Tapestry, Inc. (TPR) Q1 2027 Earnings Report, Transcript and Summary

Good day, and welcome to this Tapestry conference call. Today's call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations, Christina Colone.

Good morning. Thank you for joining us. With me today to discuss our first quarter results, our strategies and our outlook are Joanne Crevoiserat, Tapestry's Chief Executive Officer; and Scott Roe, Tapestry's Chief Financial Officer and Chief Operating 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 our comments today and in our presentation slides. For a full reconciliation to corresponding GAAP financial information, please visit our website, www.tapestry.com/investors, and then view the earnings release and the presentation posted today. Now let me outline the speakers and topics for this conference call. Joanne will begin with highlights for Tapestry and our brands. Scott will continue with our financial results, capital allocation priorities and our outlook going forward. Following that, we will hold a question-and-answer session where we will be joined by Todd Kahn, CEO and Brand President of Coach. After Q&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. Our first quarter marked a powerful start to the year with revenue, margin and earnings growth ahead of expectations and strength around the world. Our Amplify strategy continues to drive our outperformance as we consistently deliver our distinctive combination of creativity, craftsmanship and value. During the quarter, we grew revenue by 12% on a pro forma basis to $1.9 billion, expanded operating margin by 230 basis points to over 23% and increased earnings per share by 32% to $1.82. We drove strong customer acquisition as we welcomed 2.6 million new customers to our brands, with Gen Z representing approximately 35%. Our core leather goods category continued to fuel our growth with both handbag AUR and unit growth. Luxury leather goods remains one of the most attractive categories within the consumer space because of its enduring demand, compelling economics and significant runway for growth. In addition, we delivered broad-based growth across regions, gaining share and expanding the market. Growth in North America exceeded our expectations and drove our beats, while International added to our performance with strong double-digit revenue increases. Overall, building on this outperformance, we are raising our full year outlook, reflecting our confidence in the durability of our growth. Behind these results are advantages that compound over time, including our deep consumer understanding, data-driven approach and global scale. Together, they reinforce our conviction that our greatest opportunities are ahead of us. Now, moving to our results by brand. Coach delivered another strong quarter with constant currency revenue growth of 16% and increasing gross margin and profitability, demonstrating the enduring desirability and relevance of our iconic 85-year-old brand. Several factors continue to underscore the durability of our growth. We drove new customer acquisition around the world, welcoming over 2.1 million new consumers in the quarter. This growth was led by Gen Z, a key focus of our strategy. At the same time, existing customers continue to drive strong sales growth, reflecting our ability to attract new consumers and deepen those relationships over time. Our leather goods assortment continued to drive our growth, with handbag AUR increasing at a low double-digit rate and unit volumes growing low single digits. The strength of the brand is evident in how we're growing and in the choices we're making to support durable long-term growth. We delivered handbag AUR and strong unit growth within our $200 to $500 sweet spot, while intentionally deemphasizing more promotional price points, resulting in a planned unit decline below $200. Importantly, we continue to see significant runway to grow both AUR and units while staying true to the brand's core value proposition. Touching on trends by geography at constant currency, we achieved strong global results with North America up 7%, Greater China up 41%, Europe up 27% and Japan returning to growth with a 5% increase. This broad strength demonstrates our ability to grow in established markets while expanding our reach in markets where we remain underpenetrated. Overall, our performance continues to reinforce the power of Coach's expressive luxury positioning and the exceptional execution of our teams. Our heritage and relevance allow us to connect with a broad audience around the world, bringing new consumers into the category and into our brand. With a large addressable market and significant opportunity ahead, we see a clear path for Coach to become a $10 billion brand. Now, to cover our first quarter results in more detail, our key families continued to outperform with strength across the assortment. The New York, Tabby, Teri collections drove Gen Z acquisition and reinforced Coach's leadership in its core category with a robust innovation pipeline ahead. Structurally, we concentrate on product innovation behind core families that build over time, remaining disciplined in our pursuit of sustainable and profitable growth. We also continue to see clear benefits from our One Coach strategy. By unifying the brand experience across channels, we are creating a stronger, more consistent expression of Coach, helping drive customer acquisition, higher AURs and growth around the world. Next, turning to footwear, a significant growth opportunity for Coach, revenue grew over 20% in the quarter, driven by the Margot family and the continued success of sneakers. Turning to marketing. We continue to invest behind sustained cultural relevance and demand creation at scale. This quarter, we launched Live Your Story, the latest expression of our Courage to Be Real brand purpose. Our approach is globally connected and locally relevant, combining consistent brand storytelling with experiences and cultural partnerships tailored to consumers around the world. With this campaign, we are creating connection and empowering self-expression through music, which includes a new global cultural partnership with Spotify. Early results are encouraging with strong consumer engagement and positive brand lift. Our marketing approach reflects the strength of our consumer insights and our ability to turn those insights into meaningful engagement and customer acquisition globally. And finally, we continue to invest in and innovate across our physical touch points with consumers, creating distinctive experiences that build brand desire and deepen engagement with Coach. We are rolling out our expressive luxury store concept globally. These stores are outperforming our investment targets across both new stores and remodels, driving higher traffic and longer dwell times, particularly among Gen Z consumers. This supports our plan to expand the concept to impact approximately 80% of our traffic by fiscal year '30. In addition, Coach Play is building brand desire with our target consumers, while providing insights that we are applying across the broader store experience. Our food and beverage concepts are also outperforming, and we plan to continue expanding our coffee shop presence in North America. Our stores are both a place to connect with consumers and a powerful driver of growth. With strong field teams and a productive store fleet, we see significant opportunity to build on that strength through continued investment and innovation. Looking ahead to holiday, we're leaning into proven drivers of the business, bringing the full expression of Coach to life through our assortment and store experiences. All stores will feature festive decor, including trees with custom Coach ornaments. Our gifting assortment includes fragrance box sets, new bag charms and straps, and seasonal colors and customer favorites such as Tabby, Brooklyn and Chelsea. In closing, my confidence in Coach is grounded in the strength of the brand and how we're stewarding it for the future. We're building on 85 years of heritage with deep consumer understanding, disciplined execution, and continuous innovation, preserving what makes the brand distinctive while connecting with new generations of consumers around the world. This unique combination gives me confidence in Coach's continued leadership and significant long-term growth. Turning to Kate Spade. Our strategy for Kate Spade is consistent and phased. Streamlining the business, solidifying the foundation and positioning the brand to scale for sustainable, profitable growth. During the quarter, revenue declined 10%, consistent with guidance, while gross margin expanded 190 basis points. We remain focused on strengthening the underlying business and continue to make strategic investments to support long-term growth. Moving forward, a key priority is sharpening our creative execution in product and storytelling. Jonathan Saunders, our newly appointed Executive Creative Director, is working alongside our brand CEO, Eva Erdmann, to bring uplifting luxury to life for a new generation of consumers. Now, touching on the first quarter results in more detail. First, we are investing in marketing to build brand relevance and connect with our target consumers. Our fall campaign, featuring Tyla, the brand's new global ambassador, and a constellation of influencers reinforced the brand's ethos to discover, share and spread joy. We achieved greater reach and strong organic engagement with Gen Z consumers whose brand consideration and purchase intent rose after engaging with the campaign. For holiday, we'll build on this engagement through creator content and social activations designed to increase awareness, build brand desire and drive customer acquisition. Next, we continue to strengthen our handbag offering led by our blockbusters. Consistent with our strategy, handbags are driving customer acquisition with nearly 500,000 new customers entering the brand at higher AUR. This was led by our blockbuster families of Margot, 454 and Duo. For holiday, we'll animate these proven styles with seasonal colors and finishes and expand gifting opportunities at entry price points in small leather goods, charms and jewelry. Finally, we continue to focus on creating compelling omnichannel experiences. Stores with our light-touch renovation program continued to achieve a lift in sales through improvements in conversion and average transaction value. We now have approximately 50 locations in this format with plans to add another 30 over the balance of the year. To close, we remain confident in Kate Spade's long-term potential. With the creative team in place, we are bringing together the brand's distinctive identity and Tapestry's capabilities to build lasting consumer demand and position the brand for sustainable, profitable growth over time. Before turning it over to Scott, I want to reiterate my confidence in the durability of Tapestry's growth and my excitement about where we're heading. We have a clear vision, a deep understanding of our consumers and exceptional teams that bring creativity, strategic thinking and disciplined execution to everything we do. Against the complex backdrop, our agile operating model and compelling combination of craftsmanship and value position us to compete and win, driving long-term growth and shareholder returns. With that, I'll hand it over to Scott.

Thanks, Joanne, and good morning, everyone. Our first quarter results highlight the compounding benefits of our financial model. We are driving strong growth at scale, expanding an already strong margin profile and generating significant free cash flow. This gives us the capacity to invest in our brands and business to support durable growth while returning meaningful capital to shareholders. So with that, let me walk through our first quarter results in more detail, starting with revenue trends on a pro forma constant currency basis. Sales increased 12% compared to the prior year with growth across regions. North America sales rose 4%, driven by a 7% increase at Coach, where we continued to deliver healthy growth and expanding gross margins. North America revenue and margins both exceeded our guidance. In Europe, revenue grew 22%, fueled by continued new customer acquisition and growth among local consumers. Given our strong momentum and relatively low market penetration, Europe remains a compelling long-term growth opportunity. We have runway to increase productivity across our existing business and reach more consumers by expanding our digital store and wholesale presence in both existing and new markets. Now, turning to Greater China. Revenue rose 39%, with growth across channels. Coach's quality, craftsmanship and value together with its brand promise of authenticity and self-expression are attracting Gen Z consumers and driving market share gains. Our strong regional teams and more than 2 decades in China give us deep understanding of the local consumer. Building on this foundation, we're investing incrementally in brand building to capture the significant growth opportunity ahead. In Other Asia, revenue increased 23%, led by growth in South Korea and Australia. And in Japan, we inflected to growth with sales increasing 4%. Taken together, we remain confident in the long-term revenue drivers of our business with durable growth in North America, complemented by strong growth in international markets. Now, touching on revenue by channel for the quarter. We drove a 9% increase in direct-to-consumer revenue, exceeding expectations, with store revenue growing low double digits and digital increasing mid-single digits. In addition, we delivered wholesale growth of approximately 30%. Breaking this down by region, with a focus on Coach, our wholesale growth was driven by international markets where we're growing brand awareness and reaching new customers. Conversely, in North America, Coach's growth was driven by our direct business with wholesale, a relatively small portion of sales growing due to strong point-of-sale trends at major department stores. So, overall, strong profitability in each of our channels allows us to meet consumers where they are, delivering brand-accretive experiences at compelling returns. Moving down the P&L. We delivered a first quarter gross margin of 78.7%, up 220 basis points versus last year. This reflected 130 basis points of operational expansion, a 70 basis point net benefit from lower tariffs and duties and a 20 basis point benefit from FX. Gross margin exceeded guidance by 100 basis points, with 50 basis points of our upside coming from operational outperformance and 50 basis points due to tariff favorability. Turning to SG&A. We leveraged 10 basis points versus last year, which was better than our guidance. Marketing represented over 12% of sales in the quarter, up 140 basis points as we continue to invest behind growth while maintaining strong operational discipline. Overall, operating margin expanded 230 basis points in the quarter driving a 24% increase in operating income ahead of our expectations. First quarter EPS increased 32% to $1.82, exceeding guidance by approximately $0.27. This outperformance was driven by an $0.18 operational beat, reflecting higher revenue, stronger gross margin and lower expenses, $0.05 from lower tariffs and approximately $0.04 from a lower tax rate and share count combined. Now, turning to shareholder returns. In the first quarter, we returned approximately $700 million to shareholders, including $600 million in share repurchases and over $90 million in dividends. We now expect to return approximately $2 billion to shareholders in fiscal 2027. This includes an increase of $350 million in share repurchases to $1.7 billion and an expected annual dividend of $1.85 per share. Our strong free cash flow generation enables us to increase shareholder returns while continuing to invest in our brands and business for the long term. And now, before turning to the details of our balance sheet and cash flows, I'd like to reiterate our capital allocation priorities, which are unchanged. We have two foundational commitments. First, to invest in our brands and business to support long-term sustainable growth and to return capital to shareholders via our dividend with a goal over time to increase the dividend at least in line with earnings growth. Beyond these two foundational commitments, our robust cash flow generation provides us with balance sheet flexibility for value creation. This includes the opportunity for share repurchase activity under our previously announced share repurchase authorization. And finally, utilizing our rigorous 4-lens framework, we consistently evaluate opportunities for strategic portfolio management. Importantly, and as previously communicated, before moving forward with any acquisitions, we will ensure Coach remains strong and Kate Spade has returned to sustainable top line growth. These clear capital allocation priorities are underpinned by our firm commitment to a solid investment-grade rating and maintaining our long-term gross leverage target of below 2.5x. Now, turning to the details of our balance sheet and cash flows. We ended the quarter with $782 million in cash and short-term investments and total borrowings of $2.6 billion, representing net debt of $1.8 billion. Our gross debt to adjusted EBITDA leverage ratio was 1.1x, more than a full turn below our long-term target. Adjusted free cash flow totaled $56 million in the quarter and inventory at quarter end was 4% above prior year. Our inventories remain current and well positioned, and we continue to expect fiscal '27 inventory levels to increase year-over-year to support our growth. Now, moving to our guidance for fiscal '27, which is provided on a non-GAAP and comparable 52-week versus 52-week basis. We are raising our full year revenue, operating margin and EPS outlook, reflecting the strength of our business and our confidence in the future. For the fiscal year, we expect revenue of $8.5 billion to $8.6 billion representing 6% to 7% growth on a constant currency basis. FX is expected to be a 30 basis point tailwind for the year. Touching on sales by region on a constant currency basis. In North America, we expect revenue to increase low single digits with Coach up mid-single digits in North America for the year. In both Europe and Greater China, we expect growth of mid-teens. In Japan, we're forecasting a return to growth of low single digits, and in Other Asia, we now anticipate low double-digit growth. By brand, this guidance continues to incorporate high single-digit growth at Coach, and a high single-digit decline at Kate Spade. In addition, our outlook assumes operating margin expansion of approximately 100 basis points to more than 24%, driven by both an increase in gross margin and SG&A leverage. We expect gross margin to increase by approximately 80 basis points, driven by operational improvements and favorable geographic and brand mix. Embedded in our outlook is the assumption for a low to mid-20s percent tariff rate on U.S. imports for fiscal '27 resulting in a modest net P&L benefit year-over-year, including mitigating actions. On SG&A, we expect approximately 20 basis points of leverage, reflecting disciplined expense management while continuing to invest behind brand growth. For some texture on operating profit by brand, we expect Coach's operating margin to be approximately 36% and at Kate Spade, we continue to expect a modest operating loss, reflecting ongoing investment in the brand. Corporate expenses are expected to leverage for the year. Moving to below the line expectations for the year. Net interest expense is forecasted to be approximately $60 million, a modest increase from our prior guidance, reflecting lower cash balances and higher commercial paper borrowings to fund incremental share repurchases. The tax rate is expected to be approximately 18% and our weighted average diluted share count for the year is expected to be approximately 200 million, which includes $1.7 billion in share repurchase activity planned for the year. Taken together, we expect EPS of $8.25 to $8.35, representing 17% to 18% growth versus prior year and a meaningful increase from our prior outlook of $7.80 to $7.90. To help bridge, $0.27 of the increase is due to our Q1 outperformance. Looking at the balance of the year, approximately $0.12 is due to below the line items, driven primarily by incremental share repurchases. The remaining increase primarily reflects higher revenue expectations driven by North America, still within our original guidance range for the region and underscoring our confidence in the achievability of the outlook. As a reminder, our guidance is provided on a comparable 52-week basis, fiscal 2027 includes a 53rd week, which is expected to contribute approximately 1 percentage point of annual revenue growth and have a neutral impact on operating margin. Moving on, we anticipate adjusted free cash flow to approach $1.7 billion. And finally, we expect CapEx and cloud computing costs to be in the area of $300 million or 3% to 4% of revenue. This reflects a year-over-year step-up in investment to support future growth, including incremental investment in Coach's store fleet through new openings and renovations. Approximately 70% of our spend will be related to growing and enhancing our fleet with the balance primarily supporting our ongoing technology and digital investments. Now, touching on expectations by quarter. Our Q2 guidance reflects our latest expectations, while our revenue outlook for the balance of the year is consistent in aggregate with our long-term financial algorithm. In Q2, specifically, we expect revenue growth of 5% to 6% on a constant currency basis versus the prior year. Using the midpoint of the guidance range, nominal revenue growth will be approximately 6%, including an expected FX tailwind of 70 basis points. Our top line guidance incorporates high single-digit growth at Coach, including mid-single-digit growth in North America and mid-teens growth internationally. On a 2-year basis, total Coach sales growth is in the mid-30% range. At Kate Spade, we've embedded a low double-digit decline. Turning to margins. We expect gross margin to increase by 170 basis points in Q2 and SG&A to increase by roughly 120 basis points, driven primarily by increased marketing investment. This results in operating margin expansion of 50 basis points versus prior year. Taken together, we expect Q2 EPS of approximately $3.05, representing low teens growth. Beyond Q2, we continue to anticipate uneven profitability by quarter given macro uncertainty evolving tariff dynamics, and shifts in the timing of investments year-over-year. With that said, for the second half of the year, we've embedded mid-single-digit revenue growth, and using the midpoint of our guidance range, low-teens EPS growth, with Q4 outpacing Q3 given prior year comparisons. Importantly, we remain confident in our ability to drive sustainable growth and build on our proven track record of delivering on our commitments. So to close our prepared remarks, our strong start to the year reinforces the power and durability of our financial model. Our outperformance positioned us to raise our full year revenue, operating margin and EPS outlook and increase expected shareholder returns to $2 billion, all while continuing to invest in growth and competitive advantages. We are building on significant earnings power and cash flow generation with substantial runway to grow both well into the future. We move forward with confidence in the opportunities ahead and in our ability to deliver long-term shareholder value. I'd now like to open it up and take your questions.

[Operator Instructions] And we'll take our first question from Ike Boruchow with Wells Fargo.

Congrats on the great first quarter, strong beat and raise like it. Just curious what gives you guys the confidence in the durability of a mid-single-digit growth in North America Coach, both in the second quarter and the fiscal year. I know you're anniversarying some pretty difficult compares. And then, just more broadly, thoughts on the U.S. consumer backdrop.

Team, you may want to check your mute switches?

Thanks, Ike. Can you hear me?

Yes. Now we can.

Okay. Sorry, having technical -- okay. Thank you for your comments. I'll kick us off and then turn it to Todd to comment on Coach specifically, but our first quarter shows the strength we're delivering around the world. Our strategies are working. We're bringing new customers into the market and our brands, and we're taking share globally. But you asked about North America specifically, and growth in the region drove our beat in the quarter. And you're seeing the results of deliberate actions we're taking to drive durable growth over the long term in our largest market. That's what gives us confidence, and that confidence is reflected in the increased outlook that we shared for the balance of the year as well. Here's what we're seeing from consumers. Leather goods is driving our growth. And I think that shows the relevance of the category with consumers and the durability of this category. And we're driving strong customer acquisition, which is a testament to the execution behind our strategy, and we're seeing growth across generations, our target Gen Z consumer as well as non-Gen Z consumers are growing and we're seeing growth across income cohorts. So we're seeing broad-based consumer resilience. And the backdrop in the U.S., while we see a discerning consumer, they're choosing our category and our brand, and our value proposition has never been stronger. Industry forecast for holiday in the U.S. are calling for mid-single-digit growth. So there's a constructive backdrop overall as we head to holiday. At Coach, we're looking at mid-single-digit growth expectations for both the quarter and for the year in North America. We're ready to compete and win. Our teams are focused, we're aligned and we're executing with excellence. But let me invite Todd to add his perspective on Coach.

And let me be very clear. I am incredibly confident about the durability of the Coach brand to continue to grow both globally and in North America. First, it's worth remembering that in the last 23 quarters, we have grown 22 of them. That's a track record of consistency that I think makes us rather unique. In North America, this last quarter, we grew 7%, which is an acceleration from Q4 on a 2-year stack basis and of course, a beat to our guidance. What's important is almost all of the growth is coming from our direct business, which will continue in -- for the balance of the year. As Joanne mentioned, our guidance embeds Coach North America at mid-single digits for Q2 and for the balance of the year. And as I look at the holiday quarter and the year ahead, we have multiple levers to help us achieve our goals. Our focus on the $200 to $500 price band for handbags will continue to provide us with both AUR and unit growth in that sweet spot. And we have a fantastic core offering. I use the acronym TNT, Tabby, New York family and Teri. And what's important about that core is it's there to address this incredibly large TAM that we have both in North America and globally. But what it also does, because we have such a strong core, we're able to animate off of that core. And I'm going to give you one quick example. 11 months ago, we introduced a bag called Chelsea. Chelsea quickly became one of our best-selling New York family bags at $325. In September, we introduced Chelsea 20, a new bag for $250. And then I'm going to give you a little sneak preview, but in March, we're introducing Chelsea 40, a larger bag at $525. And that's a great example of how we focus on our core, we animate the core, and we provide such incredible value in the sweet spot. And of course, you're going to see us continue to have productivity gains from other categories like footwear and like men's, which will help boost our growth in the quarter and the years ahead. And all of this is fueled by our compelling marketing that maintains the relevancy of our brand for our Gen Z and young consumers. So I remain hyper focused on execution, and we're always balancing our short-term commitments, which we meet with being exceptional brand stewards for this 85-year-old incredible legacy brand.

We'll move on now to Matthew Boss with JPMorgan.

Congrats on a nice quarter. Joanne, so on the durable compounding growth that you're seeing globally at the Coach brand and the multiyear stacked revenue growth in the first quarter that you talked about accelerating across all regions, I guess what are you seeing in the customer file if you looked at the U.S. versus China? And, then Scott, relative to the 130 basis points of operational gross margin expansion in the first quarter, how should we think about the evolution of the drivers that you're embedding over the course of the remainder of the year?

Well, thanks, Matt. Taking the first part of your question in terms of regional differences and what's driving our compounding growth, there's more similarities than differences, and it really starts with the value proposition we're delivering. And Todd touched on the innovation that we're delivering in the market. And we're delivering style and quality at compelling price points. When I say our value proposition has never been stronger, that is a place that we play that gives us access to a broad range of consumers. And so that is, I think, at the core of our growth strategy. And our growth strategy is to welcome more new consumers, it's driving customer acquisition around the world. Our brand values, our brand quality, the styling and innovation we're delivering are resonating with our target Gen Z consumer globally. We're building capabilities regionally to make sure that we execute with an understanding of the local customer and translating the core values of the brand appropriately and effectively for consumers in each market, and we've been very, very focused on making sure we have those capabilities globally. And so the value proposition gives us that access to this really massive TAM. The customer acquisition opportunity is clear, and we continue to build growth -- drive growth through this customer acquisition, and that's the durability of our strategies and you're seeing it around the world. But I'll toss it maybe to Scott on gross margin levers.

Yes. I think first, Todd had a brief add on Coach, and then I'll come back to gross margin.

Thanks, Scott. Just very quickly, building on everything Joanne said, remember, 2.1 million new customers, 40% of them were Gen Z in the last quarter, and we saw that across all markets. And I'm going to take a small victory lap here. Every major market grew, inclusive of Japan, where that was a great example of how our strategy came into fruition. We worked hard the last 1.5 years or so to reset that market and to focus on acquisition, focus on the younger consumer and create relevant marketing for that consumer, and it works. And that's what gives us confidence that we can continue to replicate this strategy over and over again across the world. And when we win with Gen Z, Joanne said it, you've heard me say, we tend to win with every other cohort as well, but we have to stay focused on delivering that value to them. Sorry, Scott. Go give them the good...

Yes. You know I love gross margin, Todd. So I really appreciate the call out on the strong gross margin operational performance and what we see for the balance of the year. Just to ground everybody, remember, we did take up our full year gross margin and operating margin guidance. And I would say that was really led by strength in the Coach brand. We see that really across all the regions. Those drivers are still in place. You saw them in evidence in Q1, and what we see in Q1 and our early looks at Q2 give us a lot of confidence in the guide that we gave for the balance of the year. So what are those drivers? AUR, Todd and Joanne just talked about a reinvestment back in the brand, bringing innovation, bringing things that are resonating against that price value relationship that we protect so dearly. That gives us the ability to price. We've talked about inflation plus a little bit, and we still have a lot of confidence in that on a go-forward basis. Also, don't forget about AUC. Really, we've seen modest inflation pressures this year. We talked about that last quarter. We do see a little fuel-related surcharges. Honestly, they're not significant to the overall -- to our overall cost base, and what we see is reflected for the balance of the year and our current guide, but we also have the best supply chain in the business, in my opinion. And we are able to find efficiency across our network in terms of mitigating some of those costs. And finally, we're growing faster outside of the U.S. than we are inside, and we have better margins outside of the U.S. So that's a structural mix benefit that we see. So whether it's this year's guidance or beyond, we have a lot of confidence in our ability to continue to grow those gross margins.

Congrats. Best of luck.

We'll move on now to Bob Drbul with BTIG.

I guess I was wondering if you could spend some more time on just the performance in China, what you're seeing with that level of growth in the consumer environment over there? And, Todd, if you could just also give us more insight into like where the footwear business is and the sustainability at the Coach brand in footwear would be helpful.

So, maybe I'll start and kick it off, Bob. On our progress in China, in the first quarter, our growth remains strong. And as we just said, new customer acquisition is driving that growth. And we are growing well above market. And it does speak to the values of the brand, but the value proposition in the market as well as our strong regional execution. We've had teams on the ground for decades, and we continue to invest in capabilities in the market. And there's a lot going on in the world in every market, and our work starts with understanding the consumer and the landscape and really understanding what resonates with our target consumers and what they value. And while we do that, we also invest in our future growth and marketing and experiences that they value as well as bringing great product into the market. And in China, overall, we continue to see a tremendous opportunity. We have low -- relatively low penetration in the market, and it is a large TAM, again, at our value proposition. And with this focus on the Gen Z consumer, we're winning today, and we have the capacity and capabilities to continue to drive growth for the long term. For the second quarter and for the year, we've modeled mid-teens growth even as we lap more difficult compares. So there's no change in our long-term expectations in China. We continue to believe it represents significant long-term opportunity. And we just came back from the region, super optimistic about what's happening on the ground. Maybe I'll invite Todd to share some comments about our recent store manager conference and the work we've done in China.

Yes. Thanks, Joanne. We couldn't be more excited about China. As Joanne mentioned, Joanne, Scott, many of us were in China, we had a store manager conference in Macau. So it was a regional conference brought all of our APAC managers together. It was over 1,100 people because we had the opportunity to bring both Kate and Coach in the same venue. And the enthusiasm for our brands, the value and what we're doing at scale is so incredible, and we're seeing it on the ground. We said to you, Bob, at our Investor Day, 70% of our growth was going to come from international. Well, the good news is we're seeing growth domestically, but we're seeing that growth internationally as well. You're going to see us build more new stores. 2027 is a great year for us building stores at Coach. You're seeing us grow materially across all markets. But China, there's just so much untapped potential in China, both in areas that we're not or doubling down in areas that we are. And again, our brand positioning of expressive luxury gives us much more runway than perhaps traditional European luxury because we can go where young people are going and the value proposition is so clear. So we feel extraordinarily excited by China. We could talk about how our co-creation in China and our Dongguan facility has inspired. Actually, Stuart, but now our Creative Director for Kate has seen the magic that can take place there. So that's where we leverage some of our capabilities. On footwear, footwear contributed about 6% of our growth. I mean, we're still walking. We haven't run yet. There is so much opportunity. And footwear is one of those examples where our One Coach strategy comes into being. We launched our Soho sneaker at one price across all channels, and that's resonating. What's interesting about Soho, it's a great acquisition vehicle for our young men. They may -- their first purchase at Coach is often a Soho and then eventually, we get them into leather goods. So we love that. Margot is an outstanding casual shoe in women's. And what we like about footwear, obviously, I love additional UPTs at any of our direct businesses, we love that. But in addition, it's a great beachhead for wholesale accounts in markets that maybe we were underpenetrated like Europe. So you see us drive a lot of wholesale business through that category in a very profitable way. So we love the frequency of purchase of footwear. We love the additional UPT, and we love that. It's expanding us across all genders.

We'll move on now to Laurent Vasilescu with BNP Paribas.

I think in the prepared remarks, it was called out that the expressive luxury concept stores will touch about 80% of your traffic by 2030, which I found very interesting as a data point or target. Maybe if you could, for the audience, can you share how much of these new concepts are touching the current fleet, and how do we think about that rolling up to 80% as we think about from a CapEx and a return on invested capital perspective?

We are really pleased with what we're seeing with expressive luxury and the store design. I think we mentioned last year in the first 6 months of last fiscal, we tested a couple of stores, and we paused because we really wanted to see how the consumer responded to it. And that allowed us to go slow to smooth, smooth to fast. Now we're growing faster because we have the capabilities and understanding, and it's working. In every store so far, we're seeing a positive reaction. We're seeing positive reaction to dwell time. We're seeing positive reaction to how the consumer experiences our stores. We've taken many more elements of play and put them into expressive luxury. Our stores are engaging and not off-putting. And what we're doing is unlike times in the past, we're touching some of our biggest stores first, not necessarily whether they were a retail or whether they were traditionally an outlet store. Last week, we just launched and if you happen to be in L.A. area, Citadel, one of the most beautiful stores, if you close your eyes and walk in it, I challenge you to believe that you're in an outlet store because you're not, you're in a One Coach store. So it looks fantastic. And I think I'll turn it over to Scott to let him talk to you about the CapEx elements since I hand them the check.

Yes. Yes. Well, I can assure you there's a close conversation between Todd, and me on CapEx. But -- so here's the great news. It's not that expensive, right? If you look at our total CapEx, $300 million, 3% to 4% of sales, very consistent with what we've talked about in our long-range plan. About 2/3 of that CapEx is related to -- specifically to doors or stores. We are opening stores predominantly outside of the U.S., a few in the U.S., but we're also doing the retrofit. So all of that is included in that roughly $200 million. And as it relates to the returns, we -- first of all, we haven't touched a lot of these stores in some of them a decade or so, right? So this is ongoing built into our plans, and this is, call it, hygiene. That said, it's early days, but we do expect that we'll see some improvement, not just from making them look better, as Todd talked about, but also we learned a lot over the years how to lay out a store more effectively, what One Coach means and how we get the most out of that, some of the new categories and the applications there. So there's multifacets benefits to the retrofits that we're looking at.

We'll move on now to Michael Binetti with Evercore.

Great quarter. Let me add my congrats up and down line, really nice to see. I think, Joanne, on the holiday, you said industry forecast for North America to be a mid-single-digit growth. You expect mid-single-digit growth. Are you seeing the industry trending at that rate as we head into the holiday and maybe where you see any opportunities that you're most excited about for the brand to gain share outperform? And then I just want -- I guess, on maybe a jump ball, I think North America promotions were lower in first quarter than they were in the first quarter a year ago. If I'm right on that, maybe still a very healthy full price growth, it looks like. And as you look at 2Q, does the plan also include lower promotions? Or just what's baked into your assumptions for the quarter?

Thanks, Michael. We're just getting started on holiday. So I think our consumer research shows that only 25% of consumers will have started their shopping by Black Friday. So I fall into that category. So I'm pleased to hear that. But we're just getting started. We feel great. We have momentum in North America and in the U.S., as we talked about, the first quarter beat came from the North America market. And we took up our expectations for the year based on our confidence in the North America market. And I think the backdrop in the forecast is constructive overall. And in our research and in third-party research, we hear that more people are planning to spend more this holiday than a year ago. And so there are a lot of data points that support constructive backdrop for holiday. We continue to steward our brand. What you saw us deliver in the first quarter includes discipline on promotion. So North America is our largest market. And our focus in terms of being great stewards of our brand is making sure that we're managing the brand for durable long-term growth. And we see that opportunity in North America as well as outsized opportunities in international. So as we're stewarding the brand, and I'll toss it to Todd in a second to talk about how the team is really being exceptional stewards of the brand and managing our growth in a very healthy way to protect the durability of growth over time. That's what we see sort of long term. That's our strategic approach. And our day-to-day management reflects that long-term strategy. And maybe, Todd, I'll send it to you to talk about that.

Thanks, Joanne. Yes, we've got a lot of learnings on this. And it really starts with the value of our offering as is. And what we have found over time is it becomes less significant to the call to action of around price is not the driver. In fact, Black Friday, some of our "doorbuster" opportunities, while they performed, they were the least engaging element of our selection. This year, we've taken that learning and what we said is, instead of necessarily screaming price, we're screaming limitations, meaning if there's a colorway you want, you're going to have to come and get it the first few days because it won't be there. So that rarity, that exception is going to be what's compelling. And what we're seeing across the fleet, and this goes back to our One Coach strategy. What people want is our best product. They want Tabby, they want Teri. They want the New York family. They want Brooklyn, and they want it in the colorways they want that are relevant for the season or the animation that we provided in those families. And our price points are still accessible. So we're going to lean in on that. We're going to lean in on the colorways. We're going to lean in on how compelling our assortment is. And you know what? Get a bag charm while you're at it, you personalize the offering. That's what's exciting for us. So yes, net-net, you should see us be even less promotional, staying focused on the $200 to $500 sweet spot for handbags.

We'll move next to Aneesha Sherman with Bernstein.

Congratulations on the quarter. I actually wanted to jump off on that last point, Todd, that you made around the $200 to $500 sweet spot and your strategy to intentionally shrink the sub-$200 business and grow that sweet spot. So do you envision a continued upward move on price mix for Coach beyond the $500 price point as well? And can you talk about how that factors into the mid-single-digit North America growth? Is that the primary driver of the mid-single-digit North America growth? And then stepping back, you've talked about the broadening value gap versus the European luxury brands. Is there any risk that this value gap could narrow as some of those brands are now trying to win back aspirational customers by mixing lower on AUR to try to compress the value gap versus Coach?

Sure. So let's be clear, $200 to $500 is our sweet spot that will remain our sweet spot. Occasionally, we have bags over $500. I walk around with an Empire bag. It's a compelling bag. It is over $500. Our growth is coming from this $200 to $500 sweet spot in handbags. And I want to be clear, we have bags under $200. We have SLGs under $200. We have a lot of price points to enter the brand, whether it's through footwear, whether it's through jewelry, fragrance that people, particularly a young person can come in and their first purchase at a Coach brand doesn't necessarily have to be Tabby or Teri, but we would like them to aspire to that. So we will continue to innovate with newness across the entire spectrum. So you'll still see innovate under $200. But one of the things we have found is, generally speaking, under $200 bags are the most promotional. So we tend to want to take it up just a little bit. We are clear on: we are not going to do maybe what some other people do is just because the brand is hot to start going materially above our sweet spot because we want to stay focused on point of market entry. And today, that's Gen Z, eventually that will be Gen Alpha. In terms of the European luxury and other people, the delta is material. So the fact that we -- look, we welcome competition. We thrive on competition. We are not scared of competition. I think the white space is so materially different. And remember, what we're focused on. We're focused on customer acquisition to drive growth. We know if we acquire a customer, if their first bag purchase, if their first footwear purchase is compelling, we have them for life. So this will stay in our DNA. And we have so much room on that TAM. Again, not just internationally, but here in North America, there are millions of customers who today can afford and have yet to experience the wonderfulness of owning a Coach bag, we want to get them into our family.

We'll move next to Dana Telsey with Telsey Group.

As you think about the Kate Spade brand, Joanne, how are you framing the progress there? How you're thinking of icons and adding to the collections? Is it moving as you would have expected? And then on the store growth, any difference in performance outlets versus full price? And how you think about the availability of newness in the outlets because it certainly seems like when I go there, you can sell through higher price points in the outlets also. Anything you're seeing there and how it differs by region?

Thanks, Dana. The Kate Spade business was in line at a revenue level, in line with our expectations at expanding margins this quarter, and we are making choices to improve the quality of the business to set a stronger foundation. Remember, our strategy has been to streamline the business and solidify that foundation to position it to scale. And our focus, to your point, is building stronger brand desire to accelerate our turn, which includes driving more distinctiveness in the product and storytelling. I'm really pleased to hear that you're in our outlet stores, and you believe, like I do, that there's quality and pricing power in that product that we're delivering. Jonathan Saunders, our new Executive Creative Director, has hit the ground running and is working on sharpening that creative execution behind Kate Spade. He has an incredible sense of the brand DNA, and we're modernizing that for today's consumers. So I'm excited about the future of Kate Spade. Both in terms of the product, but also the storytelling and the investments that we're making, and we'll continue to execute against our plan.

We'll move next to Mark Altschwager with Baird.

Just first, on Kate Spade, can you help us think through the cadence of the turnaround from here? What needs to happen in product and customer engagement before the improvements can translate to the top line. And then, Scott, SG&A, I believe the outlook for the second quarter and full year implies more leverage in the back half. Can you just talk us through the drivers there? How much of that is in marketing versus other expenses?

Mark, on Kate, I sort of touched on the phases of our strategy, streamlining the business, closing unproductive stores, stepping away from promotional activity, and we see that having a headwind on the top line. We're managing the phases of the strategy in a very disciplined way, as I said in the first quarter, revenue met our expectations, and we're expanding gross margin. So that's a really important foundation. As we move through the year, and I had an opportunity to be in Dongguan and see some of the early work that Jonathan and teams are doing as we sharpen that creative execution, we do expect progress as we move into the back half of the year and as we move forward. And I neglected to mention, on Aneesha's question earlier on stores, we are also investing. So we're investing in marketing and we're investing in remodels and effectively driving improvement in our store fleet, more engagement with consumers, a better experience, and we're seeing that translate. What we need to see is higher customer acquisitions to drive long-term growth. And we're building our handbag assortment with that in mind. We're seeing early signs and green shoots with handbags driving 500,000 new customers in the quarter. They're coming in at higher AUR. We're expanding margins. So some of those early green shoots we're monitoring, and we expect to make progress as we move forward.

Yes, Mark, and I'll take your SG&A question. So let me just point you to the full year guide. So 100 basis points of operating margin expansion, that includes about 20 basis points of SG&A. That's pretty consistent with where we were in our initial guide for the year. And what's underneath the covers on that is more of the same, right? We've got marketing investments, about 12% of sales. That's an increase from the prior year and, like, 4x from where we were if we go back 5 years ago or so. And we believe that's a big part of the customer acquisition engine that we have. And we have every intent to maintain our investment in brand, and that's one of the things that gives us confidence in future growth. But underneath that is a lot of leverage across the rest of the P&L, I would say a testament to the operational discipline. The other thing, I can't talk about guidance without talking about cash, too. So it's top line growth led by Coach North America direct in Q1 and based on the balance of the year, mostly in Q2 based on what we see; it's gross margin expansion for all the reasons I talked about earlier. There's discipline in the P&L. We're reinvesting back into the business. And I'll just remind you, we upped our buyback by $350 million to a total return to shareholders of $2 billion. That includes dividends and repurchases. So I mentioned that to say our ability to keep investing and our confidence to return cash hopefully gives you some indication of not only the strength of the business, but our conviction that we have a long-term durable growth model here and a lot of confidence in the future.

That's great. Congrats on the momentum.

Thank you. That concludes our Q&A. I will now turn it over to Joanne Crevoiserat for some concluding remarks.

[indiscernible] and thanks for joining us. To recap, our first quarter results are a testament to the way we're stewarding our brands with discipline and the exceptional execution of our team whom I want to recognize and thank. I'm confident in what we've built. I'm excited about where we're headed, and I appreciate your continued interest in our story. Thank you.

This concludes Tapestry's earnings conference call. We thank you for your participation.