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?

Thanks, Joanne, and good morning, everyone. I'm thrilled to be with you today after joining Tapestry just a few months ago. While I'm still relatively new, I can already see that this is a truly unique company with strong and engaged talent, great brands that are well-positioned in attractive market spaces, and a distribution model that allows us to directly own our consumer relationships coupled with advanced digital and analytics capabilities. As we move forward, my focus is to work alongside our management team to align business and financial strategies to drive sustainable long-term growth, which profits shareholders, and all stakeholders alike. Looking back at fiscal year 21, it was a transformational year for the organization, as Joanne mentioned. We effectively executed our acceleration program against a difficult backdrop, creating a foundation for sustainable growth. Specifically, we increased the penetration of our margin-accretive digital and China businesses, which led overall growth in the fiscal year, We expanded gross margins primarily through higher AURs driven by lower levels of promotional activity. We grew operating margin by 300 basis points versus FY19, reaching peak levels as tapestry. This despite significant investments in talent, digital capabilities, and marketing, which were more than funded by gross profit gains and $200 million in gross SG&A savings delivered through the acceleration program. And we further strengthened our financial position through tight inventory management and a reduction in debt levels, while achieving $1.2 billion in free cash flow, resulting in an ending cash position of approximately $2 billion. Turning to the details of the fourth quarter, total sales rose 126% versus prior year on a 14-week basis, or 113% on a 13-week basis, outpacing pre-pandemic levels, an important milestone. These results were led by strength at coach, while Kate Spade and Stuart Weitzman delivered material sequential improvements and trends. By region, North America led the overall growth, rising approximately 150% versus FY20 and a high single-digit percentage versus FY19, fueled by digital and a continued improvement in our brick-and-mortar businesses. In mainland China, our strong momentum continued as revenue increased approximately 60% on a one-year basis, and over 40% compared to pre-pandemic levels. Across the balance of Asia, sales rose materially compared to the prior year, though remained below pre-pandemic levels, with notable pressure in Japan given the continued state of emergency and lack of tourist sales. And Europe, while a small portion of our total sales, experienced a sequential improvement in trends on both a one- and two-year basis as lockdown measures were lifted. And while revenue remained well below fiscal 19, given the lack of tourist travel, our local demand did rise in the quarter. By channel, we maintained strength in digital, which grew more than 35% compared to prior year, reaching 30% penetration. That's three times 2019 levels. While our stores remained pressured, slightly better traffic drove a sequential improvement for the channels. And in wholesale, while revenue remained below FY19, trends improved with particular strength in duty-free growth in China. Moving down to P&L, we realized another quarter of overall gross margin expansion compared to prior year and FY19, with all brands exceeding expectations. We continued to successfully execute our strategy to maintain price discipline, reduce skew counts, and leverage data analytics to more effectively tailor our product assortment and marketing messaging to the consumer. As anticipated, SG&A rose significantly given the prior year's atypical comparison due to the impact of COVID-19. On a two-year basis, the increase in SG&A was attributable to higher marketing spend of almost $100 million compared to Q4-19, and an increase in our annual incentive plan given our outperformance this year. In addition, our expenses for the quarter included the $25 million contribution toward the endowment of the newly established Tapestry Foundation. Taken together, we achieved our fourth consecutive quarter of operating income growth and margin expansion compared to pre-pandemic levels. Earnings per diluted share for the quarter was 74 cents on a 14-week basis or 65 cents on a 13-week basis, a significant increase compared to a loss in the prior year and 7% ahead of pre-pandemic EPS levels. Now moving to distribution. We continued to optimize our global fleet to prioritize profitability. For tapestry, we closed a net of 59 locations globally in FY21, including 10 net closures in the fourth quarter. As compared to fiscal 19 year end, we have closed a net of 90 locations across our brands. Turning to a discussion of our balance sheet and cash flows, we ended the quarter in a strong position with $2 billion in cash and equivalents and total borrowings of $1.6 billion. Total inventory at quarter end was approximately in line with last year, and 6% below FY19, reflecting, in part, deliberate actions to reduce skew counts and prioritize inventory turn. And we generated $1.2 billion in free cash flow in FY21 versus $202 million in the prior year and $518 million in fiscal 19. This included capex of $116 million, a decline of 44% versus prior year, as we prioritize investments in high-return projects, notably in digital, while tightly controlling overall spend and reducing our outlay for new stores. Now touching on our capital allocation priorities. First, we continue to prioritize investments in the business to support strong returns and long-term profitable growth. Second, we're committed to returning capital to shareholders through both dividend and share repurchases. In keeping with this strategy, we're pleased to announce today a plan to return over $750 million to shareholders. Specifically, the board declared a quarterly cash dividend of $0.25 with an anticipated annual dividend rate of $1 per share. Over time, our intent is to increase the dividend at a faster rate than earnings growth. We also expect to repurchase approximately $500 million worth of stock in fiscal 22 under our current authorization. Importantly, once we have more visibility into a normalization in the external environment, we expect, over time, to more aggressively return cash to shareholders. And finally, in keeping with our objective to reduce leverage, we expect to repay our July 2022 bonds totaling $400 million at the end of this fiscal year. So when considered together, the dividend, share repurchase, and debt repayment are intended to approximately equal our projected free cash flow in the fiscal year. And as Joanne mentioned, these actions demonstrate our confidence in the underlying strength of our business, as well as our commitment to driving total shareholder returns. Now moving to our fiscal 22 outlook. Before touching on the specific details, it's important to note the paradigm shift compared to just a year ago. Entering COVID, there was a macro demand concern, and we took bold actions to adjust supply in order to preserve liquidity. As you can see in our just reported results, we were very successful in achieving our goals while continuing to accelerate investments to drive increasing momentum in our brands. Today, we find ourselves in a dynamic where the consumer demand backdrop is strong, while supply chain remains challenging. So I want to emphasize the underlying strength and trend of our business and separate that from the uncertainty in the macro environment, primarily due to COVID-related impacts, which are largely out of our control. Therefore, the outlook we're giving you is a reflection of what we know as of today. It's a point in time. While we have visibility into the risks that we see on the horizon, We're not trying to predict that which is unknowable. We have taken the position that we'll be aggressive on protecting the momentum of the business by securing significant expedited deliveries at an additional cost in order to mitigate the impact of supply chain disruptions, at least through the holiday period. Further, we'll continue to increase AUR as price is a lever to counter some of the additional cost pressures. Of course, we'll continue to monitor the impact of the new developments on our outlook over time. Now turning to the details of our FY22 outlook. Please note that all growth rates as compared to prior year are on a comparable 52-week basis. We expect revenue to increase at a mid-teens rate versus FY21, resulting in approximately $6.4 billion in sales, which would mark a record for the company. This includes the expectation for a continuation of strong growth in digital and greater China, as well as improving global trends in stores. While we expect stores to show improvement, revenue is currently planned to remain below pre-pandemic levels. Turning to gross margin, we expect to sustain the company's strong margins through continued AUR improvements and lower promotional activity. Our outlook also incorporates the expectation for GSP's renewal, with a retroactive benefit in the second fiscal quarter, which is currently planned to partially mitigate the negative impact associated with higher freight costs currently embedded in our plan. Touching on SG&A, we expect expenses to grow relatively in line with sales for the year, We continue to estimate that we will realize approximately $300 million in structural gross run rate expense savings, including $100 million of incremental savings from the prior year. We are utilizing these savings to fund investments in the business, including $50 million of planned higher marketing spend, which is expected to represent approximately 7% of sales in fiscal 2022, up roughly 75% or three full percentage points compared to FY19. We're also investing in our teams, adding talent to growing areas of the business, such as digital. And we're focused on continuing to retain and develop these strong teams, as evidenced by our recently announced commitment that all U.S. Tapestry employees will earn at least $15 per hour. Operating income is expected to increase at a mid-teens rate, resulting in operating margin modestly ahead of prior year and an increase of over 300 basis points versus 2019. Net interest expense for the year is expected to be $65 million, and the tax rate is estimated at 18.5%, assuming a continuation of current tax laws. Weighted average diluted share count is forecasted to be in the area of 283 million shares, approximately even with last year, with share repurchase activity expected to offset dilution. We anticipate EPS to be in the range of $3.30 to $3.35, reflecting leverage to the bottom line. CapEx for the year is projected to be about $220 million. We anticipate approximately 40% of the spend to be related to store development, primarily in China, with the balance dedicated to our digital and IT initiatives including the initial investments related to build out our new distribution center. Specifically, as our digital business continues to grow, we've recognized the opportunity to sharpen our focus on the consumer by expanding our distribution capabilities. We recently signed a lease for a new distribution facility based in Las Vegas which we believe will allow us to better serve our customers in the western part of the United States. Finally, we expect inventory levels to be up meaningfully throughout the year as we pull forward receipts to match strong demand and face elongated lead times from supply chain pressures due to COVID disruptions. Given the dynamic environment and last year's atypical comparisons, we again expect significant variability by quarter. Revenue growth versus prior year is expected to be front-half weighted, given relatively easier compares due to lapping COVID impacts, with the first quarter forecasted to increase more than 20%. Earnings growth in the first half is expected to be somewhat pressured due to incremental SG&A investments, along with last year's unusual compare, including lower expenses due to compensation reductions, lease abatements, and the timing of government assistance. That said, we still expect EPS growth in the first half versus prior year, particularly in Q1. So in closing, we drove strong results in FY21. Our significant progress is a testament to the successful execution by our passionate teams, the power of our brands, and our competitive advantages, including our differentiated platforms. The bold and deliberate actions we've made under Tapestry's acceleration program have transformed our organization. These changes are foundational and will continue to be a meaningful point of difference for our brands. As we look ahead, with regard to those things we can control, we're continuing to build momentum and we are confident in our ability to leverage this solid foundation to drive sustainable top and bottom line growth across our portfolio of brands. And with respect to those things we can't control, We've taken aggressive actions to protect our strong momentum and mitigate those macro challenges we see today. Our conviction is underscored by our capital allocation actions, highlighting our optimism for the future and commitment to enhancing value for all stakeholders.

I'd now like to open it up for Q&A.

And at this time, if you would like to ask a question, please press the star then one on your touchtone phone. You may withdraw your question at any time by pressing the pound key. Once again, to ask a question, that is star and one. And we'll take our first question from Bob Dribble with Guggenheim. Please go ahead. Your line is open.

Good morning. And Scott, welcome and congratulations. My question I have, generally, Joanne, you mentioned improving consumer demand and continued momentum in the FY22. What signs give you confidence in the strong trajectory that you guys do have planned? Thanks.

Joanne, start again. I think your mic was off.

I'm sorry. Can you hear me?

Yes, I can.

Okay. Sorry about that, Bob. You would think we get the mute button down by now. Uh, good morning. I would say that our confidence begins with the standout results we delivered this fiscal year. Um, fiscal 21 was a year of successful transformation for the company and it was capped by a strong fourth quarter. You know, we saw sales trends improve every quarter of the year and exceeded pre pandemic levels in the fourth quarter. For the year, we delivered record operating income and record operating margin as a multi-brand company, despite the challenging backdrop. And we see momentum building as we enter fiscal 22. And you can see that in the outlook we shared. We expect to reach a record level of revenue for fiscal 22 at $6.4 billion on mid-teens growth. And we see further untapped potential longer term, particularly in digital and China. And those represent sustainable top and bottom line growth vehicles going forward. I think importantly, we're investing in long-term growth drivers. We're investing in marketing, and we're investing in digital and our people. And while we've made significant progress this past year, we're just getting started. As Scott said, we're operating from a position of strength as a fundamentally different company today. We're reaching... uh through our acceleration program you know we took bold actions and we're now reaching new customers in new ways as a more agile organization and the actions we took not only delivered a strong year but positioned us to thrive on the other side of the pandemic and we're better equipped as a company i would say to pull these levers growth levers going forward we have new capabilities to engage consumers and drive higher lifetime value and we have four million new consumers that we acquired in the last year alone, who are increasingly younger. We're delivering really strong gross margins at increasing AUR, showing pricing power in our brands. And we have a direct-to-consumer model, building strength in digital and China with significant runway ahead. And, you know, Scott also mentioned we have a strong team, and we continue to invest in our team to secure that competitive advantage. So I would say overall, we're operating from a position of strength. We're building momentum, and we see significant runway ahead for all of our brands.

Great. Thank you very much. Good luck. Thanks, Bob.

And we'll take our next question from Ike Barucho with Wells Fargo. Please go ahead. Your line is open.

Hey, thank you. Good morning. Congrats, everyone. I guess, Scott, welcome. Two questions for you, one quick one and then one more higher level. Just on the second quarter, you talked about the retroactive GSP benefit. Can you quantify that for us so we know what to expect on the gross margin line? And then again, bigger picture, having you join TPR, Clearly, we all know your background from VF portfolio optimization. I'm kind of curious when you look at TPR, do you see some of the same opportunities that you had in your prior company? Do you see opportunities for creating a more efficient portfolio, potential divestitures? And then again, when you think about the M&A platform here versus your prior company, do you see similarities over the next couple of years that you can capitalize on? Thank you.

Yeah, hey, Ike, good to hear from you. Wow, that was quite a question, man. So first of all, tactically, GSP, yeah, it's about 50 basis points from a margin standpoint, and you're right. I said in my prepared remarks second quarter, so that means a little bit of a drag in the first quarter as you're not seeing that take effect, and our thought is that and hope is that it will be reestablished I think 10 out of the last 14 times this has come up, it's been approved. So, you know, we have solid basis for making that assumption, but it's not done until it's done. So we wanted to give you all visibility into that. You know, observations about tapestry, you know, I'm going to take it a little higher level. I think You know, first of all, what a great team. And I've been so impressed by the people and the capabilities. This is a team that has taken bold action over the last, you know, we haven't wasted the pandemic. And the focus around building those foundational platform capabilities is impressive. You see it in the numbers. You see evidence of that. And we've got three great brands that are focused on attractive market spaces and And we've got a lot of work to do. So, you know, over time, I laid out capital allocation priorities, which are investing in our great brands. That's our highest return today. Number two, the dividend, you saw we reinstated that, and returning cash to shareholders. That's where our focus is right now. You know, longer term, who knows what the future brings. But we've got really exciting opportunities with high returns right in front of us, and that's where we're going to be focused. Great. Good luck. Thanks, Ike.

We will take our next question from Erin Murphy with Piper Sandler. Your line is open.

Great. Awesome. Nice to be back in the Q&A. So welcome, Scott, and I can't wait to see the man satchel you'll be sporting next time we all travel together. I guess it's going to be an upgrade. So I guess my question is on the Kate Spade margins. You know, really good to see some of the green shoots that you have there now in the expansion relative to 2019. But they still trail the Coach brand by 20 percentage points. So just curious, I guess, maybe Joanne and Scott, for you, how you see that evolving over time? Really, what's the potential with the Kate Spade margin profile over time? And then if I can just have a clarification from Todd, the AUR for Coach, I believe you said, was up high single digits. How did that compare outlet versus full price in the quarter? Thank you.

Thanks, Erin. This is Joanne. I'll jump right into the Kate Spade question. We are really pleased with our execution in fiscal 21, and we made important progress. You noted the progress on margin, but we made important progress across the foundations of the brand. You know, I'll just call out a few highlights. You know, Kate is, you know, highly digitally penetrated. We showed continued strength in the digital channel. It now represents nearly 35% of sales for the brand worldwide. We're acquiring new customers, 1.4 million new customers during the year. And we're reactivating customers at a more frequent rate. So 550,000 customers reactivated, a 35% increase from last year. And some of those customers are deeply lapsed customers. So when we think about the Kate Spade brand and engaging consumers and really rebuilding the brand, we made really important progress. And I would say that partly is due to the fact that we've re-energized our core handbag offering. Liz and team have worked really quickly to build a stronger, more solid platform. We're seeing traction across our leather platform with the knot, our signature platform we've talked about with the spade flower, and our nylon platform with the reimagined sandbag. And what we're seeing is, the customer reacting to those changes in our assortment with increased global handbag AUR. So with handbag AURs moving higher, that's another sign of brand health. So longer term, we continue to have and see a path for Kate Spade to build to a $2 billion brand. And to your point, at significantly higher margins, we see a path to high teens margins opportunity. And, you know, as you compared versus Coach, Kate Spade is a, you know, is a true full lifestyle brand. And there are some differences to the Coach business today. You know, Kate Spade has, as I said, more lifestyle categories. And right now as a brand is centered more in North America and Japan doesn't have as developed an international business. But we see those as opportunities moving forward.

And just picking up on Coach, we were really pleased with the continued AUR growth we saw in handbags this quarter. In fact, it was the ninth quarter in a row that we increased our AUR, and it really was led by North America. And we don't disaggregate AUR by channel, but I can tell you both channels had increases in AUR, and we feel really pleased with what we're accomplishing and what we can accomplish in front of us.

Thank you both. And we will go next to Mark Altschweiger with Baird. Your line is open.

Great. Good morning. Thanks for taking my questions and congrats on the solid results here. So to start off just with the top line guide for the year, the mid-teen sales growth, can you give us a bit more color on what Outlook looks like by brand there? Any big differences in terms of the contribution of units versus AUR as you look across the portfolio?

Yeah, you know, we don't break down the guide specifically by brand, but, you know, obviously with, by the way, record earnings or record top line estimated $6.4 billion, and with Coach being roughly three-quarters of the total, you can assume that very strong top line growth in Coach and really sequential across all the brands, right? We're seeing the strong... improvement that we saw last year continuing into this year, so growth and all. And I just note you talked about top line, but we're also returning to profitability on Stewart next year is our expectation. So really, really strong continued momentum across all. But, of course, Coach just law of mathematics is driving the lion's share of that.

That makes sense. Thanks. And then, Scott, just following up on SG&A, it sounds like you plan to keep pace with SG&A spend to revenue this year as you reinvest. Can you just speak to the level of flexibility in those plans? I guess asked another way, should we expect EBIT growth at least in line with sales regardless of how the operating environment evolves through the year? Thank you.

Yeah, sure, Mark. We've talked about next year that – You know, we're consolidating these record margins and even expect slight improvement next year. And as it relates to SG&A, so that's the overall picture. As it relates to SG&A, remember what Joanne said. We're saying it's about flat or in the neighborhood of last year as a percentage of sales. But underneath that, there's a lot going on. We continue to invest in Those platforms and growth drivers for the long term, you know, Joanne mentioned marketing. I had it in my prepared remarks, our digital capabilities, analytics, et cetera. But underneath that, you know, the acceleration program and the savings according or attendant to that have given us the ability to see leverage elsewhere. So some of these things are certainly variable, right? I mean, we can, we flex and we do based on the data and analytics and the insights that we see where you lean into marketing, where, where we see that we have returns. Certainly those are choices that we can make. And we, we do have some optionality and variability in the model, but I got to tell you we're, we're seeing results from continuing to invest, creating that flywheel effect and, And based on our confidence of reinvesting back in our business, it's our intent to continue to do so. And as evidenced by the strong trend, leaving the fourth quarter and leading into the guidance we just talked about for next year.

That's great. Best of luck. Thanks, Mark.

And we'll take our next question from Oliver Chin with Cowan. Please go ahead.

Hi, thank you. The average unit retail momentum has been impressive. What do you see ahead as your anniversary increases and as you seek to continue to offer value to the customer? Would also love your thoughts on the evolution of the Coach brand as a lifestyle brand as you think about footwear and men's and other categories. What will be some priorities and how are you thinking about, you know, the handbag families such as Tabby and others? relative to how you thought about handbag family groups in the past. Thank you.

Good morning, Oliver. Let me jump on that, and then I'll toss it to Todd to get into the details of Coach. But, you know, as it relates to AUR, we've been really pleased with the AUR growth that we've seen across our brands in the past year. And we've been focused on implementing and embedding the structural changes in our organization to help us do that. We're getting closer to our consumer, certainly, which is helping us deliver great product that our consumers value and embedding data and insights into our processes more. But we're also leveraging data to better manage our assortments. And you've seen that in the SKU count reductions we've made. and in the way we've managed inventory across the world in an environment that, you know, has a lot of choppiness to it. So those are structural changes that we've made, and, you know, they have proven benefits on AUR and gross margin expansion over the year, and we expect that to continue. On your specific questions on Coach, I'll let Todd talk about the successes he's seen.

Yes, thank you. We are really pleased with how we've changed the brand very materially over the last year plus, partly because of the acceleration program and partly because we really changed the conversation with our customer from leaning in and the call to action being around price and promotion to move to value and values. And this has really fundamentally changed us, and it has really increased our AUR. Our approach to how we merchandise is fundamentally different. We have reduced our SKUs, but we've leaned into icons. And Stuart Beavers and the creative team have been getting data from the customer and really leaning in. So you mentioned Tabby. Tabby is a collection we launched in June of 19. By February of 21, it would normally have been out of the mix. Instead, we doubled down. We relaunched it with Pillow Tabby. It became the number one bag. You saw this month we've launched Soft Tabby, and then we're going to see Pillow Tabby reemerge. So having these iconic styles that are not so pressured by short selling windows really materially changes our outlook. And then regarding lifestyle, one of the opportunities I think we have is while we call it men's, men's product is an all-gender product often. And one of the things we recognize is we can do better not necessarily merchandising it exactly the same way we merchandise historically women's products. So you'll see us mix in more outerwear, more cut-and-sew opportunities, and it is really resonating with our customer. And then finally, I'm a big believer and have been for many years in the opportunities that we have with footwear. And you're seeing us win in the category, both in our own stores, retail and outlet, but even in wholesale, which is obviously a very competitive environment, but is the most democratic environment. And when we're winning there, we know we actually are winning in the category.

A new customer acquisition, Joanne, you called it out in a Great to see that. What's your hypothesis for what might be really important to retain the new customers, how that relates, you know, likely to innovation and what you need to do to engage those new customers, as well as maintain existing? Thank you. Best regards.

Thanks, Oliver. You know, driving engagement requires, you know, consistent innovation, innovation in products. We're learning a lot about those new customers, and we're also engaging them in different ways. And we're meeting our customers where they are, and we're better capable to meet those customers and engage them with our data and analytics capabilities, with our increasing, you know, presence on social media and the innovations we're bringing to life there. And at the end of the day, it's about delivering great products. So taking those insights, and really understanding our consumer at a deeper level. And that's a lot of the foundation that we've built this past year is how do we really truly understand our customer, our consumer, and embed that consumer and those insights in the product development process where our creative teams bring their terrific product and creativity to bear against things that consumers value. And our focus moving ahead is with all this new customer acquisition, driving higher lifetime value with our consumers going forward.

Thank you.

And we'll take our next question from Lorraine Hutchinson with Bank of America. Please go ahead.

Thanks. Good morning. You talked about the expectation that store sales will remain below pre-pandemic levels. Have you been able to right-size the store-based cost structure? And how should we think about profitability of the fleet if this trend persists?

Yeah, I'll start and maybe steal all of Scott's thunder here. But, you know, that has been, we think stores matter. And, you know, as we focus on the consumer, it's about providing a seamless experience for our consumer, regardless of where they choose to shop. And we've been incredibly successful at building a digital business and meeting our consumer on digital platforms. But the store platform and that physical touch point is still important. And if you go back a year, what we said is, or more than a year now, we said, you know, while stores are still important, we have higher profitability expectations for our fleet and productivity thresholds. And we've taken bold actions to, you know, structure our fleet in that way. But we're also investing to make sure that that represents the right experience and the right physical touchpoint. We're adding omni-channel capabilities for our consumers. And that's paying off. It's paying off on the top line, but it's also because we've seen incremental growth in our brick and mortar fleet as the world sort of recovers from the pandemic. But what we've also seen importantly, and here's where I'm stealing a little bit of Scott's thunder, is we've seen operating margins of our store fleet actually above pre-pandemic levels, even right now on depressed volume and a depressed traffic. So Scott, I don't know if there's anything you want to add, but I'll throw it to you.

That's pretty comprehensive. It's really impressive. I just have to compliment the team on, at the same time, rationalizing and having top line, you know, being down a little bit, the quality of the underlying remaining fleet and the profitability through the pandemic is pretty impressive. The other thing I would just say is, as we think about the Omni channel, journey that we're on. Remember Joanne's comment, a billion dollars more in digital at the same time. We're rationalizing getting more profitable on brick and mortar. We're reinforcing the Omni experience and added, you know, we're at $1.6 billion a sale. That's a billion dollars in two years. So it's not just one channel and increasingly it's how we meet that consumer where she is and And it's pretty impressive from my perspective, seeing how we've managed both of these channels, increasing profitability and at the same time finding a foundation for future growth.

One thing, and, you know, at the risk of piling on, what we've seen in North America, which really bodes well for our store fleet, is with all of this digital growth, as we see a return to traffic in stores, in those areas, we have not seen our digital penetration, our digital sales in those areas shrink. So the wonderful thing, and this really brings home the point, it is an omni world. It's an and, not an or. We see our ability to continue to grow digital while seeing very profitable interaction in our stores as traffic returns.

We'll take our next question from Michael Bonetti with Credit Suisse. Please go ahead.

Guys, let me add my congrats, Scott. Nice to hear you with another great team here. Thanks, Michael. You know, I want to – I guess, Scott, I'll ask you on slide 17 here in the deck, you mentioned improving visibility could let you more aggressively return cash to shareholders. I'm just curious, maybe a thought there early on here is how you think about leveraging the business, giving – Given what we know about the very, very strong cash flows of this business pre-pandemic and that it's improving now, I wonder how you think what the appropriate level is early on. And then I'd also be curious on the SG&A guidance, just to follow up with Mark's question earlier. This will be the first year in a more normal environment, more normal after you did a big reset to the structure of SG&A last year. So I know there's a lot more variability in there. After you took some corporate costs out and you're generating really good You know, ROAS on the marketing investments you've made. Sounds like you still have good growth from high margin drivers like AUR, CAPE margin targets, high teams over time versus the 10% exit rate this year. So I'm just wondering, there seems like a lot of good margin drivers in there to the extent that we do see revenues coming in above plan. How should we think about what flows through to earnings this year in an upside scenario for revenues?

Yeah, well, first of all, Michael, good to talk to you again, as usual, very thorough and comprehensive on your insights here. So let's start with capital allocation and how we're thinking about it. I think a little context first is important. First of all, don't lose the message here. The reinstatement of the dividend, the reinstatement of the repurchase program, $750 million intended return of cash. is really a testament to our underlying confidence in the business. So that, I think that's the important message here. And if you think about the journey over the last year, you know, early on in COVID, given the massive uncertainty and demand issues, you know, we took a lot of actions to protect liquidity, to protect the enterprise with our rating agencies, bankers, bondholders, et cetera. There was a commitment on deleveraging and a glide path that we laid out. So, The great news here is we're able to not only advance on that glide path and even be a little ahead of it. You heard us mention paying off the $400 million of debt at the end of this fiscal year, which is our intent, and reinstate the dividend. And we still have a strong balance sheet and we still have ample cash. We're in between these two periods, right? We see much more confidence, and that's why we've stated the aggressive return to shareholder cash or returning cash to shareholders. But at the same time, we think it's prudent to take, to keep a little elevated cash position given the uncertainty of the environment. So, my comment was really intended to signal that while we're definitely in a more confident position, we're engaging in repurchases and dividends. we're still maintaining an elevated buffer until we get better line of sight on what COVID, Delta variant, et cetera, the uncertainty, how that evolves. Once we have that confidence, there's no reason that we wouldn't be, you know, go back to kind of normal levels, and we have opportunities to be even a little more aggressive from a return of cash to shareholders. So that was the intent, right, to say we're not going ditch to ditch here, right? We've made progress, but we want to watch the uncertainty. As it relates to, you know, margin flows, again, I'd point you back, you know, SG&A, the picture there is the tale of two things. We have the benefits around acceleration, which are providing leverage throughout the P&L to allow us to reinvest. Obviously, we have variability, and we're making choices. Those choices are based on the insights and data that we have and we've seen it pay off right so that's that's why we've given guidance that says we we do expect to expand margins next year should we get more more upside would some of that flow through it depends yes likely but we're also going to look at where we can lean in and advance you know advance our platforms and capabilities for the future but But we expect expanding margins, and you should expect that some of that would flow through as we see upside.

Thanks a lot. Take care, guys.

We'll take our next question from Brooke Roach with Goldman Sachs. Please go ahead. Your line is open.

Good morning. Thanks so much, and thanks for taking the question. And, Scott, welcome. Thanks, Brooke. I wanted to ask two quick questions. First was this. Joanne, can you talk to the plan step up in marketing investments this year, where those investments will be most focused and your excitement on brand building into FY22? And then for Scott, I wanted to get your thoughts on industry-wide supply chain and freight costs. How is tapestry managing through some of these challenges, and can you provide any additional color on the impact of these industry-wide challenges that are embedded into your margin outlook for the fiscal year? Thank you.

Thanks, Brooke. I'll start with our marketing spend, and I would say that as part of our transformation, we have fundamentally restructured our P&L with a focus on And we did that really with a focus on how we were going to engage consumers and needed to engage consumers in sort of the new world of retailing in a post-pandemic era. And we've made significant changes within the P&L. And Scott called it out in his prepared remarks, but, you know, 3% higher investment in marketing. And we've done that with confidence because With our new data and analytics capabilities, we're better able to measure the return on our marketing investments. And our intention is to structure our business so that we can continue to engage consumers across all of our brands and continue to create and tap into growth. And we have seen tremendous traction over the past year based on these capabilities. The investments that we're making in marketing are across the funnel and I think that's important to know too because as we get better at measuring our returns we're getting better at measuring returns across the full funnel so it's not only performance marketing but it is about brand building and measuring our returns on the on those brand building investments we're making you know of course digital is a priority we're you know we're better able to engage consumers on many digital platforms and we're driving innovation there and We've called out the work we've done on live streaming and TikTok with even organic and viral videos on TikTok. So we're continuing to innovate. We're investing across the funnel. And we think that is an important enabler as we look to unlock future growth.

And, Brooke, as it relates to elevated costs that we're seeing, we are seeing some elevated costs primarily due to expedited freight, air freight, essentially, as we absorb and deal with the supply chain disruptions that we see. And our outlook reflects additional air freight really through the holiday period, which is as far as we can see. in terms of getting the deliveries and trying to maintain the strong momentum we have. You heard Joanne say it, right? The great news here is demand for our brands is strong. And while we see some disruption, we're taking bold actions. And we got out ahead of this a little bit in terms of securing as much supply as we can to keep that strong momentum going. You know, we talked about gross margins being roughly equal to this year, and that means we're consolidating on record high gross margins, up 300 basis points versus a couple years ago. And underneath that, we have some elevated costs related to expedited freight. We also see the continuing build in AUR, pricing leverage, less discount, and the general trend of the business, which is helping us offset that. So those are the puts and the takes. I would say, though, by quarter, you know, it's not necessarily going to be a straight line. We're going to see as some of this freight cost turns into the P&L, it may not come exactly matched with some of the price increases, but over time for the year, that's the picture that we see.

Thank you.

And we'll take our final question from Matthew Boss with J.P. Morgan. Please go ahead.

Hi, good morning. This is Kevin Heenan on for Matt Voss. Congrats on a strong quarter. I wanted to ask about your inventory positioning, not flat, relative to the prior year. I think that's a significant improvement versus the third quarter. I guess, how do you feel about your ability to chase demand into what is expected to be a pretty robust back to school and holiday season for retail, given some of the disruption that we're seeing in the supply chain today. Thanks.

Yeah, Kevin, maybe I'll take that one or at least start. So first of all, yeah, we had a great performance from an inventory standpoint for all the reasons that have already been said and down versus the last couple of years. This is part of a very focused effort in simplifying, reducing SKUs and and seeing real progress there. And it's one of the factors for cash flow. But as we look to next year, we are going to see elevated inventory positions starting in the first quarter. And the reason for that is twofold. Number one, just growth, supporting the growth of the business. Number two, we're expediting, as I said, what we can to bring in inventory, whether it be even Even by air or by sea, we're getting inventory in as fast as we can reasonably do in order to keep the momentum of the business. And those factors together are going to be a slightly elevated increase in inventory. But I have no concerns about this at all. This is inventory that is supporting the trend of the business. And frankly, if we could get more, we probably would. You're going to see that dynamic play out. It's not significant, but understand what's really driving it. And you asked about our ability to chase. You know, listen, we're doing what we can. I just told you expedited air freight. We're looking to, you know, I think we were quick to get in front of our suppliers and we've secured what we can. So to the best of our ability, we will chase. It's going to be a difficult environment to chase, frankly. given the dynamic in the short term. But we feel good about all the levers that are in our control to set us up as well as we can.

Yeah, Scott took the words out of my mouth. I would be happy to get whatever we can. We feel really, really good about our holiday offering. And, again, going back to what we said before, our iconic styles really diminishes that sort of markdown risk that you think about in our space. And we feel exceptionally good about what we have coming and our ability to respond because, again, the demand is there. We're seeing the demand. And that is the most important thing in our industry. And now satisfying that demand in the ways that our customer wants to see us, whether that's brick and mortar or digital, is how we're going to go about capturing it.

Thanks very much.

Thank you. And that concludes our Q&A. I will now turn the call over to for some concluding remarks.

Yeah, thank you, everyone, for joining us this morning and hanging in there through our technical difficulties. You know, fiscal 21 was a transformational year for Tapestry, and I want to extend a huge thanks to our teams around the world for their unwavering passion and dedication to our business. You know, as we just talked about, the dynamic environment continues, but we're in a position of strength with a proven track record of success, and we have increasing conviction in our ability to accelerate top and bottom line growth. with a focus on delivering for all our stakeholders, our customers, our teams, our community, and our shareholders. I appreciate your interest in tapestry. Have a great day.

Thank you, and this concludes today's program. Thank you for your participation. You may disconnect at any time.