Tapestry, Inc.

Good day and welcome to this Tapestry conference call. Today's call is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question at that time, press star, then the number one on your telephone keypad. 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 third quarter results, as well as our strategies and outlooks, are Joanne Savoiserat, 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 projection for our business in the current or future quarters or fiscal year. 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 other 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.capestry.com forward slash investors, and then viewing the earnings release and the presentation posted today. Separately, As we have started to anniversary the onset of the COVID-19 pandemic last year, we believe year-over-year comparisons are not fully indicative of business performance. Therefore, we will be providing financial information compared to both FY19, or pre-pandemic, and FY20, where applicable. Now, let me outline the speakers and topics for this conference call. Joanne will begin. with a brief recap of the third quarter for tapestry in 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 our priorities going forward. Following that, we will hold a question and answer session where we will be joined by Todd Kahn, 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 for VoiceRat Tapestry CEO.

Good morning. Thank you, Christina, and welcome, everyone. As you read in our press release, Tapestry reported a standout quarter, which once again outpaced expectations, reflecting the successful execution of our acceleration program and the power of our brands. Our sharpened focus on the consumer fueled new customer acquisition at Coach, Kate Spade, and Stuart Weitzman, contributing to a continued sequential improvement in overall top-line trends. Revenue growth in the quarter was led by robust increases in digital and China, two areas of meaningful long-term opportunity. In addition, for the third consecutive quarter, we achieved operating income and EPS gains, both compared to prior year and to pre-pandemic fiscal year 19, supported by a reduction in promotional activity and higher AUR, as well as disciplined expense management. We also generated significant free cash flow in the quarter, demonstrating our financial strength and flexibility. This performance is a testament to our talented teams around the world. Their creativity, agility, and resilience have enabled us to effectively navigate a challenging backdrop and deliver for our customers, while positioning Tapestry to emerge from the pandemic stronger and build on our recent momentum to drive sustainable growth. Before turning to a discussion of our strategic pillars, I want to touch on the leadership changes we've announced in recent weeks. I'm delighted with the team that we've brought together, which combines deep knowledge of our company with fresh perspectives as we position Tapestry to win in the dynamic retail and consumer environment. Todd Kahn, who was appointed coach CEO, has a unique balance of brand stewardship and commercial capabilities and has done a tremendous job leading coach and delivering exceptional results. Andrea Resnick is a proven leader who ensured that we successfully executed on our acceleration program as interim CFO. And we're excited that she will now assume a new role as Chief Communications Officer, where we know she'll continue to make important contributions to our company. As such, Christina Colon, who has tremendous credibility and experience with the investment community, has promoted to Global Head of Investor Relations. Finally, I'm thrilled to have Scott Rowe join us in June as Chief Financial Officer and Head of Strategy. With his extensive experience in consumer, retail, and apparel businesses, as well as his deep expertise developing best-in-class global multi-brand platforms, I'm confident he is the right strategic business partner to further enhance our strategy and financial performance. With this strong leadership team now in place, we are galvanized around our shared commitment to fully realize Tapestry's growth potential across brands, as well as our passion for building a purpose led organization with empowered, inclusive, and highly collaborative teams. Now I'll discuss the important progress we've made advancing our acceleration program during the third quarter. First, we continue to create immersive customer experiences across our e-commerce and social channels, driving our global digital business to over $1.5 billion in revenue on a trailing 12 month basis, more than doubling in size from a year ago. During the quarter, we generated triple-digit e-commerce growth, bringing digital sales to approximately 30% of total revenue, as compared to a mid-teens percentage last year. This growth was led by the recruitment of approximately 700,000 new customers across brands through our e-commerce channels in North America, where we're continuing to capture a growing number of millennial and Gen Z customers. And not only did we successfully recruit new customers, we also drove a higher purchase frequency versus prior year across brands. We also continued to reactivate lapsed customers across the portfolio. This reflects the work we've done to crystallize the unique positioning of our brands while strengthening our platform to better utilize data to support more targeted marketing campaigns. Overall, we remain incredibly excited by the digital opportunity and the scalable tapestry omni-channel platform we're building. Digital is a key competitive advantage and a growth enabler for us long-term, supporting both revenue growth and profit gains, particularly given that our digital business is accretive to our operating margins. Second, our ongoing efforts to sharpen our focus on the Chinese consumer led to significant growth in China as compared to both prior year and pre-pandemic levels. 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 at a high single-digit rate compared to pandemic levels. These results benefited from the integrated, comprehensive brand building strategies, which drove innovative product marketing and experiences. Third, we're strengthening our platform and changing the way we work to increase our agility and responsiveness. A key element of the strategy is embedding data across the organization, allowing each brand to leverage the shared resource to drive more effective decision making. In the quarter, we utilized these capabilities to deepen our understanding of customer preferences and behaviors. This enhanced our processes, ultimately driving significant gross margin expansion and higher AUR, specifically by supporting optimized assortment planning, which helped to affect a 30 to 50% reduction in SKU counts across brands, resulting in higher productivity per SKU, driving inventory turn, and providing clearer messaging to the consumer. And we leverage data analytics to drive more dynamic and informed pricing decisions, supporting lower levels of promotional activity. Overall, we believe the use of data is powering a shift in our culture, creating a robust test and learn environment that empowers our teams to move quickly to respond to changes in consumer preferences and demand. Fourth, we continue to drive operational efficiencies in our business. We further enhance the flexibility of our operating model through the optimization of our global fleet. As you know, our focus is to improve profitability across our store network. We've made substantial progress, and in fact, the operating margin for our global bricks and mortar business exceeded pre-pandemic fiscal year 19 levels, despite the challenging backdrop. We see further opportunity going forward as we remain focused on delivering compelling omnichannel experiences with both digital and stores contributing to our success. This is clearly evidenced by the ongoing strength we're seeing in our digital channels, even as our brick and mortar business improves. Overall, I'm very pleased with the continued improvements we've realized under our acceleration program. Based on our results to date and assuming a continued recovery emerging from the pandemic, we now expect to exceed pre-pandemic levels of operating income and EPS for the fiscal year. far surpassing our original expectations provided in August. Importantly, the changes we have made are foundational. As we embed a consumer-centric approach into our organization, unlock new ways of working, and distort our focus to high-return initiatives, we're establishing sustainable growth drivers for Tapestry and our brands. Now, let me touch on our results and strategies for Coach Kate Spade and Stuart Weitzman. starting with Coach, where results were once again impressive. Revenue exceeded our expectations with sales improving sequentially, increasing 25% as compared to last year, and returning to pre-pandemic levels, an important milestone for the brand. In addition, we continued to significantly expand gross margin and leverage SG&A, resulting in strong operating margin expansion and substantial profit gains. There were many highlights from the third quarter guided by our strategic priorities, which drove our positive results. First, we delivered compelling and innovative product with a focus on reinvigorating key families that are foundational to the brand. In retail, we successfully built on our core icons, infusing newness that is resonating with consumers. We introduced Pillow Tabby, a fresh take on a best-selling family, which was very well received, particularly with new younger customers. We also launched extensions within the Beat and Willow families, which outperformed plan. In Outlet, we expanded the top-selling Georgie and Dempsey families to include new styles and fabrics, which performed well at higher AURs. Overall, we are building enduring icons, which respond to the emotional and functional needs of our target consumers and help to create a strong foundation for our product pipeline in future seasons. We also continued to deliver strong gross margin expansion through deliberate actions. 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 over 25%, both globally and in North America. These results are not possible without great product. I want to take a minute to recognize our talented design and merchandising teams, who under Stuart Weaver's creative direction, continue to deliver product innovation with a focus on quality that has infused energy and excitement into our assortments and delivered exceptional value to customers across all channels. Turning to marketing, we continued to build deeper customer relationships, leaning into our values of inclusivity and authenticity through our campaigns and digital content, which are driving increased engagement, recruitment, and reactivation. Two key examples are Coach It Forward, which featured our global ambassador sharing personal messages of gratitude, and our YouTube series, Coach Conversations, which provided a forum to discuss culture, community, and creativity, and engage audiences through authentic dialogue. These campaigns increased engagement, creating buzz across social media platforms. In digital, Coach again realized triple-digit revenue growth. We recruited roughly 400,000 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. In addition to customer acquisition, we also focused on driving retention and lifetime value through a number of actions, including the recent launch of the Coach Outlet Loyalty Program. Overall, we see significant runway to realize continued digital growth while improving our brick and mortar productivity. This is reinforced by the trends we're seeing in the business as stores have reopened. Specifically in the US, we've seen continued strong demand online, even amid easing restrictions and improving brick and mortar traffic. Moving on to China, revenue on the mainland rose significantly compared to last year and approximately 40% compared to pre-pandemic levels. In addition, we recaptured tourist demand through the China duty-free channel as consumers increasingly shift to domestic travel. To celebrate the Chinese New Year, we featured a playful ox across our limited edition collection, which drove e-commerce growth, including on Tmall. As we previously shared, in February, we were the first luxury brand to launch an e-commerce platform on Dalian, the TikTok of China. Our results thus far have well outpaced our expectations, with the majority of customers transacting with us entering the brand for the first time. Now, looking ahead to summer, we are building on our momentum into the fourth quarter with key product launches while continuing to sharpen our merchandising strategy to deliver innovative and emotionally compelling collections. In retail, we are expanding our signature offering into new and bright colorways of Jacquard to infuse optimism into the assortment. We're also excited for a new combination of our signature sea and horse and carriage logos, bringing together two icons on our best-selling beet and field families. In addition, to capitalize on trends in the market, we are introducing our Coach Originals in a new quilted version named Coach Quilties, which will be offered in seasonal colors. Separately, following the success of our Pillow Tabby, we recently introduced a mini version, which is already off to a promising start. In fact, over the last three months, we've seen an increase in viral user-generated content on TikTok featuring the Pillow Tabby. In Outlet, we launched a Disney Princesses collaboration in April, which is outperforming our expectations. And for Mother's Day, we plan to deliver a floral-focused collection for the important holiday. Turning to marketing, we are excited to host a Winter 21 Collection runway show in Shanghai in June. We believe this will support our growth ambitions both in China and globally by driving desire for the Coach brand and broadening our reach through partnerships with a diversified group of ambassadors, celebrities, and key opinion leaders. The collection will feature exclusive products for the Chinese market and will amplify the show through integrated guest experiences, including live streaming. In summary, we believe coaches return to pre-pandemic levels of sales and significant profit growth is a standout achievement, particularly given the challenging backdrop. We are building on this momentum and the foundational changes we've made this year as we head into the fourth quarter and beyond. We're proud to celebrate the brand's 80th anniversary this year and are confident in the future. Now moving to Kate Spade. The brand again outperformed expectations in the quarter from both a top and bottom line perspective, highlighting the progress we've made through strong execution. Revenue improved sequentially, increasing 1% compared to fiscal year 20, which included a six-point impact from the wholesale business, inclusive of the strategic pullback and the disposition channel. We delivered gross margin expansion of 150 basis points, well ahead of our projections. while also reducing SG&A, resulting in operating income growth and operating margin expansion versus last year. There are many key strategic milestones of the quarter, highlighting the traction we're making as we continue to fulfill the brand's promise and build stronger connections with consumers, starting with product. In retail, we made further progress on rebuilding our core, as exemplified through the strength of our recently launched families. The knot collection, which featured new colorways, was particularly well received by our younger customer. We also expanded our signature platform, the Spade Flower, with the jacquard fabric continuing to outperform expectations. The success of these introductions supports our momentum and reinforces our ability to sustain higher AURs by offering differentiated, innovative designs. Additionally, our novelty assortment, which reflects a return to our roots, continued to resonate with our customers. Notably, our mailbox, crab, and strawberry milk carton bags. In outlet, we saw continued traction in Safiano leather styles. We also brought in new cross-body options in keeping with the hands-free trend. Importantly, we leveraged data to inform our assortment breadth and pricing strategies, reducing our SKU counts by over 40% and remaining disciplined in our promotions. which drove an increase in global handbag AUR in both our specialty and outlet channels compared to last year. Outside of handbags, we saw strength in footwear across channels. In fact, footwear delivered positive growth driven by casual flats and sneakers as we continue to build momentum into the summer selling season. In addition, tech accessories continued to outperform while the launch of our new fragrance in North America outpaced expectations. These categories, which are foundational to the brand's unique lifestyle positioning, are also important for customer recruitment and cross-selling. Turning to marketing, we drove brand heat both through our lifestyle campaigns as well as organically on social media through our passionate Kate Spade community. To that end, we continue to drive organic engagement in the quarter with two more handbags going viral on TikTok from customer-created content. Following videos created post-purchase, the strawberry handbag and the butterfly wing crossbody have garnered approximately 12 million views to date on the platform, with excitement spreading to other social channels. As a result, we saw increased site searches for these products, driving significant uptick in sales. This highlights the importance of social selling through the loyal and passionate members of the Kate Spade community. We also saw success with our first-ever mail gifting campaign, which featured NBA star Kevin Love for Valentine's Day and fueled an increase in conversion among mail shoppers. We're excited by these green shoots and are taking these learnings into our Mother's Day campaign, which I'll touch on shortly. Turning to digital, during the quarter, we continued to drive momentum online, achieving approximately 50 percent revenue growth through a combination of engagement with existing customers and the recruitment of new consumers. In fact, we attracted nearly 300,000 new customers through our e-commerce channels in North America, a meaningful increase compared to last year. Importantly, these customers entering the brand for the first time are purchasing at a higher AUR compared to the balance, highlighting the brand's compelling value proposition along with a meaningful opportunity to build customer lifetime value. Additionally, we again re-engaged lapsed customers at an increasing rate, During Q3, we reactivated over 100,000 customers through our North America digital channels, up approximately 40% compared to last year. This demonstrates our continued progress in strengthening relationships with our core customer. Turning to Kate Spade's priorities for summer. First, our focus is on delivering product that supports our brand promise and anchors the assortment to our brand codes. In specialty, we're continuing to re-energize the core leather goods offering through animations within the Knott family. We will also feature newness in the Sam nylon bag, an icon of the brand. In outlet, we will continue to expand our core Safiano assortment. We will also focus on fun storytelling groups, such as the strawberry collection and the butterfly bag, which as mentioned are off to a solid start in generating excitement on social media. Across channels, we will continue to evolve our novelty offering with playful picnic themed product aimed to drive emotional purchasing. In marketing, our approach remains multidimensional, utilizing a wide range of digital platforms and influencers to tell our brand and product stories to engage with consumers and our community. As I mentioned, we were pleased with the results from our first mail gifting campaign in the third quarter. Therefore, we're applying the learnings to our Mother's Day marketing, which features celebrities and athletes including Rob Gronkowski, Steven Twitch Boss, and Leslie Odom Jr. In addition, we're returning to marketing infused with storytelling, which is at the core of the brand's DNA. In fact, the summer campaign will feature joyful videos highlighted by a spontaneous dance taking place in the middle of New York City. This content is dynamic and optimistic, well-timed with consumers increasing focus on celebrating the impending return to normalcy. Importantly, as announced in March, we redesigned Kate Spade's creative structure, and the team is energized by this new way of working. We believe these changes will help to sharpen our focus on the consumer, drive innovation, and increase collaboration. This builds on the brand's heritage and strength as a storytelling brand, with marketing and product design developing in lockstep. In closing, I'm very encouraged by Kate Spade's results in the quarter, which reinforced the progress we're making through increased clarity of the brand's positioning and enhancements to our product and marketing, underpinned by a powerful platform of data analytics and digital capabilities. This is evidenced by new customer recruitment and lapsed customer reactivation, as well as increasing handbag AUR and improving top and bottom line trends. I remain excited for the brand's future and the meaningful opportunity we have to accelerate revenue and profit growth. Turning now to Stuart Weitzman. The brand demonstrated continued progress through the execution of the acceleration program. Total revenue rose 13% compared to prior year, led by growth in China. This growth was partially offset by softness and wholesale, which included the negative impact of shipment timing into the fourth quarter as well as headwinds related to market exits and unprofitable store closures. Importantly, our strategic actions resulted in significant operating margin expansion compared to both fiscal year 20 and fiscal year 19, as we continue to focus on restoring the brand's profitability. During the quarter, we remained focused on building relevance within the assortment. In keeping with market trends, elevated casual products represented the majority of our offering. We expanded on proven successful product families and brand codes, namely the evolution of the 50-50 boot, the return of the jelly with the Sawyer sandal, and the expansion of our signature pearl embellishments with the Goldie family. At the same time, we reduced SKU count by over 50% globally, driving higher productivity and clearer messaging to our consumers. In digital, revenue increased over 50% compared to prior year as we leveraged the tapestry platform and sharpened our focus on creating relevant assortments to engage with our core consumers. As mentioned, China remained a significant area of growth for the brand increasing over 130% compared to fiscal year 20 and approximately 45% versus pre-pandemic levels. This performance was driven by strong growth in new and younger customers, which supports our confidence in the long-term potential for the Stuart Weitzman brand in China. Touching on global marketing, we generated brand heat with optimistic marketing messages. Most notably, our campaign featuring Serena Williams and her daughter Olympia was a huge success, garnering over 8 billion impressions, making it the most impactful campaign in the brand's history. In wholesale, we continue to strengthen our partnerships with key accounts. We were pleased with our reentry into 90 Nordstrom doors in the quarter, including an expanded assortment in the top 20 locations. Looking ahead to summer. In product, we are well positioned with a focused assortment, which will emphasize dress styles, including a range of sandals and pumps, along with our bridal collection. As we have shared, we expect an increase in vaccine distribution to drive an improvement in demand for these key categories, and we have adjusted our offering to reflect this shift. At the same time, we will continue to provide balance with newness in our casual assortment to address the ongoing trend in the market. In marketing, our upcoming campaigns are focused on key product messages, including our espadrilles, bridal, and limited edition capsules. We are also prioritizing investment in upper funnel activities aimed to recruit new customers into our full price channels. And in China, we are continuing our successful live streams with daily events planned, which will feature an array of hosts, including our sales associates and KOL, such as Austin Lee, to build emotional connections with our customers. Overall, we've made important progress at Stuart Weitzman, and we remain focused on restoring the brand's profitability. In closing, at Tapestry, we are increasingly optimistic about our ability to generate sustainable top and bottom line growth, building on our performance to date. Looking forward, while the environment remains volatile, we see encouraging signs of recovery as vaccination efforts progress, resulting in increased consumer confidence, strong demand for our categories, and improving in-store traffic trends. In this context, we remain focused on driving brand relevance and customer engagement through product innovation and compelling marketing. supported by data-driven insights. We will also continue to lean into our competitive advantages, including our globally diversified direct-to-consumer model and distort investments to high-growth opportunities. We are confident that our clear, consumer-centric strategy, powerful brands, and differentiated, scalable platform uniquely position us to capture market share at higher levels of profitability. With that, I'll turn it over to Andrea for a detailed discussion of our financial results and outlook. Andrea?