Good day, and welcome to this Tapestry Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations, Christina Colone.

Good morning. Thank you for joining us. With me today to discuss our third quarter results as well as our strategies and outlook are Joanne Crevoiserat, Tapestry's Chief Executive Officer; and Scott Roe, Tapestry's 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 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. 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 slides posted today. Now let me outline the speakers and topics for this conference call. Joanne will begin with third quarter highlights for Tapestry and our brands. 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 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. Our third quarter results were well ahead of our expectations despite the challenging environment. We drove increased customer demand across our portfolio, resulting in double-digit top line growth at Coach, Kate Spade and Stuart Weitzman, and EPS well ahead of our outlook. Our continued outperformance demonstrates the vibrancy of our brands, the power of our digitally enabled platform and the successful execution of our strategy by our talented teams around the world. Importantly, our progress reinforces the significant runway we have ahead of us as we harness our unique blend of magic and logic. The combination of iconic brands amplified by an agile and data-rich operating model creates tremendous opportunity. Our brands are at the heart of our company. They occupy distinctive positions in the attractive and resilient accessories market. Each has a rich heritage and substantial potential for growth. This is evidenced by the strengthening brand heat we're seeing through meaningful new customer acquisitions as well as growth with existing customers across our portfolio. We are focused on building lasting relationships with our customers to increase lifetime value through continuous innovation in both our product and the experiences we offer throughout the purchase journey. The opportunities for our brands are enhanced by our platform, which has been transformed to power them to move at the speed of the consumer. We are leaning into our digital leadership, meeting consumers where they want to shop and providing exceptional experiences [Indiscernible]. We're also leveraging our rich consumer data and sophisticated analytics to establish and enrich our customer connections, augmenting our creative processes with a deep understanding of our customers, while bringing faster and more consistent execution to bear. The benefits of investments in digital and data analytics are highlighted by our results over the…

Thanks, Joanne, and good morning, everyone. Our third quarter performance beat our expectations fueled by our North American business. In addition, we utilized our free cash flow to return over $550 million to shareholders through share repurchases and our dividend payment. While the external environment remains difficult, our teams are continuing to effectively navigate the backdrop by focusing on the factors within our control. Turning to the details of the quarter. Revenue rose 13% compared to prior year, including double-digit growth at each of our brands. By region, North America fueled our results, delivering 22% growth amid a strong consumer backdrop. Sales in Greater China declined at a low-teens rate. This included a mid-teens decline in Mainland China, so it still represented a 20% increase in revenue compared to FY '19 pre-pandemic levels. And to give more color on China, while the quarter started off with year-over-year growth, trends weakened due to pressures from COVID-related restrictions, including declines in traffic with locked down cities as well as throughout the balance of the region. By the end of March, over 40% of our mainland store base was closed or operating on modified hours and our regional distribution center located in Shanghai temporarily shut down. Digital sales growth of over 20% was not sufficient to offset pressure to our stores and wholesale businesses. We're continuing to navigate these near-term headwinds and believe in the resiliency of the Chinese consumers. In Japan, excluding the headwind from currency, revenue increased mid-single digits compared to the prior year as COVID lockdowns and cases eased in the region. And in Europe, sales rose nearly 60% against last year. While year-over-year trends have improved in both Japan and Europe from an increased focus on the domestic consumer, revenue remains below FY '19 pre-pandemic levels due to the…

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

I was wondering, could you talk a little bit more just about the headwinds that you're facing in China? And I guess, conversely, can you talk about more of the positive trends that you're seeing in the rest of the world?

Yes. Thank you, Bob. Overall, I'm seeing strength and momentum across our business. In our third quarter, we delivered strong growth in all regions outside of China, more than offsetting the headwinds we saw in China. We talked about in our prepared remarks the strong growth in North America at 22%. We also saw strength in Europe, in Japan and rest of Asia, which again more than offset the temporary headwinds we're seeing in China due to COVID and really showing the resilience of our model. We delivered double-digit global growth in Coach, Kate Spade and Stuart Weitzman in the quarter. Tapestry is a powerful combination of iconic brands and we have a transformed platform that's driving innovation and customer engagement. And I see us gaining traction across our brands. We're continuing to acquire new customers. We're driving growth and increased spending from our existing customer base. And our Q3 performance really highlights the strength and the underlying trends we're seeing in the business. Our outlook for the year reflects continued headwinds in China, mostly offset with continued outperformance across the rest of our regions, mainly North America. And our outlook also represents record top line sales for the year for Tapestry at $6.7 billion.

We will take our next question from Ike Boruchow with Wells Fargo. Your line is open.

Just -- it's a pretty dynamic world we're in clearly. I guess, Joanne or Scott, when I think about the potential for GSP to hit next fiscal year in this renewed authorization $1.5 billion, it seems like you have the dry powder to drive another 10% earnings growth next fiscal year. And you probably don't want to get explicit, but could you give us some guardrails on how to think about, after we get through Q4, just how to think about the next 12 months given all the puts and takes in the business right now?

Well, I'll kick this off to Scott for maybe the dynamics of the financials. But what I can tell you is that our business continues to gain strength and we're seeing that in all of our brand metrics and in our consumer metrics. And our focus has been on, throughout the Acceleration Program, really transforming our company and strengthening our brands. And we're seeing increasing traction that provides our confidence and underpins our confidence in the potential for further growth as we move forward. But I'll ask Scott to give you a little bit of the dynamics and the demands of the P&L.

You’re right. We’re not going to give guidance. If I think about just sort of the factors, listen, we've got really strong brands that have momentum, that are positioned well against really resilient categories. And we've seen this over a long period of time and some very volatile environments in the past as well. I mean our consumers engage and continues to respond. We also have pricing power. We've talked a lot about that AUR which gives me confidence in our ability to maintain margins over time. So the combination of great brands, well positioned and the ability to maintain margins means we can continue to invest in driving our business and our digital capabilities and our marketing, we transformed this P&L over the last couple of years. And that gives me confidence in our ability to continue to drive top and bottom line. And the last thing I'd say is this [Indiscernible] that's really been remade over the last two years, and you saw that in our guidance today. We're actively returning that cash to shareholders. So that's another driver or lever in terms of earnings as we look forward.

We'll take our next question from Oliver Chen with Cowen.

The average unit retail momentum has been really impressive. What's ahead with the promotional activity profile? What should we assume in our models there? And also regarding pricing actions, specifically at Coach brand, would love further detail on what you see as opportunity ahead and how you're balancing this against the consumer environment which sounds quite robust in the U.S.

Yes. Oliver, we are seeing pricing power across all of our brands. We're delivering beautiful products at great prices and consumers continue to recognize the value we're delivering. We've seen no consumer pushback on the price increases. And we've spent time to make sure we're keeping the consumer at the center and through our transformation efforts using data to improve our assortment. So the combination of magic and logic is coming to bear and enabling us to take pricing. Again, seeing no pushback. Coach, I'll let Todd talk about what we're seeing, but almost three years of continued AUR growth. But at Kate and Stuart, we're really just beginning the journey and we see further opportunity, particularly because we see European luxury driving price increases, there's more wide space for our brand, and the customer continues to recognize the value that we represent in the market.

Yes. Just building on what Joanne said. First, you think about the new customers that come into the brand in the last 2.5, 3 years, and even in this last quarter we saw 800,000 new customers coming to the brand. So they're experiencing Coach at elevated prices. And that's what you see with the AUR growth. We feel really good about where we're at and how much room we have because, first of all, we built our iconic style. We're amplifying those styles. We're making compelling stories around them. We're creating a value proposition. And as Joanne alluded to, when you think about where Coach is positioned today relative to traditional European luxury, there is more white space now than has ever existed. And I just see that as tremendous opportunity for continued growth on our AURs, on our initial pricing. And we will continue to maintain the discipline of not going back to periods where the brand was highly discounted.

Just a follow-up on the cloud investment regarding customer data platforms as well as on IDFA and privacy. Are there thoughts on why the cloud makes sense now and how that may plug into agility in managing speed as well as the personalization efforts?

Can I just jump in, Joanne. Just one clarification, we've always been in the cloud, right? And so there is some accounting changes which caused some geography differences from a reporting standpoint, but we’ve started talking more overtly about the cloud. But just to know, that's not necessarily a change in direction. That's just a change in geography based on some of the more recent pronouncements that have come out and just being in line with that Sorry, Joanne.

Oliver, your point is a good one. However, the technology infrastructure that we've invested in over time is critical in allowing us the agility to take advantage of this rich data that we have. And again, we're a 90% direct-to-consumer company. We have rich data that is -- it's our data, we understand our customers and we're able to leverage that with tools and technology. And innovation in the space is happening very quickly. So it is critical for us to have a platform, a technology platform that allows us to take advantage of the data that we have, to turn that data into insight, put that in the hands of decision-makers in our organization and move with speed to adopt a new technology as innovations are happening in the space. So that's been our focus. As Scott mentioned, it's -- it's been our focus for a while, but it is a critical underpinning of our ability to [Indiscernible]

[Operator Instructions] We will go next to Mark Altschwager with Baird. Your line is open.

So I mean it sounds like momentum in North America is very healthy, but I'm just curious, I mean are you seeing any indications of a deceleration in demand in North America over the last couple of months? I mean your brands target a wide range of consumers. Any differences in the trajectory of some of the higher price points at retail versus outlet? And then it looks like your SG&A outlook for modest leverage is unchanged despite some of the global sales headwinds, understanding the macros are out of your control. Just curious how we should think about your ability to protect margin should a slowdown present itself in the coming months?

Yes. Let me kick it off with what we're seeing in the consumer. And what I can tell you is that we're seeing a strong consumer that's increasing their engagement with our category and with our brands. You can see that in the numbers we're putting up, but we're continuing to see strong growth in customer acquisition. 1.4 million customers in the third quarter alone. That's 13 million new customers over the last 21 months since we've launched our Acceleration Program. And we see that, that consumer is increasingly younger, a younger consumer and has been transacting at higher AUR and they're coming back to our brands more frequently. And I think that leads you to -- handbags in our category, handbag and footwear have remained an emotional purchase, both emotional and [Indiscernible] for our consumer. And as the world has reopened and consumers are increasing their connection in the real world and occasions and return to work, we see that driving demand across our categories and across our brands. We're driving increasing brand heat and, as I said, the emotional connection with our consumers is growing. So we feel well positioned moving forward. And as it relates to SG&A, I'll let Scott maybe talk a little bit about what we're seeing there. But I would also say that we are seeing pricing power in our -- across our brands. So consumers are engaging with our brands and the brands have established pricing power. And we see wide space in the market given the value that we represent. And that, we believe is -- and we feel confident will be offsetting inflationary pressures as we move forward.

Yes, the only thing I would add, Mark, is first of all, we continue -- we're playing our long game, right? We're seeing the benefits of the investments that we've been making over the last couple of years pay off in terms of consumer acquisition, brand momentum, et cetera. And our understanding of that consumer through data and analytics and meeting her where she wants to be from a digital and omnichannel, we're seeing that, that works. Just a reminder though, on the other hand, we have our eyes open, we see the same macro issues. But right now, our consumer is engaged and responding. And one thing also to remember is about 8% of our investments are around marketing, right? So those are truly variable as we see the dynamic change. But honestly, right now, it's driving our business. And we see a healthy consumer, we continue to lean in. So right now, our posture is more offensive than defensive.

And just to add for Coach very specifically. We've come off of a very strong, and I know our sister brands have as well, Mother's Day. That gives us a lot of confidence in the future. And even in Japan, Golden Week was very strong for us. And one question you asked about AUR growth. We've had AUR growth across all of our channels. So it isn't just concentrated at the bottom or at the top. We're taking it up across all of our price points. So that's really powerful for us.

Our next question comes from Michael Binetti with Credit Suisse. Your line is open.

Scott, just a few housekeeping little ones quickly and then a bigger question -- bigger-picture question. You mentioned the Shanghai DC reopening in mid-May, I think that's pretty quick here. It sounds like you have some pretty clear indications there. Just what you're seeing in your ability to open that soon. And then the comment that you expect freight to improve in fourth quarter and then into fiscal '23. I know it was a little worse than you were initially thinking in the third quarter. So just the moving parts that you see there. But then I guess backing up to go off Ike's question a little bit earlier, I think what -- you guys are controlling the controllables so well. I don't really think what's going on in China and GSP really have much to do with you. Margins are great. And Scott, you've obviously got the treasury buying a lot of stock here. I think where the stock is, the market is very hungry for any kind of downside support to what fiscal '23 could be. Just is there anything that you can offer us to just help us think about what's the minimum that the business can deliver in a reasonable scenario next year?

Yes. Let me start, Michael. I think, generally, my comment is I think you got it pretty much right in terms of the way you characterize that. The DC is a slow reopening, and we do have some line of sight. We actually are open on a very limited basis. And without getting too far in the weeds, we're getting approvals from the local authorities to do a slow restart and that gives us confidence that it will continue. Of course, we don't have absolute knowledge of that, but signs are positive. And likewise, the reopening at the beginning of June. I would say it this way, Michael. We have taken the best information that we know today and giving you the best indication of what we believe that slow reopening will look like. Of course, it's out of our control, but it's the best information that we have today. And I think it's a reasonable estimate based on what our line of sight is. I'm guessing Joanne will make a broader comment. But just a reminder, we really can't give you '23 guidance at this point. But 90 days from now, we will, right? We'll come back and we'll give our guidance and then followed in early September by an Investor Day to give you a longer-term view. I would just refer back to earlier comments, I think it was from maybe Ike's question earlier, listen, we're in great categories, strong brands, well positioned in resilient great categories, which has proven to be a good indicator of top line growth, and we have pricing power and our ability to maintain margins. And to me, that's what holds the model together and gives us confidence in the future.

Yes. And I'll just reiterate that we are optimistic about the future, Michael. We're driving both the brand health metrics and the consumer metrics and are gaining traction in our strategies in terms of leveraging those. Our data, bringing magic and logic together and driving our business forward. And Scott alluded to earlier, we've invested and we'll continue to invest in brand building. We have made substantial investments and they're working, they're paying off, and we see that continuing. We've acquired 13 million new customers across our brands in the last 21 months. We see those customers engaging with our brands through the innovation and product and innovation and marketing, and they're coming back to our brands more frequently, and we'll continue to leverage that for growth going forward. And we are looking forward to providing more discrete details at our year-end call on what '23 looks like. But our brands and our company are poised for growth.

I forgot to cover one point you asked about which was the freight. And the freight picture has really not changed overall, a little pluses and minuses here and there, but 260 basis points, about $175 million for the full year. If you recall last quarter, I said it's a little bit hard to exactly know when it's going to turn into the P&L because it attaches to the underlying inventory. I mean the business is strong, so more sold through in the quarter, right? But if we look at the overall picture, our -- we've really curtailed our expedited freight or air freight already. It will take a while for that to move through the P&L. If you do the math, it says there's about $35 million in the fourth quarter of additional freight. That's about 210 basis points. And that's a little less than half of what we saw in the third quarter. So it's following that same curve that we laid out in the past, and there's really no new news there in terms of what we're seeing in freight.

So at the moment already in inventory, you see it moving through. Okay. I appreciate.

We'll go next to Brook Roche with Goldman Sachs. Your line is open.

Can you provide a little bit more context on your philosophy on capital allocation and how you're thinking about that balance between reinvesting in the business to drive that future growth versus returning capital via repurchases? As you look over the course of the next one to three years, what are the most important internal areas of investments that we should be planning for? And where have you pulled forward those investments since the inception of the Acceleration Program that should provide support if a downside scenario does materialize?

Yes. Let me kick it off and maybe toss it to Scott to add any more details. But we've been aggressive and rigorous about allocating capital. And we believe, as our first priority, in investing in our business. And the good news is we're seeing really strong returns on those investments. We're investing in brand building capabilities across our company. And we've transformed our company over the last couple of years. We're a different company than we were two years ago based on these investments. We're leaning into our digital capabilities and our data and analytics capabilities and developing not only -- it's not only systems, it's process, it's the ways of working, it's the investments we've made in talent that are helping to drive our business. And we're -- as I said, we're seeing really strong returns. Again, those are primarily, the investments we're making, are in digital and in -- and in marketing. You've seen us invest in fulfillment. We broke ground on a fulfillment center on the West Coast of the U.S. We're adding automation to that fulfillment center. We're engaging consumers more and more in digital channels and those capabilities have been driven by the investments, the very intentional investments we've made. So that is our first priority. We also -- we're optimistic about Tapestry's future. And you've also seen us make a substantial increase in our buyback program, including the new authorization. And we're confident that over time we'll continue to drive growth through our brand building investment and return cash to shareholders. I don't know, Scott, if there's any more detail that you want to provide.

The only thing I would say is capital allocation priorities, just to restate them, invest in the business, dividends growing faster than earnings and then returning excess cash. Remember, coming from the early days of the pandemic, we're able to actually spend more and to return more than our annual cash flow because we had increased our maintenance capital in light of the early days of COVID. So we had the good fortune of being able to be in a really strong, relatively low leverage cash position and at the same time saw the intrinsic value of our shares dislocated from what the market reality is were. So we have leaned in, right? And I think the way I would say about it is it's not a change in priorities, but this is a cash-generative machine. It's cash -- free cash flow is about 2 times what it was pre-pandemic. And you should think of us as disciplined capital allocator. So as we continue to generate this free cash flow, we're going to invest first in our business, we're going to grow our dividend and you should think about returning cash through share repurchases programmatically over a period of time. This will be another lever for price appreciation over the long term.

We'll take our next question from Omar Saad with Evercore. Your line is open.

Wanted to dive a little bit deeper on the handbag trends kind of across the brands and in the industry. It feels like you guys have AURs up a lot, especially on a multiyear basis for the Coach brand. We're hearing that from other players in the marketplace. Is it fair to assume that kind of unit volumes in the handbag category versus, let's say, 2019 are substantially down industry-wide in the kind of aspirational category? And is there a chance for meaningful unit growth even in this kind of inflationary environment kind of going forward?

Yes. Let me start off and then I'll [Indiscernible]. But we are seeing pricing power across our brands which is a really good thing for our business. We've been focused on driving higher AURs [Indiscernible] by the healthy business and that's been working. Our focus on the consumer, bringing data to bear, managing inventories better, leveraging data and analytics to drive SKU productivity are all helping us drive higher AURs. And it is price at this point that is driving our results versus units. And again, we think that's a good thing and healthy for our business. But we continue to see opportunities to drive growth. And we're doing that by attracting more customers to our brands and engaging more customers in our brands. And that gives us a platform to continue to drive lifetime value. I mentioned earlier that the new customers that we're acquiring [Indiscernible] younger consumers, which is great for our brands and they're coming back and transacting with our brands with higher frequency. So we see opportunities there. We see opportunities geographically to continue to drive growth. And so a lot of levers we can pull, including driving higher lifetime value across our customer base. But Todd, I'll toss it to you for a little more color on Coach.

Thank you, Joanne. We are -- we have not hit our unit counts from '19 but the delta has shrunk pretty dramatically. And I see that as an opportunity for us. And all of the things that Joanne mentioned, the lifetime value, the increased AUR, the overall complexion of our customer is changing. And beyond women, we're very excited about the opportunity in men's. We're about a year ahead of our goal of getting to a $1 billion men's business. And what we like about that is it adds new customers to our mix and the brand. And when you think about it, we merchandising, we call them men, often, it's an all-gender program. But what I also am very excited about in the last year, we've added 1.5 million male customers into the brand. And when you think about opportunities and AUR growth there, particularly in those categories, where some of our highest AURs in the company. So I feel really good about the room we have, the new customers, the frequency of purchase will eventually get us to both AUR growth from pricing, but also unit growth.

We will take our final question today from Adrienne Yih with Barclays. Your line is open.

Congrats on the progress. You can see it in the frontline stores in particular, no promos. Scott, my question is for you. Can you give us an update sort of on what the state of the China market looks like? Maybe some color on digital versus stores. Obviously, e-commerce has been able to be delivered. Are you seeing any improvement in that front, the distribution of stores in Tier 1 cities. Just like anything that you can give us with regard to what the current state of affairs is, seeing any signs of improvement current day to get to that kind of June reopening target.

Yes, sure, Adrienne. Maybe I'll start and one of my colleagues might want to jump in, too. Listen, the -- I think I already mentioned the ADC, our Asian Distribution Center that we're starting to see some modest reopening. We are seeing some stores going back online here and there. But I would say, by and large, not a major change in condition and that's been reflected in the outlook that we just gave. Just to put some numbers on it. Our China expectation for the fourth quarter is down about 35% as we -- which is baked into our outlook. And that again has the slow reopening starting in June is our expectation.

And just a quick reminder. The Tier 1 cities -- are you primarily in the Tier 1 cities right now? I know there were some stores in Tier 2, but not a lot. So if you assume 80% is in Tier 1 in the lockdown cities.

Yes. We have a broad footprint across China. So we're not just in Tier 1 cities. And to Scott's point, we are seeing impact across -- broadly across the region. And our business was strong entering the third quarter and prior to the COVID disruptions. And as we saw the COVID disruptions rolling through the region, we saw traffic declines in the lockdown areas, but also more broadly across the regions as traffic was curtailed. I think it's also important to note that the strength coming into the quarter pre-disruption and the research we've done in the market continue to confirm that our brand health in the market is strong and consumer sentiment continues to be strong. So we're navigating the near-term headwinds, but we feel well positioned as China recovers to continue to drive growth, both during the recovery period and long term in the market.

And the only thing I'd like just to add for the Coach. First, and it's all of our Tapestry in place, we have an incredibly fantastic team on the ground in China. The resilience that they have shown through this and the creativity is -- I mean I am in awe of what they are able to do even in pretty tough conditions. And just in the last month or so, we've seen a real increase in virtual selling and that is something that could be really interesting as and an, not and or, when the stores reopen. So again, our teams are incredibly creative, they're resilient and it gives us that much more confidence that when these events end, we'll have an even greater runway and connectivity with our clients there.

That concludes our Q&A.

Well, thanks. I'll say a few words just to wrap up. First, to build on what Todd was just talking about, I want to thank, first and foremost, our teams around the world for their relentless focus on the customer. This is continuing to drive our strong results. And our thoughts are especially with our teams in China who are navigating COVID and supporting each other during this difficult time. As you've seen in our results, our business is performing and I'm even more confident [Indiscernible] in a rapidly changing environment. Tapestry has tremendous runway for growth, with a positioning that's both unique and advantaged. Our powerful iconic brands are uniting magic and logic to deliver compelling [Indiscernible]. We play in attractive category that has proven durable high growth. We have a diversified direct-to-consumer business model. And we've transformed our platform with digital leadership is fuelling customer engagement. Our strong underline momentum is particularly evident in customer matrix we highlighted today. Long term we’re playing offense and lining in our conviction is reflected in our capital allocation actions, we’re investing in brands building as well as accelerating and increasing our share purchase given the significant growth potential ahead. So thanks 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.