Good day. And welcome to this Tapestry Conference Call. Today's call is being recorded. Later, we will conduct a question-and-answer session. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations at Tapestry, Christina Colone.

Good morning. Thank you for joining us. With me today to discuss our Second Quarter Results, as well as our strategies and outlook are Joanne Crevoiserat, Tapestry's Chief Executive Officer; and Andrea Shaw Resnick, Tapestry's Interim Chief Financial Officer. Before we begin, we must point out that this conference call will involve certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes projections for our business in the current or future quarters or fiscal years. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to our Annual Report on Form 10-K, the press release we issued this morning and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance. Non-GAAP financial measures are included in the comments today and in the presentation slides. You may find the corresponding GAAP financial information, as well as the related reconciliations on our website, www.tapestry.com/investors, and then viewing the earnings release and the presentation posted today. Now let me outline the speakers and topics for this conference call. Joanne will begin with a brief recap of the second quarter for Tapestry and each of our brands. She will also provide an overview of the progress we've made on our Acceleration Program. Andrea 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 Khan, Tapestry's President and Interim CEO and Brand President of Coach. After Q&A, Joanne will conclude with brief closing remarks. I'd now like to turn it over to Joanne Crevoiserat, Tapestry's CEO.

Good morning. Thank you, Christina. And welcome, everyone. As you read in our press release, Tapestry's second quarter results significantly outpaced our expectations, driven by the successful execution of our Acceleration Program. Our sharpened focus on the consumer fueled new customer acquisition across all brands, supporting notable sales gains in digital and China. For the second consecutive quarter, we generated strong operating income growth, both compared to prior year and to fiscal year ‘19, supported by a reduction in promotional activity and higher AUR, as well as disciplined inventory and expense management. I am particularly proud, that we delivered this profit growth in the face of unprecedented COVID-related external headwinds, including pressured bricks-and-mortar traffic, store closures and capacity limits, as well as higher freight costs and shipping constraints. This success clearly underscores the talent and resilience of our teams around the world. It also reinforces the power of our brands and the competitive advantages of Tapestry's enabling platform. Importantly, our outperformance in the quarter also highlights the progress we've made under our Acceleration Program. First, we continue to drive our global digital business, which reached $1.3 billion in revenue on a trailing 12 month basis, more than doubling in size from a year ago. During the quarter, we once again generated triple-digit e-commerce growth, bringing digital sales to approximately one third of total revenue, as compared to a low teens percentage last year. And in North America, as expected, the penetration was even higher, with e-commerce representing nearly half of our sales in the holiday quarter, up from a high teens percentage last year. This outcome is a testament to our company-wide focus on leading with a digital-first mindset and our success in creating immersive customer experiences across our e-commerce and social channels. To deliver these outsized gains, we leveraged…

Thanks, Joanne. And good morning, everyone. I hope this finds you all safe and well. Before I begin, please keep in mind that my comments are based on non-GAAP results. Corresponding GAAP results and the related reconciliation can be found in the earnings release posted on our website today. As Joanne mentioned, our holiday quarter results were well-ahead of our expectations, as we continue to drive operating income growth in an unprecedented environment. Total sales declined 7% from prior year, representing a significant sequential improvement across all brands. Importantly, we successfully implemented our strategy to elongate the holiday shopping period, pulling forward demand ahead of the peak Thanksgiving week to allow the customer to start their shopping experience earlier. By region, North America, though still pressured versus last year, led the sequential improvement driven by better in-store trends and a higher penetration of the fast growing digital business. In Asia, growth remained positive, aided by 30% plus revenue gains in Mainland China, along with a return to year-over-year growth in Korea. Across the balance of Asia, sales remained below last year, specifically in Japan and Malaysia, as lockdown measures were reinstated. Europe, though a small portion of our total sales, experienced a material slowdown in the business, given a significant increase in lockdown accordance with local government restrictions. By channel, as Joanne noted, performance was driven by another quarter of triple digit growth in digital, as we leaned into the opportunity to meet the customer where they want to shop. In our global bricks-and-mortar channel, revenue continued to decline due to materially lower traffic compared to last year, partially offset by increases in AUR and conversion. In wholesale, while the channel remained below prior year, trends improved, reflecting, in part, a significant growth in our duty-free business in China's Hainan…

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Bob Drbul of Guggenheim Securities.

Hi. Good morning. Congratulations.

Good morning, Bob.

Thanks, Bob.

Thanks. I have two questions for you. I think the first one, how sustainable are these strong profit margin results? And then the second one is, when do you expect EPS to return to pre-pandemic levels? Thanks.

Thanks Bob. I'll take those one at a time. Two great questions. First, on the sustainability of the results, when we developed our Acceleration Program, it was with an eye on foundational changes that we needed to make, to be ready for what we were calling at the time, the new world of retailing. And the trends that we saw over a year ago have only accelerated through COVID, as you know, and that's given us stronger conviction to move quickly. These are foundational changes. They are embedded in our business. Some of those changes include, having a sharper focus on the customer. We're using more consumer data and research to inform our plans and our execution. We're leaning into digital, really leveraging the Tapestry platform to engage customers in a different way. We're making real headway here with triple-digit growth in digital, over the past two quarters. We're maximizing the opportunity with the Chinese consumer, as evidenced by the 30% growth we showed in Mainland China this past quarter. And we're leveraging data for decision making. And that means really embedding these tools in our decision making framework and our processes, which is supporting our approach to things like disciplined promotions, our SKU reductions, inventory control. And we're also delivering gross SG&A savings, as Andrea mentioned, which is about streamlining our operating model. It's about taking layers out [ph] and empowering our teams, so that we can drive agility and speed. And at the same time, we're investing in capabilities to reach customers in new ways. And I would say, finally, we're focused on driving more productivity and profitability from our fleet. I mean, these are sustainable actions. And they're embedded in our operating model as we move forward, and we expect to drive accelerated revenue and profit growth across brands. I think year-to-date, our performance shows the actions are taking hold. We achieved strong operating income growth and operating margin expansion despite the pressured revenue year-to-date. To the second part of your question, with our first half outperformance, our fiscal year ‘21 outlook implies a return to high teens operating margin, despite the external environment. And it also implies that in this fiscal year, we'll be approaching pre-COVID earnings on a 52 week basis despite the lower sales. So it really speaks to the success of our Acceleration Program and honestly, the strength of our team's execution.

Thank you.

[Operator Instructions] Our next question comes from the line of Ike Boruchow of Wells Fargo.

Hey. Good morning, everyone. I just wanted to dig on the…

Good morning, Irwin.

Good morning. On the quarter-to-date and the third quarter outlook for revenue growth was really strong, especially in light of some peers of yours of what they've guided. Just curious if you could kind of dig into that a little bit more. I'm curious, what's going on in China. We've heard more channel restrictions and caseloads, so, curious if you're seeing volatility there? And then, in the North America market, specifically for Coach, how are you doing there? Is there a chance that you're back to positive comp there? Thanks.

So maybe what I'll do is I'll start off with the China month-to-date comment. Obviously, as we spoke to on the call, we had very strong results in China during the quarter, up 30% across brands, up 35% in Mainland China for the Coach brand. And Todd can get into that a little bit more. Quarter-to-date, in Northern China, we've seen some resurgence in COVID cases. And we have a few temporary store closures, literally a handful. And we've seen some impact to traffic. But they do appear to be easing, as we move into the important China New Year - Chinese New Year holiday, which I think you know probably starts on February 12. So we're monitoring the trends. But as I said, things appear to be getting better. And we recognize that this is a near term dynamic. We're still as bullish as ever on the long-term prospects for our brands and business in China, especially in light of our second quarter results. Todd, I'll turn it around to you, what you're seeing in Coach.

Thank you, Andrea. We were really pleased with our second quarter results. And, in fact, in North America, the Coach brand was - we did comp positively in North America. So we're coming off of that. We're pleased with where we are quarter-to-date. As you can - as you know, for the brand, comp in the next two months gets very wonky as we have closures in China, and then we have closures in the US. But in terms of where we're at, again, we had positive comp in this quarter, and we like what we're seeing in the future.

Okay. Thank you.

Welcome

Our next question comes from the line of Erinn Murphy of Piper Sandler.

Great. Thanks. Good morning. My question is around digital. I think it's been three consecutive quarters that you've seen triple-digit growth. Can you just share with us, as the world reopens, where do you see the digital mix settling out? And if you can kind of help us through the P&L of that. I believe it's margin-accretive, but any other kind of details on kind of the longer term impact you see from that on the P&L? Thank you.

Yes. Good morning, Erinn. We are really pleased with our digital business. Another quarter of triple-digit growth, as you said. And as we look at it, we're in the middle of our fiscal year. But if you look on a trailing 12 month basis, our digital business has grown to $1.3 billion. So we're achieving significant scale. It's more than double where we were a year ago at this time. We ramped up quite quickly. And we're getting much better at engaging consumers on these platforms through e-commerce and social platforms. In fact, our digital business has been a great source of recruitment. We recruited over 1.5 million new customers in North America through digital channels, just this last quarter alone, across all of our brands. It is an important channel. We do see it continuing to grow. These digital shopping behaviors, we think, will be sticky, and we're well-positioned to continue to invest in and engage consumers here. And to your point, our digital margins are accretive versus their brick-and-mortar counterpart. So as we grow this and continue to grow this channel and meet our customers where they want to shop, it also is a tailwind from an operating margin perspective as we move forward.

Great. Thank you.

And just to add a little bit of context on that. And Erinn, I think you know this, but we have a relatively high AUR compared to your average retailer or e-tailer, should I say. And we have a fairly low rate of return, because we don't have size inventory for the most part. Most of our goods are leather goods. So at that, it takes that and then understand that we have the lower cost structure having been in fulfilling orders since we were - Coach was a catalog company. Our digital margins are well higher than those of the B&M channel, brick-and-mortar channel. And therefore, as we continue to grow in digital, that is going to support both the higher level of sales and a tailwind to operating margins.

Great. That's all I have. Thank you.

Our next question comes from the line of Alexandra Walvis of Goldman Sachs.

Good morning, everyone. Thanks so much for all the color. Thanks for taking my question. I had a question about new customers. You shared a few details on those new customers. I think you mentioned they were younger. I think you mentioned they spent more. I wonder if you could go into that in a little bit more detail. Are those customers distinct from the customers that were shopping in your stores previously? What sort of age range are they? And then how are they spending? Is the higher spending rate because they're buying more expensive products? Is it because they're buying more product? Any further comments on that would be super interesting. Thank you.

Yeah. I'll take the big picture and then pass it to Todd to give you some input on what we're seeing in Coach specifically. But overall, our focus through our Acceleration Program is to sharpen the focus on the consumer. And as we do that, we're looking at ways that we can engage consumers with our brands. Some of that is on digital and social channels, and we're building the tools and capabilities to be able to engage more consumers in our brands. We're gaining a lot of traction. We've added a lot of customers to our brands. When I talk about recruiting 1.5 million new customers, these are customer’s who are new to the brand overall. So these are not customers who are just migrating from brick-and-mortar into digital. We are seeing some of that behavior naturally with the lower traffic to our stores. But these are new to brand customers. And as you mentioned, they're increasingly younger. We're acquiring younger customers at an increasing rate as we engage in e-commerce channels and digital channels and through social media, which is great for the long-term health of our brands. And I'll kick it to Todd to give you a little bit more color on what you're seeing at Coach.

Thank you, Joanne. We are so pleased with this. Not only did we have 1 million new customers in the quarter. But if you think about year-to-date, we added 2.5 million new customers to the brand, mostly through digital. So that's exciting. We are seeing them – you know, almost half being younger, Gen Zs and millennials. We're not seeing them buy necessarily higher priced product. But since the brand overall is less promotional, we're seeing that lift of AUR, it's winning across every demographic. Lastly, its early days, but we're seeing a fairly high repeat purchase rate. So that's very exciting to see that maintaining a relatively high repeat purchase rate on such a higher base is very exciting. And so we see this continuing. We're really looking at our data, all of the consumer insight to understand what's going to appeal to them, what's the medium, what's the messaging that we're going to continue to use, and it influences our design. So again, I think you've heard Joanne talk about the benefits of the flywheel. This is one where it comes into life.

Thanks for the color.

You are welcome.

Our next question comes from the line of Mark Altschwager of Baird.

Good morning. Thank you for taking my question and congrats on the progress so far. I was hoping to dig into the performance at Kate Spade a bit more, and really, your assessment of the progress with the strategic changes that you're making. If asked another way, trying to get a better sense of the cyclical recovery that may be emerging here versus some of the course corrections of the brand missteps in the recent past. And then it's separate, but also related to Kate. You called out a reduction in wholesale disposition as a headwind there. Maybe just where are you in terms of your level of exposure to that channel versus where you plan to be on a go-forward basis? Thank you.

Hey. Mark, good morning. Regarding Kate Spade, as we mentioned, we are really pleased with the progress we're making in that brand. And we have a number of promising greenshoots. I would say we're still early days in terms of the actions we're taking to restore the brand, to help and drive the brand to its fullest potential. And we are really encouraged by the greenshoots that the team is taking. We're seeing operating margin expansion, improvement in the topline, and that's being driven by our focus on our assortment and the product is resonating with our consumer. We've talked about our handbag assortment and stabilizing and reenergizing our core handbag assortment. We're seeing traction behind key elements of that assortment and talk about the Spade Flower and the all-day tote that we released in last quarter, all performing. So that's a greenshoot. We're recruiting new customers, which is important to the brand, so that we can continue to expand the Kate Spade community. But we're also increasingly reactivating lapsed customers, which says that as we get back to the fundamental elements of the brand, we're resonating with our core customer base. So that was another greenshoot in the quarter. And I would say, finally, our global handbag AUR grew in the quarter, which is - has been really nice progress, and I think speaks to the relevance of the product as we're delivering it. So we feel really good about the progress we're making in the Kate Spade brand. As it relates to Dispo, obviously - maybe not obviously, that is a channel that we're trying to minimize, and we've made tremendous progress on that over the past few quarters. So we continue to focus on driving our business through our value channels, to our consumers, as well as through specialty. And we're making, as I said, really good progress. And really, the great news for us is that we're only just beginning. We see a tremendous amount of potential for the Kate Spade brand as we move forward.

And I would just add to that, Mark, that we are very pleased that our inventory position, they're very clean across Tapestry and at Kate Spade, in particular.

Great. Best of luck.

Thank you.

Thank you.

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

Thanks. Good morning. The shift to digital has been pretty sharp. Are there any big investments you need to support this strong growth? And then how does the shift change your thinking about the size of the fleet?

Hi, Lorraine. Thanks for that question. Yeah, the shift in digital has been rapid, and we've seen that more than doubled in the last 12 months, our total digital. I mentioned earlier, but $1.3 billion now business has reached sizable scale as well. And we have reacted quite quickly to support that business. We've added distribution square footage. We've added carrier partnerships and we continue to make the investments required to support that business on the distribution and fulfillment side, as well as investing in the platform and the data and technology and the tools that we need to manage that business. The teams have done a great job moving inventory around the world to ensure we're supporting demand where we see it. So we feel great about our position, our Tapestry platform and the scale that we bring to our digital business. And as it relates to the fleet, you know, our first focus is to sharp - is on the customer, right? We want to follow where the customers, we want to meet the customer where they are. And our shift into digital this year has really been to serve our customer where they and how they want to be served. And as we think about the fleet, we think about it through that same lens. We've talked about over the last couple of quarters, raising the thresholds of profitability and our expectations for the productivity and profitability for our fleet, and we continue to manage our fleet with those expectations, higher expectations for productivity and higher expectations for those - our brick-and-mortar stores to be profitable. Having said that, we also believe that there is a need for physical touch-point of the brand, stores matter. And we're investing in and ensuring that, that physical touch-point is the right experience for our consumer. And a great example of that is the store that we opened up in Shanghai and the IAPM Mall, it's a fully immersive digital store with floor-to-ceiling video walls that engage our consumer and let them engage with the video on the wall. So it's about the experience, but our - from a financial perspective and how we manage our business and our fleet, is with an eye on productivity and profitability.

Okay.

And the store that Joanne is referring to, I have to take a little pride is a Coach store. So we're - we love what we're seeing there. And it's something that I think we can adopt and have learning’s across the fleet, obviously, for Coach as well as the rest of our Tapestry brands.

Yes. Thanks, Todd. Didn't mean to steal your thunder.

You’re welcome. Okay. No, problem.

Our next question comes from the line of Oliver Chen of Cowen.

Hi. Thank you. You've made encouraging and innovative progress at Coach outlet and also broadcasting to that customer and being inclusive and offering value. Could you update us on that strategy and where it is? And how it may synergize with your greater ecosystem? And also, as we think about outlet, how is outlet running with respect to promotions and traffic? It sounds like you've had really encouraging AUR gains there as well? Thank you.

I guess, I'll take that. I mean, you hit - you read our playbook. It is all about innovation, about messaging beyond just the product. So we see that the consumer really cares. They are value and value-oriented. So - and we're going to continue to double down on that. And we see it resonate, not just in North America, but globally. In North America, traffic is down. We see that, and that's going to continue to be a headwind until we get to through COVID relief and vaccination. But we're optimistic that we'll see a return. And as Joanne just mentioned, there is going to be and continue to be a strong brick-and-mortar business at Coach, both in full price and in outlet. In terms of coachoutlet.com, our strategy remains, we're being very responsive to the consumer, providing the consumer with really innovative product that both has their - satisfied their emotional needs and their functional needs. And you're going to see continue really accelerated innovation in all channels for Coach. So we're very pleased. We are going to be very, very rigid on the promotionality of the brand and continue to provide value and promote value versus pure price.

Thank you. And Joanne, sustainability and ESG are big priorities for us in our research product and - and other. What are your thoughts in terms of key priorities for the organization? And what would you highlight as your focus areas as you approach these topics? Thank you.

Yeah. Thanks, Oliver. That's a great question. And ESG and sustainability, overall, is something that has been very important. It's important to each of our brands, and it's important to Tapestry as a company. In fact, as we were forming Tapestry as a company a few years ago, we talked about how ESG needed to be part of the fabric of our company. And we created our social fabric, which encompasses our ESG program, if you will our goals. And they're around people, communities and in our environment. And so, all three of those areas are focused areas of ours. As it relates to our people goals, it's about having more representation, across our organization and in leadership. And we continue to hold our teams accountable for progress. There's definitely more work we need to do there. But we remain very focused on it. And as it relates to communities, it's about how we impact our communities, as a company. And that's through our foundation and the work our foundations do, but also through volunteering efforts from our teams. And I would say, lastly, on the environment, we're very focused on our carbon footprint, and the impact and traceability of our supply chain. So those are some of the areas of focus. It is a very important element of our strategies going forward. And we're holding ourselves accountable to making progress on our goals.

Thank you very much. And best regards.

Thanks, Oliver.

Our next question comes from the line of Matthew Boss of JPMorgan.

Great, thanks. And congrats on the improvement.

Thanks for that.

Maybe on the topline inflection that you cited for the back half, could you speak from these indicators that provide your confidence in accessories to category growth coming out of the pandemic versus pre-pandemic? And then on the bottom line model flow through to exceed topline growth, as you cited, could you just speak to sustainability of Coach brand operating margins, here in the low 30s?

Yeah. Let me talk about - I'll take the category more broadly. And then, Todd and Andrea can talk about the sustainability of our margins. But as we think about the category, this - we have that small leather - has been a strong category, pre-COVID. For years, leading into the pandemic, the category was growing mid to high single digits. We've been incredibly pleased with the level of engagement that customers have had with the category, as we move through the pandemic. That's evidenced by our digital business, but also in areas in China, where the recovery is further along, we're seeing strong growth. So, continue to see consumers engage with the category. And we continue to hear, that handbags, these categories are emotional categories, that consumers love and they continue to purchase to treat themselves. They consider the purchase a treat. And so we've also done some research, in the middle of COVID about purchase intent going forward. And what we've heard from consumers is that, there continues to be strong purchase, intent for our categories. It ranks one of the highest categories for purchase intent in the coming 12 months. So we're pleased with the engagement in the category during the pandemic. We expect the category to continue to grow post pandemic. And as I think about it, as the vaccine rolls out and the world opens up again and people begin to connect in the physical world, we expect people to be going to events again and going out to eat, and we are very excited to be able to continue to grow our business, as we outfit our consumers, as their habits change going forward. So we see a lot of growth ahead as well. And Todd - in terms of sustainability margins, I addressed that a little bit in our - my first - the first question today, but our - the changes we're making in our organization are embedded in the organization. And we do think they're sustainable. But I'll pass it to Todd to take these.

Thanks, Joanne. We do see significant potential to grow topline. We said, and we said this now repeatedly over a number of quarters, our goal is to capture market share. And we think we can do that at higher levels of profitability. What you see some of the key drivers are digital, obviously, China and just driving higher gross margin and reducing our fixed cost base, particularly with the discipline on promotions and the increase in AUR. So we're pleased where we're at, and we see a lot of runway.

And just to round it out on total Tapestry, as Joanne mentioned, based on our FY '21 outlook, you can imply a return to high teens operating margin, even on a 52 week basis, which is above our prior peak at Tapestry rate at 17% despite the external environment. And as Joanne mentioned, it does imply that EPS will hit or approach, I should say, pre-COVID FY '19 type of level. But importantly, we see continued opportunity from here, supported by continued revenue growth and operating expansion across brands. I think we have significant opportunity at both Kate Spade and at Stuart Weitzman to improve their gross margins. And obviously, we'll see the flow through on the higher level of revenues. And if you look in the next a couple of quarters, obviously, third quarter, we'll still see a very good increase in gross margin, led by Coach. Fourth quarter will be slightly pressured in terms of gross margin. And then in terms of SG&A, we would expect SG&A dollar growth to be down in the third quarter slightly, even though we'll have that nice gain, low double-digit in sales. And then in the fourth quarter, we would expect SG&A dollar growth to be up significantly on a year-over-year basis as - given last year's closures, et cetera, et cetera. Going forward, we still think there's significant opportunity for Tapestry's overall operating margin.

Congrats again.

Thanks, Matt.

Thank you.

And ladies and gentlemen, we have time for one more question. Our final question will come from the line of Omar Saad of Evercore.

Thanks for squeezing me in and thanks for all the information. Really, I just wanted to ask about the digital outlet strategy. What you're seeing there, any updates around that? Obviously, your e-commerce business is doing well. So I assume that's doing well. Are you seeing new customers come in through that channel? Are you seeing people cross-shop that channel? As you engage more digitally in that channel, I'd love to see what you're learning about the customers there? Thanks.

Yes. Thank you, Omar. We are seeing a new customer. And as we said, it is both in digital - both in outlet and in full price. It's a younger customer. They're value-oriented, and we see potential for a lot of crossover. So we're excited about this. Again, we recognize that the value customer is an omni-customer. And so we want to be there for that customer. So again, early days we're going to see a lot of growth here. We're going to lean in on this opportunity across the globe. So this is not just a North American opportunity. I see this opportunity present itself in a lot of our territories of the future.

Thanks. Best wishes. Thank you.

Thanks, Omar.

And before we close...

I'll turn it over to Joanne for some closing remarks.

Thank you, Christina. I just want to thank everyone for joining us today. We are pleased with our outperformance to-date in a uniquely challenging environment, and it underscores the progress we're making through our Acceleration Program. I do want to take a moment to thank our talented teams around the world who move mountains to deliver for our customers this past quarter. The challenges will speak, but their passion, energy and ingenuity made these results possible. Our performance this quarter reinforces our competitive advantages of our talented global teams, our great brands and Tapestry enabling platform and gives us confidence in our long-term strategy and ability to create value. And I believe we're positioned to emerge from the pandemic stronger with the ability to capture market share at higher levels of profitability. And I look forward to keeping you posted on our progress in the coming quarters. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.