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 during this 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 allow optimal sound quality. At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations and Corporate Communications at Tapestry, Andrea Shaw Resnick.

Good morning, and thank you for joining us. With me today to discuss our quarterly results are G. Day Zeitlin, Tapestry's Chairman and Chief Executive Officer, and Joanne Cravoisarat, 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 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.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. G-Day will provide an overall summary of our fiscal first quarter 2020 results for Tapestry, as well as our three brands. Joanne will continue with details on financial and operational results of the quarter and our outlook for FY20. 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 Chief Legal 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 G. Day Zeitlin, Tapestry's Chairman and CEO. Good morning.

Good morning. Thank you, Andrea, and thank you to each of you for joining our earnings call. Although this is my first as CEO, this is Tapestry's 77th call since Coach's IPO in 2000. I still remember how exciting it was to listen to that first call 19 years ago when I joined the call as an advisor to the company. Having seen this journey progress over the years, my principal takeaway relates to the resilience of this remarkable organization. The combination of a powerful brand with exceptional people and culture has enabled this company to reinvent itself, to fix historical mistakes, and to address new competitors and evolving consumer desires. I've approached my first two months as CEO with an optimism born of our history and an appreciation that this history has been defined by innovation and change. I've immersed myself in day-to-day operations and key decision-making. My experience during this period of time has deepened my conviction that our three brands have powerful equities that connect meaningfully with significant and distinct consumer segments globally. I believe that each brand benefits from our shared set of resources that drive efficiencies and allow for sharing best practices across divisions. I'm excited by the work ahead of us to reignite growth by bringing a more consumer-centric focus to our investment decisions and by improving our execution. While our first quarter EPS was better than the forecast we shared with you in August, embedded in our results are external and internal challenges ranging from the situation in Hong Kong to competitive pressures to self-induced mistakes. We will touch on a number of these headwinds throughout the course of this call. Now, let me turn to results by brand. We achieved solid and consistent performance at coach. This was our eighth consecutive quarter of positive comps, which speaks to how our product resonated with consumers globally, driven by brand interest and vibrancy. Coach's digital and international channels again led growth this quarter. In fact, I recently returned from China, where all of Coach's international store managers gathered, including those from London to Tokyo to Sydney and many points in between. This group and the store associates they work with are exceptional. Although I am admittedly biased, I believe that they are the best store team at scale in all of retail. Turning to Kate Spade, revenue performed in line with expectations. The business realized a mid-teens decline in comparable store sales, which reflected the product and merchandising challenges we've previously identified and are actively working to address. Kate Spade's geographic mix is also more skewed to North America than Coach, thus leaving the brand more exposed to a domestic market that is facing greater traffic and promotional challenges than many of our key international markets. At Stuart Weitzman, sales were negatively impacted by softer wholesale demand, which offset growth in the brand's direct business. That said, gross margin expansion resulted in an operating loss equal to plan and to the prior year quarter. As we look ahead, we are maintaining our total tapestry outlook for fiscal year 20. We understand that to meet this guidance, we need to continue to drive growth at Coach while simultaneously improving trends from current levels at Kate Spade and Stuart Weitzman. Our imperative is to fuel desire for our brands and make investment decisions through a consumer-centric lens. We are focused on becoming more agile, continuously leveraging data and technology to increase our productivity and speed to market. These improvements will enable us to fund additional brand-building initiatives and to return capital to shareholders. To this end, we have commenced an in-depth, comprehensive, and efficient review of our business to address both near-term and long-term opportunities. Let us now discuss results by brand in greater detail, starting with Coach. Global comparable store sales rose 1% in the first quarter, led by outperformance in our international channels and across our e-commerce platforms. Excluding the pressures from Hong Kong, which intensified over the period, comps were up roughly 2%. The drivers of our global bricks and mortar comparable store sales were conversion, reflecting our strong product offering, as well as traffic. Coach delivered overall positive comps across most international regions, including Europe and Asia. As anticipated, results in Japan were strong, benefiting from a pull forward of demand in advance of the consumption tax increase, which was affected on October 1st. Our Greater China business was constrained by the situation in Hong Kong. However, we continued to drive positive same-store sales on the mainland as well as in Taiwan. Our international wholesale business also rose on a POS basis in the quarter. Comps in North America were flat to prior year, despite the negative impact of lower tourist spend. In addition, while our North America wholesale shipments were below prior year, in part due to timing, our business at POS increased despite fewer promotional event days. We are particularly proud of the brand's performance in North America in light of the weaker mall traffic trends in both outlet and full price retail. looking at our first quarter progress against Coach's brand strategies for fiscal year 20. First, we accelerated product innovation and disruption across our good, better, best price architecture in retail with introductions of Tabby, Troop, and Hadley, and an outlet with a Disney collaboration along with several new styles, both sporty and functional. We comped the comp and signature in both channels. Particularly exciting was an increase in global and North America outlet handbag AUR against a highly promotional backdrop. In addition, we drove outsized growth beyond bags in our less developed women's and men's footwear and ready-to-wear categories. Second, we drove fashion authority through cultural relevance. Examples this quarter include our September New York Fashion Week runway show, On the High Line, attended by global influencers and a number of celebrities, including actor, producer, and face of Coach Men's, Michael B. Jordan. In addition, we released a new Dream It Real campaign, which featured a global cast, including MVJ, Yara Shahidi, and Kiko Mizuhara. More recently, since quarter end, we launched a collaboration with MBJ featuring the anime franchise Naruto, which generated strong excitement and sell-throughs in the men's category. Third, we injected excitement into the store experience. One of the highlights of this quarter was an Art of Signature pop-up next to the vessel at Hudson Yards. We also had a Coach Original store takeover in New York during Fashion Week, set to coincide with our Spring 2020 show on the High Line. Coach Originals celebrated the heritage of the brand in a modern way with distinct product stories, including restored vintage bags, remade updates of archival styles, and remixed bags, which are individually handcrafted combinations of vintage Coach bags. These activations not only drove strong sales in their respective locations, but just as importantly, drove significant digital engagement. Based on the positive reaction to Coach Originals and its link to the spring collection, we will roll out Coach Originals pop-ups in high-profile locations globally. We're looking forward to holiday, where we will continue to innovate in our core families while disrupting with new drops that include the Tabby Shop. The Tabby Shop drops show the full breadth of this best-selling style across new novelty iterations as well as a new take on our original icon, the horse and carriage logo. In Outlet, we'll be launching a Star Wars collaboration, and in both channels, we're excited about our robust gifting assortments. In summary, we're optimistic about the holiday season and the balance of fiscal year 20 for our largest brand. We remain confident about the opportunity for continued growth as we look to accelerate innovation and relevance globally. Moving to Kate Spade, total sales declined 6% on both a reported basis and in constant currency, with the mid-teens comp decline offset in part by new store distribution, as well as the acquisition of the brand's operations in Singapore, Malaysia, and Australia, which we have not yet anniversaried. Comparable store sales matched our expectations. declining 16% on an aggregate basis impacted by the brand's exposure to the difficult North America market, as well as the product voids and merchandising challenges discussed on our August call. In our bricks and mortar business, average ticket was positive for the quarter, which together with the brand's relatively stable gross margin speaks to our deliberate management of in-store promotions. Traffic comp remained under significant pressure and was a primary cause of the decrease in comp store sales. On the other hand, international markets continue to outpace our domestic business with positive comps in mainland China and Japan. Turning to product and brand strategy at Kate Spade, the team has begun to address initial learnings, including broadening the product assortment in retail through increased breadth of key silhouettes and a diversity of materials in order to more fully satisfy consumer use educations. We're also bringing in more colour and novelty for holiday and beyond, These are playful elements that are the hallmark of the brand's unique personality and that we believe drive direct and indirect demand. In addition, we're evolving our marketing with a nod to the past, which we saw in the first quarter with our campaign that featured Anna Kendrick, our beloved brand ambassador. Further, our spring runway show at New York Fashion Week featured a diverse cast of women. This show, and notably the product, was well-received as feminine, optimistic, democratic, and relatable. In Outlet, as we've discussed, we're heightening the overall level of innovation, including our first-ever collaboration designed for the channel. We expect these actions to support sequential progress in comps as we move through the year. As mentioned, we're currently in the process of an intensive review of our business. A key focus is the Kate Spade brand. Our intent is to re-engage our core consumer and attract new customers. We need to find the right balance between sophistication, witty novelty, and color across all aspects of the brand. Our internal research has shown that the consumer continues to have an admiration and affection for the brand, but we must ensure that we have product that is compelling and relevant to her lifestyle, supported by marketing that more effectively connects her emotionally with the brand. Turning to Stuart Weitzman, while top-line sales results were weak, we did make progress on a number of key strategic initiatives in the quarter. In product, we broaden our footwear offering beyond boots and sandals, notably with growth in sneakers in keeping with market trends. We continue to build our awareness globally. Our fall campaign that featured Kendall Jenner and Yang Mi garnered over a billion impressions. We also drove local buzz and editorial coverage in China following the Plaza 66 pop-up launch in Shanghai and landing the cover of Vogue China. As we look forward, we're working to improve our execution from concept to market. Simply put, this means offering fashion innovation while ensuring that we meet our high-quality expectations and delivery commitments. Stuart Weitzman has always represented a fusion of fashion and fit, a key differentiator for the brand, one that is highly valued by our customers. Therefore, we're addressing our challenges through investment in talent, operational process improvements, and a focus on the fashion sensibility of the core design aesthetic. I'm confident we can leverage the brand's core equities to drive revenue growth and improved profitability. To recap, we delivered first quarter results that were in line with our plan, and our teams are now focused on the holiday season. These are exciting times at Tapestry, and there's continued opportunity to better connect consumers with our brands. Each of our brands have powerful equities that resonate meaningfully with distinct consumer segments, bringing diversification to our portfolio. Each brand leverages Tapestry's infrastructure and core capabilities, including local market knowledge and a wealth of talent to drive significant benefits. With that, let's turn to Joanne for the financial review of the quarter and our outlook. Joanne?

Thanks, G-Day, and good morning, everyone. As G-Day has just taken you through the highlights and strategies, I will cover some of the important financial details of the quarter as well as our outlook for fiscal year 20. Before I begin, please keep in mind that my comments are based on non-GAAP results. Corresponding GAAP results and the related reconciliation can be found in the earnings release posted on our website today. In addition, as noted in our press release, beginning in fiscal year 20, we are presenting the impact of foreign currency gains and losses within other expense and income. Accordingly, our Q1 results are presented on this basis, and our prior year results have been recast for comparability. Turning to our first quarter financial results. Total sales were in line with our expectations, with revenue declining 2% on a reported basis and 1% in constant currency. As G-Day mentioned, Coach showed continued momentum, with global comps increasing 1%. Kate Spade revenue declined by 6%, with comps decreasing 16%, in line with our projection, while Stuart Weitzman's sales decreased 9%, reflecting softer wholesale demand. Gross margin was down 20 basis points in the quarter, primarily due to FX headwinds at Coach. In addition, gross margin results reflected incremental pressure related to tariffs, principally at Kate Spade, given the brand's higher penetration of ready-to-wear and jewelry, which are primarily manufactured in China. At Stuart Weitzman, gross margin expanded significantly, driven by channel mix with the growth in direct sales. SG&A for the quarter was even with prior year and better than forecast as we tightly controlled cost in the context of a challenging environment. We also benefited from favorable expense timing with some costs originally planned for Q1 now shifting into the second quarter. Favorability in SG&A was partially offset by an FX loss in the quarter primarily related to the devaluation of the RMB. Earnings per share of 40 cents was ahead of our guidance of 35 to 37 cents. During the quarter, as highlighted in our press release, across Tapestry, we added a net of four locations, driven by international expansion at Kate Spade and Stuart Weitzman. We ended the quarter with 1,544 directly operated stores globally. Turning to our balance sheet and cash flows, at the end of the quarter, cash and short-term investments were approximately $788 million, while borrowings outstanding were $1.6 billion, consisting primarily of senior notes. As noted in our press release during the quarter, we recorded impairment charges of $76 million related to store assets, including the lease assets recorded in connection with the adoption of the new lease accounting standard. Inventory ended the quarter at $880 million, up 7% versus last year, consistent with our expectations for sequential improvement during the quarter. We expect inventories to remain elevated in the second quarter but end the fiscal year approximately even with last year. For the first quarter, net cash from operating activities was an inflow of $6 million versus an outflow of $19 million a year ago. CapEx spending was $72 million versus $55 million a year ago and reflected the shift in spend from the fourth quarter as mentioned on our August call. We continue to expect CapEx to be approximately $300 million for the year. Free cash flow for the quarter was an outflow of $66 million versus an outflow of $75 million last year. Now turning to capital allocation. In this fiscal year, we are dedicating our resources to driving organic growth rather than pursuing strategic acquisitions, while returning capital to shareholders through dividends and share repurchases. To that end, and consistent with our expectations for the fiscal year, we bought back $300 million of common stock in the first quarter. Together with our current annual dividend payout, we are on track to return approximately $700 million to shareholders this fiscal year. Moving to our 2020 outlook. Consistent with our prior practice, the following guidance is presented on a non-GAAP basis and replaces all previous guidance. Starting with the second quarter, we are projecting revenue to be similar to prior year. This guidance incorporates continued low single-digit comp growth at Coach, At Kate Spade, we expect comps to decline at a high single-digit rate, while revenue at Stuart Weitzman is expected to be approximately even with last year. Operating income is expected to decline in the quarter due to a contraction in gross margin, as well as mid-single-digit increase in SG&A growth, including the shift in timing of expenses from the first quarter. We expect earnings per share to be $0.95 to $1 in Q2. Now turning to our full year outlook where we are reaffirming key elements of our guidance. We continue to expect total revenues for tapestry to increase at a low single digit rate from fiscal 2019. This includes the expectation for low single digit growth at coach driven by continued positive low single digit comps. We expect Kate Spade to deliver low to mid single digit sales growth driven by distribution. At Stuart Weitzman, we now project slight growth, reflecting weaker than expected performance in Q1, as well as continued soft wholesale demand. In addition, we are still projecting a modest decline in gross margin for the year, including the negative impacts associated with bringing the Kate Spade footwear business in-house in the second half of the fiscal year, along with pressures from currency, primarily at Coach. The gross margin projection now also incorporates the impact of known U.S. tariffs on imports from China, including the 30% tariff on handbags and small leather goods enacted on October 1st, as well as the 15% tariff for categories such as footwear, ready-to-wear, and jewelry. For context, 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. However, in footwear, ready-to-wear, and jewelry, which are smaller but fast-growing categories for tapestry, we currently have more exposure to China. We continue to expect SG&A growth to be approximately in line with top-line growth, reflecting the important investments we have made in the long-term health of our business, including systems, new stores, and regional buybacks. Net interest expense is now expected to be approximately $50 million for the year, reflecting lower interest income related to the recent federal rate cuts. The full-year tax rate is still projected to be approximately 17.5%. Overall, we continue to project earnings per diluted share to be roughly even with last year. Touching on distribution. Across tapestry, our distribution expansion efforts will focus on international markets. By brand, we expect little change in our coached, directly operated store count, with closures in North America offset by modest net openings in international markets. At Stuart Weitzman, we expect to open a net of 15 to 20 locations globally. And at Cape Spade, we're projecting 30 to 40 net openings in this fiscal year. In closing, we're focused on sharpening our execution and delivering our financial plan with the important holiday season underway. As G-Day discussed, we're working to address both near-term and long-term opportunities with a consumer-centric mindset. We're also looking to be more agile and invest in areas that maximize returns. Overall, our strategic initiatives are intended to drive sustainable growth and productivity across our brands and unlock the inherent value in our multi-brand model. At the same time, we're committed to returning meaningful capital to shareholders supported by our strong balance sheet and cash flows. I'd now like to open it up to Q&A.

Thank you. Once again, if you'd like to ask a question, 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. Our first question comes from the line of Bob Dribble of Guggenheim.

Hi. Good morning. I guess my first question, G-Day, I know it's early days, but can you just give us your assessment of the business from where we are and why you are still a proponent of the multi-brand strategy, assuming that you are?

Terrific. Good morning, Bob, and thank you for your question. Let me address it perhaps both through a rearview mirror perspective as well as one that's forward-looking. So as noted, I'm 60 days in, and my perspective, I believe, is balanced somewhere between realism and optimism. If we take a look backwards for just a moment, we did what we told you we would do, right? We delivered an inline quarter, and the start of the year was as expected. We repurchased $300 million in stock, and we're on track to return a total of $700 million to our shareholders this fiscal year, inclusive, clearly, of our dividend. And this represents an increase of 40% year-on-year and underscores our commitment to return capital to our owners. And then lastly, backwards looking, we've maintained our outlook for fiscal year 20, even in the face of internal and external headwinds such as Hong Kong. That said, you know, looking forward, we need to sharpen our focus on execution. And as such, we're asking a lot of hard questions here internally. you know, first principles for us are to focus on driving organic growth. And you heard me say a number of times in my prepared comments, and you heard Joanne also reiterate it, we're very focused on being consumer-centric. And what do we mean by that? We really mean that we need to ensure that our core consumer is at the heart of everything we do, from product to marketing to store design. And this is a key element of the work that we've launched here in recent weeks. We need to make sure that we're really in a position to tell relevant brand stories that really connect our consumers with the values of our brands. The second real area of focus is on, as you drive growth, how do you really ensure that you've got operating leverage in the business? So how is it that we can become more agile, more efficient, and really do believe that there's an opportunity to better leverage the data and technology to increase our speed to market? We also need to be more efficient, frankly, and productive across, you know, many different areas from, you know, market strategies in terms of concept to market strategies, in terms of product assortment, in terms of our stores, and also the ways that we work. And I think if we're able to do this, it'll allow us to ultimately unlock resources that we can distort in terms of investing more in brand building at the same time as returning capital to our shareholders. More specifically to part of your question on our multi-brand strategy, one of the things that clearly we're very focused on is how to unlock even further the benefits of our multi-brand model. And I very much believe that our brands are stronger together as a result of our shared platform. This said, let's acknowledge it. Tapestry is a relatively young multi-brand company. And we're doing a lot of work to better define that balance between corporate and brand functions and do so in a way that's appropriate to our brands and to our culture. So the diagnostic work has just begun, but it's one that we're moving forward with quite rapidly. And we want to conclude it relatively soon so that we're in a position to address both near-term and long-term opportunities. We're clear that we face a number of challenges, and we're clear about those challenges. At the same time, frankly, we're confident that these challenges are fixable and that the solutions are largely within our control. So as we go forward, we're committed to being transparent in our communications. And, you know, we will openly acknowledge where we see issues. And at the same time, we're going to move very swiftly to apply the learnings from the work we've done and the learnings from just the deep experience in this organization. So thank you, Bob.

Got it. And if I could just ask a second question. You know, I think the guidance is for a sequential Kate Spade improvement in comps in the second quarter. I was just wondering if you could just give us a read in terms of your confidence in there. What are the key drivers that you're seeing within that business on the sequential improvement expected? Thanks.

Absolutely, Bob, and hopefully nothing is not consistent on that front in terms of being very focused on our product architecture in terms of broadening that, being very focused on our merchandising, so introducing more color, for example, in outlet, really working to find that right balance between sophistication and playful witty elements in our product and in our marketing and in our store environment that are consistent with the brand so it's it's a lot of you know kind of a very fundamental steps in terms of just broadening the reach of the of the brand and of the product and of the business

In the interest of time, we ask that you please limit yourself to one question only. Your next question comes from the line of Erwin Borchow of Wells Fargo.

Hey, good morning everyone. So my one question will be regarding the progress at Kate Spade. So I guess, just curious, within your guidance for the fiscal year, is there a plan to see a positive comp in any quarter for the remainder of the fiscal year? And then just when we're trying to think about the inflection in the business that is going to loom at some point, G-Day, would you expect to see comps inflect a positive before we're able to see CATE's margins stabilize, or could EBIT margin actually begin to improve ahead of comp growth? Just trying to understand the cost side and the pricing side, just basically what's going on at the brand overall.

Ike, you cut out just a moment. Do you mind repeating the second half of your question? I got the first half in terms of, yeah, but do you mind repeating the second half?

Yeah, I was just basically asking, is it possible that we could see the Kate Spade EBIT margins stabilize ahead of comp growth? Just trying to understand on the cost side and pricing, like how do we think about EBIT margin inflection in relation to comp inflection?

Understood. So, a couple of things. First of all, we are calling for sequential improvement as the year unfolds, and particularly in the second half of the year. You know, footwear will be additive to the business as we have brought in that license in the second half of the year. And, you know, in terms of calling, you know, specifically positive comp or calling margin enhancement, that's not something that I'm prepared to do at this moment.

Yeah, I can jump in. You know, our guidance does reflect sequential improvement in the Kate business as we see those merchandising actions really gain traction as we move through the year. Near term, we expect some gross margin challenges related to both tariff pressure, which is more exacerbated at the Kate Spade brand based on the penetration of ready-to-wear and footwear and jewelry, which are manufactured in China, although we are working on diversifying our sourcing In that brand, there are near-term pressures related to tariffs. As well as bringing footwear in-house, although it'll have a top-line benefit, it will have a, you know, versus a license agreement, it'll weigh on margins a bit in the back half. And then, you know, we expect some heightened promotional activity as we clear through some inventory levels at CAPE. So that's the near-term story of gross margin for the brand.

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

Great. Thanks. Good morning. I guess my question today is on the coach brand and the consistency there. You referenced the North American business was flat. Could you share kind of what you saw between full price and outlet during the quarter? And then what did tourism into the North American market look like this quarter in context relative to the prior few? Thank you so much.

Thank you, Josh.

Yeah, I'll take that one. Good morning, Aaron. You know, as we said earlier, The North America market was flat this quarter, and given the tough trends in both retail and outlet mall traffic, we were pleased with our ability to outperform the mall traffic in both of those relevant sectors. And we did that through a variety of of methods. You can see there was an acceleration in our strategy around collaborations, and we saw that when we do those, those tend to drive big inflections in traffic, particularly in the outlet malls. Disney in July. We had a graffiti artist castle in August. And so we've been getting better at executing those, and we see the traffic stop in outlet. G-Day also mentioned something on the horizon, our big Star Wars collaboration, which will be hitting in advance of Black Friday this year. So that's something to look forward to on that front. Your question about tourism, tourism has been tough for all of fiscal 19, and that trend continued into Q1. So the traction that we've seen in North America retail and outlet has been primarily through the domestic customer.

Your next question comes from the line of Alex Walvis of Goldman Sachs.

Great. Thanks so much. A little bit of a follow-up to the previous question. Can you talk a little bit about, you know, the Coach brand continues to deliver solid results in North America despite, you know, challenges seen elsewhere. Can you comment on the backdrop for consumer spending and overall retail traffic? You know, where are we versus where we are three months ago? You know, how are you expecting those trends to progress?

You know, it's been very consistent. You know, the data that we see about the consumer is that the consumer is in a good place. However, the traffic has been challenging consistently through fiscal 19 and into Q1, and whether that's retail malls or the outlet malls, the traffic has been tough. And so that really speaks to the execution of the teams in how they're driving excitement so that we get an outsized share of the traffic that is coming to the malls. And increasingly, the customer is shopping in an omnichannel ecosystem and engaging with us online where we're seeing very robust growth. And when we talk about the digital growth out and international growth outpacing, a lot of that digital growth is happening in North America, obviously.

Our next question comes from the line of Oliver Chen of Cowan & Company. Hi.

Good morning, Oliver. Good morning. Regarding the brand architecture at Cape State, what's your hypothesis regarding balance and thinking about product versus femininity versus novelty? And as we seek to understand the opportunity ahead at Kate Spade, would love your thoughts on sequencing the change because there's different things that are happening, you know, whether it be silhouettes, options, and thinking about the speed of execution. Would love thoughts on how this will unfold and how you're thinking about timing and what should come earlier versus later, you know, as you also test, read, and react in the marketplaces. Thank you.

Thank you. So let me just make an overall comment about Kate because questions come up a number of times. And, you know, we talk a lot about, and, you know, you've heard us in both Joanne and me talk in our opening comments and Josh in his last response about kind of brand equities and, you know, connecting consumers emotionally with these values. And as you know, that's a process that is part science and part art. but it's also 100% experience. And it's one where, you know, when you look at a premium fashion brand, you do not turn it on a dime. And so if you go back six or seven years when we had overextended the Coach brand, the process of rebuilding the health of that critical brand did not happen overnight. And I still personally remember how there was a period of time after we'd taken some dramatic steps to reconnect the brand with its core consumer when we did not immediately see green shoots. So we had to at that time have confidence in the relevance of our brand values and in the experience of brand building. And in many ways, Oliver, this is where we are met today with Kate Spade, right? Since acquiring the brand, we've changed both the creative and commercial leadership of the brand. We understand what the process is for building brand health and growing a business. And we also, as part of that, we understand that it's not a straight line, but it's one that we believe we will get right. It's part of our DNA. And we really believe we're not telling ourselves stories, we're not telling you stories when we look at the core pillars of this brand and we see a lot of white space, a lot of alignment with the values, the desires of a large group of consumers globally. So the brand work we've done and more recently done with the help of some outside consultants since I became CEO has only confirmed and deepened our internal analysis in terms of just the size of the potential market that really has an alignment with the Kate Spade brand pillars. So, you know, as I said earlier, you know, when working with premium fashion brands, you know, positioning yourself for sustained growth does not happen in a straight line. You know, it's a process. It's a process that we know well, and it's a process that we're confident, you know, that we will get right. You know, there are a number of near-term tactical steps that we're taking, you know, including adding more novelty to the product line, you know, broadening the assortment in specialty, particularly around satchels, you know, more innovation in outlets. But all of those are steps or durations along the way towards a process that we've been through before and that we're confident that we will ultimately get right.

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

Great. Good morning. Thank you. I wanted to ask a question on coach. So recently the coach comp has been led by international. Given the pull forward in Japan that benefited Q1 and some of the intensifying pressure in Hong Kong, Does the performance in North America need to accelerate in order for the brand to maintain its positive comps? I guess overall I'm just trying to better understand your level of confidence and the sustainability of the positive comps that coach, given some of those intensifying macro pressures internationally. Thank you.

Good morning. We continue to be confident in our ability to drive low single-digit comps. for the remainder of the year in each quarter. And we understand that there will be puts and takes given some of the macro trends, but we are confident in our guidance.

Your next question comes from the line of Paul Trussell of Deutsche Bank.

Good morning. Thanks for taking our question. I wanted to ask about gross margins. Perhaps first starting with the just reported quarter, maybe break down for us some of the puts and takes across FX, product sourcing costs, mix, and days of promotion in terms of the overall companies and specifically the coach banners, GPM, and how should we think about those same puts and takes looking forward?

Yeah, this is Joanne. Paul, I'll jump on that. The gross margin, it makes sense, I think, to disaggregate by brand to talk about what happened in Q1. In the coach brand, the gross margin performance was primarily driven by FX, so the decrease in gross margin. Promo activity was up a little bit, but much less than what we saw in Q4. In Kate Spade, the gross margin performance at was fairly stable year over year and far less promotional than we had been in Q4. We were very focused on carefully balancing promotional activity and brand health in the Kate Spade brand, and that continues to be a focus as we move forward. And with Stuart Weissman, we saw a significant increase in gross margin, primarily due to channel mix, with the increase in direct business due to the impact of the distributor buybacks that we've invested in and new store openings. that we've seen there. So that was the story for the first quarter. As we look to gross margin for the year, the modest decline in gross margin, really the mix out of Hong Kong impacting Coach and Kate Spade, along with, I should say, along with FX pressures in the Coach brand. In Kate Spade, we continue to see pressures as we right-size inventory, so there'll be some promotional pressures, some pressures related to tariffs, as I mentioned before, and related to bringing footwear in-house, which, again, the change from being a licensed business to bringing it in-house weighs a little bit on our gross margins there. So those are the primary contributors to the gross margin outlook for the year.

Your next question comes from the line of Omar Saad of ISI.

Morning. Thanks for taking my question. You know, G-Day is a follow-up to the multi-brand question. Maybe you could talk about your assessment of some of the kind of core competencies and capabilities, especially in the digital arena, that Tapestry, the operating group, has that it can really bring to bear unique capabilities and technology that it can bring to bear across multiple brands. Where do you think some of those competencies are that we can watch unfold across all three brands over the coming years? Thanks.

Thank you, Omar. A couple of comments there. First, in terms of broadly some of the benefits of the multi-brand, and then we'll talk more specifically to digitally. But as you've likely heard us talk about before, first, it's just a diversified earning stream. It reduces the pressure on us to be overly reliant on any one brand. Two, we're stronger when dealing with landlords, whether buying, marketing, advertising. as well as creating a more robust platform for top tier talent to want to be on. And so those are some of the benefits. As you've heard us talk about in earlier calls, we've also talked extensively about our data labs capability that we've built now over time that allows us to both take a very deep database and leverage the insights from that database everywhere from, you know, marketing to a promotional cadence to, you know, really thinking through our brand alignment, you know, in terms of product as well as, you know, store environment. Our new chief digital officer, you know, is really brought a lot of capacity to bear in terms that allows us to drive kind of efficiency across the platform. So we're actually one of the key aspects of the work we're doing right now in terms of diagnostic work is very focused on how to better leverage our digital capability, and that's literally everything from thinking about strategic partners with people such, with entities such as Tmall, and how do we deepen that, to thinking about other ways of, in an omnichannel world, meeting our customer where she or he most looks to engage with product. And, you know, there's some, I think one of the benefits of this combination that we've talked about of experience management with new leaders coming in is that there have been, you know, certain aspects of digital that have perhaps been a little bit more, you know, out of, you know, one that the organization was less willing to engage with that we're, you know, very much open to thinking about how, you know, whether or not it makes sense for us to engage with and to leverage as part of driving the top-line growth of this business.

Just building on what Gide mentioned, I think a great example of this is our work with Tmall. As we've mentioned, we recently launched Coach on Tmall with a soft launch in September, and we've seen terrific results. with 90% of the customers being new customers to the brand. And with Noam's partnership, we're going to be able to more quickly leverage those learnings across not just Coach but the other brands. So, you know, there's a lot of work. here on how we can leverage insights from each other's digital activities for the greater good.

Your next question comes from the line of Michael Benetti of Credit Suisse.

Hey, guys. Thanks for taking all of our questions here. Let me just ask you on – GD, I'd love to know if you'd be willing to share whether the brands are trending today in line with your outlook for the quarter. I know the low single digit for Coach and high singles for Kate and whether that includes the negative snapback in Japan that you guys have seen in the past after some of the spike and the change in the tax rate. I guess the bigger picture point, though, on Coach, on the Coach brand and the leverage point there, I have to say with that brand, it's been remarkably consistent through good times and bad. Where is the leverage point on that brand now? You've done a nice job growing same-store sales for the past few years in that low single-digit rate, but the margins have been up every year. How do you think about the sustainability of that dynamic given some of the natural inflation in that business.

Absolutely. So why don't I start and then Josh, you may want to jump in. First, it's early days in the quarter, and our guidance that we've given in terms of full-year guidance is predicated on our current view in terms of outlook for the quarter and beyond. So I wouldn't say a lot more than that, but one comment I'll make in terms of just coach and the opportunity there. I very much believe, and a lot of the initial work that we're doing, is that there is actually substantial opportunity over the intermediate to long term to actually drive organic growth there to even more closely align the core brand values with where we believe consumers are today and where consumers are going. So if anything, some of the early days of the work that we're doing would suggest that there is greater growth opportunity there as opposed to what I think was implicit in your question in terms of the opposite of that.

So I'll comment actually on both aspects of the question. Just a few things to watch out for. In the upcoming holiday season with Coach, I mentioned the Star Wars collaboration in Outlet. And we are also super excited about Coach's appearance as the first fashion or luxury brand in the Macy's Thanksgiving Day Parade. And all of us will be watching on Thanksgiving morning as our mascot, Rexy, floats down Broadway. And I think that's an example of the power of Coach. Coach is a powerful brand that has always stood for inclusivity and how we can even more fully own that in a culturally relevant way. We're pleased with Coach and that the base we start with is a well-run machine with a 27% operating margin today. And as we think about product opportunities for us, our strategy is really focused on Innovation in our core. We've talked about the need to innovate in the good, better, and best price buckets. This quarter, we specifically called out our handbag AUR in the outlet channel. We know a lot of you have been on the journey with us here, particularly in North America, and we're so pleased with the progress that our teams are making on introducing new differentiated products, but also leveraging some of the insights from our data labs in terms of finessing their promotional strategies to drive better AURs. So innovation and core is key because leather goods are today and will always be the core of Coach. Secondly, collaboration and co-creation. whether that is a big traffic-driving collaboration that we've done. We've mentioned Star Wars, which is coming up in the future. We've mentioned Disney, which drive a lot of traffic and sales. Or as Gide mentioned in his prepared remarks, a collaboration with Michael B. Jordan and Naruto, much smaller in scale, actually driving scarcity and brand heat. Both of those are super important. And then the third category of our focus here in product are our acceleration categories. And we've said that there are opportunities for us in footwear, in men's, and to a lesser extent in ready-to-wear, all of which are important focuses for us. And you'll be hearing more about our important footwear launch of the CitySol family, which will launch in spring. CitySol is a new sneaker and hybrid category, to be clear.

Your next question comes from the line of Rick Patel of Needham.

Good morning. Thank you for taking the question. My question is on Kate Spade. So given what you're seeing with traffic, can you provide some additional color on the outlook for marketing? I'm curious if you'll invest more in performance-based marketing or higher up the funnel, what you can do differently there. And as we think about financials, any context on how much marketing investment may change relative to last year?

Yeah, I'll say this. We We don't anticipate any significant shifts in our marketing spend as we go forward. And although we are one of the conversations that we have had a lot of discussion on internally is the mix of performance versus brand building. And if you take a look at last year, second quarter, we didn't spend effectively anything on marketing. This year we will spend on marketing.

Your next question comes from the line of Brian Nagel of Oppenheimer.

Hi, good morning. Thank you for taking my question. So my one question, bigger picture, Today, for the last few quarters, we've been discussing the weakness, and you've done a really nice job of outlining the initiatives you're undertaking to drive better results at Cade and even Coach. But the question I have is, if we step back, how much of the weakness in the bags, and again, this is mostly Cade, but even to a certain extent Coach, do you think is a function of internal missteps versus some shifts in the competitive landscape? And then the other question on top of that is, is there still – Within the context of your multi-brand strategy, is there still enough differentiation between Coach and Kate that they're not cannibalizing one another? Thank you.

Thank you. And in many ways, both questions are, I think, asking the same question in two different ways. But the work that we are doing is really intended to make sure, the first part of it is to really make sure we get underneath the brand equities and that we have real clarity as to the distinct consumer basis for each of the brands. And the work we've done so far built on top of internal work that's been done does underscore that they are distinct consumer bases. And as such, we think as we execute against those consumer bases that you will see even probably greater distinction between the positioning of the products and the brands, between each of the brands. That said, inherent in that is a view that the Kate Spade brand, and sorry to repeat myself, but the Kate Spade brand does speak very clearly to a substantial core consumer, somebody who is looking for fashion, who's looking for fun, who's looking for a feminine product. And we think that there's a reasonable amount of white space around that positioning that creates real opportunity for that brand. So we're optimistic, but also mindful of the real work ahead of us to more fully achieve that potential.

We have time for one more question. Your final question will come from the line of Paul Lajue of Citi.

Hey, thanks, guys. You guys have talked about some industry headwinds facing the business. I'm curious what you consider to be the greatest pressure points in that North America business. Maybe talk about it by brand and if any of those headwinds are actually showing some signs of improvement or are they working against you even further? Thanks.

Right. So why don't we, I mean, the big headwind that we've talked about is traffic here domestically and largely driven by a fall off in tourism. But why don't we perhaps start with Coach and then we can talk as appropriate about the other brands.

Yeah, I think we touched on it earlier. You know, we are overall, we're geographically agnostic. in terms of where we're recognizing the revenue. So, you know, tourist traffic trends ebb and flow over time, but clearly they have impacted North America now for an ongoing period. And that really just forces us to be sharper on our focus for the domestic customer. And how do we get better at serving the domestic customer? I think, you know, historically, you know, we may have had stores that were more tourist-centric, and those ones are being challenged the most. But even in those locations, how do we focus most on the domestic customer? And what we find is that her shopping habits are changing. So when it's a domestic customer, she is more often to start her shopping journey online. and want to continue that in the store channel. So how do we become more symbiotic between those channels in catering to the evolving needs of the domestic customer really is one of our biggest focuses.

And just very briefly, in terms of Kate Spade, the traffic trends are consistent there, so nothing really different to say there. And on Stuart Weitzman, the challenges, the historical one coming out of our supply chain challenges, which had an impact on our order book at wholesale, which we're very, very much focused on addressing. So thank you for the question.

That will conclude our Q&A. Jide, turn it over to you for some brief closing comments.

Terrific. Thank you, Andrea. I want to just take a moment to thank our shareholders. We are mindful that it is your capital that enables us to come to work every day seeking to connect consumers emotionally with our powerful brands. We take our responsibility as stewards of your capital very seriously. To my fellow employees, thank you for everything you do for our customers, and thank you for your contributions to the culture of this house of remarkable brands. I'm grateful for the opportunity to work with each of you. Thank you.

Thank you for participating in this tapestry conference call. You may now disconnect your lines and have a wonderful day.