Tapestry, Inc.

Good day and welcome to this Tapestry conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Andrea Resnick, Global Head of Investor Relations and Corporate Communications.

Good morning and thank you for joining us with me today to discuss our quarterly results for Victor Luis, Tapestry's Chief Executive Officer, and Kevin Wills, Tapestry's Chief Financial Officer. Before we begin, we must point out that this conference call will involve certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including 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 for 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 our presentation slides. You may find the corresponding GAAP financial information as well as the related reconciliations on our website, www.tapestry.com forward slash investors, and then viewing the earnings release posted today in the presentation slides. Now, let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our second fiscal quarter 2019 results for Tapestry, as well as our three brands. Kevin Wills will continue with details on financial and operational results of the quarter and our outlook for the balance of FY19. Following that, we will hold a question and answer session where we will be joined by Todd Kahn, Tapestry's President and Chief Administrative Officer, and Josh Schulman, CEO and Brand President of Coach. Following Q&A, we will conclude with some brief summary remarks. I'd now like to turn it over to Victor Luis, Tapestry's CEO. Good morning.

Thank you, Andrea, and welcome, everyone. As noted in our press release this morning, during the second quarter, our sales and gross profit rose, successfully anniversaring the strong holiday results of the prior year. That said, this performance fell short of our expectations in the face of an increasingly volatile macroeconomic and geopolitical backdrop. and as expected, we generated significant synergies while also making material systems and strategic brand investments across our portfolio. Taken together, adjusted earnings per diluted share were even with the prior year. Across Tapestry, we made significant progress on our strategic pillars during Q2, notably maximizing the opportunity with the Chinese consumer globally. To this end, Coach held its first-ever runway show in Shanghai, which was incredibly well-received by the editorial community and generated more than 1.1 billion impressions. At Kate Spade and Stuart Weitzman, where we are focused on driving awareness in the region, we invested in key talent, infrastructure, as well as marketing partnerships with Chinese brand ambassadors, while expanding our reach through the opening of new stores. While we understand that there are some continuing concerns around Chinese luxury spending, we view China's heightened emphasis on driving domestic demand as entirely aligned with where we are making our investments across brands. Indeed, we believe further investment in domestic markets, with China the most important, is the best hedge against volatility that may at times occur in tourist spending. We were very pleased by the relative outperformance of all of our brand's China businesses this quarter. Our teams across Tapestry remained focused on executing our four strategic priorities. First, continuing to harness the power of our multi-brand model. Our synergy capture was evidenced in part in the significant gross margin expansion we achieved in Kate Spade's second quarter results. To that end, We remain on track to achieve run rate synergies from both COGS and SG&A of approximately 100 to 115 million in fiscal 2019, up from 45 million in fiscal year 18. We've also continued to make progress on building a scalable shared services model, including investments in systems and infrastructure to support our current and future growth opportunities. During the quarter, we deployed the first phase of our ERP implementation, SAP's S4 HANA, successfully migrating our global finance functions for Tapestry, Coach, and Stuart Weitzman. And just yesterday, we successfully transitioned Kate Spade to the S4 HANA ERP system as well. Now that our S4 implementation is well advanced and with our experience operating as a multi-brand holding company, We've identified additional opportunities to further streamline our organizational structure. We expect these incremental efficiencies, along with a return on our brand investments, to support our goal of double-digit operating income growth in fiscal year 20. Second, fueling innovation. Across all of our brands, we are focused on delivering distinctive newness and compelling product across categories and channels. We understand that innovation is what drives velocity of purchase in our key categories, and having a nimble, flexible supply chain, which we leverage across brands, enables us to deliver a higher level of innovation with increased frequency. Our commitment to innovation is clearly evident across our brands in our just-introduced spring collections, as well as the impactful marketing campaigns launched to support them. Third, driving global growth. We continue to integrate the recently completed buybacks of the Kate Spade operations in Singapore, Malaysia, and Australia, as well as the Stuart Weitzman business in southern China in the second quarter. We also invested in key talent and infrastructure in these markets to support business development across our portfolio. These initiatives will allow us to accelerate international growth and drive brand awareness. During the second quarter, we added 40 net new stores across brands, including the acquired businesses. These new locations were primarily focused in international markets and took our directly operated total store count to 1,496. Our business is now more direct than ever In fact, we had over 170 million visits to our stores and sites in the second quarter alone. And fourth, advancing our digital and data analytics capabilities. Across all brands, we are continuing to drive superior results for our online channels and remain committed to delivering a seamless online, offline experience. Our Data Labs team is focused on further strengthening and integrating our customer database platform and supporting customer relationship management programs in each of our brands, advancing data tools to drive aggregated business insights across the organization, and innovating with advanced analytics to optimize key processes, for example, using machine learning on product allocation, pricing, or promotion planning. The team is making substantial progress on these goals in helping us become even more data-driven and predictive, building on the solid foundation we have created. Some of the key launches of this past quarter include a tapestry real estate tool that allows our teams to analyze store density and identify white space in any geographic location, as well as measure cross-channel migration of our customers. A tapestry product portfolio tool that allows our brand management, merchandising, and marketing teams to measure the performance of all our products across channels and regions against target priority segments, driving deep insights which can inform future product launches. Moving forward, in light of our recent results in the uncertain global environment, We are revising our outlook for the balance of the fiscal year, which Kevin will touch on shortly. And while we were not satisfied with our second quarter performance, we are proud of the continued progress on our key strategic priorities and confident that the investments we are making in our brands and our tapestry platform will drive a return to double-digit operating income and earnings per diluted share growth in fiscal 2020. Now returning to the second quarter results and starting with category trends. During the second quarter, we estimate that the men's and women's premium handbag and accessories market, which is now over $45 billion, grew at a high single-digit rate globally on an organic basis, a slight deceleration from the September quarter. In U.S. dollars, the growth rate was mid to high single digits, given the appreciation of the dollar. We also wanted to share some highlights of our U.S. Brand Tracking Survey fielded in November and December. Among the broad premium market in looking at emotional attributes, Coach is a leading brand in making women feel confident, original, and smart, while Kate Spade leads in making women feel feminine, beautiful, and fun. It is important to note that we saw gains in the brand affinities of both Coach and Kate, specifically Among the broad premium market, the percentage of women who agree that Coach and Kate Spade are their most loved handbag brand and are brands that they would confidently recommend increased versus a year ago. Looking at specific brand performance and starting with Coach, global comparable store sales rose 1% in Q2, led by outperformance in our international channels and across our e-commerce platforms. and reflected our compelling offering across categories. We were especially excited by the brand's increased traction with Chinese consumers globally, driven by domestic demand, partially offset by a decline in tourist spend. Further, we drove an increase in operating income through both gross margin expansion as well as FG&A leverage. Our goal for holiday across all channels was to continue to elevate and differentiate the brand by offering innovation and emotion through our product assortment, marketing, and the in-store experience with a special focus on gifting for the season. There were many highlights of the quarter in keeping with our brand priorities. In retail, we successfully cascaded leather goods innovation from our fashion shows and global marketing campaigns with Parker, Charlie, and Dreamer families, all of which remain strong drivers of the business in the first holiday season. We've continued to animate these families with new materials and shapes during the quarter. Likewise, we also reinforced signature as a coveted brand icon by having the most significant presentation at retail in many years. In addition to the iconic tan coated canvas, we also introduced a metallic signature platform for a festive holiday take on logo and a new elevated Jacquard print. As expected, Our customers were excited to have Signature back in a meaningful way in their retail assortment. Most broadly during holiday, we transformed our stores into a festive gifting destination featuring our whimsical party animals and emotional gifts across all price points. We also continued our momentum in women's ready-to-wear with strength in shearling outerwear globally and particularly in China. In Outlet, During the quarter, we increased the level and frequency of newness and novelty in the channel. We had multiple introductions in the edit, which represents the pinnacle of our outlet assortment. The best sellers included the new Cassidy Crossbody, the perfect day-to-evening bag, which was featured in many novelty iterations, as well as the Abbey Duffel and El Hobo, two-shoulder bags in rich pebbled leather. The edit continues to achieve higher AURs globally. In addition, we pulsed multiple gifting messages during the season, including a strong component of festive glitter and metallic bags and small leather goods. We also had a disruptive Wizard of Oz collaboration, bringing the excitement of this holiday classic to a full lifestyle collection, including bags, small leather goods, ready-to-wear, and soft accessories. Overall, Signature product continues to drive sales, and our customer is responding to innovation within this assortment. We had multiple iterations of signature newness throughout the quarter, including an exclusive Black Friday capsule juxtaposing signature against animal prints. In Q2, logo penetration rose over the prior year. And consistent with our strategy to drive growth outside of our core women's bags and small leather goods categories, men's continued to comp across channels and geographies, driven by lifestyle, notably outerwear and footwear, as well as small leather goods. In outerwear, shearling styles drove more than half of Q2 ready-to-wear sales. The November launch of the new Rivington family in bags also proved a great success. This family continues to be a focus as we move into spring and beyond. We were very pleased with the performance of our women's and men's footwear assortment globally. In retail, our strong growth was led by our sport and casual offerings, notably women's boots and booties, as well as on-trend sneakers across genders. In Q2, strong performance in the C143 sneaker continued across both women's and men's, with an expanded offering coming for spring. An outlet We were excited by the traction we experienced in women's boots and booties and men's sneakers. Our signature platform continued to perform well in both our women's and men's offering and across channels. In addition, we have made significant progress in driving our licensed categories both in stores and in the broader market. Coach fragrances gained momentum. Moving up from the 27 rank to number 16 within the Prestige Fragrance division of the U.S. Department and Specialty Store market based on dollar sales, according to the NPD Group's point-of-sale data in the 12 months ending December 12, 2018. Further, last month, we announced a global multi-year licensing agreement with Incipio Group to launch mobile device accessories. A comprehensive range of Coach mobile accessories will release on Coach.com and Coach stores worldwide beginning in the fall of 2019 and will be a key part of our holiday programs. We were also delighted with the growth we drove in e-commerce, with particular strength in our full-price retail.com business globally. Of note, Q219 was our best.com holiday performance ever in North America. During the quarter, we also rolled out our new homepage design, which has seen terrific engagement results, as well as enhanced personalization functionality through our product recommendations, which is driving strong conversion results. On stores, our customization program, Coach Create, continued to drive sales in Q2 as we accelerated our offering of customization options. Now including footwear and outerwear in addition to leather goods. Customization was offered in 12 countries in 110 stores during holiday. Supported by over 200 onsite craftspeople and by fiscal year end, this service will be expanded to over 150 stores. Around 300 additional stores are serviced remotely with the millennial focus on personalization and authenticity Thank you. Thank you. with local ambassadors with Guangxiatong in China and Kiko Mizuhara in Japan. As mentioned, a highlight of the quarter was our first ever Shanghai runway show, our first dual gender show outside of New York, which was live streamed and drew significant and positive global attention, both editorially and in media coverage overall. We will continue to leverage the halo from the show during the next few quarters culminating with the in-store launch of the Shanghai Collective, a series of collaborations with Chinese artists that was an integral part of the show. More recently, we've launched our partnership with Michael B. Jordan as the first global face of Coach Men's and held our first event with our philanthropic partner for the Coach Foundation, The Future Project. To celebrate the launch, Michael surprised students at Barringer High School in his hometown of Newark, New Jersey, generating national TV coverage and driving very positive engagement across social media platforms. Now to get into a bit of comp detail on the quarter. The drivers of our overall second quarter performance were fairly consistent with our previous trends, with global comparable store sales in bricks and mortar driven primarily by conversion. Thank you. Thank you. While our other Asia businesses were also positive, with Korea the only exception. Finally, Europe comp returned to positive territory. North America also accelerated on a two-year stacked basis, but comp slightly negatively, reflecting a difficult compare given last year's very strong holiday quarter performance. We understand that there's been a lot of focus on tourist flows, as well as concerns related to Daegu, or reseller activity. What we saw over the quarter was the anticipated and continued headwind from the tourist spending in North America. In addition, notably in outlet, we experienced volatility in the spending patterns of some of our customers, believed to be resellers, in advance of changes in e-commerce laws on the mainland, Effective January 1st. Our North America shipments were slightly below prior year during the quarter due to shipment timing with the first quarter as well as the closure of certain department store accounts. On a POS basis, we comped up in the quarter despite the lower level of promotional event days. Our international wholesale revenue rose versus the prior year in Q2, excluding Coach Australia and New Zealand as that business has transitioned to a directly operated retail model. This reflected some shipment timing shift with third quarter. At POS, sales were modestly below prior year on the same basis. Overall, we are satisfied with coaches' performance in the quarter in light of the tough compare volatile tourist trends, notably in North America. Moving forward, we remain focused on, first, delivering a heightened level of newness throughout the pyramid of fashion, price, and occasion across channels and geographies. Continuing to build on our established and authentic signature platform, driving growth beyond our core bags and accessories, utilizing technology and digital to enhance and modernize the customer experience, notably through customization, and lastly, amplifying our marketing message that balances unexpected brand impact and broad appeal. In summary, we are excited about the spring season and remain confident and the brand's opportunities for growth go forward. Moving to Kate Spade, we made continued progress on our integration efforts and the execution of strategic initiatives. That said, our sales fell short of our expectations with second quarter revenue totaling $428 million, down 1% versus prior year. Top line results were driven by new stores and the consolidation of Kate Spade China. Offset by the deliberate pullback in disposition and the decline in comparable store sales, which fell 11%, with our online business outperforming bricks and mortar stores. This comp softness reflected the lack of distinctive newness in the final season from the brand's previous design team. Given the lack of newness for holiday and our excitement about the new creative direction, We made a deliberate decision to shift marketing dollars from both Q2 and Q4 into the current quarter in support of the launch of Nicola Glass's new collection. In fact, her spring collection was introduced in our full price channels just last week. And while early days, initial reads have been strong. In handbags, the Nicola Group featuring the Spade Twistlock hardware, a new brand code, is resonating globally. and Margo, defined by its curved feminine silhouette and crafted from refined grain leather, is also performing very well. Perhaps most exciting is the response to her ready-to-wear designs, notably online and across classifications. We believe this indicates that we're taking the existing customer on the journey with us. Overall, this performance underscores our confidence in achieving a significant inflection in the business with a return to positive comps. At Kate Spade, we continue to focus on our five strategic pillars. First, global expansion. We added 31 net new locations in Q2, including 15 acquired in Singapore and Malaysia, and are on track to add 60 to 70 stores globally, including distributor buybacks. To date, our new doors are meeting or exceeding our expectations at high levels of productivity. Second, branding. We evolved our messaging to play to the brand's core attributes of fashionable and feminine while addressing fun in a more universal way. In support of Nicola's debut collection, we cast actress Julia Garner, Sadie Sink, and Kiki Layne to star in our new Kate Spade New York campaigns for 2019. The three new faces personify the brand's promise of optimistic femininity. The campaign was shot by famed photographer and longtime brand collaborator Tim Walker and has launched globally to very positive reviews and engagement. Third, as we've discussed, we're introducing exceptional and aspirational product, upgrading quality through elevated materials and construction while maintaining price, providing excellent value to our customers. And we've begun to create compelling and covetable brand icons and codes such as the spade turn lock to make our product both instantly recognizable and more distinctive. Fourth, we're creating immersive channel experiences and have started to roll out new retail and outlet concepts. In fact, of all the openings thus far in fiscal year 19, all have reflected the new color palette, enhanced visual merchandising elements, and merchandising by category of our evolved store model. In addition, We've made some light-touch renovations in key existing full-price locations, approximately 50 in total as of the end of January, with the goal of touching approximately 90 locations globally by the end of this quarter. These front-room wraps leverage the brand's new iconography in our specialty stores to appropriately showcase the new product in a cost-effective yet brand-enhancing manner. and fifth, we are leveraging the Tapestry platform in capturing synergies for Kate Spade through COGS and indirect savings as we optimize our supply chain, notably for bags and small leather goods from raw materials buying and manufacturing through transportation and logistics. The Kate Spade team is also tapping into Tapestry's resources and expertise such as global business development and store construction to accelerate growth and improve profitability over time. As we look ahead for Kate Spade, we continue to expect that it will be a year of solid revenue growth driven by new distribution, acquisitions and consolidations of distributor businesses and a return to positive comps during the second half and notably in the fourth quarter when all specialty products will evolve to new designs. And while we remain confident that Nicholas' product will drive an inflection in the business, we have now built in a slightly more muted top-line assumption for the balance of the year, given the weaker-than-expected performance of the carryover product, which we'll be transferring to Outlet. Importantly, as previously noted, over our three-year planning horizon, we continue to believe that Kate Spade can approach $2 billion in sales at significantly higher operating margins. Turning to Stuart Weitzman. We were pleased to meet our objective of returning the brand to top line growth in the holiday quarter. This reflects the progress the SW team has made in executing our FY19 strategic priorities. First, we continue to evolve and refine our product development processes and supply chain, addressing the challenges that arose last spring. Importantly, production levels and shipments have stabilized, reflecting the investment in talent and processes, as well as the added manufacturing capacity. Of course, we recognize that there is still work ahead to optimize our production and delivery schedules, especially for the global wholesale market, to allow us to capture the in-season replenishment orders. With the rollout of our world-class Tapestry IS platform in the months ahead, the team is excited by the prospects of capturing this opportunity. Second, we're expanding our footwear offering in new classifications while maintaining our authority in iconic Stuart Weitzman styles. During the quarter, we experienced growth in booties, loafers, sneakers, and pumps, where we had notable product newness. Third, we are expanding globally with a focus on the Chinese consumer. We are encouraged by the brand's performance in China. where we've acquired our business from our distributor partner and are focused on driving awareness and increasing market share. This spring, we're particularly excited to launch a capsule collection in collaboration with Yang Mi, a leading celebrity and influencer in China. In fact, her first post for the brand on her own feed drove 48 million views and was reposted 700,000 times in the week after launch. In addition, in January, prior to Lunar New Year, we opened an additional seven locations on the mainland in our new modern and elegant store concept. Fourth, we're driving growth beyond footwear, gaining credibility in handbags and leather goods. This quarter, we introduced the brand's new spring collection of handbags, which generated exceptional growth. We continue to see significant opportunity to grow the brand's handbag offering Given the complimentary nature of the footwear and bag categories. And fifth, we are creating brand desire through bold and modern marketing. We're thrilled to have just launched our new marketing campaign, introducing Kendall Jenner, Yang Ni, Willow Smith, and Jean Campbell as the season's diverse cast of hashtag SW women. This campaign, with its global relevance, highlights the brand's core attributes and values of fusing fashion, function, and fits. In summary, we've made significant progress in addressing the challenges in our supply chain, while at the same time evolving the brand's creative direction through product and marketing. Overall, we would expect improvement in the second half versus the prior year, with the third quarter still pressured by investments, and the fourth quarter approaching break-even levels of profitability on strong sales growth. We remain excited about the opportunities for the brand across geographies, classifications and categories and are confident in our long-term vision. Before handing the call over to Kevin for details on our financial results and guidance for fiscal 2019, I would like to touch on our CFO transition. As we announced in November, Kevin's last day with Tapestry. He has been a key member of our leadership team, and I speak for the entire organization in wishing him success as he embarks on his next chapter in Tennessee. Until a new CFO is named, I am extremely excited to share that Andrea Resnick will serve as our interim CFO. All of you know Andrea and her exceptional knowledge of the business and leadership will ensure that we do not miss a beat. Importantly, our strategic priorities remain unchanged, with our experienced and proven teams across Tapestry focused on their execution. With that, I will turn it over to Kevin for the financial review of the quarter and our outlook. Kevin? Thanks, Victor, for your warm wishes.