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Operator
Good day and welcome to this 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 this time, simply press star then the number one 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 the Director of Investor Relations at Tapestry, Kelsey Mueller.
Kelsey Mueller
Good morning. Thank you for joining us. With me today to discuss our first quarter results, as well as our strategies and outlook, are Joanne Prevoisorat, 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 Security 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 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. In addition, as we continue to anniversary the onset of the COVID-19 pandemic, we will be providing financial information compared to FY20 or pre-pandemic and FY21 where applicable. For a full reconciliation to 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 first quarter highlights for Tapestry and our brands, along with an update on our strategies for the holiday season. Scott will continue with our financial results, capital allocation priorities, and outlook 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 Kravoy-Threat, Tapestry's CEO.
Joanne Prevoisorat
Good morning. Thank you, Kelsey, and welcome, everyone. I'm pleased to report that the strong momentum we saw throughout last year has accelerated further in the first quarter, with our sales now 9% above pre-pandemic levels. Our operating margin has improved 8.5 points compared to fiscal year 20, even as we've reinvested in key growth drivers for our business. The fundamental changes we've made through the acceleration program to transform Tapestry and our brands have enabled our teams to act with agility to drive highly effective customer engagement and support increasing demand. This performance also reaffirms our confidence in our differentiated platform. Our three unique brands are enabled by our talented teams, technology infrastructure, globally diversified supply chain, and a 90% direct-to-consumer model. These assets, coupled with our growing data and consumer insights capabilities, have fueled more targeted product development, more efficient pricing, and more effective marketing, all of which support accelerating revenue, higher gross margin, improving profitability, and most importantly, stronger connections with our customers. Now turning to the highlights from the first quarter. We continued to make meaningful progress against the acceleration program by sharpening our focus on the consumer, leveraging data to lead with a digital-first mindset, and transforming Tapestry into a more responsive organization. First, we kept the consumer at the forefront of our strategy, which drove further increases in customer recruitment. In fact, we acquired approximately 1.6 million new customers across our direct channels in North America, an increase of over 20% with growth in both stores and online. Second, we leveraged our unique data and analytics capabilities to enhance engagement with our consumers. As a result, retention improved year over year at each brand, including strong re-engagement with the 4 million customers acquired last year in our North America digital channels. In addition, we drove a higher number of repeat transactions and reactivated lapsed customers at an increasing rate. These examples highlight the advancements we've made to utilize customer insights to increase engagement with our brands and drive higher lifetime value. Third, we enhanced our expertise in the digital channel, a margin accretive business across brands. We've made significant investments, including in talent, to improve the customer experience and drive conversion. As a result, we realized a sequential acceleration in e-commerce revenue trends in the quarter, a meaningful achievement as we lapped difficult online comparisons from last year. Sales rose close to 50%, with digital penetration now nearly four times pre-pandemic levels. At the same time, trends across our global store fleet again improved, with operating margins that continue to exceed pre-pandemic levels. Fourth, we further strengthened our positioning in China, a region that represents significant long-term opportunity, supported by the rising middle class. While COVID resurgences during the quarter impacted traffic across the industry, we delivered sales growth of over 25%. Compared to pre-pandemic levels, sales increased roughly 65%, accelerating versus the prior quarter. And importantly, we grew on both the mainland and with Chinese consumers globally, which increased at a low double-digit rate versus fiscal year 20. And fifth, we increased global AUR at each of our brands, reflecting traction with our customer base and the deliberate structural changes we've made to reduce promotional activity and improve assortment productivity. Now, let me touch on the first quarter highlights for each of our brands. Coach delivered another exceptional quarter, accelerating further off an already strong base. Revenue rose 27%, representing an increase of 15% compared to pre-pandemic levels, or a 13-point sequential improvement. Operating margin expanded, fueled by gross margin, which reached nearly 75%. the highest rate in any quarter in the last 10 years. These results are a testament to the increasing brand heat and strong customer demand and engagement we're seeing at Coach, highlighting progress against the brand's fiscal year 22 growth strategies. First, we drove another quarter of AUR gains as we benefited from strengthening pricing power and our deliberate actions to improve SKU productivity and lower promotional activity. Globally, Coach's handbag AUR increased high single digits in both the retail and outlet channels. In addition, we achieved the 10th consecutive quarter of AUR improvements in North America, which rose low double digits. This continued improvement reflects our pricing power and strong engagement with consumers as we focus on enhancing customer lifetime value. In the quarter, we acquired over 900,000 new customers across our North America channels, a high teens increase compared to the prior year. At the same time, purchase frequency rose versus last year. Second, we continued to develop our iconic families to create a foundation for our product pipeline in future seasons, with notable strength in key families such as Tabby and Rogue. In addition, we are led by Stuart Weaver's creative vision, who is building on 80 years of iconic coach codes, notably the signature C and horse and carriage, both of which have supported increasing sales across all channels. Third, we increased investments and drove stronger returns in marketing, leveraging our data capabilities to drive outsized growth in our digital business. In the first quarter, e-commerce increased over 60%, representing a sequential improvement on a on both a one and two year basis underscoring the significant opportunity that this channel represents fourth we again drove growth in china sales rose over 25 compared to last year with improvements across stores and e-commerce as we diversify our approach to meet the customer where they want to shop this includes better leveraging existing platforms and establishing relationships with new online forums As we build on the strength of our brand and our positioning with the emerging middle class, we continue to see tremendous long-term potential in China. And fifth, we outperformed in the men's business, in keeping with our ambition to deliver $1 billion in sales in the category over our planning horizon. In the quarter, we reinvigorated some of our iconic leather goods silhouettes, infusing camo print in retail and the Basquiat collaboration in outlets. In summary, Coach continues to stand out even amid external pressures. Customers are engaging with the brand at an increasing rate given the traction of our product and marketing. We're driving continued momentum as we enter the important holiday quarter. The brand has proven that the foundational changes we've made are working and our results are sustainable. We are increasingly confident in our ability to drive both revenue and profit gains for fiscal 22 and beyond. Now moving to Kate Spade. The brand continued to make steady progress against its strategic priorities and outperformed internal expectations across the P&L. We built on the increasing traction we're seeing with consumers, which drove top-line improvement during the quarter. Importantly, direct sales, excluding wholesale, increased mid-single digits versus pre-pandemic levels, a sequential improvement compared to the fourth quarter. These results confirm that the growth strategies we're executing to return Kate Spade to its roots and improve the underlying foundation of the brand are taking hold. In the quarter, we maintained a consumer-centric approach in our execution, acquiring over 650,000 new customers across channels in North America, a significant increase over last year. At the same time, we reactivated lapsed customers with outsized growth among those customers lapsed over three years, reflecting a renewed connection with our core customers and confirming the efforts to clarify the brand's positioning are gaining traction. Second, we continued to build out our core product offering by amplifying key platforms. Most notably, the knot and spade flower again outperformed expectations and act as strong foundations for future growth. The strength of these recent introductions, coupled with deliberate actions to improve full-price selling and pull back on promotional activity, fueled another quarter of global handbag AUR growth, which rose low double digits. The progress we've made has increased our confidence in Kate Spade's pricing power as we deepen our connection with consumers and execute on our strategic agenda. Third, we drove brand heat by deploying marketing centered on our Kate Spade community and leaning into our DNA as a best-in-class storytelling brand. We employed new ways of reaching our customers, including a variety of social media platforms and a reimagined and uniquely Kate Spade approach to New York Fashion Week, which featured a pop-up apple orchard in downtown Manhattan, incorporating our I Heart New York collection. Fourth, we maximized our lifestyle positioning by continuing to strengthen the foundation of ready-to-wear footwear and jewelry, all of which outperformed our expectations. Overall, the brand's differentiated and broad offering supports our goal to increase lifetime value as those customers buying lifestyle products tend to purchase more frequently and spend more. And fifth, we utilized our already strong digital platform to continue to grow e-commerce sales, which rose over 15% in the quarter as we test, learn, and scale innovative and new ways to engage the consumer online. In closing, we're leading with our values to strengthen the emotional connection with our passionate Kate Spade community. We are excited by the brand's progress and our solid performance underscores that we have the right strategy in place. We have significant... confident in our ability to achieve $2 billion in revenue at high teams operating margins over the planning horizon. Turning now to Stuart Weitzman. The brand has made continued progress towards achieving our overarching goal of restoring profitability in the current fiscal year. To achieve this, we advanced our growth strategies in the quarter. First, we improved operating margin compared to prior year, further increasing our confidence in a return to profitability this year. This was driven by continued outperformance in high growth areas, including digital and China. Our e-commerce channels rose over 30% globally, driven by customer experience upgrades to improve conversion. And in China, a market that remains a significant opportunity for the brand, revenue increased over 25%. Second, we recruited an increasing number of new customers compared to last year and drove higher retention rates overall. The consumer remains at the forefront of our strategy as we capitalize on shifting market trends, most notably the return to in-person socialization and the growing need for occasion and dressy footwear. At the same time, our iconic collections continue to resonate, notably the nudist family, which brought an increasing number of new and younger customers to the brand. Third, we drove brand heat through a tailored offering supported by marketing actions to engage the consumer. Stuart Weitzman's momentum was evidenced by a return to AUR growth, which rose low double digits compared to prior year, reflecting deliberate actions to lower promotional activity as well as select price increases, which we intend to continue on a strategic basis. This was a key driver of the gross margin expansion of over 250 basis points. Fourth, we strengthened our wholesale partnerships, specifically with key domestic full-price partners, resulting in high teens' growth in the channel. Overall, our solid execution is evidenced by our improving financial performance. We're laser-focused on the consumer by offering compelling product and marketing to enhance customer engagement and increase our productivity in key regions and channels. This, in turn, will support our goal to restore profitability in fiscal 22. Now turning to the overarching strategies for the holiday quarter. The consumer backdrop is healthy, and our recent internal survey work in North America highlights that demand for the handbag and footwear categories remain strong. We're remaining nimble and keeping the customer at the center of our priorities. First, we are controlling the factors within our control and playing offense. We've moved quickly and taken bold and deliberate actions to mitigate industry-wide inventory constraints. We're also messaging to customers earlier in the holiday season to elongate the shopping period and capture demand early. Importantly, we will be maintaining our discipline around discounting and selectively increasing prices as we lead with messaging on innovation and values over price. Separately, we are creating engaging omnichannel customer experiences as in-store traffic continues to improve and online engagement increases. Across brands, we're employing exciting initiatives to surprise and delight consumers during this important shopping period. At Coach, we've kicked off the holiday season in a truly iconic fashion with our recreation of Jennifer Lopez's All I Have video, nearly two decades after the original, featuring our signature codes. At Kate Spade, we're creating magical holiday moments with our To All a Sparkly Night collection, which captures the sense that the littlest things can be life's biggest indulgences. And at Stuart Weitzman, our recently launched campaign featuring Kate Hudson arrives just in time for the start of the holiday season, as well as celebrations for our 35th anniversary. Overall, our first quarter results and the momentum we're delivering are evidence that our strategy, led by the Acceleration Program, is working. We've radically transformed our company, realizing material operating margin improvement while fueling investments in key growth areas of our business. We're largely a direct-to-consumer business with a digital-first mindset, building a deeper understanding of our customers. We're utilizing these capabilities along with the additional benefits of our multi-brand platform to drive even further growth at Coach and accelerate the trajectory of both Kate Spade and Stuart Weitzman over our planning horizon. I'm encouraged by the growing vibrancy of each of our brands and the strengthening engagement with consumers, backed by the work of our talented and passionate teams. Our confidence is underscored by the stronger outlook for fiscal year 22 and additional shareholder return plans announced today. We've entered the second quarter with momentum and have proactively put in place plans to deliver for our customers this holiday season and into the new year. We are well positioned to capture market share at structurally higher operating margin in the years to come, creating significant value for all our stakeholders. With that, I'll turn it over to Scott, who will discuss our financial results, capital deployment priorities, and fiscal year 22 outlook. Scott?
Kelsey
Thanks, Joanne, and good morning, everyone. We delivered another quarter of high-quality earnings results, outpacing last year's pre-pandemic levels and expectations. We continued to execute against the strategies of our acceleration program, building upon the foundational changes made in fiscal year 21 against a difficult backdrop. We drove continued top-line momentum and improved operating margin meaningfully, fueled by gross margin expansion. Turning to the details of the first quarter, total sales increased 26% versus prior year and outperformed expectations. Compared to pre-pandemic levels, revenue rose 9%, representing an eight-point acceleration compared to the prior quarter, fueled by improvements across all channels, stores, digital, and wholesale. By region, revenue rose double digits versus last year in mainland China, North America, and Europe. Importantly, these regions improved on a two-year basis, including relative outperformance of North America, which rose at a high teens percentage compared to pre-pandemic levels. In mainland China, while there were pockets of COVID increases, overall momentum continued. And in Europe, we realized improving trends as lockdown measures were lifted. Moving down to P&L, we expanded gross margin at each brand during the quarter. These results reflect a continuation of the successful execution of our strategy as we maintain price discipline, improve SKU productivity, and leverage our data analytics capabilities to more effectively tailor our product assortment and marketing messaging to the consumer. SG&A rose relatively in line with sales, given the reinvestment of cost savings into the organic business, the prior year's atypical comparison due to COVID-19 and the impact from higher sales. Taken together, we achieved operating income growth and margin expansion, both company-wide and at each individual brand. Earnings per diluted share for the quarter was 82 cents, an increase of 42% compared to the prior year, and more than doubling pre-pandemic levels. Now turning to our balance sheet and cash flow, as well as an update to our capital deployment plans. We ended the quarter in a strong position with $1.7 billion in cash and investments and total borrowings of $1.6 billion. Therefore, given the strong results of our first quarter, our robust balance sheet, significant free cash flow generation, and outlook for growth, we're announcing an incremental $1 billion share repurchase program as highlighted in our press release. As such, we now expect to return approximately $1.25 billion to shareholders in the fiscal year, a meaningful increase compared to our previous outlook to return $750 million to shareholders in fiscal 22. This return reflects approximately $1 billion of share repurchases in the fiscal year, which consists of $600 million to complete our existing program, inclusive of the $250 million of shares already repurchased in the first quarter. And we expect to utilize approximately $400 million under our new program in fiscal 22. In addition, our shareholder return plans continue to forecast approximately $250 million returned through our dividend program. Overall, the organic business momentum and the actions announced today underscore our commitment to capital allocation priorities. First, investing in the business to drive long-term profitable growth. And second, returning capital to shareholders through dividends and share repurchases. In addition, we still intend to repay our July 2022 bonds, totaling $400 million by the end of the fiscal year. These actions highlight our confidence in the strength of our brands, our ability to drive sustainable growth, and our commitment to returning capital to shareholders. Now moving to our fiscal year 22 outlook. Before turning to the specific details, I want to touch on the current state of the industry. The external environment continues to be dynamic as consumer demand remains solid with supply chain headwinds are constricting inventory availability. We certainly see the same dynamic within our business, as demand for our brands remains robust. As Joanne mentioned, we've acted early and boldly to maintain the momentum we're seeing across each of our brands. While we're not immune to external factors, nor can we predict future challenges that may come, the bold actions we take into secure supply, along with our experience at reacting with agility to a constantly changing landscape over the last 18 months or so, gives us confidence to increase our annual guidance. Please note that all growth rates compared to prior year are on a comparable 52-week basis, excluding the impact of our 53rd week last year. So let's unpack this increase in outlook. We now expect revenue to approach $6.6 billion, which would mark a record for the company. This represents a mid-teens increase compared to fiscal 21. Our outlook for operating income is now expected to grow at the high end of our previous growth expectation for a mid-teens increase compared to prior year, resulting in modest operating margin expansion. This contemplates modest gross margin pressure due entirely to the incremental freight investments in order to maintain product flow to meet strong consumer demand. This pressure is expected to be most acute in Q2 and Q3. Excluding this additional freight impact of approximately 200 basis points, we are driving continued underlying gross margin expansion through lower discounting, improved skew productivity, along with price increases that will be implemented for the balance of the year across brands. In addition, we now expect modest SG&A leverage for the fiscal year. We continue to expect about $300 million in structural gross run rate expense savings as a result of the acceleration program. As previously shared, we are reinvesting these benefits to fuel growth, including $90 million in higher marketing spend, or approximately three percentage points higher than fiscal 19. We're also investing further in our digital talent and capabilities. That 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. We're now forecasting weighted average diluted share count to be in the area of 278 million shares, incorporating a planned $1 billion in share repurchases. So taken together, we now expect EPS to be in the range of $3.45 to $3.50, incorporating the first quarter's outperformance and an approximate $0.05 benefit from additional share repurchases. We continue to expect CapEx to be about $220 million for the year. Of this spend, we anticipate approximately 45% of it related to store development, primarily in China, with a balance dedicated to our digital and IT initiatives. This also includes initial investments related to the build-out of our new fulfillment center to support both growth and speed to market. Finally, we expect inventory levels to be up meaningfully during the balance of this year as we pull forward receipts to match strong demand and face elongated lead times from supply chain pressures due to COVID disruptions. As mentioned, we're taking deliberate steps to accelerate inventory growth and we feel comfortable in our inventory positioning to meet demand. Given the dynamic environment and last year's atypical comparisons, we expect variability by quarter. To provide some guardrails on Q2 specifically, revenue is forecasted to grow high teens, reflecting continued momentum on a two-year basis. Operating income is projected to be in the area of prior year levels, which contemplates incremental air freight of approximately $70 million in the quarter or roughly 350 basis points. In addition, we have shifted the benefit from the reinstatement of GSP into the second half of the fiscal year. As a reminder, GSP is expected to benefit the full year by almost 50 basis points. So taken together, while margin pressure is anticipated in the second quarter, our full year operating margin outlook remains unchanged as our underlying business momentum and price increases are estimated to offset cost and inflationary pressures. As a result, EPS in Q2 is expected to be relatively in line with prior year. In closing, we entered the fiscal year with strong momentum, reflecting the benefits of the deliberate and decisive actions we've made under our acceleration program. We're continuing to focus on what's in our control as we navigate a dynamic operating environment, and we're taking bold steps to ensure that we can meet robust underlying demand for our brands without compromising our long-term operating margins that are already up significantly. We're increasing both our fiscal year revenue and EPS guidance, as well as our expected return of cash to shareholders. Overall, our strategy is working. I'm confident that we're in a position to create significant value for all our stakeholders in the years to come. I'd now like to open up the call for your questions.
Operator
If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key on your telephone keypad. We will go first to Bob Drewbell with Guggenheim. Your line is open.
Bob Drewbell
Hi, good morning. Joanne, can you talk about what's actually giving you the confidence that you can maintain the strong momentum you've seen heading into an inventory-constrained holiday quarter for us, please? Thanks.
Joanne Prevoisorat
Well, good morning, Bob. You know, our confidence is really driven by three factors. Our acceleration program initiatives are gaining traction and driving brand heat. We're seeing a strong consumer backdrop, and we're taking bold actions to manage the environment. You know, we're pleased with the momentum we're seeing across brands. The actions we've taken through our acceleration program have transformed our company and are driving strong and sustainable results. We see brand heat building as evidenced with the AUR growth that we're delivering in each of our brands. We're also seeing acceleration in top line trends. In the first quarter, we delivered growth of 9% above pre-pandemic levels, which was an eight point acceleration from the fourth quarter. And we're delivering that with significant gross margin expansion, which is allowing us to deliver structurally higher operating margin while also reinvesting in the key growth drivers of the business. And we're seeing continued strength in digital in China, which are two areas that we've talked about represent long-term opportunity for tapestry. As I mentioned, as we look at the landscape, consumer spending is healthy, and demand for our categories remains very strong. So although the environment continues to be dynamic, we've moved aggressively to manage the supply side of the equation to protect the strong trends that we're seeing and serve our customers, really keeping the customer at the center of our strategy and of our execution. You know, our teams have a proven track record of managing these dynamics, and we are very confident in our ability to deliver for our customers this holiday and beyond. And that confidence, Bob, is really evidenced by the increased guidance and incremental share repurchase programs that we announced today.
Bob Drewbell
Thank you.
Operator
And in the interest of time, we do ask that you limit yourselves to one question. And we can go now to Ike Boruchow with Wells Fargo. Your line is open.
Ike Boruchow
Hey, good morning, everyone. Congrats. I guess, Scott, I wanted to ask about, I understand freight, you know, a lot of us in soft lines are looking at the cost of cotton and inputs like that. But for you guys, I know that's not super important. Can you talk to us about key inputs for you guys, maybe leather specifically? Is there anything inflationary on the cost side, input cost side that pops out to you guys that's at all impactful?
Kelsey
Yeah, good morning, Ike. Sure, we've seen elevated input costs, and that's not really a new dynamic for us. And also, as we've said, we've seen higher AURs and higher prices, right? So, as we look at the overall structural gross margin and operating margin picture, You know, we've got confidence in our ability to maintain our margins, even in the face of elevated costs that we see being with us for some period of time. Thanks.
Operator
We'll go now to Erin Murphy with Piper Sandler. Your line is open.
Erin Murphy
Great. Thank you. Good morning and nice job on the quarter. My question is around Kate Spade. The sales for the business are still not back at pre-pandemic levels, but the profitability has clearly improved with some of the actions you've taken. So can you share a little bit more about your sales outlook for the brand that's embedded in your guidance this year? And then, Scott, I do have a clarification just on freight. You talked about higher freight in Q2 and Q3. You called out the $70 million in air freight specifically in Q2. Should we expect a similar level in the third quarter or is Q2 for air freight peak? Thank you.
Joanne Prevoisorat
Let me jump into the Kate Spade comments, Erin. So, you know, we are making steady progress at Kate Spade, and we do have the right strategy. You know, we are clarifying the brand positioning, and we're seeing traction across the P&L. And, in fact, direct sales for the quarter increased mid-single digits versus pre-pandemic levels. So on a direct basis, we are growing above pre-pandemic levels. And that improved quarter over quarter. And we are focused on returning the brand to its roots and driving stronger consumer engagement. We acquired over 650,000 new customers across North America channels to the brand this past quarter alone. And we're reactivating lapsed customers at an increasing rate, which gives us confidence that the strategy is working, that we're reaching customers. the core Kate Spade consumer. And, you know, we've worked hard to improve the product assortment there. We talked about new platforms like The Knot and Spade Flower, which continue to perform, and those represent important platforms for future growth. And we're seeing increased global handbag AUR. AURs grew low double digits. So all signs that Kate Spade is on the right path on the direct business growing against pre-pandemic levels. And it reinforces our confidence that the brand can achieve $2 billion in revenue and at a high teens operating margin as we move forward.
Kelsey
Yeah, good morning, Erin. I'll jump in on your freight question as well. Maybe just a little bit of perspective before I get into the quarter-by-quarter details. Remember, the last time we spoke to you all, we talked about reopening in our largest single supply source, Vietnam, which is about 40% of our supply base, we expected that to start reopening in August. And in fact, that occurred about seven weeks later. And so what we decided, you know, to just build on Joanne's comments early and boldly, so we did secure air freight. The reason I give you that perspective, because it's important as you think not only about the flow by quarter, but also at this point, we now see that we're approaching normalized level of production. We see goods flowing. We have much better visibility than we did the last time we spoke, even at the skew level, so we can merchandise against the product flow that we see. So the result of that is the exceptional air freight that we have used to bridge that gap and meet this really strong consumer demand that we see. That's starting to moderate as you get into back half of the year. So as you think about gross margin shaping, you just saw the gross margin in Q1 up 450 basis points from two years ago. You're going to see we said elevated air freight in Q2 and Q3. We gave you our best estimate. Obviously, it matters as we see what exact products sell through. And there could be a little timing between Q2 and Q3. But think about that as roughly equal from an air freight standpoint. But remember, in the second half, we start to see the increase in prices. making a meaningful impact. We talked about the change in GSP from a timing standpoint. So what that means is gross margins will be up in the second half and specifically in the fourth quarter. So that's one of the reasons we speak with confidence about our ability to maintain operating margins over time. We're actually this year coming out of the fourth quarter with strong gross margins and the kind of increases that you're used to seeing from us on an overall basis.
Erin Murphy
Super helpful. Thank you so much.
Kelsey
Sure.
Operator
The next question comes from Mark Altschwager with Bayard. Your line is open.
Mark Altschwager
Good morning and congrats on the continued momentum here. So, encouraging to see the handbag AUR momentum, I guess, both at Coach and at Kate. Can you speak a bit more to the AUR opportunity you see outside of the handbag category? With the healthy demand backdrop and inventory challenges out there, I'm wondering to what extent can you take price in other accessories and lifestyle categories to help offset the elevated cost pressures?
Joanne Prevoisorat
Yeah, let me start, and then I'll toss it to Todd, who can give you an update on Coach specifically. But across all of our categories, we see the opportunity to take price, and we, as brands in the portfolio, are gaining pricing power. And, you know, we're structurally positioned to be able to improve our AURs with the data and analytics applications and the structural changes that we've made across our assortments. It's not just a handbag effort. We're looking across our assortments. We're understanding what our consumers need. are looking for and expecting from our brands. And we're getting better and better at leveraging that data to, you know, tailor our assortments appropriately, tailor our messaging, and evaluate pricing across. So we feel good about the progress we've made, but we see tremendous run. We're really just getting started. You know, we're a data-rich company, and we're learning to use this data in better and better ways. and that you're seeing throughout the P&L, including in gross margin and AUR increases. But, Todd, I'll toss it to you to talk about what you're seeing and doing at Coach.
Todd
Thank you, Joanne. Yes, I think what you're seeing, as Joanne indicated, we are seeing AUR expansion across every category. And what gives us so much confidence is the quality of our products, the values that we bring. And we're seeing that across footwear. We're seeing that in ready-to-wear. And when you think about the Coach brand and you think about historic norms, where pinnacle luxury sits, we have more white space today than any time in our history. And I think that's going to give us a real opportunity to increase our pricing. And as we celebrate now Coach's 80th year, we are seeing real credibility on our lifestyle component. And that's very exciting. And I think you'll see over the next couple of years us penetrating even higher in elements of the lifestyle. Thank you.
Operator
Our next question comes from Lorraine Hutchinson with Bank of America. Your line is open. Thank you.
Lorraine Hutchinson
Good morning. I just wanted to focus for a minute on the new customer acquisition at both Coach and Kate. Can you talk a little bit about what strategies are working best for you and if there are areas that you need to lean into from an investment perspective?
Joanne Prevoisorat
Thanks, Lorraine. You know, we are gaining traction, and that has been a big focus of our acceleration program. As we say, we're getting closer to our consumer. it's understanding the consumer at a deeper level. And we're leveraging those insights and applying them to the work we're doing and bringing great product to market and then leveraging those insights to understand how and where to reach customers. We're increasingly reaching customers through digital channels. We've talked about that as a as a place that we think there is tremendous runway ahead, but we've added over a billion dollars to that business in two years. We're testing and learning more. We've changed the way we work, and we're investing more in marketing. Even as we're delivering structural operating margin improvements, we've really tilted the P&L to invest in those places that allow us to reach more customers and reach them in different ways. So those efforts are paying off. We acquired 4 million customers through digital channels in North America last year and 1.6 million in the first quarter across North America across channels. And we expect to continue as we learn because we're really just getting started on leveraging these insights, new ways of working, and targeting our investments more into the places that will allow our brands to grow.
Todd
And I'll just add for Coach, in the last quarter, as you saw, we increased 900,000 new customers. And what we're seeing is an increased frequency. We're seeing over 40% of the new customers are Gen Z and millennials, so that bodes well for our future. And couldn't be more excited about the opportunity. And even as we invest in digital, we see a true omni opportunity here. And there is a synergistic opportunity between our brick and mortar and our digital, and they feed off each other in a really great way. And with the acceleration program and leaning in on understanding the data, it helps us create better store experiences and even helps us determine where to put stores into the future.
Joanne Prevoisorat
And one point I want to add that I didn't mention, but it's about acquiring customers, but then it's about driving lifetime value. And I did want to make sure I mentioned we are focused on reengaging the consumers after we acquire them and driving higher lifetime value. All of our brands have a broad array and assortment that we can engage our customers. We're seeing those customers come back and transact more frequently. And so we're really building the foundation for future growth.
Operator
We'll go now to Michael Bonetti with Credit Suisse. Your line is open.
Michael Bonetti
Hey, guys. Thanks for taking our questions here, and congrats on a great quarter in, obviously, a tough environment. Thank you. I guess, Joanne, can you just run me through China in a little bit of detail on the quarter? In third quarter, you said it was up 40% on a two-year basis. Fourth quarter, up 40% also. And I think that might have included an extra week, so maybe it was a little lower than that. And now we're at 65% on a two-year basis this quarter. It was pretty unexpected for us, just considering all the headlines coming out of that market with lockdowns and disruptions in the quarter. That's a meaningful acceleration in what looked to be a tough quarter, if you wouldn't mind running us through that. And then I guess, Scott, how should we think about margins for the Coach brand as we kind of jump over some of the cost impacts here in 2Q and into the second half? Can the margins for the brand continue to increase in the second half?
Joanne Prevoisorat
So let me jump on the China question. We were pleased with our growth in China, as you mentioned. We accelerated on a two-year basis. And although we did experience pockets of COVID-related disruption, we delivered growth. We grew greater than 25% on the year, but to your point, 65% on a two-year basis. And, you know, we are seeing continued strong engagement with customers in the market, and brand sentiment remains strong, you know, particularly in the Coach brand. And we're seeing growth, I guess, in, I would say, Coach and at Stuart Weitzman, our two biggest Brands with the highest penetration in the market. And Kate, as you know, remains relatively smaller. But we see tremendous runway ahead. You know, of course, we're monitoring the developments in the market. The environment remains dynamic. But we're staying very close to the customer. And we're well positioned. All of our brands are well positioned against the growing middle class. So, you know, as we stay close to the customer and deliver the product and the experiences that and show up where the customers are, increasingly innovating in places like Dalian, the TikTok of China, and putting our brands where our customers are and being very relevant to that customer, we expect and we continue to see we have tremendous runway in the markets.
Kelsey
Yeah, and maybe, Todd, I'll take this from different angles to your second part of the question. Yeah, we see margins up in the second half. I mean, what I mentioned earlier regarding the shape of the overall tapestry picture is obviously a lot of big numbers, largely driven by coach. So we would see that same general dynamic playing for coach. So, Todd, maybe a little color.
Todd
Yeah, thank you, Scott. The one thing I'd like to add is as we maintain these really fabulous margins, if you look at the first quarter, Coach captured market share in our primary category of handbags. We looked at the handbag growth globally between 15% and 20%, and you saw Coach's results way above that. So the combination of being able to capture market share while maintaining these margins. We're not buying the market. We are maintaining a really healthy business. And I think that is one of the key differentials between us and where maybe we historically were.
Operator
Our next question comes from Adrienne Yee with Barclays. Your line is open. Good morning.
Barclays
Congratulations. The sector just seems ripe for multiple years of healthy growth. So my first question is, Joanne or Todd, can you talk about the penetration of sales in the Coach brand over 400 versus under 400 versus last year? Is she buying higher end goods as well as buying them more frequently? And then Scott, I would imagine that prior to this, you know, basically everything was on the ocean. And so I'm just wondering what percent is air freighted in 2Q, what's expected to be air freighted in 3Q, like as a percent of what you normally do? Thank you.
Todd
Scott, you want to take the air freight first, and then I'll come back?
Kelsey
Sure. Yeah, that's probably a simple one. So, Adrian, we haven't given the exact percentages. I guess historically we've seen about a 90-10 percentage. split ocean versus air freight or expedited freight. And obviously we're at an elevated level at this point. So, you know, I guess the thing I would really point you to, though, is my earlier comments around that based on our visibility to normalizing production flows, we're really seeing that moderate in the back half of the year and getting back to, I'll say maybe not exactly normal, but certainly an improved environment as we move through the balance of the year.
Todd
Great. When you look at our business overall, and as you know, we're very defined by different channels, what we're really pleased with is the increase in AUR across all of our channels. And that is the most important thing for us. So we will have bags for $1,000 and we will have bags for $149. What we're doing is driving all of them up And that's how we look at the business. And one of the things we've done differently now is when we design a bag, we actually think about the market where that bag will do the best. And we price accordingly. So in the past, we might have priced at the lowest common denominator. Now we price at the highest common denominator.
Barclays
Fantastic. Very helpful. Best of luck.
Todd
Thank you.
Operator
We'll go now to Matthew Boss with JP Morgan. Your line is open.
Matthew Boss
Great, thanks. Joanne, so on the continued outperformance of the Coach brand, I guess how best to triangulate the outsized strength that you're seeing from the digital channel to potential market share that you believe you're taking across categories exiting the pandemic? And Scott, any way to size up the multi-year margin opportunity from this structural model channel shift to digital over time?
Joanne Prevoisorat
Yeah, I'll kick it off. As we embarked on our acceleration program, we saw a huge opportunity to better understand and serve our customers where they wanted to shop. And that really had us leaning into investments we had made historically, but leaning into our capabilities in digital and data. We are, as we said, 90% direct-to-consumer business. We know a lot about our customers. And we knew we had an opportunity to better engage our customers and meet customers as their shopping behaviors were changing. So we, you know, we have invested quite a bit and we've grown that business tremendously. We are seeing continued engagement at Coach where we have runway, but across all of our brands. We're seeing, you know, continued engagement, customer acquisition through digital channels. Um, that's not to say that's our only focus. We, you know, the omni-channel customer and customer shopping behaviors are changing, uh, continue to change rapidly. Um, so we're staying close to the customer and we want to be available with our brand, uh, to our customers where they want to shop and how they want to shop. And, um, you know, we're staying close to that. We're making the investments we need to make, and we're seeing really high returns on those investments, um, leveraging data, and getting closer to our consumers, leaning into those digital capabilities has been paying off. And it's not just acquisition, as I mentioned earlier. It's really, once we acquire our consumers, driving to drive higher lifetime value, and that's engaging them across our broad array of categories in each of our brands. So proud of the work the teams are doing. As I mentioned, it's early days for us. We're happy and very pleased with the with the traction we're seeing, but a long runway ahead.
Kelsey
Maybe I'll just take and bridge from Joanne's comment to the longer-term structural margin. I guess the first thing I need to remind you of is we have given no guidance beyond our current outlook. We're not at a point where we're ready to have that conversation, but I would point you to a few things. You're exactly right. As we As we grow our digital business, it's one of our most profitable channels, actually our most profitable. And as Joanne said, our penetration is now four times what it was just two years ago. And the data and analytics that Joanne just outlined and some of the things Todd said around pricing and our opportunity, we see that absolutely. We're using data better, understanding our consumer at a more intimate level, and all that gives us confidence that we can we can maintain our margins. On the other hand, don't forget, you know, we are in an elevated cost, uh, environment. So we, that's not new. We've been seeing this for a while and, and input costs are up. Uh, the great news is we've got visibility to it. Um, we, we see that we have the pricing power and that gives us confidence to maintain those margins over time. So more to come as we get closer to next year. But, uh, you know, I, I think what, what I hope you would take away from that is, uh, The things that we're seeing and demonstrating this year in our outlook are structurally favorable for us as we look to the future.
Matthew Boss
Great color. Best of luck.
Operator
We'll go now to Brooke Roach with Goldman Sachs. Your line is open.
Brooke Roach
Good morning, and thank you so much for taking the question. Joanne, I wanted to follow up on the prior question on customer acquisition and retention, and you highlighted that customer re-engagement and transaction levels among those existing customers are really building a strong foundation and improving here. Could you possibly share some additional insight on what strategies have proven to be most effective in getting that customer to continue to come back and repeat and reengage with that brand? And then Scott, maybe as a follow-up, some other companies have talked a lot about labor supply as being a big focus recently. Can you talk to the impact of your recent employee initiatives and your staffing levels maybe what you're seeing in terms of wage rates at retail and in distribution centers going forward. Thank you.
Joanne Prevoisorat
So let me jump on the first part of your question. You know, consumer acquisition, retention, repeat rates, we're seeing that across all of our brands. And, you know, we've deployed strategies really across our value chain. It's not one thing. It's really through the work of our acceleration program It starts with getting to know our customers and being clear on who our target customers are for each of our brands and then serving those customers, understanding them and then serving them with great creative products and then, you know, making sure we've got the right assortment in the right places so we're leveraging data and analytics plus the creativity of our talented creative teams to put the right assortments in the right places and manage inventory in the right way And then the marketing investments that we've made is we've structurally changed the pitch of our P&L to invest more in those things that will drive acquisition, retention, those investments in the growth drivers in digital and in marketing. At the same time we're doing that, we're improving our capabilities to understand and reach customers. So we have specific strategies that we're executing. We've got a test and learn framework that our teams are executing under. And, you know, we're innovating constantly as we learn how to better engage our consumers, bring them back more frequently, serve them better messaging. And those are the things that are working. And, again, that's the power of the tapestry platform. We're applying these capabilities across our brands, and we're seeing traction across our brands.
Todd
Yeah. For just the coach, Brad, I just can add two things. One is, and I think this is true for all our brands, we are leaning into values and a sense of community. And that is resonating. And one of the things that has worked extremely well for us is the Coach Insider Program. If we can get our new clients to join us as Coach Insiders, their frequency of purchase, their lifetime value increases many folds. And the Coach Insider program is not a discount program. It's not a points program. It's about community. It's about access. And that has created a really terrific basis to not invest, have the one and done scenario, but instead create multiple purchases over a lifetime.
Kelsey
And Brooke, I'll address the second part of your question around labor supply. You know, we're not immune to the challenges that everybody sees out there. But I guess as I look at it, the good news here is we're not just beginning to address this issue. This has been a multi-year journey, not just on wages. You might recall earlier in the year we talked about raising wages in the $15 range. um uh minimum and and uh things that we have done on uh to be competitive from from a cost or a wage uh dollar amount uh standpoint but i think maybe even more important is the focus on engagement of the employees as someone relatively new to the story here uh as i've come in i've been very impressed with how high the engagement scores are on on our retail employees and distribution centers You know, this is an area that's been a long-term focus. It's a people-centered approach. And that double prong of focusing on the people and also making sure we're competitive so far has been a pretty good formula for us in terms of getting the labor that we need. Of course, we're not immune to the situations that are going on.
Brooke Roach
Thank you very much.
Operator
Thank you. That concludes our Q&A. I will now turn the call over to management for some concluding remarks.
Joanne Prevoisorat
Thank you, Catherine. Q1 was a strong quarter for Tapestry with outperformance across all brands. We are building momentum, and our confidence in the tremendous runway ahead for our brands is underscored by the increased guidance and shareholder returns we announced today. We've moved quickly and decisively in navigating industry-wide headwinds to meet rising demand for our brands. As always, our results are driven by our passionate teams who are moving with greater agility and are ready to deliver for our customers this holiday and beyond. Thanks, everyone, for joining us this morning, and have a great day.
Operator
This does conclude today's program. Thank you for your participation. You may disconnect at any time.
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