Tapestry, Inc.

Good day and welcome to this tapestry conference call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please 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 to provide optimal sound quality. At this time, for opening remarks and introductions, I would like to turn the call over to Christina Colone, Vice President, Investor Relations.

Good morning and thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Tapestry's Chief Executive Officer, and Andrea Shaw-Resnick, Tapestry's Interim CFO. 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 statements. Please refer to our annual report on Form 10-K, the press release we issued this morning, and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance. Non-GAAP financial measures are included in our comments today and in our presentation 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 and the presentation slides posted today. Now, let me outline the speakers and topics for this conference call. Victor will provide an overview summary of our third quarter 2019 results for Tapestry as well as our three brands. Andrea will continue with details on the 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. Tapestries President and Chief Administrative Officer and Chief Legal Officer, as well as 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, Tapestries CEO.

Good morning. Thank you, Christina, and welcome, everyone. As noted in our press release this morning, we are pleased with our third quarter performance. highlighted by increases in sales and gross margin on a constant currency basis in each of our three brands. Further, we continue to make key investments across our portfolio and to realize meaningful synergies from the successful integration of Kate Spade as we harness the power of our multi-brand model. Taken together, adjusted EPS was in line with our expectations for the quarter. Some additional highlights by brand include another quarter of positive comps at Coach, led by international and e-commerce. A significant sequential comp improvement at Kate Spade, with Nicola Glass' new collection resonating with consumers globally. And at Stuart Weitzman, results were consistent with our expectations, with top-line growth driven by our Buy Now, Wear Now strategy and spring newness. We're also excited to announce the approval of a $1 billion share repurchase authorization, demonstrating our confidence in driving long-term sustainable growth and value. Through this program, we will optimize our capital deployment and enhance shareholder return while maintaining our financial and strategic flexibility. Importantly, we remain committed to our long-standing capital allocation priorities, and many more. First, Continuing to harness the power of our multi-brand model, which is unlike other portfolio holding companies in our space, with each of our brands targeting a unique consumer attitude within the attractive and growing accessories, footwear, and outerwear markets. We are driving significant synergies on a shared platform with each brand leveraging Tapestry's core capabilities and infrastructure. 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. Our ERP implementation is well advanced, with Phases 1 and 2 successfully completed and Phase 3 targeted to launch this summer. We are also brand-led and consumer-centric. Our goal is to nurture authentic, innovative brands, thereby creating meaningful relationships with our customers by offering relevant product and experiences. And we are building a values-led culture. Based on optimism, innovation, and inclusivity, having both a strong culture and talented teams are critical to our success. We believe that anyone from anywhere can have the best idea, and with hard work and determination, anything is possible. Our belief in meritocracy creates credible career opportunities and rewards for those who share our values and who want to be a part of and help shape our growing company. Nowhere are our values more apparent than in our comprehensive 2025 corporate responsibility goals recently launched. These goals, across our three pillars of our people, our planet, and our communities, solidify our commitment to social responsibility as we recognize our role as a leader in our industry to affect real, measurable change. Further, we are committed to reporting to our stakeholders annually on our progress and achieving these goals. Second, fueling innovation. Innovation is at our core and it's foundational to our success. Across each of our brands, we are focused on delivering distinctive newness and compelling product across categories and channels supported by our flexible and dynamic supply chain. Some examples of how we are working in new, innovative ways include At the beginning of April, we held our first open source vendor fair. Over three days, we hosted 250 attendees from over 100 vendors around the world at our Hudson Yards headquarters. They presented their best ideas across leather, hardware, and textiles to our design and product development teams from all three brands. We challenged our vendors to bring new ideas and they came enthusiastically. This is an example of a new way we can work, benefiting from our scale as a multi-brand company. In addition, we have also launched a series of design-led thinking pilots within our creative process, enhancing the individual talent and limitless imagination of our creative teams. Several cross-functional groups of product designers and developers, merchants and marketeers are involved in pilots this season. Design-led thinking minimizes the uncertainty and risk of innovation by engaging customers or users through a series of prototypes to learn, test, and refine concepts. Design-led thinkers rely on customer insights gained from real-world experiments, not just historical data or market research. leading to the discovery of often unforeseen functional and emotional needs. Third, driving global growth with an emphasis on under-penetrated markets through both new store openings and distributor buybacks on a selective basis. This quarter, we anniversaried the consolidation of Kate Spade's Greater China Joint Ventures in January and the buyback of Stuart Weitzman's operations in northern China in mid-February and Coach's business in Australia and New Zealand in March. Since taking operational control of these markets, we've invested in key talent and infrastructure to support further development across our portfolio. These initiatives are allowing us to accelerate international growth and Drive Brand Awareness. We also continue to integrate the buybacks of the Kate Spade operations in Singapore, Malaysia and Australia, as well as the Stuart Weitzman business in Southern China, which closed earlier this fiscal year. And we're excited to announce that just this week we completed the acquisition of Stuart Weitzman's business in Australia, further leveraging our multi-brand hub in Sydney. We're also continuing to maximize the opportunity with Chinese consumers globally across each of our brands. At Coach, our global business with Chinese consumers again rose, driven by domestic consumption. In fact, following our Shanghai fashion show and our recent handbag brand tracking survey fielded in China this quarter, we saw an improvement in Coach's unaided awareness from 32 to 41%, and aided awareness from 69 to 72%, driven by growth amongst millennials. We're also continuing to build awareness for both the Kate Spade and Stuart Weitzman brands, amplifying our brand messages with tailored marketing, introducing local brand ambassadors for the first time this quarter. And in the same China handbag brand tracking survey, Kate Spade's unaided awareness was 4%, versus 2% previously, while the brand's aided awareness improved from 11% to 16%, also driven by growth among millennials. Importantly, we've expanded our reach through the opening of new stores, utilizing the key learnings we've had from Coach's successful growth in the region. In fact, during the quarter, we opened four net Kate Spade locations and seven Stuart Weitzman stores in Greater China. and forth, advancing our digital and data analytics capabilities. Digital touches every part of our business. In a world where technology is changing everything, investing in an industry-leading digital strategy is critical to our success. In keeping with this, I am pleased to announce that Noam Peransky has joined Tapestry as Chief Digital Officer, leading our company-wide digital strategy. Nome is a thought leader who has built his career around the digital experience in retail. He also brings expertise building digital innovation within multi-brand organizations, joining us most recently from Gap, Inc., where he was SVP of digital and led digital sales and engagement channels for all of Gap, Inc.'s brands. Prior to that, he spent six years at Alex Partners as a retail, digital, and marketing expert, working directly with a number of retail and fashion brands navigating the digital space. At Tapestry, Noam will focus first and foremost on refining and building a scalable global digital platform to drive growth and efficiency for our brands. He'll play a key role as our enterprise leader to deliver an innovative omnichannel experience for all of our customer digital touchpoints, including our websites, marketing, social, and digital in-store experience. Nome will also lead our digital innovation agenda, bringing new technology and ideas to support our brands to uniquely express their brand promise in new and compelling ways. Touching on Data Labs, this quarter we officially launched Tapestry's Data Labs portal, a centralized web platform that offers secure and seamless access to applications built in-house. This provides our internal teams with a personalized suite of data science and AI tools tailored to maximize the impact on both their short-term and long-term strategies. Our portal also enables us to scale our applications. such as our real estate and product portfolio tools to an expanded user base. In addition, we developed a suite of application programming interfaces or APIs that can be integrated with other systems utilized by cross-functional partners on the front lines of our business. In the near future, the output from our algorithms will feed into our POS, clienteling, and CRM platforms to further enhance the overall customer experience. Overall, we are confident in the clarity of our vision, the strength of our team, and the benefits of our global multi-brand platform. As we look ahead, we are committed to executing our strategic plan and achieving our near-term and long-range financial targets, including delivering double-digit operating income and EPS growth in FY20. Now turning to category trends. During the third 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, consistent with the December quarter. In U.S. dollars, the growth rate was mid to high single digits, given the appreciation of the dollar. Now looking at specific brand performance and starting with Coach. Global comparable store sales rose 1% in the third quarter, led by outperformance in our international channels and across our e-commerce platforms consistent with the previous quarter. The drivers of our global bricks and mortars comparable store sales were conversion, reflecting our strong product offering, as well as traffic. By region, we delivered overall positive comps across all of our international regions, including Europe, Japan, Greater China, and other Asia. Comps in North America declined slightly, including negative impact of the shift in timing of Easter, the continued pressure from lowest tourist spend, as well as the ongoing volatility in Daegu or reseller activity. Moving to wholesale, our North America shipments were below prior year, including the negative impact of timing with the fourth quarter while our business at POS increased despite a lower level of promotional event days. Our international wholesale revenue rose versus the prior year in Q3 while POS sales were modestly below prior year on the same basis. There are many highlights of the quarter in keeping with our brand priorities. In retail, we continued to cascade leather goods innovation with the successful launches of the Parker Top Handle as well as the Charlie Carryall 40. Dreamer also remained a top family with new novelty introductions. Our signature offering remained strong, comping the comp, anniversaring its relaunch in retail last spring. We were thrilled with the performance of novelty with our runway patchwork and denim assortment resonating with consumers. Our Japanese exclusive Sakura cherry blossom collection also outperformed. We also saw momentum in lifestyle categories driven by women's ready-to-wear and footwear, notably sneakers, with continued strength in the C143 runner as well as sandals. Additionally, we continued our partnership with Disney. which was included in our spring runway show and featured Dumbo across a playful collections of bags, ready to wear, and accessories. In Outlet, we debuted a fresh dual gender Keith Haring collaboration across categories and in women's handbags launched the Coach Avenue Carry All continuing to infuse newness throughout the assortment. We also remain focused on introducing pinnacle product with higher AURs. This quarter, within the edit assortment, we were pleased with the performance of the new Zoe carryall, as well as the continued momentum in Abby, where we launched a new mini silhouette. And as in retail, we drove growth in signature, while denim resonated across platforms and categories. Footwear also outperformed, and we were excited by the traction experienced in loafers and sneakers. and consistent with our strategy to drive growth outside of our core women's bags and small leather goods categories, men's continue to comp across channels driven by lifestyle, notably apparel and footwear, as well as small leather goods. The launch of a new coach logo and retro sports style as shown in our ad campaign featuring Michael B. Jordan also proved a great success and outperformed expectations. On stores, Our customization program, Coach Create, which includes footwear and outerwear in addition to leather goods, continued to drive sales in Q3. I'd also like to touch on our pop-up store initiative, which is another exciting way we're connecting with consumers and creating innovative, immersive experiences. These pop-ups showcase the product in interactive settings, allowing customers to engage with the brand in new ways. Thus far in FY19, we've launched over 100 pop-ups globally, including a New York City subway installation at Le Bon Marché in Paris, a made-to-order rogue shop at Neiman Marcus Hudson Yards in New York, and the Coach Create pop-up on the stage at Isetan Shinjuku in Tokyo, Japan, as well as a men's modern active installation at Aventura Mall in Miami. On marketing, we are driving fashion authority, both from the runway and increasingly through cultural relevance and co-creation. For the February fashion show, Coach's creative director, Stuart Beavers, collaborated with artist, Kay Fassett, known for his maximalist prints, which added color to the brand's already robust visual vocabulary. Also in February, We were especially excited to launch a collaboration between Academy Award winner Spike Lee and actor, producer, and global face of coach Michael B. Jordan. Shot last fall, this short film entitled Words Matter brings together two modern dreamers who are known for challenging and redefining the American film landscape. While we were inspired to create this storytelling moment with a simple goal, to harness the power of our brand to speak up for inclusion and optimism. This is a universal message and represents the best of Coach. We also launched a series of first-person videos, hashtag Words Matter, to spark a social conversation and inspire the greater community to share their own stories and personal points of view on why words matter. The series features the artists Wisby, Nets player Spencer Dinwiddie, Spike's children Jackson and Sacha Lee, amongst others. And in another first for Coach, we debuted our Dream It Real podcast series in late April. These are unfiltered conversations featuring celebrity guests, thought leaders, and inspiring young people talking about their dreams for themselves and for the future. This is an exciting moment as we continue our commitment to empowering young people. Our first episode featured Selena Gomez as she spoke about authenticity and self-acceptance. In our second, Michael B. Jordan joined us to speak about courage. Future episodes will feature Stuart Weavers as well as actors Maisie Williams and Ben Platt. Overall, we are satisfied with Coach's performance in the quarter in light of the volatile tourist trends and Easter shift, notably impacting North America. Moving forward, we remain focused on, first, delivering a heightened level of newness through the pyramid of fashion, price, and occasion across channels and geographies, continuing to build on our established and authentic signature platforms. 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 seasons ahead and remain confident in our largest brand's opportunity for growth. Moving to Kate Spade, we drove a significant eight-point sequential improvement in comparable store sales to negative 3%. In both our brick and mortars and e-commerce channels, conversion accelerated from the prior quarter. Total sales rose 4% on a reported basis or 5% in constant currency driven by new store distribution as well as the acquisition of the brand's operations in Singapore, Malaysia, and Australia, which we've not yet anniversaried. We also made significant progress in keeping with our five strategic pillars. Drive global growth, especially across Asia. Introduce emotional and distinctive product platforms. Launch lifestyle-focused branding. Create immersive channel experiences and leverage of the tapestry platform. As you know, this quarter we launched Nikola Glass' spring collection in our full-price channels, where penetration levels met our expectations, driving our excitement with the customer response. In handbags, The Margot family has become a leading platform, and the new Molly Tote is a best-selling style globally. In addition, we remain delighted with consumers' reaction to the brand's new code, the enamel spade, across categories, including the Nikola handbag group and the Heritage Spade jewelry collection. In March, we launched Polly, a soft pebbled leather group, and initial reads have been strong. And just last month, We introduced Andy, a canteen bag which is a modern take on a classic shape and is becoming a top seller. In ready-to-wear, fit-and-flare dresses, feminine tweed, wear-to-work silhouettes, statement sweaters, and on-trend jumpsuits are key wins. As expected, our results continue to be negatively impacted by the performance of the legacy carryover product, notably in handbags, though we have made substantial headway in moving through this inventory. We've also had important key learnings which will inform our future development. In handbags, we see additional runway and satchels in casual, soft, and sophisticated iterations. We also see opportunity for product extensions within the top performing groups such as Margo and Molly. We will evolve our small leather goods offering Further distorting our investment to small wallets and cardholders while also updating functionality. In Ready to Wear, we will focus on chasing what's working, building on the attributes that the Kate Spade apparel and outerwear customers have come to expect with compelling day to night styles. And we will introduce additional playful and emotional novelty items, both as permanent and limited edition offerings. These are hallmarks of the brand that play well to the drop model that is driving millennial fashion shopping. Now turning to the launch of our brand evolution across consumer touchpoints. In support of Nikola's debut collection, we launched a 360 global marketing campaign, amplifying the new creative vision and the brand's unique positioning of optimistic femininity. The campaign featured actresses Julia Garner, Sadie Sink, and Kiki Lane, and was shot by famed photographer and longtime brand collaborator Tim Walker. In fact, since the launch of the new creative direction at the end of January through March, the number of new Instagram followers accelerated, increasing nearly 20% over the same period last year. While we also introduced our first ever campaign tailored specifically for the China market, In addition, we also focused on our stores and digital channels, ensuring consistency with the new product brand vision and creating immersive channel experiences. In keeping with our strategy, we made light-touch renovations in key full-price locations, ending the quarter with over 100. The showcase of our new color palette and enhanced visual merchandising elements. 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 way. In addition, we also launched a new product, brand codes, and imagery across our digital and social platforms. Importantly, we remain confident in the growth opportunities for the brand, supported by the successful integration of Kate Spade onto the Tapestry platform, leveraging our core capabilities. Key accomplishments include migrating the Kate Spade brand to the Tapestry supply chain, realizing significant synergies, and clear product quality improvements. attracting and retaining key operational and creative talent across the organization, laying the foundation for accelerated international growth through the direct control of the brand's businesses in Asia, notably Greater China, driving brand heat and reinforcing brand health through both the launch of a new creative direction and the strategic curtailment of third-party promotional channels. We also integrated Kate Spade's customer data across North America, Europe, and Japan into the Tapestry customer data platform. Overall, our third quarter performance, along with our continued progress on our strategic initiatives, underscores our confidence in delivering positive comps in the fourth quarter. Looking beyond FY19, as previously noted, we continue to believe that Kate Spade can approach $2 billion in sales over our three-year planning horizon at significantly higher operating margins. Turning to Stuart Weitzman, we delivered another quarter of sales growth with revenue increasing 2% on a reported basis and 4% in constant currency. This reflects the progress the SW team has made in executing our FY19 strategic priorities. We're broadening our footwear offering while maintaining our authority in iconic Stuart Weitzman styles. During the quarter, we experienced growth in our buy now, wear now offering of booties, while new classifications of platforms and wedges drove growth in sandals. Pumps also performed well, driven by the Mary Ann and the Lee. Sneakers remained exceptionally strong, fueled by success in the SW612. We're also driving growth beyond footwear, gaining credibility in handbags and leather goods. Handbags rose significantly in the quarter, albeit from a small base, and outpaced our expectations. We continue to see significant opportunity to grow the brand's handbag offering, given the complementary nature of the footwear and bag categories. We're creating brand desire through bold and modern marketing. Our spring campaign featuring Kendall Jenner, Yang Mi, Willow Smith, and Jean Campbell with its global relevance highlights the brand's core attributes and values of fusing fashion, function, and fit. Stuart Weitzman continues to be a red carpet brand of choice, once again dressing many celebrities at this year's Oscars. Importantly, we are expanding globally with the focus on the Chinese consumer. In fact, this quarter, our business in China once again outperformed, and we remain intent on driving relevance awareness and increasing market share. We opened seven new locations in mainland China in our new, modern, and elegant store concept. As planned, we also launched a capsule collection in collaboration with Yang Mi across an assortment of sandals, pumps, and Sneakers. Talasa, the pearl embellished sneaker, was a notable bestseller. In addition, performance was particularly strong on our e-commerce channels globally. And finally, as our production levels and shipments have normalized, our focus is rebuilding our order book with our global wholesale partners to capture the in-season replenishment orders. This focus will support our objective of driving strong sales growth and improved profitability in the fourth quarter. In summary, we've made significant progress in evolving the brand's creative direction through product and marketing. We remain excited about the opportunities for Stuart Weitzman across geographies, classifications, and categories and are confident in our long-term vision. To recap, We have a clear vision, a strong team, and a unique global multi-brand platform. Our model is distinctive. We're brand-led and consumer-centric, with a culture built upon values of optimism, innovation, and inclusivity. Each of our brands have differentiated attitudes, bringing diversification to our portfolio. At the same time, Each can leverage Tapestry's core capabilities and infrastructure to drive meaningful synergies. Taken together, we are uniquely positioned to capture the vast opportunities within the attractive and growing global accessories, footwear, and outerwear markets. With that, I will turn it to Andrea for the financial review of the quarter and our outlook. Andrea?