Q4 2019 Earnings Call

And answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue press. The pound key we ask that you. Please pick up your handset <unk> optimal sound quality.

At this time for opening remarks, and introductions I would like to turn the call over to Christina Cologne, Vice President Investor Relations.

Good morning, and thank you for joining us with me today to discuss our quarterly and annual results are Victor Luis Tapestries, Chief Executive Officer, and Andrea Shaw Resnick.

Tapestries global head of Investor Relations and corporate communications.

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.

Including projections for our business and the current or future quarters or fiscal years.

Forward looking statements are not guarantees and our actual results may differ materially from those expressed or implied.

In the forward looking statements. Please refer to our annual report on Form 10-K . The press release, we issued this morning and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors that could impact our future results and performance.

non-GAAP financial measures are included in our comments today and in our presentation slides you may find the corresponding GAAP financial information as well as the related reconciliations on our website www dot tapestry dotcom forward slash investors and then viewing earnings release and the presentation slides posted today.

Now, let me outline the speakers and topics for this conference call Victor will provide an overview of our fourth quarter and full year 2019 results for tapestry as well as our three brands Andrea will continue with detailed them the financial and operational results and our outlook for Fyseventeen.

Following that we will hold a question and answer session, where we will be joined by Todd Cohen tapestries, President and Chief administrative officer, and Chief Legal Officer.

Josh Tillman CEO and brand president of coach and Joanne Crevoiserat tapestries recently appointed CFO . Following Tonight, we will conclude with some brief summary remarks, I'd now like to turn it over to Victor Luis Tapestry CEO . Good morning. Thank you Christine and welcome everyone. As noted in our press release 2019 was a year of meaningful evolution for tapestry importantly, we made significant progress on our strategic initiatives against the difficult retail backdrop in North America.

Touching on results by brand.

We achieved solid and consistent performance the coach which speaks to the success of our transformation strategy driving brand health and vibrancy for the year Coach's International and digital channels led while the brand also outperformed its direct competition in North America.

Poachers performance is key for two important reasons.

First coach is the core of tapestry.

We understand that driving sustainable growth a coach is essential to the success of our company. Overall. Therefore, we are incredibly proud of the brands results in spite of the volatile backdrop.

Second.

This performance reinforces our strategic intent to diversify our acquired brands across geographies and channels.

Turning to Stuart Weitzman, we made advancements across product people and processes, returning the business to topline growth.

Yes, W. team remains focused on driving improved profitability in the year ahead.

Hi, Kate Spade, we launched a new creative vision for the brand and while there have been some green shoots we clearly need more time to drive an inflection to positive comps, especially given the brand's exposure to the competitive and traffic challenged North America market.

We acknowledge that there are opportunities and are addressing those areas with a sense of urgency.

As we look ahead, we are revising our outlook for F Y 20 to reflect the current trends in our business, notably at Kate Spade.

We believe that this prudent, particularly in light of the uncertain environment in North America, and while we build the brands awareness in global markets.

Importantly, with continued momentum at the coach brand our priority is to fuel an acceleration in our acquired businesses to unlock the power of our multi brand platform.

Therefore, while our long term vision is unchanged, we are modifying our capital allocation policy in fiscal 2020.

Dedicating our resources to driving organic growth and do not expect to pursue strategic acquisitions.

We are focused on balancing the investment in our brands to drive growth with a return to capital with the return of capital to shareholders to this end we plan to increase the capital we return to shareholders repurchasing approximately 300 million of common stock, while maintaining our annual dividend, resulting in a total payout of nearly $700 million.

Overall, we remain steadfast in our vision and are focused on maximizing the benefits of our global multi brand platform.

Now turning to RF, why 19 milestones and fytwenty priorities across our strategic pillars.

First we made significant progress and reinforcing the foundation of our distinctive multi brand platform in fiscal 2019.

We generated the anticipated synergies from the integration of Kate spade into our portfolio, which funded in part by our key strategic initiatives.

To this point, we made material investments in tapestries infrastructure implementing phases, one and two of our ERP system and that's why my team with a third and final phase just launched last week.

All without business interruption.

We could not be prouder of our teams for their diligence and hard work throughout this multi year project.

We launched a comprehensive 2020 five corporate responsibility goals, recognizing our role as a leader in our industry to effect change and solidifying our commitment to social responsibility.

These goals are consistent with the values led culture that we're building.

And we brought in key new tapestry meters known Permian Ski Chief Digital Officer, Tom Glaser, COO and most recently Joanne Crevoiserat as our CFO to help set and execute our strategic agenda.

Looking ahead to F. Y 20, we are focused on leveraging the investments we've made in our platform.

Specifically, our investment in our ERP system will help to drive standardization across the organization.

In addition, we are excited to benefit from Tom Glaser is unique and deep operational experience and multi brand multi category fashion supply chains.

One of our key initiatives led by Tom will be to identify opportunities to improve our demand to production planning cycle, while increasing our speed to market across categories.

This is especially important as we accelerate product innovation and the number of customization programs within our brands.

He will also be important as we bring the Kate Spade footwear business in house and the second half of the fiscal year, which I will touch on shortly.

Next driving global growth.

And that's why 19, we expanded our international presence through both distributor acquisitions and new store openings in key regions.

This allows us to directly control and drive our business internationally capitalizing on our scale and market knowledge across brands.

Importantly, we also gained traction with Chinese consumers globally, which as F. Y 19 represented a high teens percentage of tapestry sales and where we see tremendous opportunity for growth.

Throughout the year, we drove awareness for our brands with targeted events and marketing campaigns featuring locally relevant Influencers, a first for Kate Spade and Stuart Weitzman.

Yes, perhaps the most significant highlight why 19 was coaches first ever runway show in Shanghai, which garnered 1.6 billion impressions.

Turning to F Y 20, capturing growth with the Chinese consumers for all brands remains a key strategic initiative.

Our focus will be creating seamless and innovative experiences both offline and online as we continue to translate each of our brands key messages into locally relevant content.

Which takes us to digital and data labs, where we are building the skills and capabilities that truly differentiate us from the competitive set.

During the fiscal year, we officially launched tapestries data labs portal, a personal life suite of data science and AI tool that are changing the way, we use and interact with data providing access to those on the front lines of our business.

As mentioned, we recently welcomed known per ask is our new Chief Digital officer to lead our company wide digital innovation agenda.

He will play a key role is our enterprise leader to deliver innovative omni channel experiences across all our customer digital touch points.

His objective is to create a scalable tapestry global digital ecosystem.

Comprised of people process and technology to enable global teams to act locally with greater agility and that greater velocity.

No Ms hit the ground running we are excited to announce the launch of China next our digital innovation agenda focused on the China market.

Adding fuel to our digital leadership on Sina Weibo and we chat.

This initiative connects to have tapestries key strategic priorities.

Driving digital innovation and growing our business with Chinese consumers.

And not only are we focused on driving local engagement, we expect our China next digital innovation agenda to provide learnings that we can leverage on a global scale.

Overall, driving advancements in digital and data labs will be an important area of focus and that's why 20.

And we look forward to updating you on our progress in the quarters ahead.

And finally brand innovation nothing is more important than this.

As a brand led and consumer centric consumer centric company. Our goal is to nurture authentic innovative brands to capture the opportunities within the attractive and growing premium bags and small leather goods footwear and outerwear categories.

We estimate that these combined categories total 95 billion and grew at a high single digit rate on an organic basis enough why 19.

This growth was led by bags and accessories, which topped an estimated 50 billion and grew at an estimated high single digit rate enough why 19 or a mid to high single digit rate in U.S. dollars given the appreciation of the dollar for both the fourth quarter and the year.

With that I'll move into our performance by brand starting with coach.

Global comparable store sales rose, 2% in the Four Q4 th quarter led by outperformance in our international channels and across our e-commerce platforms consistent with the previous quarter.

The drivers of our positive global brick and mortar comparable store sales were conversion, reflecting our strong product offering as well as traffic.

This was coaches seventh consecutive quarter of comp store sales growth.

By region, we delivered overall positive comps across all of our international regions, including Europe , Other Asia, Greater China and Japan.

Our international wholesale business also rose on a Pos basis in the quarter.

Comps in North America was flat to the prior year accelerating sequentially, including the positive impact of the shift in timing of Easter along with the negative impact of continued pressure from low was tourist spend as well as ongoing volatility in digoxin or reseller activity.

In addition, our North America wholesale shipments were above prior year and our business at Pos increased despite a lower level of promotional event days.

We are particularly proud of the brand sequential improvement in North America in light of the weekend traffic trends in both outlet and full price retail malls.

We believe this speaks to the vibrancy of the brand, which is outperforming its direct accessible luxury peers fueled by innovation across channels and product.

Marketing and in store experience.

Looking at our progress against brand strategies for F y 19.

We drove leather goods innovation across the pyramid of fashion occasion and price.

In retail our signature assortment comp the comp reflecting the continued demand for this most proprietary brand icon.

While an outlet we benefited from our good better best strategy in our core women's handbag business.

We fueled brand momentum and sales through collaborations drops in pop ups, including Disney ex coach and most recently the Rex the remix a collaboration with Chinese artists, which was featured on the runway of our Shanghai fashion show.

During the year, we had over 130 pop ups engaging with our customers in a new way.

We gain traction and lifestyle categories, including footwear and ready to wear while growing our men's business to almost $900 million at Pos.

These initiatives were supported by compelling marketing campaigns, which balanced our position as a fashion authority, while broadening our messages.

We launched Michael B., Jordan as the first global ambassador of coach mens and post innovative culturally relevant and disruptive messages throughout the year.

We also drove e-commerce growth in digital innovation globally, as we continue to enhance our omni channel capabilities.

Overall, we saw strong double digit increases in the brand's followers on Instagram, we chat and weigh both.

Moving forward and that's why 20, we will first accelerate product innovation and disruption second Dri fashion authority through cultural relevance tapping into celebrities and influencers.

Third inject excitement into stores with light touch high impact refreshes and fourth fuel digital innovation and ecommerce growth benefiting from the enterprise initiatives underway.

In summary, we are excited about the seasons ahead and remain confident in our largest brands opportunity for continued growth.

As we look to accelerate innovation and relevant globally.

Moving to Kate Spade and focusing on the fourth quarter.

Total sales rose, 6% on a reported basis and 7% in constant currency driven by new store distribution as well as the acquisition of the brands operations in Singapore, Malaysia, and Australia, which we have not yet anniversary.

Comparable store sales fell below our fell below our expectations declining 6% on an aggregate basis.

Conversion comp in our bricks and mortars business accelerated on a sequential basis and was positive for the quarter, reflecting the emerging positive signs we are seeing with nickel as new product offerings.

However, traffic comp was significantly under pressure against the challenging backdrop in North America and compounded by the anniversary of the difficult comparison following the passing of the brands founder, which drove unusually high traffic as discussed last year.

Conversely, our international business was essentially in line with our expectations and on a relative basis significantly outpaced the performance in North America, including positive comps in greater China.

Turning to product.

While the penetration of Nicolas collection was consistent with our expectations in both retail and outlet clearly overall sales were not on plan.

We feel strongly that we have the right strategic and creative direction based on customers' response to the brand's new iconic elements and strength, we're seeing in select handbag offerings, such as the Margo Molly and Nicola families and most recently the introduction of poly.

We've also experienced traction in jewelry and ready to wear.

However, we were missing breadth of choice in key silhouettes, such as wear to work satchels as well isn't the diversity of material ways.

In addition, during the quarter, we introduced previous retail best selling styles into the outlet Channel Cameron Street, and Jackson Street, which did not perform as expected.

In short, while we refined the balance across silhouettes and full price. The outlet channel is in need of a much more substantial amounts of distinctive newness than we planned.

Looking forward, our overarching objectives for Kate Spade remain unchanged.

Leveraging the brand's unique positioning of optimistic femininity and leadership in the attributes of fashionable and fun.

That said, we felt it was important to provide you with some additional color on the specific actions underway to immediately address the areas of opportunity.

First we are applying our product and merchandising learnings by launching additional satchel in keeping with the brands feminine anesthetic.

Updated in modern and relevant ways.

We're introducing new designs in a broader range of high quality materials that provide the structure durability and functionality that the Kate Spade brand is known for.

We also believe there is an opportunity in cross bodies and backpacks, given the hands free trend in the market.

We're bringing in additional witty an emotional novelty items, which have been hallmarks of the brand both as permanent and limited edition offerings.

We're also planning to launch product collaborations across categories to drive excitement and buys.

For holiday, we are launching a new make it mind personalization program in both specialty stores and our E Commerce site, which will feature an updated multi function bags and accessories offerings designed to appeal to a broad audience.

We're also excited by the footwear opportunity for the brand as we take the business in house from our licensed partner, Steve Madden beginning into calendar 2020.

We showed our new spring collection at Fannie just last week and the response was very positive as buyers described the offering as relevant.

Fun exciting and truly lifestyle and addressing many usage occasions.

For stores, we're continuing to expand our distribution with a focus on international markets that said, we are deliberately pulling back on the number of new store openings for the brand, while we focus on maximizing awareness and productivity.

In marketing, we will drive brand awareness, an aspiration with bold collaborations with global and local celebrities and influencers leveraging the power of social media and PR buzz across markets.

In outlet, we're leaving no stone unturned, we're looking at product design branding merchandising in store experience and on mall indirect mean email marketing.

In product.

We're focused on accelerating accelerating the pace of newness with an assortment that is more clearly differentiated from the saffiano heavy competitive set.

This will also include the launch of new materials branding elements and collaborations unique to the channel.

We're also building out the successful Nicolet designed Eva group.

With these measures in place we have a comprehensive plan to drive an inflection in the business.

Overall, we are acting swiftly and decisively applying our learnings to drive positive change and we remain confident in our direction and the 2 billion dollar opportunity for the brand had improved profitability.

Turning to Stuart Weitzman.

And that's why 19, our priority was to return the brand to topline growth addressing the production challenges we faced exiting F.Y. 18.

I'm pleased that we were successful in doing this with revenue increasing 17% in the fourth quarter on a reported basis and 20% in constant currency driving the mid single digit gain for the year.

We made important investments in several key areas.

In product, we focused on fit and construction, creating foundational pieces that were consistent with the brand DNA.

We broadened our footwear offering while maintaining our authority and iconic Stuart Weitzman style.

We also introduced a brand new codes that we will build upon in the seasons in years ahead.

We gained further credibility in handbags, and leather goods, which remains an area of opportunity for the brand.

We also drove international expansion, particularly in China.

Where we doubled our store footprint, including the acquisition of our business in southern China.

And we completed the buyback of our operations in Australia, where we will leverage tapestries multi brand hub.

Finally, we evolved the brand's marketing featuring a task of new and culturally relevant global brand ambassadors distorting our investment to digital.

Looking ahead to fiscal 2020 , our strategic pillars include first enhancing our systems and processes to improve profitability.

Key to this will be optimizing the supply chain in the wake of our three of our phase three S. Four go lives.

Second maintaining the brand's boot sandal authority, while expanding our footwear expression, especially in flats and sneakers and keeping with current trends.

This is paramount as we look to recapture the brand leadership position and top tier wholesale accounts.

To this end we were pleased with the initial positive feedback we received from our Department store partners during the brand's spring market presentation last month.

Third driving credibility in handbags through exceptional functionality and differentiated design and branding.

Fourth fueling customer desire through marketing increased brand awareness globally and acquiring new customers.

And fifth expanding globally with the focus on China.

Building on our current momentum.

In summary, we have made significant progress in shape sharpening the focus of the brands core strength.

And we remain excited about the opportunities for Stuart Weitzman.

To recap, we have a clear vision and the unique global multi brand platform.

Our model is distinctive brand led and consumer centric with the culture built upon values of optimism innovation and creativity.

Each of our brands have differentiated attitudes.

Bringing diversification to our portfolio at the same time, each can leverage tapestries core capabilities and infrastructure to drive meaningful synergies.

Before I turn it over for the financial review I would like to welcome our CFO Joanne Crevoiserat to the team.

I know that many of you have had the opportunity to work with her throughout her career.

We're delighted that she is joined tapestry.

She has extensive financial and operational experience with established retailers and global brands and brings a unique perspective and important skill set to our company.

I am confident that she is the right person to lead our strong finance team as we execute our strategic initiatives and long term vision.

Joanne Thanks, Victor I'm very excited to be here at tapestry working with the talented teams across the globe as we execute our brand and growth strategies.

I'm also looking forward to reconnecting with many of you on the line and meeting those new to me who follow our story in the months ahead.

Thank you Joanne.

And before turning it over to Andrea I'd like to recognize or for our hard work and energy over the last several months that she has held the position of interim CFO .

Andrea wears many hats within our organization.

She is a mentor to many in the key business partner to me and our leadership team with an unparalleled understanding of our company and its history.

On behalf of our entire leadership team. Thank you Andrea for your end less energy and leading the finance team in this period.

With that I'll now turn the call over to Andrea for a discussion of our financial results as well as our outlook for fiscal year 20.

Thanks, Victor for those kind words and good morning, everyone. Victor has just taken you through the highlights and strategies. Let me now take you through some of the important financial details as well as our outlook for fiscal year 20 before I begin. Please keep in mind that the comments I'm about to make are based on non-GAAP results corresponding GAAP results as well as the related reconciliations can be found in the earnings release posted on our website today.

As Victor mentioned it was an evolutionary year for the company. We entered F.Y. 19 understanding that it would be one of significant strategic investment as we built the foundation of our multi brilliant brand platform. We also anticipated and achieved meaningful synergies from the successful integration of Kate Spade impart funding. These investments at the same time, we delivered ongoing top and bottom line increases that coach the core of our house that said, we did not drive the intended growth at Kate Spade and face incremental industry wide promotional headwinds in the North America outlet channel.

Overall, our EPS was in line with our most recent guidance.

Now turning to some key financial details of the fourth quarter sales in the quarter rose, 2% on a reported basis and 4% in constant currency with disparate results by brand. We continue to drive positive same store sales at coach and delivered strong sales growth, it's Stuart Weitzman lapping a challenging quarter from a year ago, well keep the comps declined 6% in Q4.

Consolidated gross margin declined 60 basis points versus prior year for context, we did project and guide to gross margin contraction for the quarter pressured by Kate Spade, given the brand's difficult prior year compare which included the financial benefit of unusually high full price selling founding following the founders passing as well as the initial realization of synergies. In addition, keep speeds gross margin was further pressured by incremental promotional activity year over year, particularly in the North America outlet channel in contrast, and importantly, both coach and Stuart Weitzman delivered gross margin expansion over the prior year as Genie expenses rose, 2% inline with the top line increase operating income declined 3% and represented 14.6% of sales as compared to 15.3% in the prior year.

Our EPS of 61 cents was a penny above last year and consistent with the implied guidance range for the quarter, reflecting in part lower than expected tax rate. We also commenced our buyback period program during the quarter as reported repurchasing approximately 3.4 million shares of common stock at an average cost of $29.31 for a total of $100 million.

Now moving to global distribution as highlighted in our press release across tapestry. We added a net of 108 locations in Fynineteen driven by international expansion at Kate Spade, and Stuart Weitzman, including a total of 69 net new openings and 39 stores acquired through regional distributor buyback. We ended the year with 1540 directly operated stores globally.

Turning to our balance sheet and cash flows at the end of the fiscal year cash and short term investments were approximately $1.2 billion, while our borrowings outstanding were 1.6 billion, consisting primarily of senior notes.

Inventory levels at year end were $778 million, an increase of 16%, reflecting in part the unusually low ending inventory balance at Kate spade in the prior year given the magnitude of full price selling following the founders passing in addition, as discussed on our last earnings call. We've continued to experience port congestion in Asia, which has resulted in a higher level of in transit importantly, we're confident we can strategically manage our inventory given its currency and our multichannel distribution model, we have a plan to work through our inventory specifically a keep faith in a programmatic manner. During the first half of fiscal 20, which has been contemplated in our gross margin guidance.

For the full year net cash from operating activities was an inflow of 792 million as compared to an inflow of 997 million a year ago. Our capex spending was 274 million versus 267 million a year ago Capex spend came in favorable to our expectations primarily to the due to the timing of cash payments, which shifted into fiscal 2020 free cash flow for the year was an inflow of 517 million versus an inflow of 729 million last year and in Fynineteen. We returned a total of approximately 490 million to shareholders through our dividend as well as our recently instituted share repurchase program, representing approximately 95% of our free cash flow for the year.

Now turning to our capital allocation policy as Victor mentioned, while our long term priorities remain unchanged supported by our strong balance sheet and cash flow. We are modifying our policy in the near term.

Dedicating our resources to driving organic growth, while returning capital to shareholders through our dividend and share repurchase program to that end in fiscal 2020, we do not expect to pursue strategic acquisition.

Now moving to our 2020 outlook consistent with our prior practice. The following guidance is presented on a non-GAAP basis and replaces our previous guidance.

Starting with Q1, we are projecting revenue in the first quarter to be slightly below prior year. This reflects low single digit comp growth. It coach Kate Spade comps are expected to decline at a high teens rate based on the current traffic trends, we're seeing in the business and as we address the product and merchandising challenges. We would also expect Stuart Weitzman to post an operating loss in this its smallest quarter.

Reflective of wholesale shipment timing.

We're forecasting gross margin for tapestry to be slightly pressured in the quarter impacted by FX, notably approach, while SGN is expected to increase driven by new store openings and higher depreciation associated with our systems investment taken together, we expect Tappan Street EPS to be in the range of 35 to 37 cents in Q1.

Now turning to our full year outlook, we expect total revenues for tapestry in fiscal 2020 to increase at a low single digit rate from COVID-19. This includes the expectation for low single digit growth head coach driven by continued positive low single digit comp, we expect Kate spade to deliver low to mid single digit sales growth driven by distribution at Stuart Weitzman, We expect solid sales growth for the year.

In addition, we are projecting a modest decline in tapestries gross margin for the year, including the negative impacts associated with bringing Kate spade footwear business in house, along with pressure from currency. Our gross margin forecast also incorporates the impact of U.S. tariff on imports from China, including the 25% tariff on handbags and small leather goods currently in place as well as the recently announced 10% tariff on the list of 300 billion of good expected to go into effect on September onest for categories, such as footwear and ready to wear.

As you know we have a diversified manufacturing base and our exposure to China is relatively limited for handbags, and small leather goods, where we've migrated our production and while footwear in ready to wear or smaller but fast growing categories for tapestry, we do have more exposure currently to China.

We expect as seen a growth to be approximately in line with topline growth as you know we've made several important investments in our multi brand model and our brands over the last two years, which are foundational to our long term success. These include new store openings and regional buybacks as we focus on expanding our brands and directly managing the customer experience in key international markets and system to allow us to drive sustainable growth an increasingly digital world.

Net interest expense is expected to be in the area of 45 to 50 million for the year. The full year fiscal 2020 tax rate is projected to be in the area, 17.5% and overall, we're projecting earnings per diluted share to be roughly even with prior year. This incorporates the expectation of share repurchase of shares.

Approximately 300 million in fiscal 2000.

We expect capex to be approximately 300 million for the year, which includes the shift in cash payments from for Q1 9 as mentioned.

Touching briefly on our F Y 20 directly operated distribution plan across tapestry, our distribution expansion efforts will focus on international market.

By brand, we expect little change in our coach directly operated store count with closures in North America offset by modest net openings internationally Stuart Weitzman, we expect to open in that 15 to 20 locations globally and the Kate Spade, we're projecting 30 to 40 net openings in Fytwenty as noted in our press release. This morning. This represents a modestly slower pace of openings that Keith fade as compared to F.Y. 19, and our prior projection as we strategically focused on maximizing the brand's productivity.

In closing we are focused on executing our vision supported by a strong balance sheet and cash flows providing us with important financial and strategic flexibility, while enabling us to return meaningful capital to our shareholders I'd now like to open it up to QNX.

Thank you at this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.

Your question has been answered any wish to remove yourself from the queue press the pound key our first question comes from the line of Bob trouble of Guggenheim Securities.

Hey, good morning.

Joann welcome and congratulations best of luck.

Thanks, Bob.

The I guess I'd like to focus just on the Kate Spade brand for a minute.

Victor you still confident about cage brand health and I guess when you look at the results this quarter.

How did you not see it coming and how will you fix it and when you look at it you know contrasting it to this strong coach brand performance can you just talk a little bit about that as well. Thanks.

Okay. Thank you Bob.

Maybe I'll start with contrasting with coach.

Into Kate and then Josh can support.

And on the coaches performance, which of course.

Yes, really outperforming not only here in the U.S. a truly global age against a more direct competitive set could not be prouder of that team and the work that they're doing they're really hitting on all cylinders.

Okay as you all know.

We saw a significant improvement.

In the third quarter.

Really many emerging signs of traction post the.

Launch of Nicolas collection, we saw positive conversion comps, we launched a new core family in Margot Lee followed by policy, which has really checking and increasingly we received really positive signs across categories, especially ready to wear and jewelry with the iconography working well that we launched as we entered Q4. We were optimistic of course were supported by the Easter shift and with the amount of newness that we had coming in starting in the.

Outlet channel.

What we saw was.

May into June .

But especially beginning in May was rapid deterioration in the North American environment.

Traffic declined and especially in the outlet channel. This led to increasing promotion across competitor isn't in fact, I would say across across the channel.

And as all of you know Kate is disproportionately impacted given its nascent international footprint and its dependence on North America relative to the coach brand.

In addition, I would add that case simply did not have the level of distinctive newness.

That we needed to drive.

Conversion in that channel, especially given the.

Decreasing traffic and especially against the saviano heavy competition for context, when we transformed the coach brand one of the strategies that we took early on when Stewart joint was to take top selling previous full priced collections, we reengineer them, we launched them an outlet and we really drove terrific you ours in the case of Niccolo, you've heard US talk Nicolas collections, you've heard us talk about the fact that approximately 30% of the outlet product was nicolet decide to product of that 30% of the total two thirds or 20% of the total or slightly more actually work as we had done what coach taking previous full priced top sellers, which niccolo reengineering retouched added some functionality and brought into the channel specifically collections Cameron Street, and Jackson Street, which are today still core.

To our business and unfortunately.

Not performing as we expected and the key learning there is that they were just not perceived as new enough in the outlet channel.

Especially as they work.

Cameron Street Saffiano based collections are not able to compete with some of the major competitors, who are really being.

Promotional in those key platforms.

And what we began to see basically is with that pressure.

And with the continued traffic pressures the collections are simply still not pulling their weight and now we're prioritizing gross margin and quite frankly longer term brand house. The good news so what do we see.

First Ava, which was 100% designed by Nicola and it's under 10% of the total outlet is truly outperforming and gives us a lot of confidence as we bring in tremendous amounts of distinctive newness over the next.

Months and quarters and we're also.

Pleased with the performance that we're seeing outside of North America, especially in Asia.

And in greater China, where were seeing positive comps and is a key area of investment for us. So key steps Bob to your the second part of your question and what are we working on what are we doing so.

With a great sense of urgency indicates bank team is really focused on first and foremost product in the full price channel I would say, it's much more tweaking the collection really getting in high function styles that are focused on our key wear to work consumer.

And now it's truly about distinctive innovation, both in silhouettes materials and I would say even in branding as we continue to diversify collections and then in both channels were looking to truly love leverage novelty, which is a key part of the brands, while launching coming up in the second quarter.

Make it mine and I think as you heard in my notes Q3, the launch of footwear.

And taking a lot of learnings and whats happening across brands.

And those that are truly engaging effectively with consumers, we have a tremendous amount of activation in store as well as collaborations coming up.

On the marketing side, you guys will hear us talk a lot about.

Leveraging influencers and celebrity stay tuned there will have one or two announcements in the not too distant future on key key partnerships, there and its doors that focus right now is truly on driving productivity.

We're going to be doing some light touch investments, especially in the most productive part of our outlet fleet and there you're going to see us look at fixture productivity signage and window package renewals as we look to truly drives a much bigger change in the guidance.

The consumer.

Turning to branch out, saying all of that and that gives you I think a little bit of a synopsis on where we weren't what we saw steps that we're taking and now looking at brand health look we just finished.

Recently may into June .

A global brand tracker.

We interviewed thousands of consumers here in North America across all of our brands and the competitive sets and we are confident in the health of the brand and it actually gave us confidence into creative direction and Nicolas vision, we continue to be very strong in a very unique position we lead in the key emotional attributes of fashionable fun and feminine and the key is really in tweaking our.

Execution and some of those areas and I remain very confident and Kate being a 2 billion opportunity and being so gross margins that are going to be similar to coach and like categories and that remains our clear vision.

As I mentioned.

Just a coach Bob could not be prouder of Josh and the team and what they're doing and that brand because as I said, it really hitting on all cylinders I'll, let Josh talk a little bit about what he's seeing both globally and here in North America that branch truly.

I think outperforms, the direct competition and a very strong way Josh.

Thank you Victor and good morning, Bob.

So you know how we're thinking about.

Innovation at coach is really at the heart I think of how we've been able to drive.

The seventh consecutive quarters of positive comps.

And the gross margin expansion that we've been able to see.

This year and so all share a little bit about.

How were thinking about driving this balance.

Consistency and disruption within the brand.

Really across three pillars. The first is we have to consistently innovate.

In our core.

We have to every day in every channel.

Our core product at good better best price points.

With.

Product excellence.

And innovation there I think the best example of that that we've talked about on.

Numerous calls and.

That you've seen in our stores is the re launch of signature which is now into its second year.

And is continuing.

To drive our high AIU ours in our retail channel actually higher AIU ours.

That in leather and we have.

Examples of that and the innovation and core product in our outlet channel is well whether that has been.

The added at best.

Cynical prices.

Or whether that has been new introductions like Jeff really speaking to our broad customer.

Around the world. The second pillar is more about the disruption and that is called that collaboration or co creation and during this year.

We have had an unprecedented number of activations pop ups drops capsules, where we're either collaborating with a third party or driving innovation around important cultural moments. So you know in this quarter.

In this most recent quarter.

Yes, we did 360 activations around mother's day, particularly important him in more North America.

Where is the visual it's the product if the.

It's the whole.

The whole experience, we've done third party partnerships.

We did artist collaborations with a series of Chinese artists, which we called the Rexy remix, which we rolled out in our retail channel.

In outlet, we did a collaboration all around Eightys video games Pac Man mid Pac Man and these are traffic driving collaboration and so when we do these activations.

They have really helped us and I think you see that this quarter they've helped us.

In a traffic challenged environment.

Driving the traffic to coach.

In the mall in the full very small and in the outlet malls and then the third pillar I would say is around acceleration. So this innovation collaboration and acceleration and the acceleration is really for our categories where were we consider our growth categories. So our men's business, which is approaching 900 million, our footwear business and our ready to wear business and how do we have distinct strategies.

To drive growth.

In those areas and I think what you're starting to see is you're starting to see how those.

How those three pillars kit can work together consistently.

Back to buy.

Marketing.

That is.

No longer just about one seasonal fashion message.

About something much broader which is driving a cultural relevance.

Through marketing and so you see we have a mix of.

Global ambassadors like that Mike will be Jordan.

Or a.

No more regional ambassador like a kikuyu mizzou horror.

In Japan, and driving those messages across the digital channels.

And using those digital channels as really the hub of an ecosystem that brings the customers into the stores and so and so we can't be complacent, it's competitive out there, but we have.

Pretty exciting pipeline ahead of these types of.

Innovations and activation and I think I would just close to wrap up on those points. There. Please if you haven't had the opportunity.

To take a couple of months.

Visits to a couple of key.

Outlet stores in your region and walk the competitive set compare with coaches execution and yield I think very easily understand a lot of the great work that Josh has just explained impacting across all channels at once and were on that journey with Kate and I'm very confident in that team's ability with Ana Nicola and very talented folks they have supporting them to execute accordingly.

Great. Thank you very much good luck.

Thank you.

Ladies and gentlemen in the interest.

Yes.

Quick question.

Oh.

Your next question comes from the line of Irwin Virchow of Wells Fargo.

Hi, good morning, everyone. This.

Two quick questions on key.

On the store growth pullback can you.

Actors that is good.

Hi to any specific region or is a broad based globally. Just overall and then I appreciate all the guidance on the year.

Business, but is there any chance you could give a little bit more color on on your view of Keith for the year as you progress you kind of give us some comp expectations for Q1 can you help us how you're thinking about how that how that business should progress through the year.

Both comp and on operating profit metrics anything that you're comfortable sharing and most specifically are you are you targeting a positive comp.

At some point this fiscal year. Thank you very much.

Sure. Thanks, Thanks in terms of.

The openings really our focus is on productivity I mean were you were planning a bugs.

40 locations for the year were still planning between 30, and 40 with just being much more selective and with a continued focus on Asia, and especially in China, where we are seeing the opportunity of course to leverage those investments as part of our greatest program to build brand awareness, there, which clearly remains the number one single growth opportunity for that brand and for us from an awareness perspective.

In terms of TV and through the year and comps first and foremost I think we gave guidance that were expecting low to mid single digit sales growth driven by.

Distribution at this point I won't be making a call on the exact timing of positive comps.

Typically given the dependence of Kate Spade on what is a challenge North America environment of course, we expect clear improvement throughout the year as significant newness hits.

And.

Of course, as we enter a period of easier compares once we get into Q2, three and four.

But at this point I would say that you should expect that our confidence in the mid to single digit total growth driven by distribution.

Thank you.

Thank you.

Your next question comes from the line of Erinn Murphy of Piper Jaffray.

Great. Thanks, Good morning, I guess my question is around the EBIT dollar guide I guess do you move from what would have been roughly $95 million of incremental EBIT growth and now it looks like EBIT dollars are slightly down for the year can you just help us walk through the moving parts by brand is that all Kate Spade are there incremental investment.

And are you still expecting coach and Stuart Weitzman in that guide to be positive contributors to EBIT dollars. Thank you.

Sure Erinn. So in terms of the primary change absolutely correct, it's really coming from Kate Spade, where we now have taken down top line growth.

Through a combination of lower than originally expected comp as well as the modern and the modification in our store opening schedule. As you know we had 40 to 50. Originally plan now we have 30 to 40 as Victor just just mentioned those are the primary reasons.

The primary Yelp now from where we were and then of course, we do you still have elevated as DNA are typically indicate bran associated with new store openings that we opened this year.

As well as we won't anniversary that buyback is till the end of the first quarter. So it is really primarily coming from the Kate Spade brand. We are looking for operating income generation at Stuart Weitzman, Although the first quarter will be probably a similar operating loss to what we exited fourth quarter and accord coach is I would say steady as she goes.

Great. Thank you so much.

Thank you Arnie.

Your next question comes from the line of Alec Waldis of Goldman Sachs.

Good morning, Thanks for taking the question I wanted to ask a question about the decision to bring footwear in house at Kate Spade I Wonder if you could reflect on the same strategy at coach how that's progressed versus.

Youre planning what worked well that.

And why the decision to do that Weve, Kate now and you know how that could be an opportunity in some ways. It could differ from from the coach experience.

Sure.

Very clear opportunity Alex for US we've taken basically the last I would say two to three years to establish a very solid product development production capacity.

In footwear in Asia.

Incredibly pleased to have with us.

Tom Glaser, who comes of course from a very deep experience in that space supporting our teams as we look to truly get best in class in all of these categories. So he'll provide key leadership and we haven't seen that Kate has experience in doing this and I can tell you. We just show the first case collection activity.

As well of course, it coach and Stuart Weitzman, just basically wrapping up a weaker markets here in New York across all three brands.

And what I can share with you is that in all three brands. The reaction has been super.

Hey, its first collection of my computer coaches first collection three years ago, they've really taken a leap forward, whether it's from a design perspective.

Hello, what style perspective, excuse me that usage occasion and in terms of.

Product development, leveraging pricing in developing and the development capacity that we established when coach over the last two years I go into the key first season with a lot more confidence than we entered coach.

Three years ago, I would also add that this season and sandy Josh and the coach team have taken up.

Stanko recall, we've been operating now for a few months, Josh and his team have with some new third party development capabilities, especially in the core sneaker business, which as many of you know is driving a huge trend in footwear. We just showed a new collection, which has been incredibly well received.

So saddened by our own teams so fully excited by that and for those of you who follow on Instagram and maybe have Stuart weitzman on your feet, you'll see the new sneaker collection, but they just launched a barrel, which is really new to them given that they were sandals and boots resource I'm very excited of course as we enter fall winter given that they are such a strong resource, but it's truly a good reflection of the Rollup vaccines moved to also diversified and bring new usage occasions to the brand. So this is a great platform I think were really coming into our own and I speak with a good level of confidence on that look in the first year financially there's a small.

Investment that takes place, but really minor from here to this thing becomes much more accretive.

Your next question comes from the line of Oliver Chen of Cowen and company.

Hi, Thank you regarding Kate Spade, what are your thoughts regarding the customer reception of the newness ahead and how the sequencing may go as customers look to the changes also I would love your thoughts on the codes of the Kate Spade House and how you've evaluated how those are performing or tweaks you may make and then finally regarding cade just ensuring that there is a great level distinctiveness versus coaching and that the segmentation is how you want to add that would be great to hear those your thoughts. Thank you.

Yes, great Great question, but they had a really unique positioning.

And in many ways I would say first and foremost from an attitude perspective definitely considered on the fashion and given its strong at reliance on ready to wear traditionally and other accessory categories, including jewelry Tac.

Much excuse much younger much more millennial.

Then.

Coach does and I would say has a very strong in the handbag space a very strong.

And I'm talking here in North America, now because were very much in the early stages of building this business outside of Japan internationally, very strong suburban consumer who sees it as a key were at work resource and we're really focused on providing that that functionality.

I think that relative to differences between.

Coach educate achieves a completely separate nickel in her world. They don't come in and look at the coach collections from Stewart Stewart doesn't go over and look at the K collections, obviously in the fashion World that following general trends, but I think you will see whether it's in product and functionality and if you were to go to the full price stores is probably a good place to visit their right across from each other here at the Hudson yards mall here in Manhattan, where you can see coaching Kate Kate experienced in the coach experienced a very very different case speaking to her customer.

It's very specific codes and femininity that I'm going to talk to in a minute and coach to its customer with a much more urban fashion take and I would say.

Stuart's leverage of coaches much more house of leather coats.

If we look at Kate in the codes that we launched and I think I touched upon this in my remarks in terms of our ability to compete effectively in the outlet channel cake has traditionally depended on a few very core comes first and foremost on the material perspective, it has been about.

Saffiano from a silhouette perspective has been about satchels and wear to work types of style and from a branding perspective, it's really been about that Kate Spade, New York Metro lock up which is on these products. These are traditional codes. They are used by many brands across the spectrum.

And the.

The issue is just that one is saffiano in of itself is immaterial way is facing challenges in terms of the ability of brands to distinguish themselves from one another and then when you have the price competition come in on that it becomes even more challenging so what we're seeing in terms of the codes that we launch first and foremost new materials, new pebbles leathers Youre seeing new nylon executions, you will see in the future new textile executions PVC executions much more different branding executions, you've seen Nicola, especially in the full price part of the business, which has been well received leverage a more universal code that is uniquely owned by US which is the spade turning that into hardware turning that into.

Different lockup executions, which are good is going to give us diversity.

In the iconography of the brand and now we're leveraging all of that into the outlet channel, which we're really excited about and I would just say that when we look at and as you know Oliver is we've we've talked about this a few times in the past we have an extensive database, we capture north of 85% of customer transactions across our brands and what I can share with you is that the overlap.

In the database between coach and Kate Spade consumers is truly less than 5%. So im not as concerned about that at all as I am about Kate being true to its DNA yet continue to modernize itself continues to get.

The Kate Spade core customer distinctive newness that she can engage with and that differentiates it from all of the competitive set.

Thank you very helpful Best regards.

Thank you all.

Your next question comes from the line of Mark Altschwager of Baird.

Good morning, Thanks for taking my questions just a I guess a few quick ones for me.

Kind of housekeeping here, but what is the share count implied in the flat EPS guide for fiscal 2020.

And then how should we be thinking about free cash flow I guess based on your current outlook could you do more than the 300 million on the buyback without increasing your net leverage ratios and then finally I was hoping you could touch on inventory levels by brand any pockets of excess inventory.

That you need to work through in the short run here. Thanks.

Sure so mark on that share count I think if anything between 282 integrated SEC, depending on and we thought that $300 million worth of stock over the course of the year.

We are committing to 300 million right now and that's all I think we're willing to you up tick Mick you and then in terms of your third question on cash flow could we do more without tripping any leverage issues, yes, we could based on our projection of cash flow for the year.

Oh I'm sorry.

Army inventory so inventory was up as you know about 16% on a two year stack I think that was around 8.5% for total habits three on pro forma basis. If you include the case in the <unk> in the two year comparisons Cape was actually down about 10% over the two year period because of the low levels of inventory as we exited for two last year.

And given the full price selling that we've seen and a little bit delayed delivery. We had projected that we saw an increase in in transit we talked about port congestion last quarter I would reiterate that now.

In terms of where that excess is on the lower levels of sales you can assume obviously that we have a little bit more than we'd like to have on Kate spade. We are very confident that we can strategically managed unit, it's going to be a balance on brand house versus promotional activities, along we want to be very strategic in that but we feel good given the currency of the inventory that we can work through that in the first half of the year.

Great Thanks, and best of luck.

Thank you.

Your next question comes from the line of Jamie Merriman of Bernstein.

Thanks very much.

Victor in your comments about key you mentioned some of the initiatives that you have in terms of things like bringing in Satchels and cross body et cetera can you just give us a sense of the timing of some of those initiatives you know given the length of their supply chain and speed you know when would you expect those initiatives to start to help.

Thanks, Phil I think in the full price channel really is what I was referring to there because I do think were very much in.

Inventory in that type of style, we don't have enough diversity in outlet, we don't have enough diversification and outlet for the material and branding perspective, as well as bringing in.

I would say incremental silhouettes.

To the core Satchels, where we are very much in inventory and out in full price, there's definitely an opportunity there and you're going to see us bring those and in fact.

Every month over the next four to five months, we have two to three families launching in the next two to three months that we expect to be a very significant players along with Margo, which today is our key and most successful family in the full price channel.

Thank you that will conclude our M&A I'll now turn it back over to Victor for some closing remarks. Thank you everyone for being with US as is our custom I just want to take the opportunity to thank our teams across across the globe for their hard work and dedication couldn't be prouder of their commitment and all of their efforts as we've had an amazing year of building. The foundation that will certainly serve as a key to our growth for years ahead, I have tremendous confidence in them.

And look forward to.

Working and partnering with them to drive growth off of this foundation that Weve built thank you.

Thank you. This does conclude today's conference today's conference call. You May now disconnect your lines and have a wonderful day.