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 wish 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. 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.J. Zeitlin, Tapestry's Chairman and Chief Executive Officer, and Joanne Klovoserat, 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 a 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 second quarter 2020 results for Tapestry as well as our three brands. Joanne will continue with details on the financial and operational results of the quarter as well as 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. Thank you, Andrea, and thank you to all of you for joining our earnings call. This morning, we reported our fiscal second quarter results, which exceeded our plan. Our outperformance was driven by continued momentum at Coach and a significant sequential improvement at Kate Spade. In addition, we exited the quarter in a good inventory position. We also entered our third fiscal quarter with strong underlying trends, notably at Coach, as sales growth accelerated from the holiday period. Therefore, we had originally anticipated maintaining our fiscal year 20 guidance despite continuing headwinds in Hong Kong and challenges at Stuart Weitzman. However, the escalating coronavirus outbreak in China is now impacting our business, resulting in both significant traffic declines and the closure of the majority of our stores on the mainland. As a result, we now expect that the second half of our fiscal year could be impacted by approximately $200 to $250 million in sales and 35 to 45 cents in earnings for diluted share given the current trends in China. If the situation further deteriorates or the outbreak further affects demand outside of the country, this impact could be worse. Our primary concern is the health and well-being of our team, their families, and their local communities who are dealing with the daily realities of this situation. We believe in the resilience of the Chinese people and our view that China represents a significant opportunity for our brands is unchanged. We are confident in our ability to effectively operate through this period of uncertainty. It is worth noting that during our 20 years as a public company, we've successfully faced myriad macro and geopolitical dislocations from the great recession in 2009 to 9 11, to SARS, and to the Fukushima earthquake and tsunami in 2011. We have consistently emerged from such turbulent periods a stronger company. Our strong balance sheet, cash position, and diversified sourcing base and supply chain afford us the flexibility to operate our company for the long term and to emerge stronger as we have many times in the past. Let me turn to the second quarter results by brand. We achieved another quarter of solid and consistent performance at Coach. This was our ninth consecutive quarter of positive comps, one that was driven by increases in handbags, average unit retail, or AURs in both outlet and retail. This speaks to how innovation and brand strength drives value as our products resonated with consumers around the world. Coach's global digital channels led growth this quarter, While regionally, North America outpaced our international businesses in the aggregate. Turning to Kate Spade, revenue was better than expected. We realized a mid single digit decline in comparable store sales versus expectations for high single digit decreases as we actively work to address merchandising and product challenges. In addition, we moved through excess inventory using higher levels of promotions during this typically markdown-heavy holiday period. At Stuart Weitzman, sales declined despite strong growth in mainland China. Demand was soft in North America and across other regions. That said, the gross margin expanded significantly and resulted in operating income in line with the prior year. During the quarter, we completed the comprehensive review of our brands and business that I described on our last earnings call. This diagnostic work has provided important insights into where we need to focus to build sustainable brand health and growth. There is no silver bullet. Rather, there are a handful of important changes that, when aggregated, will prove transformational. We will change key aspects of how we work. there are three major areas we've identified that will have the biggest impact on our business. Consumer centricity, data-driven decision-making, and how we work. To drive the successful development and implementation of changed business practices, we're forming a project management office which will ensure that our objectives are clear, that internal teams have the resources to succeed, and that multiple activities are coordinated. While we're not ready to share the specific plans at this time, we do have increasing clarity as to the opportunities we intend to go after, and we look forward to sharing our plans in detail at an analyst and investor day this summer. Before I mention additional details about our holiday performance, I want to touch on our leadership announcement this morning, which detailed a number of changes to the company's senior management team. First, I'm pleased to announce Liz Frazier as CEO and brand president of Kate Spade. Liz brings over 30 years of industry experience and leadership to Tapestry, having served as president of Lafayette 148, CEO of Anne Klein, and before that, president of Mark by Mark Jacobs, where she built that business into a multi-channel, multi-category, global lifestyle brand. As CEO and brand president, Liz will lead all aspects of the brand globally, working closely with creative director, Nicola Glass, and the brand's leadership team. I'm confident that Liz's leadership style, combined with her strong track record of getting things done, will translate into great outcomes for our Pates Spade team and business. Geraldo Paletto, CEO and brand president of Stuart Weitzman, recently informed us of his decision to leave the company. I'm grateful to Geraldo for the enthusiasm and dedication he brought to Stuart Weitzman, and I wish him every success in the future. Geraldo will depart on March 1st, and I'm pleased to promote an internal successor. Giorgio Sarney, currently president, Tapestry Asia, and president and CEO, Coach Japan and Asia, has been promoted to CEO and brand president of Stuart Weitzman. Partnering closely with head of product design Edmundo Castillo, Giorgio will be responsible for all aspects of Stuart Weitzman globally. Giorgio joined Coach in 2013 in New York and since 2016 has done an excellent job in leading Coach in Japan and overseeing operations in Korea and other markets in Southeast Asia. He is a passionate and strategic leader who I have great confidence will lead Stuart Weitzman into a new future. Emmanuel Ruland, currently Vice President, General Manager, Tapestry Southeast Asia and Oceana, will succeed Giorgio as President of Coach Asia, which includes Japan, Korea, Southeast Asia, Australia and New Zealand. I'm also pleased to announce that Jan Bozek, currently President Tapestry China and President and CEO, Coach China, will take on a tapestry leadership role across Asia Pacific in addition to his existing responsibilities. Jan joined Coach Japan in 2008 and has been instrumental in the brand's development and growth in the Asia region, notably its success in China. Most recently, he guided the integration of both Kate Spades and Stuart Weitzman's China operations onto the Tapestry platform. This organization has the opportunity to capitalize on the significant opportunities that exist for each of our brands, and I'm delighted to have Liz, Giorgio, and Jan join our Tapestry Executive Committee. Now, let us discuss results by brand in greater detail, starting with Coach. Global comparable store sales rose 2% in the second quarter, led by outperformance in North America and more generally across our e-commerce platforms. In aggregate, our international businesses were even with prior year, with strong comp growth in other Asia, Europe, and mainland China, offsetting continued weakness in Hong Kong. As anticipated, the Japan comp declined slightly, reflecting the consumer tax increase which went into effect on October 1st. Excluding Hong Kong, global comps were up roughly 3%. The driver of our global bricks and mortar comparable store sales was Ticket, or ADT, reflecting our AUR increases achieved through new product development, successful launches at higher price points and outlet, and lower levels of promotional activity. In addition, while our North American wholesale shipments were slightly below prior year, our business at POS remains strong 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. Importantly, Coach's momentum in North America was evidenced by our U.S. brand tracking survey fielded in December, which showed strength in positive brand affinities among the broad premium market. We are pleased to see the perception of Coach as a brand on the way up increase significantly and match fiscal year 13's all-time high, making it a standout within our panels. Now looking at our second 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 the introductions of additional colors and seasonal materials of Tabi and the launch of our horse and carriage logo platform alongside newness and signature. In Outlet, we successfully drove AUR with a relaunch of our top five bag styles. Each style received fresh design details and increased functionality, such that we were able to command a 10 to 15% premium versus their previous counterparts. With these new core styles in place, we layered on new fashion introductions to drive silhouette newness and to respond to market trends. The success of this initiative gives us the confidence to further lean into the opportunity to reduce promotional activity, drive higher prices and protect gross margins in the outlet channel. In addition, during the quarter, we continue to drive disproportionate 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 and created brand moments around key global events. Specific examples tailored to local markets this quarter included our participation in the Macy's Thanksgiving Day Parade. In fact, the Coach Float was the first for a luxury fashion company and featured singer and actor Billy Porter. In China, we celebrated Double Eleven, previously known as Singles Day, with compelling digital content featuring local talent. Overall, we generated a very positive response to our global digital content, including our holiday campaign featuring Kate Moss, Yara Shahidi, and a diverse mix of personalities that garnered nearly 1 billion impressions. As you likely noticed, in mid-November, we announced Jennifer Lopez as the global face of Coach. While her official partnership with the brand begins now in the spring 2020 season, she began posting during the second quarter, driving significant buzz around the brand. Third, we injected excitement into stores, bringing both creativity and convenience into the shopping experience. We continued to drive traffic through our store takeover and pop-up strategy involving nearly 80 installations during the quarter, including many dedicated to the launch of the Coach X Michael B. Jordan capsule collection in October and the horse and carriage collection in December. In Outlet, we kicked off pre-holiday excitement in November with disruptive activations around our Star Wars collaborations. On the digital innovation and e-commerce front, we piloted the Love Scan Save in-store digital tool in over 50 North America outlet stores during the quarter. This tool allowed the customer to use their smartphone to scan product to instantly see the out-the-door price, add favorite items to their bag, and skip the line for a faster checkout. We're encouraged by early results and customer feedback. And in China, we built on the momentum from our soft launch on Tmall earlier this year with our official grand opening in December, where we ranked highest amongst global brands in the handbag category while continuing to see growth across other e-commerce platforms, including our own coach.com and on WeChat. We estimate the nearly 90% of Tmall customers were new to coach. We're looking forward to spring with our first campaign featuring Jennifer Lopez, while we continue to partner with Michael B. Jordan as the face of Coach Men's. In retail, we will launch two new handbag families, and we will showcase Coach's heritage with a global rollout of Coach originals, grounded in leather craft, reintroducing archival shapes with a nod to the past through a modern aesthetic. Outside of handbags, we are very excited about the launch of the dual gender City Soul sneaker collection that merges coaches fashion authority with technology to increase comfort and flexibility and to minimize impact and weight. For the first time in over three years, we're dedicating significant marketing investment to the footwear category with out of home digital content and pop ups. In summary, we remain optimistic about our ability to accelerate coaches growth over the long term. Moving to Kate Spade total sales were even with last year on both a reported and in constant currency with the mid single digit comp decline offset by new store distribution comparable store sales were ahead of our expectations. and improved sequentially, declining 4% in aggregate as we moved through excess inventory and began to take key product and merchandising actions to optimize our assortment and to enhance the brand's novelty offering. In our bricks and mortar business, conversion was positive for the quarter, helped in part by higher levels of promotion, while traffic comp remained under significant pressure. Our international markets continued to outpace our domestic business, with positive comps in mainland China, Europe, and other Asia, while our global .com channels were also positive. Turning to product and brand strategy at Kate Spade, as mentioned on our last call, our strategy for holiday was to broaden the product assortment in retail to satisfy more usage occasions and to add back fun, color, and novelty. As a result, we saw strong performance in our expanded satchel offering, as well as in holiday giftables and jewelry. Collaborations, particularly Minnie Mouse in outlet and Tom and Jerry in both channels, resonated strongly with customers. Our cats group and novelty tiny elephant bag added a touch of whimsy over the holiday. In marketing, our objective was to establish the brand as a global gifting destination through compelling and impactful content and collaborations with a focus on digital. Post Black Friday, we increased our spend on digital to drive traffic to our dot-com site and generated significant growth in new and existing customers in December. Our holiday gift guide was also a notable win in North America with significant gains in spend year over year. In outlet, as we've discussed, we've been increasing the overall level of innovation and will have a focus on prints, novelty, and fashion in the second half. Looking ahead to spring, in retail, we will continue to add newness and satchels while expanding our cross-body offering in keeping with the hands-free trend in the market. In both channels, we're excited about the footwear opportunity as it comes in-house, with the first designs having arrived with the February floor set. We've developed exciting initiatives for both Valentine's Day and Mother's Day, adding new brand spokespeople in the marketing mix, such as the artist and poet Cleo Wade and the Japanese comedian and icon Naomi Watanabe. In aggregate, we expect these actions to support an improvement in comps in the second half of the year versus the first half, as the brand should be less impacted by the coronavirus outbreak, given Kate Spade's relatively modest exposure to the Chinese consumer globally. As mentioned, we've recently completed an intensive review of our business. Our intent at Kate Spade is to re-engage our core consumer and attract new customers by building the next generation platform for women's self-expression, empowering individuality. We recognize the multidimensional nature of our customer. We will return to being the brand that enables her to live her life to the fullest, from celebrating her own individual style to creating a positive and enriching community. To implement this strategy, we need to balance sophistication, emotion, wit, novelty, and color across all aspects of Kate. Our customer still has a wealth of goodwill towards 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. With Liz Frazier at the helm, leading the strong team in place, we will crystallize our brand pillars, define clear brand territories, and create an action plan to drive growth. Turning to Stuart Weitzman, top line sales remain weak. We continue to experience soft wholesale demand while our direct business also underperformed our expectations as we were unable to fully offset traffic challenges through increased conversion. China did continue to outperform with positive comps. We also generated a significant improvement in gross margin, which enabled operating income to match prior year levels. In product, we lacked distinctive newness in our heritage boot offering to drive an improvement in sales. However, we were encouraged by the consumer response to our key introductions, such as the McKenzie boot and the Nichia pump. Outside of footwear, we drove handbag sales with the new 50-50 bucket bag and nod to the iconic boot of the same name. In marketing, we continue to build our awareness globally with our first-ever Stuart Weitzman holiday campaign, which featured Misty Copeland. Total impressions reached nearly 1.5 billion globally. As we entered the third quarter, we gained unprecedented exposure from our Times Square billboard on New Year's Eve, with 1.5 million people in Times Square and over 1 billion global live broadcast viewers. Looking forward, we have built on these learnings and are reinvigorating our footwear icons through extensions in colors, materials, and hardware, while injecting innovation into the overall assortment in keeping with market trends. For spring, we've concentrated on sandal innovation beyond the nudist family with an expanded assortment of flats, wedges, and mules. 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. Our diagnostic review has reaffirmed that Stuart Weitzman has a strong and distinct brand proposition at the gateway to luxury, with considerable white space above it. It has a distinctive heritage and DNA, melding European luxury aesthetics and craftsmanship with American practicality and comfort. We are now 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 that under Giorgio's leadership, we can leverage the brand's core equities to drive revenue growth and improve profitability long-term. To recap, we've delivered aggregate second quarter results that were ahead of our plan and entered Q3 in a position of strength. We are very confident in our ability to successfully navigate what we expect to be a time-limited dislocation resulting from the coronavirus outbreak, underscored by our successful track record in managing through similar challenging periods in years past. Importantly, our teams are focused on creating action plans and strategies based on the insights from our diagnostic review. We have both a sense of urgency and a willingness to objectively face our challenges as we bring data, evidence, and logic to our work. We're stewards of three powerful brands and have the means to affect significant and positive change across our operating model to define the next chapter of sustainable growth at our company. With that, let's turn to Joanne for the financial review of the quarter and our outlook. Joanne?