Tapestry, Inc. (TPR) Q3 2019 Earnings Report, Transcript and Summary

Good day and welcome to the Tapestry Conference Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to, Christina Colone Vice President Investor Relations.

Good morning and thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Tapestry's Chief Executive Officer; and Andrea Shaw Resnick, Tapestry’s Interim CFO. 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. You may find the corresponding GAAP financial information, as well as the related reconciliations on our website, www.tapestry.com/investors, and then viewing the earnings release and the presentation slides posted today. Now, let me outline the speakers and topics for this conference call. Victor will provide an overview summary of our third quarter 2019 results for Tapestry, as well as our three brands. Andrea will continue with details on the financial and operational results of the quarter and our outlook for the balance of FY19. Following that, we will hold a question-and-answer session, where we will be joined by Todd Kahn, Tapestry's President and Chief Administrative Officer; and Chief Legal Officer, as well as Josh Schulman, CEO & Brand President of Coach. Following Q&A, we will conclude with some brief summary remarks. I'd now like to turn it over to Victor Luis, Tapestry's CEO.

Good morning. Thank you, Christina, and welcome, everyone. As noted in our press release this morning, we are pleased with our third quarter performance, highlighted by increases in sales and gross margin on a constant currency basis in each of our three brands. Further, we continued to make key investments across our portfolio and to realize meaningful synergies from the successful integration of Kate Spade as we harness the power of our multi-brand model. Taken together, adjusted EPS was in-line with our expectations for the quarter. Some additional highlights by brand include, another quarter of positive comps at Coach led by international, and e-commerce. The significant sequential comp improvement at Kate Spade with Nicola Glass’s new collection resonating with consumers globally. And at Stuart Weitzman, results were consistent with our expectations with top-line growth driven by our buy now wear now strategy and spring newness. We are also excited to announce the approval of a $1 billion share repurchase authorization demonstrating our confidence in driving long-term sustainable growth and value. Through this program, we will optimize our capital deployment and enhance shareholder return while maintaining our financial and strategic flexibility. Importantly, we remain committed to our longstanding capital allocation priorities supported by our strong balance sheet and free cash flow. First, investing in our brands and business. Second, pursuing strategic acquisitions on an opportunistic basis. And third, returning capital to shareholders through dividends and share repurchases. Now, as is our practice, I’d like to discuss our progress on our strategic pillars. First, continuing to harness the power of our multi-brand model, which is unlike other portfolio holding companies in our space with each of our brands targeting a unique consumer attitude within the attractive and growing accessories, footwear and outerwear markets. We are driving significant synergies on a shared platform with each brand leveraging Tapestry’s core capabilities, and infrastructure. To that end, we remain on track to achieve runrate synergies from both COGS and SG&A of approximately $100 million to $115 million in fiscal 2019, up from $45 million in fiscal year 2018. We’ve also continued to make progress on building a scalable shared services model including investments in systems and infrastructure to support our current and future growth opportunities. Our ERP implementation is well advanced with Phases one and two successfully completed and Phase 3 targeted to launch this summer. We are also brand-led and consumer-centric. Our goal is to nurture authentic, innovative brands, thereby creating meaningful relationships with our customers by offering relevant products and experiences. And we are building a values-led culture based on optimism, innovation and inclusivity. Having both a strong culture and talented teams are critical to our success. We believe that anyone from anywhere can have the best idea and with hard work and determination, anything is possible. Our belief in meritocracy creates credible career opportunities and rewards for those who share our values and who want to part of and help shape our growing company. Nowhere are our values more apparent than in our comprehensive 2025 corporate responsibility goals recently launched. These goals, across our three pillars of our people, our planet and our communities solidify our commitment to social responsibility as we recognize our role as a leader in our industry to effect real measurable change. Further, we are committed to reporting to our stakeholders annually on our progress and achieving these goals. Second, fueling innovation. Innovation is at our core and it’s foundational to our success. Across each of our brands, we are focused on delivering distinctive newness and compelling products across categories and channels supported by our flexible and dynamic supply chain. Some examples of how we are working in new, innovative ways include, at the beginning of April, we held our first opensource vendor fair. Over three days, we hosted 250 attendees from over 100 vendors around the world at our Hudson Yards headquarters. They presented their best ideas across leather, hardware and textiles to our design and product development teams from all three brands. We challenged our vendors to bring new ideas and they came enthusiastically. This is an example of a new way we can work benefiting from our scale as a multi-brand company. In addition, we have also launched a series of design-led thinking pilots within our creative process enhancing the individual talent and limitless imagination of our creative teams. Several cross-functional groups of product designers and developers, merchants and marketeers are involved in pilots this season. Design-led thinking minimizes the uncertainty and risk of innovation by engaging customers, or users through a series of prototypes to learn, test and refine concepts. Design-led thinkers rely on customer insights gained from real-world experiments, not just historical data or market research leading to the discovery of often unforeseen functional and emotional needs. Third, driving global growth, with an emphasis on underpenetrated markets through both new store openings and distributor buybacks on a selective basis. This quarter, we anniversaried the consolidation of Kate Spade’s Greater China joint ventures in January and the buyback of Stuart Weitzman operations in Northern China in mid-February and Coach’s business in Australia and New Zealand in March. Since taking operational control of these markets, we’ve invested in key talent and infrastructure to support further development across our portfolio. These initiatives are allowing us to accelerate international growth and drive brand awareness. We also continue to integrate the buybacks of the Kate Spade operations in Singapore, Malaysia and Australia, as well as the Stuart Weitzman business in Southern China, which closed earlier this fiscal year. And we are excited to announce that just this week, we completed the acquisition of Stuart Weitzman’s business in Australia, further leveraging our multi-brand hub in Sydney. We are also continuing to maximize the opportunity with Chinese consumers globally across each of our brands. At Coach, our global business with Chinese consumers again rose driven by domestic consumption. In fact, following our Shanghai Fashion Show in our recent Handbag Brand Tracking Survey held in China this quarter, we saw an improvement in Coach’s unaided awareness from 32% to 41% and aided awareness from 69% to 72% driven by growth amongst millennials. We are also continuing to build awareness for both the Kate Spade and Stuart Weitzman brands amplifying our brand messages with tailored marketing introducing local brand ambassadors for the first time this quarter. And in the same China Hand Bag Brand Tracking Survey, Kate Spade’s unaided awareness was 4% versus 2% previously, while the brand’s aided awareness improved from 11% to 16%, also driven by growth among millenials. Importantly, we’ve expanded our reach through the opening of new stores utilizing the key learnings we’ve had from Coach’s successful growth in the region. In fact, during the quarter, we opened four net Kate Spade locations and seven Stuart Weitzman stores in Greater China. And fourth, advancing our digital and data analytics capabilities. Digital touches every part of our business. In a world with technology is changing everything, investing in an industry-leading digital strategy is critical to our success. And keeping with this, I am pleased to announce that Noam Paransky has joined Tapestry as Chief Digital Officer leading our company-wide digital strategy. Noam is a thought leader who has built his career around the digital experience and retail. He also brings expertise building digital integration within multi-brand organizations. Joining us most recently from Gap Inc., where he was SVP of Digital and led digital sales and engagement channels for all of Gap Inc.’s brands. Prior to that, he spent six years at Alex Partners as a retail, digital and marketing expert working directly with a number of retail and fashion brands navigating the digital space. At Tapestry, Noam will focus first and foremost on refining and building a scalable global digital platform to drive growth and efficiency for our brands. He will play role as our enterprise leader to deliver an innovative omni-channel experience for all of our customer digital touchpoints including our websites, marketing, social and digital in-store experience. Noam will also lead our digital innovation agenda bringing new technology and ideas to support our brands to uniquely express their brand promise in new and compelling ways. Touching on Data Labs, this quarter, we officially launched Tapestry’s Data Labs portal, a centralized web platform that offer secure and seamless access to applications built in-house. This provides our internal teams with a personalized suite of data science and AI tools tailored to maximize the impact on both their short-term and long-term strategies. Our portal also enables us to scale our applications such as our real estate and product portfolio tools to an expanded user base. In addition, we developed a suite of Application Programming Interfaces or APIs that can be integrated with other systems utilized by cross-functional partners on the frontlines of our business. In the near future, the output from our algorithm will seed into our POS, client selling and CRM platforms to further enhance the overall customer experience. Overall, we are confident in the clarity of our vision, the strength of our team and the benefits of our global multi-brand platform. As we look ahead, we are committed to executing our strategic plan and achieving our near-term and long range financial targets including delivering double-digit operating income and EPS growth in FY 2020. Now turning to category trends. During the third quarter, we estimate that the men’s and women’s premium handbag and accessories market which is now over $45 billion grew at a high-single-digit rate globally on an organic basis consistent with the December quarter. In U.S. dollars, the growth rate was mid to high-single-digits given the appreciation of the dollar. Now looking at specific brand performance and starting with Coach. Global comparable store sales rose 1% in the third quarter led by outperformance in our international channels and across our e-commerce platforms consistent with the previous quarter. The drivers of our global bricks and mortars comparable store sales were conversion, reflecting our strong product offering, as well as traffic. By region, we delivered overall positive comps across all of our international regions, including Europe, Japan, Greater China and Asia. Comps in North America declined slightly including negative impact of the shift in timing of Easter, the continued pressure from lower tourist spend, as well as the ongoing volatility in Daigou or reseller activity. Moving to wholesale, our North America shipments were below prior year including the negative impact of timing with the fourth quarter while our business at POS increased despite a lower level of promotional event days. Our international wholesale revenue rose versus the prior year in Q3, while POS sales were modestly below prior year on the same basis. There are many highlights of the quarter in keeping with our brand priority. In retail, we continued to cascade leather goods innovation with the successful launches of the Parker Top Handle as well as the Charlie Carryall 40. Dreamer also remained the top family with new novelty introductions. Our Signature offering remains strong comping the comp anniversaring its relaunch in retail last spring. We were thrilled with the performance of novelty with our runway patch work and denim assortment resonating with consumers. Our Japanese exclusive Sakura Cherry Blossom collection also outperformed. We also saw momentum in lifestyle categories driven by women’s ready to wear and footwear notably sneakers with continued strength in the C143 RUNNER as well as sandals. Additionally, we continued our partnership with Disney, which was included in our Spring Runway Show and featured Dumbo across the playful collections of bags, ready to wear and accessories. In outlets, we debuted a fresh dual-gender key pairing collaboration across categories and in women’s handbags launched with the Coach Avenue Carrryall continuing to infuse newness throughout the assortment. We also remained focused on introducing pinnacle products with higher AURs. This quarter, within the added assortment, we were pleased with the performance of the new Willy Carryall, as well as the continued momentum in Abby where we launched a new mini Silhouette. And as in retail, we drove growth in Signature, while Denim resonated across platforms and categories. Footwear also outperformed and we were excited by the traction experienced in Loafers, and Sneakers. And consistent with our strategy to drive growth outside of our core women’s bags, and small leather goods categories, men’s continued to comp across channels driven by lifestyle, notably apparel and footwear, as well as small leather goods. The launch of a new Coach logo and retro sports style as shown in our ad campaign featuring Michael B. Jordan also proved a great success and outperformed expectations. On stores, our customization program Coach Create, which includes footwear and outerwear in addition to leather goods continued to drive sales in Q3. I would also like to touch on our pop-up store initiative, which is another exciting way where connecting with consumers and creating innovative, immersive experiences. These pop-ups showcase the product in interactive settings allowing customers to engage with the brand in new ways. Thus far in FY 2019, we’ve launched over 100 pop-ups globally including a New York City Subway installation at Le Bon Marché in Paris, and Made to Order Rogue Shop at Neiman Marcus and Hudson Yards in New York and the Coach Create pop-up on the stage at Isetan Shinjuku in Tokyo Japan, as well as a men’s modern active installation at Aventura Mall in Miami. On marketing, we are driving fashion authority both from the runway and increasingly through cultural relevance and co-creation. For the February Fashion Show, Coach’s Creative Director Stuart Vevers collaborated with artist Kaffe Fassett, known for his maximalist prints which added color to the brand’s already robust visual vocabulary. Also in February, we were especially excited to launch a collaboration between Academy Award Winners Spike Lee and active producer and global face of Coach, Michael B. Jordan. Shot last fall, this short film entitled Words Matter, brings together two modern dreamers who are known for challenging and redefining the American film landscape. While we were inspired to create this story telling moment with a simple goal to harness the power of our brand to speak up for inclusion and optimism. This is a universal message and represents the best of Coach. We also launched a series of first person videos, #Wordsmatter to spark a social conversation and inspire the greater community to share their own stories and personal points of views on why words matter. The series features the artist Whisbe, Nets player, Spencer Dinwiddie, Spikes Children, Jackson and Satchel Lee amongst others. And an another first for Coach, we debuted our Dream It Real podcast series in late April. These are unfiltered conversations featuring celebrity guests, thought leaders and inspiring young people talking about their dreams for themselves and for the future. This is an exciting moment as we continue our commitment to empowering young people. Our first episode featured Selena Gomez as she spoke about authenticity and self-acceptance. And our second Michael B. Jordan joined us to speak about courage. Future episodes will feature Stuart Vevers, as well as actors Maisie" Williams and Ben Platt. Overall, we are satisfied with Coach’s performance in the quarter in light of the volatile tourist trends and Easter shifts, notably impacting North America. Moving forward, we remain focused on, first, delivering a heightened level of newness through the pyramid of fashion, price and occasion across channels and geographies. Continuing to build on our established and authentic Signature platform, driving growth beyond our core bags and accessories, utilizing technology and digital to enhance and modernize the customer experience, notably through customization. And lastly, amplifying our marketing message that balances unexpected brand impact and broad appeal. In summary, we are excited about the seasons ahead and remain confident in our largest brands’ opportunity for growth. Moving to Kate Spade, we drove a significant eight point sequential improvement in comparable store sales to negative 3%. In both our brick and mortars and e-commerce channels, conversion accelerated from the prior quarter. Total sales rose 4% on a reported basis or 5% in constant currency driven by new store distribution, as well as the acquisition of the brand’s operations in Singapore, Malaysia and Australia, which we’ve not yet anniversaried. We also made significant progress in keeping with our five strategic pillars, drive global growth, especially across Asia; introduce emotional and distinctive product platforms, launch lifestyle-focused branding; create immersive channel experiences, and leverage of the Tapestry platform. As you know, this quarter we launched Nicola Glass’s Spring Collection in our full price channel where penetration levels met our expectations, driving our excitement with the customer response. In hand bags, the Margaux family has become a leading platform and the new Molly Tote is the best selling style globally. In addition, we remain delighted with consumers’ reaction to the brand’s new code, the Enamel Spade across categories including the Nicola Handbag group and the Heritage Spade Jewelry collection. In March, we launched Polly a soft pebble leather group and initial reads have been strong. And just last month, we introduced Andy, a canteen bag which is a modern take on a classic shape and it’s becoming a top-seller. In ready to wear, the infant dresses, feminine suit, wear to work Silhouette, statement sweaters and on-trend jump suits are key wins. As expected, our results continued to be negatively impacted by the performance of the legacy carryover products, notably in hand bags though we have made substantial headway and moving through this inventory. We’ve also had important key learnings which will inform our future development. In hand bags, we see additional runway in satchels, in casual, soft and sophisticated iterations. We also see opportunity for product extensions within the top-performing groups such as Margaux, and Molly. We will evolve our small leather goods offering further distorting our investments to small wallets and cardholders, while also updating functionality. In ready to wear, we were focused on chasing what’s working, building on the attributes that the Kate Spade apparel and outerwear customers have come to expect with compelling day to night style. And we will introduce additional playful and emotional novelty items both as permanent and limited edition offerings. These are hallmarks of the brand that play well to the drop model that is driving millennial fashion shopping. Now turning to the launch of our brand evolution across consumer touchpoints. In support of Nicola’s debut collection, we launched a 360, global marketing campaign amplifying the new creative vision and the brand’s unique positioning of optimistic femininity. The campaign featured actresses, Julia Garner, Sadie Sink and Kiki Layne and were shot by famed photographer and long time brand collaborator Tim Walker. In fact, since the launch of the new creative direction at the end of January, through March, the number of new Instagram followers accelerated increasing nearly 20% over the same period last year. While we also introduced our first ever campaign tailored specifically for the China market, starring actress Sun Yi, driving engagements on Weibo, and WeChat. In addition, we also focused on our stores and digital channels ensuring consistency with the new product brand vision and creating immersive channel experiences. In keeping with our strategy, we made light touch renovations in key full price locations ending the quarter with over 100. The showcase of our new color palette and enhanced visual merchandising elements. These front room wraps leverage the brand’s new iconography in our specialty stores to appropriately showcase the new products in a cost-effective, yet brand enhancing way. In addition, we also launched a new product, brand codes and imagery across our digital and social platforms. Importantly, we remain confident in the growth opportunities for the brand supported by the successful integration of Kate Spade onto the Tapestry platform leveraging our core capabilities. Key accomplishments include, migrating the Kate Spade brand to the Tapestry supply chain realizing significant synergies and clear product quality improvement; attracting and retaining key operational and creative talent across the organization; laying the foundation for accelerated international growth through the direct control of the brand’s businesses in Asia, notably, Greater China; driving brand heat and reinforcing brand health through both the launch of a new creative direction and the strategic curtailment of third-party promotional channel. We also integrated Kate Spade’s customer data across North America, Europe, and Japan into the Tapestry customer data platform. Overall, our third quarter performance along with our continued progress and our strategic initiatives underscores our confidence in delivering positive comps in the fourth quarter. Looking beyond FY 2019, as previously noted, we continue to believe that Kate Spade can approach $2 billion in sales over our three year planning horizon at significantly higher operating margins. Turning to Stuart Weitzman. We delivered another quarter of sales growth with revenue increasing 2% on a reported basis and 4% in constant currency. This reflects the progress the SW team has made in executing our FY 2019 strategic priorities. We are broadening our footwear offering while maintaining our authority in iconic Stuart Weitzman styles. During the quarter, we experienced growth in our buy now, wear now offering of booties while new classifications of platforms and wedges drove growth in sandals. Pumps also performed well driven by the Mary Ann and the Lee. Sneakers remained exceptionally strong fueled by success in the SW 612. WE are also driving growth beyond footwear gaining credibility in handbags and leather goods. Handbags rose significantly in the quarter, albeit from a small base and outpaced our expectation. We continue to see significant opportunity to grow the brand’s handbag offerings given the complementary nature of the footwear and bag categories. We are creating brand desire through bold and modern marketing. Our Spring Campaign featuring Kendall Jenner, Yang Mi, Willow Smith and Jean Campbell with its global relevance highlights the brand’s core attributes and values of using fashion, function and fit. Stuart Weitzman continues to be a red carpet brand of choice, once again dressing many celebrities at this year’s Oscars. Importantly, we are expanding globally with a focus on the Chinese consumer. In fact, this quarter, our business in China, once again outperformed and we remain intense on driving relevance awareness and increasing market share. We opened seven new locations in Mainland China in our new, modern and elegant store concepts. As planned, we also launched a capsule collection in collaboration with Yang Mi across an assortment of sandals, pumps, and sneakers. Swthalassa, the pearl-embellished was a notable best seller. In addition, performance was particularly strong on our e-commerce channels globally. And finally, as our production levels and shipments have normalized, our focus is rebuilding our order book with our global wholesales partners to capture the in-season replenishment orders. This focus will support our objective of driving strong sales growth and improved profitability in the fourth quarter. In summary, we’ve made significant progress in evolving the brand’s creative direction through product and marketing. We remain excited about the opportunities for Stuart Weitzman across geographies, classifications and categories and are confident in our long-term vision. To recap, we have a clear vision, a strong team, and the unique global multi-brand platform. Our model is distinctive. We are brand-led and consumer-centric with a culture built upon values of optimism, innovation and inclusivity. Each of our brands have differentiated attitudes bringing diversification to our portfolio, at the same time, each can leverage Tapestry’s core capabilities and infrastructure to drive meaningful synergies. Taken together, we are uniquely positioned to capture the vast opportunities within the attractive and growing global accessories, footwear and outerwear markets. With that, I will turn it to Andrea for the financial review of the quarter and our outlook. Andrea?

Thanks, Victor and good morning everyone. Victor has just taken you through our quarterly results and strategies, let me now take you through some of the important financial details of the quarter, as well as our outlook for the balance of fiscal year 2019. Before I begin, please keep in mind that 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 the earnings release posted on our website today. Now, turning to the financial results for Tapestry. Total sales for the quarter rose 1% on a reported basis to $1.33 billion, while constant currency sales increased 2% driven by growth across brands. Gross margin for the quarter rose 30 basis points to 69.2%. The expansion in our margin was driven by Kate Spade, which increased 90 basis points, fueled by the realization of COGS synergies, as well as a 30 basis point increase in gross margin at Coach, which included 20 basis points of currency benefit. At Stuart Weitzman gross margin declined 150 basis points, which included 210 basis points of pressure from currency. Therefore on a constant currency basis, Stuart Weitzman’s gross margin increased 70 basis points. SG&A expenses totaled $780 million and represented 58.6% of sales, as compared to $727 million and 55.0% respectively in the prior year. The increase in SG&A expenses was primarily driven as projected, by new store distribution and a higher level of marketing expense at Kate Spade, as well as cost associated with regional buybacks and a higher level of depreciation due to our systems implementation. Our operating income totaled $141 million in the quarter as compared to $184 million in the prior year, while operating margin was 10.6% as compared to 13.9%, reflecting the higher level of investment versus prior year. Net interest expense was $11 million for the quarter as compared to $17 million in the prior year. Our effective tax rate was 6.8% as compared to 5.6% in the prior year's Q3. The tax rate was slightly below our expectations due to favorability associated with certain statute expirations and the geographic mix of earnings. Taken together, our EPS was a $0.42 in the quarter. Now moving to global distribution by brand. Across Tapestry, we opened a net of 17 stores internationally, while closing 11 net locations in North America to end the quarter with 1,502 directly operated stores globally. By brand, we closed three net Coach locations, one net Kate Spade store and opened ten net Stuart Weitzman locations. During the quarter, we were particularly excited to open new Coach, Kate Spade and Stuart Weitzman stores adjacent to our Tapestry corporate headquarters at Hudson Yards here in New York City. These locations which are outperforming our expectations manifests our latest store concept and feature new elements across each of their brand. Turning now to our balance sheet and cash flows. At the end of third quarter, our cash and short-term investments were approximately $1.3 billion while our borrowings outstanding were $1.6 billion, consisting primarily of senior notes. Inventory levels at quarter end were $811 million as compared to ending inventory of $714 million in the year-ago period. The increase was primarily driven by a higher level of in-transits related to port congestion in Asia. Specifically, as companies have migrated production outside of China, infrastructure investments in key Asia ports including the Philippines, Vietnam and Cambodia especially not kept pace. And while this has not resulted in higher freight costs, it has resulted in longer lead times with more inventory on the water at any given time which we would expect to normalize when we anniversary this in the second half of fiscal 2020. Net cash from operating activities was an inflow $3 million as compared to an inflow of $156 million a year ago. Our CapEx spending was $68 million versus $60 million a year ago. Free cash flow was an outflow of $65 million versus an inflow of $95 million in the same period last year. For the first nine months of FY 2019, net cash from operating activities was $602 million as compared to $586 million last year, while CapEx spending was $184 million versus $187 million last year. Therefore, on a year-to-date basis, free cash flow was an inflow of $418 million as compared to $400 million last year. Now, turning to our capital allocation policy. As Victor mentioned, our long-term priorities remain unchanged, supported by our strong balance sheet, and cash flow. First, we will continue to invest in our brands in order to drive sustainable growth and value creation. Secondly, we will seek strategic acquisitions looking for great brands with opportunities for expansion. And finally, returning capital to shareholders. We are committed to our dividend and are pleased today to announce a $1 billion share repurchase authorization underscoring our confidence in our long-term vision and focus on driving shareholder value. In terms of guardrails, our primary objective is to offset future dilution related to share issuances under our employee compensation plan. We may on an opportunistic basis repurchase additional shares when market conditions are conducive. This plan will allow us to maintain strategic flexibility while supporting earnings per share growth and enhancing shareholder returns. Now, moving to our 2019 outlook. Consistent with our prior practice, the following guidance is presented on a non-GAAP basis and replaces all previous guidance. Starting with sales, we expect total revenues for Tapestry in fiscal 2019 to increase at a low to mid-single-digit rate from fiscal 2018. This includes the expectation for positive low-single-digit comp growth at Coach, in the fourth quarter, in addition in Q4, we expect to achieve positive comps at Kate Spade, as well as total sales growth at Stuart Weitzman. In addition, we continue to project an increase in Tapestry’s gross margin for the year, which does include a contraction in Q4. We continue to expect SG&A delverage in FY 2019 given the impact of regional distributor buyback activity and systems investments. Net interest expense is expected to be in the area of $50 million for the year. The full year fiscal 2019 tax rate is projected at about 18%. We expect our weighted average diluted shares outstanding for the year to be approximately $292 million reflecting our year-to-date favorability. And overall, we are projecting earnings per diluted share for the year in the range of $2.55 to $2.60. We expect CapEx to be $320 million to $325 million in FY2019, which we would anticipate to be the peak level of spend over our planning horizon. In addition, in FY 2019, we expect to incur non-recurring, pre-tax charges of approximately $35 million attributable to company’s ERP implementation efforts. We also expect to incur pre-tax integration and acquisition charges of approximately $80 million to $90 million. Finally, turning to our fiscal year 2019 directly operated distribution plans by brands. For Coach, we continue to expect a modest net decrease in our store count in FY 2019 due primarily to net closures in North America and Japan. For Kate Spade, we remain on track to grow the brand’s directly operated store base by 60 to 70 net new locations in FY 2019. Specifically, we continue to project 40 to 50 net new door openings, notably in international markets where we see significant opportunity for growth. We've also added 21 locations through the acquisition of the brand’s operations in Singapore, Malaysia and Australia. And for Stuart Weitzman, we expect to add approximately 50 directly operated locations globally this fiscal year. This is based on approximately 30 net new openings, primarily in China. In addition, we’ve added 18 locations through regional buybacks including six stores in Southern China and 12 locations in Australia. In closing, we are committed to executing our strategic plan and achieving our near-term and long range financial targets including delivering double-digit operating income and EPS growth in FY 2020. We remain confident in the power of our brands, our multi-brand operating platform and the significant opportunities within the premium accessories, footwear and outerwear markets. At the same time, our strong balance sheet and cash flow provide us with important financial and strategic flexibility, while enabling us to return capital to our shareholders through our dividend and recently announced share repurchase authorization. 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.

Hi, good morning.

Good morning, Bob.

Good morning. Victor, there was a lot of negative sentiment coming into the quarter given the issues that you’ve had with Stuart Weitzman and then followed by the issues with Kate Spade, does the announcement of the share repurchase program suggests you are hitting the pause button here or rethinking this multi-brand strategy?

Got it. So, quite a few parts to that question, Bob. Obviously, in terms – first and foremost, the strategy itself, the execution of the strategy and then now the buyback. First, on the strategy, all of the strategic rationale for a multi-brand strategy remains true as far as we are concerned whether that be the risk of being a single brand, single-category business, which has the risk of overextending. As has been the history for us and even some competitors here in the U.S. and of course, the leverage that we can bring across the platform with different categories, markets and brands. So, I would say that, absolutely not. We are not putting the pause button and are committed to our strategy of acquiring great brands that have solid growth potential. In terms of the execution of the strategy. And I think you touched both on SW Stuart Weitzman and Kate, first, and I will start with Kate, the most recent acquisition. I think it’s important for all of us to remember that that is an acquisition that has been accretive from day one and I could not be prouder of the work that our teams have done in integrating that business onto the Tapestry platform. We’ve migrated supply chains not only realizing significant cost synergies, we have very visibly improved product quality. We have the key talent in place both from a management and a creative perspective. We’ve laid the foundation for solid international growth by buying back all of our businesses in Asia and are already making great progress there. We reinforced brand health with the launch of a fresh creative direction that we are already seeing consumers react to. And lastly, as we announced last quarter, we integrated KS on to what is in essence a real world-class SAP S4 on a platform first in the world in fact and already seeing the benefits of synergies from that. I think that, any confusion between the carryover product having underperformed in the December quarter with the issues that we saw which were much more purely executional issues that we talked about as it relates to SW is really misplaced. And we’ve been very clear on that SW was really a one-off transition. We had a founder. We had been there for 30 or 40 years and there was obviously a lot of opportunity on our side from a supply chain perspective. We put now the team in place have worked really hard and I think go forward, we will begin to see the results of that in a much more sustainable long-term manner. Look, saying all of that, the share repurchase clearly signals our confidence in our business, in our brands and their long-term value and we have obviously a very strong balance sheet and the cash flow and we clearly believe that we can optimize our capital to enhance shareholder returns while maintaining our strategic and financial flexibility. So we are excited about what the future holds.

Great. Thank you very much.

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

Hi, good morning everyone. Congratulations. Very, very nice quarter. I guess, Victor, when you are talking about the Coach business in North America, you referenced a few headwinds you are dealing with and one of those points was the reseller market in North America. I’d love to get your perspective on the luxury resell market, what it means to you and your category accessible luxury et cetera. Just how you kind of think about that as a growing space you now have kind of contend with in North America?

Sure, sure. We know, Ike, that you’ve recently put out an interesting note on the topic which of course we’ve studied and we’ve been studying that whole phenomenon quite closely. In my notes, what we referenced in terms of resell, it was really much more the – those who are reselling as parallel products to China, the Daigou. I think that’s resale in what you are referencing in your note with much more of the U.S. platforms, I’ll touch on in a moment, but let me allow first Josh to talk specifically to the Chinese Daigou resellers and then I will touch much more on the U.S. based platforms, European based platforms that you’ve been talking a bit about. Josh?

So, hi, Ike. As we mentioned last quarter, we have been seeing this volatility in what we call the Daigou business which are the Chinese resellers who have been purchasing from us to resell on the digital platforms in China. So, from what we can tell, the reseller activity continues to be volatile. And it remained a headwind in Q3. We’ve been analyzing the e-commerce platforms in China, as well as news articles about what is happening with this market and it appears that some of the smaller resellers may have exited or closed up shops. What they are reacting to, we believe is the changing regulations and the evolution of the digital platforms globally. For us, for the long-term, the curtailments of this activity we see is a positive, because, keep in mind that our biggest focus and our primary goal is building Coach in the domestic market, with the domestic customer in China and with the domestic customer in North America and we couldn’t be more thrilled with the traction we are having in China, both in terms of the comp performance but also in terms of the brand tracking that Victor referenced in his earlier remarks.

Yes, and so, more generally, on the resell market more broadly, we see it as an opportunity based on a lot of the research that we’ve had the teams digging into this for quite some time now, a market that is about $24 billion globally. But the vast majority of that is still in watches and jewelry. Our own estimates of that about 5% $1.5 billion more or less is in handbags and accessories. We also see it as – and this is more resell of used products now. I am not talking about the parallel opportunity which is resell from lower priced markets into Asia. But we see it as much more concentrated in Europe and the U.S. and we see it less of an opportunity in Asia where consumers are much more focused on new product and much more focused on taking advantage of the international price premiums to access new products at a discount. In Europe and the U.S., we still see brick and mortar playing a very important role. In fact, our own studies show still 70% to 75% of this used product is going via brick and mortar stores and with opportunity of course for more of it to go online. But this is not a new phenomenon. Look, before the current platforms, whether it was eBay and other marketplaces, this has been certainly a trend. We dug deep into the handbag and accessories space and what we can share with you is that we see an average AUR that is really focused on traditional luxury brands. An average AUR that is about a $1000 and it’s really more than anything focused on what we see as seasonal luxury fashion bags as a result. That would not be necessarily the main targets for what we consider our core accessible luxury handbag customer who is really looking for a $300 to $400 handbag. And so, if anything we see it, potentially taking some share from the new sales in Europe and the U.S. to the traditional luxury customers. That customer who is looking for the newest hit bags that could be $2000 to $3000 is accessing it via some of these sites now at a $1000 or $1200 or $1300. Saying that, look, we are constantly following all of these formats. There are resellers. There is upcycling, recycling, there is rental formats. There is drops. Limited editions. Resale and consignment models and for me, for the team, for all of us across our brands, the main insights that we are really leveraging here is the opportunity for us to continue to up our gain in terms of increased collaborations. We are working on limited edition and drops. You heard in our speakers’ notes and Josh the teams and as well as Kate and Stuart Weitzman now working increasingly on pop-up stores and an increasing number of dotcom exclusives. All of this aligning with the experiences that’s millennials and Gen Zs drives. On the rental side, we have across a couple of our brands especially partnered very, very nicely with rent the runway, still a small opportunity, but we see that as a good way for us to continue to learn.

Super helpful. Thanks again.

Thank you.

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

Great. Thank you and good morning to you all.

Good morning, Erinn.

My question is around Kate Spade and the operating income pathway. So you are reiterating the $100 million to $115 million of synergies today which is $55 million to $70 million incremental this year. But when I just look at the key operating income this year, it’s only up slightly on a dollar basis. So, I am curious with the pressures you are seeing in Kate this year, how much do you expect to recover next year? And then, on the Kate Spade comp being positive in the fourth quarter, what are you currently seeing that’s giving you that confidence. Thank you.

Sure. I’ll start Erinn, on the question around operating income. And obviously, we have seen the COGS flow through and the significant growth we had today on including last year’s fourth quarter as well as the first three quarters of this year. Where we have seen pressure if you will, has been, as our choosing and that we are seeing significantly higher SG&A expenses associated with our buyback, associated with our significant ramp in new store openings, et cetera. So, we do expect that operating margin for Kate will grow as we move forward, but and we lap these investments, but this year we’ve really seen that in the increase and SG&A investments. I think I’ll turn it over to Victor on the positive comp question.

Sure. Erinn, of course, you know, we don’t discuss intra-quarter comps, but what I would share is that, we are definitely tracking to our plan to drive positive comps, some of what you’ve heard us talk about of course in terms of increased penetration of Nicola’s products is a key part of that by the end of the third quarter approximately three-fourth of the product in full priced was newness. By the end of the fourth quarter, all of the in essence will be new products in the full price channel and then in the outlet channel, we will be about one-third newness and we are really excited by the consumer reaction.

Thank you very much.

Thank you.

Thanks, Erinn.

Your next question comes from the line of Oliver Chen of Cowen and Company.

Hi. Thank you. As we look at the Coach brands, what are your thoughts on long-term growth opportunity? And how that will pace relative to the handbag market, thoughts on pricing and categories and what you prioritize renovation there? And then, a quick follow-up, the open source vendor forum as well as design-led thinking, that sounded new to me, as well as very interesting for driving some competitive advantages. I mean, how would you articulate that moving forward in terms of what makes it different versus how you innovated in the past and how that may drive our models on a long-term basis? Thank you.

Sure, sure. Let me let Josh talk a little bit about Coach and what we are thinking long-term or let me just start, I’ll start and Josh will then jump in on Coach. But on opensource and design-led thinking which we are really leveraging across the Tapestry platform. As you know, we’ve been talking about innovation for quite some time. I think it’s not just us, it’s obviously invention and newness and the pace that is today required is vital for all businesses in an increasingly transparent world. We are looking for ways in which we can obviously engage differently with outside partners to increase and drive the level of that innovation. And one of the ideas that we started working on a year ago that we just executed that really brought tremendous excitement to 10 Hudson Yards was actually reaching out to all of our current vendor base globally as well as new vendors and asking them to come for three days to our headquarters present to all of our design teams, present to all of our merchants as well as product development and even marketeers in pods. So, we have the small leather goods team for Coach combined with the PD people, combined with their marketeer parts, with their marketing partners and merchant partners across each of the categories, across all three brands go around for three days and meet with all of these vendors who came and we asked them to bring us newness. We asked them to bring us new ideas and materials, executions, printings, hardware, leathers, that we would then as a company take some bets behind and it was exciting. I mean the teams come up with incredible opportunity now. Over the next quarters, we will be able to see some of that actually executed into product and bets that we will be taking. With the opportunity for some of that to obviously, depending on the size of bets that we take to partner with these vendors and this newness and actually drive some exclusives. So, this will be an annual event. And I am actually not – we were still happy with the results, Oliver that we are thinking about allowing some of these vendor partners to leverage their visits to even in our building perhaps partner with non-competitors to come in and drive a little bit of synergy for the fashion community here in New York. As it relates to design-led thinking, look, nothing more important to me absolute, creative genius and imagination of our designers. We believe in that fully. But there are ways to drive innovation across the organization and new ways of working and design-led thinking as a process is one of these ways. It is based upon very deep consumer insights. It forces the designers, again working with their merchants, PD and marketing partners to get out talk to consumers with deep interviews to gain those insights. Test their ideas, come back and iterate in a very short period of time to again drive newness not only in function, but also in emotional attributes that normally we would not have. And so, we are excited about that. It resulted out of a experience with these stand for design school. It is now a program that we are doing two pilots in the Coach brand that we will then leverage those individuals as catalysts to drive that profits across the entire organization. So, those are just two examples. We are working on a few others. We are going to test and learn and as we see traction, we see it as driving of course newness and innovation across the organization which is absolutely vital to our success. So, on Coach, I am going to let Josh jump in long-term growth for Coach. Josh?

Yes, hi, Oliver. So, as we think about long-term growth for Coach, from a product lens, it really comes from innovation as Victor was mentioning. And the way we think about that by category is within handbag, it’s developing new powerful core lines, like we have now with Charlie, with Parker, with Dreamer that have a certain consistency about them. But then, can get updated in new platforms season-after-season. And then, increasingly it’s also about getting that balance between consistency and disruption. And so, in this quarter, we talked about our collaboration with Disney and Dumbo and things like that that surprise and delight the customer. Certainly, a lot of these pop-ups that we’ve been doing are important to drive disruptive messages around the brand as well. Then from a emerging category perspective, we have three focus areas which is footwear, where we are really starting to see a nice traction in that business both within our own stores and within wholesale that’s growing driven by sneakers for both genders and booties for women and fashion sandals, as well, this season. Our men's business is also a focus. In men’s we have a clear path to $1 billion and that is getting an inflection from our association with Michael B. Jordan and as we think about the way men are dressing today, in a more modern active sensibility, the importance of signature and logo in that business has been really powerful. And while still small, and intended to remain a small percentage for us, our ready to wear business is growing as well, driven by outerwear. In terms of distribution growth, we see no net distribution growth, but geographically, a big focus on China of course, and Europe where we are starting to see some nice traction. In addition, of course, it’s everything we are doing digitally. So, I hope that gives you some perspectives on the categories and the geographies that we are thinking about.

Yes, that’s really helpful. The last one on sustainability, that was a really nice point of difference, Victor, how you moved in that direction. Maybe just if you could share with us of the consumer insights around sustainability and why this matters to you and how it may play in to separating you from competitors?

Sure. Look, at the end of the day, Oliver, and simple – to put it simply, it’s just good business. Our teams care about it. Our consumers care about it. And I think that’s as fiduciaries and good corporate citizens and good citizens within the communities that we live and work in, we think it’s just the right thing to do whether it be on how we treat our teams, how we treat and support the communities that we work in. And as well, of course, from the environment we work with our vendor partners very closely and I think that’s putting out very, very clear targets for 2025 and coming out every single year and holding ourselves accountable to those targets by communicating them very clearly to all of you, to our teams, and to the consumers who will hold us accountable, we felt it was the absolute right thing to do and we are really proud of the moves we are making there.

Thank you. Best regards.

Thank you.

We have time for one more question. Your final question will come from the line of Simeon Siegel of Nomura Instinet.

Thanks. Hey guys. Good morning and nice progress in the quarter.

Good morning Simeon.

Good morning.

Victor, did you or can you speak to a trend that you are seeing at full price versus outlets? And then, just Andrea, maybe within just given the moving pieces and the Kate non-comp component, I guess the buy-ins also best positions. What do we need to keep in mind into Q4 and next year for the sales to comps rate? Thanks.

Yes, I think full price to outlet, as you know, of course, we deliver and only provide global comps. But in general, I would say that, from a global perspective, Simeon, the reality is all of our businesses internationally have been very robust. I could not be prouder of the traction that we are seeing across Asia on all of our brands and now from a much smaller base of course. As you are all aware, in Europe, really good and I would say across all channels really. Asia, of course has now wholesales, but full price and outlet performing really well and I would say that in Europe, the same is true with wholesale becoming an increasingly important part of our business across all three of our brands. In the U.S. I would say that our full price business is robust. I encourage you guys, especially for those of you who haven’t, please come to Hudson Yards, and you will see the most recent execution of the store formats for Coach, Kate Spade and Stuart Weitzman that we are tweaking and rolling out globally. Those stores are all doing incredibly, incredibly well. Really pleased with the performance of this new location for us really significantly above our expectations for all three actually. And what I would say is that, the opportunity in the outlet channel for increasing AURs that we’ve been talking about, that Josh has been talking about and the teams have been talking about, remains the real opportunity and we are very, very focused on innovating there, on obviously engaging with the consumer there and separating ourselves from the competition.

And I think, Simeon, as you look into the fourth quarter and you look beyond the fourth quarter, you are going to see both the Kate Spade organic comp growth augmented by significant non-comp growth. We will still be accelerating store openings next year and in this last quarter, just as an aside, we already saw the China business outperformed and contribute to our overall comps in terms of the fact that we brought them in Jan 1 of last year. So they did participate in the global comp number that we shared. So they were a driver of the improvement.

Yes, I think, I’ll just add Simeon on that, you got 242 Coach doors in Greater China where it’s 54 for Kate, 39 for SW. We are only scratching the surface here. So, a lot, a lot of opportunity. We are very excited about that.

Great. That’s exciting.

Thank you. That concludes our Q&A. I’ll now turn it back over to Victor for some closing remarks.

Thanks to all of you as usual for joining us and as is our custom, I just want to again thank our 21,000 strong team across the globe for all of their hard work and dedication and to recognize my excitement for the great work being done, not only across our brands, but as well across our very nascent and increasingly strong Tapestry platform. We have three amazing brands. Each of them has a unique narrative and an exciting creative direction that we are committed to investing behind across our multichannel and our global platforms. And I am continually inspired by the resilience and the desire of our teams to drive great experience for our customers globally. Thank you.

This does conclude the Tapestry earnings conference. We thank you for your participation and you may now disconnect.