TAPESTRY, INC. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Record Results: Record third quarter earnings per share exceeded expectations, up 27% year-over-year. Raised fiscal 2025 earnings outlook to $5 per share.
• Global Growth: Total revenue up 8% at constant currency. North America revenue up 9%, Europe up 35%, Greater China up 5%.
• New Customers: Acquired over 1.2 million new customers in North America, two-thirds Gen Z and Millennials. Gen Z retention rates at Coach improved.
• Omnichannel: Strong digital growth (mid-teens) and global brick and mortar sales growth (mid-single digits) at increasing profitability. Direct-to-consumer model a competitive advantage.
• Fashion Innovation: Coach delivered broad-based growth with product innovation. Kate Spade focused on strengthening handbag offering and reducing styles.
• Brand Building: Coach launched campaigns like 'On Your Own Time', Kate Spade focused on cohesive storytelling and brand media investments.

Segment Performance

• Coach: Delivered accelerated growth with 15% top line gains at constant currency. Drove 35% growth in Europe, 5% in Greater China, 9% in North America. Digital grew mid-teens, brick and mortar mid-single digits. Gross margin increased nearly 100 basis points. Revenue contribution significant, driving overall growth.
• Kate Spade: Revenue declined 12% at constant currency, but profit met expectations due to gross margin expansion. Focus on resetting the brand with strategies like cohesive storytelling, strengthening handbag offering, and reducing promotional activity.
• Stuart Weitzman: Entered into an agreement to sell to Caleres, expected to close summer, ensuring portfolio alignment for long-term success.

Guidance

• Fiscal 2025: Raised revenue outlook to ~$6.95B (4% growth reported, ~50bps currency headwind). EPS outlook ~$5, up from prior guide. Adjusted free cash flow expected ~$1.3B.
• Q4 Outlook: Estimates revenue mid-single digit growth on reported and constant currency. Operating margin expected prior year level, incorporating gross margin gains and higher SG&A costs.
• Long-Term: Confident in sustainable growth driven by brand building, innovation, and customer acquisition.

Risks

• Tariffs: Exposure to import tariffs, but mitigation strategies in place like forward inventory receipts and optimizing supply chain.
• Market Uncertainty: External factors like global trade shifts and economic uncertainties could impact results.
• Brand Reset Challenges: Kate Spade's brand reset may take time to show full results.

Question and Answer

Q: Hey, good morning everyone. Really, really strong quarter. Good to see it. I guess this very high level maybe for Joanne, what's driving it? I mean, especially at the Coach brand, I just don't think you guys have put up numbers like this in 20 years. What's driving it? And how are you thinking about the business in the future in a more dynamic environment? Can the brand sustain this kind of heat? Just kind of curious your thoughts?

A: Well, good morning Ike, and thanks. We did deliver a standout quarter, and I think one that illustrates the power of our business model and the unique strengths and structural advantages that we have to navigate in really any environment. To your point, in the quarter, we delivered accelerated top and bottom line growth that exceeded our expectations, and we did this at increasing margins, and that enabled us to raise our outlook for the year. And there are really 4 key structural advantages that we think about as we think about navigating a dynamic environment and those are also the things that helped contribute to our success to date and I would say the first is that we're building strong emotional connections with consumers and we play in a category in handbags that have proven to be durable over time because of the emotional connection that consumers have with our category. I think second is our high margins and strong cash flow and our direct to consumer model. These fundamentals insulate us from some tariff exposure, but also allow us to read demand signals sooner and allows us to react sooner and that brings in our diversified and agile supply chain. You know, this supply chain was built over decades and it's proven we've navigated disruptions in the past both on the supply side and on the demand side. And I think underpinning it all is the value that we're delivering in the global market. We are delivering incredible, exceptional innovation I can say at compelling value, and customers are responding, which helped us deliver the results from the quarter, the beat and raise for the year. And I do think it's notable that we're on track to deliver $5 in earnings per share. That's consistent with the targets that we set at our Investor Day in 2022. Our teams have done an excellent job navigating through volatility and delivering on the commitment we made 3 years ago, and that gives us confidence that we're in a position of strength, and it shows our ability to adapt and win in all environments.

Q: Thank you. Good morning. It was encouraging to hear that the 2025 outlook would have an immaterial impact from tariffs. If the environment stays where it is today, can you provide some guard rails around what 2026 impacts might look like?

A: Yeah, Lorraine, I'll take that. This is Scott. So first of all, I think you can appreciate our longstanding and consistent practice. We'll give you guidance on next year at the end of our next fiscal, which will be our fourth quarter. But there are some things I can say that might help you a little bit. First of all, remember we've taken a number of actions already to mitigate impacts of tariffs. I mentioned that in my prepared remarks, but some of those are we brought some inventory in ahead of times before effective dates. We're looking at optimizing across our diverse supply chain with a very agile team that's informed by, I would say a crackerjack trade expertise that's allowing us to optimize across that diverse supply chain. And lastly, we're working with our suppliers. We have scale and we have long-standing relationships, strategic relationships with very important suppliers, and we're working collaboratively to find opportunities to mitigate the cost of any potential tariffs. But there are a few things we won't do. We'll never sacrifice innovation or quality as we think about trying to find those mitigating actions. And I also mentioned in the prepared remarks and in some of the documents that we gave you, just some ways to dimensionalize potential exposures to tariffs. So, about $900 million of cost of goods sold is related to imports into the U.S. market. So obviously, if you do simple math, a 10% incremental tariff across the board would be $90 million. Now that's unmitigated, right? That's before any of those actions that I talked about. And we've made substantial inroads already at finding mitigations against those -- any potential exposure that we might see. So, everything I've said here is related to the cost side. And if you think about gross margins, remember, independent of costs, we also have a long-standing history of AUR gains, right? So you think about mitigating the cost side, coupled with our brand building, consumer engagement and our ability to raise AURs over time, because we're delivering a more compelling value, that gives us confidence in our ability to maintain margins. Maybe, Todd, little more on the AUR side of that equation.

Q: Great, thanks and congrats on a really nice quarter. Maybe 2 parts. Joanne, if you could elaborate on the new customer acquisition that you cited. It seems like it's really driving the inflection in North America and just some of the retention metrics that you're seeing and initiatives around that. And then Todd, I wanted to circle back, maybe just forward-looking, how you see the merchandising assortment position today to take continued market share? And maybe if you could just assess the product and the relative value at Coach, maybe relative to luxury or just what you're seeing. Is it trade in? Trade down? Maybe just elaborate on the market share acceleration that you're seeing.

A: Sure, Matt. I'll kick it off, and I'm glad you called out new customer acquisition. This is a metric and KPI that we've been focused on from the beginning of our transformation. And I used to say new customer acquisitions is like oxygen for brands. But we've been quite intentional about going after new customer acquisition and importantly acquiring a new and younger consumer to our brands for a couple of reasons. One, it was clear that by 2030, most of the consumption in our category was going to be Gen Z and Millennials. So, we knew we had to appeal to a younger generation of consumers with all of our brands. So, we began to become more intentional about it. And we really put the consumer at the center of everything we do, and we call out new customer acquisition every quarter intentionally. And that's what everybody in our company is really focused on, how do we engage more consumers and engage them with deeper emotional connections to our brands. So that we're not just selling a bag at a price, we're connecting these consumers to our brands on an emotional level. And that's what proves to be durable over time. And the exciting thing about acquiring a young consumer is that the lifetime value opportunity is long. And we -- so we see that. But we also see young consumers influencing all age groups. So, we haven't forgotten about our entire customer mix. We love all of our customers. And when we talk about our growth, we're seeing growth across age groups, across income demographics, but our focus on acquiring a new and younger consumer is breathing a lot of life into our brands, a lot of relevance into the way our brands show up in the world. And again, because these young consumers are so connected, digitally connected across the world, honestly, they're driving choice for all generations and influencing all generations. So, that's helping us drive our brand heat. And you mentioned retention rates, we're actually beginning now, and we called it out this quarter to see these young consumers coming back with higher frequency. So the year 1 retention rate of Gen Z at Coach is going up, it's higher. And that is a great sign for us as we talk about this lifetime value and the durability of this business over time. It's a great leading indicator of what's to come for Coach. So, we have a lot of confidence in the future. And I'll pass it to Todd talking about the positioning of Coach.

Q: Good morning and thank you for taking my question. How are unit volumes trending at the Coach brand, both in North America and internationally? Given the strong growth in AUR that you've seen, what do you think is the right medium to long-term balance between AUR and unit growth?

A: I guess I'll take that. We're bringing new clients to our business. And over time, you'll continue to see us grow units. But this AUR that we've had, we've grown so materially since I’ll take a starting point of 2019. We're behind 2019. But in 2019, our AUR was about 70% lower than it is today in North America. So, each of these interactions, as I always say, one client, one customer that we interact with. I am very pleased that we are selling less product on promotion. That's just a general truism that creates sustainable brand growth. And because of that and because of these new customers, we're going to see a -- not only AUR continue to grow, but we will start seeing units to grow as well. But again, the brand positioning is one of strength. And the fact that we are not just pumping units into the market to create sales volume gives me sustainable long-term growth.

Q: Thank you and congrats on the strong execution. Can you unpack your performance and strategy across Coach full price and outlet just given the evolving macro? How do you maintain the momentum you have while remaining nimble given consumer preferences could be subject to change in the coming months?

A: Thanks for the question. It's very interesting. We've been talking a lot about our performance across the fleet. And we've talked to you a little bit about our One Coach strategy where we're putting more and more what was historically full-priced product in traditional outlets at full price, and it's resonating with the consumer. As we've seen over and over again, we want to be consumer-centric, not channel centric. And what that means is when somebody comes into a Sawgrass Mall outside of Fort Lauderdale [indiscernible], that might be the only mall they go to. It might be their best mall in the area. It might be the mall that they're visiting as a tourist. They come in knowing they want the Tabby bag. And so we're giving them that opportunity at full price across the channel. And we're extending that One Coach concept into other categories like footwear. Footwear has been something that we're very, very focused on, but not just chasing any trends in footwear. We're very focused on sneaker business. And this last quarter, we launched our Soho sneaker at $145 across all channels at one price point. It's resonating really strongly, particularly with that young consumer we're going after. So, you're going to see us blur the lines more and more across channels, because the value proposition是there. It's there. It's compelling. It's recognized by the consumer. So, I think you'll hear us talk continue to build on the momentum of this One Coach idea, and blurring the channels, again, putting that consumer at the heart of everything we do.

Q: Congratulations on the nice progress. With the uptick in acceleration in digital and store sales that you saw this quarter, -- the marketing obviously is very effective, how do you think about marketing by channel and what you're looking at? And as you look even towards next year a little bit, remodels of stores, opening new stores, what do you see as the balance of where you're looking to show up given the competitive moat that you're building around the Coach brand?

A: Well, maybe I'll kick it off and then toss it to Todd to give you some details on Coach specifically. But I appreciate你noting that we grew in our direct channels, we think our direct business is in a competitive advantage, Dana. And we do -- we are able, through our direct business, to meet consumers wherever they are. And that includes having the strong digital capabilities as well as really compelling in-store experiences. So, we grew in both channels this quarter, strong growth in digital and growth in stores and at increasing profitability across channels. So, we think that's a competitive advantage for us and we care about the experiences that we deliver to consumers in each of those channels, making sure that those channels are fit for purpose in terms of what -- how the customer interacts with our associates, their discovery, their brand discovery, the inspiration we provide. So, we spend a lot of time on that. And you asked about our media investments. And I would say marketing overall, we talk a lot about the fact that we've increased our marketing and brand-building investments over time. I think I went back to pre-pandemic levels, we were at 3% to 4% of our sales at one time, and we're approaching 10% of our sales now invested in marketing and brand building. And as we've built the capabilities, the brand-building capabilities and the experience and expertise to drive these investments into places that are driving high returns, we are very intentional about those media investments, and where we show up with what content and based on where the customer is in their journey. And that's not something will ever be done with. This is a process of continuing to improve our execution behind our media strategies and investments. What I can say, what is on display is the compounding effect of these strategies, and you can see that at Coach, as we continue to hone those capabilities, we're seeing the compounding effect of the brand building and the brand heat we're driving at Coach. In addition to all the other things that need to come together to deliver a great customer experience, including the creativity and product and the store experience and the digital experiences. And we're investing in store experiences as well, and maybe I'll pass it to Todd, and he can share a little bit about the -- some of the excitement that's happening there.

Q: Good morning, thank you for taking my question. First with Coach, I was hoping to get a little bit better sense of some of the regional drivers. Is it the same product that's hitting at the same time across the globe here? And then China, obviously nice momentum currently. Just how are you navigating the risk of consumers potentially souring on U.S. brands?

A: Maybe I'll pick up the last part of your question and start with China, and then I'll toss it to Todd for the regional -- the broader regions for Coach. But to your point, our business accelerated in Greater China in the third quarter, growing mid-single digits. We're seeing that broad-based growth, right? Growth in digital and in stores, across city tiers, and we are driving Gen Z acquisition. And I will say that's in a market, to your point, that has been in our category, pressured. Some of the numbers we see is that the market was down double digits in our category, but yet we're growing. And we're doing that because we're acquiring a new and younger consumer, and we're delivering incredible value和innovation to that consumer. And it is a discerning consumer in China, and we're seeing momentum building there. So, we continue to see China as an important region. We're confident in the long-term opportunity, and we're staying close -- importantly, staying close to consumers so that we can read and deliver what they want, what they need. And we're not seeing any signs, in our business or in our global consumer work, of pressure on anti-American sentiment. Again, we're seeing strong engagement from consumers continued new customer acquisition and we're delivering growth in China. And in China, we expect to deliver low single-digit growth for the year with continued acceleration in the fourth quarter. So, our business is on track in China. We have great teams on the ground building the business. We were just there a few weeks ago talking to the teams in the region and we feel good about the opportunities ahead. And now, I'll toss it to Todd to talk about maybe more color on China, but also what's happening in the other regions.