Tapestry, Inc. (TPR) Q1 2021 Earnings Report, Transcript and Summary

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

Good morning. Thank you for joining us. With me today to discuss our first quarter results, as well as our strategies and outlook, are Joanne Crevoiserat, Tapestry's CEO; 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 posted today. Now, let me outline the speakers and topics for this conference call. Joanne will begin with a brief recap of our first quarter results for Tapestry and each of our brands. She will also provide an overview of the progress we have made on our Acceleration Program. Andrea will continue with our financial results and our priorities going forward. Following that, we will hold a question-and-answer session, where we will be joined by Todd Kahn, President and Interim CEO and Brand President of Coach. After Q&A, Joanne will conclude with brief closing remarks. I'd now like to turn it over to Joanne Crevoiserat, Tapestry's CEO.

Good morning. Thank you, Christina, and welcome everyone. It's a pleasure to be with you today and a distinct honor to be leading this great Company at such an important time in our history. I'm incredibly proud of the momentum our teams are driving across the organization and confident that together we can both create and capture significant opportunities ahead. Now, turning to our results. As you read in our press release, our first quarter well exceeded our expectations across brands, demonstrating the bold actions we're taking as part of our Acceleration Program. We drove a meaningful sequential improvement in topline trends, supported by strength in Digital and China. We successfully raised AUR by offering customers compelling high-quality products that delivered exceptional value. This resulted in reduced promotional activity and significant gross margin expansion for the quarter. At the same time, we continue to tightly control costs. Taken together, despite the challenging backdrop, we achieved significant increases in operating income and EPS on a year-over-year basis. Importantly, we also generated strong positive free cash flow and ended the quarter with $1.5 billion in cash and equivalents and a clean inventory position heading into the holiday season. This performance underscores the power of our brands with leadership in the attractive premium handbags, accessories and footwear categories. It also reinforces the competitive advantages of Tapestry's enabling platform, including, first and foremost, our talented teams around the world who have shown tremendous agility and passion in delivering a great experience for our customers. Second, our consumer insights resources across brands and regions, providing the tools and deep consumer knowledge to unlock value. Third, our diversified supply chain and scalable global operations, which has proven invaluable, especially during these volatile times. And fourth, our technology infrastructure and robust digital capabilities accessible across the globe. In addition, leveraging these strengths, we've made meaningful progress on our Acceleration Program, which is defined by sharpening our focus on the consumer, leveraging data, leading with digital, and transforming into a leaner and more responsive organization. Some key highlights of the quarter include: first, we continue to drive triple-digit growth on our digital channels, leaning into our global capabilities to offer immersive customer experiences. In the quarter, e-commerce represented nearly 25% of total revenue as compared to a high-single-digit percent last year. These outside gains were led by the recruitment of nearly 800,000 new customers across brands in North America. Importantly, we are successfully driving repeat purchases among these customers at a higher frequency and we're capturing a growing number of Millennial and Gen Z customers online. Further, the growth in online sales is driving profit growth as well, as our digital businesses carry higher operating margins than their respective bricks and mortar channels. We believe that the consumer shift to online is a trend that's here to stay and we're excited by the traction we're seeing in this area of the business. Second, we also delivered significant growth in China in the quarter through innovative product assortments, enhanced marketing and expanded reach across direct channels and third-party online distribution. In fact, Coach is now the number one ranked handbag brand on Tmall, just one year after our soft opening on the platform. Our Digital business in China, while growing rapidly is still quite nascent, underscoring the enormous runway we have, particularly as Chinese consumers are highly digitally engaged. Third, as we've shared, we're committed to building industry-leading data and analytics capabilities to drive decision-making. In the quarter, we leveraged data and analytics to optimize our marketing messaging, assortment planning and promotional levels to support higher AUR. The successful outcome of these initiatives together with our innovative product offering and inventory management is evident in our strong gross margin expansion in the quarter. Fourth, we made further progress in creating an agile and scalable operating model. We're streamlining our organization structure and empowering our teams. As part of this work, we reduced our global corporate headcount costs by 20% on a run rate basis. As a result, we are emerging as a more agile organization that will drive faster decision-making. In the near-term, this better aligns our cost base with the current demand environment. And over the long-term, it supports operating leverage and profitable growth. We are also driving efficiencies through the optimization of our global fleet. Our focus is to improve profitability across our store network while delivering a consistent brand experience for our increasingly omnichannel consumer. Overall, through our Acceleration Program, we are better meeting the needs of our customers while creating a strong foundation for profitable expansion. Now, I'd like to touch on some of the overarching strategies for the holiday season and actions under way across Tapestry to navigate the dynamic backdrop. We will continue to focus on the factors within our control with an eye toward best-in-class execution. We're putting the consumer first with each of our brands delivering newness throughout the quarter. We will provide our customers with seamless shopping experiences by offering curbside pickup and contactless payment options, and the opportunity to make virtual appointments. We are also testing new technology to offer virtual queues in select North America outlet stores, allowing guests to bypass lines and instead receive an alert text when is their time to enter the store. Importantly, given social distancing requirements and related capacity constraints, we're implementing strategies to elongate the holiday shopping period, pulling forward demand ahead of the peak Thanksgiving week by offering customers the opportunity to start their holiday shopping earlier in the season. We will also continue to lean into Digital, with e-commerce sales expected to represent nearly half of holiday sales in North America this year. And we will remain disciplined in our management of promotions, inventory and costs. Overall, we have a comprehensive plan with the opportunity to leverage our scale, expertise in retail operations and best practices across brands to deliver exceptional customer experiences during this important and unprecedented holiday season. Turning to specific results and strategies by brand, starting with Coach, which delivered an impressive quarter. Revenue surpassed our expectations with sales down only 9% versus prior year, reflecting a significant sequential improvement. We also continued to expand gross margin, while leveraging SG&A, generating a 710 basis point increase in operating margin. There were many highlights from the first quarter. In keeping with our strategic priorities, we delivered compelling product, innovating across style silhouettes and price points. In retail, we continued to fuel Signature and proprietary brand codes to a variety of new iterations, while evolving our top family, such as Tabby and Hutton. In September, we launched our Coach by Jean-Michel Basquiat collection, which outperformed globally across categories. In outlet, we offered newness that balanced fashion and function, including the town bucket shoulder bag, the Serena Satchel and the Molly Tote. Importantly, we continue to be disciplined in our approach to promotions, consistent with our strategy, we're shifting the customer's focus to the value, attributes and quality of Coach's product. In fact, our global handbag AUR again rose over 25%, including over 20% growth in North America. In the Digital channel, we again realized triple-digit revenue growth, as we expanded our capabilities and services to drive sales and engagement. We recruited over 500,000 new customers through our North America e-commerce channels, representing a significant increase compared to last year. Turning to China. Our growth was fueled by a nearly 40% increase on the Mainland. In addition, we recaptured tourist demand through the China duty-free channel, as consumers increasingly shift to domestic travel. For holiday more broadly, we're sharpening our product strategy, delivering innovative and emotionally compelling product to excite the consumer. Across channels, we will focus on gifting options throughout the extended holiday season. In retail, as previously announced, we partnered with our global ambassador Jennifer Lopez on a Coach by JLO-designed Hutton bag, which was introduced globally this month. In outlet, our recently launched Marvel collaboration is driving strong customer engagement. At the same time, we will offer exceptional value to our customers, while continuing to reduce promotional activity. One of the key elements of the strategy is the planned SKU reduction, which is key to driving greater productivity and clearer brand messaging to the consumer. We expect these actions to support gross margin expansion in the second quarter. Touching on marketing, you will see messaging that is inviting and inclusive. In our holiday campaigns, we are highlighting our global brand ambassadors, including Jennifer Lopez, Michael B. Jordan, Kiko Mizuhara, Yang Zi and Jeremy Lin. The campaign celebrates stories of togetherness, relationships that endure and the power of modern families, those that we are born into and those we choose over time. In summary, we are delighted with the brand's performance in the first quarter and remain confident in Coach's ability to capture market share and drive long-term growth. Now, moving to Kate Spade. We are very pleased with the brand's top and bottom line results exceeded expectations for the quarter. Revenue improved sequentially declining 21% year-over-year. This included a 7 point impact from the strategic pullback of the low-margin wholesale disposition business. Gross margin expanded 100 basis points, primarily due to channel mix, partially offset by the negative impact of taking the footwear business in-house. We also tightly controlled costs and leveraged expenses resulted in -- resulting in a 380 basis point increase in operating margin. In addition to these solid financial results, there were many key strategic milestones for the quarter, as we focused on leaning into the fundamental elements of the brand that we know our customers value. We made progress in reenergizing the leather goods offering through our new Signature platform, the Spade Flower. This collection has been a global success with both new and existing customers. Margaux remained the top-selling family and customers continued to respond to our novelty offering, including the faux fur remedy bag in the specialty channel. Outside of handbags, we saw relative strength across jewelry, footwear and tech accessories. These categories, which are foundational to the brand's unique lifestyle positioning, are also important for customer recruitment and cross-selling. Turning to Digital. Kate Spade has a well-established e-commerce business with the highest digital sales penetration within our house of brands. During the quarter, we continued to drive momentum online, achieving strong double-digit revenue growth through engaging brand experiences across our platforms. In fact, we attracted over 250,000 new customers to the brand through our e-commerce channels in North America, meaningful increase compared to last year. Additionally, we reactivated over 100,000 customers through our digital channels, an increase of 100% compared to last year. This is an important green shoot that demonstrates the traction we're making in strengthening our relationships with our core customer base. Turning to Kate Spade's priorities for holiday. Most importantly, we will position the brand as the destination for gifting, joy and celebration. In specialty, we are building upon the successes of the Spade Flower assortment with our new coated canvas launch. In addition, we're excited to launch the all day tote. And we will debut a collaboration with brand ambassador Naomi Watanabe, which will rollout globally starting in Japan. In outlet, we will offer an array of festive holiday products that are in keeping with the brand's DNA. We're increasing the breadth and depth of box gift sets while also offering exclusive product drops over key weekends throughout the holiday season. We're also launching a new core handbag collection, Natalya, during the quarter. Across channels, we are more fully integrating novelty into our assortment, offering fun and witty shapes to excite the customer. At the same time, our teams are continuing to evolve the customer experience from leveraging digital and social media platforms to opening select pop-up stores in order to engage consumers in new and innovative ways. These are great examples of the teams' agility and responsiveness to adapt to the current landscape by putting the consumer first. And our holiday marketing campaigns will be both celebratory and playful as we continue to lean into our strength as a storytelling brand. We're also testing new digital platforms, such as TikTok as a way to amplify our messages and connect with consumers in relevant ways. In closing, I'm incredibly optimistic about the long-term potential for Kate Spade. We are making significant progress and while there is still work ahead of us, we are confident that we're on the right track. Turning now to Stuart Weitzman. We are encouraged by the progress we made during the quarter. Sales declined 35% versus prior year, improving from the previous quarter and exceeding our expectations as a result of momentum in the direct business led by China and e-commerce, while wholesale results benefited from shipment timing with the second quarter. Further, our focused strategic actions, notably tight expense control, unprofitable market exits in store closures, supported a significant narrowing of the brand's operating loss year-over-year. During the quarter, we delivered relevant and compelling product, capitalizing on the shift to casualization in the marketplace. We drove innovation across key classifications, including our iconic 5050 in LAND families. We delivered strong performance across our casual combat offering led by our pearl-embellished Sondra boot. We also leaned into the lug sole trend with launches of the KOLBIE, WENDA and IVEY booties. In keeping with our focus on the consumer, we relaunched extended sizes and widths based on feedback from our customers through a series of in-person and virtual trunk shows. This drove retention and reactivation among our most loyal customers who love the brand for its fusion of fashion and fit. Additionally, through our US e-commerce channel, we recruited over 40% more new customers compared to last year, establishing a more robust digital presence is an ongoing opportunity for the brand. Touching on marketing, we drove cultural relevance through our fall campaign featuring Serena Williams, our global spokeswoman, and Elane Zhong, our new local ambassador in China. In addition, we launched the 5050 VOTE campaign, showcasing a limited edition design of our 5050 boot, which sold out within the first week. This campaign has generated over 1.5 billion fresh impressions to date. We also strengthened partnerships with key wholesale accounts, supported by consistent execution and on-time deliveries. Looking ahead to spring, we're beginning to reestablish an expanded presence in these retailers. As mentioned, consistent with our strategy, we are focusing distribution on those markets and channels of greatest opportunity, notably China, building on the existing brand momentum. At the same time, we closed underperforming stores and markets as planned. Moving on to strategies for holiday at Stuart Weitzman. In product, we are emphasizing key classifications: boots, booties and sneakers, while balancing buy-now-wear-now styles with transitional product. We will also continue to build momentum in our casual offering, featuring our LIFT, lug sole across these assortments. From a marketing perspective, we will continue to feature our brand ambassadors in immersive 360 degree campaigns focused on lifting women up in high fashion, high function boots and booties for the winter season. In closing, we have a clear vision for the brand and we are seeing promising green shoots in the business. I'm confident we will return Stuart Weitzman to profitable growth over our planning horizon. Looking forward, building on the strength of the first quarter, we are increasingly optimistic in our ability to accelerate growth across our portfolio. With three powerful brands, each with a unique purpose and leadership position in attractive categories, they have a strong foundation and are well positioned as we enter holiday and beyond. By continuing to sharpen our focus on the consumer and more fully leveraging the power of the Tapestry platform, we will fuel desire for our brands and better meet the needs of our customers through innovative and relevant product, a seamless shopping journey and immersive customer experiences. These efforts, in combination with the work under way to transform Tapestry into a leaner, more responsive organization, will not only accelerate the growth of our portfolio but enhance the profitability and cash generation of our overall business, driving sustainable top and bottom line growth over our planning horizon. With that, I'll turn it over to Andrea for a detailed discussion of our financial results and outlook. Andrea?

Thanks, Joanne, and good morning, everyone. I hope this finds you all safe and well. Before I begin, please keep in mind that my comments are based on non-GAAP results, corresponding GAAP results and the related reconciliation can be found in the earnings release posted on our website today. As Joanne mentioned, our first quarter results exceeded expectations from a top and bottom line perspective across our portfolio of brands. Total sales declined 14% from prior year, representing a significant sequential improvement from the prior quarter across all brands, regions and channels. By region, we delivered double-digit revenue growth in China, including double-digit bricks and mortar growth. Outside of China, while revenue trends remained under pressure, every region showed substantial progress from the prior quarter. By channel, performance was led by continued strength in e-commerce, where we once again drove triple-digit growth. At the same time, we continued to drive improvement in our global store sales trends. Our holiday season has started off well with the continuation of momentum in China and across all digital channels globally. Of course, the vast majority of the quarter is ahead of us and the variables are many. Moving down the P&L, gross margin expanded 320 basis points year-over-year, driven by significant -- by a significant 350 basis point improvement at Coach. This expansion was primarily due to lower levels of promotion as we successfully executed our strategy to maintain price discipline and raise AURs, along with the continued tailwind from geographic mix. At Kate Spade, gross margin rose by 100 basis points, fueled by channel mix benefits, notably a strategic pullback in the low-margin wholesale disposition channel. For Stuart Weitzman, as expected, gross margin declined modestly year-over-year as a result of actions to clear through inventory in advance of planned market exit. SG&A declined 20% year-over-year, primarily reflecting effective expense management and the previously announced actions to transform our operating model, which included a 20% reduction in run rate corporate headcount costs. In addition, we realized a benefit from the sale of our Hong Kong office, as well as from temporary compensation reductions for our Board, management team and employees, which we expect to restore beginning November 1. We also realized variable cost savings on the lower level of sales and benefited from retail furloughs, notably early in the quarter. Taken together, despite lower sales in the quarter, we delivered operating income growth of 37% and operating margin expansion of 720 basis points. As you may recall, we anticipated that FY'21 would be a year of efficiency-led profit growth and that our ability to drive increases in gross margin and reductions in SG&A would be the initial indicators of progress, along our multi-year growth journey. Therefore, we are particularly pleased with our strong operating margin expansion in the quarter, which reflects the foundational changes under way and the potential to drive long-term profitable growth under our acceleration program. Earnings per diluted share for the quarter was $0.58, compared to $0.40 a year ago, representing an increase of 45%. Now, moving to distributions. For Tapestry, we closed a net of 15 locations globally as compared to the prior quarter and a net of 50 closures over the past year, as we continue to optimize our global fleet. Turning to a discussion of our balance sheet and cash flows. We ended the quarter in a strong position, with $1.5 billion in cash and equivalents. Total borrowings outstanding at the end of the quarter were $2.3 billion, including the $700 million we drew down on our $900 million revolver. Total inventory ended the quarter down 8%, which was better than our expectations due to better than anticipated revenue results. While the backdrop remains uncertain, we believe our inventories are well positioned into the holiday season and beyond. As an organization, we are managing to tighter inventory turn goals, while expanding gross margins. Capex for the quarter was $26 million, a decline of 64% versus prior year as we continue to prioritize investments in high return projects, notably in Digital, while tightly controlling overall spend in reducing our outlay for new stores. We continue to expect capex to be in the area of $150 million for FY'21, which would be a decline of approximately $125 million, compared to our normal annual spend. Free cash flow for the quarter was $64 million well ahead of both our expectations and an outflow of $66 million in the prior year period. This achievement underscores the resilience and effective management of our brands and business. Now, touching on our capital allocation priorities. In the near-term, our priority is to preserve our cash on hand and utilize free cash flow for revolver paydown in FY'21. We will start this paydown in Q2. Longer-term, our strategic intent is to return to sustainable top and bottom line growth and strong free cash flow generation, which we intend to utilize for debt paydown, as well as capital return to shareholders. Turning to our outlook. As noted in our release, we are not providing detailed guidance for the fiscal year at this time due to lack of visibility. Given our strong performance in the first quarter and assuming a continuation of the slow and steady recovery from the pandemic, we now project revenue to increase at a mid-single-digit rate over prior year for the full-year fiscal '21 on both a 52-week and 53-week basis. This includes the expectation for a low-double-digit sales decline in the second quarter as we are planning realistically, given the uncertain backdrop. However, we are well positioned should demand remain stronger. Importantly, we're continuing to project a significant topline inflection in the second half of the fiscal year. We remain focused on controlling the controllables and are building a strong foundation for profitable expansion over our planning horizon. This includes continuing to take deliberate action to lower promotional activity, increase AURs across brands, as demonstrated once again in the first quarter, to drive gross margin expansion for the fiscal year. As previously announced, we're taking steps to aggressively control our SG&A spend to implement structural changes to drive increased efficiencies. Through these initiatives, we continue to estimate that we will realize approximately $300 million in gross run rate savings -- expense savings, including approximately $200 million in gross savings in FY'21 alone. However, with the higher level of variable costs associated with the higher sales forecast, we would naturally expect our net savings dollars to be somewhat lower than originally expected. Looking ahead, we are creating a virtuous cycle or flywheel, it should, as revenues inflect, drive bottom line growth well in excess of topline gains over our planning horizon. In closing, we are confident in our ability to create long-term value for our stakeholders. We are committed to strengthening our brands and organization by focusing, first and foremost, on the consumer, leveraging digital, and data more fully and transforming into a leaner, more responsive organization. Our teams continue to focus on the factors within our control and the successful execution of our Acceleration Program during the holiday season and beyond. Importantly, our view of the long-term opportunities for our brands is unchanged and our strategic intent to drive organic growth and profitability is unwavering. Further, as Joanne mentioned, we firmly believe that together benefiting from Tapestry's enabling platform, our brands can achieve greater size and share than they could on their own. We look forward to keeping you posted on our progress as we move forward. 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.

Good morning. And Joanne, congratulations on the new official role. Best of luck.

Thanks, Bob.

Congratulations on a great first quarter. I was wondering if you could just address -- maybe elaborate a little bit more in terms of how you feel your position for the holiday. I was just wondering if you could share any of the trends you've seen thus far in Q2 for us. Thanks.

Thanks, Bob. And thanks for getting up a little early with us this quarter. We did deliver a strong quarter in the first quarter and our Q1 performance really reinforces the potential of our Acceleration Program, as well as the agility of our teams. We're really pleased with the progress we're making across all of our brands and we're confident in the foundation we're building and the opportunity to drive long-term growth and value. The environment is uncertain in the near-term and we're staying focused on being close to the consumer, and as Andrea said, controlling the controllables. We have a comprehensive strategy around holiday, leaning into Digital. We have initiatives to elongate the holiday shopping period. We're leveraging technology, such as virtual queues or appointment shopping, which we're seeing customers increasingly adopt, and omnichannel capabilities like buy online, pickup in store become more important. October has started out well. We've continued our momentum from the first quarter and we're well positioned to flex should demand further improve.

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

Hey. Good morning, everyone. Great to see the improvement, Joanne. I'll add my congratulations. That's great news. Just at a high level since Bob kind of went through the holiday stuff. On AUR, the past couple of years I feel like you guys have talked about a shift to lower-priced handbags, cross-body, things that have added to the AUR pressure for the category in your business. And it seems like some of that stuff might be reversing, maybe a shift to larger bags, women need to carry gloves and sanitizers and masks. So, I'm kind of curious if you're seeing any of that. And if that's has some tail to it? And then within North America, the improvements are great, but can you talk about market share? Are you gaining share? Or is the category just kind of taking off a lot faster than what people thought? Thank you so much.

Thanks, Ike. Our AUR performance has been quite intentional and really not related to product mix. We've been on this journey for a while, even pre-COVID starting to get traction in growing our AUR. And I'll make a few comments, but top it over to Todd to talk about the specific successes we're seeing at Coach. But we are focused on driving AUR by being close to our consumer and delivering value that our consumers value. And we're also embedding data and analytics better into our decision-making processes to better inform the assortment breadth, how we allocate that assortment, where we put -- allocate inventory by at a store level and how we price our product. And I think you're seeing all of those things come to bear in the AUR expansion. But it does start with understanding our consumer and delivering beautiful products that they value and we're doing that so well at Coach. And I'll pass it to Todd for his comments.

Thank you, Joanne. Joanne is exactly right. What we've seen and what we've started in the fourth quarter demonstrated in the first quarter and will continue in our future is really deliver compelling product. And with great intention we have taken down the promotional cadence and that has really impacted our AUR and we see that trend going forward. Also, we benefit slightly from mix. So, as you know, China is more and more important in our mix and that's adding to our AUR. But again it is a very intentional process. And as we've always said, at Coach, we use magic and logic. I think now more than ever, this consumer centricity that we are embedding in the actual design and the briefs that our merchants and our designers get create much better success rates going forward. And you'll see that in a reduced SKU count that will also enhance our ability to maintain higher AURs.

And Ike, I want to come back on your question around market share in North America. We're really pleased with the progress we're making and the trends in North America across our channels and we believe that we are -- we have tremendous growth potential in the market and we're seeing more -- and recruiting more new customers to the brands. So -- and that's across all of our brands. So, we are pleased with our performance in North America and the growth we're seeing across the market.

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

Great, thanks. Good morning. And Joanne congratulations to you and to the team as well. I guess, my question is around the influx of new customers that you were just speaking to. Can you talk a little bit more about where are these customers are coming from? Are they switching from other brands? Or just following up on Ike's question, so just broader interest in the handbag category. And then maybe if you can share a little bit more about your strategies to retain these customers and think about them as more repeat customers over time. Thank you.

We spent a lot of time improving our marketing capabilities and understanding our consumer. When we say as part of our Acceleration Program, that we want to focus on our consumers, it's really developing a deeper understanding of our consumers and how to reach them. We talked a lot about some of the test and learn capabilities that we've added to our marketing teams, leveraging analytics, not only to know them better and develop deeper insights, but also test how to reach our consumers at a better level and that has helped us unlock some of this new customer recruitment that we're seeing. But also, we believe will help us reach these customers and retain customers. There are many things that we have under way across our brands to drive, not only recruitment, but retention of our customers and we're seeing traction. We talked about recruitment at Coach, but we're also seeing it at Kate Spade as well, including reengagement of lapsed customers. And we're also rolling out loyalty programs to continue to better engage our consumers. So we have a comprehensive strategy, not just in marketing, as Todd mentioned, it's knowing our consumers, leveraging those insights, building it into our product, also building it into our marketing capabilities, so we can continue to reach and engage those consumers.

Yeah. And just building on what Joanne said with the Coach brand. This quarter, we attracted 500,000 new customers, over 40% of them were Gen Z and Millennials. And we see a continue high purchase intent. And one of the things early days, but we're seeing them their repeat purchase at an accelerated rate. So, that bodes really well for the program and our offering. And as Joanne mentioned, we launched on October 1 in North America, our Coach Insider program, which is an omni program for both digital and brick-and-mortar to really further engage and create a sense of community among the Coach customers.

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

Good morning. Thanks for taking my question, and Joanne, [indiscernible] my congratulations as well.

Thanks, Mark.

So, I wanted to follow-up on gross margin. Could you maybe just help us understand the magnitude of some of the geographic mix benefits versus AUR in some of the other factors? Looking ahead, gross margin comparisons do ease over the next couple of quarters, but as North America recovers, perhaps that's a bit of a headwind to gross margin. But, I guess, as you put this all together, I mean, are you -- do you think you can sustain gross margins near this 70% level that you've achieved over the past couple of quarters? Thanks.

So, Mark, we are targeting gross margin expansion for the year and we are making the systemic changes to how we manage our business and that is driving our margin improvement, as well as we have seen some channel mix benefit as well in the gross margin, but we are also seeing product margins increase from the actions -- specific actions we're taking, I touched on them earlier. But driving AUR includes embedding data and analytics into how we're managing the business, really knowing our customer and delivering products that resonates with them and delivering a great value. That has allowed us to step away from promotional activity and that has been a real win in terms of driving AUR. I'll pass it to Andrea, she could give you some of the statistics about the splits between channel mix and product mix. But the answer to your question is, we expect to continue to drive AUR growth and margin expansion this year.

Thanks, Mark. Thanks, Joanne. Yes, absolutely, in the first quarter, we saw, obviously, very strong gross margin expansion. At Coach, that gross margin expansion was primarily driven by a reduction in promotional activity and higher IMU, while channel mix did help, given our growth in China, which as you know, Mark, international markets do have a higher overall gross margin. And, of course, having a very low exposure at Coach to wholesale also helps its gross margin. The overriding driver there was on the promotional -- the reduction in promotional activity in the higher AUR. At Kate Spade, we saw the primary driver, the channel mix, and as I spoke to in the prepared remarks, we saw a significant decline in year-over-year wholesale disposition, which, of course, is a low-margin business for us. As we look ahead, in our second quarter, we would expect that gross margin at Coach would continue to be significantly expanding on a year-over-year basis, driven again by that promotional activity and AUR. At Kate Spade, we would not expect gross margin to increase and that will not have that, if you will, the channel mix driver in the second quarter, although, we would not expect promotional activity to be up year-over-year as it was not up in Q1, and we would expect gross margin at SW to be down. So in the second quarter, promotional activity at Coach and higher AURs at Coach will be the primary driver. And for the full-year, we would expect gross margin for Tapestry to be overall up. Obviously, in the fourth quarter of the year, just going out a little bit, we will have a very difficult comparison given the significant growth in gross margin in the fourth quarter of '20.

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

Thanks very much. Joanne, you've talked about data and analytics initiatives and the ability of that to help drive your lower promotional levels and help reengagement of your lapsed customers. But could you talk a little bit about how you're building that capability? Is that being done and how are you partnering with third parties? And then where do you see the biggest opportunities to leverage that data? Is it in terms of actually driving accelerated revenue? Is it sustainably reducing promotions over the long-term? Thanks.

Thank you. It's all of the above. Part of our Acceleration Program is really focused on leveraging data and analytic capabilities. And we have over time built a very sophisticated data and analytics capabilities. And our focus through the Acceleration Program is really embedding those capabilities into our decision-making process. So, we have very robust capabilities and the right architecture and a lot of data. And our focus now is how to unlock that data and the insights and really drive decision-making. And we're seeing that benefit across several areas of our business and of the value chain, if you think about it from how we assort products. We talked about SKU reductions. We've taken significant reductions in our SKU count informed by the analytics that we're seeing. So the teams, the merchants and the product teams are understanding the performance of our assortments and leveraging those analytics, balancing that with their intuition, but leveraging analytics to understand what the right assortment architecture is. I talked about the work we're doing to allocate to our stores, the right product based on the customers in those stores and what they are voting for and what they -- what resonates with them. So knowing customers more deeply in each of our locations and then building our assortments in our stores to reflect their preferences. We're getting much sharper at that. That's driving improvement. The pricing piece of it and the promo analytics is about -- is aggregating our promotional data and understanding at a consumer level what resonates with which consumers. And then leveraging that to our marketing capabilities, leveraging analytics to make sure we're reaching the right customers with the right messages. So, it's really throughout the value chain and it's an opportunity -- we found the opportunity to really embed the analytics into our decision-making processes. And it does impact revenue growth overall, because all of those things drive higher AUR, faster turnover of our inventory and lower promotional activity, which drives higher sales.

Our next question comes from the line of Lorraine Hutchinson of Bank of America.

Thanks. Good morning. I was encouraged to hear that you'll begin paying the revolver down in the second quarter. Can you talk a little bit about what it will take to reinstate the dividend? Is it a debt leverage ratio or sales and margin returning to positive territory? Maybe just give us a little bit of your thought process behind that?

Yeah. I would say, I appreciate that question, Lorraine, because as we entered and have been navigating through the disruption, our focus was to ensure the stability of our business and the sustainable generation of free cash flow. So as we're having this conversation about paying down the debt and capital allocation in the future, it does show that we're making progress and generating stable free cash flow. I'll pass it to -- but the environment and visibility does remain uncertain in the environments dynamic. So we're managing through that. But I'll pass it to Andrea to give you an understanding of our capital allocation priorities.

Yeah. Joanne, I think you really touched on it. We're really prioritizing liquidity and financial flexibility in '21 to navigate the current environment. We made the decision to suspend our dividend and share repurchase programs that saves us about $700 million a year on an annualized basis compared to last year. And our intent is to return to sustainable top and bottom line growth and strong free cash flow generation, which we're going to use for debt paydown. In fact, our first paydown on the revolver should be tomorrow. And so, we're going to begin in Q2 '21, but just note that during our covenant period, we are restricted from paying dividends or repurchasing shares. And Lorraine, I think you know that I think we discussed that. But longer-term, we are going to, of course, evaluate shareholder returns as part of our priorities for cash through dividend and share repurchase. And we're going to be prudent before restating -- reinstating our shareholder return program. We have to consider the near-term liquidity needs of the business and credit metrics to maintain our investment-grade rating and we know what it takes to maintain that and that's important to us.

Thank you.

Our next question comes from the line of Oliver Chen of Cowen.

Hi, thank you. Regarding Coach outlet and marketing to the Coach outlet customers, what do you see as the roadmap ahead and plans there to continue to innovate and capture customers and engage them there? I would also love your thoughts on creativity and creative innovation and magic plus logic. In the context of the consumer data and the machine learning and your thoughts on the Coach brand and where that should go next? How do you -- how will you harness that to just maintain fashion credibility as you continue to make progress? Thank you.

Thanks, Oliver. I'll make a couple of comments, but then pass it over to Todd. In terms of the outlet business we're really thrilled with the response we've seen from our consumers. In the outlet channel, we continue to deliver really tremendous value and beautiful high-quality product to consumers in that channel. And we're learning how to engage consumers in a more relevant way through all channels in the outlet. And it's not just the outlet, it's also across the space -- across all channels. And as we think about, I love the question about creativity and magic and logic. I tend to talk a lot about data and analytics, but our Company has always priced that balance of magic and logic. And I think you can see from the assortments that we're delivering that creative balance is critically important to deliver products that consumers value, and our teams continue to do a great job delivering beautiful products and great value for our consumers. And that's a key element. I think if you see in the Basquiat collection at Coach, and Todd, I don't want to steal all your thunder. I'm just stealing all of your thunder. But it is a beautiful product and quite creative, as well as the novelty products and the Spade Flower that we're -- we've introduced in the Kate Spade, so it's across our brands. But I'll kick it over to Todd and let him comment.

It is the CEOs prerogative to steal a little thunder, that's OK. But Joanne, did hit on really key issues. First, machine learning is absolutely something we're looking at and all of this data, particularly to help inform the briefs and the merchants. But I think and you hit it on the head, it's the balance of the magic and logic. And that is so key, a machine as sophisticated and I hope my data analytics people don't get too offended by this, are not going to design the handbag that definitively we put out there in shelves. They will also help inform the design of the handbag. And what you see with Joanne mentioned Basquiat, that's a full price opportunity. We hit amazing AURs in the first quarter for handbags over $745 with that collection. It just shows, when it's emotional, it really trumps price and trumps anything else. And that was emotional. Similarly, in October, we launched the Marvel collection for outlet. Again, incredible AUR, very compelling, very emotional. So, we see those opportunities continued. And even what we've done with Basquiat is, for the first time, we ceded a bag, the beat bag in that collection, and now that's a major bag for our holiday season going forward. So, I think it is constantly reimagining that blend. And then finally on outlet, we're just getting started. What we understand and recognize is the outlet consumer is an omni consumer. And limiting that value customer, who by the way tends to be a little younger, limiting them only to brick-and-mortar was a mistake. The opportunity to be expansive and to allow them to shop where they want to shop is a huge unlock that I see us accomplishing our goal of capturing market share through all of these channels.

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

Good morning, and I too want to share my congratulations, both for the performance and one of the announcement, Joanne.

Thanks, Paul.

And also, I can personally speak to the men's Basquiat collection being quite compelling. So, I wanted to go back and touch on the Digital growth. You're obviously driving really strong gains there. Maybe just speak in more detail on the success you're having across the geographies on the Digital platform? And maybe in China, specifically, how should we think about your direct business versus the third-party online distribution mix? And just the overall impact that these Digital gains are having to the P&L from a channel mix perspective? And then just to sneak in, just separately, Coach has really been the focus of investor conversations that we've had. So, I would just want to make sure that we have -- what should be the major takeaway or learning for investors from this quarter as it relates to Kate and Stuart, specifically?

I'll start with the Digital business, Paul. We saw the second quarter in a row of triple-digit growth across our digital channels. And we're leveraging and leaning into our digital capabilities, not only to serve the customer in that channel, but also the recruitment vehicle for new customers. Todd just mentioned the success we're having in the Coach brand, but across all of our brands and recruiting new customers across brands through that channel. Significant growth in North America, but also globally. And we have the capabilities to serve our customers through the digital channel globally. Simultaneously, however, we saw that triple-digit growth while we continue to drive sequential improvement in the stores business, so -- in the first quarter. So encouraged that we continue to see the consumer adopt and lean into digital as the stores businesses has improved. To your point on the P&L, our digital margins are accretive. And we are structurally from a P&L perspective leaning into Digital is a benefit to our P&L. Our business, as I said structurally, is favorable. In the Digital business, we have high AUR and high order values, as well as high-margin and because our businesses not size, we have a relatively lower returns rate, which drives a higher overall operating margin in the channel. We're capturing new customers, as I mentioned and expect to continuing to invest in this channel, both in marketing, but also new capability. So, we're incredibly optimistic about what we see the road we see ahead in digital and continue to expect the penetration to increase. We're doing that across regions, to your question, again, significant growth in North America, but also significant in China, where -- and in Europe. But in China, interestingly, our -- the Coach brand is the number one ranked brand on the Tmall platform. So, we are reaching consumers through that channel and that's obviously an important channel to reach a number of consumers in that market. So, we're very encouraged by the work that we're doing and our ability to engage consumers, recruit consumers and retain consumers through that channel and what it means for our P&L. We are seeing that across our brands, and you mentioned Kate Spade. We made progress across all of our brands this quarter. And I don't want -- Coach had such a standout performance. I don't want it to be lost that we also drove topline and bottom line ahead of expectations in both Kate Spade and Stuart Weitzman. We are making progress in those brands and important progress. And particularly as it relates to Digital, Kate Spade is our most digitally -- highest digitally penetrated brand already. And we're having success reaching consumers through that channel. And the Kate Spade brand recruiting new customers, reengaging lapsed customers. The team is working very hard to really lean into the fundamental elements of the brand. We talked about the Spade Flower introduction from a product perspective, which has been very well received. And that is -- that will become a new icon that we can build off for the brand. So, we're making progress in the product, as well as in the way we're engaging consumers in the Kate Spade brand. I continue to have, and we continue to be confident in the long-term potential there. And I'll touch on Stuart Weitzman also, promising green shoots in the quarter. We improved revenue. We narrowed our operating loss during the quarter with focused actions. The team was very bold to make sure that we were focusing on the most profitable and productive distribution. And that you can see -- the results of that you can see in the progress we made in Stuart Weitzman in the quarter. So progress across our portfolio for the first quarter.

Our next question comes from the line of Omar Saad of Evercore.

[Indiscernible] especially maybe give us kind of a historical evolution of the digital channel for the outlet business. I think a couple of management teams ago it was more of a flash sale operation. And maybe you can kind of describe the iterations and where you are now with coachoutlet.com or what the vision is for coachoutlet.com and how that's different for this, obviously, very important part of the customer base? Thanks.

I think you cut out on the first part of your question, Omar, but related to the Digital and how we think about the Digital business now versus historically. I -- historically, the consumer and the channel was leveraged for in a completely different way. And now as we think about, you're right, historically, we did lean into the flash sale element of the Digital business. But today, as we get closer to our consumers, the digital channel and understand how they shop. The digital channel is an important way the consumers discover brands, engage with brands on a number of levels, not just to transact, but also to engage across different platforms. And the way we think about engaging consumers today is really putting the consumer first. And being available for that consumer wherever and however they want to engage with our brands. We're seeing a lot of success in the digital channel in terms of growing sales through the channel, but we're also having a lot of success through the digital channel in engaging our consumers through our marketing activities, even with our store associates engaging our consumers on social media platforms, the virtual staffing parties and really developing communities behind our brands. And so, the digital space is quite a bit different today than it was even a few years ago. The consumer shopping behaviors are changing rapidly. We're staying very close to our consumers and working to meet them where they are. And I can pass it to Todd to talk about some specifics around the Coach brand.

Yeah. Thank you, Joanne. And I was here in the days when we launched [DOS]. And this is not your father's DOS. This -- our digital platform now is so different. Before it was a closed idea where we kept going to the same customer base over and over and over again and talking about price, price, price. This is an expansive channel recognizing where the consumers, how she shopping, and talking about value. And the learnings we're getting, and the frequency of purchase and the marketing that we're putting behind it, that's measurable in the digital performance marketing, it's completely different. And as I mentioned a little earlier, talking about the Coach Insider launch, this is a huge opportunity to create a sense of community across both the digital and the physical platforms. And what we're seeing is greater purchase intent, higher frequency and really just deeper engagement with the brand. So, I see this as a tremendous opportunity and the learnings with that we're gaining from North America will transcend this market. And we will see us do this in other markets over our planning horizon.

Thank you. That's very clear. Sorry about the tech issues and congratulations, Joanne, on the great opportunity.

Thank you, Omar.

Ladies and gentlemen, we have time for one more question. Our last question comes from the line of Simeon Siegel of BMO Capital Markets.

And again, Joanne, really congrats on the new position. That's a great news. So, really impressive handbag AUR increase. Could you share the total Company your Coach level AUR increase? And then, really encouraging to hear kind of the short-term expectation for opportunity. Any help on thinking through the longer-term gross margin opportunity from here? Thanks.

Yeah. I'll kick it off by saying the gross margin expansion that we saw in the first quarter has been intentional and an integral part of our Acceleration Program to get closer to our consumer and embed data and analytics and I touched on a couple of times on the call, how that's coming to life in the business and delivering the gross margin expansion that we're seeing. We do believe that we have the opportunity to continue to expand gross margin as we move forward, not only for this year, but beyond this year, across all of our brands. And I can let Todd touch on the specific Coach AUR.

Yeah. Our AUR, as you saw, grew over 25%, including 20% in North America. So, we are really pleased with these AURs. And again, our intention through creation, through SKU reduction, through reduction in promotion, we want to hold on to higher AURs, and we think we have that opportunity.

Thank you so much everyone for your time. I will now turn it over to Joanne for some closing remarks.

Yeah. Thanks, again, everybody for joining us today a little bit earlier than normal. It is an honor to be leading this organization. We have such talented global teams with great brands and Tapestry is an enabling platform. Very pleased with the results we delivered in the first quarter against a very uncertain backdrop. And we're confident in the long-term strategy and potential to create value. I'm looking forward to keeping you all posted on our progress moving forward. Thanks very much.

Thank you ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.