Q3 earnings outperformed expectations, with total revenue consistent with the prior year on a constant currency basis.
International growth at 3% constant currency, with notable increases in Europe (19%), other Asia (15%), and Japan (2%).
North America revenue declined by 3%, reflecting a challenging consumer environment.
Significant gross margin expansion compared to the previous year, marking the highest third-quarter gross margin in nearly two decades.
Approximately 1.2 million new customers acquired in North America during the quarter.
Digital sales remained strong, over 3x pre-pandemic levels, accounting for over 25% of revenue.
Brand Performance
Coach: Revenue growth at constant currency, significant gross margin expansion, and profit gains. The Tabby family and new introductions like the Quilted Tabby performed well.
Kate Spade: While top-line results were challenged, profits exceeded expectations due to gross margin expansion and disciplined expense management. Newness in the product range drove higher customer recruitment and AUR.
Stuart Weitzman: Pressured results due to headwinds in North America and Greater China, but focus remains on investing in product and marketing for long-term growth.
Strategic Initiatives and Outlook
Continued investment in omnichannel experiences and digital capabilities to meet consumer demands across the purchase journey.
Focus on innovation and product excellence across brands, particularly Coach, which saw handbag AUR gains.
Outlook for fiscal year ‘24 includes maintaining EPS guidance, with revenue of over $6.6 billion expected, approximately in line with the prior year on a reported basis.
Anticipate revenue decline in North America and moderate trends in Greater China, with growth expected in Japan, Other Asia, and Europe.
Forecasted EPS for fiscal year ‘24 is $4.20 to $4.25, representing 8% to 9% growth versus last year.
Capital Allocation and Acquisition Update
Declared a quarterly cash dividend of $0.35 per common share.
Update on pending acquisition of Capri, highlighting confidence despite legal challenges and aiming to close the transaction in calendar year 2024.
Capital allocation priorities include investing in brands and businesses, rapid debt repayment, and returning capital to shareholders through dividends.
Closing Remarks
Confidence in the strategic direction and long-term growth potential across Tapestry’s brand portfolio.
Commitment to driving sustainable, profitable growth and shareholder returns.
Question and Answer
Confidence in FY ‘25 EPS Target
Question
Can you discuss the confidence in achieving the FY ‘25 Investor Day EPS target of $5, considering the current environment and second-half performance?
Answer
Despite the dynamic environment, the company remains confident in achieving the FY ‘25 EPS target, driven by brand building, disciplined execution, and a strong track record.
The Coach brand is performing well, with brand heat, new customer acquisition, and strong engagement, positioning it for continued success.
The company’s focus on operational gross margin drivers, disciplined expense control, and a variable P&L model provide further confidence in achieving the $5 EPS target.
Q4 Performance and Acquisitions
Question
Could you provide more details on the Q4 expectations for Coach in North America and China, as well as clarify the timeframe for the double-digit accretion from recent acquisitions?
Answer
In Q4, the China business is expected to decline by double digits year-over-year, primarily due to challenging comparisons and the impact of revenge spending. However, the full-year growth in China is expected to be low single digits.
The double-digit accretion from recent acquisitions is expected to be realized in the first year, with some seasonality and variability due to the timing of the deal closing and the company’s fiscal year.
Coach Brand and North America Demand
Question
Can you elaborate on the progression of North America demand for the Coach brand throughout the third quarter and recent trends in the fourth quarter, and discuss the drivers of the gross margin expansion in Q4 and the runway for multiyear operational gross margin expansion?
Answer
In North America, the consumer is becoming more cautious, leading to a more choiceful approach to spending. However, innovation and brand building efforts are driving success, with a focus on higher gross margins, average unit retail (AUR) growth, and new customer acquisition.
The company is maintaining its disciplined approach to managing the business and remains confident in its ability to build brands for the long term.
In Q4, the company expects to achieve nearly 200 basis points of gross margin expansion, driven by ongoing operational gross margin drivers, marketing investments, consumer engagement, and AUR benefits.
Strategy and Brand Building
Question
Are current conditions in North America severe enough to warrant a change in strategy, potentially sacrificing some gross margin strength to drive sales growth?
Answer
The company remains committed to its brand-building strategy and creating emotional connections with consumers, believing in the resilience and durability of the category.
The focus on offering value to consumers and building strong brand affinity through marketing investments, digital capabilities, and innovation will continue.
Innovation and Customer Engagement
Question
Can you discuss the innovation pipeline for Tapestry brands, particularly in North America, and how you are engaging customers across different channels and price points?
Answer
Innovation is a key focus area, driven by consumer insights, data analytics, and a deep understanding of customer preferences.
The company is investing in innovation across all price points and channels, with initiatives like expanding the Tabby collection to outlet stores at full price to meet customer demand and drive growth.
The company is seeing strong consumer desire for its brands and high purchase intent in the category, supporting continued investments in brand-building activities.
Performance and Revenue CAGR Scenarios
Question
Can you discuss potential upside and downside scenarios after the fourth quarter and the factors that could impact the multiyear revenue CAGRs you mentioned at the 2022 Analyst Day for fiscal ‘25? Additionally, what are the drivers of handbag AURs, and how do you view potential pricing concerns in the luxury market?
Answer
The company is not providing specific guidance for fiscal ‘25 but emphasizes its agility in the model and its ability to deliver earnings growth under various conditions.
The company is confident in its ability to sustain AUR growth due to its focus on innovation, storytelling, emotional connections with consumers, value proposition compared to traditional luxury brands, and disciplined inventory management.
Coach Gross Margin and Long-Term Outlook
Question
Given Coach’s impressive gross margin performance, what are your thoughts on its sustainability and potential for further investment? Additionally, can you discuss pricing elasticity and like-for-like sales relative to mix, and provide insights on the China customer compared to the U.S.?
Answer
The company is confident in the sustainability of Coach’s gross margin performance, driven by investments in product quality, marketing, and innovation.
The company believes it can sustain AUR growth at the Coach brand due to its innovative product offerings, emotional storytelling, value proposition compared to traditional luxury brands, and disciplined inventory management.
Despite macro headwinds in China, the company sees a strong long-term opportunity in the market and remains committed to brand building and connecting with consumers through agile strategies.
Kate Spade Performance and Strategy
Question
While Coach is performing well, what factors are currently holding back Kate Spade’s performance, and are there any implications from Coach’s success and the focus on younger customers?
Answer
Kate Spade is focused on building a stronger and larger brand, with opportunities for profitability improvement and increased consumer engagement.
The company is executing with discipline, driving gross margin expansion, operating margin improvement, and profit growth, while also focusing on strengthening the core handbag foundation, delivering innovation, enhancing the omnichannel experience, and implementing emotional marketing.
Fiscal ‘25 Sales Growth and Earnings Goals
Question
Is sales growth necessary to achieve the fiscal ‘25 earnings goals, or are there other levers that could be utilized?
Answer
While the company expects to grow and has the building blocks in place for future growth, it has demonstrated its ability to deliver profitability even in a flat sales environment.
The company’s remade model, efficiency improvements, and commitment to brand-building activities position it well for future profit and cash generation, exceeding its previous commitments.
