Tapestry, Inc.

Good day and welcome to this Tapestry conference call. Today's call is being recorded. Later, you will have the 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 telephone keypad. You may withdraw yourself from the queue by pressing star two. 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 second quarter results, as well as our strategies and outlook are Joanne for VoiceRat, Tapestry's Chief Executive Officer, and Scott Rowe, Tapestry's Chief Financial Officer and Chief Operating Officer. Before we begin, we must point out that this conference call will involve certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes 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 posted today. Now, let me outline the speakers and topics for this conference call. Joanne will begin with highlights for Tapestry and each of our brands. Scott will continue with our financial results, capital allocation priorities, and our 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 Prevoicerat, Tapestry CEO.

Good morning. Thank you, Christina, and welcome, everyone. As noted in our press release, we delivered a strong holiday quarter, achieving record second quarter revenue and earnings per share with growth outpacing expectations. Importantly, we advanced our strategic agenda, driving consistent progress through the power of brand building, customer centricity, and disciplined execution. I want to recognize our talented global teams whose creativity, passion, and agility continue to fuel consumer engagement and our standout financial results. Touching on the highlights for the quarter. First, we powered global growth to achieve a 3% sales gain, demonstrating the benefits of our diversified business model. This increase was driven by 12% growth at constant currency internationally, which included 19% growth in greater China, consistent with our expectations. Further, sales to Chinese consumers globally grew at a mid-teens rate, which included continued growth with Chinese tourists. Looking ahead, we remain committed to investing in our brands, leveraging Tapestry's established platform in the region to build our business not only in China but with this important cohort worldwide. Turning to Japan, revenue rose 6% and in other Asia and Europe, sales increased 9% and 11% respectively, with each delivering strong growth against last year's double-digit gains. Finally, in North America, we delivered revenue in line with last year and better than our expectations. We are continuing to drive a healthy business underscored by significant gross and operating margin expansion compared to last year and plan. Second, we remain focused on building customer engagement across our brands. In the quarter, we acquired approximately 2.5 million new customers in North America alone. of which roughly half were Gen Z and millennials, consistent with our strategy to recruit younger consumers to our brands. And we continue to see new customers transact at higher AUR than the balance of our customer base. At the same time, we improved lapsed customer reactivation in North America, demonstrating our ability to engage with our existing customer base while bringing new customers to our brands. Third, we delivered unique and seamless omnichannel experiences, reinforcing the benefits of our data-rich, direct-to-consumer operating model. To this end, we drove mid-single-digit growth on a constant currency basis, both in stores and online, as we continue to meet our customers where they choose to shop. Our exceptional retail teams welcomed more customers to our stores around the world, while we maintained our strong positioning in digital, which represented one-third of revenue. During the quarter, we were proud to open a new multi-brand fulfillment center in Las Vegas as we continued to invest in our omnichannel capabilities, supporting speed, sustainability, and growth. Fourth, we fueled fashion innovation and product excellence by delivering compelling newness and value to consumers, which supported overall handbag AUR gains globally. At the same time, we drove growth in our small leather goods and lifestyle offerings, important for the holiday gifting season. Overall, we generated record second quarter EPS, which exceeded expectations and increased significantly compared to the prior year, highlighting the power of brand building and disciplined execution. We achieved these strong results while making strategic investments in our brands to accelerate future growth. Now turning to the highlights across each of our brands, starting with Coach. We delivered another standout quarter as our team continues to fuel brand desire by bringing expressive luxury to life, a positioning that is relevant and unique to Coach. Our strategies, supported by consistent execution, are driving strong innovation, consumer connections, and financial results, highlighted by revenue growth across geographies and significant margin expansion. Now, touching on some details of the second quarter. We achieved growth in our leather goods offering fueled by our iconic platforms. Tabby, again, outperformed expectations, nearly doubling versus last year and over-indexing with new and younger consumers at above average AUR. We're continuing to bring newness to this iconic family across bags and small leather goods, including the recently launched quilted Tabby with further runway ahead. At the same time, we drove growth across the balance of the assortment anchored by our Willow and Rogue families, which remain foundational volume drivers. We also drove momentum with the recently introduced Idle family, expanding the offering with new sizes. Overall, our creative and innovative products supported a mid-single-digit gain in global handbag AUR, including growth in North America. Looking forward, we see continued opportunity for pricing improvements given our innovation pipeline, and brand heat. At the same time, we fueled gains in lifestyle as we focused on building the brand's reach with consumers with the goal of powering customer recruitment, purchase frequency, and ultimately customer lifetime value. In ready-to-wear, we advanced our strategy to build a core assortment of key styles that represent compelling value. Growth in the quarter was driven by outerwear. In footwear, the Lea Loafer continued to outperform, And in men's leather goods, growth was driven by success in the key Gotham, Charter, Hitch, and Relay families. Next, we created purpose-led storytelling, building meaningful emotional connections with the brand. We continued to lean into the strength of the Wear Your Shine campaign, which inspires consumers to use fashion as a means for personal expression and empowerment. The Shine collection included a range of gold and metallic bags, ready-to-wear and accessories, allowing customers to own their shine with confidence. We also delivered emotional content through our More Than a Gift campaign, which celebrates the gifts that give us the confidence to be ourselves. Overall, the success of these campaigns helped to support the acquisition of approximately 1.5 million new customers in North America, including a growing number of Gen Z and millennials. And according to our U.S. brand tracking work fielded during the quarter, Coach saw a lift in unaided awareness versus prior year, led by gains with Gen Z consumers, underscoring that our investments in brand building are working. And finally, we continue to build momentum in our sub-brand Coachtopia, our reimagination of the product creation process to evolve our vision of circularity. During the quarter, Coachtopia's ergo shoulder bag, made with either repurposed leather or leather scraps, was the top-selling style. While Coachtopia remains a small portion of the assortment, we are excited by the significant consumer attention it's receiving, specifically with younger audiences. In closing, Coach continues to build strength on strength with a clear strategy, unique purpose, and commitment to investing behind sustainable growth. The power of expressive luxury rooted in deep consumer insights and consistent execution is bringing new innovation, new customers, and new potential to this iconic brand, and we're confident in the tremendous runway ahead. Now, moving to Kate Spade. During the quarter, we continued to advance our long-term priorities, reinforcing our strategic direction. Profits were ahead of both expectations and the prior year, led by gross margin expansion and demonstrating our agility and discipline. Having said that, top-line trends remain challenged. In order to realize the ambition we have for the brand, we need to accelerate our progress through improved execution. To this end, we see an opportunity in three key areas. First, strengthening Kate Spade's core handbag offering. Second, powering the omni-channel experience. And third, driving more emotional marketing that fuels brand relevance and heat. Now I'll touch on our quarterly results in each of these focus areas in more detail. First, we are reimagining and broadening the brand's core handbag assortment across channels, creating the foundation to be a larger and more profitable brand consistent with our strategic intent. And where we've provided more newness, innovation, and emotion, our customers have responded. However, the traction we've seen with new product was offset by declines in carryover families, which underperformed our expectations. This reinforces the need to move faster to build a more innovative core assortment that's required to win in today's dynamic consumer backdrop. Moving forward, we are laser focused on improving the execution of our handbag offering, bringing more relevancy to the assortment. The pipeline for the back half of the year and into fiscal year 25 will increase the penetration of newness across channels with the launch of bags featuring new materials, silhouettes, and distinctive branding elements. This innovation builds on the green shoots we're seeing today while incorporating consumer feedback and insights, which help to inform our product strategies and investments. At the same time, we'll maintain the strength of our novelty and lifestyle offerings, differentiators for the Kate Spade brand. To this point, footwear rose double digits in the quarter, while jewelry remained an important acquisition vehicle, consistent with our strategy and focus on enhancing customer lifetime value. Second, the execution of a cohesive omnichannel strategy is a key opportunity to drive stronger customer engagement. During the quarter, we launched a dedicated katespadeoutlet.com site, replacing the brand surprise site and providing a more seamless way for outlet consumers to discover and shop the brand online. Overall, by bringing a more focused and unified experience to consumers across all brand touchpoints, we can more efficiently scale our marketing and merchandising efforts. supporting our goal of driving sustainable direct-to-consumer growth. Third, we are focused on creating emotional marketing that fuels brand relevance and heat on a global scale. During the quarter, our marketing investments supported the acquisition of approximately 950,000 new customers to the brand in North America. In keeping with our strategy to become a more global brand, we launched a series of physical activations from London to Shanghai that brought the brand's codes to life and helped grow brand awareness internationally. Moving forward, we recognize the need to distort our marketing efforts to brand building to enhance our impact. Unique storytelling has been a strength of the brand over time, and as we move into spring, we will focus on creating marketing to drive fashion credibility and customer engagement. by shifting our investment to top-of-funnel marketing through the launch of our campaign anchored in the brand codes of Joy, Color, and New York City. Finally, as we fuel enhanced innovation, we will maintain a commitment to operational excellence, positioning the brand for long-term success. This focus has supported the brand's meaningful gross margin and profit expansion thus far this year and is embedded in our strategies and ways of working for the future. Overall, while we're continuing to advance our long-term strategies at Kate Spade, we're leaning in with intention to accelerate our progress. Our path forward is clear, and our vision for the brand and its potential is unchanged. Turning to Stuart Weitzman. Top-line results in the quarter were pressured, reflecting in part the ongoing strategic reduction in off-price wholesale shipments. These headwinds were partially offset by growth in China against last year's COVID-impacted compare. and continued positive wholesale POS trends. Further, we grew AUR, expanded gross margin, and improved profitability versus prior year. That said, we remain unsatisfied with the brand's pace of recovery, and we continue to focus on prioritizing brand health and delivering innovation for consumers. Touching on key elements of the brand's strategic growth pillars from the quarter. First, we curated a relevant offering of emotional product. we delivered growth in our core boot classification fueled by gains in the Soho and 50-50 families. Further, we continued to build out our assortment with more seasonless casual styles, including loafers and ballet flats. During the quarter, we also launched a new sneaker assortment featuring a range of innovative designs engineered to combine fashion and function. At the same time, our handbag collection, while still a small portion of the assortment, drove growth at high AUR, As we move forward, we will deliver more newness into the core assortment in keeping with rapidly evolving consumer trends. Next, we created engaging marketing to fuel brand heat and consideration. In celebration of the brand's 30th anniversary, we employed a multi-pronged approach to our marketing, including utilizing an array of influencers to organically engage with consumers, from He Kong to Kim Kardashian to Sofia Richie Grange. As a result, we saw brand awareness improve in the U.S. per YouGov and drove increased customer engagement across our social channels. Similarly, in China, brand exposure rose significantly following the launch of this campaign. Overall, the Stuart Weitzman team is focused on executing against its strategic priorities, fueling brand heat and deepening customer engagement through a stronger, more diversified foundation of differentiated product, and emotional purpose-led storytelling to drive enhanced growth and profitability long-term. In closing, Tapestry delivered a strong second quarter, positioning us to raise our earnings per share outlook for the fiscal year. Importantly, this reflects the progress we're making to advance our strategic agenda and power our iconic brands to move at the speed of the consumer in an ever-changing environment while investing in our future. We remain confident in our vision and in our ability to bring that vision to life, putting the customer at the center of everything we do to drive sustainable organic top and bottom line gains. Further, through the planned acquisition of Capri, we see a significant opportunity to accelerate our strategies while driving accretion to our strong standalone financial plan. Overall, we remain excited by the opportunity to expand our house of powerful brands and positioning Tapestry as a leader in innovation, talent development, and shareholder returns for years to come. We continue to make progress toward closing the transaction and look forward to sharing more detailed growth strategies for the future at an appropriate time. With that, I'll turn it over to Scott, who will discuss financial results, capital priorities, and fiscal 24 outlook. Scott?

Thanks, Joanne, and good morning, everyone. As Joanne mentioned, our fiscal Q2 results exceeded expectations. We delivered top-line growth, significantly expanded gross margin, and drove record revenue and EPS for the key holiday quarter while generating over $800 million in free cash flow. Our strong and consistent performance demonstrates the benefit of our globally diversified direct-to-consumer business model as well as our financial discipline and agility. It's this discipline that allows us to continue to invest in long-term brand growth while delivering record earnings. Now, moving to the details of the quarter, beginning with revenue trends on a constant currency basis. Sales increased 3% compared to the prior year, fueled by strong international growth of 12%. In Greater China, revenue rose 19% as we anniversary last year's COVID impacted results. At the same time, we've continued to see an uptick in travel spend for mainland China tourists with increases across Asia and Europe. While these trends have been encouraging, sales to Chinese tourists globally remain well below pre-pandemic levels, representing further opportunity ahead. Outside of China, we drove growth in our key international regions, anniversaring strong gains in the prior year. In Japan, sales grew 6% due to increased tourist demand, And in other Asia, revenue grew 9%, including strength in Korea, Singapore, Australia, and New Zealand. In Europe, momentum continued with revenue 11% above last year. And in North America, sales were in line with the prior year and above expectations on stronger margins, supporting brand health and not chasing sales. Now touching on revenue by channel for the quarter, our direct-to-consumer business grew 4%, fueled by mid-single-digit growth in both stores and digital. And in wholesale, which represents about 10% of sales globally, revenue declined 4%, reflecting wholesale market pressure in North America, partially offset by growth in international accounts. Moving down to P&L, we delivered our strongest second quarter gross margin in over a decade, which was ahead of our expectations and 300 basis points above last year, This year-over-year expansion was driven by a benefit of 170 basis points due to lower freight expense as well as operational outperformance fueled by geographic mix, tailwinds, and net pricing improvements. SG&A rose 5%, which was favorable to our forecast on both a dollar and a rate basis, reflecting operational savings compared to planned. Importantly, we're continuing to tightly control costs while making ongoing strategic investments in our brands, people, and business platforms. So taken together, operating margin expanded 220 basis points and operating income rose 14% compared to the prior year, both ahead of our expectations. And our record second quarter EPS of $1.63 was ahead of guidance and represented growth of 20%. Now turning to our balance sheet and cash flows. We ended the quarter with $7.5 billion in cash and investments and total borrowings of $7.7 billion, which reflects the bond financing related to the planned acquisition of Capri, which I'll touch on momentarily. Free cash flow for the quarter was an inflow of $804 million. CapEx and implementation costs related to cloud computing were $30 million, And inventory levels at quarter end were 15% below prior year, reflecting our focus on disciplined inventory management and driving inventory turn. Before moving on, I did want to touch on the disruption related to the Red Sea conflict. We're closely monitoring this situation and currently estimate a modest increase in lead times and freight costs in the back half of the fiscal year, which has been incorporated in the outlook provided today. Importantly, we currently anticipate minimal impact to our operating results and customer experience given our well-positioned inventory. Turning to our dividend program, our board of directors declared a quarterly cash dividend of 35 cents per common share, representing $81 million in dividend payments for the quarter. For the fiscal year, we continue to expect to return approximately $325 million to shareholders through the dividend at an annual rate of $1.40 per share. a 17% increase compared to last year. Now moving to our guidance for fiscal 24, which is provided on a non-GAAP basis and does not include any potential impact from the planned acquisition of Capri. Our strong second quarter results position us to raise our EPS outlook for the fiscal year while taking a prudent approach to our second half planning. On revenue, we're maintaining our outlook on a reported basis as we reflect coaches' outperformance in the second quarter, as well as moderating headwinds from FX offset by lower expectations at Kate Spade and Stuart Weitzman. At the same time, we're raising our EPS estimate for the year, given our stronger margin results and commitment to being disciplined stewards of our brands. Our guidance also reflects the strategic decision to invest a portion of our Q2 profit back into our brands and business to support our long-term strategies. Moving to the fiscal year in further detail, we expect revenue of approximately $6.7 billion, representing an increase in the area of 1% versus prior year on a reported basis. Excluding an FX headwind of roughly 100 basis points, we anticipate constant currency sales growth of 2%. Turning to sales details by region at constant currency, which are unchanged from the ranges previously provided, In North America, we expect revenue to be in line with to slightly above prior year. This forecast contemplates our commitment to maintaining higher margins as we manage our brands and business for the long term. In greater China, we expect mid-single-digit sales growth. In Japan, revenue is forecasted to grow mid-single digits, while other Asia is expected to increase at a low double-digit rate. And in Europe, we anticipate high single-digit growth. In addition, our outlook assumes operating margin expansion of approximately 100 basis points. We anticipate gross margin gains in the area of 200 basis points, which includes a benefit from moderating freight costs of roughly 120 basis points. On SG&A expenses, we expect deleverage of roughly 100 basis points, reflecting reinvestments in our brands, people, and business in supportive growth initiatives. Moving to the below-the-line expectations for the year, net interest expense is anticipated to be approximately $20 million. The tax rate is expected to be approximately 20%, and our weighted average diluted share count is forecasted to be in the area of 233 million shares. So taken together, we're now projecting EPS of $4.20 to $4.25 representing 8% to 9% growth versus last year. Finally, before contemplating any deal-related costs, we still anticipate free cash flow of approximately $1.1 billion, and we expect CapEx and cloud computing costs to be in the area of $190 million. This forecast includes roughly half of the spend to be related to store openings, renovations, and relocations, mostly in Asia, with the balance primarily related to our ongoing digital and IT investments. Now, let me take you through the shaping of the year. We continue to expect relatively consistent constant currency top line growth between the first half and second half at around 2%. This includes the expectation for stronger growth in the fourth quarter relative to the third quarter, helped by the anniversary of easier comparisons in North America. On operating income, as noted, we're utilizing a portion of our outperformance in the second quarter to reinvest in our people, brands, and business. Therefore, our outlook now contemplates second half operating income to be roughly in line with the prior year. By quarter, we expect gross margin expansion in both the third and fourth quarters with modestly higher SG&A dollar growth in Q3 versus Q4 based on the pace of our investments versus the prior year. For the third quarter specifically, we anticipate revenue to be in line with to slightly above prior year in constant currency and down slightly on a reported basis, including roughly 120 basis points of FX pressure. In aggregate, we expect EPS for the third quarter to be in the area of 65 cents with growth anticipated for Q4. Now to outline our capital allocation priorities looking forward, which are unchanged. First, we will invest in our brands and businesses to support sustainable growth. Second, we will utilize our strong free cash flow for rapid debt repayment. We are committed to maintaining a solid investment grade rating. To this end, we initiated a long-term leverage target of less than two and a half times on a gross debt to adjusted EBITDA basis and expect to achieve that within two years of the Capri transaction closed. Finally, we will return capital to shareholders through our dividend. Importantly, we believe our strong cash flow profile provides us with further opportunity for investment and capital return. Following the achievement of our leveraged target, over time we expect to increase our dividend with the goal of achieving our stated target payout ratio of 35% to 40% and see the opportunity to resume share repurchases in the future. Before closing, I want to touch more holistically on the planned acquisition of Capri. We believe the acquisition will drive significant value creation with immediate accretion to adjusted earnings, enhanced cash flow, and strong financial returns underpinned by a compelling industrial logic that is consistent with our commitment to being disciplined financial operators. To this end, it's important to highlight that we continue to expect Capri to generate double-digit EPS accretion on an adjusted basis and compelling ROIC. Embedded in these expectations is the assumption that the standalone Capri business will generate free cash flow in the area of $500 million on a non-GAAP, un-synergized basis. And as noted, we've made further progress towards transaction close. In November, we issued $6.1 billion in USD and Euro bonds, achieving an all-in debt interest rate of 6.5%, inclusive of Tapestry's existing debt and consistent with our expectations. Our financing strategy supports rapid debt paydown in order to achieve our stated leverage target within 24 months post-close, given the combined company's strong pre-cash flow generation. We're moving forward with integration planning efforts and continue to gain confidence in our ability to achieve run rate cost synergies of over $200 million within three years of closing. And finally, we're continuing to work towards receiving all required regulatory approvals and as publicly announced by the Chinese regulatory authority, the transaction received clearance in China. In terms of timing, we remained confident in our ability to complete the transaction with a close expected in calendar 2024, consistent with our original expectations. In closing, for the quarter, we drove strong results, highlighted by revenue gains, significant margin expansion, earnings growth, and cash flow generation, while continuing to invest in the long-term growth of our business. This outperformance demonstrates the power of our strategies operating model, and talented global teams. Looking forward, we will remain disciplined stewards of our brands and business with an unwavering commitment to drive sustainable, profitable growth and shareholder returns for years to come. With that, I'll turn it back to the operator and take your questions.

At this time, if you would like to ask a question, please press star 1 now on your telephone keypad. To withdraw yourself from the queue, you may press star 2. Our first question comes from Bob Durbel of Guggenheim.

Hi. Good morning. Congratulations on a great quarter. Can you talk about the strength you're seeing at Coach, at the Coach brand, and your confidence in maintaining the momentum? And separately, I just have a question on the deal. Since you announced the transaction, we've seen a softening of trends at Capri. Can you just give us an update on if and how this has changed any of your thinking? Thanks.

Well, good morning, Bob. We delivered a solid holiday quarter, which is a testament to the strong and passionate teams we have around the world. And first, I want to recognize that we are executing consistently. We delivered growth across revenue, operating income, and earnings per share. In fact, we delivered record second quarter earnings per share. And at the same time, we're delivering gross margin and operating margin expansion, really showing that we're maintaining brand health while delivering against our earnings commitments, which is protecting the bright future we see for our brand. These results speak to the operational excellence and the discipline that we've shown now for over three years. And we're driving strong and consistent free cash flow. And to your point, importantly, we are gaining momentum at Coach and Instead of stealing all of Todd's thunder, maybe I'll toss it to him to let him comment on that momentum, the sustainability of that momentum, and then I'll come back at the end and pick up your question on the acquisition. Todd?

Thank you, Joanne, and good morning, Bob. I'm feeling very confident about our future because of our brand positioning of Expressive Luxury, which we launched in September of 23. What it did is provided us with the clarity and focus on the target market, the timeless technology. Gen Z consumer. With that consumer in mind, this fall and into holiday, we launched our Wear Your Shine campaign. The traction that we've seen with this campaign, building on momentum of previous Purpose campaigns, confirmed the opportunity to talk to our clients in an authentic, unique, and meaningful way. Turning to product, our innovation is working as demonstrated by our Tabby family, which I can't talk enough about. So when you take our storytelling and compelling product together, we are driving meaningful growth with new and younger consumers and generating brand heat. This leads me to talk about what we refer to as coachonomics. We grow our gross margin by reducing costs, increasing initial pricing, and reducing promotion coupled with efficient non-marketing SG&A allows us to invest in full funnel marketing, which drives productive sales. This creates a virtuous flywheel. Growing sales enhances the lifetime value of our new and younger clients. Our coachonomic model bodes well for our future growth in the quarters and years ahead.

Well, thanks, Todd. And let me pick up on your question on the acquisition. I'll start by saying these are great brands, and we remain excited about the runway ahead. We recognize the opportunity to unlock value by improving execution, leveraging the tapestry platform, and we have continued confidence, evidenced by the coach results that Todd just referenced, that our strategies and our execution deliver. And in terms of the deal, the economics remain strong. We're making progress as we expected towards a close in this calendar year that's unchanged from our prior outlook. And in the meantime, integration planning efforts continue. I've been impressed with how the teams are working together, and we continue to gain confidence in the opportunities where we can add value. Importantly, though, we remain laser focused on driving our organic business, which is reflected in the strong second quarter beat and raise we reported today.

Thank you.

We'll take our next question from Ike Boracow of Wells Fargo.

Hey, good morning, everyone. I'll add my congrats. So I guess maybe this is for Scott or Joanne, but I think Scott, back in August, I'm trying to think about the business organically, so excluding Capri and any deals. In August, you gave us some updated thoughts on the fiscal 25 organic goals you guys had set for yourself, which included the 19% margins and the You took the $5 down to $4.65 because of the lack of repo. Curious if you could give us some updated thoughts on how those targets are evolving internally. And really, Scott, I'm specifically asking because your brand performance looks very different versus your initial goals. with the coach margins looking to come in at least this year, probably a few hundred basis points above the 30% goal you set for fiscal 25 and Kate, you know, kind of the opposite, several hundred basis points below the mid teams, mid teams goal. So any just thoughts on how that's all evolving would help us when we kind of think about the business organically into next year.

Yeah, sure. I'm happy to take it. So just to reiterate, first of all, the, the four 65, which is really the, as you said, the five less the, curtailment of the share repos, we still have confidence. And, you know, yeah, has it evolved a little differently? It has. But I think, you know, not only is this a testament to the momentum that you see in coach, but also I think it speaks to our model, right? And the discipline being capital allocators, we're feeding those opportunities where we see growth. You're seeing the discipline across the P&L, as Joanne mentioned, in terms of gross margin, expansion, we're getting leverage across most cost areas and reinvesting back where we see points of difference and the ability to drive the brand. So while it's evolved a little bit differently, yeah, we still have the confidence. And I think that just speaks to the diversity of the model and I think the discipline in this organization.

Got it.

Thanks.

Our next question is from Matthew Boss of JP Morgan.

Great, thanks, and congrats on a nice quarter. Thanks, Matt. So, Joanne, as we think about new customer acquisition, could you speak to differentiation of the Tapestry portfolio platform that you think allows the product innovation data capabilities that support the continued global momentum? And then for Scott, could you speak to the continued gross margin drivers multi-year, maybe beyond this year's freight recovery, and just How best to think about or any change to double-digit accretion in year one from the planned acquisition?

So I'll kick it off on our customer, what we call customer obsession. And it is really the engine that drives growth for our brands, but frankly for all brands. And it really does start with being curious about the customer and understanding what how to bring our brand to the market with even more relevance, more connectivity, and truly creating a more emotional connection with the consumer. We start that. It really permeates our entire value chain. So we start early with understanding who our target customer is and what the true DNA of each of our brands is and how that fits. But then we talk to a lot of customers. We do a tremendous amount of customer research, not only research that does our brand tracking, but deeper ethnographic research to understand how the customer feels in a store environment, feels about our product, feels about their outlook on the world. And that's something that always changes. So it's a continuous curiosity, I would say, in the company. We ingest that data across our company. And I talk a lot about putting the data and the insights in the hands of decision makers. The ways of working have changed at Tapestry over the last four years. And our teams are better and better at gaining these insights and applying them to all of our work across the value chain. So we are using this not only in our brand positioning, but also in our product development, understanding as we develop product who we are speaking to and what value we are delivering, both emotional value as well as functional value, what needs we're fulfilling for the consumer. And then we leverage data and insight as it relates to pricing, as it relates to our assortment, the breadth and depth of our assortment, and allocation across the world and where that product and how that product shows up around the world. We test and learn on our website and some of our marketing capabilities so that we can continue to improve our execution. So all the way, and I don't know if I mentioned pricing, but pricing as well, So all the way through the value chain. And importantly, our focus has been to attract younger consumers to our brand. And we've seen a lot of traction with our execution behind the insights that we've found. And you can see that as we talked about the 2.5 million new customers we attracted to brands in this past quarter, nearly half being Gen Z and millennial. That is critical for us to continue to create the momentum we want to create for each of our brands. And then, Scott, I don't know if you want to pick up the gross margin drivers.

Yeah, I'd love to. I'd love to talk about gross margin. I'll really start where you ended. And I think, you know, even if you look at this year, Matt, reinvesting back in those capabilities that help us understand who those consumers are, all the things that Joanne said, that's what gives us confidence in our pricing power longer term. And that's a key driver. And we see that You know, when you take out the noise of freight and some of the other things, some of the mix, regional, all that stuff that's going on quarter by quarter, we still see that core operational improvement is coming through, and we expect that to continue. And, you know, I'm not going to give – we're not giving 25 and beyond guidance other than earnings reaffirmation on the 465 that I talked about. But one of the key linchpins is what Todd and Joanne both talked about, that flywheel, reinvesting back in the business – which reinforces our margins, and it's those margins that allow us to both increase our profitability and reinvest at the same time. You also asked a little bit about double-digit accretion in year one. Short answer, I assume, you know, we're talking about the concrete deal. The answer is yes, and I would also just add, in addition to accretion, which is kind of a mathematics problem, we also see strong returns in excess of our WAC. So, you know, we see return on capital that is also a creative as we continue to look at the deal. Remember, we never bought into necessarily you all's estimates. We had what we called prudent assumptions on the condition of the business, and we still have confidence in those key drivers.

Great. Best of luck.

Our next question is from Lorraine Hutchinson of Bank of America.

Thanks. Good morning. I wanted to focus on China for a minute, understanding the year-over-year comparisons are pretty volatile. Joanne, can you just zoom out and give us your view on the health of the Chinese consumer and what's driving the Coach brand's strength in China specifically?

Sure. You know, we continue to believe in that China represents long-term opportunity across our brands. And as you know, we've been in the market for a long time with the Coach brand, over two decades. As it relates to the business right now, we are seeing a slower pace of recovery in the market. But our China business landed right in line with our expectations in the second quarter at up 19. Our outlook for this fiscal year is that we will drive mid-single-digit growth in the year. That expectation is unchanged. So the dynamics in the market are unfolding the way we expected. And again, we continue to have confidence in the long-term opportunity in the market. And what's driving our success is that our teams in the market are doing an excellent job building our brands and connecting with consumers. We continue to see consumer desire for our brands is strong. And we saw that through the second quarter. And importantly, in the surveys we field in the market, purchase intent in our category, handbags and leather goods, is still high with consumers in the market. So again, expectations are high. Maybe I'll toss it to Todd if there's any other color on your secret sauce in the market, Todd.

Well, I won't give away the full secret sauce, but I will say, building on your comments, we feel really good about China, particularly the long-term opportunities in China. And one of the things that I point to and one of the questions all of you ask me every quarter is how do you continue to see AUR growth and expansion? When you look at where the coach brand sits today and the white space between us and traditional European luxury, that's at an all-time high. And in a market like China, where maybe people are being more frugal and thoughtful about their purchase, that bodes very well for Coach. So I'm excited by the white space. I'm excited by our brand positioning. Expressive Luxury is working. As Joanne said in the prepared remarks, our last quarter, we saw growth at all markets, including China. So excited by what we have coming up. And we're already seeing Tilted Tabby, take hold in that market in a really meaningful way.

Thank you.

Our next question is from Brooke Roach of Goldman Sachs.

Good morning, and thank you for taking our question. Joanne, I was hoping you could provide some additional thoughts on how you're thinking about the outlook for North America handbag and accessories, but specifically both for your Coach brand and for Kate Spade. What's driving the underlying confidence in stronger growth in the back half of the year, specifically in fiscal fourth quarter? And how are you thinking about that relative to the competitive pressures that you might be seeing in the market?

Yeah, North America market is always competitive. We love a competitive market, and we're performing. What we saw in Q2, our business was flat with last year, in line with last year, but above our expectations today. And we're driving that business at higher margins. So we continue to prioritize a healthy business and managing a healthy business, and we will focus on healthy growth in the market. What we see happening in the market is, frankly, the consumer is being choiceful, and they're responding to newness and innovation and the elevated brand messaging that we're delivering in the markets. And we'll continue to do that. Our outlook for the rest of the year is, frankly, in line with where it was in the first half. So no dramatic inflection between first half and second half of the year. We think trends will be in line. But again, we're managing the business in a healthy way. We grew AUR last quarter, expanded gross margin and operating margin. Our inventories, importantly, are well positioned, not only in North America, but globally. So we expect to continue to manage a healthy business in North America as we move forward.

And the only thing I'll add for Coach is, you know, obviously we're always aware of competition, but we're playing our own game. And this new virtuous flywheel where we're really growing these new customers, a million and a half in North America last year, They're younger. They're transacting at a higher AUR. That's the fuel. That's the coachonomics that will play out in many quarters ahead. So they're coming in at our brand. We're touching them through expressive luxury, through with purpose and innovation. And as long as we keep doing that, using our data, I think there's so much room for growth in North America. We feel really good about what's ahead of us. particularly in the fourth quarter when we have easier comps, obviously. But beyond the comp issue, we just see a lot of growth ahead, even in our most mature market, because as we saw, we can continue to grow awareness.

So that's really important for us.

Our next question is from Michael Benetti of Evercore.

Hey, guys. Thanks for taking our question. I'll add my congrats on the next quarter. Maybe just a near-term one first. On the revenue guidance for flat in third quarter, is that what you're seeing today? Maybe just comment there. It sounded like you're seeing an inflection in China with some of the comments on tourism, but then Todd also mentioned some choicefulness from the consumer as well. Maybe just a little color on what to expect in China in the second half. And then maybe a jump ball, Joanne and Scott, but Scott, since we've talked about this for a lot of years in your previous life, about the philosophy and the filters you use to assess which brands belong in, in a portfolio of brands. I'm curious how you guys, you know, look ahead to being a house of six brands on, of different scales, different market shares within their subcategories, different global opportunities, and maybe speak a little bit about what are the lenses you use at Tapestry to determine which brands are best fits within this platform?

Yeah, sure. Sure. Michael, I'll take the first part of that. And, uh, You haven't read our website, man. All that's out there. Anyway, the third quarter, really, there's a lot of noise, but to make it simple, the biggest issue is China, right? So if you think about in Q2, we were up 19% in line with our expectations. Really, that was anniversary and COVID issues. And then we had revenge spending, right, which is coming in. Q3, so it's a tougher compare. But when you zoom out from that a click and look at the overall, you know, we said mid-single digits last quarter. In terms of our expectation, that's right where we are today. So, yes, there's noise quarter by quarter. It puts particular pressure in the third quarter from a top and bottom line. But when you zoom out and look at the top, we beat in the second quarter. We took the full year up, right? So I would ask you to, you know, understand the noise, but really don't lose the big picture here.

Let me pick up the portfolio question you asked. We are creating a global house of iconic brands. And what's important to us, the most important thing is that these brands are iconic and that they trade in attractive and growing categories. Adding these brands to our platform, we've talked about the strong industrial logic of this transaction. It extends our reach across customer segments across geographies and across product categories. So it provides more diversification for our business and taken together enhances our opportunity to drive value, superior value for all of our stakeholders. We are disciplined capital allocators. And to your point, we Any capital allocation decision we make, we use a four-lens framework. You mentioned lenses. There is rigor and discipline in our evaluation. That's how we arrived at the decision to make the acquisition of Capri. And the four lenses are really, first, does it fit with our strategies as a company? Second, what do we bring as an owner? Are we a good owner of these assets? Third, what is the financial outcome we expect and the modeling and the shareholder return we expect? And the fourth lens is really degree of difficulty of execution. And as we evaluated all of those, we landed on this Capri acquisition is quite compelling. And any future capital allocation decision we make, we'll apply those same four lenses and the same rigor and discipline.

Thanks a lot, guys. Again, great quarter.

Thank you.

Our next question is from Mark Altschwager of Baird.

Thank you. Good morning. A couple questions on Kate. First, you talked about the need to accelerate some of the changes there. What are the insights you've gathered over the last few quarters that are informing the changes you're making to plans over the next few seasons here? And then separately on margin, you are delivering margin expansion at CATE despite the ongoing sales pressure this year, which is nice to see. So I was hoping you could just update us on how you're thinking about that path to the mid or even high-teens EBIT margin. What's the timeline there, and is there a level of revenue that is needed to get within that range? Thank you.

Thanks, Mark. We remain confident, to your point, in the strategies and our long-term vision for Kate Spade. The team exercised incredible discipline and agility in the quarter. To your point, we expanded gross margin, operating margin, and profit. All of those were ahead of last year and ahead of our expectations. But to your point, the top line remains challenging. We didn't see an inflection from first quarter. So we saw a continuation of our first quarter trends. And we have higher aspirations for the brand as it relates to growth. You know, we noted an opportunity to improve our execution. And really three key areas we talked about in our prepared remarks. We've been focused on strengthening the core handbag foundation and And that continues to be an opportunity. Where we've delivered newness and innovation in our core handbag assortment, we are seeing the customer respond. And we will see as we move into the back half, newness grow both in the back half and into fiscal 2025. Newness will grow as a percent in penetration in our assortment. The second opportunity that we see is an opportunity to power the on-channel experience with our consumers. You saw us launch Outlet.com in the last quarter. That is an important foundational element to provide consumers a real 360 experience and a quality 360 experience with the brand. We believe that we can build on that foundation as we move forward. And then last, it's an opportunity to drive more emotional marketing to fuel brand heat. So it's around the execution in these three points. Actually, this week we launched our spring campaign. We'll be investing more in top-of-funnel marketing to cut through the noise and drive more brand heat. We have clear actions in place. We're moving with speed to achieve those higher aspirations we have for the brand. You know, the pace of the margin improvement is welcome this year, again, ahead of expectations in the quarter. And we expect continued growth, both on the top line as well as margin. And certainly top line growth is a part of it, but as we demonstrated this quarter, there are other opportunities that we are leveraging to drive growth in operating margins.

Yeah, and maybe I'll just do a quick build on that, Mark. You know, we do still see a path to the team's operating margin. And I think, you know, this year, even overall at Tapestry, with modest growth, I mean, you know, a couple percent of growth, the discipline of our teams, and you think about everything from gross margin expansion, controlling expenses and operating margin expansion, even as as the top line has been pressured, that's discipline, right? And we didn't mention it, but inventory, you know, down teens overall, down teens in this brand, right? So we've made room for innovation and new product coming in the second time. One thing that our insights do and don't do, as I've said repeatedly, they don't make us infallible, right? But they, in general, help us make better decisions. And because of our model and our direct-to-consumer data, we see trends and issues quicker. So that's allowed us to react in terms of inventory, to react in terms of expenses. And that's one of the reasons that you see this, you know, gross margin and operating expansion in CATE, even with the pressure on the top line.

Thank you.

Our next question is from Oliver Chen of TD Cowan.

Hi, thank you very much. Tabby's been a really great platform. What do you see ahead, and will there be others that will be great second platforms in addition to Tabby? As we think about the average unit retail, is it more mix or like-for-like or a combination of both? And then on the Kate Spade side, why was now the right time for Outlet? And you mentioned strengthening the core a few times. Just would love thoughts on what that really means and what your consumer research is indicating that you need there. And finally, Todd, Coach Topia has been amazing. Just how material is that to our model, modeling, and where do you see that heading as a penetration over time? Thank you.

I counted five questions total. Did we get that right? Do you want me to take the three?

Well, kick it off with Tabby, Todd. I think that's a great place to start.

I agree. Thank you, Oliver. You know, first of all, Tabby is an incredible platform, and platforms aren't created by us. Platforms are created by our clients. They vote, ultimately. Our job is to continue to innovate, on a platform, keeping it relevant. And you see that with Tabby. I see Tabby as something that isn't a season or a year. It's a multi-year opportunity. We just launched Quilted Tabby. It's phenomenal. Really early readings, but it's doing incredibly well. And every time we launch a new iteration of Tabby in different fabrications or treatments, What it does is it elevates all of TAPI. So we're super pleased with what we're seeing there. On AUR, it is a combo of both initial pricing, less discounting, being really disciplined in our approach. So we're excited by that. Lastly, Coachtopia. Coachtopia is not meaningful enough from a dollars perspective yet to put in your model. What Coachtopia is doing for us is giving us a halo effect. I said this before. It basically outpunches its size yet. What we've seen is it's creating incredible desire and relevancy in the brand. There are some opportunities in Coachtopia that I think will over time become very big. The Loop product, for one, which is effectively a nylon product, which in our history we have not particularly been strong with. That's resonating, and I could see that becoming something very material and maybe a giant platform of its own one day. But again, it's not for us to decide. It's for our clients and consumers to vote.

And I'll pick up the Kate question quickly here as we approach the end of our time, but For Outlet.com at Kate, it really is about creating a better experience for our customers and a more 360 experience that customers in all channels at Kate Spade are served a tremendous experience. And Outlet.com allows us to do that. And we're excited about building on that foundation. And what we hear from our customers about strengthening the core handbag, you know, Kate has Very strong core equities. They're clear in joy and self-expression. But where they tell us, Kate is not known for signature product or branding codes. That's the opportunity that we continue to build. You saw it with Dakota that we launched stronger hardware, stronger branding codes. We're excited about the Madison launch. It's a coated canvas, spade flower signature program and outlet. last quarter, and that's off to a good start. And that's the work of the work. That's what we're focused on doing at Kate. But we're excited about the runway ahead there.

That's great. Thanks.

And we'll take a question from Paul LeJouet of Citi.

Hey, thanks, guys. I'm curious what drove the gross margin beat. I think you mentioned operational performance, but any more specifics there in terms of by brand performance? or channel, and how are you thinking about puts and takes in the second half, specifically on the freight side? I think you mentioned you've been seeing some pressure in dollars going up on the freight side as well. Any quantification that you can provide? Thanks.

Yeah, happy to. What a great story, right? Over 300 basis points in the quarter, and about 170 of that was freight, and as you mentioned, correctly said, we expect it to moderate but still be positive in the second half. I think for the full year with 200 basis point expansion in our outlook, there's about 120 of freight benefit for the full year. It's still positive but moderating somewhat in the second half. Again, I'll reference an earlier comment. As you think forward, obviously we're not going to give any any outlook for 25. But I would just say that, you know, operationally, which is really what Todd was talking about, you know, in coach and, and, and by the way, we grew gross margin across all our brands. I don't know if I said that earlier, but really it's that, that pricing power, which is a combination of headline prices and, and a discipline around discounts and, We see that coming through underneath all the freight noise and mix and all that stuff quarter by quarter, and we would expect, based on our reinvestment in our brands, increased marketing and the insights and understanding we have of the consumer, that we expect that to continue as we move forward.

Thanks, Paul.

Thank you. That concludes our question and answer. I will now turn it over to Joanne for some concluding remarks.

Well, thank you for joining us and for your interest in our story. And thank you to our talented global teams who continue to build our brands and our relationships with consumers. It's clear that our strategies and consistent disciplined execution are delivering. We achieved record second quarter revenue and earnings per share and raised our earnings outlook for the full year while investing for the future. I'm confident in our significant runway ahead to drive sustainable growth and shareholder returns from this strong foundation. Thanks again and have a great day.

This concludes Tapestry's earnings conference call. We thank you for your participation.