Tapestry, Inc.

Good day and welcome to this Tapestry conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your touchtone phone. I will be standing by if you should need any assistance. At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations, Christina Colon.

Good morning. Thank you for joining us. With me today to discuss our third quarter results, as well as our strategies and outlook, are Joanne Pervoiserat, 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. 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 slides posted today. Now, let me outline the speakers and topics for this conference call. Joanne will begin with third quarter highlights for Tapestry and our brands. 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 Krivoy-Serat, Tapestry's CEO.

Good morning. Thank you, Christina, and welcome, everyone. Our third quarter results were well ahead of our expectations, despite the challenging environment. We drove increased customer demand across our portfolio, resulting in double-digit top-line growth at Coach, Kate Spade, and Stuart Weitzman, and EPS well ahead of our outlook. Our continued outperformance demonstrates the vibrancy of our brands, the power of our digitally enabled platform, and the successful execution of our strategy by our talented teams around the world. Importantly, our progress reinforces the significant runway we have ahead of us as we harness our unique blend of magic and logic. The combination of iconic brands amplified by an agile and data-rich operating model creates tremendous opportunity. Our brands are at the heart of our company. They occupy distinctive positions in the attractive and resilient accessories market. Each has a rich heritage and substantial potential for growth. This is evidenced by the strengthening brand heat we're seeing through meaningful new customer acquisition, as well as growth with existing customers across our portfolio. We are focused on building lasting relationships with our customers to increase lifetime value through continuous innovation in both our product and the experiences we offer throughout the purchase journey. The opportunities for our brands are enhanced by our platform, which has been transformed to power them to move at the speed of the consumer. We are leaning into our digital leadership, meeting consumers where they want to shop and providing exceptional experiences when they get there. We're also leveraging our rich consumer data and sophisticated analytics to establish and enrich our customer connections, augmenting our creative processes with a deep understanding of our customers while bringing faster and more consistent execution to bear. The benefits of investments in digital and data analytics are highlighted by our results over the last two years, and we're still in early innings in terms of unlocking this potential. Our platform also affords the benefits of scale, shared learnings, and talent mobility. These advantages are increasingly important in today's rapidly evolving landscape and allow us to have a greater positive impact on our customers, our people, and the world at large. Before moving to our recent highlights, I want to recognize those that are being impacted by conflict in Ukraine and by the ongoing ravages of COVID-19 in China and elsewhere. Our hearts go out to them during this turbulent time. Now turning to Tapestry's performance in the third quarter. First, we maintained a consumer-centric lens by leveraging the magic of our brands and our powerful customer data and analytics capabilities to drive improvements in key customer metrics. We acquired over 1.4 million new customers who transacted with our brands across channels in North America, a mid-teens increase compared to the prior year, with continued growth in both stores and online. Since the start of the acceleration program 21 months ago, we have brought in nearly 13 million new customers to our brand. Importantly, these customers purchased at higher AURs and have already returned to shop again at a higher frequency than the average. At the same time, we continue to effectively reactivate lapsed customers while realizing increased average spend, highlighting our focus on driving lifetime value to fuel sustained growth. Overall, the underlying momentum across customer metrics drove our standout performance in North America in the quarter. Second, we continue to lead in digital, driven by the investments we've made in our capabilities online. In the quarter, we delivered sales growth of over 20% in the channel, which represented approximately 30% of our total business. As consumers remain extremely engaged in shopping online, we continue to expect to achieve $2 billion in revenue in digital in fiscal 22 with further runway ahead. Third, we continue to see pricing power across the portfolio and realized another quarter of global AUR gains in each brand's core category. importantly we have seen no negative impact on customer demand from these price increases highlighting our value proposition brand relevance and the increasing traction of our product offering and fourth touching on china our business was impacted by covid related restrictions in the quarter although we expect these headwinds to continue in the near term we remain optimistic given the proven resilience of the chinese consumer and the long-term opportunity for growth Overall, brand awareness and handbag purchase intent in China remains high, reflecting the quality of our efforts to build brand equity with Chinese consumers. In summary, we continued to make meaningful progress, supported by the acceleration program, and we are confident in our ability to drive sustainable growth going forward. I will now touch on third quarter highlights for each of our brands, starting with Coach. We drove another quarter of top and bottom line outperformance, achieving a sales increase of 11% compared to prior year, including a nearly 20% gain in North America. This continued growth reflects our consumer-centric strategy and agile execution and underscores the significant potential ahead for the brand. During the quarter, Coach continued to advance its strategic initiatives. First, we delivered a focused and compelling product assortment across categories. Our iconic leather goods families are the foundation of our assortment and fuel consistent growth. Cabi, Rogue, Field, and Willow were our top selling groups in the quarter, driving half of retail's handbag revenue. To continue to spark consumer interest, we've animated these families with new colorways, fabrics, and embellishments. Outside of our core styles, the studio bag, featuring a push-lock C closure, resonated with consumers, while the launch of the new Hero shoulder bag, boasting a horse and carriage snap closure, outpaced our expectations. In our lifestyle categories, we're driving outsized growth, yet remain under-penetrated versus market. In both footwear and ready-to-wear, customers are embracing our highly branded pieces, reinforcing coaches' desirability and the incremental commercial opportunities these categories represent currently and over the long term. Second, we continued to build brand awareness within men and delivered over 20% growth in the quarter, led by strength across backpacks, ready-to-wear, and footwear. Importantly, given the success, we expect to approach $950 million in revenue this fiscal year, closing in on our near-term target to reach $1 billion in sales. Third, our product offering was further enhanced by the use of data, which provides customer insights and analytics to support new, more agile ways of working and higher SKU productivity. Together, this supported a significant pullback in promotions and drove full price selling, resulting in an increase in global handbag AUR. In North America, handbag AUR rose at a high single digit pace, marking 12 consecutive quarters of gains. Our momentum and the customer's response to the style and craftsmanship of our product reinforces Coach's pricing power and the further opportunity to increase prices to offset inflationary cost pressures. While we have raised prices selectively over the last quarter, the majority of the benefit will be realized at Coach beginning in fiscal year 23. Fourth, we drove customer engagement through 360-degree marketing activations. We amplified our spring product introductions on social platforms, notably TikTok, targeting Gen Z and millennial consumers. Additionally, building on the success of the brand's February fashion show, themed Somewhere in America, we created localized, immersive experiences through a collection of pop-ups across the globe, including a Coach laundromat, convenience store, and bagel shop. These fun and unexpected venues enabled us to attract new customers and expand the way our brand is perceived. We also emphasized our values through the Coach ReLoved program, an opportunity to engage with the customer in different ways by offering circular pathways for our product, whether through upcrafting, restoring, or remaking. Given the success of the program thus far, we've expanded its reach across our North America retail stores. Overall, the combination of these actions drove further improvements in customer metrics, including the acquisition of over 800,000 new customers transacting in North America channels. At the same time, purchase frequency again rose, and we reactivated lapsed customers at an increasing rate. Fifth and finally, we again drove outsized revenue growth in the digital channel, which rose nearly 25% compared to last year, or more than five times where we were three years ago. In the quarter, e-commerce represented nearly 30% of sales. In closing, Coach is consistently building momentum, reflecting the new and innovative ways we're engaging with consumers. Based on our underlying growth, we continue to expect the brand to approach $5 billion in revenue this fiscal year, while maintaining exceptional margins, despite the COVID-related challenges we're facing. Looking ahead, we have significant runway to drive growth across our product offering by enhancing our leadership position in leather goods and delivering outsized gains in men's and our lifestyle categories. Additionally, we see meaningful long-term potential across high-growth channels and geographies, such as digital and China, given consumer demand and the brand's value proposition. Taken together, we remain confident in Coach's ability to gain market share given increasing brand heat and the relationships we're fostering with our growing customer base. Now moving to Kate Spade. Sales and operating income significantly outperformed expectations once again this quarter. Revenue rose 19%, which included a 25% increase in our North America business. The brand continues to gain momentum as we forge connections with our customers by leaning into Kate Spade's unique positioning within the market. Overall, our strong results year to date speak to the relevance and clarity of our brand purpose and underscore that we have the right strategy in place to drive sustainable growth over the long term. Turning to progress against our strategic priorities in the third quarter. First, we amplified key platforms as we continued to build and innovate our core product offering. while infusing newness in our novelty platforms. Within handbags, success was balanced across our core styles and new introductions. The knot remained our number one collection, which we expanded to include a crossbody tote. At the same time, recently launched styles such as the Carlisle and Avenue outperformed expectations. Further, we invested in novelty introductions that demonstrate the brand's unique personality and play a key role in storytelling to drive interest and engagement with consumers. This quarter's offering featured handbags shaped as flowers, tennis balls, and butterflies. These styles won with our highest value customers, and they carry AUR well ahead of the average. Importantly, this strong performance as well as deliberate actions to decrease promotional activity and strategically raise prices resulted in nearly 20% global handbag AUR growth. Second, we drove brand heat by engaging the consumer through emotional storytelling and a community-driven approach in keeping with our DNA. Our floral-focused spring campaign reinforced our brand purpose by evoking the color and joy that Cape Spade is known for. We delighted our community with the opening of an experiential Kate Spade townhouse in New York City, which was met with a line of enthusiasts nearly two city blocks long. This pop-up embodied the full brand expression as we offered custom experiences pulled from the pages of our new Kate Spade book and also included a preview of our upcoming fall collection. Digitally, we increased our reach on social channels, notably TikTok, where we're engaging with a younger and more diverse audience. Importantly, our successful execution of these brand-building activities is underscored by a three-point sequential increase in brand awareness for surveys hosted in the U.S. by YouGov. Third, we strengthen the foundation of our lifestyle positioning through a focused assortment across ready-to-wear footwear and jewelry. These categories help boost customer acquisition and engagement, and they remain an important driver of purchase frequency. Lifestyle currently represents over 20% of total sales, and looking forward, we see opportunity to grow these categories to serve all customers, boost lifetime value, and fuel global expansion. Fourth, we drove strong trends in our e-commerce business, building on Kate Spade's already solid digital presence. Recently, we've implemented live streaming across social platforms to gain further reach for our pop-ups and events, including the Kate Spade Townhouse Experience. Through continued digital innovation, we fueled mid-teens growth in e-commerce, which was nearly double pre-pandemic fiscal year 19 levels. Fifth, and finally, we maintained a consumer-centric approach and utilized data to gain a deeper understanding of customer preferences and purchase drivers. Our performance in the quarter was led by higher spend among our existing customer base, including those deeply lapsed. At the same time, our investments in the brand have resulted in continued customer acquisition. adding nearly 600,000 new customers this quarter in our North America direct channels. Stepping back, during the initial phase of Kate Spade's transformation, we focused on rebuilding the brand's foundation and clarifying our purpose. We kept our brand vision at the forefront of our strategy as we set out to reestablish our core product and customer base. Today, as a result of these efforts, we are clear in our positioning within the market with consistent results that indicate our increasing traction. Looking ahead, our next phase is to weave the why of Kate Spade into our mission, expression, and execution to connect more deeply with our community. We're harnessing the power of the brand to drive growth, enabled by diversified categories and a balanced global distribution. We also continue to be laser-focused on delivering higher AUR, building on our recent success. This will be a key element of capturing the significant margin potential we see in front of us. Overall, we remain incredibly excited for the opportunity ahead and remain confident in our ability to achieve $2 billion in revenue and a high team's operating margin over the planning horizon. Turning to Stuart Weitzman. During the quarter, the brand continued to make progress against its growth strategies. First, we delivered significant operating margin expansion, reflecting the bold and nimble execution by the Stuart Weitzman team in the face of a challenging environment. Importantly, despite a deterioration in trends in China due to COVID, we remain confident in our ability to return to profitability this fiscal year. We're leaning into the strength we're seeing in North America, notably in the wholesale channel, which is helping to offset the pressures in China. Second, we maintained a consumer-centric strategy by leveraging our data analytics capabilities to deliver a compelling assortment for our customers as we capitalized on the recent market shift toward occasionware. Sandals fueled the quarter's demand as iconic styles, including the nearly nude, as well as new introductions such as the rider platform and summer wedge resonated with customers, specifically millennials. In addition, we introduced the versatile and timeless Stewart pump, which exceeded expectations and has been well received for return to work. Our streamlined and relevant offering, coupled with lower promotional activity and select price increases, drove AUR growth in the quarter. In fact, AUR rose over 20% in North America. Looking ahead, we see further opportunity to increase prices while maintaining our positioning within the overall market. Third, we fueled brand heat through focused narrative backed by emotional and relevant marketing. Our spring campaign featured the mother-daughter duo of Kate Hudson and Goldie Hawn wearing the Alina, Disco Platform, and Stewart Pump, all of which became a top 10 style following the launch. Our engaging messaging helped to drive customers at a double-digit rate while continuing to reengage and reactivate clients. Fourth, we gained momentum in the wholesale channel as Stuart Weitzman has now reestablished a presence in all Nordstrom full-price stores in North America, representing significant progress from where we were just one year ago. At the same time, we've added depth within our international luxury accounts across Europe. Fifth and finally, we continued to invest in digital and delivered a double-digit increase in demand. While digital now represents 20% of global sales, an increase of five points compared to fiscal year 19 pre-pandemic levels, we still see runway ahead. Overall, Stuart Weitzman remains on track to deliver a profitable year in fiscal year 22, fueled by better than expected performance in North America. The brand's product and marketing initiatives, coupled with solid execution, continue to drive results. We are confident in our ability to achieve significant top and bottom line improvements long term as we build brand awareness globally and capitalize on the recovery in China where Stuart Weitzman has a strong position. In closing, Tapestry is a powerful combination of iconic brands that offer tremendous value for our customers and a platform that has been transformed to drive innovation and customer engagement. Our foundation is solid and our brands are poised for growth. Further, we participate in advantage categories that have increased at mid to high single digit rate over time and have proven resilient in the face of macroeconomic shocks and global crises. These categories serve an important emotional and functional need for consumers, which is as relevant today as ever before. With the resilient nature of our categories, the attractive positioning of our brands, and the emotional connections we are building with our customers, we are confident in the significant runway ahead. We look forward to discussing each of these elements in more detail, along with our roadmap for continued growth at our upcoming Investor Day in September. With that, I'll turn it over to Scott, who will discuss our financial results, capital priorities, and fiscal 22 outlook. Scott?

Thanks, Joanne, and good morning, everyone. Our third quarter performance beat our expectations, fueled by our North American business. In addition, we utilized our free cash flow to return over $550 million to shareholders through share repurchases and our dividend payment. While the external environment remains difficult, our teams are continuing to effectively navigate the backdrop by focusing on the factors within our control. Turning to the details of the quarter, revenue rose 13% compared to prior year, including double-digit growth at each of our brands. By region, North America fueled our results, delivering 22% growth amid a strong consumer backdrop. Sales in greater China declined at a low teens rate. This included a mid-teens decline in mainland China, though still represented a 20% increase in revenue compared to FY19 pre-pandemic levels. And to give more color on China, while the quarter started off with year-over-year growth, Trends weakened due to pressures from COVID-related restrictions, including declines in traffic with lockdown cities, as well as throughout the balance of the region. By the end of March, over 40% of our mainland store base was closed or operating on modified hours, and our regional distribution center located in Shanghai temporarily shut down. Digital sales growth of over 20% was not sufficient to offset pressure to our stores and wholesale businesses. We're continuing to navigate these near-term headwinds and believe in the resiliency of the Chinese consumers. In Japan, excluding a headwind from currency, revenue increased mid-single digits compared to the prior year as COVID lockdowns and cases eased in the region. And in Europe, sales rose nearly 60% against last year. While year-over-year trends have improved in both Japan and Europe from an increased focus on the domestic consumer, revenue remains below FY19 pre-pandemic levels due to the continued lack of tourist inflows. In the balance of Asia, trends accelerated sequentially, rising over 45%, driven by Malaysia and Singapore. By channel, top line results were led by continued outperformance in the margin accreted digital channel, which grew over 20% in the quarter. In addition, we saw further strength in wholesale and growth in stores compared to the prior year. Moving down the P&L, gross margin was better than expected due primarily to higher full price sell throughs and lower discounting. As a reminder, while our results included 440 basis points or $63 million of pressure From income rental freight, our underlying trends remain strong given our better use of data analytics to improve assortment planning and marketing messaging, as well as strategic price increases at each of our brands. SG&A rose 14% compared to the prior year, reflecting a 260 basis point increase in our marketing spend as we continue to invest in brand building activities while leveraging across the balance of our expense base. Overall, SG&A was in line with our expectations, even with the top line B. So, taken together, operating income was better than forecasted due to revenue outperformance, favorable gross margin, and well-controlled SG&A. Earnings per diluted share for the quarter was 51 cents, in line with prior year and well ahead of our expectations. Now, turning to our balance sheet and cash flows, we ended the quarter in a strong position with $1.07 billion in cash and investments and total borrowings of $1.59 billion. Inventory at quarter end was 30% above prior year, primarily due to in-transits, which remained elevated in light of continuing industry-wide supply chain and logistics challenges. To this point, on-hand inventory was up low single digits. As a reminder, we've adjusted the timing of our buys in recognition of elongated lead times supported by investments in core styles. Overall, we're pleased with the makeup of our current inventory, which supports our future growth expectations. Moving to our capital allocation priorities. Based on our strong results year-to-date, significant free cash flow generation, robust balance sheet, and outlook for growth, We're now on track to return approximately $1.9 billion to shareholders in fiscal 2022, an increase from the prior outlook of over $1.5 billion. We've raised our share buyback expectations for the fiscal year and now anticipate the repurchase of $1.6 billion in common stock, which includes $1.25 billion bought back through Q3. Our shareholder return plans continue to assume approximately $270 million through our dividend program. In addition, our board of directors has approved a new $1.5 billion share repurchase program, which we expect to begin utilizing in fiscal 2023, highlighting our confidence in the company's trajectory for growth. These capital deployment plans underscore our commitment to our shareholders and our confidence in the momentum of our business. Overall, our capital allocation priorities remain unchanged. First, we're investing in the business to drive long-term profitable growth, and second, we're returning capital to shareholders through dividends and share repurchases. Touching on our capital structure, subsequent to quarter end, we refinanced our existing credit facility by entering into a new credit facility which extends maturity, upsizes the revolver to $1.25 billion, and includes a $500 million five-year term loan. The proceeds from this term loan will be utilized to repay our July 2022 bonds, totaling $400 million by the end of the fiscal year and for general corporate purposes. These actions support the company's incremental share repurchase activity while maintaining a strong liquidity position and financial flexibility. Now moving to our fiscal 2022 outlook, which replaces all previously issued guidance. As noted in our release, we're modifying our outlook for the fiscal year. Let's peel back the layers and associated EPS impacts. First, escalating COVID-related headwinds in Greater China have had a greater impact than previously anticipated, representing approximately 25 to 30 cents of pressure. Second, due to uncertain legislative timing, we've now removed the assumption that GSP would be reinstated with retroactive benefit in the fiscal year from our outlook. This translates to a negative impact of approximately 17 cents. On the other hand, we're reflecting 25 to 30 cent tailwind, primarily due to the healthy underlying momentum across the rest of the world, notably North America, and inclusive of a four-cent contribution from higher share repurchase activity. Turning to the details of our guide, 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. We expect revenue to be approximately $6.7 billion, which would mark a record for the company. This represents a high teens increase compared to fiscal 21 with double-digit increases in each brand. For the fourth quarter specifically, we would expect continued strength in North America and Europe with accelerating growth in the rest of Asia, which is helping to partially offset the near-term COVID-related disruption in China. In greater China, we're now anticipating a revenue decline of approximately 35% in the fourth quarter. On the mainland specifically, we're assuming that Shanghai lockdowns will be listed at the beginning of June, followed by gradual improvements thereafter. In addition, our guidance incorporates the expectation that our regional distribution center will reopen in mid-May. Of note, we've not assumed full lockdowns in other major cities. For the year, we've anticipated a gross margin decline compared to the prior year, assuming First, a headwind of approximately $175 million or 260 basis points of margin associated with increased freight expense. This includes the expectation for a moderating impact in the fourth quarter and into the next fiscal year. And second, geographic mixed pressure due to China, a high-margin business. These impacts are being partially offset by AUR growth across brands through lower promotions supported by enhanced SKU productivity as well as select price increases. Thus far, the AUR gains we've realized have largely been driven by lower promotional activity. We would expect to see further benefits from pricing actions beginning in fiscal year 23. Finally, as mentioned, we have removed the retroactive benefit associated with the reinstatement of GSP from our outlook and now anticipate paying the associated duties in the fourth quarter as we have in the previous five quarters. Turning to SG&A, we continue to anticipate modest leverage for the fiscal year. This incorporates the expectation for $300 million in structural gross run rate expense savings from the acceleration program. Importantly, we're continuing to utilize these savings to reinvest in areas of the business that fuel long-term growth, notably digital and marketing. So taken together, we now expect operating margin to decline over 70 basis points compared to the prior year. Net interest expense for the year is anticipated to be approximately $62 million. In addition, our guidance contemplates a fiscal year tax rate of 18%, assuming a continuation of current tax laws. We expect weighted average diluted share count to be in the area of 271 million shares. This reflects the $350 million increase to our share buyback expectations. We anticipate EPS to be in the area of $3.45, representing nearly 20% growth compared to the prior year. For the fourth quarter, this guidance implies high team earnings growth, outpacing the high single-digit revenue increase on a 13-week basis. Finally, we now plan to deploy approximately $180 million towards capital expenditures and cloud computing implementation costs in the fiscal year. In closing, we continue to leverage the benefits of our transformed, diversified business model and strong underlying trends, notably in North America. The opportunity ahead for Tapestry and each of our brands is meaningful, and we remain focused on driving sustainable growth and total shareholder return. In addition, we're generating significant free cash flow and now plan to return approximately $1.9 billion to shareholders in this fiscal year alone. further demonstrating our financial strength and confidence in the future. I'd now like to open it up to Q&A.

And as a reminder, if you would like to ask a question today, please press star and one on your touchtone phone. If your question is answered, you may remove yourself from the queue by pressing the pound key. Again, that is star and one if you would like to ask a question today. We will go first to Bob Durbel with Guggenheim. Your line is open.

I am. Good morning. I was wondering, you know, could you talk a little bit more just about the headwinds that you're facing in China? And I guess conversely, can you talk about more of the positive trends that you're seeing in the rest of the world?

Thank you, Bob, and good morning. Overall, I'm seeing strength and momentum across our business. In our third quarter, we delivered strong growth in all regions outside of China, more than offsetting the headwinds we saw in China. We talked about in our prepared remarks the strong growth in North America at 22%. We also saw strength in Europe, in Japan, and rest of Asia. which again, more than offset the temporary headwinds we're seeing in China due to COVID, and really showing the resilience of our model, we delivered double-digit global growth in Coach, Kate Spade, and Stuart Weitzman in the quarter. Now, Tapestry is a powerful combination of iconic brands, and we have a transformed platform that's driving innovation and customer engagement. And I see us gaining traction across our brands. We're continuing to acquire new customers and We're driving growth and increased spending from our existing customer base, and our Q3 performance really highlights the strength in the underlying trends we're seeing in the business. Our outlook for the year reflects continued headwinds in China, mostly offset with continued outperformance across the rest of our regions, mainly North America. And our outlook also represents record top-line sales for the year for Tapestry at $6.7 billion. Great. Thank you very much.

We will take our next question from Ike Boruchow with Wells Fargo. Your line is open.

Ike Boruchow Hey, good morning, everyone. You know, just it's a pretty dynamic world we're in, clearly. I guess, Joanne or Scott, you know, when I think about the potential for GSP to hit next fiscal year and this renewed authorization, $1.5 billion, it seems like you have the dry powder to drive another 10% earnings growth. Next fiscal year, and you probably don't want to get explicit, but could you give us some guardrails on how to think about, you know, after we get through Q4, just how to think about the next 12 months, given all the puts and takes in the business right now?

I'll kick us off to Scott for maybe the dynamics of the financials. But what I can tell you is that our business continues to gain strength. And we're seeing that in all of our brand metrics and in our consumer metrics. And our focus has been on, throughout the acceleration program, really transforming our company and strengthening our brands. And we're seeing increasing traction that provides our confidence and underpins our confidence in the potential for further growth as we move forward. But I'll toss it to Scott to give you a little bit of the dynamics and the dimensions of the P&L.

Yeah, Ike, I mean, you're right. Of course, we're not going to give guidance. But if I think about just some of the factors, you know, listen, we've got really strong brands that have momentum that are positioned well against really resilient categories. And we've seen this over a long period of time in some very volatile environments in the past as well. And we know our consumers engaged and continues to respond. You know, we also have pricing power, and we've talked a lot about that, AUR, which gives me confidence in our ability to maintain margins over time. So the combination of great brands well-positioned and the ability to maintain margins means we can continue to invest and drive in our business, in our digital capabilities, in our marketing. You know, we've transformed this P&L over the last couple years. And that gives me confidence in our ability to continue to drive top and bottom line. And the last thing I'd say is, you know, this is a – It's really been remade over the last two years, and you saw that in our guidance today, and we're actively returning that cash to shareholders. So that's another driver or lever in terms of earnings as we look forward.

Great. Thanks.

We'll take our next question from Oliver Chen with Cowan. Your line is open.

The average unit retail momentum has been really impressive. What's ahead with the promotional activity profile? What should we assume in our models there? And also regarding pricing action, specifically at Coach Brand, we'd love further detail on what you see as opportunity ahead and how you're balancing this against the consumer environment, which sounds quite robust in the U.S. Thank you.

Yeah. Oliver, we are seeing pricing power across all of our brands. We're delivering beautiful products at great prices, and consumers continue to recognize the value we're delivering. We've seen no consumer pushback on the price increases, and we've spent time to make sure we're keeping the consumer at the center And through our transformation efforts, using data to improve our assortment. So it's this combination of magic and logic that's coming to bear and enabling us to take price. And again, seeing no pushback. Coach, I'll let Todd talk about what we're seeing, but almost three years of continued AUR growth. But at Kate and Stewart, we're really just beginning the journey. And we see further opportunity, particularly because we see pinnacle luxury driving price increases, there's more white space for our brand, and the customer continues to recognize the value that we represent in the market.

Yeah, just building on what Joanne said. First, think about the new customers that come into the brand in the last two and a half, three years. And even in this last quarter, we saw 800,000 new customers come into the brand. So they're experiencing, Coach, at elevated prices. And that's what you see with the AUR growth. We feel really good about where we're at and how much room we have. Because first of all, we built our iconic style. We're amplifying those styles. We're making compelling stories around them. We're creating a value proposition. And as Joanne alluded to, when you think about where coaches position today, relative to traditional European luxury. There is more white space now than has ever existed. And I just see that as tremendous opportunity for continued growth on our AURs, on our initial pricing, and we will continue to maintain the discipline of not going back to periods where the brand was highly discounted.

Very helpful. A follow-up on the cloud investment. regarding customer data platforms as well as IDSA and privacy. Are there thoughts on why the cloud makes sense now and how that may plug into agility and managing speed as well as the personalization efforts?

Can I just jump in, Joanne? Just one clarification. We've always been in the cloud, right? And so there was some accounting changes which caused some geography differences from a reporting standpoint, but we've started talking more overtly about the cloud. But just to know, that's not necessarily a change in direction, that's just a change in geography based on some of the more recent pronouncements that have come out and just being in line with that. Sorry, Joanne. But thank you.

Oliver, your point is a good one, however. the technology infrastructure that we've invested in over time is critical in allowing us the agility to take advantage of this, this rich data that we have. And again, you know, we're a 90% direct to consumer company. We have rich data, uh, That is, you know, it's our data, we understand our customers, and we're able to leverage that with tools and technology and innovation in the space is happening very quickly. So it is critical for us to have a platform, a technology platform that allows us to take advantage of the data that we have. to turn that data into insight, put that in the hands of decision makers in our organization, and move with speed to adopt new technologies as innovations are happening in the space. So that's been our focus. As Scott mentioned, it's been our focus for a while, but it is a critical underpinning of our ability to drive.

Thank you. Best regards.

Thank you.

And once again, that is star and one for your questions today. In the interest of time, we do ask that you limit yourselves to one question. We will go next to Mark Altschwager with Bayard. Your line is open.

Good morning. Thank you. I mean, it sounds like momentum in North America is very healthy, but I'm just curious. I mean, are you seeing any indications of a deceleration in demand in North America over the last couple of months? I mean, your brands target a wide range of consumers. You know, any differences in the trajectory of some of the higher price points at retail versus outlet. And then, you know, it looks like your SG&A outlook for modest leverage is unchanged despite some of the global sales headwinds. You know, understanding the macro side of your control. Just curious how we should think about your ability to protect margin should a slowdown present itself in the coming months. Thank you.

Yeah, let me kick it off with what we're seeing in the consumer. And what I can tell you is that we're seeing a strong consumer that's increasing their engagement with our category and with our brands. You can see that in the numbers we're putting up, but we're continuing to see strong growth in customer acquisition, 1.4 million customers in the third quarter alone. That's 13 million new customers over the last 21 months since we've launched our acceleration program. And we see that that consumer is increasingly younger, a younger consumer, and is in transacting at higher AUR. And they're coming back to our brands more frequently. And I think that, you know, leads you to, you know, handbags in our category, handbags and footwear have, you know, remain an emotional purchase, both emotional and for our consumer. And as the world has reopened and consumers are increasing, you their connection in the real world and occasions and return to work, we see that driving demand across our categories and across our brands. We're driving increasing brand heat, and as I said, the emotional connection with our consumers is growing, so we feel well-positioned moving forward. And as it relates to SG&A, you know, I'll let Scott maybe talk a little bit about what we're seeing there, but, you know, I would also – say that we are seeing pricing power across our brand. So consumers are engaging with our brands and the brands have established pricing power and we see white space in the market given the value that we represent. And that we believe is, and we feel confident, will be offsetting inflationary pressures as we move forward.

Yeah, and the only thing I would add, Mark, is, you know, first of all, we continue, we're playing our long game, right? We're seeing the benefits of the investments that we've been making over the last couple years pay off in terms of consumer acquisition, brand momentum, et cetera. And, you know, our understanding of that consumer through data and analytics and meeting her where she wants to be from a digital and omni-channel, we're seeing that that works. You know, just a reminder, though, on the other hand, we have our eyes open. We see the same macro issues, but right now our consumer is engaged and responding. And one thing also to remember is, you know, about 8% of our investments are around marketing, right? So those are truly variable as we see the dynamic change. change, but honestly, right now, it's driving our business, and we see a healthy consumer, and we continue to lean in. Right now, our posture is more offensive than defensive.

Just to add for Coach, very specifically, we've come up with a very strong, and I know our sister brands have as well, Mother's Day. That gives us a lot of confidence in the future, and even in Japan's Golden Week was very strong for us. And one question you asked about AUR growth, we've had AUR growth across all of our channels. So it isn't just concentrated at the bottom or at the top. And we're taking it up across all of our price points. So that's really powerful for us.

That's great. Thank you for all the detail. You're welcome. Thanks, Mark.

Our next question comes from Michael Bonetti with Credit Suisse. Your line is open.

Hey, guys. Thanks for all the detail and thanks for taking our question here. Scott, just a few housekeeping little ones quickly and then a bigger picture question. You mentioned the Shanghai DC reopening in mid-May. I think that's pretty quick here. Sounds like you have some pretty clear indications there, just what you're seeing in your ability to open that soon. And then The comment that you expect freight to improve in fourth quarter and then into fiscal 23, I know it was a little worse than you were initially thinking in third quarter, so just the moving parts that you see there. But then I guess backing up to go off Ike's question a little bit earlier, I think you guys are controlling the controllables so well. I don't really think what's going on in China and GSP really have much to do with you. Margins are great, and, Scott, you've obviously got the Treasury buying a lot of stock here. I think that where the stock is, the market's very hungry for any kind of downside support to what fiscal 23 could be. Is there anything that you can offer us to just help us think about, you know, what's the minimum that the business can deliver in a reasonable scenario next year?

Yeah. Excuse me. Let me start, Michael. I, you know, I think generally my comment is, I think you got it pretty, pretty much right in terms of the way you characterize that, you know, The D.C. is a slow reopening, and we do have some line of sight. We actually are open on a very limited basis, and without getting too far in the weeds, we're getting approvals from local authorities to do a slow restart, and that gives us confidence that it will continue. Of course, we don't have absolute knowledge of that, but signs are positive. And likewise, you know, the reopening at the beginning of June, I would say it this way, Michael. We have taken the best information that we know today and given you the best indication of what we believe that slow reopening will look like. Of course, it's out of our control, but it's the best information that we have today, and I think it's a reasonable estimate based on what our line of sight is. You know, I'm guessing Joanne will make a broader comment, but just a reminder, you know, we really can't give you 23 guidance at this point, but, you know, 90 days from now we will, right? We'll come back and we'll give our guidance and then follow in early September by an investor day to give you a longer-term view. I would just refer back to earlier comments. I think it was from maybe Zyke's question earlier. You know, listen, we're in great categories, strong brands, well-positioned and resilient, great categories, which has proven to be, you know, a good indicator of top-line growth, and we have pricing power and our ability to maintain margins. And to me, that's what holds the model together and gives us confidence in the future.

Yeah, and I'll just reiterate that we are optimistic about the future, Michael. You know, we're driving both the brand health metrics and the consumer metrics and are gaining traction in our strategies in terms of leveraging our data, bringing magic and logic together, and driving our business forward. And, you know, Scott alluded to earlier, we've invested and will continue to invest in brand building. We have made substantial investments, and they're working. They're paying off. And we see that continuing. We've acquired 13 million new customers across our brands in the last 21 months. We see those customers engaging with our brands through the innovation and product and innovation and marketing, and they're coming back to our brands more frequently. And we'll continue to leverage that for growth going forward. And we are looking forward to providing more discreet details, you know, at our year-end call on what 23 looks like. But our brands and our company are poised for growth.

Okay. Hey, Michael, I forgot to cover one point you asked about, which was the freight. And, you know, the freight picture has really not changed overall. Little pluses and minuses here and there. But 260 basis points, about $175 million for the full year. If you recall last quarter, I said it's a little bit hard to exactly know when it's going to turn into the P&L because it attaches to the underlying inventory. I mean, the business is strong, so more sold through in the quarter. But if we look at the overall picture, we've really curtailed our expedited freight or air freight already. It'll take a while for that to move through the P&L. If you do the math, it says there's about $35 million in the fourth quarter of additional freight. That's about 210 basis points, and that's a little less than half of what we saw in the third quarter. So it's following that same curve that we laid out in the past, and there's really no new news there in terms of what we're seeing in freight.

Okay, so it's visible and it's already in the inventory that you just see it moving through. Okay. I appreciate it. That's right. Yep. Thanks, guys.

We'll go next to Brooke Roche with Goldman Sachs. Your line is open.

Hi, good morning, and thank you so much for taking the question. Can you provide a little bit more context on your philosophy on capital allocation and how you're thinking about that balance between reinvesting in the business to drive that future growth versus returning capital via repurchases? As you look over the course of the next one to three years, what are the most important internal areas of investments that we should be planning for? And where have you pulled forward those investments since the inception of the acceleration program that should provide support if a downside scenario does materialize? Thank you.

Yes, let me kick it off and maybe toss it to Scott to add any more details. We, you know, we've been aggressive and rigorous about allocating capital. And we believe as our first priority in investing in our business. And, you know, the good news is we're seeing really strong returns on those investments. We're investing in brand building capabilities across our company. And, you know, we've transformed our company over the last couple of years. We're a different company than we were two years ago based on these investments. We're leaning into our digital capabilities and our data and analytics capabilities and developing not only, you know, it's not only systems, it's process, it's the ways of working, it's the investments we've made in talent that are helping to drive our business. And as I said, we're seeing really strong returns. Again, those are primarily the investments we're making are in digital and in technology. And in marketing, you've seen us invest in fulfillment. We broke ground on a fulfillment center on the west coast of the U.S. We're adding automation to that fulfillment center. We're engaging consumers more and more in digital channels, and those capabilities have been driven by the investments, the very intentional investments we've made. So that is our first priority. We also, you know, we're optimistic about Tapestry's future, and You've also seen us, you know, make a substantial increase in our buyback program, including the new authorization. And we're confident that over time we'll continue to drive growth through our brand building investments and return cash to shareholders. I don't know, Scott, if there's any more detail that you want to provide.

No, the only thing I would say is capital allocation priorities, just to restate them, invest in the business, dividend, growing faster than earnings, and then return excess cash. Remember, coming from the early days of the pandemic, we're able to actually spend more and return more than our annual cash flow because we had increased our maintenance capital in light of the early days of COVID. So we had the good fortune of being able to be in a really strong, relatively low leverage cash position and at the same time saw the intrinsic value of our shares just dislocated from what the market realities were. So we, we have leaned in. Right. And I think the way I would say about it is it's not a change in priorities, but this is a cash generative machine. It's cash free cash flows about two X, what it was pre pandemic. And you should think of us as a disciplined, uh, capital allocator. So as we continue to generate this free cash flow, we're going to invest first in our business. We're going to grow our dividend. And you should think about returning cash through share repurchases programmatically over a period of time. This will be another lever for price appreciation over the long term.

Thank you.

We'll take our next question from Omar Saad with Evercore. Your line is open.

Thanks for taking my question. Appreciate all the information. Wanted to dive a little bit deeper on the handbag trends kind of across the brands and in the industry. It feels like you guys have AURs up a lot, especially on a multi-year basis for the Coach brand. We're hearing that from other players in the marketplace. Is it fair to assume that kind of unit volumes in the handbag category versus, let's say, 2019 are substantially down industry-wide in the kind of aspirational category of And, you know, is there a chance for, you know, meaningful unit growth, even in this kind of inflationary environment, kind of going forward?

Yeah, let me start off, and then I'll talk about what was the typical approach. But we are seeing pricing power across our brands, which is a really good thing for our business. We've been focused on driving higher AURs to drive a healthy business, And that's been working. Our focus on the consumer, bringing data to bear, managing inventories better, leveraging data and analytics to drive SKU productivity are all helping us drive higher AURs. And it is price at this point that is driving our results versus units. And, again, we think that's a good thing and healthy for our business. But we continue to see opportunities to drive growth. And we're doing that by attracting more customers to our brands and engaging more customers in our brands. And that gives us a platform to continue to drive lifetime value. You know, I mentioned earlier that the new customers that we're acquiring are younger consumers, which is great for our brands. And they're coming back and transacting with our brands. with higher frequency. So we see opportunities there. We see opportunities geographically to continue to drive growth. And so a lot of levers we can pull, including driving higher lifetime value across our customer base. But Todd, I'll toss it to you for a little more color on coach.

Thank you, Joanne. We have not hit our unit counts from 19, but the delta has shrunk pretty dramatically. And I see that as an opportunity for us. And all of the things that Joanne mentioned, the lifetime value, the increased AUR, the overall complexion of our customers changing. And beyond women, we're very excited about the opportunity in men. We're about a year ahead of our goal of getting to a billion dollar men's business. And what we like about that is it adds new customers to our mix and the brand. And when you think about it, we merchandise things, we call the men often, it's an all gender program. But what I also am very excited about in the last year, we've added one and a half million male customers into the brand. And when you think about opportunities and AUR growth there, particularly in those categories, they're some of our highest AURs in the company. So I feel really good about the room we have, the new customers, the frequency of purchase will eventually get us to both AUR growth from pricing, but also unit growth.

Got it. Thanks.

You're welcome.

And we will take our final question today from Adrian Yee with Barclays. Your line is open.

Good morning, and congrats on the progress. You can see it in the frontline stores in particular. No promos. Scott, my question is for you. Can you give us an update sort of on what the state of the China market looks like? Maybe some color on digital versus stores. Obviously, e-commerce wasn't able to be delivered. Are you seeing any improvement in that front, the distribution of stores in Tier 1 cities? Just like anything that you can give us with regard to what the current state of affairs is, are you seeing any signs of improvement current day to get to that kind of June reopening target? Thank you.

Well, yeah, sure, Adrienne. Maybe I'll start, and one of my colleagues might want to jump in, too. You know, listen, I think I already mentioned the – ADC, our Asian distribution center, that we're starting to see some modest reopening. We are seeing some stores going back online here and there. But I would say, by and large, not a major change in condition. And that's been reflected in the outlook that we just gave you. You know, just to put some numbers on it, our China expectation for the fourth quarter is down about 35%. which is baked into our outlook. And that, again, has the slow reopening starting in June is our expectation.

And just a quick reminder, the Tier 1 cities, are you primarily in the Tier 1 cities right now? I know there were some stores in Tier 2, but not a lot. So should we assume 80% is in Tier 1 and the lockdown cities?

Yeah, we have a broad footprint across China. So we're not just in Tier 1 cities. And to Scott's point, we are seeing impact broadly across the region. And our business was strong entering the third quarter and prior to the COVID disruptions. And as we saw the COVID disruptions rolling through the region, we saw traffic declines in the lockdown areas, but also more broadly across the regions as traffic was curtailed. You know, I think it's also important to note that, you know, the strength coming into the quarter pre-disruptions and the research we've done in the market continue to confirm that our brand health in the market is strong and consumer sentiment continues to be strong. So we're navigating the near-term headwinds, but we feel well-positioned as, you know, as China recovers to continue to drive growth both during the recovery period and long-term in the markets.

And the other thing I'd like to, just to add for, you know, the coach, first, and it's all of our Tapestry employees, we have an incredibly fantastic team on the ground in China. The resilience that they have shown through this and the creativity is, I mean, I am in awe of what they are able to do, even in pretty tough conditions. And just in the last month or so, we've seen a real increase in virtual selling. and that is something that could be really interesting as an and, not an or, when the stores reopen. So, again, our teams are incredibly creative, they're resilient, and it gives us that much more confidence that when these events end, we'll have an even greater runway and connectivity with our clients there.

Thank you very much. Best of luck.

Thank you.

Thank you. That concludes our Q&A.

Well, thanks. I'll say a few words just to wrap up. First, to build on what Todd was just talking about, I want to thank first and foremost our teams around the world for their relentless focus on the customer. This is continuing to drive our strong results. And our thoughts are especially with our teams in China who are navigating COVID and supporting each other during this difficult time. As you've seen in our results, our business is performing, and I'm even more confident in our business in a rapidly changing environment. Tapestry has tremendous runway for growth with a positioning that's both unique and advantaged. Our powerful, iconic brands are united magic and logic to deliver compelling products. We play an attractive category that has proven durable high growth. We have a diversified direct-to-consumer business model, and we've transformed our platform with digital leadership that's fueling customer engagement. Our strong underlying momentum is particularly evident in the customer metrics we highlighted today. Long-term, we're playing offense and leaning in. Our conviction is reflected in our capital allocation actions. We're investing in brand building as well as accelerating and increasing our share repurchase given the significant growth potential ahead. So thanks for joining us this morning, and have a great day.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.