Tapestry, Inc.

Good day and welcome to this Tapestry conference call. Today's call is being recorded. To ask a question during the Q&A session, please press star 1 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 Andrea Resnick, Global Head of Investor Relations and Corporate Communications.

Good morning, and thank you for joining us. With me today to discuss our quarterly results are G. Dave Zeitlin, Tapestry's Chairman and Chief Executive Officer, and Joanne Krogocerat, 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 guaranteed, and our actual results may differ materially from those expressed or implied in the forward-looking statement. 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 performance and results. 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 a recap of our fiscal third quarter results for Tapestry, as well as a current update on our global business in light of the COVID-19 pandemic. Joanne will continue with high-level financial and operational results for the quarter in addition to the mitigating actions we are taking and our priorities going forward. 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 who is serving in an interim role as Chief Commercial Officer of the Coach brand while the search for a permanent CEO is underway. 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, everyone, for joining our call. I hope this is the first and the last earnings call I'll be taking from my home office in Brooklyn. Sadly, all of us are living through a true 100-year storm. No one is exempt from the daily realities of COVID-19. Our thanks go out to courageous individuals on the front line of the fight against this pandemic. Our hearts are with those affected by its ravages. This crisis has profoundly impacted the way we live our lives and manage our business. This morning, we recorded our fiscal third quarter results. These are the first adjusted quarterly earnings loss in our nearly 20 years as a public company. We entered the calendar year with a strong underlying momentum, most notably for the Coach brand. As the novel coronavirus expanded across the globe, our results maturely weakened. Initially, we hoped the pandemic's damage would be limited to one country or region, especially as mainland China and South Korea began recovering. By mid-March, results deteriorated in North America, Europe, and numerous countries across Asia Pacific. We never before experienced a time when 90% of our store fleet was either closed or on shortened operating hours. It's clear that the crisis will have an impact lasting beyond a quarter or two. We're taking steps to mitigate the impact on a business that requires sales growth to leverage brick and mortar store expenses. As we look ahead, we're focusing our efforts on four key areas. Protecting the health and well-being of our people, our consumers, and our communities. Driving digital revenue and revenue in China and South Korea while preparing for store reopenings. accelerating key elements of our multiyear growth agenda, and preserving liquidity and enhancing financial flexibility, which Joanne will take you through shortly. First, guided by our values, we have prioritized our community, our people, their families, and our customers. Nearly three months ago, we acted swiftly to close stores in mainland China. We reopened where it was safe to do so, we've continued to provide pay and benefits to our retail associates while moving our corporate staff to a remote working environment, initially in China, today in North America and Europe. While our distribution centers remain operational, we've instituted enhanced health and safety precautions, and we're supporting our local communities through philanthropic donations from our brand foundations and specific initiatives around PPE. I am incredibly proud of our teams around the world and want to express my gratitude for the spirit and dedication they show every day. Second, here are the actions we've taken to drive revenues and reopen stores. We've seen green shoots and are confident we will weather the storm and emerge strong. During our last earnings call, I noted that the vast majority of our mainland China stores were closed. By mid-March, 95% of our stores on the mainland were open, although traffic lagged year-ago levels. Over the last six weeks, we've opened all remaining stores and we've seen brick and mortar sales build, led by retail. We've also seen significant disparities within the country, impacted in part by domestic travel restrictions. Unlike some of our European counterparts, the preponderance of our sales to the Chinese consumer globally have historically occurred in China. While our sales are encouraging, we're not experiencing outside domestic growth driven by the repatriation of tourist spending. In addition to these dynamics in China, revenues in South Korea are recovering. All our stores in South Korea are operating under normal hours. We learned important lessons from our Chinese business, which are informing our actions globally as we start to turn the lights back on in Europe, North America, and the rest of the world. We're reopening stores based on federal, state, province, or municipal requirements in the different countries where we operate. We're making these decisions carefully on a location by location basis. Our reopening playbook is focused on protecting the health and safety of our consumers and associates, including the cleaning of stores and fitting rooms, signage that highlights social distancing requirements, the enforcement of maximum customer densities, the use of masks and gloves where appropriate, offering sanitizers and wipes at cash wraps, and the availability of contactless payment and other measures. In accordance with these guidelines, I'm pleased to announce that tomorrow we will reopen approximately 40 stores in North America with only contactless curbside or storefront pickup service. Customers will have the ability to place orders over the phone and for some retail stores online as well and have orders brought to them curbside or at the storefront depending on mall configurations. We plan to offer this service in additional stores in the future. As of today, we've reopened five locations in Germany and Austria, as well as a dozen in Australia. Moving from brick and mortar to digital. Not surprisingly, e-commerce was a bright spot this quarter, and we leaned into it. We shifted our marketing investment and focus to strengthen our presence in consumer channels for our consumer shops today. Responding digitally is particularly important in a world where the majority of our physical stores are closed. Roughly 10% of tapestries pre-COVID sales were generated online. Leaning into digital as this secular trend accelerates is a significant opportunity and a critical element of our customer-centric growth agenda. Our global distribution centers are operating with little interruption. increasing e-commerce demand. We had no material China-related supply chain issues. We manufacture limited product in China and have a geographically diversified manufacturing and sourcing base. Subsequent quarter end, there were more disruptions across Asia and Europe. However, we successfully worked with our raw material and service providers to actively balance changing levels of supply and demand. We are pleased that most of our partners in Europe have reopened, including tanneries in Italy and footwear makers in Spain. Our distribution and logistics operations, including shipping, trucking, and air freight, are in good order. Importantly, we're acting decisively to fast track work already underway prior to the onset of COVID-19. work focused on driving outside growth in digital and creating a more streamlined and data-driven organization. We do not know how long this pandemic will impact us, but the world will be different on the other side. Consumer behaviors are changing, and secular trends are accelerating. As mentioned earlier, one of the most important consumer trends is digital, with increasing online consumer exploration, engagement, and purchasing. We're advancing our understanding of consumers' digital experiences to respond to their needs and desires. We must be better able to meet consumers where they are traveling. The shift from brick and mortar to digital shopping is accelerating. Physical stores will always play a vital role in a consumer's experience with our brand, but we expect their share versus digital will move towards greater parity. Growth in digital represents the consumer expressing where they prefer to shop, and we have to acknowledge this shift. For example, this means extending our partnership with Tmall in China. This also means carefully scrutinizing our distribution network as stores reopen and traffic levels normalize at what could be lower post-COVID brick-and-mortar levels. Successful business models for the future will make substantial investments in enabling platforms we are also reimagining our operating model and culture. Being rigorous about leveraging data proactively to make forward decisions is critical. Listening to the consumer is job one. Before turning to Joanne, I'll briefly describe strategies specific to each of our brands. Starting with Coach, our focus is on three areas, digital engagement, accelerating growth in China, and operational excellence achieved through right-sizing our SG&A cost structure and improved balance sheet management. Digital, which as we've discussed, is more than a shopping platform. It's about meeting with, engaging, and empowering the consumer and connecting with their values. China represents Coach's largest geographic growth opportunity. Chinese customers are proving resilient in their continued appetite for fashion and luxury. Our strong brand momentum and positioning will enable us to benefit from the rapid growth of the Chinese middle class. Already highly digitally engaged, Chinese consumers have increased their digital interaction with Coach through official social media sites as well as by engaging store associates on social media platforms such as WeChat. Coach conducted hundreds of live stream sessions that proved an important way to drive business. Finally, we're focused on improving operational efficiencies in both the near and long term. First, we're assessing our global store fleet and holding individual stores to a higher productivity threshold. Second, we're materially reducing our SKU assortment with the objective of significantly improving supply chain efficiencies and inventory churns. we're substantially reducing our corporate payroll while maintaining best-in-class brand experience and service levels. At Kate Spade, Liz Frazier is fully engaged in every aspect of the business. With a mission to reconnect with the core culture and unique spirit of the brand, she is focused on brand strategy and customer centricity. On the product level, the important role of color and novelty remains central. While the team works to redefine the balance and healthy tension between playfulness and pragmatism, two of the brand's defining values. The team is also putting great emphasis on community and customer, understanding the consumer more thoroughly in order to better serve and engage her. As a result, in recent weeks, the effectiveness of digital marketing has driven major increases in the e-commerce business as well as in social media engagement. and those stores largely remain closed, the team is finding new approaches. Some retail customers have personally reached out, and so the brand has begun testing Zoom shopping parties with notable success. Turning to Stuart Weissman, while we are disappointed in the brand's recent performance and the related impairment charge, we remain confident in the brand's long-term potential and are focused on returning it to sustainable, profitable growth. Our team, led by Giorgio Sarne, are executing a number of key initiatives, including, first, creating a focused assortment that speaks to the brand's fashion sensibility and leadership position in the boot, espadrille, and sandal categories. As an example, we just recently launched our new espadrille family, one of the key platforms of the brand, and a nod to our Spanish ties. We are pleased with the early online performance. Second, driving growth in China through strategic store opening and marketing investment. And third, expanding the brand's digital capability. Examples include buy online and pick up in store, a key omni-channel functionality, an innovative browsing experience to increase discovery and conversion, and more efficient customer segmenting and targeting capabilities that will enable us to increase customer personalization. In summary, no one is immune to the effects of this 100-year storm. We're taking aggressive actions to assure that Tapestry emerges a strong company when conditions normalize. We have a strong balance sheet. We benefit from a multi-channel international distribution model. Our exposure to wholesale is modest, and our supply chain is diversified. Most importantly, we have powerful brands with deep consumer connections and a long history of successfully navigating global challenges and macroeconomic shock. With that, let's turn to Joanne for a brief financial review of the quarter and the actions we've taken to mitigate the impact of the COVID-19 crisis. Joanne?