Tapestry Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 18, 2022

There are 11 speakers on the call.

Operator

Good day, and welcome to this Tapestry Conference Call. Today's call is being recorded. Please note this call may be recorded. 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.

Speaker 1

Good morning. Thank you for joining us With me today to discuss our Q4 year end results as well as our strategies and outlook are Duane Corvoiserat, 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 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 ks, the press release 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.

Speaker 1

Given that FY 2021 included an additional week in the Q4, the years referenced in today's 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. Joanne will begin with highlights for Tapestry and our brands. Scott will continue with our financial results, capital allocation priorities and outlook going forward. Following that, we will hold a question and answer session, where we will be joined by Todd Kung, CEO and Brand President of Coach.

Speaker 1

After Q and A, Joanne will conclude with brief closing remarks. I'd now like to turn it over to Joanne Perboisarat, Tapestry's CEO.

Speaker 2

Good morning. Thank you, Christina, and welcome, everyone. We drove standout results this fiscal year, delivering accelerated revenue and profit growth across our portfolio, a direct reflection of the vibrancy of our brands And the agility and ingenuity of our talented teams around the world. Our performance also demonstrates both our competitive advantages As well as the success of our strategic growth agenda, which we developed nearly 3 years ago to radically transform our organization to compete And utilizing our data rich platform to acquire new consumers and better connect with our existing customers. At the same time, our ambition required a commitment to leading in digital to complement our world class store operations, Recognizing the increasing importance of the omni channel journey, we also embrace the need to fundamentally pivot, driving efficiencies in many areas of the business to support brand building and high return investments.

Speaker 2

Overall, we had to be more agile, while doubling down on the innovation we bring to consumers at every touch point of our brands. As we crystallized our vision, which we aptly named the acceleration program, we could have never predicted the ways the external environment would change With the onset of the COVID-nineteen pandemic, although this profoundly altered the world around us, it reaffirmed our strategic direction. And with consistent execution, we emerged a stronger company. Through an unwavering focus on the consumer, we acquired million new customers in North America alone over the last 24 months, including approximately 7,700,000 new customers in fiscal 2022. Importantly, we have seen these new customers transact at higher AURs and they have returned to the brands with higher frequency.

Speaker 2

At the same time, we've increased retention rates and continued to reactivate lapsed customers across brands, all of which has led to more active customers engaging with our brands at higher average spend. Next, we fueled significant growth in digital, which reached $2,000,000,000 in sales at accretive margins in fiscal 2022, More than tripled fiscal 2019 levels. We see runway ahead to further increase our e commerce sales, leveraging our established capabilities online. In addition, we grew AUR, highlighting the strength of our brands and the increasing traction of our product offerings through innovation and craftsmanship. This growth was also supported by a 40% to 50% reduction in SKU counts And a significant pullback in promotions as we utilize data and analytics to enhance our go to market strategies.

Speaker 2

Overall, these accomplishments contributed to Tapestry reaching record annual revenue of $6,700,000,000 in the fiscal year. This performance underscores the power of our globally diversified business model in the face of a challenging backdrop. In the back half of our fiscal year, while our operations in China were materially impacted by COVID related disruptions, Outperformance throughout the rest of the world led by North America drove strong top line growth. Our results For the year, we're also fueled by gains across our portfolio with each brand delivering double digit sales increases in the fiscal year. And we achieved accelerated growth versus fiscal 2019 despite facing meaningful supply chain headwinds that required us to adapt to meet growing demand for our brands.

Speaker 2

At the same time, we have transformed our business model, realizing $300,000,000 in run rate expense savings, which helped to fund our growth initiatives, including a significant step up in brand marketing, which reached 8% of sales, Doubling from fiscal 2019. Overall, we drove earnings growth 35% ahead of pre pandemic levels And we utilized our robust free cash flow generation to return $1,900,000,000 to shareholders in fiscal 2022 alone. Importantly, we also made significant progress on many of our corporate responsibility commitments in fiscal year 2022. We took bold action through our newly created Tapestry Foundation, becoming a founding partner of FIT's Social Justice Center In addition, we hired our 1st Chief Inclusion and Social Impact Officer, and we were a signatory of the open to all's Mitigating racial bias in retail charter, underscoring our commitment to build a company that's equitable, inclusive and diverse. Overall, we've made tremendous strides forward under our acceleration program.

Speaker 2

I'm confident in the foundation we've built, which positions us to continue to be agile In an ever changing environment, as we remain focused on moving at the speed of the consumer to drive sustainable growth across our brands for years to come. Now turning to the highlights across each of our brands, starting with Coach. In fiscal year 2022, we delivered 18% top line growth while driving momentum with our existing customers. Importantly, we achieved this while delivering strong operating margin of 30%. This speaks to the heightened level of innovation we're bringing to consumers, underpinned by consistent execution and reinforcing Coach's significant potential ahead.

Speaker 2

For the Q4, we achieved a sales increase of 8% compared to prior year, including 14% growth in North America By advancing our strategic initiatives, first, we delivered a focused and compelling product assortment across categories. Our core families of Cabby, Willow, Rogue and Field, which have become pillars of our assortment, continued to resonate with consumers as we fuel innovation to maintain the relevance and emotional appeal. In Rogue, we added new shapes, including a In addition to the TAVI expansion in men's, we delivered outsized gains overall in the men's category as well as across our lifestyle assortment, specifically footwear. Going forward, these will be important growth vehicles for Coach by increasing brand heat and top line momentum to drive customer recruitment, Purchase frequency and overall basket size. Touching on AUR, while we delivered an increase for the year, we saw Importantly, we remain confident in Coach's pricing power going forward and see further AUR opportunity in fiscal 2023, helped in part by broad ticket increases, which began in August.

Speaker 2

2nd, we continue to infuse data into our decision making To ensure we're meeting the needs of the consumer, while driving efficiencies in our go to market strategies. To this point, Through product and concept testing as well as predictive analytics, we delivered a more focused and compelling assortment to consumers, resulting in higher sell throughs and increased SKU productivity. 3rd, we strengthened our consumer outreach to emotionally appeal Customers and drive engagement. Throughout the quarter, we utilized multilayer influencer strategies to amplify our offering and enhance our campaign, including on social platforms such as TikTok. Overall, we've driven stronger customer metrics, including the acquisition of approximately 1,000,000 new customers transacting in our North America channels.

Speaker 2

In fact, over the course of the acceleration program, Coach recruited over 8,000,000 new customers, which included a higher penetration of millennial and Gen Z customers. Importantly, during this timeframe, we've continued to engage with our existing customers, while increasing both overall spend per customer and purchase frequency. 4th, we invested in our digital business, which led to a low double digit revenue increase in the quarter. As of fiscal year end, e commerce represented nearly 30% of sales for the brand, a material increase compared to the high single digit penetration pre pandemic. Looking ahead to fiscal year 2023, we are capitalizing on the foundational changes we've made and are advancing our agenda to drive continued growth Specifically, we will focus on expanding our customer reach and increasing lifetime value by recruiting new customers with a particular focus on younger audiences, while increasing overall purchase frequency and retention rates.

Speaker 2

We will drive growth in our core leather goods offering, continuing to build equity in iconic families, Accelerate gains in men's and lifestyle categories, notably footwear and ready to wear, where we've been delivering outsized growth Invest in digital and China long term high growth opportunities for the brand and translate and infuse Coach's narrative into messaging across consumer touch points to reinforce our brand purpose. In closing, Coach is an iconic Rand with significant runway ahead as we continue to create deeper connectivity with consumers through innovative product, Emotional storytelling and a purpose led agenda that together creates a virtuous flywheel for customer engagement. Our success over this past fiscal year highlighted by a significant acceleration in sales at strong margins Underscores our confidence in the brand and its meaningful opportunity for long term sustainable growth. Now moving to Kate Spade. The brand delivered record revenue of over $1,400,000,000 in the fiscal year, representing growth of 22 While expanding operating margin.

Speaker 2

Throughout the year, our team has been laser focused on rebuilding the brand's foundation and clarifying our purpose. We have delivered consistent results, a testament to our strong team, the solid execution of our strategic actions and the increasing traction and unique positioning of our brand. In fact, over the past year in North America, we acquired over 3,000,000 new customers, Reactivated nearly 1,500,000 lapsed customers and drove low double digit growth in average customer spend. Briefly touching on highlights from the Q4, Kate Spade outperformed expectations on both the top and bottom line, reflecting progress against our growth strategies. First, we amplified key handbag platforms as we continue to build and innovate our product, Infusing newness across the assortment.

Speaker 2

KNOT, our core family and number one collection again fueled the quarter's performance, Delivering strength across the offering, most notably the crossbody option, which was launched last quarter. In addition, fashion shapes Such as the Manhattan Tote and the recently introduced Tophamal Meringue outpaced our expectations. Novelty remains an important asset, a unique and differentiating factor for the brand that plays a key role in our storytelling culture. In fact, the newest novelty collections once again delivered strong sell throughs at well above overall AUR. Importantly, the traction of our core, new introductions and novelty offering coupled with the pullback in promotional activity drove a low double 1st, we drove brand heat by engaging the consumer through emotional storytelling and a community driven approach.

Speaker 2

Our Cabana Capsule acted as an engagement engine as well as an opportunity to test product drops And build best practices. To amplify the campaign, we launched a series of pop ups in key cities, including New York, London and Kuala Lumpur. These locations evoke the color and joy that Kate Spade is known for, leading to new customer acquisition with over 50% of purchases made at the pop ups from new customers. At the same time, our Kate Spade New York Cabana hashtag challenge on TikTok, which boasted a wide cast of influencers, well outpaced approach and gain a deeper understanding of the preferences and drivers of customer purchases. For example, we've seen our mini and micro Shapes drive recruitment of new customers, while fashion shapes and novelty resonate with our existing customer base.

Speaker 2

This knowledge comes into play as we develop our Our focus on consumer centricity is highlighted by strong customer metrics. In North America, we drove an increase in the number of active customers driven by reactivating lapsed customers and reengaging our existing customer base. At the same time, we recruited over 700,000 new customers to the brand in the quarter. 4th, we built On the strong foundation of our lifestyle positioning and delivered double digit growth across ready to wear footwear and jewelry, We're offering innovative and distinctive product in these categories, which emotionally connects consumers to our Kate Spade stories and the brand's DNA. Ultimately, these categories foster deeper connections with consumers, supporting higher lifetime value and global expansion.

Speaker 2

And 5th, we have continued to invest in our digital business as we test innovative ways to engage with consumers online, including Expanded use of influencers. Overall, we've made significant progress building out this channel. In fact, Kate Spade's digital revenue represented 1 third of total sales, well ahead of the brand's 20% penetration just 3 years ago. Overall, Kate Spade is entering fiscal 2023 with momentum. Our intent for this fiscal year is to connect more deeply with our community, Leaning into the power of our brand to drive global growth.

Speaker 2

To accomplish this, we will deliver a distinctive leather goods offering, Capitalizing on the brand's unique positioning within the market and continue to drive higher AUR. Accelerate lifestyle, Focusing on jewelry, footwear and ready to wear drive customer lifetime value by continuing to reactivate engage existing customers, While recruiting younger, more diverse customers and fuel the emotional power of the Kate Spade brand Our success at Kate Spade is a direct reflection of the power of customer centricity and commitment to brand building. Through a focus on what differentiates the brand in the eyes of the consumer, including its lifestyle offering and community engagement through storytelling, We're resonating with new and existing customers, driving higher AUR and increasing our traction internationally. We are increasingly confident in the brand's opportunity to achieve $2,000,000,000 in revenue and a high teens operating margin over our planning horizon. Turning to Stuart Weitzman.

Speaker 2

Throughout fiscal 2022, the brand maintained a focused strategy to drive growth, improving execution while remaining nimble to foster The success of these actions resulted in double digit sales gains for the fiscal year and a return to profitability, despite managing through challenging external dynamics, notably COVID related pressures in China. In the Q4, Stuart Weitzman continued to advance Growth strategies. First, we improved profitability as we leaned into strength in North America, which helped to offset the pressures in China. Despite headwinds in the margin accretive China region, we delivered operating margin improvement compared to the prior year and above our forecast in the quarter. 2nd, we maintained a consumer centric strategy as we delivered a compelling and trend right offering for our customers, leveraging data and analytics.

Speaker 2

Sandals were a key category as we capitalized on the increased consumer need for occasion wear. This included a standout performance from our iconic Nudist collection, which continue to see traction. In fact, our versatile Stewart pump, which has resonated for return to work will be featured as a new family in fiscal 23 given the styles outperformance. Our streamlined and relevant offering coupled with lower promotional activity and the benefit of price increases Drove AUR growth of over 20% in North America. Going forward, we see continued opportunity to increase and expanded the brand's footprint in key accounts across the globe.

Speaker 2

5th and finally, we continued to invest in digital, resulting in nearly 20% sales growth. For the fiscal year, digital represented over 20% of revenue, which while a significant increase From a low double digit penetration pre pandemic highlights the significant opportunity to continue to grow our e commerce business. Looking ahead to fiscal 2023, Stuart Weitzman's focus is to fuel continued momentum through innovation across all customer touch points with the brand. Specifically, we will spark desire with high emotion product, leading into our authority on occasion wear and building on our casual foundation Drive brand awareness through impactful marketing campaigns, accelerate China while continuing to grow North America, Increased digital revenue by continuing to improve the online experience and further improve profitability through a focus on high margin growth opportunities as well as increased store productivity. Overall, we believe these are the right strategic priorities to build brand awareness, Grow market share and position the brand for continued profitable growth.

Speaker 2

In closing, our results underscore the power of our brand, and durable nature of our categories, which have proven resilient over time, given both the emotional and functional needs they fulfill for consumers. As we embark on a new fiscal year, the environment remains challenging and continues to rapidly evolve. However, the foundation we've built positions to be nimble and responsive to change, balancing near term headwinds with our long term ambition. Importantly, we see significant runway ahead as we harness our unique combination of authentic brands amplified by an agile and data rich operating model. This has supported our significant acceleration over the last 3 years and is key to our ongoing success as we focus and look forward to sharing the details of our financial and strategic roadmap at our Investor Day in September.

Speaker 2

With that, I'll turn it over to Scott, who will discuss our financial results, capital priorities and fiscal 'twenty three outlook. Scott?

Speaker 3

Thanks, Joanne, and good morning, everyone. Looking back at fiscal year 2022, we delivered strong results in the face of a volatile backdrop $700,000,000 in revenue grew earnings per share 20% against last year and 35% versus pre pandemic levels And we returned $1,900,000,000 to shareholders, demonstrating our strong cash flow generation, Confidence in the future and our commitment to enhancing value for all stakeholders. Turning to the Q4, our results capped a strong year. Revenue rose 9% in constant currency or 7% on a reported basis. By region, North America again drove in the quarter delivering a sales increase of 12%.

Speaker 3

Revenue in Greater China was pressured as anticipated due to headwinds associated with the pandemic, including lockdowns in major cities. As such, sales declined 32% versus last year due entirely to the pullback in store traffic as digital trends in the region rose 10% compared to the prior year. Importantly, overall trends in Greater China improved modestly throughout the quarter and into fiscal 2023. In Japan, on a year over year basis, sales trends accelerated meaningfully compared to the prior quarter, increasing over 25 on a constant currency basis or approximately 10% on a nominal basis. For Europe, sales rose approximately 65% Proved significantly due to the anniversary of last year's pandemic related headwinds as well as strong traction with domestic consumers, Revenue in both regions remained below fiscal 2019 pre pandemic levels.

Speaker 3

Across the balance of Asia, trends again accelerated Sales in the margin accretive digital channel rose high single digits in the quarter, while stores and wholesale saw continued growth. Moving down the P and L. As expected, gross margin declined in the quarter given the incremental freight expense of $36,000,000 Representing approximately 2 15 basis points of pressure as well as unfavorable geographic mix from the lower penetration of high margin China business. That said, performance of our underlying business remains strong and we continue to utilize data to better understand and meet the needs of our consumers while SG and A was slightly above the prior year and better than our expectations, Even excluding the anniversary of a $25,000,000 contribution towards the endowment of the Tapestry Foundation last year, we improved our SG and A rate, reflecting leverage across the expense base. Taken together, operating income was largely in line with our expectations So now turning to our balance sheet and cash flows.

Speaker 3

We ended the quarter in a strong position with $953,000,000 in cash and investments and total borrowings of $1,690,000,000 There were no borrowings outstanding under our $1,250,000,000 revolver. Free cash flow for the fiscal year was an inflow of 7 $9,000,000 including CapEx and implementation costs related to cloud computing of $162,000,000 CapEx for the year came in favorable to our expectations and included a timing shift of approximately $35,000,000 In the FY 'twenty three, due to shifts in projects mostly in Asia. Inventory was up 35% at year end, including an increase in in transits of over 50% impacted by longer lead times. Overall, we're pleased with the makeup of our current inventory, which is highly penetrated in core styles. We expect inventory to end fiscal 2023, up single digits versus the prior year.

Speaker 3

Moving to our capital allocation priorities. In fiscal 2022, we returned approximately $2,400,000,000 The incremental buyback was supported by our significant free cash flow generation as well as our Strong liquidity position as we emerge from the acute pressures of the COVID-nineteen pandemic in fiscal 2021 with a more conservative cash position. Therefore, the momentum we drove in our business and our confidence in the future allowed us to return to more normalized cash balances by the end of fiscal 2022. In addition, we returned $264,000,000 to shareholders through our dividend program. Now looking forward, our capital allocation priorities remain unchanged.

Speaker 3

First, we're investing in the business to drive long term profitable growth. And second, we're returning capital to shareholders through dividends and share repurchases. Therefore, in fiscal 2023, of $700,000,000 under our existing $1,500,000,000 authorization. In addition, our Board of Directors We remain committed to increasing our dividend over time at a rate faster than earnings growth. Now moving to our outlook for fiscal 2023.

Speaker 3

We're entering 2023 with a number of tailwinds. We operate in high margin categories, which have proven to be durable and resilient. We have strength and pricing power Each of our brands underscored by the gains we've made throughout the acceleration program and margins will benefit from a reduction in incremental levels of airfreight versus the prior year. That said, our eyes are wide open and we're not immune to headwinds that exist in our space. The appreciation of the U.

Speaker 3

S. Dollar, ongoing COVID related disruption in China, soft consumer sentiment compared to historical averages in the U. S. For the fiscal year, we expect constant currency revenue growth of 6% to 7%. On a reported basis, we anticipate revenue in the area of $6,900,000,000 which represents growth of 3% to 4% and includes roughly 300 basis points of FX headwinds from the significant appreciation of the U.

Speaker 3

S. Dollar. Our guidance assumes balanced growth with all brands and channels contributing to currency top line gains for the year. By region, at constant currency, this contemplates low to mid single digit growth throughout the year in North America and a Gradual recovery in Greater China resulting in growth for the fiscal year as well as double digit gains in Japan and Europe. In addition, we anticipate a year over year operating margin decline in the area of 50 basis points due entirely to FX Headwinds of roughly 100 basis points.

Speaker 3

This contemplates gross margin relatively in line with We expect these tailwinds to be partially offset by the previously anticipated rising input costs for materials as well as the negative impact of FX. On SG and A, we anticipate modest deleverage for the year, reflecting continued investments in growth drivers, including digital and the planned 2023 opening of our new fulfillment center in Las Vegas. Moving to below line items, net interest expense for the year is anticipated to be approximately $35,000,000 a significant Tax rate is expected to be approximately 21%. This represents an increase against last year, primarily due

Speaker 4

to the

Speaker 3

anticipated Geographic mix of earnings. Weighted average diluted share count is expected to be in the area of 242,000,000 shares. This reflects approximately $700,000,000 in share repurchases expected for the fiscal year as noted. So taken together, we expect EPS of $3.80 to $3.90 representing double digit growth compared to the prior year. Finally, CapEx and cloud computing costs are forecasted to be in the area of $325,000,000 Including the previously mentioned $35,000,000 shift from fiscal 2022, we anticipate approximately half of the and investments related to our new fulfillment center in Las Vegas.

Speaker 3

Given the volatile environment and last year's atypical comparisons, We again expect significant variability by quarter. Specifically, we expect revenue and earnings growth versus prior year to be back half weighted, helped by the sequential improvement planned in China as we move throughout the year. In addition, we will anniversary the substantial For the Q1, We expect revenue to increase mid single digits in constant currency, which includes a decline of approximately 15% projected in Greater China. On a reported basis, we anticipate global sales to increase slightly, including a negative impact of approximately 3 50 basis points from FX, With EPS in the area of $0.75 In closing, we delivered strong results in fiscal 2022 with 18% top line growth driving record annual sales. EPS increased 20% versus prior year and 35% over pre pandemic levels.

Speaker 3

At the same time, we returned $1,900,000,000 to shareholders. This is a testament to the resilience of the categories where we play, the strength of our brands, the benefits of our transformed Globally diversified business model and our talented teams around the world who continue to drive our strong performance. As we look forward, we remain confident in our trajectory and disciplined in our approach to driving long term sustainable growth And total shareholder return. And now I'll open it up for your questions.

Operator

We'll take our first question from Bob Drbul of Guggenheim Securities.

Speaker 5

Hi. Good morning. I guess, Joanne, I was wondering, when you look at the last couple of years, As you guys think about FY 'twenty three, the environment is clearly challenging. Can you just talk about the confidence That you guys have that you can deliver another strong year for shareholders? Thanks.

Speaker 2

Well, good morning, Bob. I would say that we're confident in our ability to connect with the consumer. Over the last 2 years, we've gained 15,000,000 new customers In North America alone, and we just as you pointed out, we just delivered a great year. We posted record revenue levels, Double digit growth at each of our brands and those results last year and over the past 2 years have been delivered in a very difficult retirement. We saw top and bottom line growth over that period, and we're up double digits to pre pandemic level.

Speaker 2

And that really speaks to the success of our acceleration program. We've built a very strong foundation and we see significant runway ahead. Given the macro backdrop, as you mentioned, we believe that our outlook is both prudent and realistic. We Expect constant currency 6% to 7% growth for the year. And some of the drivers of our confidence, it starts With our team, I believe we have the best team in the business.

Speaker 2

Our team has proven to have agility and we've been Sponsored to all of the changes that we've seen in the backdrop, our brands are strong and getting stronger. And over the last 3 years, we've really pivoted the company to have a real focus on brand building and brand building capabilities, and we're investing behind that And then the future of our brand. We play in attractive categories. The categories that we serve our customers have proven to be resilient over And I think that the success of our transformation is really underpinned by our laser focus on the customer. We're staying closer And closer to our customers and executing behind that.

Speaker 2

And not only are we calling for growth in this fiscal year, but we see Tremendous amount of runway ahead across each of our brands and we're looking forward to sharing more of those details at our Investor Day coming up next month.

Operator

We'll move next to Ike Boruchow of Wells Fargo.

Speaker 6

Hey, good morning, everyone. Scott, you gave some additional color to the fiscal year guide, but just wanted to follow-up, is there more you can provide us on The shape of the year, there's a lot of variability first half, back half with freight in China, etcetera. So any other help on the shape would be helpful. And then on GSP, I see that that's not included in the guide, but if that does go through, can you just remind us the EPS benefit on an annualized benefit that you guys would see?

Speaker 3

Sure, Ike. Good morning and thanks for the question. So on the first part, And maybe a little more unpacking on the shape of the year by quarter. So first of all, in North America, Joanne's comments, we do see some moderation in our growth. We talked about low to mid single digit growth.

Speaker 3

But importantly, that's off the base of growing last year 28%, almost 30% and On a pre pandemic stack, more than 22%. So our business in North America is strong. It remains strong. We expect that to be consistent throughout each of the quarters as we go through the 4 quarters of the year. Next, I'll address the rest of the world excluding China.

Speaker 3

And again, very strong year on year growth, Not quite as we're recovering there and not quite as strong on the 2 year stack, but versus last year where we saw severe COVID Impacts Japan, rest of Asia, we're seeing very strong double digit growth, more than 20% in most regions, and we expect that to continue throughout the year. The one that's a little different is China, as mentioned in the prepared remarks. Just some perspective there. Last quarter, We were down about 32%. That's a little better than we had guided.

Speaker 3

We guided down 35%. And importantly, as we exited the year and entered this year, we see the trends improving and continue to improve. So we've really just taken the So that regional difference by year really accounts for a lot of the progression. It's really a consistency in the trends that we see. It's not a big change in trend.

Speaker 3

It's just the mathematics of how those different regions come together. And then one in addition to the revenue Cadence by quarter, we should also talk about some of the profitability drivers and the biggest one is freight. So you may recall, we've talked about Rate last year being elevated for two reasons, the ocean rates up as well as airfreight. And we're essentially out of the airfreight business, but it takes a while for that rabbit to work through the snake, right? And as that inventory The freight is attached to that inventory.

Speaker 3

We're going to see still some negative impact year on year in Q1 because we don't start anniversarying The big airfreight until Q2 and beyond. So in putting some numbers on that, in Q1, we still expect a headwind from freight somewhere Around 150 basis points on the negative, that inflects in Q2 and beyond. And for the year, we see about 80 basis points Favorability in freight and importantly from Q2 through Q4, so Qs 2, 3 and 4, That's going to be about 140 basis points favorability to last year and that gets you to that ongoing rate of about half of what we saw last year Coming back to us is a tailwind. And then the last point that creates just a little noise is FX. So FX, We mentioned in the prepared remarks about 300 basis points impact on top line, about 100 basis points on bottom line.

Speaker 3

That's a little more acute in the first about 3 50 basis points as we start to lap some of the movements in the USD as we move through the balance of the year. Hopefully that gives you a little bit of context on the shape. 2nd part of your question was GSP. As you noted, we did not reflect any Assumption and changes in the law around GSP, it's about $40,000,000 in the annual duties paid because we don't have the GSP regime in place and if it should be retroactive, which in all recent past it Always has been that would be about another $50,000,000 So $90,000,000 in total, assuming that it's passed And assuming that it's retroactive, so significant impact, it's $0.30 plus or so.

Operator

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

Speaker 2

Thank you. Good morning. Can you give us your thoughts on the health of the store fleet and how you think about the footprint We feel really good about our store fleet and the health of our store fleet. We had, over the last 3 years, had a focus on improving the productivity and Consumer and it represents, as I said, an important touch point. But with our focus on the profitability, even as we've come through the pandemic and had Traffic pressures, our store fleet is more profitable than it was pre pandemic level today, even today.

Speaker 2

So we feel good about where we're positioned, And we see opportunities to continue to work to improve the experience we're delivering to consumers In that physical touch point, it's really an important part of the consumer shopping journey. Importantly, to your point, we've driven an incredible growth in our digital business. We've reached $2,000,000,000 In that business, more than tripled where we were pre pandemic. And it's important because we've taken a focus, Shifting from a specifically channel focus to focusing on the consumer and we want to be where the consumer is In terms of how to engage the consumer with our brands and we've again lots of traction in digital. It's $2,000,000,000 business that comes with accretive margins versus the brick and mortar channel.

Speaker 2

So for us, seeing that continued growth across these channels, which is really healthy for our brands, including an increasing number of younger consumers. So That's how we're thinking about stores. We'll continue to test and learn in the omni channel capabilities for our store And make sure we're delivering the right experience for our consumers there.

Operator

Our next question comes from Michael Binetti of Credit Suisse.

Speaker 4

Hey, guys. Thanks for all the detail here. I think you're on the AUR comment, Joe, did I hear you correctly that North America Hamburger's AUR Negative year over year in the quarter. And then you said global, I'm assuming a lot of that was from China mix. I'm curious on North America.

Speaker 4

And I think you referenced some ticket increases in August. Maybe the size there and whether the 1Q plan based on a return to positive AUR for the Coach brand in North America?

Speaker 2

Yes. I'll kick it off by saying and then I'll pass it to Todd for some color on Coach. AUR, it continues to be we continue to see pricing power And for the quarter overall, we saw AUR growth, in the Coach brand in the Q4. So if we parse it out, Coach has been successful driving AUR growth for 3 years. And a lot of that is due to our focus on the Consumer and delivering value, and really leveraging data and analytics from our in our platform, but also delivering The innovation that the customers value, and again, 3 years of a strong track record.

Speaker 2

In the 4th quarter, The Coach brand in North America was down slightly, but still 40% above pre pandemic levels. So that gives you I think an understanding of the pace of change that we've made in the Coach brand, but that we still see continued opportunity for growth And I'll let Todd touch on that. In our other brands, the Kate and Stewart, we're much earlier on that journey and continue to drive And our consumer centricity forward, it has had traction and we see that going forward. But Todd, I'll let you provide some color on Coach specifically.

Speaker 4

Thank you, Joanne. As Joanne indicated, we're coming off some amazing numbers, 40% above pre pandemic in North America. And what we had said to you before was we had always planned on ticket increases this August and throughout the year. And generally speaking, it's about 6%, sometimes a little higher, in that range. And we feel very good about that.

Speaker 4

We feel good about that because we've not seen any resistance from our consumer And they really appreciate the codes that Coach offer that are unique, the value and the innovation. And We anticipate seeing a return to AUR growth even in North America handbags in the Q1 and throughout the year.

Operator

Our next question is from Adrienne Yih of Barclays.

Speaker 7

Good morning. Nice end to a fantastic year. Joanne, I wanted to go back to the comment on the 40% to 50% SKU reduction. What categories or did you just kind of tighten up sort of the AUR, the target AUR? Did you take out certain Category, so any more color on that piece of it?

Speaker 7

And then Todd, how much of the product's objectiondesign process is based on predictive analytics? And how do you balance sort of your creative force of the team versus the more analytical nature of kind of data analytics? Thanks so much.

Speaker 2

Yes. Thanks, Adrienne. I'll kick it off with our AUR and some of the data and analytics approach to How we thought about SKU reduction. And your point on understanding the assortment, we leveraged data and analytics To really help drive our SKU reduction efforts, we wanted to make sure that we did have the right assortment architecture, And we cut a lot of the tail of the unproductive SKUs, but importantly, we leveraged analytics And market research to understand the consumer across the landscape and make sure that we had the right products to deliver against and understanding a deeper understanding of the customer. So as we developed our assortment architecture, understanding who the consumer is, who the target consumer is And where we wanted to put a place our bets and it's been an important and a huge win for us as we've come through a pretty volatile environment To have that focused assortment that has each SKU has a purpose and we're evaluating which SKUs are attracting new customers, what are the entry points for our brands, where are we seeing customers move up in AUR and delivering that value that they recognize.

Speaker 2

It's been a tremendous help to have more focused assortment as we navigate a lot of the supply and demand changes around the world. And it's been a tremendous help in terms of communicating to the consumer what's important. So with all of the changes that have Over the last 2 years, we're better at identifying the SKUs, we're better at allocating those items that assortment across the world, we're better at Allocating our inventory behind those and we're better at messaging our consumers behind the reduced SKU count. So a lot of wins on that score.

Speaker 4

What I can add is, our designers are not going to So, what we've said often in the past is we are at our best When we blend magic and logic. And today, what that means is all the things that Joanne mentioned, but in addition, it's informing the creative process. It's informing design. We're having much better feedback loops earlier. And again, I want to make sure we continue To be innovative and creative, and that is not going to be something that we're outsourcing to computers.

Speaker 4

Stuart Vevers and his team Really come up with incredible ideas and focus and their goal, their muse is this younger consumer, This global consumer that cares about values, that we infuse in the brand. So again, it's an informed creative process. We're at our best when we do this. We're using the Tapestry platform and the data to Help us do this in a really authentic way and you're seeing it in the product.

Operator

Our next question is from Mark Altschwager of Baird.

Speaker 8

It's been great to see the continued progress at Kate. Can you give us some updated perspective on the path to $2,000,000,000 How are you thinking about growth by geography? And at what point does China become a bigger part of the story again?

Speaker 2

Well, we see, Mark, the opportunity to achieve $2,000,000,000 We're increasingly confident that as the team has really Customers that has been our focus, right, to get the brand steady and growing in our core markets of North America and Japan. And we see tremendous runway and opportunity ahead to get to that $2,000,000,000 with growth in our core markets. We also though to your point see opportunity to expand internationally. We've driven strong growth, our business is small in both China and Europe. Europe has been performing quite well.

Speaker 2

We see opportunities to expand there and over time, also impact the China market. So That is an opportunity. The $2,000,000,000 is not contingent upon a big step into China. We see runway in our core markets in addition to China, which is right now, it represents a lot of white space for the brand to continue to grow beyond 2,000,000,000

Operator

Our next question is from Oliver Chen of Cowen.

Speaker 9

Hi, Joanne, it's Scott. Our survey data at Cowen is showing some pressure on the higher end customer as well. Just would love your thoughts on the Strategy for the average unit retail increases at the Coach brands in the 4th year of doing this, just the nature of what's achievable yet still offering Clear value and innovation. And Joanne, you mentioned younger customer in your prepared remarks as well as opportunity Could you be more specific about what you mean there and where you see the evolution of the innovation going? Thank you.

Speaker 2

Yes. Why don't I toss it to Todd to talk about the Coach brand and then I'll follow it up with our young consumer?

Speaker 4

Thank you. Good morning. We feel really good about where we are in AUR and particularly the place you focus on, which is the higher end, 2 quick data points. First of all, In retail, we saw AUR handbag growth, even in the Q4. And what that shows is the Dramatic white space that exists today between Coach and the traditional European luxury brands.

Speaker 4

And I think what you see with Rogue and some of our more elevated products, the consumer is recognizing the value there and there's a lot of opportunity To continue to grow there. And so I see us further increase our ARRs throughout the year, both in North America and globally, and we're going to see that in Japan, in China, Coupled with innovation, I feel very good, particularly about us capturing more of that white space.

Speaker 2

And let me just follow-up with a to answer the second part of your question, Oliver, on Brand building, we have spent the last 3 years really pivoting the company to get focused on how we continue to invest in our brands. And as we've done that, we've focused on acquiring new customers, reactivating the customers, lapsed customers and Continuing to drive higher customer lifetime value and that focus on the customer is part of our brand building story. We are trying to acquire more customers and succeeding, 15,000,000 new customers in the last 2 years alone and we are seeing an increasing number of younger consumers. And we're doing that with capabilities that we've developed in marketing, and Also with data and how we're positioning our assortment, so understanding that consumer, getting closer to that consumer and delivering product And experiences that they value. And again, we're seeing traction.

Speaker 2

We're showing up in the places where they are, particularly on digital channels. We're showing up not only for the transaction, but engaging consumers as they're on their journey, the customer journey in discovery. So part of our investments and we talked about how we've significantly changed our investments to be behind that brand building and in digital, Moving our marketing spend from 4% of sales to 8% of sales is meaningful and we have the capabilities to continue to measure the effectiveness of the Investments we're making and ensuring that we're getting the outcomes that we want. And you can see those results again in the customer

Operator

Our next question is from Brooke Roach of Goldman Sachs.

Speaker 10

Good morning. Thank you for taking our question. Joan, I'd love to hear your outlook for growth Share in the North American handbag and accessories market this year? Thank you.

Speaker 2

Yes, we are fortunate to play in a category that has Historically had very proven very resilient and had durable growth over years. We've seen Pre pandemic, the category grow in the mid to high single digit range very consistently. And even Through the pandemic, we saw consumers engaging with the category and coming out strong, as we've recovered from the pandemic. But going forward, we expect the category to continue to grow in that mid to high single digit level. And From the Coach brands, I give Todd and the team at Coach tremendous credit.

Speaker 2

They have really infused Life and energy into that brand, we're acquiring new customers, we're driving innovation and really managing the business quite well. And you can see that in the customer acquisition that we're seeing at the Coach brand, we still have tremendous runway Ahead for Coach, the category we see growing and we think Coach is very well positioned to continue to grow with the category at very strong margins.

Speaker 4

Yes. I think the only thing I can point you to is, it was very interesting recently the Business of Fashion Did a very deep dive in the handbag category and with unaided awareness, they were asked Consumers who were engaged in the category and anticipated buying a brand, what brand would they buy? And we were very pleased See that Coach was the number one brand in the U. S. On an unaided awareness by Consumers who have the intention to buy, even what was also very interesting was on high net worth individuals, individuals So that bodes very well and shows that we are cutting through in our messaging on values.

Speaker 4

And I think you're going to see us and you're going to hear us talk quite a bit about it at the upcoming Investor Day, how we're going to chart our future And take us into the next meaningful growth period for Coach.

Operator

Our next question is from Dana Telsey of Telsey Advisory Group.

Speaker 7

Hi, good morning, everyone. Can you talk a little bit for each of the brands where you are on the journey of price increases? And does it at all differ in terms of how you're pricing for some of your exclusive or limited edition products? Thank you.

Speaker 2

Good morning, Dana. First, I'll start by saying, we occupy an incredible position in the market and we represent Tremendous value for the quality and the innovation that we're delivering to consumers and consumers are recognizing that. We have been seeing AUR growth consistently at Coach for 3 years, and Consumers are recognizing the value that we're delivering in the marketplace.

Speaker 3

Where we

Speaker 2

are in the journey, we still see runway ahead across All three brands to drive AUR, we see pricing power across our brands, again with customers recognizing that value. While Coach is further along on this journey, again, and as Todd just mentioned, we see runway ahead to drive More price increases, more than offsetting inflationary input cost pressures as we move forward. And as we deliver continue to deliver Great value in the market. And in the context of the market, we've seen the Pinnacle luxury players move price up pretty substantially over the last 3 years and that creates that white space for all of our brands to position our and continue to position AUR higher. And again, At Kate Spade and at Stuart Weitzman, continuing to see strong AUR growth in the last quarter over the last year, earlier

Operator

Thank you. That concludes our question and answer session this morning. I will now turn the call over to Joanne for some concluding remarks.

Speaker 2

Thanks, operator. I want to close by thanking our teams around the world for their passion and commitment. They drove these standout results We delivered record annual revenue this year with double digit growth at each brand Our digital business reaching $2,000,000,000 along with earnings 20% above last year, so standout performance, Really clearly demonstrating the strength of our brands and the power of our transformation, which positions us well for the future. We have significant long term runway and through a continued focus on the customer and commitment to brand building, I'm confident and our ability to drive sustainable growth going forward. I'm looking forward to sharing more details on our long term roadmap at our Investor Day next month, and I hope to see you all there.

Speaker 2

Thank

Operator

you. This does conclude the Tapestry earnings call. We thank you for your participation. You may now disconnect your lines and everyone have a great day.

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Earnings Conference Call
Tapestry Q4 2022
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