Tapestry, Inc. (TPR) Q4 2019 Earnings Report, Transcript and Summary

Good day and welcome to the Tapestry Conference Call. Today’s call is being recorded. 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 and annual results are Victor Luis, Tapestry’s Chief Executive Officer and Andrea Shaw Resnick, Tapestry’s Global Head of Investor Relations and Corporate Communications. 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, including 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 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 of our fourth quarter and full year 2019 results for Tapestry as well as our three brands. Andrea will continue with details on the financial and operational results and our outlook for FY ‘20. 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; Josh Schulman, CEO and Brand President of Coach; and Joanne Crevoiserat, Tapestry’s recently appointed CFO. Following Q&A, we will conclude with some brief summary remarks. I would 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, 2019 was a year of meaningful evolution for Tapestry. Importantly, we made significant progress on our strategic initiatives against a difficult retail backdrop in North America. Touching on results by brand, we achieved solid and consistent performance at Coach, which speaks to the success of our transformation strategy, driving brand health and vibrancy. For the year, Coach’s international and digital channels led, while the brand also outperformed its direct competition in North America. Coach’s performance is key for two important reasons. First, Coach is the core of Tapestry. We understand that driving sustainable growth at Coach is essential to the success of our company overall. Therefore, we are incredibly proud of the brand’s results in spite of the volatile backdrop. Second, this performance reinforces our strategic intent to diversify our acquired brands across geographies and channels. Turning to Stuart Weitzman, we made advancements across product, people and processes, returning the business to top line growth. The SW team remains focused on driving improved profitability in the year ahead. At Kate Spade, we launched a new creative vision for the brand. And while there have been some green shoots, we clearly need more time to drive an inflection to positive comps, especially given the brand’s exposure to the competitive and traffic challenged North America market. We acknowledge that there are opportunities and are addressing those areas with a sense of urgency. As we look ahead, we are revising our outlook for FY ‘20 to reflect the current trends in our business, notably at Kate Spade. We believe this is prudent, particularly in light of the uncertain environment in North America and while we build the brand’s awareness in global markets. Importantly, with continued momentum at the Coach brand, our priority is to fuel an acceleration in our acquired businesses to unlock the power of our multi-brand platform. Therefore, while our long-term vision is unchanged, we are modifying our capital allocation policy in fiscal 2020 dedicating our resources to driving organic growth and do not expect to pursue strategic acquisitions. We are focused on balancing the investment in our brands to drive growth with the return to capital, with the return of capital to shareholders. To this end, we plan to increase the capital we return to shareholders, repurchasing approximately $300 million of common stock, while maintaining our annual dividend, resulting in the total payout of nearly $700 million. Overall, we remain steadfast in our vision and are focused on maximizing the benefits of our global multi-brand platform. Now, turning to our FY ‘19 milestones and FY ‘20 priorities across our strategic pillars. First, we made significant progress in reinforcing the foundation of our distinctive multi-brand platform in fiscal 2019. We generated the anticipated synergies from the integration of Kate Spade into our portfolio, which funded in part our key strategic initiatives. To this point, we made material investments in Tapestry’s infrastructure implementing Phases 1 and 2 of our ERP system in FY ‘19 with the third and final phase just launched last week, all without business interruption. We could not be proud of our teams for their diligence and hard work throughout this multiyear projects. We launched comprehensive 2025 corporate responsibility goals, recognizing our role as a leader in our industry to effect change and solidifying our commitment to social responsibility. These goals are consistent with the values led culture that we are building. And we brought in key new Tapestry leaders, Noam Paransky, Chief Digital Officer; Tom Glaser COO, and most recently, Joanne Crevoiserat as our CFO to help set and execute our strategic agenda. Looking ahead to FY ‘20, we are focused on leveraging the investments we have made in our platform. Specifically, our investments in our ERP system will help to drive standardization across the organization. In addition, we are excited to benefit from Tom Glaser’s unique and deep operational experience in multi-brand, multi category fashion supply chains. One of our key initiatives led by Tom will be to identify opportunities to improve our demand to production planning cycle, while increasing our speed to market across categories. This is especially important as we accelerate product innovation and the number of customization programs within our brands. It will also be important as we bring the Kate Spade footwear business in-house in the second half of the fiscal year, which I will touch on shortly. Next, driving global growth, in FY ‘19, we expanded our international presence through both distributor acquisitions and new store openings in key regions. This allows us to directly control and drive our business internationally capitalizing on our scale and market knowledge across brands. Importantly, we also gained traction with Chinese consumers globally, which as of FY ‘19 represented a high-teens percentage of Tapestry sales and where we see tremendous opportunity for growth. Throughout the year, we drove awareness for our brands with targeted events and marketing campaigns featuring locally relevant influencers, first for Kate Spade and Stuart Weitzman. And perhaps the most significant highlight of FY ‘19 was Coach’s first ever runway show in Shanghai, which garnered 1.6 billion impressions. Turning to FY ‘20, capturing growth with the Chinese consumers for all brands remains a key strategic initiative. Our focus will be creating seamless and innovative experiences both offline and online as we continue to translate each of our brand’s key messages into locally relevant content, which takes us to digital and data labs where we are building the skills and capabilities that truly differentiate us from the competitive set. During the fiscal year, we officially launched Tapestry’s Data Labs portal, a personalized suite of data science and AI tools that are changing the way we use and interact with data, providing access to those on the frontlines of our business. As mentioned, we recently welcomed Noam Paransky as our new Chief Digital Officer to lead our company-wide digital innovation agenda. He will play a key role as our enterprise leader to deliver innovative omni-channel experiences across all our customer digital touchpoints. His objective is to create a scalable Tapestry global digital ecosystem, comprised of people, process and technology to enable global teams to act locally with greater agility and at greater velocity. Noam has hit the ground running. We are excited to announce the launch of China Next, an agenda focused on the China market. Adding fuel to our digital leadership on Sina Weibo and WeChat, this initiative connects two of Tapestry’s key strategic priorities, driving digital innovation and growing our business with Chinese consumers. And not only are we focused on driving local engagement, we expect our China Next digital innovation agenda to provide learnings that we can leverage on a global scale. Overall, driving advancements in digital and Data Labs will be an important area of focus in FY ‘20 and we look forward to updating you on our progress in the quarters ahead. And finally, brand innovation, nothing is more important than this. As a brand-led and consumer-centric company, our goal is to nurture authentic innovative brands to capture the opportunities within the attractive and growing premium bags and small leather goods footwear and outerwear categories. We estimate that these combined categories totaled $95 billion and grew at a high single-digit rate on an organic basis in FY ‘19. This growth was led by bags and accessories which topped an estimated $50 billion and grew at an estimated high single-digit rate in FY ‘19 or a mid to high single-digit rate in U.S. dollars given the appreciation of the dollar for both the fourth quarter and the year. With that, I will move into our performance by brand starting with Coach. Global comparable store sales rose 2% in the fourth quarter led by outperformance in our international channels and across our e-commerce platforms consistent with the previous quarter. The drivers of our positive global brick-and-mortar comparable store sales were conversion, reflecting our strong product offering as well as traffic. This was Coach’s seventh consecutive quarter of comp store sales growth. By region, we delivered overall positive comps across all of our international regions, including Europe, other Asia, Greater China and Japan. Our international wholesale business also rose on a POS basis in the quarter. Comps in North America was flat to the prior year, accelerating sequentially, including the positive impact of the shift in timing of Easter, along with the negative impact of continued pressure from lowest tourist spend as well as ongoing volatility in Daigou or reseller activity. In addition, our North America wholesale shipments were above prior year and our business at POS increased despite a lower level of promotional event days. We are particularly proud of the brand’s sequential improvement in North America in light of the weekend traffic trends in both outlet and full-priced retail malls. We believe this speaks to the vibrancy of the brand, which is outperforming its direct accessible luxury peers fueled by innovation across channels and products, marketing and in-store experience. Looking at our progress against the brand strategies for FY ‘19, we drove leather goods innovation across the pyramid of fashion, occasion and price. In retail, our Signature assortment comp-to-comp reflecting the continued demand for this most proprietary brand icon, while in outlet we benefited from our good, better, best strategy in our core women’s handbag business. We fueled brand momentum and sales through collaborations, drops and pop-ups, including Disney, ex-Coach and most recently, a Rexy Remix, a collaboration with Chinese artists, which was featured on the runway of our Shanghai Fashion Show. During the year, we had over 130 pop-ups, engaging with our customers in a new way. We gained traction on lifestyle categories, including footwear and ready-to-wear, while growing our men’s business to almost $900 million at POS. These initiatives were supported by compelling marketing campaigns, which balanced our position as a fashion authority, while broadening our messages. We launched Michael B. Jordan as the first global ambassador of Coach men’s and post innovative culturally relevant and disruptive messages throughout the year. We also drove e-commerce growth and digital innovation globally as we continue to enhance our omni-channel capabilities. Overall, we saw strong double-digit increases in the brand’s followers on Instagram, WeChat and Weibo. Moving forward in FY ‘20, we will first accelerate product innovation and disruption; second, drive fashion authority through cultural relevance tapping into celebrities and influencers; third, inject excitement into stores with light touch, high impact refreshes; and fourth, fuel digital innovation in e-commerce growth benefiting from the enterprise initiatives underway. In summary, we are excited about the seasons ahead and remain confident in our largest brands opportunity for continued growth as we look to accelerate innovation and relevance globally. Moving to Kate Spade and focusing on the fourth quarter. Total sales rose 6% on a reported basis and 7% 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 have not yet anniversaried. Comparable store sales fell below our expectations, declining 6% on an aggregate basis. Conversion comp in our bricks and mortars business accelerated on a sequential basis and was positive for the quarter, reflecting the emerging positive signs we are seeing with Nicola’s new product offering. However, traffic comp was significantly under pressure against the challenging backdrop in North America and compounded by the anniversary of the difficult comparison following the passing of the Brand’s Founder, which drove unusually high traffic as discussed last year. Conversely, our international business was essentially inline with our expectations and on a relative basis significantly outpaced the performance in North America, including positive comps in Greater China. Turning to product, while the penetration of Nicola’s collection was consistent with our expectations in both retail and outlet, clearly, overall sales were not on plan. We feel strongly that we have the right strategic and creative direction based on customers’ response to the brand’s new iconic elements and strength we are seeing in select handbag offerings, such as the Margot, Molly and Nicola families, and most recently, the introduction of [indiscernible]. We have also experienced traction in jewelry and ready-to-wear. However, we were missing breadth of choice in key silhouettes, such as wear-to-work [indiscernible], as well as in the diversity of material ways. In addition, during the quarter, we introduced previous retail best selling styles into the outlet channel, Cameron Street and Jackson Street, which did not perform as expected. In short, while we refine the balance across silhouettes and full price, the outlet channel is the need of a much more substantial amount of distinctive newness than we planned. Looking forward, our overarching objectives for Kate Spade remain unchanged, leveraging the brand’s unique positioning of optimistic femininity and leadership in the attributes of fashionable and fun. That said we felt it was important to provide you with some additional color on the specific actions underway to immediately address the areas of opportunity. First, we are applying our product and merchandising learnings by launching additional [indiscernible] and keeping with the brand’s feminine aesthetic updated in modern and relevant ways. We are introducing new designs in a broader range of high-quality materials that provide the structure, durability and functionality that the Kate Spade brand is known for. We also believe there is an opportunity in cross-bodies and backpacks given the hands-free trend in the market. We are bringing in additional witty and emotional novelty items, which have been hallmarks of the brand both as permanent and limited addition offerings. We are also planning to launch product collaborations across categories to drive excitement and buzz. For holiday, we are launching a new Make It Mine personalization program in both specialty stores and on our e-commerce site, which will feature an updated multifunction bag and accessories offering, designed to appeal to a broad audience. We are also excited by the footwear opportunity for the brand as we take the business in-house from our licensed partner, Steve Madden, beginning in the calendar 2020. We showed our new spring collection at Fannie just last week and the response was very positive as buyers describe the offering as relevant, fun, exciting and truly lifestyle in addressing many usage occasions. For stores, we are continuing to expand our distribution with the focus on international markets. That said we are deliberately pulling back on the number of new store openings for the brand, while we focus on maximizing awareness and productivity. In marketing, we will drive brand awareness and aspiration with both collaborations with global and local celebrities and influencers, leveraging the power of social media and PR buzz across markets. In outlet, we are leaving no stone unturned. We are looking at product design, branding, merchandising, in-store experience and on-mall and direct e-mail marketing. In product, we are focused on accelerating the pace of newness with an assortment that is more clearly differentiated from the Saffiano heavy competitive set. This will also include the launch of new materials, branding elements and collaborations unique to the channel. We are also building out the successful Nicola designed AVA Group. With these measures in place, we have a comprehensive plan to drive an inflection in the business. Overall, we are acting swiftly and decisively applying our learnings to drive positive change and we remain confident in our direction and the $2 billion opportunity for improved profitability. Turning to Stuart Weitzman, in FY ‘19 our priority was to return the brand to top line growth addressing the production challenges we faced exiting FY ‘18. I am pleased that we were successful in doing this with revenue increasing 17% in the fourth quarter on a reported basis and 20% in constant currency driving the mid single-digit gain for the year. We made important advancements in several key areas. In product, we focused on fit and construction, creating foundational pieces that were consistent with the brand’s DNA. We broadened our footwear offering while maintaining our authority, in iconic Stuart Weitzman styles. We also introduced brand new codes that we will build upon in the seasons and years ahead. We gained further credibility in handbags and leather goods, which remains an area of opportunity for the brand. We also drove international expansion, particularly in China, where we doubled our store footprint, including the acquisition of our business in Southern China and we completed the buyback of our operations in Australia, where we will leverage Tapestry’s multi-brand hub. Finally, we evolved the brand’s marketing, featuring a cast of new and culturally relevant global brand ambassadors, distorting our investment to digital. Looking ahead to fiscal 2020, our strategic pillars include: first, enhancing our systems and processes to improve profitability. Key to this will be optimizing the supply chain in the wake of our three of our Phase 3 S4 go-live. Second, maintaining the brand’s boot and sandal authority, while expanding our footwear expression, especially in slacks and sneakers and keeping with current trends. This is paramount as we look to recapture the brand’s leadership position in top tier wholesale accounts. To this end, we were pleased with the initial positive feedback we received from our department store partners during the brand’s spring market presentation last month. Third, driving credibility in handbags through exceptional functionality and differentiated design and branding. Fourth, fueling customer desire through marketing, increased brand awareness globally and acquiring new customers; and fifth, expanding globally with the focus on China building on our current momentum. In summary, we have made significant progress in sharpening the focus of the brand’s core strengths and we remain excited about the opportunities for Stuart Weitzman. To recap, we have a clear vision and a unique global multi-brand platform. Our model is distinctive. We are brand-led and consumer-centric with the 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. Before I turn it over for the financial review, I would like to welcome our CFO, Joanne Crevoiserat to the team. I know that many of you have had the opportunity to work with her throughout her career. We are delighted that she has joined Tapestry. She has extensive financial and operational experience with established retailers and global brands and brings a unique perspective and important skill set to our Company. I am confident that she is the right person to lead our strong finance team, as we execute our strategic initiatives and long-term vision. Joanne?

Thanks, Victor. I’m very excited to be here at Tapestry working with the talented teams across the globe as we execute our brand and growth strategies. I’m also looking forward to reconnecting with many of you on the line and meeting those new to me who follow our story in the months ahead.

Thank you, Joanne and before turning it over to Andrea, I’d like to recognize it for our hard work and energy over the last several months, that she has held the position of Interim CFO. Andrea, wear many hats within our organization. She is a mentor to many, and a key business partner to me and our leadership team, with an unparalleled understanding of our Company and its history. On behalf of our entire leadership team, thank you Andrea for year end less energy and leading the finance team in this period. With that, I’ll now turn the call over to Andrea for a discussion of our financial results, as well as our outlook for fiscal year ‘20.

Thanks, Victor for those kind words, 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 as well as our outlook for fiscal year ‘20. 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 reconciliations can be found in the earnings release posted on our website today. As Victor mentioned, it was an evolutionary year for the Company, we entered FY ‘19, understanding that it would be one of significant strategic investment as we built the foundation of our multi-brand platform. We also anticipated and achieved meaningful synergies from the successful integration of Kate Spade, in part funding these investments. At the same time, we delivered ongoing top and bottom line increases at Coach, the core of our house. That said, we did not drive the intended growth at Kate Spade and faced incremental industry wide promotional headwinds in the North America outlet channel. Overall, our EPS was in line with our most recent guidance. Now turning to some key financial details of the fourth quarter, sales in the quarter rose 2% on a reported basis and 4% in constant currency, with disparate results by brand. We continue to drive positive same-store sales at Coach and delivered strong sales growth at Stuart Weitzman, lapping a challenging quarter from a year ago, while Kate Spade comps declined 6% in Q4. Consolidated gross margin declined 60 basis points versus prior year. For context, we did project and guide to a gross margin contraction for the quarter pressured by Kate Spade, given the brand’s difficult prior year compare, which included the financial benefit of unusually high full-price selling, following the founder’s passing, as well as the initial realization of synergies. In addition, Kate Spade’s gross margin was further pressured by incremental promotional activity, year-over-year, particularly in the North America outlet channel. In contrast, and importantly, both Coach and Stuart Weitzman delivered gross margin expansion over the prior year. SG&A expenses rose 2% in line with the top line increase. Operating income declined 3% and represented 14.6% of sales as compared to 15.3% in the prior year. Our EPS of $0.61 was a penny above last year and consistent with the implied guidance range for the quarter, reflecting in part a lower-than-expected tax rate. We also commenced our buyback period program during the quarter as reported, repurchasing approximately 3.4 million shares of common stock at an average cost of $29.31 for a total of $100 million. Now, moving to global distribution, as highlighted in our press release across Tapestry, we added a net of 108 locations in FY ‘19 driven by international expansion at Kate Spade and Stuart Weitzman, including a total of 69 net new openings and 39 stores acquired through regional distributor buybacks. We ended the year with 1,540 directly operated stores globally. Turning to our balance sheet and cash flows at the end of the fiscal year, our cash and short-term investments were approximately $1.2 billion, while our borrowings outstanding were $1.6 billion, consisting primarily of senior notes. Inventory levels at year-end were $778 million, an increase of 16%, reflecting in part the unusually low ending inventory balance at Kate Spade in the prior year, given the magnitude of full price selling, following the founder’s passing. In addition, as discussed on our last earnings call, we’ve continued to experience port congestion in Asia, which has resulted in a higher level of in-transit. Importantly, we are confident that we can strategically manage our inventory, given its currency and our multi-channel distribution model. We have a plan to work through our inventory specifically at Kate Spade in a programmatic manner, during the first half of fiscal ‘20, which has been contemplated in our gross margin guidance. For the full year, net cash from operating activities was an inflow of $792 million as compared to an inflow of $997 million a year ago. Our CapEx spending was $274 million versus $267 million a year ago. CapEx spend came in favorable to our expectations primarily to the – due to the timing of cash payments, which shifted into fiscal 2020 Free cash flow for the year with an inflow of $517 million versus an inflow of $729 million last year. And in FY ‘19 we returned a total of approximately $490 million to shareholders through our dividend as well as our recently instituted share repurchase program, representing approximately 95% of our free cash flow for the year. Now turning to our capital allocation policy as Victor mentioned, while our long-term priorities remain unchanged, supported by our strong balance sheet and cash flow, we are modifying our policy in the near term, dedicating our resources to driving organic growth while returning capital to shareholders through our dividend and share repurchase program. To that end, in fiscal 2020 we do not expect to pursue a strategic acquisition. Now moving to our 2020 outlook, consistent with our prior practice, the following guidance is presented on a non-GAAP basis and replaces our previous guidance. Starting with Q1, we are projecting revenue in the first quarter to be slightly below prior year, this reflects, low-single digit comp growth at Coach. Kate Spade comps are expected to decline at a high-teens rate based on the current traffic trends we are seeing in the business, and as we address the product and merchandising challenges. We would also expect Stuart Weitzman to post an operating loss in this – its smallest quarter, reflective of wholesale shipment timing. We’re forecasting gross margin for Tapestry to be slightly pressured in the quarter, impacted by FX, notably at Coach, while SG&A is expected to increase, driven by new store openings and higher depreciation associated with our systems investments. Taken together, we expect Tapestry EPS to be in [Technical Difficulty] $0.37 in Q1. Now turning to our full-year outlook, we expect total revenues for Tapestry in fiscal 2020 to increase at a low single digit rate from fiscal ‘19. This includes the expectation for low-single digit growth at Coach, driven by continued positive low-single digit comp. We expect Kate Spade to deliver low to mid-single digit sales growth, driven by distribution. At Stuart Weitzman we expect solid sales growth for the year. In addition, we are projecting a modest decline in Tapestry’s gross margin for the year, including the negative impacts associated with bringing Kate Spade’s footwear business in-house along with pressure from currency. Our gross margin forecast also incorporates the impact of U.S. tariffs on imports from China, including the 25% tariffs on handbags and small leather goods, currently in place, as well as the recently announced 10% tariff on the list of 300 billion of goods expected to go into effect on September 1 for categories such as footwear and ready-to-wear. As you know, we have a diversified manufacturing base and our exposure to China is relatively limited for handbags and small leather goods, where we’ve migrated our production. And while footwear and ready-to-wear are smaller but fast-growing categories for Tapestry, we do have more exposure currently to China. We expect SG&A growth to be approximately inline with top line growth. As you know, we’ve made several important investments in our multi-brand model and our brands over the last few years, which are foundational to our long-term success. These include new store openings and regional buybacks as we focus on expanding our brands and directly managing the customer experience in key international market, and systems to allow us to drive sustainable growth in an increasingly digital world. Net interest expense is expected to be in the area of $45 million to $50 million for the year. The full year fiscal 2020 tax rate is projected to be in the area, 17.5%. And overall, we are projecting earnings per diluted share to be roughly even with prior year. This incorporates the expectation of share repurchase of approximately $300 million in fiscal ‘20. We expect CapEx to be approximately $300 million for the year, which includes the shift in cash payments from 4Q ‘19 as mentioned. Touching briefly on our FY ‘20 directly operated distribution plans, across Tapestry our distribution expansion efforts will focus on international market. By brand, we expect little change in our Coach, directly operated store count with closures in North America, offset by modest net openings internationally. Stuart Weitzman we expect to open a net of 15 to 20 locations globally, and the Kate Spade we’re projecting 30 to 40 net openings in FY ‘20. As noted in our press release this morning, this represents a modestly slower pace of openings at Kate Spade as compared to FY ‘19 and our prior projection as we strategically focus on maximizing the brand’s productivity. In closing, we are focused on executing our vision, supported by a strong balance sheet and cash flows, providing us with important financial and strategic flexibility, while enabling us to return meaningful capital to our shareholders. I’d now like to open it up to Q&A.

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

Hey, good morning. Joanne, welcome and congratulations. Best of luck.

Thanks Bob.

I guess, I’d like to focus just on the Kate Spade brand for a minute. Victor, are you still confident about Kate’s brand health? And I guess when you look at the results this quarter, how did you not see it coming and how will you fix it? When you look at it, contrasting it to the strong Coach brand performance, can you just talk a little bit about that as well? Thanks.

Okay. Thank you, Bob. Maybe I’ll start with the contrasting with Coach, get into Kate and then Josh can support at the end on the Coach’s performance, which of course is really outperforming, not only here in the U.S. but truly globally against our more direct competitive set, could not be prouder of that team and the work that they’re doing, they’re really hitting on all cylinders. On Kate, as you all know, we saw a significant improvement in the third quarter, and really many emerging signs of the traction post the launch of Nicola’s collection, we saw a positive conversion comps, we launched a new core family in Margot, late followed by Polly which is really checking and increasingly we received, really positive signs across categories, especially ready-to-wear in jewelry with the iconography of working well, that we launched. As we entered Q4 we were optimistic, of course we are supported by the Easter shift and with the amount of newness that we had coming in, starting in the outlet channel. What we saw though was through May, into June, but especially beginning in May was rapid deterioration in the North American environments, traffic declined. And especially in the outlet channel, this led to increasing promotion across competitors. And in fact, I would say across the channel. And as all of you know, Kate is disproportionately impacted, given its nascent international footprint and its dependence on North America relative to the Coach brand. In addition, I would add that Kate simply did not have the level of distinctive newness, that we needed to drive conversion in that channel, especially given the decreasing traffic and especially against the Saffiano heavy competition. For context, when we transformed the Coach brand, one of the strategies that we took early on, when Stuart joined was to take top selling previous full price collections, we re-engineered, then we launched them an outlet and we really drove terrific AURs. In the case of Nicola, you’ve heard us talk Nicola’s collections, you’ve heard us talk about the fact that approximately 30% of the outlet product was Nicola designed product. Of that 30% of the total, two-thirds, or 20% of the total were slightly more actually – whereas we had done with Coach, taking previous full priced top sellers which Nicola reengineered – re-touched, added some functionality and brought into the channel. Specifically, collections Cameron Street and Jackson Street which are today, still core to our business. And unfortunately are not performing as we expected, and the key learning there is that, they were just not perceived as new enough in the outlet channel, especially as they were Cameron Street, Saffiano-based collections and not able to compete with some of the major competitors who are really being promotional in those key platforms. And what we began to see basically is with that pressure and with the continued traffic pressures, the collections are simply still not pulling their way, and now we are prioritizing gross margin and quite frankly, longer term brand health. The good news, so what do we see? First AVA which was 100% designed by Nicola and it’s under 10% of the total outlet, is truly outperforming and gives us a lot of confidence as we bring in tremendous amounts of distinctive newness over the next months and quarters. And we’re also pleased with the performance that we’re seeing outside of North America, especially in Asia and in Greater China, where we’re seeing positive comps, and is a key area of investment for us. So key steps, Bob, to your – the second part of your Kate question and what are we working on, what we’re doing. So look with a great sense of urgency the Kate Spade team is really focused on first and foremost product. In the full price channel I would say it’s much more tweaking the collections, really getting in high function styles that are focused on our key wear-to-work consumer. And outlet, it’s truly about distinctive innovation, both in silhouettes, materials and I would say even in branding, as we continue to diversify collections. And then in both channels, we are looking to truly leverage novelty, which is a key part of the brand, while launching coming up in the second quarter, Make It Mine and I think as you heard in my notes, Q3, the launch of footwear. And taking a lot of learning’s from what’s happening across brands and those that are truly engaging effectively with consumers. We have a tremendous amount of activation in store as well as collaborations coming up. On the marketing side, you guys will hear us talk a lot about leveraging influencers and celebrity, stay tuned there, we will have one or two announcements in the not too distant future on key partnerships there. And then stores, the focus right now is truly on driving productivity. We’re going to be doing some light touch investments especially in the most productive part of our outlet fleet and there you’re going to see us look at fixture productivity, signage and window package renewals, as we look to truly drives a much bigger change in the eye of the consumer. Turning to brand health, saying all of that and that gives you, I think a little bit of a synopsis on where we were, what we saw, steps that we’re taking and now looking at brand health. Look, we just finished, recently May into June, a global brand tracker. We interviewed thousands of consumers here in North America across all of our brands and the competitive set, and we are confident in the health of the brand and it actually gave us confidence in the creative direction and Nicola’s vision. We continue to be very strong, in a very unique position, we lead in the key emotional attributes of fashionable, fund and feminine, and the key is really in tweaking our execution in some of those areas and I remain very confident, and Kate being a $2 billion opportunity. And being so, at gross margins that are going to be similar to Coach and like categories, and that remains our clear vision. As I mentioned, relative to Coach, Bob could not be prouder of Josh and the team, and what they’re doing in that brand, because as I said, they’re really hitting on all cylinders. I’ll let Josh talk a little bit about what he is seeing both globally and here in North America as that brand truly, I think outperforms the direct competition in a very strong way. Josh?

Thank you, Victor. And good morning, Bob. So you know how we’re thinking about innovation at Coach is really at the heart, I think of how we’ve been able to drive the seven consecutive quarters of positive comps, and the gross margin expansion that we’ve been able to see this year. And so I’ll share a little bit about how we’re thinking about driving this balance of consistency and disruption within the brand, really across three pillars. So, the first is, we have to consistently innovate in our core. We have to – yes, every day in every channel have our core products at good, better, best price points with product excellence and innovation there. I think the best example of that, that we’ve talked about on numerous calls and – that you’ve seen in our stores is the re-launch of Signature, which is now into its second year and is continuing to drive a high AURs in our retail channel actually higher AURs than leather. And we have examples of that, of the innovation and core product in our outlet channel as well, whether that has been The Edit at best clinical prices or whether that has been a new introductions like Jet really speaking to our broad customer around the world. The second pillar is more about the disruption, and that is – and I call that collaboration or co-creation. And during this year we have had an unprecedented number of activations, pop-ups, drops, capsules where we’re either collaborating with a third-party or driving innovation around important cultural moments. So in this quarter, in this most recent quarter, we did at 360 activations around Mother’s Day, particularly important in North America, where it’s the visual, it’s the product, it is the whole experience we’ve done, third-party partnerships. We did artist collaborations with a series of Chinese artists, which we call the Rexy Remix which we rolled out in our retail channel. In outlet, we did a collaboration all around ‘80s video games Pac-man – Ms. Pac-Man and these are traffic driving collaborations. And so when we do these activations, they have really helped us, and I think you see that this quarter, they helped us in a traffic challenged environment, drive the traffic to Coach, in the malls, in the full-price malls and the in the outlet malls. And then the third pillar, I would say, is around acceleration, so there is innovation, collaboration and acceleration. And acceleration is really for our categories where we – we consider our growth categories so, our men’s business which is approaching $900 million, our footwear business and our ready-to-wear business. And how do we have distinct strategies to drive growth in those areas. And I think what you’re starting to see is you’re starting to see how those three pillars can work together consistently, back to buy marketing that is no longer, just about one seasonal fashion message – about something much broader, which is driving a cultural relevance through marketing. And so you see – we have a mix of global ambassadors like a Michael B. Jordan or a more regional ambassador like Kiko Mizuhara in Japan, and driving these messages across the digital channels, and using those digital channels as really the hub of an ecosystem that brings the customers into the stores. And so, we can’t be complacent, it’s competitive out there, but we have a pretty exciting pipeline ahead of these types of innovations and activations.

Yes. And I think I would just close to wrap up on those points there. Please if you haven’t had the opportunity, do take a couple of visits to a couple of key outlet stores in your region, and walk the competitive set compared with Coach’s execution and you’ll – I think very easily understand a lot of the great work that Josh has just explained, impacting across all channels at once. And we’re on that journey with Kate and I’m very confident in that team’s ability with Anna and Nicola and very talented folks, they have supporting them to execute accordingly.

Great. Thank you very much. Good luck.

Thank you.

[Operator Instructions] Your next question comes from the line of Irwin Boruchow of Wells Fargo.

Hi, good morning everyone. Just two quick questions on Kate. On the store growth pullback can you Victor is that tied to any specific region or is that broad-based globally, just overall? And then I appreciate all the guidance on the year for the business, but is there any chance you could give a little bit more color on your view of Kate for the year as you progress you kind of gave us some comp expectations for Q1. Can you help us how you’re thinking about how that business should progress through the year? Both comp and on operating profit metrics, anything that you’re comfortable sharing? And most specifically are you targeting a positive comp at some point this fiscal year? Thank you very much.

Sure. Thanks. In terms of the openings really our focus is on productivity, I mean you were planning above 40 locations for the year, we’re still planning between 30 and 40, we’re just being much more selective. And with the continued focus on Asia and especially in China where we are seeing the opportunity of course to leverage those investments as part of our greater program to build brand awareness there, which clearly remains the number one single growth opportunity for that brand and for us from an awareness perspective. In terms of Kate and through the year and comps, first and foremost, I think we gave guidance that we’re expecting low-to-mid single digit sales growth, driven by distribution. At this point I won’t be making a call on the exact timing of positive comps, particularly given the dependence of Kate Spade, what is the challenge North America environments of course we expect clear improvement throughout the year as significant newness hits, and of course as we enter a period of easier compares once we get into Q2, Q3 and Q4. But at this point, I would say that you should expect that our confidence in the mid-to-single digit total growth driven by distribution.

Thank you.

Thank you, Ike.

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

Great. Thanks, good morning. I guess my question is around the EBIT dollar guide, I guess you moved from what would have been roughly $95 million of incremental EBIT growth, and now it looks like EBIT dollars are slightly down for the year. Can you just help us walk through the moving parts by brand, is that all Kate Spade or there, incremental investments? And are you still expecting Coach and Stuart Weitzman in that guide to be positive contributors to EBIT dollars? Thank you.

Sure Erinn. So, in terms of the primary change, absolutely correct, it’s really coming from Kate Spade where we now have taken down top line growth through a combination of lower than originally expected comp as well as the modern the modification in our store opening schedule. As you know, we had 40 to 50 originally planned, now we have 30 to 40 as Victor just mentioned. Those are the primary reasons, the primary delta from where we were. And then of course we do still have elevated SG&A specifically at the Kate brand associated with the new store openings that we opened this year, as well as we won’t anniversary the buyback until the end of the first quarter. So it is really primarily coming from the Kate Spade brand, we are looking for operating income generation at Stuart Weitzman, although the first quarter will be probably a similar operating loss to what we exited fourth quarter and of course Coach is, I would say, steady as she goes or it goes.

Great. Thank you so much.

Thank you.

Your next question comes from the line of Alex Walvis of Goldman Sachs.

Good morning, thanks for taking the question. I wanted to ask a question about the decision to bring footwear in-house at Kate Spade. And I wonder if you could reflect on the same strategy at Coach, how that’s progressed versus your plan on what’s worked well there? And why the decision to do that with Kate now and how that could be an opportunity and ways it could differ from the Coach experience?

Sure, very clear opportunity, Alex, for us. We’ve taken, basically the last, I would say, two to three years to establish a very solid product developments, production capacity in footwear in Asia, incredibly pleased to have with us Tom Glaser who comes of course from a very deep experience in that space, supporting our teams as we look to truly get best-in-class in all of these categories, so he will provide key leadership and we have a team at Kate that has experience in doing this. And I can tell you we’ve just shown the first Kate collection at Fanny as well of course of Coach and Stuart Weitzman, just basically wrapping up a week of markets here in New York across all three brands. And what I can share with you is that in all three brands the reaction has been superb. Kate it’s first collection, if I compare to Coach’s first collection three years ago, they’ve really taken a leap forward, whether it’s from a design perspective, silhouette style perspective, excuse me the usage occasion and in terms of product development, leveraging pricing and developing and the development capacity that we established with Coach, over the last three years. I go into the Kate first season with a lot more confidence than we entered Coach three years ago. I would also add that this season in Fanny, Josh and the Coach team have taken a very substantial lead role. We’ve been operating now for a few months, Josh and his team have with some new third-party development capabilities, especially in the core sneaker business, which as many of you know, is driving a huge trend in footwear, we just showed a new collection, which has been incredibly well received at wholesale and by our own teams, so fully excited by that. And for those of you who follow on Instagram and maybe have Stuart Weitzman on your feed, you’ll see the new sneaker collection that they’ve just launched a Daryl, which is really new to them. Given that they were at sandal and food resource, and very excited of course, as we enter fall-winter given that they are such a strong group resource, but it’s truly a good reflection of the Eraldo and that teams move to also diversify and bring new usage occasions to the brand. So this is a great platform, I think, was really coming into our own and I speak with a good level of confidence on that, look in the first year financially, there is a small investment that takes place, but really minor from year two, this thing becomes much more accretive than the royalty, it was a timely business relative to the Coach license that we took back. We’re very thankful to the partners that we had not in their predecessors, but now it really is about us leveraging this key strategic category along with core handbags and accessories and outerwear as core drivers for all of these investments that we’re making in our own direct distribution and with key third-party partners.

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

Hi, thank you. Regarding Kate Spade what are your thoughts regarding the customer reception of the newness ahead and how the sequencing may go as customers look to the changes? Also, I would love your thoughts on the codes of the Kate Spade house and how you evaluated? How those are performing or tweaks you may make? And then finally regarding Kate, just ensuring that there is a great level of distinctiveness versus Coach and that the segmentation is how you wanted. That would be great to hear this, your thoughts. Thank you.

Yes. Great. Great question. Look, Kate has really unique positioning. And in many ways, I would say, first and foremost from an addiction perspective, definitely considered on the fashion and given its stronger reliance on ready-to-wear traditionally and other accessory categories, including jewelry tech, much SKUs much younger, much more millennial than Coach. And I would say, has a very strong in the hand bag space, a very strong and I’m talking here in North America now, because we’re very much in the early stages of building this business outside of Japan internationally, very strong suburban consumer who see that as a key wear-to-work resource and we’re really focused on providing that functionality. I think, that relative to differences between Coach and Kate, the teams are completely separate, Nicola and [indiscernible], they don’t come in and look at the Coach collections from Stuart, Stuart doesn’t go over and with the Kate collections, obviously in the fashion world they follow in general trends, but I think you’ll see, whether it’s in product and functionality, that you would go to the full price stores, it’s probably a good place to visit where they’re across from each other here at the Hudson Yards Mall here in Manhattan, where you can see Coach and Kate. The Kate experience and the Coach experience are very, very different. Kate speaking to her customer with its very specific codes in femininity, that I’m going to talk to in a minute and Coach to its customer with a much more urban fashion take, and I would say Stuart’s leverage of Coach is much more house of leather coats. If we look at Kate and the codes that we’ve launched, and I think I touched upon this in my remarks, in terms of our ability to compete effectively in the outlet channel. Kate has traditionally depended on a few very core clothes, first and foremost from the material perspective, there has been about Safiana; from a silhouette perspective, it has been about satchels and wear-to-work types of styles and from a branding perspective, it’s really been about that Kate Spade New York metal lock-up, which is on these products. These are traditional codes, they’re used by many brands across the spectrum and the issue is just that, one is Safiana, in and of itself is a material way, is facing challenges in terms of the ability of brands to distinguish themselves from one another. And then when you have the price competition coming on that, it becomes even more challenging. So, what we’re seeing in terms of the Coach that we launch, first and foremost, new materials, new type of leathers, we are seeing new nylon executions. You will see in the future, new textile executions, PVC executions, much more different branding executions, you’ve seen Nicola especially in the full price, part of the business, which has been well received, leverage a more universal code that is uniquely owned by us, which is the Spade, turning that into hardware, turning that into different lockup executions which are good is going to give us diversity, in the iconography of the brands. And now we’re leveraging all of that into the outlet channel, which we’re really excited about. And I would just say, that’s when we looked at and as you know, [indiscernible] we’ve talked about this a few times in the past, we have an extensive database, we capture north of 85% of customer transactions, across our brands. And what I can share with you is that, the overlap in the database between Coach and Kate Spade consumers is truly less than 5%. So, I’m not as concerned about that at all, as I am about Kate being true to its DNA, yet continue to modernize itself, continuing to give the Kate Spade’s core customer, distinctive newness that she can engage with and that differentiates it from all of the competitive set.

Thank you. Very helpful. Best regards.

Thank you, Oli.

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

Right good morning. Thanks for taking my questions. Just I guess a few quick ones from me, kind of housekeeping here. But what is the share count implied in the flat EPS guide for fiscal 2020? And then how should we be thinking about free cash flow? I guess, based on your current outlook, could you do more than the $300 million on the buyback, without increasing your net leverage ratios? And then finally just hoping you could touch on inventory levels by brand, any pockets of excess inventory that you need to work through in the short run here? Thanks.

Sure. So, Mark, on the share count, think of anything between 282 and 286, depending on when we buy that $300 million worth of stock over the course of the year. We are committing to $300 million right now. And that’s all I think we’re willing to commit to you. And then in terms of your third question on cash flow, could we do more without tripping any leverage issue? Yes, we could, based on our projections of cash flow for the year. On the inventory so inventory was up as you know about 16%. On a two-year stack, I think that was around 8.5% for total Tapestry on pro forma basis, if you include Kate in the two-year comparison. Kate was actually down about 10% over the two-year period, because of the low levels on inventory as we exited 4Q last year, and given the full price selling that we’ve seen and a little bit of delayed delivery. We had projected it, we saw an increase in-transit, we talked about port congestion last quarter, I would reiterate that now in terms of where that excess is on the lower levels of sales, you can assume obviously that we have a little bit more than we’d like to have on Kate Spade. We are very confident that we can strategically manage through this, it’s going to be a balance on brand health versus promotional activities along we want to be very strategic in that, but we feel good given the currency of the inventory that we can work through that in the first half of the year.

Alright. Thanks, and best of luck.

Thanks Mark.

Thank you.

Your next question comes from the line of Jamie Merriman of Bernstein.

Thanks very much. Victor in your comments about Kate, you mentioned some of the initiatives that you have in terms of things like bringing in satchels and cross-body etc. Can you give us a sense of the timing of some of those initiatives, you know given the length of your supply chain and speed, when would you expect those initiatives to start to help? Thanks.

I think in the full price channel really is what I was referring to there, because I do think we’re very much in inventory in that type of style, we don’t have enough diversity in outlet, we don’t have enough diversification in outlet from the material and branding perspective, as well as bringing in, I would say incremental silhouettes to the core satchels where we are very much in inventory and outlet. In full-price there is definitely an opportunity there, and you’re going to see us bring those in fact every month over the next four to five months. We have two to three families launching in the next two to three months, that we expect to be very significant players along with Margot, which today is our key and most successful family in the full-price channel.

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

Thank you everyone for being with us. It’s is our custom, I just want to take the opportunity to thank our teams across the globe for their hard work and dedication, couldn’t be prouder of their commitment in all of their efforts. As we had an amazing year of building the foundation that will certainly serve as the key to our growth for years ahead. I have a tremendous confidence in them and look forward to working and partnering with them to drive growth out of this foundation that we’ve built. Thank you.

Thank you. This does conclude today’s Tapestry conference call. You may now disconnect your lines and have a wonderful day.