Tapestry Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 18, 2021

There are 10 speakers on the call.

Operator

Good day and welcome to the Tapestry Conference Call. Today's call is being recorded. After the speakers' opening remarks, there will be a question and answer period. At this time, for opening remarks and introductions, I would like to turn the call over to Global Head of Investor Relations at Tapestry, Christina Colone. Please go ahead.

Speaker 1

Good morning. Thank you for joining us. With me today to discuss our 4th quarter and full year results As well as our strategies and outlooks are Joanne Kervoixarat, 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.

Speaker 1

Please refer to our annual report on Form 10 ks, the press release we issued this morning and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance. Non GAAP financial measures are included in our comments today and in our presentation slides. Separately, given FY 'twenty one included an additional week In the Q4, figures referenced in today's comments will be on a comparable 13 52 week basis unless otherwise noted. In addition, as we continue to anniversary the onset of the COVID-nineteen pandemic last year, We will be providing financial information compared to FY 2019 or pre pandemic and FY 2020 For a full reconciliation of corresponding GAAP financial information, please visit our website, www.tapestry.com/investors and then view the earnings release and the presentation posted today. Now let me outline the speakers and topics for this conference call.

Speaker 1

Joanne will begin with highlights from the fiscal year for Tapestry in each of our brands. She will also provide an overview of the progress we've made on our acceleration program along with goals for FY 2022. Scott will continue with our financial results and priorities going forward. Following that, we will hold a question and answer session, where we will be joined by Todd Kahn, CEO and Brand President of Coach. After Q and A, Joanne will conclude with brief closing remarks.

Speaker 1

I'd now like to turn it over to Joanne Krivosrat, Tapestry's CEO. Good morning.

Speaker 2

Thank you, Christina, and welcome, everyone. We delivered standout results in fiscal 2021, a transformational year for Tapestry. We are a fundamentally different company today than we were just 1 year ago. Through our acceleration program, we reached new Customers in new ways and effectively adapted to a rapidly changing environment. Our success is a testament to our powerful brands and talented team.

Speaker 2

We achieved many strategic milestones this year, which have strengthened our organization. We've sharpened our focus on the consumer Clarify the unique positioning of each of our brands. This drove improvements in key customer metrics, including recruitment, retention and reactivation. We enhanced our digital capabilities highlighted by our global e commerce channel, a margin accretive business for Tapestry, Reaching approximately $1,600,000,000 in revenue, nearly doubling versus prior year and over $1,000,000,000 ahead of pre pandemic levels. This was fueled by the acquisition of nearly 4,000,000 new customers in North America alone, including a growing number of millennial and Gen Z consumers.

Speaker 2

And we sustained double digit e commerce sales growth in the Q4 even as we lapped more difficult comparisons online. At the same time, we drove continued sequential sales improvement for our global store fleet with operating margins that were once again above pre pandemic levels. We further strengthened our positioning in China, which still has tremendous runway supported by the growth of the rising middle class. In fact, Tapestry's business in Greater China reached $1,100,000,000 in sales this fiscal year, led by over 60% growth on the mainland. At the same time, we grew our business with Chinese consumers globally, increasing at a high single digit rate as compared to pre pandemic levels.

Speaker 2

We successfully leveraged data and analytics, embedding capabilities across the company to enhance our understanding of the customer, increase responsiveness and drive faster, more effective decision making. This has underpinned our ability to optimize the assortment planning process, Lower SKU counts by 40% to 45% and reduced promotional activity, supporting higher AUR and gross margin as well as improved inventory turn. We also embrace new ways of working with a leaner operating model and more empowered teams. This resulted in $200,000,000 of gross expense savings in fiscal year 2021, which funded investments in areas such as digital and marketing to fuel our continued growth as well as our purpose led initiatives to accelerate and amplify our work within our social fabric to effect positive change for our industry and stakeholders. Importantly, the traction of our strategy is clearly evidenced by our financial performance, including the achievement of record operating margin as Tapestry, Inc, as well as operating income and EPS growth versus both FY 2020 and FY 2019 in each quarter of the year.

Speaker 2

We also exceeded pre pandemic sales in the 4th quarter, representing an important financial milestone. In addition, we generated $1,200,000,000 of free cash flow and ended the year in a strong cash position, while reducing our leverage through organic profit growth and the pay down of the company's revolver. Given our strong financial position and underlying business trends, our Board of Directors approved the reinstatement of our capital return program with a plan to return over $750,000,000 to shareholders through both dividend and share repurchases in fiscal year 2022. These actions underscore our conviction in Tapestry's ability to drive long term growth along with our commitment to enhancing value for our stakeholders. Scott will discuss our capital allocation priorities in more detail shortly.

Speaker 2

Now let me touch on our results and strategy for Coach, Kate Spade and Stuart Weitzman. Coach, our largest brand led Tapestry, outperforming in each quarter of the year. The brand fueled momentum through innovation Across consumer touch points, driving engagement with new and existing customers. During the Q4, Coach revenue rose 117% versus prior year, Outpacing pre pandemic levels of sales by 2%, a meaningful achievement given the volatile backdrop. In addition, we delivered significant profitability enhancements during the fiscal year, resulting in operating income increases of 67% on a 1 year basis and 14% on a 2 year basis.

Speaker 2

This outstanding performance was the result of both gross margin expansion and SG and A leverage, reflecting strategic actions and structural changes we've made to sustain long term growth. Throughout the fiscal year, we made significant and authenticity to drive increased recruitment and reactivation. In addition, through the launch of our loyalty program in North America and more targeted marketing, we drove significant gains in the number of repeat transactions. 2nd, we created innovative, unique and compelling product to meet the needs of our target consumer segment. We are building enduring icons that create a foundation for our product pipeline in future seasons.

Speaker 2

This was evidenced by the recent success of newness within the Tabby family, including our pillow and mini versions. In addition, we saw continued strength in our signature platforms Across an expanded assortment of refreshed styles, highlighting desirability for the brand. 3rd, we drove triple digit sales growth in our digital channels on both the 1 and 2 year basis, led by new customer recruitment. During the fiscal year, we acquired nearly 2.5 1,000,000 new Coach customers through our digital channels in North America alone, a meaningful increase versus prior year. Importantly, we sustained strong momentum in the Q4 even as we comped our digital initiatives and the initial uplift in e sales that occurred during the pandemic in the prior year, highlighting continued opportunity in the channel.

Speaker 2

4th, we accelerated growth in China by leveraging our foundation in the country, which resulted in over 60% revenue growth on the mainland in fiscal year 2021 with strength across channels. This performance reflected our integrated and comprehensive brand building strategies, including investments in marketing, innovative product and a continued focus on digital channels. Most recently, we hosted our live streamed fashion show in Shanghai, operating margin of over 31%. This performance was driven by higher gross margin, which reached nearly 74% Through a focus on streamlining our offering, sharpening our merchandising efforts and reducing SKU counts by approximately 45%. These initiatives resulted in global handbag AUR growth in each quarter of the fiscal year.

Speaker 2

In fact, in the Q4, our handbag AUR rose high Single digits globally, led by particular strength in North America. In addition, we made structural changes to SG and A, including our fleet optimization efforts. Looking ahead to fiscal year 2022, our goals are to increase market share in our core handbag Approachable and inclusive messaging and consistent global positioning. Invest and grow in digital while delivering differentiated and compelling omni channel Continue to drive growth in China with key initiatives to capitalize on market trends of the emerging middle class and increase digitalization And grow men's by expanding lifestyle, building brand awareness and increasing our presence in Asia, in keeping with our ambition to deliver over $1,000,000,000 in revenue in this category over our planning horizon. In summary, Coach has both a remarkable 80 year history And a bright future.

Speaker 2

We are confident that the deliberate actions we've taken to improve the foundation of the brand, including the realization of higher AUR and stronger margins are sustainable over the long term as revenue continues to inflect. We're continuing to improve on the momentum we've built to drive market share Gain at sustainably high margins in fiscal 2022 and beyond. Now moving to Kate Spade. Throughout the year, the brand delivered consistent improvement on the top line, resulting in fiscal year 2021 sales growth of 3% compared to prior year for a 13% decline compared to pre pandemic revenue levels. In the most recent quarter, sales increased 95% versus prior year and were 4% below fiscal year 2019.

Speaker 2

Direct sales in the 4th quarter, excluding wholesale, increased on a 2 year basis. In addition, for both the quarter and fiscal year, operating income rose meaningfully with margin expansion compared to prior year on both the stronger gross margin and SG and A leverage. We were pleased with Kate Spade's progress across its growth strategies, which highlight We're making to build stronger connections with consumers. In fiscal 2021, we crystallized the brand's purpose, returning to its roots of unique and best in class storytelling and fulfilling its promise as a lifestyle brand representing joy, optimism and color. During the most recent quarter, we continued to reengage lapsed customers in an increasing rate as we reactivated 550,000 customers through our North America digital channels, an increase of nearly 35% compared to prior year, demonstrating This was evidenced by our viral Happy Dance campaign on TikTok, which has over 11,000,000,000 views and counting.

Speaker 2

3rd, we reenergized our core handbag offering by introducing innovative and universal brand elements. We're seeing traction in leather with the introduction of the knot, In addition, our new signature branding, the Spade Flower, continues to perform, while the reimagined SAM and Nylon has outpaced expectations. These platforms represent strong foundations for future growth. 4th, we leaned into our digital strength delivering approximately 35% growth Compared to prior year across our e commerce channels, reaching 35% of sales for the fiscal year. This growth was driven by both The acquisition of nearly 1,400,000 new customers through our North America digital channels, as well as the engagement of existing customers.

Speaker 2

5th, we improved profitability by focusing on acquiring, reengaging and retaining customers to drive top and bottom line growth. Through the use of data, we adjusted our assortment and pricing strategies, which resulted in approximately 40% lower SKU count and disciplined promotional activity. This ultimately drove overall handbag AUR growth, which increased mid single digits in both the Q4 and for the fiscal year. Finally, we've continued to focus on talent and culture. This year, we reorganized our creative structure with the formation of the cross functional ideation studio, Standing across our brand creative, design, merchandising and marketing teams.

Speaker 2

This is increased collaboration and cohesion to drive more impactful and consistent story As we head into fiscal 2022, we are building on the strong foundation we've established with a goal to deliver profitable and sustainable global growth. To achieve this, we will maintain a consumer centric approach across all aspects of the business, amplify recent product introductions, While continuing to build out our core handbag platforms, continue to engage newly acquired, reactivated and existing customers To drive higher lifetime value, drive brand heat through marketing focused on our Kate Spade community, particularly in social channels, Maximize lifestyle positioning by strengthening the foundation of ready to wear, jewelry and footwear and improve the global omni channel experience and drive continued growth in digital. Overall, we are pleased with Kate Spade's execution and reflected in Kate Spade's outperformance versus internal expectations, reinforcing our confidence in the brand's potential. Kate Spade is a unique yet universal brand and our teams are galvanized around driving our clear strategy. We continue to believe runway ahead in our ability to achieve $2,000,000,000 in revenue and enhanced profitability in the future.

Speaker 2

Turning now to Stuart Weitzman. Throughout the fiscal year, the brand progressed on its growth strategies. Specifically, we continued to renew the brand's reputation for Fit, comfort and quality by listening and responding to customer needs. During the Q4, we were pleased to see a significant increase in demand for dress styles As much of the world began to reopen and events and in person socialization returned. 2nd, we grew our key categories by building Strength in boots, booties and sandals through fashion innovation, highlighted by the continued success of our iconic fifty-fifty Land and Nudis families, which brought in new and younger customers.

Speaker 2

We also expanded the casual assortment, including a broader sneaker offering in the recently introduced on trend jelly style. At the same time, we dramatically simplified the product assortment with SKU counts declining approximately 45%. 3rd, we focused our distribution on markets and channels of greatest opportunity to create a foundation to return to profitability as revenues inflect. This included the exit of unprofitable markets across the globe and rightsizing of the fleet in North America. At the same time, momentum continued for our China business in fiscal 2021, with revenue on the mainland increasing over 35 China remains an important area of long term opportunity for Stuart Weitzman at structurally higher margins.

Speaker 2

4th, we strengthened our relationship with wholesale partners by providing relevant products and faster and more consistent execution. As previously shared, we reentered 90 Nordstrom doors in the year, fueling North America wholesale revenue ahead of pre pandemic levels in the Q4. Finally, we made progress in establishing a robust digital presence and drove approximately 30% e commerce growth during the fiscal year, including continued strength in Q4 even as store trends improve. In fiscal 2022, our overarching goal is to return to profitability. We will recruit and engage customers through products that spark desire with a focus on must have launches featuring icons, key items and capital collection as well as bright bright brand heat with a digital first drumbeat of relevant romantic storytelling Fuel continued growth in China, including an expanded footprint and further investment in digital elevate the omnichannel Customer journey, including delivering a best in class digital experience and accelerate wholesale partnerships with an expanded footprint in key accounts globally.

Speaker 2

Overall, I'm pleased with the progress we've made at Stuart Weitzman and we remain focused on restoring the brand's profitability. In closing, we are focused on driving our next phase of growth supported by our clear strategy, compelling brands and differentiated platform. Although the environment remains volatile, we see a strong consumer who is ready to shop and continuing to engage with our brands. We entered fiscal year 'twenty two with a solid foundation, improved capabilities and increasing momentum. From this position of strength, we are confident in our ability to win with consumers and capture market share, accelerating growth and profitability across our portfolio long term, enhancing value for all stakeholders.

Speaker 2

With that, I'm pleased to welcome Scott Rowe, who many of you know, to discuss our financial results, capital allocation priorities and fiscal 2022 outlook. Scott?

Speaker 3

Thanks, Joanne, and good morning, everyone. I'm thrilled to be with you today after joining Tapestry just a few months ago. While I'm still relatively new, I can already see that this is a truly unique company with Strong and engaged talent, great brands that are well positioned in attractive market spaces and a distribution model that allows us to directly own our consumer relationships coupled with advanced digital and analytics capabilities. As we move forward, my focus is to work alongside our management team To align business and financial strategies to drive sustainable long term growth, which profits shareholders and all stakeholders alike. Looking back at fiscal year 2021, it was a transformational year for the organization, as Joanne mentioned.

Speaker 3

We effectively executed our acceleration program against a difficult backdrop, created a foundation for sustainable growth. Specifically, we increased the penetration of our margin accretive digital and China businesses, which led overall growth in the fiscal year. We expanded gross margins primarily through higher AURs driven by lower levels of promotional activity. We grew operating margin by 300 basis points versus FY 'nineteen, reaching peak levels with Tapestry. This despite significant investments in talent, digital capabilities and marketing, which were more than funded by gross profit gains and $200,000,000 in gross SG and A savings delivered through the acceleration program.

Speaker 3

And we further strengthened our financial position Through tight inventory management and a reduction in debt levels, while achieving $1,200,000,000 in free cash flow resulting in an ending cash position of approximately $2,000,000,000 Turning to the details of the 4th quarter, total sales rose 126% versus prior year on a 14 week basis or 113% on a 13 week basis, outpacing pre pandemic levels, an important milestone. These results were led by strength at Coach, while Kate Spade and Stuart Weitzman delivered material sequential improvements in trends. By region, North America led the overall growth, Rising approximately 150% versus FY 2020 and a high single digit percentage versus FY 2019, fueled by digital and a continued improvement In our brick and mortar businesses. In Mainland China, our strong momentum continued as revenue increased approximately 60% on a 1 year basis and over 40% compared to pre pandemic levels. Across the balance of Asia, sales rose materially compared to the prior year, They'll remain below pre pandemic levels, but notable pressure in Japan given the continued state of emergency and lack of tourist sales.

Speaker 3

And Europe, While a small portion of our total sales experienced a sequential improvement in trends on both a 1 year and 2 year basis as lockdown measures were lifted. And while revenue remained well below fiscal 2019, given the lack of tourist travel, our local demand did rise in the quarter. By channel, we maintained strength in digital, which grew more than 35% compared to prior year, reaching 30% penetration. That's 3 times 2019 levels. While our stores remain pressured, slightly better traffic drove a sequential improvement for the channel.

Speaker 3

And in wholesale, while revenue remained below FY 2019, trends improved with particular strength in duty free growth in China. Moving down to P and L, we realized another quarter of overall gross margin expansion compared to prior year and FY 2019 With all brands exceeding expectations, we continue to successfully execute our strategy to maintain price discipline, Reduce SKU caps and leverage data analytics to more effectively tailor our product assortment and marketing messaging to the consumer. As anticipated, SG and A rose significantly given the prior year's atypical comparison due to the impact of COVID-nineteen. On a 2 year basis, the increase in SG and A was attributable to higher marketing spend of almost $100,000,000 compared to Q4 2019 and an increase in our annual incentive plan given our outperformance this year. In addition, our expenses for the quarter included the $25,000,000 contribution Towards the endowment of the newly established Tapestry Foundation.

Speaker 3

Taken together, we achieved our 4th consecutive quarter of operating income growth And margin expansion compared to pre pandemic levels. Earnings per diluted share for the quarter was $0.74 on a 14 week basis Or $0.65 on a 13 week basis, a significant increase compared to the loss in the prior year and 7% ahead of pre pandemic EPS levels. Now moving to distribution. We continue to optimize our global fleet to prioritize profitability. For Tapestry, we closed a net of 59 locations globally in FY 2021, including 10 net closures in the 4th quarter.

Speaker 3

As compared to fiscal 2019 year end, we have closed a net of 90 locations across our brands. Turning to a discussion of our balance sheet and cash flows. We ended the quarter in a strong position with $2,000,000,000 in cash and last year and 6% below FY 2019, reflecting in part deliberate actions to reduce SKU counts and prioritize inventory current. And we generated $1,200,000,000 in free cash flow in FY 2021 versus $202,000,000 in the prior year and $518,000,000 in fiscal 2019. This included CapEx of $116,000,000 A decline of 44% versus prior year as we prioritize investments in high return projects, notably in digital, while tightly controlling overall spend and reducing our outlay for new stores.

Speaker 3

Now touching on our capital allocation priorities. First, we continue to prioritize investments in the business to support strong returns and long term profitable growth. 2nd, we're committed to returning capital to shareholders through both dividend and share repurchases. In keeping with this strategy, we're pleased to announce Today, a plan to return over $750,000,000 to shareholders. Specifically, the Board declared a quarterly cash dividend $0.25 with an anticipated annual dividend rate of $1 per share.

Speaker 3

Over time, our intent is to increase the dividend at a faster rate than earnings growth. We also expect to repurchase approximately $500,000,000 worth of stock in fiscal 2022 under our current authorization. Importantly, once we have more visibility into a normalization in the external environment, we expect over time to more aggressively return cash to shareholders. And finally, in keeping with our objective to reduce leverage, We expect to repay our July 2022 bonds totaling $400,000,000 at the end of this fiscal year. So when considered together, the dividend, share repurchase and debt repayment are intended to approximately equal our projected free cash flow in the fiscal year.

Speaker 3

And as Joanne mentioned, these actions demonstrate our confidence in the underlying strength of our business as well as our commitment to driving Total shareholder returns. Now moving to our fiscal 2022 outlook. Before touching on the specific details, it's important to note that the paradigm shift compared to just a year ago. Entering COVID, there was a macro demand And we took bold actions to adjust supply in order to preserve liquidity. As you can see in our just reported results, we were very successful in achieving our goals, While continuing to accelerate investments to drive increasing momentum in our brands.

Speaker 3

Today, we find ourselves in a dynamic where the consumer demand backdrop is strong, While supply chain remains challenging, so I want to emphasize the underlying strength and trend of our business and separate that from the uncertainty in the macro environment, primarily due to COVID related impacts, which are largely out of our control. Therefore, the outlook we're giving you is a reflection of what we know as of today. It's a point in time. While we have visibility into the risks that we see on the horizon, we're not trying to predict that which is unknowable. We have taken the position that we'll be aggressive on protecting the momentum of the business by securing significant expedited deliveries at an additional cost in order to mitigate the impact of supply chain disruptions, at least through the holiday period.

Speaker 3

Further, we'll continue to increase AUR, as prices are levered to counter some of the additional cost pressures. Of course, we'll continue to monitor the impact of the new developments on our outlook over time. Now turning to the details of our FY 'twenty two outlook. Please note that all growth rates as compared to prior year are on a comparable fifty 2 week basis. We expect revenue to increase at a mid teens rate versus FY 2021, resulting in approximately 6 point $4,000,000,000 in sales, which would mark a record for the company.

Speaker 3

This includes the expectation for a continuation of strong growth in digital and Greater China, as well as improving global trends in stores. While we expect stores to show improvement, revenue is currently planned to remain below pre pandemic levels. Turning to gross margin, we expect to sustain the company's strong margins through continued AUR improvements and lower promotional activity. Our outlook also incorporates the expectation for GSP's renewal for the retroactive benefit in the 2nd fiscal quarter, which is currently planned to partially mitigate the negative impact associated with higher freight costs currently embedded in our plan. Touching on SG and A, We expect expenses to grow relatively in line with sales for the year.

Speaker 3

We continue to estimate that we will realize approximately $300,000,000 Structural gross run rate expense savings, including $100,000,000 of incremental savings from the prior year. We are utilizing these savings to fund investments in the business, including $50,000,000 of planned higher marketing spend, which is expected to represent approximately 7% of sales in fiscal 2022, up roughly 75% Or 3 full percentage points compared to FY 2019. We're also investing in our teams, adding talent to growing areas of the business such as digital, And we're focused on continuing to retain and develop these strong teams as evidenced by our recently announced commitment that all U. S. Tapetree employees will earn at least $15 per hour.

Speaker 3

Operating income is expected to increase in a mid teens rate, resulting in operating margin modestly ahead of prior year and an increase of over 300 basis points versus 2019. Net interest expense for the year is expected to be $65,000,000 and the tax rate is estimated at 18.5% assuming a continuation of current tax laws. Weighted average diluted share count is forecasted to be in the area of 283,000,000 shares, Approximately even with last year, with share repurchase activity expected to offset dilution. We anticipate EPS to be in the range of $3.30 to $3.35 reflecting leverage to the bottom line. CapEx for the year is projected to be about 2 $20,000,000 We anticipate approximately 40% of the spend to be related to store development, primarily in China with the balance dedicated to our digital and IT initiatives, including the initial investments related to build out our new distribution center.

Speaker 3

Specifically, As our digital business continues to grow, we've recognized the opportunity to sharpen our focus on the consumer by expanding our distribution capabilities. We recently signed a lease for a new distribution facility based in Las Vegas, which we believe will allow us to better serve our customers in the western part of the United States. Finally, we expect inventory levels to be up meaningfully throughout the year as we pull forward receipts to match strong demand And face elongated lead times from supply chain pressures due to COVID disruptions. Given the dynamic environment and last year's atypical comparisons, We again expect significant variability by quarter. Revenue growth versus prior year is expected to be front half given relatively easier compares due to lapping COVID impacts with the Q1 forecasted to increase more than 20%.

Speaker 3

Earnings growth in the first half is expected to be somewhat pressured due to incremental SG and A investments along with last year's unusual compare, including lower expenses due to compensation reductions, lease abatements and the timing of government assistance. That said, we still expect EPS growth in the first half versus prior year, particularly in Q1. So in closing, we drove strong results in FY 2021. Our significant progress is a testament to the successful execution by our passionate teams, The power of our brands and our competitive advantages, including our differentiated platform. The bold and deliberate actions We've made under Tapestry's acceleration program that transformed our organization.

Speaker 3

These changes are foundational and will continue to be a meaningful point of difference As we look ahead, with regard to those things we can control, we're continuing to build momentum And we are confident in our ability to leverage the solid foundation to drive sustainable top and bottom line growth across our portfolio of brands. And with respect to those things we can't control, we've taken aggressive actions to protect our strong momentum and mitigate those macro challenges we see today. Our conviction is underscored by our capital allocation actions, highlighting our optimism for the future and commitment to enhancing value for all stakeholders. I'd now like to open it up for Q and A.

Operator

And we will take our first question from Bob

Speaker 4

My question I have, generally, Joanne, you mentioned improving consumer demand And continued momentum into FY 2022, what signs give you confidence in the strong trajectory that you guys do have Thanks. Julien, I'll start again.

Speaker 5

I think your mic is off.

Speaker 2

I'm sorry. Can you hear me?

Speaker 4

Yes. Yes, I can.

Speaker 2

Okay. Sorry about that, Bob. You would think we get the mute button down by now. Good morning. I would say that our confidence begins with the standout results we delivered this fiscal year.

Speaker 2

Fiscal 2021 was a year of Successful transformation for the company and it was capped by a strong Q4. We saw sales trends improve every quarter of the year and exceeded pre pandemic levels in the Q4. For the year, we delivered record operating income and record operating margin as a multi brand company despite the challenging backdrop. And we see momentum building as we enter fiscal 2022. And you can see that in the outlook we shared.

Speaker 2

We expect to reach a record level of revenue For fiscal 2022 at $6,400,000,000 on mid teens growth. And we see further untax potential longer term, particularly in digital in China. And those represent sustainable top and bottom line growth vehicles going forward. I think importantly, we're investing in long term growth drivers. We're just getting started.

Speaker 2

As Scott said, we're operating from a position of strength as a fundamentally different company today. We're reaching Through our acceleration program, we took bold actions and we're now reaching new customers in new ways as a more agile organization. And the actions we took not only delivered a strong year, but positioned us to thrive on the other side of the pandemic. And we're better equipped as a company, I would say, to pull these levers growth levers going forward. We have new capabilities to engage consumers and drive higher lifetime value.

Speaker 2

And we have 4,000,000 new consumers that we acquired in the last year alone who are increasingly younger. We have We're delivering really strong gross margins at increasing AUR, showing pricing power in our brand. And we have a direct to consumer model, building strength in digital in China with significant runway ahead. And Scott also mentioned, we have a strong team and we continue to invest in our team to secure that competitive advantage. So I would say overall, we're operating from a position of strength.

Speaker 2

We're building momentum and we see significant runway ahead for all of our brands.

Speaker 4

Great. Thank you very much. Good luck.

Speaker 2

Thanks, Bob.

Operator

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

Speaker 4

Hey, thank you. Good morning. Congrats, everyone. I guess, Scott, welcome. Two questions for you, one quick one and then one more higher level.

Speaker 4

Just on the Q2, you talked about the retroactive GSP benefit. Can you quantify that for us so we know what to expect on the gross margin line? And then again, bigger picture having you join TPR, clearly, we all know your background from VF, portfolio optimization. I'm kind of curious when you look at TPR, do you see some of the same opportunities that you had in your prior company? Do See opportunities for creating a more efficient portfolio, potential divestitures.

Speaker 4

And then again, when you think about the M and A platform here Do you see similarities over the next couple of years that you can capitalize on? Thank you. Hey, Ike. Good to hear from you. Wow, that was quite a question, man.

Speaker 4

So first of all, tactically, GSP. Yes, it's about 50 basis points from a margin standpoint. So and you're right, we I said in my prepared remarks, 2nd quarter. So that means A little bit of a drag in the Q1 as you're not seeing that take effect. And our thought is that And hope is that it will be reestablished.

Speaker 4

I think 10 out of the last 14 times this has come up, it's been approved. We have solid basis for making that assumption, but it's not done until it's done. So we wanted to give you all visibility You know, observations about Tapestry, I'm going to take it a little higher level. I think, First of all, what a great team. I've been so impressed by the people and the capabilities.

Speaker 4

This is a team that has taken bold Over the last, we haven't wasted the pandemic and the focus around building those foundational platform capabilities is impressive. You see it in the numbers. You see evidence of that. And we've got 3 great brands that are Focused on attractive market spaces and we got a lot of work to do. So over time, I see I laid out capital allocation priorities, which are investing in our great brands.

Speaker 4

That's our highest return today. Number 2, the dividend, you saw we reinstated that and Returning cash to shareholders, that's where our focus is right now. Longer term, who knows what the future brings. But We've got really exciting opportunities with high returns right in front of us and that's where we're going to be focused. Thanks, Ike.

Speaker 2

We will

Speaker 6

take our next question from Erinn Murphy with Piper Sandler. Your line is open.

Speaker 7

Great. Awesome. Nice to be back in the Q and A. So welcome, Scott, and I can't wait to see the MAM staff that you'll be supporting next time we all travel Heather, I guess it's going to be an upgrade. So I guess my question is on the Kate Spade margin.

Speaker 7

Really good to see some of the green shoots that you have there now and the expansion relative to 2019, but they still trail the Coach And by 20 percentage points. So just curious, I guess, maybe Joanne and Scott for you, how you see that evolving over time? Really, what's the potential with the Kate Spade margin profile And then if I can just have a clarification from Todd. The AUR for Coach, I believe you said was up high single digits. How did that compare outlet versus full price in the quarter?

Speaker 7

Thank you.

Speaker 2

Thanks, Aaron. This Joanne, I'll jump right into the Kate Spade question. We are really pleased with our execution in fiscal 2021 and we made important progress. You noted the progress On margin, but we made important progress across the foundations of the brand. I'll just call out a few highlights.

Speaker 2

Kate is highly digitally penetrated. We showed continued strength in the digital channel. It now represents nearly 35% of sales The brand, we're acquiring new customers, 1,400,000 new customers during the year, and we're reactivating customers at a more frequent rate. So 550,000 customers reactivated, a 35% increase from last year. And some of those customers are deeply lapsed customers.

Speaker 2

So when we think about the Kate Spade brand and engaging consumers and really building rebuilding the brand, We made really important progress. And I would say that partly is due to the fact that we've re energized our core handbag offering. Liz and team have worked really quickly to build a stronger, more solid platform. We're seeing traction across our leather platform with the knot, Our signature platform we've talked about with the spade flower and our nylon platform with the reimagined sandbag. And What we're seeing is, the customer reacting to those changes in our assortment with increased global handbag AUR.

Speaker 2

So with handbag AURs moving higher, that's another sign of brand health. So longer term, we continue to have and see a path for Kate Spade to build to a $2,000,000,000 brand. And to your point, at significantly higher margins. We see a path to high teens margin opportunity. And as you compare versus Coach, Kate Spade is a true full lifestyle brand and there are some differences to the Coach business today.

Speaker 2

Kate Spade has, as I said, more lifestyle categories. And right now, as a brand, it's centered more in North America and Japan, and doesn't have developed an international business. So we see those as opportunities moving forward.

Speaker 5

And just picking up on Coach, we were really pleased with the continued AUR growth we saw in handbags this Quarter. In fact, it was the 9th quarter in a row that we increased our AUR and It really was led by North America. And we don't disaggregate AUR by channel, but I can tell you both channels Had increases in AUR and we feel really pleased with what we're accomplishing and what we can accomplish in front of us.

Speaker 1

Thank you, both.

Speaker 6

And we will go next to Mark Altschwager with Baird. Your line is now

Speaker 8

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

Speaker 4

Yes. We don't break down the guide specifically by brand, but obviously with, by the way, record earnings or Record top line estimated $6,400,000,000 and with Coach being roughly 3 quarters of the total, you can assume that Very strong top line growth in Coach and really sequential across all Right. We're seeing the strong improvement that we saw last year continuing into this year, So growth in all. And I just note you talked about top line, but we're also returning to profitability on Stewart next year is our expectation. So Really, really strong continued momentum across all, but of course, Coach just while mathematics is driving the lion's share

Speaker 8

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

Speaker 8

Thank you.

Speaker 4

Yes, sure, Mark. We've talked about next year that we're consolidating these record margins and even Expect slight improvement next year. And as it relates to SG and A, so that's the overall picture. As it relates to SG and A, remember what Joanne said, we're Saying it's about flat or in the neighborhood of last year as a percentage of sales. But underneath that, there's a lot going on.

Speaker 4

We continue to invest in those platforms and growth drivers for the long term. Joanne mentioned marketing, I had it in my prepared remarks, our digital capabilities, analytics, etcetera. But underneath that, the acceleration And the savings according or attendant to that have given us the ability to see leverage elsewhere. So some of these things are certainly variable, right? I mean, we can we flex and we do based on the data and analytics And the insights that we see, where you lean into marketing where we see that we have returns, certainly those are choices that we can make.

Speaker 4

And we do have some optionality and variability in the model. But I got to tell you, We're seeing results from continuing to invest, creating that flywheel effect. And based on our confidence of reinvesting back in our business, It's our intent to continue to do so and as evidenced by the strong trend leaving the 4th quarter and leading The guidance we just talked about for next year.

Speaker 8

That's great. Best of luck.

Speaker 4

Thanks, Mark.

Operator

Then we'll take our next question from Oliver Chen with Cowen. Please go ahead.

Speaker 9

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

Speaker 2

Good morning, Oliver. Let me jump on that and then I'll pass it to Todd to get into the details of Coach. But as it relates to AUR, we've been really pleased with the AUR growth that we've seen across our brands in the past year. And we've been focused on implementing and embedding the structural changes in our organization to help us do that. We're getting closer to our consumer certainly, which is helping us deliver great Product that our consumers value and embedding data and insights into our processes more.

Speaker 2

But we're also leveraging data to better manage And you've seen that in the SKU count reductions we've made, and in the way we've managed inventory across the world, in an environment that has a Lot of choppiness to it. So, those are structural changes that we've made and they have proven benefits on AUR and gross margin expansion over the peer, and we expect that to continue. On your specific questions on Coach, I'll let Todd talk about the successes he's seeing.

Speaker 5

Yes. Thank you. We are really pleased with how we changed the brand Very materially over the last year plus, partly because of the acceleration program and Probably because we really changed the conversation with our customer from leaning in and the call to action being around price and promotion to move to value and value. And this has really fundamentally changed us and it has really increased our AUR. Our approach to how we merchandise is fundamentally different.

Speaker 5

We have reduced our SKUs, But we've leaned into ICON and Stuart Beavers and the creative team have been getting data from the customer and really leaning in. So you mentioned Tabby. Tabby is a brand is a collection we launched in June of 2019. By February of 2021, it would normally have been out of the mix. Instead, we doubled down.

Speaker 5

We relaunched it with Pillow Tabby became the number one bag. You saw this month, we've launched Soft Tabby and then we're going to see Pillow Tabby reemerge. So having these iconic styles that are not so pressured by Short selling window really materially changes our outlook. And then regarding lifestyle, One of the opportunities I think we have is, while we call it men's, men's product is an all gender product often. And one of the things we recognize is we can do better, not necessarily merchandising it exactly the same way we merchandise Historically women's product.

Speaker 5

So you'll see us mix in more outerwear, more cut and sew opportunities. And it is really resonating with our customer. And then finally, I'm a big believer and have been for many years in the opportunities that we have with footwear. And you're seeing us win in those categories, both in our own stores, Retail and outlet. But even in wholesale, which is obviously a very competitive environment, but is the most democratic environment and what we're winning there, we know we actually are winning in the category.

Speaker 9

A new customer acquisition, Joanne, you called it out and it's great to see that. What's your hypothesis for what might be really important to retain The new customer first, how that relates likely to innovation and what you need to do to engage those new Thank you. Best regards.

Speaker 2

Thanks, Oliver. Driving engagement requires consistent innovation, innovation and product. We're learning a lot about those new And we're also engaging them in different ways. And we're meeting our customers where they are and we're better capable to meet those customers and engage them with our data and analytics capabilities, with our increasing presence on social media and the innovations we're bringing to life there. And at the end of the day, it's about delivering great products.

Speaker 2

So taking those insights And really understanding our consumer at a deeper level. And that's a lot of the foundation that we've built this past year is how do we really truly understand our Customer or consumer and embed that consumer and those insights in the product development process where our creative bring their terrific product and creativity to bear against things that consumers value. And our focus moving ahead is With all this new customer acquisition, driving higher lifetime value with our consumers going forward.

Speaker 4

Thank you.

Operator

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

Speaker 2

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

Speaker 2

I'll start and maybe steal all of Scott's Under here, but that has been we think stores matter. And as we focus on the consumer, it's about providing a seamless experience for our consumer regardless of where they choose to shop. And we've been incredibly successful at building a digital business and meeting our Consumer on digital platforms, but the store platform and that physical touch point is still important. And if you go back a year, what we said is or more than a year now, We said, while stores are still important, we have higher profitability expectations for our fleet and productivity thresholds. And we've taken bold actions to structure our fleet in that way, but we're also investing to make sure that that represents The right experience and the right physical touch point, we're adding omnichannel capabilities for our consumers.

Speaker 2

And that's paying off. It's paying off on the top line, but it's also because we've seen incremental growth in our brick and mortar fleet, as the world sort of recovers from the pandemic. But what we've also seen importantly, And here's where I'm feeling a little bit of Scott's thunder is we've seen operating margins of our store fleet actually above pre pandemic levels even right now on pressed volume and a depressed traffic. So, Scott, I don't know if there's anything you want to add, but I'll throw it to you.

Speaker 4

It's pretty comprehensive. The only it's really impressive. I just have to compliment the team on at the same time rationalizing and I've even had the top line being down a little bit. The quality of the underlying remaining fleet and the profitability through Pandemic is pretty impressive. The other thing I would just say is, as we think about the omnichannel journey that we're on, remember Joanne's Comment $1,000,000,000 more in digital at the same time, we're rationalizing getting more profitable in brick and mortar.

Speaker 4

We're reinforcing the omni Experience and added, we're at $1,600,000,000 of sales, that's up $1,000,000,000 in 2 years. So It's not just one channel and increasingly it's how we meet that consumer where she is and it's pretty impressive From my perspective, seeing how we've managed both of these channels, increasing profitability and at the same time finding

Speaker 5

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

Operator

We will take our next question from Michael Binetti with Credit Suisse. Please go ahead.

Speaker 8

Yes. Let me add my congrats, Scott, nice to hear you with another great team here. I want to I guess, Scott, I'll ask you On Slide 17 here in the deck, you mentioned improving visibility could let you more aggressively Return cash to shareholders. I'm just curious, maybe a thought there early on here is how you think about leverage in the business, given what we know about the Very, very strong cash flows of this business pre pandemic and that is improving now. I wonder how you think what the appropriate level is early on?

Speaker 8

And then I'd also be curious on the SG and A guidance, just a follow-up with Mark's question earlier. This will be the 1st year in a more normal More normal after

Speaker 9

you did a big reset to

Speaker 8

the structure of SG and A last year. So I know there's a lot more variability in there. After you took some corporate costs You're generating really good ROAS on the marketing investments you've made.

Speaker 5

It sounds like you still have good growth from high

Speaker 8

margin drivers like AUR, cape margin targets, High teens over time versus the 10% exit rate this year. So I'm just wondering,

Speaker 4

it seems like a lot

Speaker 8

of good margin drivers in there. To the extent that we do see revenues Coming in above plan, how should we think about what flows through to earnings this year in an upside scenario for revenues?

Speaker 4

Yes. Well, first of all, Michael, good to talk to you again, as usual, very thorough and comprehensive on your insights here. So let's start with capital Allocation and how we're thinking about it. I think a little context first is important. First of all, Don't lose the message here.

Speaker 4

The reinstatement of the dividend, the reinstatement of the repurchase program, $750,000,000 intended return of cash is really a testament to our Underlying confidence in the business. So that I think that's the important message here. And if you think about the journey over the last year, Early on in COVID, given the massive uncertainty and demand issues, we took a lot of actions to protect liquidity, to Protect the enterprise with our rating agencies, bankers, bondholders, etcetera. There was a commitment on deleveraging and a glide path that we laid out. So the great news here is we're able to not only advance on that glide path and even be a little ahead of it.

Speaker 4

You heard us mention paying off the $400,000,000 of debt at the end of this fiscal year, Which is our intent and reinstate the dividend. And we still have a strong balance sheet and we still have ample cash. We're in between these two periods, right? We see much more confidence and that's why we've stated the Aggressive return to shareholder cash or returning cash To shareholders, but at the same time, we think it's prudent to take to keep a little elevated cash position given the uncertainty of the environment. So my comment Was really intended to signal that while we're definitely in a more confident position, we're engaging in repurchases and dividends.

Speaker 4

We're still maintaining an elevated buffer until we get better line of sight on what COVID, delta variant, etcetera, the uncertainty, How that evolves. Once we have that confidence, there's no reason to that we wouldn't be go back to kind of normal levels And we have opportunities to be even a little more aggressive from a return of cash to shareholders. So that was the intent, right, to say we're not going ditch to ditch here, right? We've made progress, but we want to watch the uncertainty. As it relates to margin flows, again, I'd point you back.

Speaker 4

SG and A, the picture there is the tale of 2 things. We have the benefits around acceleration, which are providing leverage throughout P and L will allow us to reinvest. Obviously, in a very in a we have variability and we're making choices. Those choices are Based on the insights and data that we have and we've seen it pay off, right? So that's why we've given guidance.

Speaker 4

We do expect to expand margins next year. Should we get more upside? Would some of that flow through? It depends. Yes, likely.

Speaker 4

But we're also going to look at where we can lean in and to advance our platforms and capabilities for the future. But we expect expanding margins and you should expect that some of that Flow through as we see upside.

Speaker 8

Thanks a lot. Take care, guys.

Operator

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

Speaker 6

Good morning. Thanks so much and thanks for taking the question and Scott welcome. I wanted to ask 2 quick questions. First was, Joanne, Can you talk to the planned step up in marketing investments this year, where those investments will be most focused and And then for Scott, I wanted to get your thoughts on industry wide supply chain and How is Tapestry managing through some of these challenges? And can you provide any additional color on the impact of these industry wide challenges that are embedded into your margin outlook for the fiscal year.

Speaker 6

Thank you.

Speaker 2

Thanks, Brooke. I'll start with our marketing spend. And I would say that we as part of our transformation, we have fundamentally restructured our P and L with a focus on We did that really with a focus on how we were going to engage consumers and needed to engage consumers in sort of the new world of retailing in a post Pandemic era. And we've made significant changes within the P and L. And Scott called it out in his prepared remarks, but the 3% higher investment in marketing.

Speaker 2

And we've done that with confidence because, with our new data and analytics capabilities, we're better able to measure the return on our on our marketing investments. And our intention is to structure our business so that we can continue to engage consumers across All of our brands and create that and continue to create and tap into growth. And we have seen tremendous traction over the past Based on these capabilities, the investments that we're making in marketing are across the funnel. And I think that's important to know too, because as we get better at measuring our returns, we're getting better at measuring returns across the full funnel. So it's not only performance marketing, but it is about Brand building and measuring our returns on those brand building investments we're making.

Speaker 2

Of course, digital is a priority. We're better able to engage consumers On many digital platforms and we're driving innovation there. We've called out the work we've done on live Streaming and TikTok with even organic and viral videos on TikTok. So we're continuing to innovate. We're investing across the funnel.

Speaker 2

And we think that is an important enabler as we look to unlock future growth.

Speaker 4

And Brook, as it relates to elevated costs that we're seeing, we are seeing some elevated costs primarily due to expedited freight, air freight essentially, as we absorb and deal with the supply chain disruptions that we see. And our outlook reflects additional airfreight really through the holiday period, which is as far as we can see in terms of getting the deliveries and trying to maintain the strong momentum we have. You heard Joanne say it, right? The great news here is Demand for our brands is strong. And while we see some disruption, we're taking bold actions.

Speaker 4

We got out ahead

Speaker 9

of this a little bit

Speaker 4

in terms of securing as much supply as we can to keep that strong momentum going. Yes. We talked about gross margins being roughly equal to this year. And that means we're consolidating on record high gross Margins up 300 basis points versus a couple of years ago. And underneath that, we have some elevated costs related to expedited Right.

Speaker 4

We also see the continuing build in AUR pricing leverage less discount and the general trend of the business, which is helping us offset that. So Those are the puts and the takes. I would say though by quarter, it's not necessarily going to be a straight line. We're going to see As some of this freight cost turns into the P and L, it may not come exactly matched with some of the price increases, but over time for the year, that's

Operator

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

Speaker 4

Hi, good morning. This is Kevin Inan on for Matt Boss. Congrats on the strong quarter. I wanted to ask about your inventory positioning, not flat As well as to the prior year, I think that's a significant improvement versus the Q3. I guess, how do you feel about your ability to Demand into what is expected to be a pretty robust back to school and holiday season for retail given some of the disruption that we're seeing in the supply Yes.

Speaker 4

Kevin, maybe I'll take that one or at least start. So first of all, yes, we had a great performance from an From an inventory standpoint for all the reasons that have already been set and down versus the last couple of years, this is part of A very focused effort in simplifying, reducing SKUs and seeing real progress there. And it's one of the factors for for cash flow. But as we look to next year, we are going to see elevated inventory positions starting in the Q1. And the reason for that is twofold.

Speaker 4

Number 1, just supporting the growth of the business. Number 2, we're expediting, As I said, what we can to bring in inventory, whether it be even by air or by sea, we're getting inventory in as fast as We can reasonably do in order to keep the momentum of the business. And those factors together are going to be a slightly elevated Increase in inventory, but I have no concerns about this at all. This is inventory that is supporting the trend of the business. And Frankly, if we could get more, we probably would.

Speaker 4

So you're going to see that dynamic play out. It's not significant, but Understand what's really driving it. And you asked about our ability to chase. Listen, we're doing what we can. I just told you expedited airfreight, We're looking to I think we were quick to get in front of our suppliers and we've secured what we can.

Speaker 4

To the best of our ability, we will chase. It's going to be a difficult environment to chase, frankly, given the dynamic in the short term. But we feel good about All the levers that are in our control to set us up as well as we can.

Speaker 5

Yes, that took the words out of my mouth. I would be happy to get whatever we can. We feel really, really good about our holiday offering. And again, going back to what we said before, Our iconic styles really diminishes that sort of markdown risk that you think about in our space. And We feel exceptionally good about what we have coming and our ability to respond because again, the demand is there.

Speaker 5

We're seeing the demand. And that is the most important thing in our industry. And now satisfying that demand in the ways that our customer wants Whether that's brick and mortar or digital is, how we're going to go about capturing it.

Speaker 4

Thanks very much.

Operator

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

Speaker 2

Yes. Thank you, everyone, for joining us this morning and hanging in there through our Technical difficulties, fiscal 2021 was a transformational year for Tapestry, and I want to extend a huge thanks With a proven track record of success and we have increasing conviction in our ability to accelerate top and bottom line growth with a focus on delivering for all Our customers, our teams, our community and our shareholders. But appreciate your interest in Tapestry. Have a great day.

Speaker 6

On behalf of our client, I would like to thank you for joining. This concludes our program.

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Earnings Conference Call
Tapestry Q4 2021
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