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?