Tapestry, Inc.

Welcome to the Tapestry conference call. Today's call is being recorded. After the speaker's opening remarks, there will be a question and answer period. If you would like to ask a question during that time, simply press the star then 1 on your telephone keypad. If you would like to withdraw your question, please press the pound key on your telephone keypad. At this time, for opening remarks and introductions, I would like to turn the call over to Global Head of Investor Relations at Tapestry, Christina Colon. Please go ahead.

Good morning. Thank you for joining us with me today to discuss our fourth quarter and full year results, as well as our strategies and outlooks. Our Joanne Corvoisarat, Tapestry's Chief Executive Officer, and Scott Rowe, Tapestry's Chief Financial Officer and Head of Strategy. 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 guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to our annual report on Form 10-K, the press release we issued this morning, and our other filings with the Securities and Exchange Commission for a complete list of risks and 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. Separately, given FY21 included an additional week in the fourth quarter, figures referenced in today's comments will be on a comparable 13 and 52-week basis unless otherwise noted. In addition, as we continue to anniversary the onset of the COVID-19 pandemic last year, we will be providing financial information compared to FY19 or pre-pandemic and FY20 where applicable. For a full reconciliation of corresponding GAAP financial information, please visit our website, www.tapestry.com forward slash investors, and then view the earnings release and the presentation posted today. Now, let me outline the speakers and topics for this conference call. Joanne will begin with highlights from the fiscal year for tapestry in each of our brands. She will also provide an overview of the progress we've made on our acceleration program, along with goals for FY22. Scott will continue with our financial results and 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 Corvoisarat, Tapestry's CEO.

Good morning. Thank you, Christina, and welcome, everyone. We delivered standout results in fiscal 2021, a transformational year for Tapestry. We are a fundamentally different company today than we were just one year ago. Through our acceleration program, we reached new customers in new ways and effectively adapted to a rapidly changing environment. Our success is a testament to our powerful brands and talented teams. We achieved many strategic milestones this year, which have strengthened our organization. We've sharpened our focus on the consumer and clarified the unique positioning of each of our brands. This drove improvements in key customer metrics, including recruitment, retention, and reactivation. We enhanced our digital capabilities highlighted by our global e-commerce channel, a margin accretive business for Tapestry, reaching approximately $1.6 billion in revenue, nearly doubling versus prior year and over $1 billion ahead of pre-pandemic levels. This was fueled by the acquisition of nearly 4 million new customers in North America alone, including a growing number of millennial and Gen Z consumers. And we sustained double-digit e-commerce sales growth in the fourth quarter, even as we lapped more difficult comparisons online. At the same time, we drove continued sequential sales improvement for our global store fleet, with operating margins that were once again above pre-pandemic levels. We further strengthened our positioning in China, which still has tremendous runway, supported by the growth of the rising middle class. In fact, Tapestry's business in Greater China reached $1.1 billion in sales this fiscal year, led by over 60% growth on the mainland. At the same time, we grew our business with Chinese consumers globally, increasing at a high single-digit rate as compared to pre-pandemic levels. We successfully leveraged data and analytics, embedding capabilities across the company to enhance our understanding of the customer, increase responsiveness, and drive faster, more effective decision-making. This has underpinned our ability to optimize the assortment planning process, lower SKU counts by 40% to 45%, and reduce promotional activity, supporting higher AUR and gross margin, as well as improved inventory turn. We also embrace new ways of working with a leaner operating model and more empowered teams. This resulted in $200 million of gross expense savings in fiscal year 21, which funded investments in areas such as digital and marketing to fuel our continued growth as well as our purpose-led initiatives to accelerate and amplify our work within our social fabric to affect positive change for our industry and stakeholders. Importantly, the traction of our strategy is clearly evidenced by our financial performance, including the achievement of record operating margin as Tapestry, Inc., as well as operating income and EPS growth versus both FY20 and FY19 in each quarter of the year, We also exceeded pre-pandemic sales in the fourth quarter, representing an important financial milestone. In addition, we generated $1.2 billion of free cash flow and ended the year in a strong cash position while reducing our leverage through organic profit growth and the paydown of the company's revolver. Given our strong financial position and underlying business trends, our board of directors approved the reinstatement of our capital return programs with a plan to return over $750 million to shareholders through both dividend and share repurchases in fiscal year 22. These actions underscore our conviction in Tapestry's ability to drive long-term growth along with our commitment to enhancing value for our stakeholders. Scott will discuss our capital allocation priorities in more detail shortly. Now let me touch on our results and strategies for Coach, Kate Spade, and Stuart Weitzman. Coach, our largest brand, led tapestry, outperforming in each quarter of the year. The brand fueled momentum through innovation across consumer touchpoints, driving engagement with new and existing customers. During the fourth quarter, Coach revenue rose 117% versus prior year, outpacing pre-pandemic levels of sales by 2%, a meaningful achievement given the volatile backdrop. In addition, we delivered significant profitability enhancements during the fiscal year, resulting in operating income increases of 67% on a one-year basis and 14% on a two-year basis. This outstanding performance was the result of both gross margin expansion and SG&A leverage, reflecting strategic actions and structural changes we've made to sustain long-term growth. Throughout the fiscal year, we made significant progress at Coach against the pillars of our multi-year growth agenda. First, we deepened our engagement with consumers by leaning into our brand values of inclusivity and authenticity to drive increased recruitment and reactivation. In addition, through the launch of our loyalty program in North America and more targeted marketing, we drove significant gains in the number of repeat transactions, Second, we created innovative, unique, and compelling products to meet the needs of our target consumer segments. We are building enduring icons that create a foundation for our product pipeline in future seasons. This was evidenced by the recent success of newness within the Tabby family, including our pillow and mini versions. In addition, we saw continued strength in our signature platforms across an expanded assortment of refreshed styles, highlighting desirability for the brand. Third, we drove triple-digit sales growth in our digital channels on both a one- and two-year basis, led by new customer recruitment. During the fiscal year, we acquired nearly 2.5 million new coach customers through our digital channels in North America alone, a meaningful increase versus prior year. Importantly, we sustained strong momentum in the fourth quarter, even as we comped our digital initiatives in the initial uplift in e-com sales that occurred during the pandemic in the prior year. highlighting continued opportunity in the channel. Fourth, we accelerated growth in China by leveraging our foundation in the country, which resulted in over 60% revenue growth on the mainland in fiscal year 21, with strength across channels. This performance reflected our integrated and comprehensive brand-building strategies, including investments in marketing, innovative product, and a continued focus on digital channels. Most recently, we hosted our live-streamed fashion show in Shanghai, which was extremely well-received and highlights our commitment to the Chinese consumer. Finally, we enhanced profitability to realize an operating margin of over 31%. This performance was driven by higher gross margin, which reached nearly 74% through a focus on streamlining our offering, sharpening our merchandising efforts, and reducing SKU counts by approximately 45%. These initiatives resulted in global handbag AUR growth in each quarter of the fiscal year. In fact, in the fourth quarter, our handbag AUR rose high single digits globally, led by particular strength in North America. In addition, we made structural changes to SG&A, including our fleet optimization efforts. Looking ahead to fiscal year 22, our goals are to increase market share in our core handbag and small leather goods categories through a combination of AUR and unit growth, by continuing to develop the brand's iconic families, approachable and inclusive messaging, and consistent global positioning. Invest and grow in digital while delivering differentiated and compelling omnichannel experiences. Continue to drive growth in China with key initiatives to capitalize on market trends of the emerging middle class and increase digitalization. And grow men's by expanding lifestyle, building brand awareness and increasing our presence in Asia, in keeping with our ambition to deliver over $1 billion in revenue in this category over our planning horizon. In summary, Coach has both a remarkable 80-year history and a bright future. We are confident that the deliberate actions we've taken to improve the foundation of the brand, including the realization of higher AUR and stronger margins, are sustainable over the long term as revenue continues to inflect. We're continuing to improve on the momentum we've built to drive market share gains at sustainably high margins in fiscal 22 and beyond. Now moving to Kate Spade. Throughout the year, the brand delivered consistent improvement on the top line, resulting in fiscal year 21 sales growth of 3% compared to prior year, or a 13% decline compared to pre-pandemic revenue levels. In the most recent quarter, sales increased 95% versus prior year and were 4% below fiscal year 19. Direct sales in the fourth quarter, excluding wholesale, increased on a two-year basis. In addition, for both the quarter and fiscal year, operating income rose meaningfully with margin expansion compared to prior year on both a stronger gross margin and SG&A leverage. We were pleased with Kate Spade's progress across its growth strategies, which highlight the traction we're making to build stronger connections with consumers. In fiscal 21, we crystallized the brand's purpose, returning to its roots of unique and best-in-class storytelling and fulfilling its promise as a lifestyle brand, representing joy, optimism, and color. During the most recent quarter, we continued to reengage lapsed customers at an increasing rate as we reactivated 550,000 customers through our North America digital channels, an increase of nearly 35% compared to prior year, demonstrating our focus on building lasting relationships with our customers. Second, we embedded a laser focus on the customer by harnessing the power of the broad and loyal Cape Spade community to engage consumers in new and exciting ways. This was evidenced by our viral happy dance campaign on TikTok, which has over 11 billion views and counting. Third, we re-energized our core handbag offering by introducing innovative and universal brand elements. We're seeing traction in leather with the introduction of the knot, which has already grown to approximately 20% of our retail assortment, proving its position as a key family in the assortment going forward. In addition, our new signature branding, the Spade Flower, continues to perform, while the reimagined SAM and Nylon has outpaced expectations. These platforms represent strong foundations for future growth. Fourth, we leaned into our digital strength, delivering approximately 35% growth compared to prior year across our e-commerce channels, reaching 35% of sales for the fiscal year. This growth was driven by both the acquisition of nearly 1.4 million new customers through our North America digital channels, as well as the engagement of existing customers. Fifth, we improved profitability by focusing on acquiring, reengaging, and retaining customers to drive top and bottom line growth. Through the use of data, we adjusted our assortment and pricing strategies, which resulted in approximately 40% lower SKU count and disciplined promotional activity. This ultimately drove overall Handbag AUR growth, which increased mid-single digits in both the fourth quarter and for the fiscal year. Finally, we've continued to focus on talent and culture. This year, we reorganized our creative structure with the formation of the Cross-Functional Ideation Studio, spanning across our brand creative, design, merchandising, and marketing teams. This has increased collaboration and cohesion to drive more impactful and consistent storytelling. As we head into fiscal 22, we are building on the strong foundation we've established with a goal to deliver profitable and sustainable global growth. To achieve this, we will maintain a consumer-centric approach across all aspects of the business, amplify recent product introductions while continuing to build out our core handbag platforms, continue to engage newly acquired, reactivated, and existing customers to drive higher lifetime value, Drive brand heat through marketing focused on our Kate Spade community, particularly in social channels. Maximize lifestyle positioning by strengthening the foundation of ready-to-wear, jewelry, and footwear. And improve the global omni-channel experience and drive continued growth in digital. Overall, we are pleased with Kate Spade's execution and the traction we gained with consumers in fiscal 21, including AUR improvement and strong customer engagement. This progress is reflected in Kate Spade's outperformance versus internal expectations, reinforcing our confidence in the brand's potential. Kate Spade is a unique yet universal brand, and our teams are galvanized around driving our clear strategy. We continue to believe in the significant runway ahead and our ability to achieve $2 billion in revenue and enhanced profitability in the future. Turning now to Stuart Weitzman. Throughout the fiscal year, the brand progressed on its growth strategies. Specifically, we continued to renew the brand's reputation for fit, comfort, and quality by listening and responding to customer needs. During the fourth quarter, we were pleased to see a significant increase in demand for dress styles as much of the world began to reopen and events and in-person socialization returned. Second, we grew our key categories by building strength in boots, booties, and sandals through fashion innovation, highlighted by the continued success of our iconic 50-50 land and nudist families. which brought in new and younger customers. We also expanded the casual assortment, including a broader sneaker offering and the recently introduced on-trend jelly style. At the same time, we dramatically simplified the product assortment with SKU counts declining approximately 45%. Third, we focused our distribution on markets and channels of greatest opportunity to create a foundation to return to profitability as revenues inflect. This included the exit of unprofitable markets across the globe and right-sizing of the fleet in North America. At the same time, momentum continued for our China business in fiscal 21, with revenue on the mainland increasing over 35% compared to prior year, or nearly 50% on a two-year basis. We kept the Chinese consumer at the forefront of our strategy, highlighted by our tailored product offering featuring capsule collections, relevant marketing with key opinion leaders, and continued outperformance across digital channels. China remains an important area of long-term opportunity for Stuart Weitzman at structurally higher margins. Fourth, we strengthened our relationship with wholesale partners by providing relevant products and faster, more consistent execution. As previously shared, we reentered 90 Nordstrom doors in the year, fueling North America wholesale revenue ahead of pre-pandemic levels in the fourth quarter. Finally, we made progress in establishing a robust digital presence and drove approximately 30% e-commerce growth during the fiscal year, including continued strength in the fourth quarter, even as store trends improved. In fiscal 22, our overarching goal is to return to profitability. We will recruit and engage customers through products that sparks desire with a focus on must-have launches featuring icons, key items, and capsule collections, as well as bridal accessories. Drive brand heat with a digital-first drumbeat of relevant, romantic storytelling. Fuel continued growth in China, including an expanded footprint and further investment in digital. Elevate the Omnichannel customer journey, including delivering a best-in-class digital experience. And accelerate wholesale partnerships with an expanded footprint in key accounts globally. Overall, I'm pleased with the progress we've made at Stuart Weitzman, and we remain focused on restoring the brand's profitability. In closing, we are focused on driving our next phase of growth supported by our clear strategy, compelling brands, and differentiated platform. Although the environment remains volatile, we see a strong consumer who is ready to shop and continuing to engage with our brands. We entered fiscal year 22 with a solid foundation, improved capabilities, and increasing momentum. From this position of strength, we are confident in our ability to win with consumers and capture market share. accelerating growth and profitability across our portfolio long-term, enhancing value for all stakeholders. With that, I'm pleased to welcome Scott Rowe, who many of you know, to discuss our financial results, capital allocation priorities, and fiscal 22 outlook. Scott?