive consideration and accelerate customer acquisition.
Christina Colone: During the quarter, we acquired approximately 445,000 new customers to the brand, representing an increase versus prior year. That said, we need to drive stronger outcomes, particularly in our core category, to achieve our growth ambition.
Christina Colone: To that end, over the last quarter, our team launched new Consumer Insights ethnographic work to sharpen our focus and break through with the brand's target audience.
Christina Colone: and we've immediately implemented action plans for the holiday and into spring which will bring more focus to our execution from our assortment to our styling as well as our storytelling efforts.
Christina Colone: Importantly, we will distort our marketing investment into upper-funnel campaigns with more relevant messages for our target customer, capitalizing on the brand's strong unaided awareness in the U.S. to build greater brand desire and purchase consideration.
Christina Colone: Finally, we also continue to operate with discipline and a focus on maintaining a healthy brand and business, which is foundational to our ways of working and highlighted by our continued growth and operating margin expansion in the quarter.
Christina Colone: Touching on holiday, our goal is to drive customer acquisition through focus and relevancy. To do this, we will lead with gifting, a hallmark of the brand, while launching a social first campaign that will celebrate the joy of the holiday season in new and unexpected ways.
Christina Colone: Overall, while results for Kate Spade met our expectations in the quarter, we're not satisfied with the performance and we're sharpening our roadmap for long-term growth. This is a unique purpose-driven brand with significant potential with consumers on a global scale and we're leaning in with intention to deliver sustainable profitable growth.
Now, turning to Stuart Weitzman.
Christina Colone: We drove revenue gains for the quarter, with growth in North America offsetting continued softness in Greater China. Importantly, though financial results remained challenged, we made progress in keeping with our strategic focus on brand building and delivering higher profitability long-term.
Christina Colone: Touching briefly on our focus areas across product and marketing. During the quarter new styles including the Vinnie Pump and Naomi boot families resonated with consumers while growth and flats continued.
Christina Colone: In addition, we refreshed our iconic styles, which remain the bedrock of the brand.
Christina Colone: We launched new constructions to modernize and enhance the fit of key families, including Nudist and Stewart.
Christina Colone: Product innovation drove traction at wholesale, with the business growing double digits on both a POS and net sales basis in North America in the first quarter.
Christina Colone: Further, order bookings year-to-date are up nearly 30% to last year. This will support an improvement in revenue and profitability trends this year and beyond, consistent with our strategy to drive growth in this important channel for the brand and category.
Christina Colone: Turning to marketing, during the quarter we drove brand desire through emotional storytelling in keeping with the brand's purpose of inspiring strength and confidence.
Christina Colone: Following the brand's How Lovely to Be a Woman campaign launch featuring new, talented, and multifaceted brand ambassadors,
Christina Colone: we saw an increase in customer acquisition, Google search, and organic digital traffic in North America, which reinforce brand health and represent leading indicators of stronger business results in the future.
Christina Colone: For holiday, the key boot selling season, we are focused on delivering innovation across our icons and building on the early success of new introductions while driving sustained wholesale growth where there's momentum.
Christina Colone: In addition, we will continue to deliver purpose-driven marketing with the rollout of additional chapters of our How Lovely to be a Woman campaign.
Christina Colone: In closing, Tapestry delivered strong earnings growth in the first quarter, outperforming expectations. Our results continue to demonstrate the power of brand building, customer centricity, and operational excellence.
Christina Colone: I want to reiterate my appreciation to our exceptional global teams who continue to drive our success.
Christina Colone: From this position of strength, we raised our outlook for the full year. We remain focused and confident in the bold ambition we have for our existing brands and business. I believe the best is yet to come for tapestry.
Christina Colone: Before turning the call over to Scott, I want to take a moment to recognize Andrea Resnick.
Christina Colone: This marks Andrea's 97th and final earnings call with tapestry ahead of her retirement later this year.
Christina Colone: Andrea joined the company to take it public and has had a truly amazing career. She is an institution at Tapestry and a legend in the IR and corporate communication world.
Christina Colone: Andrea created a gold standard for thoughtful and transparent communications which have become a bedrock at our company.
Christina Colone: On behalf of everyone at Tapestry, we are grateful for her many contributions and wish her all the best in her next chapter.
With that, I'll now turn it over to Scott.
Scott Roe: Thanks Joanne and good morning everyone. Our first quarter performance continued to build on our track record of consistent and disciplined execution.
Scott Roe: To this end, in Q1, we outperformed expectations across revenue, operating income, and earnings, delivering strong EPS growth and cash flow generation, despite the volatile backdrop.
Scott Roe: Now moving to the details of the quarter, beginning with revenue trends on a constant currency basis.
Christina Colone: Sales were in line with the prior year and above our guidance for the quarter.
Christina Colone: These results were led by growth internationally, which grew 2% at constant currency. By region, Europe, revenue grew 27% above last year, driven by increased local consumer spend and strong new customer acquisition, notably with Gen Z.
Christina Colone: In other Asia, revenue rose 10% led by growth in Australia, New Zealand, and South Korea, while Japan sales declined 4%. And in greater China, revenue declined 5% at the high end of our guidance range.
Christina Colone: During the quarter, we again delivered digital growth and brick and mortar trends, while negative, improved throughout the quarter, supported by better traffic trends which continued into Q2.
Christina Colone: Despite the overall challenging market backdrop, we are confidently investing in the region, delivering compelling product and value, and positioning our brands and business for long-term growth.
Christina Colone: In North America, sales declined 1% compared to the prior year due to a planned decrease in wholesale, while North America Direct was positive. Importantly, both gross and operating margins rose versus last year as we supported long-term brand health.
Christina Colone: Now touching on revenue by channel for the quarter. Our direct-to-consumer business was in line with the prior year, which included a high single-digit increase in digital revenue and a low single-digit decline in global brick-and-mortar sales.
Christina Colone: Wholesale revenue was in line with prior year, which included international growth, including on digital platforms, where we continue to expand our reach.
Christina Colone: Moving down the P&L, we achieved a record first quarter gross margin, delivering gross margin expansion of 280 basis points versus prior year.
Christina Colone: This year-over-year increase was driven by 180 basis points of operational outperformance, which exceeded plan, as well as a benefit of approximately 60 basis points from lower freight expense and a 40 basis point tailwind from FX.
Christina Colone: Turning to SG&A, we continue to make ongoing strategic investments in our future. To this end, SG&A rose 3%, led by higher marketing spend versus prior year and expectations, in support of our brand building initiatives.
Christina Colone: So taken together operating margin increased approximately 90 basis points in the quarter driving operating profit growth ahead of prior year and expectations and first quarter EPS of $1 two exceeded our guidance and represented growth of 10%.
Christina Colone: So, taken together, operating margin increased approximately 90 basis points in the quarter, driving operating profit growth ahead of prior year end expectations. And first quarter EPS of $1.02 exceeded our guidance and represented growth of 10%.
Christina Colone: Now turning to our balance sheet and cash flows. We ended the quarter was $7.3 billion in cash and investments and total borrowings of $7.3 billion, which reflects the bond financing related to the proposed acquisition of Capri of $6 $1 billion free cash flow was an inflow of <unk>.
Christina Colone: Now turning to our balance sheet and cash flows. We ended the quarter with $7.3 billion in cash and investments and total borrowings of $7.3 billion, which reflects the bond financing related to the proposed acquisition of Capri of $6.1 billion.
Christina Colone: $94 million.
Free cash flow was an inflow of 94 million dollars.
Christina Colone: Capex and implementation costs related to cloud computing for the quarter were $30 million inventory levels at quarter end were 9% above prior year, reflecting a higher level of in transit consistent with expectations as we continue to leverage the benefits of our supply chain navigating the red Sea and port disruptions with.
Christina Colone: CapEx and implementation costs related to cloud computing for the quarter were $30 million.
Christina Colone: Inventory levels at quarter end were 9% above prior year, reflecting a higher level of in-transits consistent with expectations as we continue to leverage the benefits of our supply chain, navigating the Red Sea and port disruptions with only modest impact.
Christina Colone: Only modest impact.
Christina Colone: Importantly, as we enter the holiday season, our inventory is current and well positioned globally and we continue to expect to end Q2, and the full year with inventory above prior year.
Christina Colone: Importantly, as we enter the holiday season, our inventory is current and well-positioned globally, and we continue to expect to end Q2 and the full year with inventory above prior year.
Christina Colone: Turning to our dividend program, our board of directors declared a quarterly cash dividend of <unk> 35 per common share representing $80 million in dividend payments for the quarter for the fiscal year. We continue to expect to return approximately $325 million to shareholders through the dividend for and Andy.
Christina Colone: Turning to our Dividend Program, our Board of Directors declared a quarterly cash dividend of $0.35 per common share, representing $80 million in dividend payments for the quarter.
Christina Colone: For the fiscal year, we continue to expect to return approximately $325 million to shareholders through the dividend for an annual rate of $1.40 per share.
Christina Colone: Full rate of $1 40 per share.
Christina Colone: Okay.
Christina Colone: Now moving to our guidance for fiscal year, 'twenty, five which is provided on a non-GAAP basis, we are raising our fiscal 'twenty twenty-five outlook, which incorporates our first quarter outperformance. We view this guidance is prudent and achievable as we remain clear eyed about the realities of the external environment balanced with the opportunities we see.
Christina Colone: Now moving to our guidance for fiscal year 25, which is provided on a non-GAAP basis.
Christina Colone: We are raising our fiscal 2025 outlook, which incorporates our first quarter outperformance. We view this guidance as prudent and achievable, as we remain clear-eyed about the realities of the external environment, balanced with the opportunities we see for our business.
Christina Colone: For our business.
Christina Colone: For the fiscal year, we now expect revenue of over $6.75 billion, representing growth of approximately 1% to 2% versus prior year on a reported and constant currency basis.
Christina Colone: For the fiscal year, we now expect revenue of over $6.75 billion, representing growth of approximately 1-2% versus prior year on a reported and constant currency basis.
Christina Colone: Touching on sales details by region at constant currency, we expect high teens growth in Europe, where we are underpenetrated and have strong traction in other Asia, we anticipate mid single digit gains while in Japan, we're forecasting a low single digit decline.
Christina Colone: Touching on sales details by region at constant currency, we expect high teens growth in Europe where we are under penetrated and have strong traction. In other Asia we anticipate mid single-digit gains, while in Japan we're forecasting a low single-digit decline.
Christina Colone: In North America, we expect revenue to be approximately in line with to slightly above prior year as we continue to support a healthy business and in greater China, We expect revenue to be in the area of prior year.
Christina Colone: In North America, we expect revenue to be approximately in line with to slightly above prior year as we continue to support a healthy business.
Christina Colone: and in Greater China, we expect revenue to be in the area of prior year.
Christina Colone: In addition, our outlook now assumes operating margin expansion of over 50 basis points versus last year, we anticipate gross margin expansion to drive this increase due to improvements in both AUR and AUC.
Christina Colone: In addition, our outlook now assumes operating margin expansion of over 50 basis points versus last year. We anticipate gross margin expansion to drive this increase due to improvements in both AUR and AUC.
Christina Colone: Both freight and FX are expected to have a negligible impact on gross margin changes in fiscal 'twenty five.
Christina Colone: Both freight and FX are expected to have a negligible impact on gross margin changes in fiscal 25.
Christina Colone: On SG&A, we expect expenses to increase roughly in line with the pace of revenue growth for the year.
Christina Colone: On SG&A, we expect expenses to increase roughly in line with the pace of revenue growth for the year.
Christina Colone: Importantly, we're continuing to diligently control cost, while investing in our highest impact growth initiatives, including making the incremental investments in marketing versus our prior outlook for modeling purposes. You can expect a modest decline in corporate expenses versus prior year, while making ongoing investments in our brands.
Christina Colone: Importantly, we're continuing to diligently control costs while investing in our highest-impact growth initiatives, including making incremental investments in marketing versus our prior outlook.
Christina Colone: For modeling purposes, you can expect a modest decline in corporate expenses versus prior year while making ongoing investments in our brands.
Christina Colone: Moving to below the line expectations for the year net interest income is expected to be approximately $20 million, which incorporates the feds 50 basis point rate cut in September with some further rate cuts assumed throughout the year.
Christina Colone: Moving to below the line expectations for the year. Net interest income is expected to be approximately 20 million dollars, which incorporates the Fed's 50 basis point rate cut in September, with some further rate cuts assumed throughout the year. The tax rate is expected to be approximately 19 percent.
Christina Colone: The tax rate is expected to be approximately 19% and our weighted average diluted share count is forecasted to be in the area of 238 million shares.
Christina Colone: And our weighted average diluted share count is forecasted to be in the area of 238 million shares.
Christina Colone: Taken together, we're raising our EPS guidance to $4 50 to $4.55 representing.
Christina Colone: Taken together, we're raising our EPS guidance to $4.50 to $4.55, representing mid-single-digit growth compared to last year, and ahead of our prior guide of $4.45 to $4.50.
Christina Colone: The mid single digit growth compared to last year and ahead of our prior guide of $4 45 to $4.50.
Christina Colone: Finally, we anticipate free cash flow of approximately 1.1 billion dollars, excluding any deal related costs.
Christina Colone: And we expect CapEx and cloud computing costs to be in the area of $190 million. We expect around two-thirds of the spend to be related to store openings, renovations, and relocations, with the balance primarily related to our ongoing digital and IT investments.
Christina Colone: Touching on shaping for the year, we expect constant currency sales to be up slightly in the first half of the year, with low single-digit growth planned in the back half of the year. In Q2 specifically, we expect sales to grow in the area of 1 to 2 percent on a reported and constant currency basis.
Christina Colone: Turning to operating margin, we expect expansion in both the first and second halves, with the first half expansion led by gross margin gains, and the second half increases driven by SG&A leverage.
Christina Colone: Taken together, we expect balanced DPS growth of mid-single digits for the 1st and 2nd halves with Q2 forecasted to approach $1.70.
Now to briefly address the proposed acquisition of Capri.
Christina Colone: We are appealing the district court's order, as required by our merger agreement, and have paused all integration planning efforts during this period. Given the present dynamics, we are not reaffirming the financial aspects of the deal and will provide updated comments if and as appropriate.
Christina Colone: With that, I'd like to share with you in more detail how we're thinking about our capital allocation priorities looking forward. Our capital allocation framework is focused on the goals of driving healthy growth and sustainable shareholder value.
Christina Colone: Note, we are firmly committed to our solid investment grade rating and our long term gross leverage target of below two five times keeping this long term leverage target in mind, there's a clear opportunity to utilize excess free cash flow for share repurchases.
Speaker Change: Thanks, Joanne and we won't forget your question for Scott, We know how important that is to you but.
Christina Colone: In terms of China.
Christina Colone: Woodbury Commons and they're shopping after one shopping experience they are coming cell phone in hand, with the picture of Kathy.
Christina Colone: Our prepare to pay full price and.
Christina Colone: So desirous of having that in that channel. So again once you put everything in a customer centric lens, you see things very differently than the historic norms of our industry.
Speaker Change: Great. Thanks very much.
Speaker Change: We'll take our next question from Rick Patel of Raymond James.
Rick Patel: Thank you good morning.
Rick Patel: Can you talk about the shape of growth in North America, Q1 was down 1% guidance suggest a potential for modest growth. This year I was just curious if you can provide color on the progression of growth and the drivers of the implied sequential improvement.
Speaker Change: Well, maybe I'll, yes.
Christina Colone: And.
Scott Roe: Scott, but as we talked about our trends in North America, where in fact better than we expected in the first quarter.
Scott Roe: And we continue to disappear discipline in managing the business I would say also we're driving higher gross margins operating margin and profit dollars. While we're also acquiring new consumers to our brands. So we're operating with a great deal of discipline. The trend in the first quarter was impacted as we just talked about by the.
Scott Roe: By the wholesale drag and that's a headwind in the first quarter that doesn't repeat for the balance of the year, but maybe Scott the shaping of that.
Scott Roe: Well I think I think you said it really.
Scott Roe: The underlying trend when you take out the noise from wholesale and I'll remind you that this is a relatively small quarter too right.
Scott Roe: We do see slight growth in balancing the areas as wholesale comes back to normal if I use that word and the continued underlying directed consumer trends.
Scott Roe: Go through through the balance of the year.
Scott Roe: That wholesale business and importantly globally.
Scott Roe: Wholesale growth and international is driven by digital and we grew in digital in China. So this underpins the opportunities that we see to meet the customer where they are moving quickly.
Scott Roe: So this underpins the opportunities that we see to meet the customer where they are. We're moving quickly to meet the customer where they are, and we're acquiring new customers in this channel, which is also very important for our brands going forward. So a big opportunity for us in customer acquisition. We're acquiring younger customers in these channels. The digital channel for us is accretive in margins to our total. So those are all capabilities that are important today for our business, for our P&L, but also long-term for our brand.
Scott Roe: To meet the customer where they are and we are acquiring new customers. In this channel, which is also very important for our brands going forward.
Scott Roe: So a big opportunity for us and customer acquisition, requiring younger customers in these channels. The digital channel for US is accretive in margin to our total. So those are all capabilities that are important today for our business for our P&L, but also long term for our for our brand.
Speaker Change: Yeah, Let me, let me pick up the <unk>.
Yeah, let me pick up a question, Mark, on...
Mark: Sure Mark.
Christina Colone: On.
Christina Colone: So, first of all, I'd say, you know, we benefit from having a diverse and agile supply chain. And my goodness, we've had so many disruptions and challenges that have.
Christina Colone: Tariff. So first of all I'd say, you know, we benefit from having a diverse and agile.
Christina Colone: Leigh chain and my goodness, we've had so many disruptions and challenges that have forced us to make.
Christina Colone: forced us to make adaptions, you know, based on port strikes and...
Christina Colone: <unk>.
Christina Colone: Based on port strikes and freight lanes, whatever it might be tariff regimes changing overtime, so we're pretty well versed and AR and managing through this we'll see what comes in terms of specific tariffs.
Christina Colone: freight lanes, whatever it might be, tariff regimes changing over time. So we're, you know, pretty well versed in in managing through this. We'll see what comes in terms of specific
Christina Colone: Tariffs and other legislation that may come.
Christina Colone: And we're monitoring that closely and certainly prepared to react I would point out one thing, though as it relates to China specifically.
Christina Colone: <unk>.
Christina Colone: We have less than 10% of our overall sourcing comes out of China and when you look at leather goods, it's really minimal so from an exposure standpoint at least as it relates to China, that's really on a relative basis, not a big concern from our standpoint.
Christina Colone: We have less than 10% of our overall sourcing comes out of China, and when you look at leather goods, it's really minimal. So from an exposure standpoint, at least as it relates to China, that's really, on a relative basis, not a big concern from our standpoint.
Speaker Change: Thank you.
Thank you.
Speaker Change: Thank you we'll take our next question from Dana Telsey of Telsey Group. Your line is open.
Christina Colone: Thank you. We'll take our next question from Dana Telsey of Telsey Group. Your line is open.
Christina Colone: And Ms. Telsey. Your line is open you may want to check your mute switch.
Speaker Change: Hey Ms. Telsey, your line is open. You may want to check your mute switch.
Speaker Change: Hi, good morning, everyone and Joanne.
Speaker Change: Do you think about the complexion of the brands and the growth opportunities go forward given the state of the consumer how do you think of the balance between introducing newness and core collections and also existing collections and how do you see pricing evolving and the impact of margin given the current sourcing complex.
Speaker Change: That Scott just mentioned thank you.
Christina Colone: Sure I'll add my comments, but then pass it to Todd for a little bit of color on what's in fact been working for us in terms of adding newness, but also investing behind our icon and that is a balance that we talked about and we manage but the key is that we always have to deliver innovation.
Speaker Change: <unk>, even within our icons and you see us building strength on strength in our icons at coach Kabi continues to get stronger because we are innovating on that platform and the iconic original tabby 26 continues to perform.
Speaker Change: And then we're introducing as well newness and innovation that is also.
Christina Colone: Working in and in fact, becoming new pillars for the brand. So as we think about AUR growth.
Speaker Change: It's a combination of this magic that Todd talked about of bringing the right product in the right innovation to market with the logic that we're bringing with consumer insights and understanding and the all of the data and analytics, we bring to bear across our assortment and then the investments, we're making in marketing and in.
Christina Colone: Maybe a stolen all of your Thunder, Todd but [laughter].
Speaker Change: You left a little on the phone. So I think you know it is very foundational if we go back four or five years.
Speaker Change: Joanne and I went on this journey together.
Speaker Change: Cut the tail of sort of that very one off product that is foundational to building a future. So we really looked at how productive every SKU was and we recognize that the big families. A good bank is a good bank globally. So once.
Speaker Change: We started with that discipline, we then start adding the magic and happy if you remember I said to you in FY 'twenty tabulate starting to slowdown we invigorated the family first with pillow tabby that reinforced it so.
Speaker Change: We're very very focused on keeping these large families.
Speaker Change: For a quarter or not for a monthly drops for three years, we have to balance both the core because there's still millions of customers who have not yet benefited by owning a core tabby, which I am keen on selling them.
Speaker Change: And our marketing people will continue to focus that in our global marketing campaign and then we have our creative teams led by Steward fevers, who really keeps very top center fashion trends and you can see that evident in the <unk>.
Speaker Change: New York collection, which is a completely different aesthetic than happy.
Speaker Change: We joked initially the New York back, particularly the Brooklyn back didn't have the natural attributes of a great coach back it's not adjustable functioning as not as robust as we often think of coach back it's not structure. The branding is low key yeah. It was exactly that.
Speaker Change: <unk> family for the time and our marketing campaign.
Speaker Change: And just to pick up.
Speaker Change: So now instead of just having tabby platform our signature platform. We have this entire New York collection platform that I again will bite and allow more people at compelling prices to come into the coach family.
Speaker Change: And we'll move next to Alicia Sherman of Bernstein.
Alicia Sherman: Thank you so I'm I'm hearing a lot of optimism on organic growth, especially on the coach brand and going back to your Investor day in 2022.
Speaker Change: Your guidance at the time was assuming and growth in line with the market, which at the time was mid single digits. Given your increased optimism on customer acquisition and new growth are you now expecting to grow top line above the market.
Speaker Change: And then I also have a second question around margin impact of your category mix, especially on coach you talked about the innovation pipeline moving into ready to wear and footwear with the sneaker, etc. How do you think that's going to impact gross margins going forward and is there an offset strategy for that thank you.
Christina Colone: Yeah.
Speaker Change: I'll start and then maybe toss it to Scott on some of your questions on category.
Scott Roe: But in terms of in terms of overall growth in growth versus the category I think the reality is we are growing faster than the category right now so.
Scott Roe: We see an opportunity for us to grow this is a tremendous category that consumers have an emotional connection to.
Scott Roe: It has proven to be resilient and durable overtime, we love the category, we're in and we've sharpened our execution within our category and you see that with coach we have a tremendous amount of runway in the category to continue to grow coach I just talked about the opportunities. He's excited about so we've got a lot of runway at coach in.