Q2 2025 Tapestry Inc Earnings Call
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Good day and welcome to this tapestry conference call today's call is being recorded at this time for opening remarks and introductions I would now.
Speaker Change: Like to turn the call over to the global head of Investor Relations Christina collateral.
Joanne: Good morning, Thank you for joining us with me today to discuss our second quarter results as well as our strategies and outlook, our Joanne from voice right tapestries, Chief Executive Officer, and Scott Rowe Tapestry, Chief Financial Officer, and Chief operating Officer.
Joanne: Before we begin we must point out that this conference call will involve certain forward looking statements within the meaning of the private Securities Litigation Reform Act. This includes projections for our business in the current or future quarters or fiscal years forward looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward looking.
Joanne: 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.
Joanne: non-GAAP financial measures are included in our comments today and in our presentation slides for a full reconciliation to corresponding GAAP financial information. Please visit our website www dot tapestry dotcom forward Slash investors and then view the earnings release and the presentation posted today.
Speaker Change: Now, let me outline the speakers and topics for this conference call Joanne will begin with highlights for tapestry and our France, 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.
Speaker Change: After Q&A Joanne will conclude with brief closing remarks, I'd now like to turn it over to Joanne for voice right tapestry CEO.
Joanne: Good morning, Thank you Christina and welcome everyone.
Joanne: As noted in our press release, our strong second quarter results outperformed expectations showcasing our commitment to disciplined brand building.
Joanne: Our exceptional teams brought innovation and craftsmanship to consumers around the world. This holiday season, driving accelerated top and bottom line growth to achieve record quarterly revenue and earnings per share.
Joanne: From this position of strength, we increased our outlook for fiscal year, 'twenty, five while making strategic investments to extend our competitive advantages and fueled strong durable growth and value creation into the future.
Joanne: Touching on the highlights of the quarter.
Joanne: First we powered global growth with total revenue gains of 5% outpacing guidance fueled by 10% growth at coach.
Joanne: By geography, all regions exceeded expectations.
Joanne: International revenue rose, 7% at constant currency led by an increase of 42% in Europe, where our business is strong and our runway for growth is significant.
Joanne: In addition, we delivered a sales increase of 1% and the total APAC region.
Joanne: In greater China, specifically, we returned to growth with revenue rising 2% importantly.
Joanne: Importantly, we continue to bring compelling innovation relevance and value to consumers with a sharp focus on driving long term growth in the region and with this important consumer cohort.
Joanne: And in North America revenue increased 4% compared to last year, while gross and operating margin expanded as we continue to drive a healthy business.
Joanne: Second we remain focused on building, new and lasting relationships with consumers.
Joanne: During the quarter, we drove new customer acquisition growth welcoming approximately 2.7 million new customers in North America alone.
Joanne: Over half of these customers were Gen Z and millennials and they continue to transact at higher AUR than the balance of our customer base.
Joanne: Importantly, Gen Z consumers that coach has the highest retention rate of all cohorts reinforcing the opportunity to build lifetime value with our target consumer base.
Joanne: At the same time, we improved lapsed customer reactivation in North America, highlighting our ability to successfully engage our existing customer base as we recruit new consumers to our brands.
Joanne: Third we delivered compelling omnichannel experiences underpinned by tapestries, leading capabilities, which enable us to enhance the customer experience across all touch points with our brands.
Joanne: To this end, we maintained strength in digital which grew high single digits versus prior year and represented approximately one third of revenue at accretive margins.
Joanne: Our global brick and mortar sales rose at a low single digit rate in the quarter at strong and increasing profitability.
Joanne: Fourth we fueled fashion innovation and product excellence as we remain focused on bringing creativity quality and compelling value to consumers around the world.
Joanne: This is clearly on display at coach where we delivered strong and broad based growth in handbags with AUR gains underscoring the vibrancy of the brand and product offering.
Joanne: Our success is also reflected in our strong gross margin as we achieved a record second quarter gross margin with further opportunity for expansion long term.
Joanne: Importantly, underpinning our innovation pipeline and margin gains is our agile supply chain, a key competitive advantage, which enables us to deliver craftsmanship globally and powers our growth.
Joanne: Overall, we generated record earnings per share, which exceeded our expectations and increased over 20% compared to the prior year.
Joanne: Importantly, our business is strong today and well positioned for the future as we remain committed to delivering consistent long term growth and shareholder value.
Joanne: Okay.
Joanne: Now moving to our results and strategies by brand.
Joanne: Coach had a breakout quarter as we continue to drive brand heat and bring this storied brand to a new generation of consumers.
Joanne: Coaches successes compounding and it demonstrates the enduring power of its expressive luxury positioning.
Joanne: Our growth is credit to our talented global teams, who are operating with excellence and intention to deliver innovation across product marketing and experiences to cultivate emotional and lasting connections with consumers.
Joanne: To this end during the quarter, we achieved 10% constant currency revenue gains at exceptional margins highlighted by 270 basis points of gross margin expansion and a 210 basis point lift in operating margin.
Joanne: Importantly, our strategies are working with three key areas underpinning our accelerated growth.
Joanne: First new Gen Z customer acquisition, resulting from our systematic understanding and engagement with our target consumer.
Joanne: Second strengthen our core leather goods category, where we have authenticity and scale and our innovation is winning.
Joanne: Third global outperformance led by North America, and Europe, and a return to growth in greater China.
Joanne: These growth pillars will continue to drive our success in the future.
Joanne: Now touching on the strategic highlights of the second quarter in more detail.
Joanne: First our results were driven by strong gains in leather goods, where we have multiple platforms for growth given the power of our iconic handbag families and the success of new product introductions.
Joanne: The tabby family once again outperformed over indexing with new and younger consumers and doubling versus last year building strength on strength. The tabby shoulder bag twenty-six continue to anchor the offering with momentum in core tabby as well as new introductions, including the times square and quilted tabby.
Joanne: In addition, the recently launched New York family significantly outpaced expectations, featuring the Brooklyn and Empire bags.
Joanne: During the quarter, the Brooklyn shoulder bag 28 at $295 was a top recruitment driver while the soft Empire Carryall 40 at $695 outperformed.
Joanne: The New York family, a new foundation for the brand continued to prove incremental and compelling providing innovation thats clearly resonating with consumers globally.
Joanne: Okay.
Joanne: Further our coach original collection, featuring archival bags that celebrate the brands legacy with a modern sensibility drove growth, notably with Gen Z consumers.
Joanne: And finally bag charms and straps amplified our offerings, particularly the viral cherry charm cutting through for being emotional highly giftable and trend right.
Joanne: Importantly, our strategies are driving strong brand heat and desire among gen Z consumers and.
Joanne: In fact coach was again recognized by the list climbing 10 places to become the world's fifth hottest brand with the Brooklyn bag, leading as this quarter's hottest product.
Joanne: Additionally, the coach Cherry bag charm entered the list as the number four hottest product.
Joanne: Overall coach's growth in handbags, and accessories continued to outpace the industry, which included mid teens AUR gains globally led by North America.
Joanne: And looking forward, we remain confident in the opportunity for further sustainable growth, given our brand strength and innovation pipeline as well as the compelling value and craftsmanship, we offer in the luxury market.
Joanne: Next we remain focused on fueling lifestyle with an emphasis on footwear, where we are underpenetrated and have a right to win by leveraging our brand strength to drive customer recruitment frequency and lifetime value with our target timeless Gen Z consumer.
Joanne: During the quarter, we successfully launched the new Highline, sneaker, which sold at $125 in both retail and outlet and attracted new customers to the brand.
Joanne: This introduction in both retail and outlet channels builds on our one coach learning agenda, which we successfully piloted with tabby.
Joanne: Turning to marketing, we continue to drive cultural relevance through emotional storytelling that amplifies our brand and product offering this.
Joanne: This holiday we rolled out the next chapter of our unlock your courage campaign.
Joanne: And with each campaign, we're learning gaining deeper consumer insights that enhance our storytelling and media execution.
Joanne: This capability enables us to deliver the right content at the right time on the right platform, ensuring that our messages are cutting through.
Joanne: This is key to driving sustainable customer acquisition, and it's working globally at scale.
Joanne: To this end during the quarter, we continued to increase our top of funnel marketing investments demonstrating the confidence we have in our brand and product offering as a result, this helped drive greater consumer engagement and outperformance versus the industry, particularly in our key markets of North America and China.
Joanne: In addition, we also cultivated enthusiasm for the brand through unique and immersive retail experiences.
Joanne: Our coach play concept stores, which engage consumers across their five senses continue to outperform with higher Gen Z traffic longer dwell times and higher return frequency.
Joanne: We are taking these learnings and evaluating opportunities to bring the highest impact elements of these locations to our store fleet more broadly.
Joanne: Overall, our holistic brand building activities helped to drive increases in new customer acquisition as we welcomed over one 7 million new customers to coach in North America, a strong increase versus prior year and a significant acceleration in trend.
Joanne: Of these new customers nearly 60% were gen Z and millennials consistent with our strategy to recruit younger customers.
Joanne: At the same time, our retention rate with the Gen. Z cohort also increased reinforcing that we're building lasting relationships with our consumers and support of durable growth.
Joanne: In closing coach our largest brand is strong and differentiated and it continues to deliver outstanding results highlighting the capabilities of tapestries growth engine.
Joanne: With consumer understanding at the center of all we do our talented teams are delivering the blend of magic and logic that is the hallmark of the brand and the foundation of our future from this position of strength I am confident our best days are still to come with significant opportunity to drive continued consistent long term growth.
Joanne: <unk>.
Joanne: Now moving to Kate Spade.
While profit results met our expectations for the quarter driven by gross margin expansion revenue trends declined 10%.
Speaker Change: Most importantly, together with Eva Erdman, Kate Spade, New CEO, we are moving quickly and decisively addressing what we know is not working and laying the groundwork for a return to sustainable profitable growth.
Speaker Change: Since Avis arrival in October we've assessed the current state of the business and made progress in building our roadmap for the future informed by deeper consumer insights.
Speaker Change: The takeaway of this work is clear.
We need to rebuild the brand with consumers to reignite growth to do this we must focus our execution and accelerate our investments with clear priorities distorted to our largest opportunities developing emotional storytelling to fuel customer acquisition building handbag icons and driving growth in north.
Speaker Change: <unk> our home market.
Speaker Change: And we see the path forward as having two important stages.
Speaker Change: First we will streamline and solidify our foundation by editing for focus and investing to build brand heat.
Speaker Change: This will ultimately drive customer acquisition, which will allow us to scale from a healthy foundation, which is the prerequisite for sustainable topline growth.
Speaker Change: While we are acting with urgency we acknowledged the work to reset the brand is a multi quarter journey.
Having said that we know the path to growth is within our control and I'm confident in the plan, we have developed and the significant opportunity ahead for the brand.
Speaker Change: Now, let me take you through our growth strategies and learnings in more detail, which includes results from the quarter.
Speaker Change: First we're committed to fueling brand heat through relevant marketing to drive consideration and accelerate customer acquisition.
Speaker Change: During the quarter, we took a step forward in our brand building efforts and this began with streamlining.
Speaker Change: In the fall we made the decision to reduce spending on our fall campaign based on consumer feedback during testing.
Speaker Change: Instead, we pivoted working with speed and agility to create new more compelling content and in December we launched our holiday campaign.
Speaker Change: This was a social first campaign featuring Grammy nominated singer songwriter Madison beer, consistent with our strategy to distort our marketing investment into upper funnel campaigns with more relevant messages for our target consumer.
Speaker Change: Importantly, the tagline to the one who was pulled through creative Activations on social media and in our stores.
Speaker Change: Following the campaign, we saw a significant increase in purchase intent among gen Z consumers, who engaged with the content reinforcing the opportunity to make incremental marketing investments to drive consideration and ultimately new customer acquisition.
Speaker Change: As a result, we are extending our brand campaign in the third quarter to sustain and amplify engagement with consumers.
Speaker Change: Importantly, our learnings will be used to inform our bigger picture efforts as we build towards a larger purpose driven 360 degree campaign launch in the fall of 2025.
Speaker Change: Next we are focused on sharpening and elevating our handbag offering improving our execution to drive more relevancy in our assortment.
Speaker Change: In support of this ambition, we leveraged our consumer survey work, which illuminated the need to streamline our offering clearing deselection barriers through a tighter assortment and improved styling.
Speaker Change: By simplifying our product stories and focusing our merchandising efforts, we will ensure that the big ideas in leather goods cut through with more cohesion and relevancy with this effort, we expect to reduce the number of handbag styles by over 15% by fall.
Speaker Change: At the same time, we will work to build blockbuster handbag families informed by consumer understanding.
Speaker Change: And we have learnings from holiday, we stood firmly behind the recently launched Deco collection in our stores and in our marketing. The Deco collection continues to over index with new younger consumers at strong AUR and margins and we see further opportunity for this family going forward.
Speaker Change: Importantly, we know and its rise 30 years ago, Kate Spade offered a pioneering proposition in the market along with distinctive iconic product and this is our aim today to build on what made us unique and successful historically in a way that is modern and relevant to our consumers today.
Speaker Change: Next we are focused on maximizing omnichannel cohesiveness with one brand message across all consumer touch points.
Speaker Change: Importantly, we are taking steps to reduce our promotional messaging across channels.
Speaker Change: The results of the last quarter reinforced that emotion of newness or what's winning with consumers while promotional activity is not.
Speaker Change: Therefore, decreasing our level of promotional activity will be a key building block of solidifying our brand and positioning it to scale in a healthy way globally over the long term.
Speaker Change: To this end, we expect our gross margin to continue to expand moving forward as we build for the future and connect with consumers on our brand values beyond simply price.
Speaker Change: In closing we are focused on executing our strategic roadmap for durable growth and we are accelerating our investments to do this we acknowledge that our strategic actions will pressure the brand's near term financial results. However, the strength of our portfolio allows us to do this while delivering enhanced growth overall.
Speaker Change: Importantly, we have conviction that we are taking the right steps to reset the brand and unlock its full potential Kate spade is a beloved unique and purpose driven brand and though there is significant work to do to enhance its relevancy and reconnect with consumers the strategy to deliver this outcome is well understood and in our control.
Speaker Change: We are confident in the meaningful long term run rate for the brand and the value creation opportunity it represents for tapestry.
Speaker Change: Now turning to Stuart Weitzman.
Speaker Change: Financial results remained challenged in the quarter with net sales decreasing 16% versus prior year at constant currency, primarily reflecting softness in greater China and in North America direct channels in.
Speaker Change: In addition, global wholesale net sales declined impacted by shipment timing while trends at Pos remains strong growing at over 20% a key indicator of strategic progress.
Speaker Change: Overall, the Stuart Weitzman team remains focused on fueling brand relevancy driving customer engagement and delivering improved financial results long term.
Speaker Change: In closing tapestry delivered a standout holiday quarter I want to thank our teams once again for their passion creativity and commitment to brand building and for driving our strong results.
Speaker Change: From this position of strength, we raised our outlook for the year with a sharp focus on the path forward, we will continue to fuel momentum at coach while taking action to reset the Kate Spade brand for long term growth. We are confident that our bold growth agenda will support meaningful value creation, and we look forward to sharing the details of our long term.
Our roadmap in an Investor day this fall.
Speaker Change: Our future is bright and we have the ambition discipline and strategies to generate strong and durable growth and shareholder returns for years to come.
Scott: I'll now turn it over to Scott.
Scott: Thanks, Joanne and good morning, everyone. Our second quarter results exceeded expectations building on our track record of consistent execution as we unlocked accelerated growth in the quarter, we delivered record quarterly revenue gross margin and earnings per share, while generating significant free cash flow.
Scott: Now moving to the details of the quarter, beginning with revenue trends on a constant currency basis sale.
Scott: Sales increased 5% compared to the prior year and outperformed our guidance across all regions.
Scott: These results reflect gains in Europe, North America, and total APAC with international revenue growing 7%.
By region Europe revenue grew 42% above last year with growth across all brands and channels driven by increased local consumer spend and strong new customer acquisition, notably with Gen Z and.
Scott: In greater China revenue inflected to growth of 2%.
Scott: Our sequential acceleration was driven by a return to growth in our brick and mortar channel led by an improvement in traffic while trends in digital remained positive.
Scott: Our differentiated results in China, clearly demonstrate that our strategic initiatives and investments in the region are yielding returns positioning our brands and business for long term sustainable growth.
Scott: And in other Asia revenue Rose, 11% led by growth in Australia, New Zealand, South Korea, and Malaysia, while Japan sales declined 5%.
Scott: In North America sales increased 4% compared to the prior year led by double digit growth at coach.
Scott: Shortly total gross and operating margin rose versus last year as we supported long term brand health.
Scott: Now touching on revenue by channel for the quarter, our direct to consumer business grew 4% compared to the prior year, which included a high single digit increase in digital revenue at a low single digit increase in global brick and mortar sales.
Scott: And wholesale revenue grew in the quarter in keeping with our expectations and strategy defined targeted opportunities to expand our brands reach with consumers.
Scott: Moving down the P&L, we delivered a record second quarter gross margin, which was well ahead of plan and 280 basis points above prior year. This year over year expansion was driven by 260 basis points of operational outperformance as well as a benefit of approximately 20 basis points from lower freight expense.
Scott: Our strong gross margin performance remains a core element of our value creation model, providing us with flexibility and fuel to accelerate investments and drive long term growth.
Scott: Turning to SG&A, which rose, 7% led by higher marketing spend versus prior year and forecast as we reinvested a portion of our profit outperformance into incremental brand building activities to be a top of funnel activations.
Scott: Taken together operating margin increased approximately 210 basis points in the quarter driving profit growth ahead of expectations and 15% over the prior year.
Scott: At a record second quarter EPS of $2 grew 23% over prior year and exceeded our guidance by more than 30.
Scott: To provide context on this be approximately 17 cents of the upside was due to operational outperformance.
Scott: <unk> was due to the net benefit of share repurchase activity and eight cents was related to a favorable tax rate versus plan.
Now turning to our shareholder returns programs.
Scott: As previously announced following the termination of the merger agreement with Capri in November we took swift action to utilize our significant cash flow to execute a $2 billion accelerated share repurchase program underscoring our outlook for growth and unwavering commitment to deliver shareholder value.
Scott: Together with our dividend, which is expected at $1 40 per share for the year, we are positioned to return over $2 billion or more than 100% of free cash flow to shareholders in fiscal 'twenty five a testament to our strong organic business and robust cash flow generation.
Scott: And now before turning to the details of our balance sheet and cash flows I'd like to reiterate our capital allocation priorities, which are unchanged. We have two foundational commitments first to continue to invest in our brands and business to support long term sustainable growth second to continue to return capital.
Scott: To shareholders via our dividend as we've shared we have a goal over time to increase the dividend at least in line with earnings to achieve our stated targeted payout ratio of 35% to 40%.
Scott: Beyond these foundational commitments, our robust cash flow generation provides us with balance sheet flexibility for value creation. This includes the opportunity for share repurchase activity, which is on display. This year. In addition, we have $800 million remaining on our previous share repurchase authorization for future buyback activity.
Finally, utilizing our rigorous four lands framework, we consistently evaluate opportunities for strategic portfolio management importantly, and as previously communicated before moving forward with any acquisitions, we will ensure coach remains strong at Kate Spade as return to sustainable top line growth.
Scott: These clear capital allocation priorities are underpinned by our firm commitment to a solid investment grade rating and maintaining our long term gross leverage target of below two five times.
Scott: Now turning to the details of our balance sheet and cash flows we ended the quarter with $1 billion in cash and investments and total borrowings of $2 $7 billion, representing net debt of $1.7 billion. This includes one $5 billion of senior notes raised during the quarter at a blended interest rate.
Scott: A five 3% to help fund our ASR at quarter end, our gross debt to adjusted EBITDA was 1.6 times.
Scott: Adjusted free cash flow for the second quarter was an inflow of approximately $890 million and capex and implementation costs related to cloud computing were $39 million.
Scott: Inventory levels at quarter end were 14% above prior year as planned as we move into the back half of our fiscal year, our inventory is current and well positioned globally and by brand in support of our growth ambition.
Scott: This and we continue to expect to end Q3, and the full year with inventory above prior year.
Scott: Now moving to our guidance for fiscal 'twenty, five which is provided on a non-GAAP basis, we are raising our fiscal year 2025 revenue operating margin EPS and cash flow outlook.
Scott: Poorly we continue to view our outlook is prudent and achievable as we remain clear eyed about the realities of the external environment balanced with the opportunities we see for our business.
Scott: For the fiscal year, we now expect revenue of over $6.85 billion, representing growth of approximately 3% versus prior year on a reported basis, including an expected currency headwind of over 50 basis points touching.
Scott: Touching on sales by region at constant currency, we expect growth in Europe in the area of 30%, where we are underpenetrated and have strong traction in other Asia, we anticipate high single digit gains while in Japan, we're forecasting a low single digit decline.
Scott: In North America, we expect revenue to be up slightly as we continue to support a healthy business and a greater China, we expect low single digit growth over the prior year.
Scott: In addition, our outlook now assumes operating margin expansion of approximately 100 basis points versus prior year, we anticipate gross margin expansion to drive this increase due to improvements in both AUR and AUC, both freight and FX are still expected to have a negligible impact on gross margin changes.
Scott: For the full year.
Scott: On SG&A, we expect expenses to increase above the pace of revenue growth driven primarily from increased marketing expense, including accelerated investments at Kate Spade.
Scott: While we remain diligent with respect to overall expense control, we're making deliberate gross focused investments in our strategic priorities.
Scott: Moving to below the line expectations for the year net interest expense is expected to be approximately $35 million as compared to prior guidance of $20 million of net interest income. This change reflects the interest on our new bond issuance as well as a lower cash balance due to the execution of the ASR program.
Scott: This outlook also incorporates the expectation to repay our April 2025 bonds totaling $303 million at maturity.
Scott: The tax rate is expected to be approximately 17% to 18% and our weighted average diluted share count for the year is forecasted to be approximately 223 million shares as compared to our prior guidance of approximately 238 million shares reflecting the partial year net benefit of share repurchase activity, which.
Scott: Includes the initial delivery of approximately 28 million shares received in November.
Scott: Taken together, we're raising our EPS guidance to $4 85 to $4.90.
Scott: Representing 13% to 14% growth compared to last year and ahead of our prior guidance of $4 50.
Scott: To $4.55. This increase incorporates our Q2 operational outperformance of 17 cents a full year net benefit from share repurchase activities of a dime and a net tailwind of eight cents from favorable tax rate, partially offset by a planned second half currency headwind.
Scott: To briefly touch on the topic of tariffs this guidance embeds the expectation for an additional 10% tariffs on goods imported from China into the U S. Beginning February 4th.
Scott: Which is expected to have an immaterial impact on fiscal 2025 results given our limited manufacturing exposure to China. We continue to monitor the external landscape closely and are developing potential mitigating actions as needed to note. We do not have production in Canada or Mexico.
Scott: Moving on we now anticipate adjusted free cash flow of approximately $1.2 billion. Finally, we expect capex and cloud computing costs to be in the area of $170 million. We anticipate two thirds of the spend to be related to store openings renovations and relocations with the balance primarily related.
Scott: Two our ongoing digital and it investments.
Scott: Touching on the shaping of the year, we expect revenue to increase in the area of 4% in the back half of the year on a constant currency basis, including an expected FX headwind, we anticipate revenue growth in the area of 3% for the second half with fairly balanced top line growth between quarters.
Scott: Turning to operating margin, we expect expansion versus prior year in the second half driven by gross margin improvement, while SG&A is expected to grow modestly above the pace of reported sales gains with a higher level of growth planned in Q3 relative to Q4 and this is based on the phasing of investments.
Scott: And we expect our tax rate in Q3 to be below the full year average taken.
Scott: Taken together, we expect second half EPS growth with Q3, EPS forecasted to approach 85 cents.
Scott: In closing, we delivered a record breaking quarter highlighted by accelerated top and bottom line growth led by coach our largest brand and from this position of strength, we raised our outlook for the year importantly, our commitment to disciplined brand building and our intense focus on fundamentals allows us to invest in our future growth drivers.
Scott: Leaning into the biggest opportunities, where we will build strong gains and extend our competitive advantages while returning over $2 billion in capital to shareholders. In this fiscal year alone. We are confident that our brands our people our strategy and our outlook with steadfast focus on delivering accelerated growth and enhance.
Scott: Shareholder value in fiscal 'twenty, five and for years to come.
Scott: I'd now like to open it up and take your questions.
Scott: At this time, if you would like to ask a question. Please press star one on your telephone keypad to withdraw yourself from the queue you May press star two.
Bob Durable: Our first question is from Bob durable of Guggenheim.
Bob Durable: Hi, good morning.
Bob Durable: Just had two questions really the first one just on coach.
Bob Durable: It really drove the success this quarter do you think that it is sustainable in the second one is just can you expand a bit more just how youre thinking about Kate spade going forward. Thanks.
Bob Durable: Thanks, Hey, good morning, Bob.
Bob Durable: The record breaking quarter, we delivered shows the power of our organic growth opportunities and our brand building strategies. As you can see our teams are confident and focused our strategies are working and they are compounding and there is more growth ahead, I will say tapestry is committed to continuing to.
Bob Durable: Fuel that sustainable growth at coach and I'll turn it to Todd to discuss coach in more detail and then I'll jump back into address your question on Cape Cod.
Todd Kahn: Thanks, Joanne and thank you Bob for the support I can say with real without any reservation that strong growth in revenue and profitability at coach is sustainable.
Todd Kahn: And my confidence is based on four key pillars from our brand building playbook that we've honed over the last few years. So let me run you through them first culture.
Todd Kahn: I cannot overemphasize we.
Todd Kahn: We've materially changed our culture at Cogent tapestry, which is truly foundational to our success. We have developed an environment, where creativity innovation informed risk taking with the true test and learn agenda leads and not just the opinion of the most senior person in the room.
Todd Kahn: Even if that can be sometimes.
Todd Kahn: Second our deep consumer insights that inform our business strategies products and marketing spend and is scalable in markets across the brand and tapestry. When you think about it you see this in play.
Todd Kahn: In North America, and China and Europe.
Todd Kahn: Third our focus on customer acquisition with our targeted Gen Z cohort. These clients are discovering the brand in record numbers Theyre transacting as higher aur's and with greater frequency.
Fourth our key focus on handbags, and leather goods, providing incredible value authenticity and craftsmanship at scale demonstrated by the success of our icons such as Kabi, Brooklyn and Terry.
Todd Kahn: So if I had to summarize something we talk about a lot here coaches a storied brand with over 80 years of history, winning today, we are winning with a modern client we're doing this because we our understanding of the consumer we're nurturing creativity, we're operating as a high performing team.
Todd Kahn: <unk>.
And we're managing with financial rigor.
Todd Kahn: Thanks Todd.
Todd Kahn: Really displaying disciplined brand building and I appreciate it on Kate Spade, we are taking action and we're bringing focus to our execution and we're accelerating our investments to drive that long term growth we have made changes.
Speaker Change: We have a new CEO and Eva Erdman is partnering with Sandeep, our chief growth officer, and we're leveraging deeper consumer insights and we're building on the learnings from coach you just heard Tom talk about the successes we've built at coach.
Speaker Change: We're starting at Kate with focus and streamlining what we've heard from our customers is the need to remove deselection barriers, we're reducing our style counts and we're reducing promotional activity at the same time, we're leaning into marketing investments to fuel brand interest and ultimately drive new customer acquisition that we.
Speaker Change: No will power our growth in the future. We have work to do this is a multi quarter journey, but our strategies are clear and the path to long term growth is in our control.
Speaker Change: At tapestry, we're being disciplined about how we allocate resources and capital to come back to where we started where both fueling coach and investing across our portfolio for the future. We delivered a strong quarter and raised our outlook and we're doing that while accelerating investments to reset Kate spade.
Speaker Change: Thank you very much.
Speaker Change: Yes.
Speaker Change: Our next question is from Ike <unk> of Wells Fargo.
Speaker Change: Hey.
Speaker Change: Congrats great great results, good glad to see it.
Speaker Change: Two for me, maybe first for Joanne maybe secondly, Scott just kind of dig in a little bit more into coach specifically in terms of the robust numbers you guys are putting up maybe.
Speaker Change: You talk about Joanne maybe how much did the new York's family and tabby continue contribute to coaches grows what percent of sales of these two families represent any more detail there might be helpful. And then follow up for Scott just core drivers of potential margin expansion ahead. How are you thinking about the pace of future gross margin expansion of coach.
Speaker Change: Just following all the recent strength would be helpful.
Speaker Change: Sure I can pick it up.
Speaker Change: And just let you know that our coaches businesses.
Speaker Change: Just on really strong foundational principles and it is the growth is broad based and I think I'll pass it to Todd.
Todd Kahn: To cover the details on the business at coach.
Todd Kahn: Thanks, I appreciate that.
Todd Kahn: We are so pleased with our platforms and we have whats.
Todd Kahn: Different about coach today is we don't have a single platform, we have multiple client firms, but they are still very focused so.
Todd Kahn: First no single platform accounts for more than 10% of our sales whether thats. The cabbie family, whether that's the New York family. So I see a lot of runway with those families as well as Terry.
Todd Kahn: Outlets. So we have foundational families that we can drive real business week, what's amazing is all of that Terry.
Todd Kahn: Brook.
Todd Kahn: Brooklyn are attracting this younger consumer and so we are attracting that younger consumer Ross the price.
Todd Kahn: Spectrum, which is phenomenal for us.
Scott: Scott is going to talk about gross margin.
Scott: We'll give a plug if you think about gross margin the way we're thinking about it. We just came off of what typically is the highest promotional quarter.
Scott: In our industry, we delivered over 77 gross margin.
Scott: And again that was the highest gross margin in the second quarter in coaches history.
Scott: See.
Scott: Incredible sustainable growth in gross margin over the long term.
Scott: And as we continue to create desire based product.
Scott: These price points with the scale and the.
Scott: Opportunities that the tapestry supply chain provides so both on raising price and reducing our cost we have a lot of runway left Scott hopefully I left you something.
Scott: Yeah.
Scott: Here's the great news Todd as were in full alignment right. This management team prioritizes, both gross margin and operating margin in <unk>.
Scott: Our gross AUC, which I always say is the most underappreciated part of the story.
Speaker Change: Teams look at what consumers really value.
Speaker Change: We've got using AI for price elasticity I mean, we're getting a lot more sophisticated as we look at these these tradeoffs and decisions and.
Speaker Change: That plus the investment in brands.
Speaker Change: Brand laws.
Speaker Change: Todd how he says emotion trumps price and you see that on display right with the strong operational beat.
Speaker Change: Beat that we had in gross margin and how that's consolidating into near mirror market, leading operating margins encourage more than 33% so what.
Speaker Change: What's ahead, you can expect that same basic flywheel, we're going to grow our gross margins, we're going to continue to invest in.
Speaker Change: And engagement with consumers, which is through <unk>.
Speaker Change: Increasing marketing and more importantly, more effective marketing and storytelling and we're balancing the long term investments with short term commitments too.
Speaker Change: To our shareholders and I hope you see that's on display with record earnings in the second quarter in a strong beat and raise for the full year. What that means is 200 basis points of gross margin expansion and about 100 basis points in terms of op margin expansion as we de lever for the short term, but also invest for the long term.
Speaker Change: Congrats guys.
Speaker Change: Thanks, Mike.
Speaker Change: Our next question is from Adrian <unk> of Barclays.
Adrian: Good morning, and let me add my congratulations really well done.
Speaker Change: Joanne I'm going to go back to Kate Spade, you know often when we kind of change the strategy just wondering who do you envision an Eva envision today is the target market the target consumer kind of how you define her specifically and then Scott or Todd This is kind of a boat.
Speaker Change: Of your question so within coach Scott can you give us can you talk about the AUR lift like how much higher on a five year basis is AUR, but more specifically how much of that is actually from lower markdowns and how much of your initial retail prices higher versus five years ago, which then segue to Todd.
Speaker Change: That's the largest spread to pinnacle luxury I mean than we've seen ever covering the space.
Speaker Change: It just seems like that Europe is testament to the fact that you have a whole new market, that's sort of been advocated by political luxury if he can speak to that that'd be great. Thanks.
Speaker Change: Yeah, Thanks, Adrian and I will jump in on Kate Spade, and and I would say that it's not so much of a strategy change the principles of brand building at tapestry across our portfolio remain intact and our focus is on sharpening our execution.
Speaker Change: And as we as we think about improving that execution. It is and through building a more relevancy for our target younger consumer one of the learnings that we've had and our approach is to make sure that we're attracting new customers to the brand, but also new and younger consumers.
Speaker Change: To our brands because we know that by 2030, 70% of the consumption in our category will be with new and younger consumers. So we see that as the lifeblood and as we do deeper consumer research, we're listening and responding and improving our execution behind what.
Speaker Change: What we here to bring more relevance to the brand both in product and in the experiences and storytelling that we develop.
Speaker Change: And some of the actions we've taken already are showing some traction we know we need to streamline and focus what we're hearing from the customers removing those deselection barriers, reducing the style counts that allows us to take big ideas and have them cut through for the consumer and also reducing promotional activity.
Speaker Change: <unk> as we mentioned and as you know and what we see in the market innovation is winning with the consumer continuously hitting the consumer over the head with price is not winning.
Speaker Change: And so we will sharpen our execution around that as we build the brand and reset the brand.
Speaker Change: We're also making investments where we're going to reach our target consumer on the right platforms with relevant messaging.
Speaker Change: And we're leaning into investments there we have we see how effective that has been in building brand heat and desire and we're beginning that and we know that's not an overnight change, but we are beginning those investments and the beauty of it is that we have a strong portfolio. We are beating our estimates, we're raising our outlook and where.
Making these changes and investments in and I will end by saying that I'm really excited to partner with Eva we brought in a really strong brand builder.
Speaker Change: And the team is very focused on moving quickly behind these these actions.
Speaker Change: Yeah, Let me any bill yeah, I'll build on that real quick just put some numbers Adrian on the guide so in the quarter were down about 10%, we expect the topline trend to be more or less the same through the second half of this year with gross margins continuing to.
Bill moderated a little bit from what we saw in the first half we lap some of the cost initiatives from a year ago, but still positive on gross margin and as Joanne just said and we indicated in our prepared remarks significant investment in brand building and it will be the highest percentage brand building.
Speaker Change: As a percentage obviously coach it absolutely turn is much larger.
Speaker Change: The largest percentage increase and what gives us conviction around making that it's what we've seen on display and coach and remember the phases. It elsewhere.
Speaker Change: We're focusing on brand awareness then we're gonna go followed by customer acquisition, and finally, Greg, but even more importantly don't lose the threat because we had a beat and raise for the full year and we're able to not only make these investments in Kate spade for the long term to deliver in the short term to.
Speaker Change: To shareholders based on the results that you just printed I'll throw it to Todd on the AUR question I think better served by him.
Todd Kahn: Thanks Scott.
Todd Kahn: I chuckle, a little bit because in the FY 19 in about the 20 quarters. We've been doing this together I think 19 of them. We've had an AUR question I think 19.
Todd Kahn: You are.
Todd Kahn: Indeed, what's exciting is.
Todd Kahn: And every quarter.
Todd Kahn: Is this is this it and we keep hopefully surprising you on the upside so first on AUR. This last quarter, we did deliver double digit handbag growth on AUR and even in North America. So your question is insightful.
Todd Kahn: There's a couple of things at play here obviously.
Todd Kahn: Value matters.
Todd Kahn: And we offer incredible value against maybe traditional European luxury.
Todd Kahn: And people are seeing that and youre seeing it in markets like Europe, where we're seeing.
Todd Kahn: Double digit growth because there's value, but I will also say the value equation is only part of it you have to have compelling product you have to say your product has to stand for something so I talk a lot about value and values.
Todd Kahn: Our focus on this timeless Gen Z customer.
Todd Kahn: Our insight that we keep developing and how we continue to build on that insight is the cornerstone for ever.
Todd Kahn: Everything we do.
Todd Kahn: Understood and stone that informs Stuart and our design team.
Todd Kahn: Stone of our operations as the cornerstone of our storytelling so.
Todd Kahn: Excuse me.
The value and values is clear.
Todd Kahn: Lot of AUR growth, we obviously don't have to discount product, but also our what we've done over these last couple of years.
Todd Kahn: We focused on fewer story deeper icon, we don't have to we don't have that vicious cycle of markdowns that historically you have in our space because.
Todd Kahn: We are reinforcing fewer deeper ideas.
Todd Kahn: Fantastic well done.
Todd Kahn: Thank you.
Todd Kahn: Yes.
Todd Kahn: Our next question is from Matthew boss of Jpmorgan.
Matthew Boss: Thanks, and congrats on a great quarter.
Speaker Change: Joanne with coach now at a position of strength as you cited could you speak to new customer acquisition trends in North America in greater China, and specifically elaborate on opportunities you see to further accelerate growth just given the momentum and clear move to offense and then Scott on the bottom line.
Speaker Change: Earnings this year raised to low to mid teens. That's your former growth algorithm is there any reason that this pace is not sustainable multiyear.
Speaker Change: Thanks, Matt.
Speaker Change: We are I think that second quarter demonstrates the power of our brand building capabilities.
Speaker Change: It is the disciplines that we have on display coaches, leading coaches taking share and it does start with really leaning in to the true essence of the brand understanding our target consumer and delivering relevant product emotional product experiences and storyteller.
Speaker Change: Going to deepen the engagement with the consumer and this is a journey that we've been on for years, and we continue to build and hone our capabilities here and we're driving success. It's not just a customer acquisition that we're after where after a customer acquisition with a younger consumer and then the coach case with young.
Speaker Change: The young timeless Gen Z consumer and that's where do you see as we get more focused on exactly who our target customer is and bring all of the capabilities of our company, including the incredible innovation and creativity that the teams are delivering with our commercial capabilities.
Speaker Change: The world that is cutting through.
Speaker Change: With our with our target consumer we're acquiring more consumers that accelerated in the quarter more than half 60% at coach for Gen Z and millennial consumers and what's interesting about customer acquisition. As you asked if these customers are coming into the brand in a healthy way there transact.
Speaker Change: At higher AUR than the average and they're now coming back with more frequency. So building that lifetime value that we that we value with the with the young consumer so that is the focus it's the focus of our brand building capabilities.
Speaker Change: And it really starts with having a systemic understanding of the consumer in a continuous learning agenda and I would say that the teams while while they have success. They continue to stay humble and curious and we see a second quarter demonstrates this will drive growth and we're just getting started we see.
Speaker Change: See more growth ahead, and a lot of opportunity across our portfolio and with coach.
Speaker Change: And I guess on the second part of the question Matt is it sustainable short answer yes.
Speaker Change: Kenyan.
Matthew Boss: And why do I have conviction around that well Todd gave a lot of it right, which is our continued strength in AUR or AUC initiatives or what are the what's the best supply chain in the business' gross margin growth will continue to invest but we also read and react I think this is an important part we don't just invest in <unk>.
Matthew Boss: We invest where we see those indications and that's in our control and we're balancing short term and long term as we think about those investments and then obviously our commitment is to continue to grow earnings and the other thing I'd point out is the strong cash flow yield. We just raised our free cash flow to $1 $2 billion, we've got a very.
Matthew Boss: <unk>.
Matthew Boss: Our strong balance sheet and a lot of Optionality as you think about delivering even more shareholder value in the future.
Matthew Boss: Whether it be through buybacks or other actions.
Matthew Boss: Congrats again.
Matthew Boss: Yeah. Thanks.
Matthew Boss: Our next question is from Lorraine Hutchinson of Bank of America.
Lorraine Hutchinson: Thank you good morning, I wanted to build on the discussion around these powerful new handbag franchises, how do you balance their near term success with also ensuring that the pipeline is full of new products to take over when those products past peak.
Matthew Boss: Oh.
Todd Kahn: Go ahead, Todd I'll, let you jump in.
Todd Kahn: Confidence in our innovation pipeline.
Todd Kahn: But Todd I'll, let you jump in yeah.
Todd Kahn: Yeah.
Todd Kahn: Yes.
Speaker Change: Interesting phenomenon, we recognize this with Kathy and I think I might have said this to you in prior investor calls, but.
Speaker Change: From 19, what we started to see kabi slowdown and typically what would have happened as we would have exited it would've gone into outlet we would have.
Speaker Change: Had some markdown liability a year later, we come out with a new bag called Gabby with the similar attributes and we start to cycle. All over again, we stopped that site. What we did is we took the platform and we integrated into the platform. It was in <unk> case, we launched Villa Kathy not only did it.
Speaker Change: Create an entire new opportunity.
Speaker Change: Enhance the original Kathy we keep doing that more and more and one of the things I looked at it was had a walk through yesterday for fall in New York family.
Speaker Change: Higher.
Speaker Change: Brooklyn, we're seeing so much innovation under the platform.
Speaker Change: It's powerful and it's cohesive so when a customer comes in their choices.
Speaker Change: It tells a compelling story and you see that with.
Speaker Change: Our New York family, which really we're just getting started in New York family is less than a year old and it became the number one bag in the list. The first time in our history coach had two products in the top 10 in the list. Conversely, happy we have so much runway for tabby and.
Speaker Change: What I love about tabby is it hasnt such as distinct.
Speaker Change: Hardware in the sculpted fee that is <unk> and desirable by our clients.
Speaker Change: Thank you.
Speaker Change: Well.
Speaker Change: Our next question is from Brooke Roach of Goldman Sachs.
Brooke Roach: Good morning, and thank you for taking our question Joanna Scott Todd I was hoping we could dive a little bit deeper in the momentum that you're seeing in China. In particular, it sounds like you have a little bit more optimism there than last quarter on an ex FX basis, what's working specifically there what's changing.
Brooke Roach: The execution of your brick and mortar strategy for coach and how should we be thinking about the opportunity to accelerate coach as well as your other brands in that region going forward. Thank you.
Brooke Roach: Sure why don't I kick it off Brooke.
Brooke Roach: We were pleased to see greater China returned to growth in the second quarter, we delivered low single digit growth in the quarter significantly outpacing the industry and I think that speaks to the success of our strategies. The brand building capabilities that are working are working globally and it does underscore the opportunity.
Brooke Roach: Had.
Brooke Roach: We have strong broad based performance across channels and city tiers in China. The team is importantly, bringing the innovation and the value to consumers in that market. Our brand is positioned quite well in the market and we're investing including and higher levels of marketing in the region and we're seeing.
<unk> <unk>.
Todd Kahn: Consumers respond, including a younger consumers. So we are driving Gen Z acquisition. So the principles of brand building that are working at coach are working across the across the globe and maybe I'll pass it to Todd If I left you any material to cover how youre thinking about China, but we have we remain calm.
Speaker Change: And in the long term opportunity overall in China, but Todd any more color on typically.
Todd Kahn: Thanks Joanne.
Todd Kahn: Again, we've been in China for over 25 years, we have the depth and richness to China and understanding your China. We spent a lot of time there we have amazing people in stores on the ground, which really drives everything in some of the things I've talked about I think last call I mentioned the visit to Wuxi.
Todd Kahn: I know many of you had to look up where Wuxi was a small city of 9 million people with you know.
Todd Kahn: Three <unk> stores, which is an opportunity to triple that that story replicates itself off it.
Todd Kahn: This growth of the Middle class is so powerful for our brands again going back to value and values.
Todd Kahn: Both resonate with this Chinese consumers. So I was so pleased to see a return to growth in China, you're going to see more growth coming out of China and in addition to productivity.
Todd Kahn: Productivity growth as.
Todd Kahn: We see increases in traffic youre going to see distribution growth.
Todd Kahn: We really believe in China, we believe that the coach brand.
Todd Kahn: Represent something very special in China for a number millions and millions of clients and again when you think about.
Todd Kahn: People coming of age 18, 1920 year olds, who want to buy their first bag, we won more than our fair share of that client coming to coach and we have the right to get them.
Todd Kahn: Great. Thank you so much.
Speaker Change: Our next question is from Michael Binetti of Evercore.
Michael Binetti: Hey, guys. Let me just add my congrats on a great holiday, there, especially across North America incredible incredible work I'm sure you guys are proud of it.
Michael Binetti: Let me just ask you on the on the path forward on AUR or is there a point, where Brooklyn, and tabby and the multiple franchises that you've spoken about today, although new consumers you've brought in the good retention rates that Joanne talked about start to translate to unit growth I think if we back out the AUR as you talked about units should probably still some negatives.
Michael Binetti: You still see the growth coming largely from AUR in the near term because that's where the momentum is in unit growth would be upside and then Scott just a quick follow up can you just help us think about your near term priorities are high for how to think about flow through if the revenue upside does continue.
Michael Binetti: The SG&A rate to what we were expecting in the quarter, but you are still you still grew the dollars on the revenue came in.
Michael Binetti: We went to the top of funnel things that can drive the brand going forward. So just how to think about.
Michael Binetti: Your priorities for SG&A, if you do see upside to revenues in the back half. Thanks.
Speaker Change: Yeah on AUR and the units to your question I think Todd covered the AUR his confidence in the AUR earlier on the call our innovation pipeline is strong.
Speaker Change: AUR is driving our growth, but we see the opportunity for us, it's an and not an or we see the opportunity to drive the units going forward, both with the expansion of the market and new customer acquisition as well as with.
Speaker Change: Category expansion is as these brands continue to drive heat in.
Speaker Change: And maybe toss it to Scott for the flow through.
Speaker Change: Yeah. So you know.
Speaker Change: I can't really give you a definitive answer other than that we will.
Speaker Change: To see.
Speaker Change: Flow through Michael, but we're I hope what you see is where we're leaning in where we see real opportunities and for example, we mentioned the K, where we saw some traction in.
Speaker Change: The campaign with Madison here and some of the opportunities leaning in and certainly we could have made more money, we expected profit and to be in the 7% range or $85 million to $90 million. We could've made it a lot higher but we see the opportunity long term to make that investment and we can do that while we're still at the tapestry.
Speaker Change: Delivering significant be so we're going to look at all of these investments you will see flow through I wouldn't expect a radical change we've invested where we see that it's prudent that if other things come up we'll certainly take those opportunities.
Speaker Change: Thank you that concludes our question and answer I would now I'll turn it over to Joanne Crivoi Surat for some concluding remarks.
Speaker Change: Thank you today, we had the opportunity to share our standout holiday results and stronger fiscal 'twenty five outlook and what I want to leave you with is a reiteration of our focus and confidence.
Speaker Change: Coach is an iconic brand and we're winning with a new generation of consumers around the world.
Speaker Change: Never been more confident in the brand and its innovation pipeline.
Speaker Change: Our success shows that our strategies are working and that our commitment to disciplined brand building drives results and with this momentum works extending our competitive advantages and bringing more focus and investment to Kate Spade, Kate Spade is a unique and beloved brand we have new leadership, a clear roadmap for long term growth.
Speaker Change: And the learnings from coach to pave our way forward. There is work to do but we're moving decisively and we're confident that the path to growth is within our control.
Speaker Change: Overall, we have a bold ambition to drive accelerated durable organic growth and we're focused and confident that the value creation opportunity in front of us is compelling for our brands consumers talented teams and shareholders.
Speaker Change: Thank you again to our exceptional global teams for fueling our growth and thank you to everyone who joined US today for your interest in our story have a great day.
Speaker Change: This concludes tapestries earnings conference call. We thank you for your participation.
Speaker Change: Okay.
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