Tapestry, Inc. (TPR) Q3 2018 Earnings Report, Transcript and Summary

Good day, and welcome to this Tapestry conference call. [Operator Instructions]. As a reminder, today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations and Corporate Communications at Tapestry, Andrea Resnick.

Good morning, and thank you for joining us. With me today to discuss our quarterly results and annual forecast are Victor Luis, Tapestry's Chief Executive Officer; and Kevin Willis, Tapestry's Chief Financial Officer. Before we begin, we must point out that this conference call will involve certain forward-looking statements, including projections for our business in the current or future quarters or fiscal years. These statements are built upon a number of continuing assumptions. Future results may differ materially from our current expectations, based upon a number of important factors, including risks and uncertainties, such as our ability to achieve intended benefits, cost savings and synergies from acquisitions, expected economic trends or our ability to anticipate consumer preferences, control cost, successfully execute our operational efficiency initiatives and growth strategies and the impact of tax reform legislation. Please refer to our latest quarterly report on Form 10-Q, our annual report on Form 10-K and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors. Please note that historical trends may not be indicative of future performance. Also certain financial information and metrics that will be discussed today will be presented on a non-GAAP basis. These non-GAAP measures exclude certain items related to our operational efficiency plan, integration and acquisition-related charges and the impact of tax reform legislation as well as the impact of foreign currency fluctuation were noted. You may identify these non-GAAP measures by the terms non-GAAP or constant currency. The company believes that presenting these non-GAAP measures is useful for investors and others to evaluate the company's ongoing operations and financial results against historical performance and in a manner that is consistent with management's evaluation of the business. You may the corresponding GAAP financial information or metric as well as the related reconciliation on our website, www.tapestry.com/investors, and then viewing the earnings release posted today. Now let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our third fiscal quarter 2018 results for our 3 brands. Kevin Willis will continue with details on financial and operational results and our outlook for the balance of FY '18. Following that, we will hold the question-and-answer session, where we will be joined by Josh Schulman, Chief Executive Officer and Brand President of Coach; and Todd Kahn, Tapestry's President and Chief Administrative Officer. This Q&A session will end shortly before 9:30 a.m. We will then conclude with some brief summary remarks. I'd now like to introduce Victor Luis, Tapestry's CEO.

Good morning. Thank you, Andrea, and welcome, everyone. We are delighted to report a solid third quarter, which met our overall expectations from both a top line and bottom line perspective as we drove double-digit gains in sales, operating income and EPS on a non-GAAP basis, leveraging the benefits of Tapestry's multi-brand global model. As noted in our press release this morning, our results benefited from strong organic sales growth at Coach as well as the contribution of Kate Spade, which more than offset from execution issues and cost headwinds at Stuart Weitzman. Naturally, we were excited to drive continued positive global comps for Coach with outperformance in North America driven by our strong product offering and the successful global relaunch of Signature in retail. We were also pleased to deliver a better-than-expected consolidated operating margin, reflecting overall tight expense control, which Kevin will review in more detail shortly. The Kate Spade integration into our operating platform continued smoothly during the quarter as we executed on the strategic actions to position the brand for long-term success. These included the pullback on flash sales and wholesale disposition while taking substantial steps to unlock cost and operating synergies. We remain especially excited about the opportunities for the brand, both in terms of revenue growth, driven by distribution expansion and productivity, and profitability improvements as we leverage our scale across our supply chain and corporate functions. We now expect to achieve synergies in the area of $45 million in FY '18, primarily related to SG&A as well as earlier-than-expected realization of COGS benefits. We are continuing to target run rate synergies from both COGS and SG&A of approximately $100 million to $115 million in fiscal 2019. Over the last few months, we also made several key hires across our brands. At Kate Spade, we announced Anna Bakst as CEO and Brand President. She brings a rare combination of business acumen, directly related fashion experience and strong leadership skills to the company. Together with the recently appointed Creative Director, Nicola Glass, we now have the right senior management in place to lead the talented Kate Spade team and drive the business globally. At Stuart Weitzman, we're excited about the appointment of Eraldo Poletto, who just joined us as CEO and Brand President. He brings 30 years of fashion experience and a proven track record in driving luxury brand growth globally. On the global business development front, we closed on the three transactions we announced on our last call, all focused on two global strategic priorities, first, leveraging the opportunities for our brands with the Chinese consumer globally, highlighted by the acquisition of Stuart Weitzman business from our distributor in Northern China in mid-February and taking control of our at Kate Spade joint ventures for Mainland China, Hong Kong, Macau and Taiwan in early January; second, unlocking the value of a multi-brand operating model. To this end, we completed the buyback of the Coach business in Australia and New Zealand from our distributor in early March and created a Tapestry multi-brand hub and center of excellence in Sydney. This allows for greater control of our brands and the structure and resources to drive growth across our portfolio in an important market as we look to consolidate other Tapestry brands on to the platform in the future. As we've demonstrated over time with our past experience, we believe that controlling these businesses directly allows us to accelerate international growth and enhance each brands' development in these markets. Moving to category trends. And as you know, given our new reporting structure, we have moved to a global category update. During the third quarter, we estimate that the men's and women's premium handbag and accessory market, which is over $40 billion, grew at a low double-digit rate globally, benefiting in part from the weaker U.S. dollar. On an organic basis, we estimate that the global category rose high single digits, similar to the December quarter. Now turning to results by brand. I'd like to discuss third quarter performance and fourth quarter outlook for Coach. Overall, our third quarter performance was very consistent with our second quarter with global comparable store sales in bricks and mortar driven primarily by conversion, reflecting our strong product offering. Internet was also a strong contributor again this quarter, adding about 1 point to global comp. For the third quarter, Coach sales increased 6% as reported and 3% in constant currency with international leading on a reported basis as positive underlying growth was augmented by the weaker dollar while North America led on a constant currency basis. The brand's international constant currency sales growth was driven by increases in Europe, Asia and Greater China while Japan contributed slightly on a reported basis. Globally, we saw our business with the Chinese consumer increase with notable strength in Hong Kong and Macau, Korea, Japan and other Asian markets. During the quarter, our global Coach comp remained strong, rising 3%. North America again outperformed despite a tougher sequential compare, helped by the Easter shift. Overall, Greater China comps rose with the Mainland and Hong Kong and Macau, comping positively. This is the first comp gain in Hong Kong and Macau since the fall of 2014, when the retail market was negatively impacted by geopolitical events. Comps in Europe were also up while Japan was slightly positive. Moving to wholesale. Our North America shipments grew significantly during the quarter, driven in part by footwear as we've now anniversary-ed the spring '17 door closures while our promotional days in the channel declined 20% from last year. We were especially pleased with our core handbag and accessory sales growth at retail across department store partners. Our international wholesale revenue declined due in part to the transition of Coach Australia and New Zealand to a directly operated retail model as well as continued weakness in Korea travel retail locations. At POS, sales rose slightly. Turning to Coach product details and starting with retail. We were pleased with our performance in the quarter in the successful execution of our strategic vision. Specifically, we remain focused on cascading the level of innovation across the pyramid of price, occasion and function throughout our assortment. Highlights of the quarter include the successful relaunch of Signature in our retail channel, which exceeded our expectations globally. The updated version of our Signature pattern is inspired by and rooted in our history but has been reinterpreted for today. We relaunched Signature at the top of our pyramid in our spring runway show and marketing campaign as part of a collaboration with the iconic illustrations of the artist Keith Haring. This assortment, which juxtaposed the artist's work against Coach Signature and leather craftsmanship, provided the fashion halo for the season. Its performance has exceeded expectations, driven by success in handbags and lifestyle categories, notably ready-to-wear. In addition, we continue to drive innovation across price buckets with momentum in Coach 1941, driven by the Dinky and Rogue, as well as the very successful launch of the Charlie and Parker bags, offering a compelling combination of fashion and function at core price points under $400. Finally, in men's retail, similar to women's, Signature and Keith Haring exceeded expectations across categories while we drove solid growth in ready-to-wear. Supporting our retail product initiatives, spring marketing focused on balancing disruptive messaging and broad appeal. To this end, we successfully amplified the Signature relaunch, partnering with a variety of independent artists and creators globally to playfully reinterpret this iconic brand code. Importantly, our spring campaign showcased Selena Gomez driving impressions and supporting the introduction of our new Charlie and Parker bags. Finally, on men's, we launched a new campaign, featuring Chinese male celebrity Timmy Xu, to great success with our global Chinese market. Looking ahead to fall, we're excited about the expanded collaboration with Selena Gomez, which will extend to ready-to-wear. During the quarter, we were particularly pleased with the continued recruitment gains in both our North America and global customer databases and across channels, in part reflecting our strategy to showcase Selena to cut through to a broader audience. In addition, in our brand tracking survey fielded in March, we saw an increase in repurchase intent among category drivers while Coach continues to lead in key emotional and functional attributes among the broad premium market. Building on the successful Q2 launch during the quarter, we were excited to expand our Coach Create customization service, which allows customers to co-create bags with unique details, such as embossed leather tea roses, souvenir pins and prairie rivets to 6 new international markets, bringing the concept to over 250 retail stores worldwide. We also added new handbag and small leather goods silhouettes to the offering while rolling out expanded customization to the footwear category. In many doors globally, this customization is done by an on-site craftsman while the customer shops, a key point of differentiation from other brands that offer personalization. We also continue to expand our monogramming service, which will be available by year-end in over 50% of our global direct retail fleets, immersive craftsmanship bars or monogramming stations. I wanted to touch on our footwear initiative, which as you know, we took in-house and launched last summer. This spring, consistent with our strategy, we expanded our offering within the sport category while enhancing the dress assortment. As a result, we saw growth in footwear globally in the quarter with success in sneakers and heels, driven by novelty. As mentioned, we launched our footwear in our directly operated stores globally and in North America wholesale this year. And during the quarter, we made plans to expand distribution to key wholesale partners in Europe in FY '19. Looking ahead to our retail product strategies for the fourth quarter. Our goal is to continue to drive innovation and differentiation across our offering. Specifically in retail, we will continue to drive fashion newness across our assortment for Mother's Day, including a range of new feminine styles and shapes, such as the Rogue embellished with tea roses and new smaller sizes of Parker, Charlie and camera bags, perfect for day to evening occasions. We will also build upon our Signature offering, including an expanded range of small leather goods as we continue to be encouraged by our successful launch and the current trend for highly differentiated logo product in the broader market. Introduce our Disney and Coach Dark Fairy Tale collaboration, a unique capsule collection which again offers another backdrop in fashion context for Signature and leathercraft for women and men. And as part of our pre-fall collection, we will relaunch the duffle, an iconic Coach silhouette, celebrating the brand's rich heritage. This archival shape will be reinterpreted with modern details and function, featuring new hardware and our glove-tanned pebble leather. Moving to outlet and starting with Q3. Our spring collection celebrated vintage 1950s American motifs featured in modern ways. We drove innovation across our women's leather goods offering with the successful introduction of the Brooklyn Carryall and the Isla Chain Crossbody. We also successfully introduced newness in print with animations designed specifically for the channel while introducing a new canvas tote. Looking ahead for the balance of the year. We will continue to infuse newness across silhouettes, price points and materials. Importantly, we have a powerful Mother's Day assortment, featuring florals, bows and other feminine details across a variety of new silhouettes. Throughout the season, we will balance new silhouette launches, emphasizing leathercraft and exploring new materials while offering a compelling and playful summer assortment in June. On the men's side, we also have an expanded assortment of newness for Father's Day in June. Overall, we are pleased with Coach's performance in the quarter. As we look forward to the balance of the fiscal year and beyond, we are well positioned to generate positive comparable store sales, driven by compelling product, our differentiated modern luxury store experience and bold marketing campaigns. Moving to Kate Spade. Sales totaled $269 million in the third quarter, essentially even with the prior year on a pro forma basis, reflecting our strategic reduction of both wholesale disposition and flash or surprise sale, offset by the consolidation of China sales, strong domestic performance and FX, given the dollar weakness. Bricks and mortar comps were down 1% globally, an improvement from the last 2 quarters, benefiting from the Easter shift in North America while total comp was down about 9%, impacted by the purposeful reduction of promotional sales online. Highlights of the quarter were the strength of innovation in retail. Within handbags, our core groups continued to perform, supported by our nylon offering, which in turn was driven by the backpacks, crossbodies and our new take on the sam, the bag the brand was founded on 25 years ago. The customer continued to respond to the Make It Mine customization program, which was expanded to include an additional silhouette, a convertible backpack style and new design elements. And in ready-to-wear, it was all about dresses in great spring florals. As we've noted in our last two calls, we are especially excited about our trend in ready-to-wear and have been testing a different visual merchandising approach. This test is focused on zoning retail stores by department rather than monthly introduction, allowing for an easier category shopping experience. We expect to expand this program to 10 additional doors in Q4, taking us to 25 doors in total. Finally, we were thrilled with the response to the joint launch of our first smartwatch with Fossil, which sold through quickly both in the U.S. and Japan. And we look forward to increasing our pace of innovation with this key licensing partner. And in outlet, where we've been leveraging a stronger inventory position, we capitalized on the opportunity around bundling, which continues to work with this customer. In addition and echoing retail, backpacks and the crossbody silhouettes performed well. In small leather goods, cosmetic and travel styles exceeded plan. Supporting our spring product and seasonal marketing, including the sam campaign featuring Margaret Qualley and the 360-degree Bloom Bloom program focused on spring. Our year-long 25th anniversary campaign, focused on the brand's history and heritage, invited our customer to celebrate with us. We also built awareness and interest in our smartwatch launch and in our Full Bloom fragrance introduction with two videos and related collateral, featuring strong multigenerational women. Store events were held throughout the quarter, driving traffic into bricks and mortar. Similarly, in outlet, we used on-mall advertising to point to Kate Spade as a gifting and self-purchase resource for Lunar New year, Presidents' Day and Easter, using windows with updated creative and LED screens to drive traffic. Within our U.S. brand tracking, which also included Kate Spade, the brand has a distinctive positioning around making women feel fashionable, feminine and fun. In addition, among the broad premium market, Kate Spade holds a leadership position in handbags being viewed as on-trend. Overall, we have taken significant steps to position the brand, building a foundation for solid and sustainable growth. As we look ahead for Kate Spade, we will continue to significantly curtail promotional impressions by reducing surprise sales and pulling back on wholesale disposition and still expect about $100 million impact for the full year. Under the creative direction of Nicola Glass, we will accelerate innovation in the core handbag and accessories categories, along with ready-to-wear and tech, leveraging the Tapestry platform, notably our supply chain and product development capabilities. We are excited that we will be able to share her vision for the brand in September during New York Fashion Week. We have reviewed the store fleet and are already leveraging opportunities to maximize the brand's global footprint. To this point, we opened 9 new stores in Q3 and closed 11. We are also now including the 50 stores in Mainland China, Hong Kong, Macau and Taiwan as directly operated locations in the wake of taking operational control of the JVs in those markets this quarter. As noted, we believe Greater China is a huge opportunity for the brand, given low single-digit unaided brand awareness and Kate's unique aesthetic. And of course, I couldn't be more thrilled to pass the leadership baton to Anna, who has hit the ground running. She's already begun her global store visits and new product development work with Nicola and her team. Turning to Stuart Weitzman. Sales rose, driven by the global direct business, which in turn was fueled by distribution growth, including the buyback of the brand's Northern China business and e-commerce. We were disappointed with the overall level of sales growth, which was impacted by both lower-than-expected sell-through of carryover styles as well as the development and production challenges on new collections, issues that intensified towards the quarter-end and have impacted timely delivery of product. Our dedicated Stuart Weitzman supply chain based in Spain was not prepared for the level of complexity and new development in this transitional period for the brand. As a result, we are in the process of adding infrastructure and capacity to support the brand's creative vision with quality on-time deliveries. While these efforts are underway and bode well for the long term, we expect to continue experience some disruption through the fall/winter season. Therefore, we now believe Stuart Weitzman sales and profitability will continue to be under pressure in the fourth quarter with only slight revenue growth for the fiscal year. Longer term, we have great confidence in the team's ability to capitalize on Stuart Weitzman's potential in both the footwear and leather goods categories as we continue to evolve the brand identity across global markets under Giovanni Morelli's creative direction and Eraldo Poletto's leadership. Importantly, we expect to return to top line growth in the second half of fiscal 2019. We are also looking at distribution opportunities globally, notably in select Asian markets, where we want to leverage the rapidly growing demand for the brand. Key among these are China, where, as I mentioned, we completed the buyback of our Northern China business, and in Japan, where we can take advantage of Tapestry's deep market knowledge and business development team in launching Stuart Weitzman. Now I'll turn it over to our CFO, Kevin Wills, for details on our third quarter financial results and guidance for fiscal 2018. Kevin?

Thanks, Victor, and good morning, everyone. Victor has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of the quarter as well as our outlook for the fourth quarter fiscal year 2018. Before I begin, please note the comments I'm about to make are based on non-GAAP results. Corresponding GAAP results as well as the related reconciliation can be found in earnings release posted on our website today. Turning to the financial details. Net sales totaled at $1.32 billion as compared to $995 million in the prior year, an increase of 33%, driven by the acquisition of Kate Spade and organic growth. On a constant currency basis, total sales increased 30%. Coach net sales totaled $969 million as compared to $915 million in the prior year, an increase of 6% on a reported basis or 3% on a constant currency basis. Kate Spade net sales totaled $269 million, reflecting in part the strategic pullback in wholesale disposition and online flash, partially offset by the consolidation of joint ventures from Mainland China, Hong Kong, Macau and Taiwan. Stuart Weitzman net sales totaled $84 million, an increase of 5%, including the benefit of the Northern China buyback and currency tailwinds that negatively impacted at the execution issues mentioned earlier. Gross profit totaled $913 million while gross margin was 69% as compared to 70.9% in the prior year. The addition of Kate Spade pressured our overall gross margin by approximately 120 basis points, given the lower margin profile of the Kate Spade brand. Gross margin for Coach was 71.4% as compared to gross margin of 71.7% in the prior year. For the quarter, we experienced 50 basis points of pressure due to bringing the women's footwear business in-house while lower product costs largely offset the negative impact of commercial activity in the outlet channel. Although the negative year-over-year impact from outlet promotions was consistent with the prior quarter, it was slightly more negative than expectations. Finally, currency benefited the brand's gross margin rate of 50 basis points in the quarter. Importantly, we continue to expect Coach brand gross margin to be flat to slightly higher for the full year. Kate Spade gross margin was 64.3%. This performance was above our expectations in prior year, benefiting in part from lower discount rates in the North America outlet channel. Gross margin for Stuart Weitzman was 56.6% as compared to 62.1% in the prior year. The year-over-year decline was due to a combination of factors as we anniversary-ed significant gross margin expansion in the prior year. First, we experienced a negative impact of 220 basis points from FX headwinds. Second, we had a higher penetration of carryover product and softer-than-expected sell-throughs resulting in increased markdown sales versus the prior year. And third, the production delays we encountered negatively impacted both our retail and wholesale channels. The inability to access new product led to lower-than-expected full-price selling in retail. And we were unable to achieve the planned and traditional level of wholesale full-price reorders. SG&A expenses totaled $729 million and represented 55.1% of sales as compared to 54.6% in the year-ago period. Coach SG&A expenses totaled $450 million and represented 46.4% of sales compared to 47.3% in the year-ago quarter. The year-over-year expense leverage of 90 basis points was due to sales growth and solid expense control. Kate Spade SG&A expenses were $159 million and represented 59.2% of sales. Stuart Weitzman SG&A expenses were $52 million and represented 62.4% of sales as compared to 56.7% of sales in the prior year. The year-over-year SG&A deleverage was principally due to sales falling below expectations as well as higher marketing expenses and the incremental cost associated with directly operating the Northern China business. In addition, please note that Tapestry's total SG&A includes corporate costs as outlined in our press release. Operating income for the quarter was $184 million, an increase of 14% versus prior year while operating margin was 13.9% as compared to 16.3% in the prior year. The addition of Kate Spade pressured our overall operating margin by approximately 230 basis points. Operating income for Coach was $242 million while operating margin was 25% versus 24.4% in the prior year. Operating income for Kate Spade was $14 million while operating margin was 5.1%. Stuart Weitzman had an operating loss of $5 million in the quarter. Net interest expense was $17 million in the quarter as compared to $4 million in the year-ago period. The year-over-year increase was driven by higher debt levels associated with the Kate Spade acquisition. Our non-GAAP effective tax rate for the quarter was 5.6% as compared to 17.5% in the prior year, reflecting in part the U.S. tax legislation changes. In addition, the impact associated with the adoption of the Accounting Standards Update, ASU 2016-09, for the accounting of the employee share-based payments which cannot be forecasted, lowered the effective tax rate by approximately 5% in the third quarter. Net income in the quarter totaled $158 million as compared to $130 million in the prior year. Earnings per diluted share was $0.54 versus $0.46, representing a year-over-year increase of 18%. Now moving to global distribution by brand. For Coach, we closed a net of 8 locations globally, primarily in North America. We also acquired the Coach business in Australia and New Zealand, where we ended the quarter with 21 locations. Taken together, we finished Q3 with 980 directly operated locations worldwide. For Kate Spade, we closed a net of 2 locations globally. We also assumed operational control of our joint ventures from Mainland China, Hong Kong, Macau and Taiwan, where we finished the quarter with 50 locations. Overall, we ended the quarter with 332 directly operated stores. And for Stuart Weitzman, while we had no openings or closings in the quarter, we acquired the distributor business in Northern China, where we ended Q3 with 20 stores. Therefore, we ended Q3 with 103 directly operated locations globally. Turning to our balance sheet and cash flows. At the end of the fiscal third quarter, our cash and short-term investments were approximately $1 billion as compared to $1.9 billion in the prior year. In addition, we have $1.6 billion of senior notes as of the end of the quarter compared to $600 million a year ago. As a reminder, in January, consistent with our commitment to conservative balance sheet management, we fully repaid $1.1 billion in term loans, utilizing excess cash, resulting in a reduction of our leverage by about a turn on a debt-to-EBITDA basis. Inventory levels at quarter-end were $714 million versus ending inventory of $479 million in the year-ago period. Excluding the impact of Kate Spade as well as the inventory associated with the regional buyback activity in the quarter, total inventory increased 7% versus prior year, consistent with organic sales growth. Importantly, we've now rightsized the inventory at Kate Spade. Net cash from operating activities in the third quarter was an inflow of $156 million compared to an inflow of $202 million last year. Our CapEx spending was $60 million in Q3 versus $70 million last year. Free cash flow in the quarter was an inflow of $95 million versus an inflow of $132 million in the same period last year. Now turning to our capital allocation policy. Our long-term priorities remain unchanged, first, we will continue to invest in our brands in order to drive sustainable growth and value creation; secondly, we will seek strategic acquisition, looking for great brands with opportunities for expansion; and finally, returning capital to shareholders with a focus on dividends. Now moving to our 2018 outlook. Consistent with our prior practice, the following guidance is presented on a non-GAAP basis. Additionally, the Kate Spade guidance is provided subsequent to the deal close on July 11, 2017. Turning to our guidance. We continue to expect total revenues for Tapestry in fiscal 2018 to increase about 30% versus fiscal 2017 to $5.8 billion to $5.9 billion with low single-digit organic growth. This includes the expectation for low single-digit Coach global comps, along with some growth in Coach brand North America wholesale and a slight increase at Stuart Weitzman. In addition, we expect the acquisition of Kate Spade to add over $1.2 billion in revenue. The Kate Spade revenue projection includes the impact of the planned strategic pullback in the wholesale disposition and online flash sales channels and assumes a high single-digit decrease in comps for the fiscal year, offset in part by the consolidation on the joint ventures and new store contribution. In addition, we are now projecting operating income growth of at least 22% versus fiscal 2017, driven by mid-single-digit organic growth, the acquisition of Kate Spade and estimated synergies of approximately $45 million. These energies are expected to offset in part the reduction of profitability from the strategic and deliberate pullback of Kate Spade wholesale disposition and online flash sales channels. Taken together, the Kate Spade business and resulting synergies are now expected to add approximately $145 million to operating income. Net interest expense is now projected to be approximately $75 million for the year. The full year fiscal 2018 tax rate is now projected at about 18% to 19%. The reduction from our previous guidance is primarily attributable to the actualization of our third quarter tax rate. We expect our weighted average diluted shares outstanding for the year to be approximately 289 million. Overall, we are now projecting earnings per diluted share for the year in the range of $2.57 to $2.60, an increase of about 19% to 21% versus prior year, including high single-digit accretion from the acquisition of Kate Spade. We also now expect CapEx to be approximately $300 million in fiscal year '18. As previously noted, we will naturally be incurring a number of onetime charges primarily associated with the Kate Spade acquisition and integration. These charges include such items as transaction fees and integration costs, which include severance, store closure cost and inventory valuation adjustments. For the full year, we currently anticipate pretax integration charges to be approximately $250 million to $260 million for fiscal year '18, of which approximately $130 million to $135 million is expected to be noncash. In addition to such integration charges, we've also incurred approximately $40 million related to pretax acquisition fees. Finally, we expect to incur approximately $15 million of operational efficiency charges for the full year. As outlined last quarter, we also expect to incur a net of approximately $215 million in onetime charges as a result of the recent U.S. tax reform. These charges relate to the transition tax on foreign earnings deemed to be repatriated of approximately $315 million, partially offset by the remeasurement of deferred tax assets and liabilities under the new tax code of approximately $100 million. The actual amount of the remeasurement and the deemed repatriation tax may differ from this estimate due to, among other factors, a change in interpretations of the applicable revisions to the U.S. tax code; changes in the assumptions made in developing these estimates; as well as regulatory guidance that may be issued with respect to the applicable revisions to the U.S. tax code. Finally, turning to our fiscal year '18 directly operated distribution plans by brand. For Coach, we expect to close a net of approximately 5 locations globally. However, that does not include the addition of 21 stores associated with the acquisition of our businesses in Australia and New Zealand from our distributor. For Kate Spade, we expect to open about 20 net new locations globally in addition to the 50 stores across Mainland China, Hong Kong, Macau and Taiwan that we took operational control of in the third quarter. And for Stuart Weitzman, we have opened a net 2 locations year-to-date. And we do not expect any net change in the fourth quarter. In addition, as reported, we've acquired 20 stores as part of the buyback of the Northern China business. In closing, we will drive results through continued organic growth, notably at Coach, while continuing to integrate Kate Spade, which we believe will be high single-digit accretive to our fiscal 2018 results. And as mentioned, we will continue to expect to achieve run rate synergies of $100 million to $115 million in fiscal 2019. Overall, we remain very optimistic of our global opportunities, and we are committed to drive long-term sustainable growth across the Tapestry portfolio of brands with a very healthy balance sheet to support our strategies. I'd now like to open it up to Q&A.

[Operator Instructions]. Our first question comes from the line of Bob Drbul of Guggenheim Securities.

I had two questions, actually. The first one is, on the Coach brand gross margin, can you provide some color on the Coach brand gross margin for the third quarter? And I guess, fiscal year '18 being flat to up implies a significant expansion in the fourth quarter. Can you just talk about what gives you the confidence in that? And then the second question I have is on Stuart Weitzman, can you just provide some context on what happened and why you think of these execution issues are temporary, please?

Sure. Thanks, Bob. Let me first touch on the Stuart Weitzman issues, our strategies, learnings and more importantly what we're doing about the current situation, given that it is really the only driver in the evolution of the guidance that we've given. And then Kevin will jump in then on gross margin. First, just a tiny bit of context on Stuart Weitzman, it's a great brand. Obviously, many of you are aware of the reasons that we've discussed in the past for this acquisition, a brand that's especially seeing tremendous growth in Asia with the focus on China and reflected in the recent investment that we made in buying that business back. And indeed, sales were tracking very close to our plan through February. As all of you know, this is a brand that has leadership in really iconic two categories, the 5050 boot, over-the-knee boots, and then in the NUDIST collection of sandals. And our strategy has really been to innovate these two iconic classifications while developing new ones, especially sneakers and pumps, and as well to add accessories as we continue to develop the brand's retail footprint. And also all of you know that this past May, May of '17, Stuart Weitzman, the individual, transitioned to non-Executive Chairman. And in fact, this upcoming week, indeed later this week, he becomes Chairman Emeritus. And the collections that we have in stores this past quarter as well as into this quarter are really the work of a hybrid of designs from several teams that have transitioned from the founder. And as such, the next few seasons really represent a unique transitional period, one where our core icons have been in need of a refresh and are suffering from a bit of fatigue while we also work to drive needed levels of fashion into the brand. Also I believe all of you know that this brand has a dedicated supply chain in Alicante, Spain that is separate from everything that we do with Coach and Kate. And that while we're very proud of our team in Spain, it does lack the processes and the systems to deal with the level of complexity and innovation that the teams need and wants to deliver. And this has led to the execution challenges that we're facing in this one moment in time. The result has been really a lower-than-expected sell-through of our carryover styles and late delivery of our new collections. And these are issues that really intensified towards the quarter-end and impacted the timely delivery of product. So most importantly, what are we doing? What are the actions that we're taking? First, on the people side, of course -- and we're very proud and happy to bring on to the team Eraldo Poletto, and by his presence, strengthening the team as well as having recently brought in as well Francesca Bertoncini, who has 17 years of footwear experience with Prada, really strengthening that team. And over the last 2 to 3 months, we have been adding purchasing, product development, production planning, quality control people across the entire process of the business in our supply chain in Spain. Look, as mentioned in our speakers' notes, we do expect these challenges to last through the fall/winter season. But we see it as a moment in time. We're addressing them. And we expect to return to growth in the second half of FY '19. It is truly a once-in-a-lifetime transition from a founder-led business to a business that can scale and really hopefully execute to our vision, which is for this to be a $1 billion business with mid-teens operating margins. And we're truly transitioning the business structures, the organizations and the processes to allow us to achieve just this.

In terms of the Coach gross margin, it was 71.4%. And that was down 26 basis points to last year. And that compares to Q2, when we were down 19 basis points to last year. Currency was a tailwind. But the footwear drag was 25 basis points more of a headwind, specifically footwear pressured by about 55 basis points in Q3 versus 30 basis points in both Q1 and Q2. And as you noted importantly, we still expect flat to slightly up for fiscal year '18 versus fiscal year '17 for the Coach brand. Therefore, there's no change in our Coach guidance. We also are feeling great about Q4, where we have already actualized significant year-over-year gross margin expansion in April, which gives us confidence for annual expectations.

[Operator Instructions]. Our next question comes from the line of David Schick of Consumer Edge Research.

I just wanted to talk about the different price points in Coach brand. You talked a lot about the different bags that are working in marketing and customization. But just the energy, a different price point strata would be great. And just to follow on to Bob's question, are there any impacts worth noting in the total COGS chain, whether it's raw goods, labor? Just helping us think about what's changing versus how you thought about business 6 or 12 months ago.

Sure. I'll let Josh chime in on the Coach product mix. And then Kevin will jump in on the COGS.

As we've noted before, our strategic intent has always been to address the gaps in our handbag assortment, adding more weight of between $300 and $400 as our sweet spot. And so we're really thinking about things in terms of a good, better, best hierarchy and how we can best balance that. And so as we've always planned, the above $400 bucket declined in penetration as we increased our focus on this sweet spot. And we're continuing to drive innovation above $400 and below $300. And I think we're particularly pleased with the mix of product, both in terms of the Signature introduction and leather product in the good, better, best buckets.

Okay. And then on COGS, I'll jump in here, Kevin, really no impact, very positive savings across both Kate and Coach. Of course, as we leverage the synergies of bringing both of those brands together, we're seeing pretty consistent reaction from our supply chain in terms of both labor and materials.

Our next question comes from the line of Irwin Boruchow of Wells Fargo.

So Victor, I have a question about the Kate Spade business. You gave guidance for run rate synergies that we can look out relative to the EBIT number you expect this year. I think it's an incremental $65 million to $70 million. Should we expect that to be the base case for EBIT dollar growth next year? Or should we assume that some of that needs to get reinvested maybe with some of the Asia businesses that you took in-house? And then on top of that, is there an expectation of when we should start to think about comps maybe flattening out and turning positive for that brand next year?

Sure. Let me first touch on top line performance and Kevin will jump in, in a moment on synergies and -- well, we haven't provided any guidance, but I'll let him jump in, in a minute on the op inc margin. In terms of top line, look, as we've mentioned, Nicola and now joined by Anna have been incredibly busy in the evolution of our product. We've been clear that the key there, of course, is our core handbags and accessories. We have a truly experienced team that's done that at scale, both in the marketplace outside, of course, of Tapestry brands, and now most importantly will leverage the Tapestry platform to execute at a great level. They've been, in fact, sat with Anna just this week. She's back from product development visits with Nicola and the team. And we're really excited by what we're seeing. That first collection will be shown in September. It will start to hit markets early next calendar year, so the second half of our fiscal year. But I think that you can expect to see, of course, the business to perform from there quite nicely. Saying that, we're incredibly proud, of course, of what we have done with the development that was in line when we inherited the brands, Irwin. I mean, specifically if you look at, of course, our ability to have driven more or less flat or close to flat comps in brick and mortar, we have pulled the business back by reducing the online promotional events as well, of course, as you know, what we've done in terms of pulling back from wholesale but with really terrific improvements in our gross margin. And in the third quarter, that was the same as we continued to pull back on promotions, even in the outlet channel, driving gross margin improvements for the brands. So really pleased with what we are doing. And then on the op inc question, Kevin?

Yes. On the synergies, as you noted, we updated our expectation for this year to be $45 million and continue to expect $100 million to $110 million for next year. And I think the ability increase our expectations this year gives us further confidence in our abilities for next year. And as we're beginning to start to make some of the product next year, we're feeling good about the COGS synergies.

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

My question was around the category just being up low double digits in the quarter globally. I know there is some FX in there but still very strong performance. What is the role of logo that you see in the trajectory of this category going forward? And then can you just walk through what you saw in North America during the quarter for the category?

Sure. And I'll start there. I mean, we, of course, report globally. But that being said, and still with one major North America competitor yet to report, right now, we estimate the category grew in line in North America with the December quarter at a mid-single-digit rate with a similar story to what we're seeing globally, which is really luxury brands, especially driven by the logo brands being the main drivers. And it's very exciting to us, of course. You've heard in our speakers' notes, and Josh just talked about the excitement that we have with what we're doing with Signature, we're managing it very carefully, having had past experience with what that can do, both in terms of driving growth but also driving ubiquity to the brand. So we're managing the balance between driving growth and maintaining a certain level of scarcity around that and very excited about what it can do for the business because it is the most important way for brands to differentiate themselves as well at scale. So very ownable, very excited about the opportunity, and we see that trend continuing for the next few years.

Our next question comes from Oliver Chen of Cowen and Company.

Our question is about the Coach brand outlet and thinking about the promotions that have happened in that channel versus what you can do going forward and how you'll balance that against product cost-benefit or if those continue. And on the discussion about Signature logo, could you brief us on your thoughts about that in terms of how that's evolving by channel and where you think we are, within what time frame in terms of what you see happening in the marketplace?

Sure, thanks. I'll let Josh chime in on both of those.

Yes. In terms of the outlet channel, obviously it's a promotional channel. This season, as Kevin mentioned, we did see a little bit of heightened activity as we approached Easter. But we don't see that as particularly unusual. And we are very effectively managing the promotions in that channel. In terms of your question on Signature. I think it's important to keep in mind that even though we've been talking about this for several quarters, we only really had a full presence at retail in the middle of this quarter in March. And we saw an immediate positive response to the introduction of Signature at the top of our pyramid in products that walk the runway in our retail channels globally. And so as we see this evolve over the next season, we see opportunity obviously to introduce small leather goods, to have a presence in men's, to have a presence across categories. And in fact, Stuart Vevers put it on the runway again for fall in a completely different fashion context. But we're taking a very measured approach on this. And the products that is at retail in our full-price retail stores is very different from the product that we have had in outlet. And so far, our customers in both channels seem to be responding to the offers.

I'll just add. Oliver, the last time we saw this trend, of course, from the early 2000s, it was pretty much a decade run. Now obviously, fashion cycles are speeding up. But one would imagine this to be a 5- to 6-year cycle to 7-year cycle potentially as opposed to a 10-year cycle that we saw previously.

And just the last question is on digital, Victor. Could you update us on what you're focused on, on a few key priorities and what we should pay attention to digitally as you think about omni-channel and CRM and other factors?

Sure. Let me let Josh chime in as the Coach brand is really, along with Kate Spade, of course, leading our e-commerce charge. And then I'll touch a little bit on digital as it relates to data. Josh?

So we're extremely excited about our e-commerce business globally. And more broadly, we're excited about driving digital innovation across our business. We're very focused on our customer and providing her or him with a seamless omni-channel experience. And what we're doing now is we're sharing our best practices across geographies. So for instance in China, we have a very developed digital clienteling platform on WeChat. And we're taking learnings from there and incorporating that form of digital interaction globally. And likewise, on the other hand, in North America, we have the most developed omni-channel capabilities of all of our regions. And we're using that as a springboard for development in other regions. During this year, from a marketing perspective, we have significantly accelerated the shift to digital. And we're seeing the results of these moves in our customer acquisition. Our marketing is increasingly driven by videoconference -- video content rather and our presence on global social platforms. So in America, that would be Instagram. In China, that would be Sina Weibo. And in Japan, that would be LINE. And so we really see the coach.com website as the center of this ecosystem, which connects the customer behavior when she's shopping online, looking at the website on her mobile or increasingly in the river of where she's looking at social content as well.

Yes. And then I would just add there that David Kang, who runs those efforts for us and is a leader across the brands as well, and as we scale both the learnings from whether it be the marketing or the technologies or investments that we're making across our platform, of course, we immediately leverage those across the 3 brands. And that is a journey that we're on over the next fiscal year, especially from a global perspective, not only here in North America but also outside of North America. And lastly, Oliver, as you know and we've discussed in the past, for us, digital is as much about data. We have 110 million names in our database, as you know. We have, in fact, just a couple of weeks ago, completed the integration of Kate Spade fully now into our North America platform. And in fact, their global database as well as Stuart Weitzman now fully in there. So across our 3 brands, teams are leveraging the tools that already exist to much more effectively leverage the program tools to actually target and market to consumers. And we, just this week in fact, are very proud to announce the appointment of Fabio Luzzi, who joins us as Vice President of our Advanced Analytics and Data Labs teams. You've heard us talk about some of the efforts there. But we have very high expectations to leverage our customer data, product data and other sources that we are in the process of collecting to drive AI and machine learning opportunities across the company. One of the first tests that we're doing there, in fact is, around inventory, merchandising analytics and eventually even potentially pricing analytics as we think about the go-forward. But we're excited about those opportunities.

[Operator Instructions]. Our next question comes from the line of Anna Andreeva of Oppenheimer.

Two quick ones for us. A follow-up on the outlet channel, just curious, what are you guys seeing in terms of the foreign tourism trends over there? I think a few retailers have called out some stabilization recently. And secondly, just as we think about fiscal '19, maybe talk about the puts and takes on the gross margin line for the Coach brand. Do you think there's opportunity for lesser discounting that we should start seeing next year?

Anna, I'll let Josh talk to the tourist numbers that we're seeing and specifically in North America outlet.

So from our data, it does appear that the North America regional mall traffic remained positive in this quarter. And of course, it was helped by the Easter shift as we saw that spike in the end of March. And that was -- we saw that both in the full-price mall channel as well as the outlet channel.

As it relates to the gross margin outlook for '19, obviously we're not providing any guidance at that point in time. But obviously, we would hope with product newness and innovation, all the things that you'd expect us to do to hopefully drive reductions in the discounting. But we're not providing any specific guidance at this time.

Our final question comes from the line of Paul Trussell of Deutsche Bank.

I just wanted to follow up on a comment made regarding, I think, the department store channel. You mentioned that you were pleased with your sell-through. Could you just comment a bit more and give us an update on where you stand in terms of the assortment that you're putting into that channel and how it's differentiated from the outlets in your brand stores and digital operations and just what else you saw with your wholesale partners?

Sure. We'll let Josh chime in on that. He's very passionate and working extremely closely with the team on those efforts.

Yes. The results that we're seeing in the department store channel now are really a result of two things. One is the hard work that the team has done over the past few years to rightsize the channel. So we feel really good about our positioning in the stores that we're now in the right doors. And so we have a great base to start from. But it's also more importantly picking up on the halo of the brands that we see overall. Specifically in North America, we had a very strong quarter across channels. And so the strength that you're seeing in the department stores is a reflection of the strength that we're seeing in our own retail stores as well.

Got it. That's very helpful. And just one quick follow-up, just on the Stuart Weitzman, you all spoke about an outlook on the revenue line for next quarter and into next year. Is there any comments you can provide on the puts and takes on how we should think about the EBIT contribution from that banner?

We've indicated that we experienced obviously operating income pressure in the third quarter. And we would expect that to continue into the fourth quarter.

Yes. And then we'll be giving, of course, longer-term guidance on FY '19 in our next call. But as I close, I think over the medium term, we see this as a $1 billion business, mid-teens op inc. And that's the structure and the investments that we're putting into place right now across the organization, both on the front end and on the back end. But in the short term, at least through the fall/winter season, as we have discussed, we see some pressure on the business.

That will conclude our Q&A. And I'll now turn it over to Victor Luis for some brief concluding remarks. Victor?

Thank you, Andrea. I'm getting a message here that just to reiterate that our synergies target for the Kate Spade brand for next year are $100 million to $115 million for next year. And I want to just close by thanking our team across the world, all 21,000 of them who continue to drive the performance on a daily basis and connecting with our customers. And they're very focused, of course, in driving innovation and unique experiences across our markets. I couldn't be more excited and proud of them, and of course, with the limitless opportunities that we have ahead of us. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect, and have a wonderful day.