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,…

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…

[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…

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.