Tapestry, Inc.

Good day, and welcome to this Tapestry conference call. Today's call is being recorded. Later, we will conduct a question and answer session. To ask a question at that time, please press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. If you should need operator assistance, please press star zero. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations at Tapestry, Christina Colon.

Good morning. Thank you for joining us. With me today to discuss our second quarter results, as well as our strategies and outlook, are Joanne Pervoiserat, Tapestry's Chief Executive Officer, and Andrea Shaw-Resnick, Tapestry's Interim 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. This includes 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 statements. Please refer to our annual report on Form 10-K, the press release we issued this morning, and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance. Non-GAAP financial measures are included in the 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.tavistry.com forward slash investors, and then viewing the earnings release and the presentation posted today. Now, let me outline the speakers and topics for this conference call. Joanne will begin with a brief recap of the second quarter for Tapestry and each of our brands. She will also provide an overview of the progress we've made on our acceleration program. Andrea will continue with our financial results and priorities go forward. Following that, we will hold a question and answer session where we will be joined by Todd Kahn, Tapestry's President and Interim CEO and Brand President of Coach. After Q&A, Joanne will conclude with brief closing remarks. I'd now like to turn it over to Joanne Provoisera, Tapestry's CEO.

Good morning. Thank you, Christina, and welcome, everyone. As you read in our press release, Tapestry's second quarter results significantly outpaced our expectations, driven by the successful execution of our acceleration program. Our sharpened focus on the consumer fueled new customer acquisition across all brands, supporting notable sales gains in digital and China. For the second consecutive quarter, we generated strong operating income growth, both compared to prior year and to fiscal year 19, supported by a reduction in promotional activity and higher AUR, as well as discipline, inventory, and expense management. I'm particularly proud that we delivered this profit growth in the face of unprecedented COVID-related external headwinds, including pressured bricks and mortar traffic, store closures and capacity limits, as well as higher freight costs and shipping constraints. This success clearly underscores the talent and resilience of our teams around the world. It also reinforces the power of our brands and the competitive advantages of Tapestry's enabling platform. Importantly, our outperformance in the quarter also highlights the progress we've made under our acceleration program. First, we continued to drive our global digital business, which reached $1.3 billion in revenue on a trailing 12-month basis, more than doubling in size from a year ago. During the quarter, we once again generated triple-digit e-commerce growth, bringing digital sales to approximately one-third of total revenue, as compared to a low team's percentage last year. And in North America, as expected, the penetration was even higher, with e-commerce representing nearly half of our sales in the holiday quarter, up from a high teens percentage last year. This outcome is a testament to our company-wide focus on leading with a digital-first mindset and our success in creating immersive customer experiences across our e-commerce and social channels. To deliver these outsized gains, we leveraged Tapestry's scale and agility to support increased digital demand. Specifically, we moved quickly to add fulfillment capacity, including expanding distribution centers by nearly 350,000 square feet heading into holiday. In addition, anticipating outbound shipping challenges in the U.S., we were able to successfully diversify our parcel carrier partnerships, increasing flexibility and enabling us to avoid bottlenecks and limit disruption as much as possible. These were critical elements of our holiday preparedness strategy. Importantly, our online growth was led by the recruitment of over 1.5 million new customers across brands in North America, where we're continuing to capture a growing number of millennial and Gen Z customers online. Overall, we're incredibly excited by the traction we're seeing in digital, as our focus on this channel touches several of our key strategic priorities, including increased customer centricity, better use of data, and evolving the way we work to address the rapidly changing environment. We see tremendous opportunity to drive continued customer recruitment and engagement online, supporting not only revenue growth but profit growth as well, as our digital sales channels carry higher operating margins than their respective brick-and-mortar counterparts. Therefore, digital growth is a key enabler as we transition from a period of efficiency-led profit gains to a sustainable, demand-driven flywheel. Second, our ongoing efforts to sharpen our focus on the Chinese consumer once again led to meaningful growth in China, with benefits from innovative product assortments, enhanced marketing, and expanded reach across both direct channels and third-party online distribution. To this end, we achieved record sales during 11.11 on Tmall's Luxury Pavilion, with Coach as the number one-ranked brand in the handbags, luggage, and leather goods category, and Stuart Weitzman as the number one-ranked footwear brand. Over the holiday period, our brands offered exclusive products, virtual store pop-ups and live streaming events with influencers such as Austin Lee, elevating the customer experience to meet the needs of the highly digitally and fashion engaged Chinese consumer. In fact, the strength of our results in mainland China more than offset continued pressure from lower Chinese tourist spend, with our sales to Chinese consumers globally increasing for the quarter. Third, as we've shared, we're committed to building industry-leading data and analytics capabilities at Tapestry, enabling each brand to leverage this shared resource to drive more effective decision-making. In the quarter, we deployed new data and analytics tools to optimize marketing messaging, assortment planning, and promotional levels. This is helping to improve AUR and conversion and support the strong gross margin expansion we achieved in the quarter. In addition, we rolled out a new data platform to support our loyalty and acquisition programs. This is creating a foundation for ongoing customer recruitment and retention. Fourth, we leveraged the power of our leaner and more responsive operating model. A critical element of these changes is cultural and centers on empowering our teams to allow for faster decision making. Our organization was nimble, sharing best practices across brands to develop and execute a highly effective holiday strategy. We put the customer first and adopted strategies to elongate the shopping period and utilize new innovative approaches to safely connect with customers, including virtual appointments and line queues. We also continue to drive efficiencies through the optimization of our global fleet. Our focus is to improve profitability across our store network while delivering a consistent brand experience for our increasingly omnichannel consumer. Overall, I'm very pleased with the headway we're making on our acceleration program, which is defined by sharpening our focus on the consumer, leveraging data, leading with digital, and transforming into a leaner and more responsive organization. We are listening closely to consumers and responding to changes in their values, shopping behaviors, and brand engagement. We're leaning into the competitive advantages of our platform, bringing innovation to both product and how we connect with customers. As a result, we're driving demand and desire for our categories and stretching what's possible for our brands. Now let me touch on our results and strategies for Coach, Kate Spade, and Stuart Weitzman. Starting with Coach. Revenue exceeded our expectations with sales down only 4% versus prior year, reflecting a significant sequential improvement. We also continued to expand gross margin while leveraging SG&A, generating a 400 basis point increase in operating margin to 34%. The brand's profit growth was impressive, particularly in light of the current backdrop. There were many highlights from the second quarter guided by our strategic priorities, which drove our positive results. First, we delivered compelling product, innovating across style, silhouettes, and price points. In retail, we continued to fuel signature and proprietary brand codes through a variety of new iterations, with notable success in our horse and carriage platform. We also introduced the Beat family, which features exceptional functionality and beautiful hardware detail across a range of silhouettes. The Beat collection resonated particularly well with our Chinese customers. In Outlet, we offered newness throughout the season, beginning with our successful Marvel collaboration. Our recent introductions, the Georgie and Dempsey families, were also top-selling collections in the quarter. And at both retail and outlet, we had compelling gifting options throughout the extended holiday season. As anticipated, we significantly reduced the number of SKUs in our offering across channels, providing more focused, impactful assortments and clearer messages to consumers. Importantly, we also continued to be disciplined in our approach to promotions. Consistent with our strategy, we're shifting the customer's focus to the value, attributes, and quality of the Coach product. In fact, our handbag AUR rose approximately 15 percent both globally and in North America during this traditionally promotional season. Taken together, these actions supported the strong gross margin expansion we achieved in the quarter. Turning to marketing. Our holiday campaigns featuring Coach's global brand ambassadors, Jennifer Lopez, Michael B. Jordan, Kiko Mizuhara, Yang Zi, and Jeremy Lin, resonated with consumers and reinforced the brand's authentic and inclusive positioning. In the digital channel, Coach again realized triple-digit revenue growth. We recruited roughly 1 million new customers through our North America digital channels, representing a significant increase compared to last year. These new customers, who are increasingly younger, are helping to fuel the strong growth we're delivering online. Moving to China, revenue rose approximately 35% on the mainland. In addition, we recaptured tourist demand through the China duty-free channel as consumers increasingly shift to domestic travel. As mentioned, a highlight of the quarter was the brand's outperformance on T-Mall's Luxury Pavilion during the 1111 Shopping Festival. This was particularly exciting, given the brand only officially launched on the site about a year ago. Another key milestone was the multi-platform live streaming of our 400-drone, 15-minute performance on the Bund in Shanghai. We were the first fashion brand to utilize this format, and it highlights how we're driving brand heat through interactive digital experiences and finding innovative ways to engage with Chinese consumers. We were also excited for the opening of Coach's first fully immersive digital store in Shanghai's premier IAPM mall in December. The store has floor to ceiling video walls that feature bespoke digital art, combining some of our favorite Coach mascots with archival images to create a unique experience for consumers Controlled by gaming technology, consumers can interact and play with the digital art to curate their own experience. In January, we were thrilled to be the first luxury brand to launch e-commerce on Daoyin, the TikTok of China, as we continue to expand our reach, particularly with millennial and Gen Z consumers, by offering immersive omni-channel experiences across e-commerce and social platforms. Now looking ahead to spring, we are sharpening our merchandising strategy, delivering innovative and emotionally compelling product to excite the consumer. In retail, we will build out the BEAT family through new introductions while evolving core bags such as the Tabby, which will feature a new lightweight fabrication. We're also expanding our Jacquard signature offering to include a variety of colorways. In addition, we've launched new collaborations, including Disney by Keith Haring, which is driving strong customer engagement, and our outerwear-anchored Coach by Champion collection, which dropped just this week. In Outlet, we're launching a Coach Originals capsule and a Case collaboration, both of which are adaptations of successful retail assortments from previous seasons. At the same time, we will continue to create exceptional value for our customers while reducing promotional activity. Touching on marketing, you will see purpose-led messaging that connects community, fashion, and heritage. Our Coaches Forward campaign features our global brand ambassadors sharing personal messages which focus on the power of positivity, collective action, and the importance of everyday recognition for the people in our lives who help move our worlds forward. To bring the campaign to life, the cast will call on all viewers to coach it forward and leave messages of gratitude for loved ones, creating a ripple effect of optimism around the world. We also just launched Coach Conversations, a monthly YouTube series designed to create a two-way dialogue about culture, community, and creativity among global thought leaders. The debut episode kicked off with Jennifer Lopez and Jay Shetty, a former monk turned purpose coach, and has already received over 700,000 views since launching in late January. In summary, we are extremely pleased with the brand's continued momentum and solid financial results as we grow our customer base while driving increasing profitability. This year, we are celebrating Coach's 80th anniversary. As we look back on our history, we are proud of the brand's rich heritage as America's original house of leather goods. And just as importantly, as we look forward, we're confident in our future. Now moving to Kate Spade. We are very pleased with the brand's outperformance compared to our expectations from both a top and bottom line perspective, highlighting our team's excellent execution in a challenging environment. Revenue improved sequentially, declining 13% year-over-year, which included a four-point impact from the strategic pullback of the low-margin wholesale disposition business. We delivered gross margin expansion of 110 basis points, while outpacing our internal projections, while also reducing SG&A. Taken together, Kate Spade delivered operating margin growth versus last year. We achieved several key strategic milestones during the quarter as we leaned into the fundamental elements of the brand that we know our customers value, starting with product. In retail, we remained focused on rebuilding our core collection while bringing newness to the assortment. Margo remained the top-selling handbag group while newness, notably the all-day tote, performed well in the quarter. Our customer also responded to novelty elements integrated within our assortment, including products featuring our well-loved cat, and handbags adorned with faux fur, both of which were showcased in our holiday campaign. In Outlet, we increased the breadth and depth of our box gift sets, which were top sellers over the holiday season. We also added to our core handbag collection through the introductions of key shoulder bag families, Natalia and Marty. Importantly, we were disciplined in our promotions, specifically in our value channels, driving global handbag AUR growth versus last year. Outside of handbags, we saw relative strength in jewelry and footwear across channels. In tech accessories, where Kate Spade has a leadership position among fashion brands, the glitter AirPods case significantly outperformed expectations. In addition, I'm excited to announce our new fragrance collection, which launched in January, has seen overwhelmingly positive results in both our own channels as well as in department stores. These categories, which are foundational to the brand's unique lifestyle positioning, are also important for customer recruitment and cross-selling. During the holiday season, we highlighted Kate Spade as a destination for gifting joy and celebration. An example of the brand's innovative approach to social selling was its collaboration with Starbucks in Asia. This partnership, initiated by their APAC division, drove tremendous traffic to the Starbucks site. And it was so successful that the product sold out in just days in Japan. This example underscores the consumer's desire for Kate Spade and its relevance as a lifestyle brand. Turning to digital, Kate Spade has a well-established e-commerce business with the highest digital sales penetration within our house of brands. During the quarter, we continued to drive momentum online, achieving strong double-digit revenue growth through a combination of engagement with existing customers and the recruitment of new consumers. In fact, we attracted approximately 500,000 new consumers to the brand through our e-commerce channels in North America, a meaningful increase compared to last year. Importantly, these customers are entering the brand for the first time and purchasing at a higher AUR compared to the balance, highlighting that when we meet customers where they want to shop with emotional and compelling product, innovation supersedes price. Additionally, we reactivated over 200,000 customers through our digital channels, an increase of approximately 40% compared to last year. This is an important green shoe that demonstrates the traction we're making in strengthening our relationships with our core customer base. Turning to Kate Spade's priorities for spring. In specialty, we're continuing to re-energize the leather goods offering with the launch of the Knot Satchel. In addition, we will expand our signature platform, the Spade Flower, with new color introductions in the well-received Jacquard fabric. In outlet, we will launch Layla, a core pebbled leather group. We will also offer newness and backpacks and cross bodies in keeping with the consumer's desire for hands-free styles. Across channels, we will continue to integrate novelty into our assortment with a playful, nautical-themed focus for the spring season. In marketing, our campaigns are joyful and colorful, grounded in our brand purpose and understanding of the customer. Our approach is multidimensional, utilizing a wide range of digital platforms and influencers to amplify our brand and product stories to engage with consumers and our community. In fact, last month, our pink Love Shack heart crossbody went viral on TikTok. The excitement began with an enthusiastic customer who shared a post about her recent purchase of the bag. This quickly gained further momentum after one of our store associates created a video in response, which informed the community that the bag was now sold out across the United States. Taken together, these posts garnered over 1 million views, As a result, we worked quickly, partnering with these micro-influencers to create new marketing content to announce the product's restock. This is one of my favorite examples of how the brand's emotional connection to its customers has the potential to drive organic engagement within its loyal and passionate following. This has also been a key learning for our teams who are exploring new opportunities to harness the power of the Kate Spade community. In closing, I'm encouraged with the progress we're making and the increasing number of green shoots we're seeing that highlight the strength of the brand. I remain optimistic about the potential for Kate Spade. It is a unique lifestyle brand with meaningful runway to accelerate revenue and profit growth long term. Turning now to Stuart Weitzman. The brand demonstrated continued progress this holiday season. Sales sequentially improved from the previous quarter and exceeded our expectations as a result of the momentum in the direct business led by China and e-commerce, as well as wholesale. In addition, as previously announced, these revenue results include the impact from exiting unprofitable markets, which represented a nine-point headwind in the quarter. Importantly, our focused strategic actions resulted in significant operating margin expansion for the brand. During the quarter, we delivered compelling products with a focus on key categories of boots and booties. We grew our core classifications while balancing buy now, wear now styles with transitional product. In keeping with the market shift to casualization and building upon the strong performance of the lug sold 50-50 lift in the first quarter, We expanded our assortment of boots and booties featuring this on-trend sole, including the top-selling Colby booty. Importantly, our icons continue to resonate with customers, specifically our 50-50 and land families. In digital, we realized the double-digit increase in revenue compared to prior year. This performance was led by new customer recruitment, which includes a growing number of Gen Z and millennials entering the brand. Notably, we also drove roughly 30% increase in reactivated customers in the quarter as we sharpened our focus on creating relevant assortments to engage with our core consumers. In China, as mentioned, Stuart Weitzman was the number one footwear brand on Tmall's luxury pavilion on 11-11, a key indicator of the brand's strength and momentum in this important market. During the quarter, we also introduced Elaine Zhang as our brand ambassador, which helped to further solidify our luxury positioning in the market. In addition to our brand campaigns, we are continuing a key strategy of live streaming featuring local influencers. For the 12-12 holiday, we partnered with Austin Lee, which drove significant engagement. Touching on marketing. Our winter Be In Your Element campaign, which featured our global brand ambassador, Serena Williams, strengthened our positioning in boots and occasion wear. This campaign culminated with a billboard in Times Square featured prominently during the televised New Year's Eve celebration, which reached an estimated 1 billion viewers globally. In wholesale, we continued to strengthen our partnerships with key accounts, supported by consistent execution and on-time deliveries. We're pleased with our continued progress and the positive reactions we received coming out of our recent market week. Looking ahead to spring, in product, we're continuing to innovate by infusing our elevated take on casualization across the assortment. We're launching the Goldie family, which features pearl-embellished styles across sneakers, flats, and sandals, combining casual silhouettes with the brand's signature of polished sophistication and comfort. In January, we introduced limited edition collections, including the Lunar New Year capsule and Valentine's Day edit. These collections feature our new Ali and Demi sneakers, which have been strong performers since the launch. Importantly, as vaccine distribution increases in 2021, we expect continued improvement in demand for key categories, particularly occasion wear and bridal. As a result, we will rebalance our assortment to include sandals and pumps for when our customer is ready to go out and celebrate, while continuing to focus on elevated casual styles. In marketing, for our Spring 2021 campaign, we are very excited to once again feature Serena Williams, this time with a very special guest who will be announced in the coming weeks. We are also finding new ways to engage our customers based on direct feedback we have received from them. A great example of this is our launch of the 2021 edit on Instagram and our website, which utilizes a range of diverse influencers, including our own associates, to highlight ways our shoes can be styled to drive conversion. Overall, Stuart Weitzman's first half results were stronger than expected as we continue to make steady progress towards our goal of restoring the brand's profitability over our planning horizon. In closing, as we enter the second half of our fiscal year, while we do expect COVID-related headwinds to persist in the near term, our first half performance proves the resilience and agility of our team and the strength of our portfolio of brands. The consumer is changing rapidly in their values, shopping behaviors, and connection to brands, and these changes have highlighted opportunities for our brands and our business. We've taken the opportunity to crystallize the unique purpose of our brands and company And we fully embrace the opportunity to innovate the ways we engage with our customers and evolve how we operate as an organization. It's also reinforced the opportunity to leverage Tapestry's enabling platform and competitive advantages to stretch what's possible for our brands. These changes are foundational to our success both today and in the future. Importantly, I'm confident that Tapestry will emerge from the pandemic stronger, well-positioned to capture market share at higher levels of profitability, creating opportunities for reinvestment in the business and, in turn, unlocking the flywheel of sustainable growth. With that, I will turn it over to Andrea for a detailed discussion of our financial results and outlook. Andrea? Thanks, Joanne, and good morning, everyone.

I hope this finds you all safe and well. 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. As Joanne mentioned, our holiday quarter results were well ahead of our expectations as we continue to drive operating income growth in an unprecedented environment. Total sales declined 7% from prior year, representing a significant sequential improvement across all brands. Importantly, we successfully implemented our strategy to elongate the holiday shopping period, pulling forward demand ahead of the peak Thanksgiving week to allow the customer to start their shopping experience earlier. By region, North America, though still pressured versus last year, led the sequential improvement, driven by better in-store trends and a higher penetration of the fast-growing digital business. In Asia, growth remained positive, aided by 30% plus revenue gains in mainland China, along with a return to year-over-year growth in Korea. Across the balance of Asia, sales remained below last year, specifically in Japan and and Malaysia as lockdown measures were reinstated. Europe, though a small portion of our total sales, experienced a material slowdown in the business given a significant increase in lockdowns accordance with local government restrictions. By channel, as Joanne noted, performance was driven by another quarter of triple digit growth in digital as we leaned into the opportunity to meet the customer where they want to shop. In our global bricks-and-mortar channel, revenue continued to decline due to materially lower traffic compared to last year, partially offset by increases in AUR and conversion. In wholesale, while the channel remained below prior year, trends improved, reflecting in part the significant growth in our duty-free business in China's Hainan province. Importantly, top line trends in the month of January met our internal projections, reflecting a further sequential improvement from Q2 as we remain on track for sales to inflect in the third quarter. Moving down the P&L, we realized another quarter of excellent gross margin expansion compared to prior year with all brands exceeding our expectations. Tapestry's gross margin rose 290 basis points year over year, as we successfully executed our strategy to maintain price discipline and leverage data analytics to tailor our product assortment and marketing messaging to the consumer. Coach drove the increase in the quarter with gross margin expanding 340 basis points compared to last year driven by lower levels of promotion resulting in higher AUR along with the reduction in SKU count as planned. At Kate Spade, gross margin increased 110 basis points, which included a benefit from channel mix, reflecting a strategic pullback and lower margin disposition sales. This was partially offset by the final quarter of negative impact related to bringing the brand's footwear business in-house. Kate Spade's gross margin was significantly ahead of expectations due to lower levels of promotional activity in the North America value channels. In addition, SKU counts began to decline. For Stuart Weitzman, the brand's gross margin rose 40 basis points due to a benefit from FX. SG&A declined 9% year over year, primarily reflecting effective expense management and the previously announced actions to transform the company's operating model. In addition, and as projected, SG&A in the quarter benefited from wage subsidies, rent concessions, and a gain associated with the deferred purchase price of the Cape Bay-China joint venture. These items were partially offset by reinvestments in the business, notably higher marketing spend, and an increase in accrued annual incentive plan expense, given our outperformance year-to-date. Overall, we drove strong operating income and margin expansion compared to both FY20 and FY19 for the second consecutive quarter. We're extremely proud of these standout results, which we delivered in the phase of unprecedented COVID-related external headwinds. As you will recall, we anticipated FY21 would be a year of efficiency-led profit growth and that our ability to drive increases in gross margin and reductions in SG&A would be the initial indicators of progress along our multi-year growth journey. Further, as expected, the outperformance of our margin accretive businesses, notably digital, across brands and China are supporting our significant margin expansions. The strength of the first half is a clear indication that our foundational changes and the strategies of our acceleration program are taking hold, reflecting the potential to fully unlock the flywheel and drive sustainable long-term growth. Earnings per diluted share for the quarter was $1.15 as compared to $1.10 a year ago, representing an increase of 5%. As anticipated, these results included the negative impact from a higher tax rate compared to last year due to the geographic mix of earnings, along with an increase in interest expense, primarily associated with the drawdown on our revolver. Now, moving to distribution. For tapestry, we closed a net of 18 locations globally in the first half, including three net closures in Q2, representing a net of 84 closures as compared to the prior year, as we continue to optimize our global fleet. Turning to a discussion of our balance sheet and cash flows, we ended the quarter in a strong position with $1.6 billion in cash and equivalents and total borrowings of 1.8 billion. Consistent with our stated near-term priorities, we utilized free cash flow to pay down 500 million of the $700 million revolver drawdown during the quarter. with the $200 million balance paid down just last week. Therefore, at this time, there are no longer any borrowings under our revolver. Total inventory ended the quarter 16% below last year, reflecting in part deliberate actions to reduce skew counts and prioritize inventory turn. The ending inventory balance was below our expectations due to our sales outperformance in the quarter. Today, like many others across all industries, we are experiencing some distribution network disruption related to COVID-19, resulting in shipping capacity constraints and port congestion globally. As a result, we anticipate longer lead times, which will delay the timing of receipts and limit our ability to chase higher levels of demand should it materialize. In addition, we expect the Cape Stay business to be affected by the widely reported Naresk-Essen and One Apis cargo ship incidents, which will impact the brand's spring deliveries. These factors have been contemplated in our outlook, which I will address shortly. CapEx for the quarter was $24 million, a decline of 52% versus prior years. We continue to prioritize investments in high-return projects, notably in digital, while tightly controlling overall spend and reducing our outlay for new stores. We now expect CapEx to be in the area of $135 million for FY21 based on our favorable first half actualization. Free cash flow for the quarter was an inflow of $633 million as opposed to $506 million last year. On a year-to-date basis, free cash flow was an inflow of $697 million Our strong cash flow generation underscores the resilience and effective management of our brands and business. Now, touching on our capital allocation priorities. As noted, the strength of our business and resulting free cash flow generation positioned us to fully pay down our revolver as of January. In the near term, we will continue to preserve our cash on hand while we invest the best thing in the business. Longer term, our objectives remain unchanged. Our strategic intent is to return to sustainable top and bottom line growth, driving continued strong free cash flow generation, which will enable us to pay down debt as well as return capital to shareholders. Turning to our outlook, as noted in our release, we are not providing detailed guidance for the fiscal year at this time due to lack of visibility. However, given our strong performance in the first half and assuming a continuation of the recovery from the pandemic in the second half, we are now projecting revenue to increase at a high single-digit rate on a 52-week basis and in the area of 10% on a 53-week basis for the fiscal year. We continue to expect revenue to inflect in the second half as we begin to anniversary the meaningful headwinds associated with the start of the global pandemic last year. This includes the expectation for sales to increase at a low double-digit rate in the third quarter. We are planning realistically as we continue to monitor the external environment in light of the recent resurgence of cases across the globe and the noted supply chain and logistics challenges impacting receipts. We remain focused on controlling the controllables and are building a strong foundation for profitable expansion over the planning horizon. This includes continuing to take deliberate actions to lower promotional activity and increase AURs across brands, as demonstrated in the first half, and to drive gross margin expansion for the fiscal year. As previously announced, we're taking steps to aggressively control our SG&A spend to implement structural changes to drive increased efficiency. Through these initiatives, we continue to estimate that we will realize approximately $300 million in gross run rate expense savings, including approximately $200 million in gross savings in FY21 alone. However, with a higher level of variable costs associated with a higher sales forecast and reinvestments in our business, we would naturally expect our net savings dollars to be somewhat lower than originally anticipated. Looking ahead, we believe that we are creating a virtuous cycle or flywheel that should, as revenues inflect, drive bottom line growth well in excess of top line gains over our planning horizon. In closing, we're very pleased with our strong half results, which demonstrate the bold actions we are taking under our acceleration program, the strength of our iconic brands, and the resilience of our teams around the world and Tapestry's long-term potential to create value for all stakeholders. Looking ahead, we will continue to focus on those factors within our control as we navigate the uncertain environment in the near term. Importantly, our view of the long-term opportunities for Coach Kate Spade and Stuart Weitzman is unchanged. Our brands continue to benefit from Tapestry's enabling platform with the potential to achieve greater size and share than they could on their own. We remain steadfast in our strategic intent to drive organic growth and profitability and look forward to keeping you posted on our progress. I'd now like to open it up to Q&A.

Thank you. The floor is now open for questions. As a reminder, in order to ask a question, simply press star, then the number one on your telephone keypad. Again, 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 Securities.

Hi, good morning. Congratulations. Good morning, Bob. Thanks, Bob. Thanks. I have two questions for you. I think the first one, how sustainable are these strong profit margin results? And then the second one is, when do you expect EPS to return to pre-pandemic levels? Thanks.

Thanks, Bob. I'll take those one at a time. Two great questions. First on the sustainability of the results. You know, when we developed our acceleration program, it was with an eye on foundational changes that we needed to make to be ready for what we were calling at the time the new world of retailing. And the trends that we saw over a year ago have only accelerated through COVID, as you know, and that's given us stronger conviction to move quickly. These are foundational changes. They're embedded in our business. Some of those changes include having a sharper focus on the customer, We're using more consumer data and research to inform our plans and our execution. We're leaning into digital, really leveraging the Tapestry platform to engage customers in a different way. We're making real headway here with triple-digit growth in digital over the past two quarters. We're maximizing the opportunity with a Chinese consumer as evidenced by the 30% growth we showed in mainland China this past quarter. And we're leveraging data for decision-making, and that means really embedding these tools in our decision-making framework and our processes, which is supporting our approach to things like discipline promotions, our SKU reductions, inventory control. And we're also delivering gross SG&A savings, as Andrea mentioned, which is about streamlining our operating model. It's about taking layers out and empowering our teams so that we can drive agility and speed. And at the same time, we're investing in capabilities to reach customers in new ways. And I would say finally, we're focused on driving more productivity and profitability from our fleet. I mean, these are sustainable actions, and they're embedded in our operating model as we move forward, and we expect to drive accelerated revenue and profit growth across brands. I think year-to-date, our performance shows the actions are taking hold. We achieved strong operating income growth and operating margin expansion despite the pressured revenue year-to-date. To the second part of your question, with our first half outperformance, Our fiscal year 21 outlook implies a return to high teams operating margin despite the external environment. And it also implies that in this fiscal year, we'll be approaching pre-COVID earnings on a 52-week basis despite the lower sales. So it really speaks to the success of our acceleration program and, honestly, the strength of our team's execution.

Thank you.

As a reminder, ladies and gentlemen, in the interest of time, we please ask that you limit yourself to one question. Our next question comes from the line of Ike Borchow of Wells Fargo.

Hey, good morning, everyone. Good morning, Erwin. Good morning. On the quarter to date in the third quarter outlook for revenue growth looks really strong, especially in light of some peers of yours and what they've guided. Just curious if you could kind of dig into that a little bit more. I'm curious what's going on in China. You know, we've heard more travel restrictions and caseloads. So curious if you're seeing volatility there. And then in the North America market, specifically for Coach, how are you doing there? Is there a chance that you're back to positive comp there? Thanks.

So maybe what I'll do is I'll start off with the China month to date. a comment obviously as we spoke to on the call we had very strong results in china during the quarter up 30 across brands up 35 percent of mainland china for the coach brand um and uh todd can get into that a little bit more quarter to date in northern china we've seen some resurgence in covid cases and we have a few temporary store closures literally a handful And we've seen some impacts to traffic, but they do appear to be easing as we move into the important Chinese New Year holiday, which I think you know probably starts on February 12th. So we're monitoring the trends. But as I said, things appear to be getting better. And we recognize that this is a near-term dynamic. We're still as bullish as ever on the long-term prospects for our brands and business in China. especially in light of our second quarter results. Todd, I'll turn it around to you, what you're seeing in Coach.

Thank you, Andrea. You know, we were really pleased with our second quarter results. And, in fact, in North America, the Coach brand was – we did comp positively in North America. So we're coming off of that. We're pleased with where we are quarter to date. As you can – as you know for the brand – Comp in the next two months gets very wonky as we have closures in China and then we have closures in the U.S. But in terms of where we're at, again, we had positive comp in the quarter and we like what we're seeing in the future. Thank you. You're welcome.

Our next question comes from one of Aaron Murphy of Piper Sandler.

Great, thanks. Good morning. My question is around digital. I think it's been three consecutive quarters that you've seen triple-digit growth. Can you just share with us, as the world reopens, where do you see the digital mix settling out? And if you can kind of help us through the P&L of that. I believe it's margin-accretive, but any other kind of details on, you know, kind of the longer-term impact you see from that on the P&L? Thank you.

Yes, good morning, Erin. We are really pleased with our digital business. Another quarter of triple-digit growth, as you said. And as we look at it, we're in the middle of our fiscal year, but if we look on a trailing 12-month basis, our digital business has grown to $1.3 billion. So we're achieving significant scale. It's more than double where we were a year ago at this time. We've ramped up quite quickly. And we're getting much better at engaging consumers on these platforms through e-commerce and social platforms. In fact, our digital business has been a great source of recruitment. We recruited over a million and a half new customers in North America through digital channels just this last quarter alone across all of our brands. It is an important channel. We do see it continuing to grow. These digital shopping behaviors we think will be sticky, and we're well-positioned to continue to invest in and engage consumers here. And to your point, our digital margins are accretive versus their brick-and-mortar counterparts. So as we grow this and continue to grow this channel and meet our customers where they want to shop, it also is a tailwind from an operating margin perspective as we move forward. Great. Thank you.

And just to add a little bit of context on that, and Erin, I think you know this, but we have a relatively high AUR compared to your average retailer or e-tailer, should I say, and we have a fairly low rate of return because we don't have size inventory for the most part. Most of our goods are leather goods. So at that, take that and then understand that we have the lower cost structure You know, having been in fulfilling order since we were a coach with a catalog company, our digital margins are well higher than those of the B&M channel, bricks and mortar channel. And therefore, as we continue to grow growth in digital, that is going to support both a higher level of sales and a tailwind to operating margins.

Great. That's math we all like. Thank you.

Our next question comes from the line of Alexander Walvis of Goldman Sachs.

Good morning, everyone. Thanks so much for all the colors so far, and thanks for taking my question. I had a question about new customers. You shared a few details on those new customers. I think you mentioned they were younger. I think you mentioned they spent more. I wonder if you could go into that in a little bit more detail. Are those customers distinct from the customers that were shopping in your stores previously? What sort of age range are they? And then how are they spending? Is the Is the highest spending rate because they're buying more expensive products? Is it because they're buying more products? Any further comments on that would be super interesting. Thank you.

Yeah, I'll take the big picture and then toss it to Todd to give you some input on what we're seeing at Coach specifically. But overall, our focus for our acceleration program is to sharpen the focus on the consumer. And as we do that, we're looking at ways that we can engage consumers with our brands. Some of that is on digital and social channels, and we're building the tools and capabilities to be able to engage more consumers in our brands. We're gaining a lot of traction. We've added a lot of customers to our brands. When I talk about recruiting 1.5 million new customers, these are customers who are new to the brand overall. So these are not customers who are just migrating from brick and mortar into digital. We are seeing some of that behavior naturally with the lower traffic to our stores. But these are new-to-brand customers. And as you mentioned, they're increasingly... younger. We're acquiring younger customers at an increasing rate as we engage in e-commerce channels and digital channels and through social media, which is great for the long-term health of our brand. And I'll kick it to Todd to give you a little bit more color on what he's seeing at Coach.

Thank you, Joanne. You know, we are so pleased with this. Not only did we have million new customers in the quarter but if you think about year-to-date we added two and a half million new customers to the brand all mostly through digital so that's exciting we are seeing them you almost half being younger Gen Z's and Millennials we're not seeing them buy necessarily higher priced products but since the brand overall is less promotional And we're seeing that list of AUR, it's winning across every demographic. Lastly, it's early days, but we're seeing a fairly high repeat purchase rate. So that's very exciting to see that maintaining a relatively high repeat purchase rate on such a higher base is very exciting. And so we see this continuing. We're really looking at our data. all of the consumer insights to understand what's going to appeal to them, what's the medium, what's the messaging that we're going to continue to use, and it influences our design. So, again, I think you've heard Joanne talk about the benefits of the flywheel. This is one where it comes into life.

Brendan, thanks for all the color.

You're welcome. Our next question comes from one of Mark Altschweger of Baird.

Good morning. Thanks for taking my question. And congrats on the progress so far. I was hoping to dig into the performance at Kate Spade a bit more and really your assessment of the progress with the strategic changes that you're making. It's asked another way, trying to get a better sense of the cyclical recovery that may be emerging here versus some of the course corrections of, you know, the brand missteps in the recent past. And then it's separate, but also related to Kate. You called out a reduction in wholesale disposition as a headwind there. Maybe just where are you in terms of your level of exposure to that channel versus where you plan to be on a go-forward basis? Thank you.

Hey, Mark. Good morning. Regarding Kate Spade, as we mentioned, we are really pleased with the progress we're making in that brand, and we have a number of promising green shoots I would say, you know, we're still early days in terms of the actions we're taking to restore the brand to health and drive the brand to its fullest potential. And, you know, we are really encouraged by the green shoots that the team is taking. You know, we're seeing operating margin expansion, improvement in the top line, and that's being driven by, you know, our focus on our assortment and the product that's resonating with our consumers. You know, we've talked about our handbag assortment and stabilizing and re-energizing our core handbag assortment. We're seeing traction behind key elements of that assortment. We talked about the Spade Fat Flour and the All Day Tote that we released in last quarter, all performing. So that's a green shoot. We're recruiting new customers, which is important to the brand, so that we can continue to expand the Kate Spade community. But we're also increasingly reactivating lapsed customers, which says that as we get back to the fundamental elements of the brand, we're resonating with our core customer base. So that was another green shoot in the quarter. And I would say finally our global handbag AUR grew in the quarter, which has been really nice progress and I think speaks to the the relevance of the product as we're delivering it. So we feel really good about the progress we're making in the Kate Spade brand. As it relates to DISPO, obviously, maybe not obviously, that is a channel that we're trying to minimize. And we've made tremendous progress on that over the past few quarters. So we continue to focus on driving our business through our value channels to our consumers as well as through specialty. And we're making, as I said, really good progress. And really the great news for us is that we're only just beginning. We see a tremendous amount of potential for the Kate Spade brand as we move forward.

And I would just add to that, Mark, that we are very pleased at our inventory position. They're very clean.

uh across tapestry and at kate state in particular great best of luck thank you thank you our next question comes from one of lorraine hutchinson of bank of america thanks good morning um the shift to digital has been pretty sharp Are there any big investments you need to support this strong growth? And then how does this shift change your thinking about the size of the fleet?

Hi, Lauren. Thanks for that question. Yeah, the shift in digital has been rapid. And we've seen that more than double in the last 12 months. Our total digital, I mentioned earlier, but $1.3 billion now business has reached sizable scale as well. And we have reacted quite quickly to support that business. We've added distribution square footage. We've added carrier partnerships. And we continue to make the investments required to support that business on the distribution of fulfillment side as well as investing in the platform and the data and technology and the tools that we need to manage that business. The teams have done a great job moving inventory around the world to ensure we're supporting demand where we see it. So we feel great about our position, our tapestry platform, and the scale that we bring to our digital business. And as it relates to the fleet, our first focus is on the customer. We want to follow where the customer is. We want to meet the customer where they are. And our shift into digital this year has really been to serve our customer where they and how they want to be served. And as we think about the fleet, we think about it through that same lens. You know, we've talked about over the last couple of quarters raising the thresholds of profitability and our expectations for the productivity and profitability for our fleet, and we continue to manage our fleet with those expectations, higher expectations for productivity and higher expectations for our brick-and-mortar stores to be profitable. Having said that, we also believe that there is a need for physical touchpoint in the brand. Stores matter. And we're investing in and ensuring that that physical touch point is the right experience for our consumer. And a great example of that is the store that we opened up in Shanghai in the IAPM Mall. It's a fully immersive digital store with floor-to-ceiling video walls that engage our consumer experience. and let them engage with the video on the wall. So it's about the experience, but from a financial perspective and how we manage our business and our fleet is with an eye on productivity and profitability.

Thank you.

And the store that Joanne is referring to, I have to take a little pride, is a coach store. So we're... We love what we're seeing there, and it's something that I think we can adopt and have learnings across the fleet, obviously for Coach as well as the rest of our tapestry brands.

Yeah, thanks, Todd. Didn't mean to steal your thunder.

You're welcome. No problem.

Our next question comes from one of Oliver Chen of Cowens.

Hi, thank you. You've made encouraging and innovative progress at Coach Outlet and also broadcasting to that customer and being inclusive and offering value. Could you update us on that strategy and where it is and how it may synergize with your greater ecosystem and also as we think about Outlet, how is Outlet running with respect to promotions and traffic? It sounds like you've had really encouraging AUR gains there as well. Thank you.

You're I guess I'll take that. You read our playbook. It is all about innovation, about messaging beyond just the product. We see that the consumer really cares. They are value and value-oriented. We're going to continue to double down on that. We see it resonate not just in North America, but globally. In North America, traffic is down. We see that. that's going to continue to be a headwind until we get to true COVID relief and, you know, vaccination. But we're optimistic that we'll see a return. And as Joanne just mentioned, there is going to be and continue to be a strong brick and mortar business at Coach, both in full price and in outlet. In terms of coachoutlet.com, our strategy remains being very responsive to the consumer, providing the consumer with really innovative product that both satisfies their emotional needs and their functional needs. And you're going to see continued, really accelerated innovation in all channels for Coach. So we're very pleased. We are going to be very, very rigid on the promotionality. of the brand and continue to provide value and promote value versus pure price.

Thank you. And Joanne, sustainability and ESG are big priorities for us in our research product and other. What are your thoughts in terms of key priorities for the organization and what would you highlight as your focus areas as you approach these topics? Thank you.

Yeah, thanks, Oliver. That's a great question. And ESG and sustainability overall is something that has been very important. It's important to each of our brands, and it's important to Tapestry as a company. In fact, as we were forming Tapestry as a company a few years ago, we talked about how ESG needed to be part of the fabric of our company. And we created our social fabric, which encompasses our ESG program, if you will, our goals. and they're around people, communities, and in our environment. And so all three of those areas are focus areas of ours. As it relates to our people goals, it's about having more representation across our organization and in leadership, and we continue to hold our teams accountable for progress. There's definitely more work we need to do there, but we remain very focused on it. And as it relates to communities, it's about how we impact our communities as a company, and that's through our foundation and the work our foundations do, but also through volunteering efforts from our teams. And I would say, lastly, on the environment, we're very focused on our carbon footprint and the impact and traceability of our supply chain. So those are some of the areas of focus. It is a very important element of our strategies going forward, and we're holding ourselves accountable to making progress on our goals.

Thank you very much. Best regards.

Thanks, Oliver.

Our next question comes from one of Matthew Boss of JP Morgan.

Great, thanks, and congrats on the improvement.

Thanks, Matt.

Maybe on the top line inflection that you cited for the back ask, could you speak to lead indicators that provide your confidence in accessories category growth coming out of the pandemic versus pre-pandemic, and then on the bottom-line model flow-through to exceed top-line growth, as you cited. Could you just speak to sustainability of Coach brand operating margins here in the low 30s?

Yeah, let me talk about – I'll take the category more broadly, and then Todd and Andrea can talk about the sustainability of our margins. But as we think about the category, you know, handbag and small leather goods has been a strong category pre-COVID. For years leading into the pandemic, the category was growing mid to high single digits. We've been incredibly pleased with the level of engagement that customers have had with the category as we've moved through the pandemic. You know, that's evidenced by our digital business, but also in areas in China where the recovery is further along, we're seeing strong growth. So continue to see consumers engage with the category, and we continue to hear that handbags, these categories are emotional categories that consumers love, and they, you know, continue to purchase to treat themselves. They consider the purchase a treat. And so we've also done some research in the middle of COVID about purchase intent going forward. And what we've heard from consumers is that there continues to be strong purchase intent for our categories. It ranks one of the highest categories for purchase intent in the coming 12 months. So we're pleased with the engagement in the category during the pandemic. We expect the category to continue to grow post-pandemic. And as I think about it, As the vaccine rolls out and the world opens up again and people begin to connect in the physical world, we expect people to be going to events again and going out to eat. And we are very excited to be able to continue to grow our business as we outfit our consumers as their habits change going forward. So we see a lot of growth ahead as well. And Todd, in terms of sustainability margins, I addressed that a little bit in the first question today. But the changes we're making in our organization are embedded in the organization, and we do think they're sustainable. But I'll toss it to Todd to take the case.

Thanks, Joanne. We do see significant potential to grow top line. We've said, and we've said this now repeatedly over a number of quarters, our goal is to capture market share, and we think we can do that at higher levels of profitability. What you see, some of the key drivers are digital, obviously, China, and just driving higher gross margin and reducing our fixed cost base, particularly with the discipline on promotions and the increase in AUR. So we're pleased where we're at, and we see a lot of runway.

And just to round it out on total tapestry, you know, as Joanne mentioned, based on our FY21 outlook, you know, you can imply a return to high teens operating margin, even on a 52-week basis, which is above our prior peak as tapestry at 17%. despite the external environment. You know, and as Joanne mentioned, it does imply that EPS will hit or approach, I should say, pre-COVID FY19 type of levels. But importantly, we see continued opportunity from here, supported by continued revenue growth and operating expansion across brands. I think we have significant opportunity at both levels Kate Spade and at Stuart Weitzman to improve their gross margins. And obviously we'll see the flow through on the higher level of, you know, revenues. And if you look, you know, in the next couple of quarters, obviously third quarter, we'll still see a very good increase in gross margin led by Coach. Fourth quarter will be slightly pressured in terms of gross margin. And then in terms of SG&A, we would expect SG&A dollar growth to be down. in the third quarter, slightly, even though we'll have that nice gain, low double digit in sales. And then in the fourth quarter, we would expect SG&A dollar growth to be up significantly on a year-over-year basis as, you know, given last year's closures, et cetera, et cetera. Going forward, we still think there's significant opportunity for Tapestry's overall operating margin.

Congrats again.

Thanks, Matt.

Thank you.

And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Omar Saad of Evercore.

Thanks for squeezing me in and thanks for all the information. Really, I just wanted to ask about the digital outlet strategy. You know, what you're seeing there, any updates around that? Obviously, your e-commerce business is doing well, so I assume that's doing well. Are you seeing new customers come in through that channel? Are you seeing people cross-shop that channel? Gauge more digitally in that channel. I'd love to see what you're learning about the customers there. Thanks.

Yeah, thank you, Oliver. We are seeing a new customer. And as we said, it is both in digital, both in outlet and in full price. It's a younger customer. They're value-oriented, and we see potential for a lot of crossover. So we're excited about this. Again, we recognize that the value customer is an omni customer, and so we want to be there for that customer. So again, early days, we're going to see a lot of growth here. We're going to lean in on this opportunity. across the globe. So this is not just a North American opportunity. I see this opportunity present itself in a lot of our territories of the future.

Thanks. Best wishes.

Thank you.

Thanks Omar. And before we close, I'll turn it over to Joanne for some closing remarks. Thank you, Christina. I just want to thank everyone for joining us today. We are pleased with our outperformance to date in a uniquely challenging environment, and it underscores the progress we're making through our acceleration program. I do want to take a moment to thank our talented teams around the world who moved mountains to deliver for our customers this past quarter. The challenges were steep, but their passion, energy, and ingenuity made these results possible. Our performance this quarter reinforces our competitive advantages of our talented global teams, our great brands and tapestries enabling platform, and gives us confidence in our long-term strategy and ability to create value. And I believe we're positioned to emerge from the pandemic stronger with the ability to capture market share at higher levels of profitability. And I look forward to keeping you posted on our progress in the coming quarters. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.