Please standby. Your program is about to begin. [Operator Instructions]. Good day and welcome to the Tapestry Conference Call. Today's call is being recorded. After the speakers' opening remarks, there will be a question-and-answer period. [Operator Instructions] At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations at Tapestry, Kelsey Mueller.

Good morning, and thank you for joining. With me today to discuss our first-quarter results, as well as our strategies and outlook are Joanne Crevoiserat, Tapestry Chief Executive Officer and Scott Rowe, Tapestry Chief Financial Officer and Head of Strategy. 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 guaranteeing 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. In addition, as we continue to anniversary the onset of the COVID-19 pandemic, we will be providing financial information compared to FY '20 or pre -pandemic, and FY '21, where applicable. For a full reconciliation to corresponding GAAP financial information, please visit our website, www.tapestry. com/investors and then view the Earnings release and the presentation posted today. Now, let me outline the speakers and topics for this conference call. Joanne will begin with first quarter highlights for Tapestry and our brand, along with an update on our strategies for the holiday season. Scott will continue with our financial results, capital allocation priorities, and outlook going forward. Following that, we will hold a question-and-answer session where we will be joined by Todd Kahn, CEO and Brand President of Coach. After Q&A, Joanne will conclude with a brief closing remarks. I'd now like to turn it over to Joanne Crevoiserat, Tapestry CEO.

Good morning. Thank you, Kelsey and welcome, everyone. I'm pleased to report that the strong momentum we saw throughout last year has accelerated further in the first quarter, with our sales now 9% above pre-pandemic level. Our operating margin has improved 8.5 points compared to fiscal year '20, even as we've reinvested in key growth drivers for our business. The fundamental changes we've made through the acceleration program to transform Tapestry and our brands have enabled our teams to act with agility, to drive highly effective customer engagement, and support increasing demand. This performance also reaffirms our confidence in our differentiated platform. Our 3 unique brands are enabled by our talented teams, technology infrastructure, globally diversified supply chain, and a 90% direct-to-consumer model. These assets, coupled with our growing data and consumer insights capabilities, have fueled more targeted product development, more efficient pricing, and more effective marketing, all of which support accelerating revenue, higher gross margin, improving profitability, and most importantly, stronger connections with our customers. Now, turning to the highlights from the first quarter. We continue to make meaningful progress against the acceleration program by sharpening our focus on the consumer, leveraging data to lead with a digital-first mindset and transforming Tapestry into a more responsive organization. First, we kept the consumer at the forefront of our strategy, which drove further increases in customer recruitment. In fact, we acquired approximately 1.6 million new customers across our direct channels in North America, an increase of over 20%, with growth in both stores and online. Second, we leveraged our unique data and analytics capabilities to enhance engagement with our consumers. As a result, retention improved year-over-year at each brand, including strong re-engagement with the 4 million customers acquired last year in our North America digital channels. In addition, we drove a…

Thanks, Joanne, and good morning, everyone. We delivered another quarter of high-quality earnings results, outpacing last year pre -pandemic levels and expectations. We continue to execute against the strategies of our acceleration program, building upon the foundational changes made in fiscal year '21 against the difficult backdrop. We drove continued topline momentum and improved operating margin meaningfully, fueled by gross margin expansion. Turning to the details of the first quarter. Total sales increased 26% versus prior year and outperformed expectations. Compared to pre -pandemic levels, revenue rose 9%, representing an 8-point acceleration compared to the prior quarter, fueled by improvements across all channels, stores, digital, and wholesale. By region, revenue rose double-digits versus last year in Mainland China, North America, and Europe. Importantly, these regions improved on a 2-year basis, including relative outperformance of North America, which rose at a high teen’s percentage compared to pre -pandemic levels. In Mainland China, while there were pockets of COVID increases, overall momentum continued. And in Europe, we realized improving trends as lockdown measures were lifted. Moving down the P&L, we expanded gross margin at each brand during the quarter. These results reflect a continuation of the successful execution of our strategy as we maintain price discipline, improved SKU productivity, and leverage our data analytics capabilities to more effectively tailor our product assortment and marketing messaging to the consumer. SG&A rose relatively in line with sales, given the re-investment of cost-savings into the organic business, the prior-year's a typical comparison due to COVID-19 and the impact from higher sales. Taken together, we achieved operating income, growth and margin expansion, both Company wide and at each individual brands. Earnings per diluted share for the quarter was $0.82, an increase of 42% compared to the prior year and more than doubling pre -pandemic levels. Now,…

[Operator instructions]. We will go first to Bob Drbul with Guggenheim. Your line is open.

Hi, good morning. Joanne, can you talk about what's actually giving you the confidence that you can maintain the strong momentum you've seen heading into an inventory-constrained holiday quarter for us please? Thanks.

Good morning, Bob. Our confidence is really driven by 3 factors. Our acceleration program initiatives are gaining traction and driving brand heat. We're seeing a strong consumer backdrop and we're taking bold actions to manage the environment. We're pleased with the momentum we're seeing across brands. The actions we've taken through our acceleration program have transformed our Company and are driving strong and sustainable results. We see brand heat building as evidenced with the AUR growth that we're delivering in each of our brands. We're also seeing acceleration in top line trends. In the first quarter, we delivered growth of 9% above pre-pandemic levels, which was an 8-point acceleration from the fourth quarter. We're delivering that with significant gross margin expansion, which is allowing us to deliver structurally higher operating margins, while also reinvesting in the key growth drivers of the business. And we're seeing continued strength in digital in China, which are 2 areas that we've talked about represent long-term opportunity for Tapestry. As I mentioned, as we look at the landscape, consumer spending is healthy and demand for our categories remains very strong. So, although the environment continues to be dynamic, we've moved aggressively to manage the supply side of the equation, to protect the strong trends that we're seeing and serve our customers, really keeping the customer at the center of our strategy and of our execution. And our teams have a proven track record of managing these dynamics and we are very confident in our ability to deliver for our customers this holiday and beyond. And that confidence Bob is really evidenced by the increased guidance and incremental share repurchase program that we announced today.

Thank you.

And in the interest of time, we do ask that you limit yourself to 1 question. And we can go now to Ike Boruchow with Wells Fargo. Your line is open.

Hey. Good morning, everyone. Congrats. Scott, I wanted to ask about -- I understand 3, a lot of us in toplines are looking at the cost of cotton and inputs like that, but for you guys, I know that's not super-important. Can you talk to us about key inputs for you guys, maybe leather specifically, is there anything inflationary on the cost side, input cost side that pops out to you guys that's at all impactful?

Good morning, Ike. Sure. We've seen elevated input costs, and that's not really a new dynamic for us. And also, as we've said, we've seen higher AUR s and higher prices, right? So, as we look at the overall structural gross margin and operating margin picture. We've got confidence in our ability to maintain our margins even in the face of some elevated costs that we see being with us for some period of time.

Thanks.

We'll go now to Erinn Murphy with Piper Sandler. Your line is open.

Great. Thank you. Good morning and nice job on the quarter. My question is around Kate Spade, the sales for the business are still not back at pre -pandemic levels, but the profitability has clearly improved with some of the actions you've taken, so can you share a little bit more about your sales outlook for the brand that's embedded in your guidance this year? And then Scott, I do have a clarification just on freight. You talked about higher freight in Q2 and Q3. You called out the $70 million in airfreight, specifically in Q2. Should we expect a similar level in the third quarter or Q2 for airfreight peak? Thank you.

Let me jump into the Kate Spade comments, Erinn. We are making steady progress at Kate Spade and we do have the right strategy. We are clarifying the brand positioning and we're seeing traction across the P&L and in fact, direct sales for the quarter increased mid-single-digits versus pre-pandemic level. On a direct basis, we are growing above pre-pandemic levels, and that improved quarter-over-quarter. And we are focused on returning the brand to its roots and driving stronger consumer engagement. We acquired over 650,000 new customers across North America channels to the brand this past quarter alone. And we're reactivating lapsed customers at an increasing rate, which gives us confidence that the strategy is working, that we're reaching the core Kate Spade consumer, and we've worked hard to improve the product assortment there. We talked about new platforms like the Knot and Spade Flower, which continue to perform, and those represents important platforms for future growth. And we're seeing increased global handbag AUR. AURs grew low double-digits, so all signs that Kate Spade is on the right path, on the direct business growing, again, to pre-pandemic levels. And it reinforces our confidence that the brand can achieve $2 billion in revenue and at a high-teens operating margin as we move forward.

Good morning, Erinn. I'll jump in on your freight question as well. Maybe just a little bit of perspective before I get into the quarter-by-quarter details. Remember, the last time we spoke to you-all, we talked about reopening our largest single supply source, Vietnam, which is about 40% of our supply base. We expected that to start reopening in August. And in fact, that occurred about 7 weeks later. So, what we decided, to just build on Joanne's comments, early and boldly. So, we did secure airfreight. The reason I give you that perspective because it's important as you think, not only about the flow by quarter, but also, at this point, we now see that we're approaching normalized level of production. We see goods flowing. We have much better visibility than we did the last time we spoke even at the SKU level so we can merchandise against the product flow that we see. So, the result of that is the exceptional airfreight that we have used to bridge that gap and meet this really strong consumer demand that we see. That’s starting to moderate as you get in the back half of the year. So, as you think about gross margin shaping, you just saw that gross margin in Q1 up 450 basis points from 2 years ago. You're going to see -- we said elevated airfreight in Q2 and Q3. We gave you our best estimate, obviously, it matters as we see what exact products sell through and there could be a little timing between Q2 and Q3, but think about that as roughly equal from an airfreight standpoint, but remember in the second half we start to see the increase in prices. making a meaningful impact. We talked about the change in GSP from a timing standpoint. What that means is gross margins will be up in the second half and specifically in the fourth quarter. So that's one of the reasons we speak with confidence about our ability to maintain operating margins over time. We're actually in this year, coming out of the fourth quarter with strong gross margins and the kind of increases that you're used to seeing from us on an overall basis.

Very helpful. Thank you so much.

Sure.

The next question comes from Mark Altschwager with Baird. Your line is open.

Good morning and congrats on the continued momentum here. So, encouraging to see the handbag AUR momentum, I guess, for both at Coach and at Kate. Can you speak a bit more to the AUR opportunity you see outside of the handbag category? With the healthy demand backdrop and inventory challenges out there, I'm wondering to what extent can you take price in other accessories and in-lifestyle categories to help offset the elevated cost pressures?

Yes. Let me start and then I'll pass it to Todd who can give you an update on Coach specifically, but across all of our categories, we see the opportunity to take price and we as brands in the portfolio are gaining pricing power. And we're structurally positioned to be able to improve our AURs, with the data and analytics applications, and the structural changes that we've made across our assortments. It's not just the handbag effort and we're looking across our assortments, we're understanding what our consumers are looking for and expecting from our brands. And we're getting better and better at leveraging that data to tailor our assortments appropriately, tailor our messaging, and evaluate pricing across. We feel good about the progress we've made, but we see tremendous run, we're really just getting started. We're a data-rich Company and we're learning to use this data in better and better ways and that you're seeing throughout the P&L, including in gross margin and AUR increases. But Todd, I'll pass it to you to talk about what you're seeing in doing at Coach.

Thank you, Joanne. Yes, I think what you're seeing, as Joanne indicated, we are seeing AUR expansion across every category. And what gives us so much confidence is the quality of our products and the values that we bring, and we're seeing across footwear, we're seeing that in ready-to-wear. And when you think about the Coach brand and you think about historic norms where pinnacle luxury sits, we have more whitespace today than any time in our history. And I think that's going to give us a real opportunity to increase our pricing. And as we celebrate now, Coach 's 80th year, we are seeing real credibility on our lifestyle component. And that's very exciting and I think you'll see over in the next couple of years us penetrating even higher in elements of the lifestyle.

Thank you.

Our next question comes from Lorraine Hutchinson with Bank of America. Your line is open.

Thank you. Good morning. I just wanted to focus for a minute on the new customer acquisition, at both Coach and Kate. Can you talk a little bit about what strategies are working best for you? And if there are areas that you need to lean into from an investment perspective?

Thanks, Lorraine. We are gaining traction, and that has been a big focus of our acceleration program. As we say, we are getting closer to our consumer, it's understanding the consumer at a deeper level. And we're leveraging those insights and applying them to the work we're doing and bringing great product to market and then leveraging those insights to understand how and where to reach customers. We're increasingly reaching customers through digital channels. We've talked about that as a place that we think there is tremendous runway ahead, but we've added over $1 billion to that business in 2 years. We're testing and learning more. We've changed the way we work, and we're investing more in marketing, even as we're delivering structural operating margin improvements. We had really tilted the P&L to invest in those places that allow us to reach more customers and reach them in different ways. So those efforts are paying off. We acquired 4 million customers through digital channels in North America last year and 1.6 million in the first quarter across North America, across channels. And we expect to continue as we learn because we're really just getting started on leveraging these insights, new ways of working, and targeting our investments more into the places that will allow our brands to grow.

And I will just add for Coach, in the last quarter as you saw, we increased 900,000 new customers. And what we're seeing is the increase frequency. We're seeing over 40% of the new customers are Gen-Z and Millennials, so that bodes well for our future and couldn't be more excited about the opportunity. And even as we invest in Jiuzhou, we see a true Omni opportunity here. And there is a synergistic opportunity between our brick-and-mortar and our digital and they feed off each other, in a really great way. And with the acceleration program and leaning in on understanding the data, it helps us create better store experiences and even helps us determine where to put stores into the future.

And one point I want to add that I didn't mention, but it's about acquiring customers, but then it's about driving lifetime value and I did want to make sure I mentioned we are focused on reengaging the consumers after we acquire them and driving higher lifetime value. All of our brands have a broad array of -- and assortments that we can engage our customers. We're seeing those customers come back and transact more frequently and so we're really building the foundation for future growth.

We'll go now to Michael Binetti with Credit Suisse. Your line is open.

Hey guys. Thanks for taking our questions here and congrats on a great quarter and obviously a tough environment.

Thank you.

Joanne, let me -- can you just run me through China and a little bit of detail on the quarter? In third quarter, you said it was up 40% on a 2-year basis, fourth quarter up 40% also, and I think that might have included an extra week, so maybe a little lower than that. Now we're at 65% on a 2-year basis this quarter. It was pretty unexpected for us just considering all the headlines coming out of that market, with lockdowns and disruptions in the quarter. That's a meaningful acceleration and what looked to be a tough quarter. If you wouldn't mind running us through that. And then, Scott, how should we think about margins for the Coach brand as we jump over some of the cost impacts here in 2Q into the second half? Can the margins for the brand continue to increase in the second half?

Yeah. Let me jump on the China question. We were pleased with our growth in China, as you mentioned, we accelerated on a 2-year basis. And although we did experience pockets of COVID related disruption, we delivered growth. We grew greater than 25% on the year, but to your point, 65% on a 2-year basis. And we are seeing continued strong engagement with customers in the market and brand sentiment remains strong, particularly in the Coach brand. And we're seeing growth, I guess, in I would say Coach and Stuart Weitzman, our 2 biggest brands with the highest penetration in the market. And Kate, as you know, remains relatively smaller. But we see tremendous runway ahead. Of course, we're monitoring the developments in the market and environment remains dynamic, but we're staying very close to the customer and we're well-positioned. All of our brands are well-positioned against the growing middle-class. So, as we stay close to the customer and deliver the product and the experiences and show up where the customers are increasingly innovating in places like Dally and the Tik Tok of China and putting our brands where our customers are and being very relevant to that customer, we expect and we continue to see we have tremendous runway in the market.

And maybe Todd and I'll take this from different angles to your second part of the question. Yes, we see margins up in the second half. What I mentioned earlier, regarding the shape of the overall Tapestry picture is obviously big numbers, largely driven by Coach, so we would see that same general dynamic plan for Coach. Todd, maybe a little color?

Yes. Thank you, Scott. The one thing I'd like to add is as we maintain these really fabulous margin, if you look at the first quarter, Coach captured market share in our primary category of handbags. We look at the handbag growth globally between 15% and 20% and we saw Coach 's results way above that. So, the combination of being able to capture market share while maintaining these margins -- we're not buying the market, we are maintaining a really healthy business. And I think that is one of the key differentials between us and where maybe we historically were.

Our next question comes from Adrienne Yih with Barclays. Your line is open.

Good morning. Congratulations. The sector just seems ripe for multiple years of healthy growth. My first question is, Joanne or Todd, can you talk about the penetration of sales in the Coach brand over 400 versus under 400 versus last year? Is she buying higher-end goods, as well as buying them more frequently? And then Scott, I would imagine that prior to this, basically, everything was on the ocean and so, just wondering what percent is air freighted in 2Q? What's expected to be air freighted in 3Q? Just as a percent of what you normally do. Thank you.

Scott, you want to take the airfreight first and then I'll come back?

Sure. Yeah. That's probably a simple one. Adrienne, we're not -- we haven't given the exact percentages. I guess, historically, we've seen about a 90-10 split ocean versus airfreight and -- or expedited freight. And obviously, we're at an elevated level at this point. I guess, the thing I would really point you to you though is my earlier comments. Around that -- based on our visibility to normalizing production flows, we're really seeing that moderate in the back half of the year and getting back to -- I'll say, maybe not exactly normal, but certainly an improved environment as we move through the balance of the year.

When you look at our business overall, as you know, we are very defined by different channels, what we're really pleased with is the increase in AUR across all of our channels. And that is the most important thing for us. So, we will have bags for $1,000 and we will have bags for $149. What we're doing is driving all of them up. And that's how we look at the business. And one of the things we've done differently now is when we design a bag, we actually think about the market where that bag will do the best and we price accordingly. In the past, we might have priced at the lowest common denominator, now we price at the highest common denominator.

Fantastic. Very helpful. Best of luck.

Thank you.

We'll go now to Matthew Boss with JP Morgan. Your line is open.

Great. Thanks. Joanne, on the continued outperformance of the Coach brand, I guess, how best to triangulate the outside strength that you're seeing from the digital channel to potential market share that you believe you're taking across categories exiting the pandemic. And Scott, any way to size up the multi-year margin opportunity from this structural model channel shift to digital over time?

Yes. I'll keep it up. As we embarked on our acceleration program, we saw a huge opportunity to better understand and serve our customers where they wanted to shop and that really had us leaning into investments we had made historically, but leaning into our capabilities in digital and data. We are, as we said, 90% direct-to-consumer business. We know a lot about our customers, and we knew we had an opportunity to better engage our customers and meet customers as their shopping behaviors were changing. We have invested quite a bit and we've grown that business tremendously. We are seeing continued engagement at Coach, where we have runway, but across all of our brands, we're seeing continued engagement, customer acquisition through digital channels. That's not to say, that's our only focus. The Omni channel customer and customer shopping behaviors are changing and continue to change rapidly. So, we're staying close to the customer and we want to be available with our brand to our customers where they want to shop and how they want to shop. And we're staying close to that, we're making the investments we need to make and we're seeing really high returns on those investments, leveraging data and getting closer to our consumers. Leaning into those digital capabilities has been paying off and it's not just acquisition, as I mentioned earlier. It's really -- once we acquire our consumers, driving and to drive higher lifetime value, and that's engaging them across our broad array of categories in each of our brands. So proud of the work the teams are doing. As I mentioned, it's early days for us, we're happy and very pleased with the traction we're seeing. But a long runway ahead.

Maybe I'll just take in bridge from Joanne's comment to the longer-term structural margin, I guess. The first thing I need to remind you of is we have given the guidance beyond our current outlet. That -- there is -- we're not at a point where we're ready to have that conversation. But I would point you to the few things. You're exactly right. As we grow our digital business, it's one of our most profitable channels and actually our most profitable. And as Joanne said, it's? [Indiscernible] penetration is now 4 times what it was just 2 years ago. And the data and analytics that Joanne just outlined and some of the things Todd said around pricing and our opportunity, we see that, absolutely. We're using data better understanding our consumer in a more intimate level, and all that gives us confidence that we can maintain our margins. On the other hand, don't forget, we are in an elevated cost environment, so that's not new. We've been seeing this for a while and input costs are up. The great news is we've got visibility to it, we see that we have the pricing power and that gives us confidence to maintain those margins overtime. So more to come as we get closer into next year, but I think what I hope you would take away from that is the things that we're seeing and demonstrating this year in our outlook are structurally favorable for us as we look to the future.

Great color. Best of luck.

We'll go now to you now, Brooke Roach, with Goldman Sachs. Your line is open.

Good morning and thank you so much for taking the question. Joanne, I wanted to follow up on the prior question on customer acquisition and retention. And you highlighted that customer re-engagement and transaction levels among those existing customers are really building a strong foundation and improving here. Could you possibly share some additional insight on what strategies have proven to be most effective in getting that customer to continue to come back and repeat and re-engage with that brand? And then Scott, maybe as a follow-up, some other companies have talked a lot about labor supply as being a big focus recently. Can you talk to the impact of your recent employee initiatives and your staffing levels? Maybe, what you're seeing in terms of wage rates at retail and in distribution centers going forward. Thank you.

Let me jump on the first part of your question. Consumer acquisition retention, repeat rates, we're seeing that across all of our brands and we've deployed strategies, really across our value chain. It's not one thing, it's really through the work of our acceleration program. It starts with getting to know our customers and being clear on who our target customers are for each of our brands and then serving those customers, understanding them, and then serving them with great creative product, and then making sure we've got the right assortments in the right places. So, we're leveraging data and analytics plus the creativity of our talent and creative teams to put the right assortments in the right places and manage inventory in the right way. And then, the marketing investments that we've made as we structurally changed the pitch of our P&L to invest more in those things that will drive acquisition retention, those investments in the growth drivers in digital and in marketing. At the same time, we're doing that, we're increasing our -- improving our capabilities to understand and reach customers. So, we have specific strategies that we're executing. We've got a test-and-learn framework that our teams are executing under and we're innovating constantly as we learn how to better engage our consumers, bring them back more frequently, serve them better messaging. And those are the things that are working. And again, that's the power of the Tapestry platform. We're applying these capabilities across our brands, and we're seeing traction across our brands.

For just the Coach brand, I just can add two points: 1. Is -- and I think this is true for all our brands, we are leaning into values and sense of community. And that is resonating. And one of the things that has worked extremely well for us is the Coach insider program. If we can get our new clients to join us as Coach insiders, their frequency of purchased lifetime value increases manifold. And the Coach insider program is not a discount program, it's not a points programs; it's about community, it's about access. And that has created a really terrific basis to not invest, have the One and Done scenario, but instead, create multiple purchase over our lifetime.

And Brooke, I'll address the second part of your question around labor supply. We're not immune to the challenges that everybody sees out there. But I guess, as I look at it, the good news here is we're not just beginning to address this issue. This has been a multiyear journey. Not just on wages. You might recall earlier in the year we talked about raising wages in the $15 minimum and things that we have done on the -- to be competitive from a cost stare or a wage dollar amount standpoint. But I think, maybe even more important is the focus on engagement of the employees as someone relatively new to the story here. As I've come in, I've been very impressed with how high the engagement scores are, on our retail employees and distribution centers. This is an area that's been a long-term focus. It's the people centered approach. And that double prong of focusing on the people and also making sure we're competitive, so far has been a pretty good formula for us in terms of getting the labor that we need. Of course, we're not immune to the situations that are going on.

Thank you very much.

Thank you. That concludes our Q&A. I will now turn the call over to management for some concluding remarks.

Thank you, Catherine. The Q1 was a strong quarter for Tapestry with outperformance across all brands. We are building momentum and our confidence in the tremendous runway ahead for our brands is underscored by the increased guidance and shareholder returns we announced today. We've moved quickly and decisively in navigating industry-wide headwinds to meet rising demand for our brands. As always, our results are driven by our passionate teams who are moving with greater agility and are ready to deliver for our customers this holiday and beyond. Thanks, everyone, for joining us this morning and have a great day.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.