Good day and welcome to this Tapestry conference call. Today’s call is being recorded today, Thursday, November 10, 2022. [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 first quarter results as well as our strategies and outlook are Joanne Crevoiserat, Tapestry’s Chief Executive Officer; and Scott Rowe, Tapestry’s Chief Financial Officer and Chief Operating Officer. 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 posted today. Now, let me outline the speakers and topics for this conference call. Joanne will begin with highlights for Tapestry and our brands; Scott will continue with our financial results, capital allocation priorities and our 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 the 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 first quarter earnings were ahead of expectations despite the more challenging backdrop, demonstrating the strength of our brands, the agility of our operating model and the consistent execution of our passionate global team. Importantly, this performance also underscores our competitive advantages and Tapestry’s successful transformation into a consumer-centric and data-driven organization, which has enabled us to successfully navigate the uncertain environment. To this point, as we outlined at our Investor Day in September, our strategic agenda future speed is designed to drive strong, sustainable growth by powering our iconic brands to move at the speed of the consumer in an ever-changing world. It requires resiliency, continuous innovation and adaptability to pivot and evolve to effectively build our brands and foster enduring customer relationships. During the quarter, we did just that. Although the landscape continued to shift at a rapid pace, we were nimble and responsive to change, remaining on track to deliver our fiscal year earnings target, excluding the impact of currency, while intentionally advancing our long-term initiatives. Now turning to the financial and strategic highlights of the quarter, first, we powered global growth, delivering record first quarter revenue. These results were led by double-digit constant currency growth in international markets, which we achieved despite COVID-related headwinds in China with pressure fully offset by outsized gains in the rest of Asia and Europe. In North America, sales grew slightly amid an increasingly difficult consumer backdrop. Overall, we achieved our top line expectations, highlighting the benefits of our globally diversified brands and business. Second, we delivered compelling omnichannel experiences to drive another quarter of growth in our direct-to-consumer businesses. Our global stores led the growth driven by significant traffic increases as consumers continue to embrace the return of in-person experiences. We leaned…

Thanks Joanne and good morning, everyone. We delivered solid results in the face of a volatile backdrop as we focused on the factors within our control. In the first quarter, we achieved record revenue of $1.5 billion despite FX headwinds and COVID disruption in China and grew earnings per share at 8% against last year, excluding $0.10 of currency pressure. At the same time, we returned $175 million to shareholders demonstrating our commitment to enhancing long-term value. Turning to the details of the quarter, starting with revenue, which will be shared on a constant currency basis, sales rose over 5% led by international, delivering 11% growth versus prior year, which was ahead of our expectations. We achieved strong growth in APAC, which rose 9% versus prior year despite COVID-related headwinds in Greater China. In Japan, revenue increased 16%, while Other Asia grew over 135% with notable strength in Singapore, Malaysia and Australia and New Zealand. These trends were driven by a pickup in store traffic as we anniversary last year’s pandemic-related headwinds. In Europe, sales increased 24%, fueled by higher international tourist traffic, notably from the Middle East and within Europe, as well as continued growth with local customers. For Greater China, sales declined 11% data COVID related headwinds, though improved meaningfully on a sequential basis from the 32% decrease reported in Q4. However, as we enter our second quarter, trends softened due to the further lockdowns and business disruption. As a result, we have tempered our fiscal year ‘23 outlook based on the expectation for a delayed recovery in China, which I’ll touch on shortly. Turning to North America, sales rose slightly versus prior year, representing an increase of nearly 45% on a 2-year basis. By channel, we delivered low single-digit gains in our direct business, which included a…

[Operator Instructions] We will take our first question from Bob Drbul of Guggenheim Securities.

Hi, good morning. Congratulations on the first quarter. Can you touch on your outlook going forward? Specifically, how you’re feeling about the business heading into holiday?

Sure. Good morning, Bob, and thanks. We delivered a strong quarter, one that illustrates our agility in a difficult environment. In the first quarter, we delivered record revenue, and we drove AUR increases across all of our brands, which indicates we’re driving healthy growth across the portfolio. And we’re deepening our consumer engagement. We’re seeing more active customers shopping our brands and they are spending more with our brands. And for holiday, we’re well positioned as we head into holiday. I’m excited about the product. We’re delivering more newness and innovation across all of our brands. We’ve integrated marketing that will generate excitement with our emotional storytelling capabilities. We’re much better positioned with inventory. As you might recall, last year, we were significantly supply constrained given the disruptions we saw in the business last year. And as I think about our outlook, we are disciplined operators. Our outlook reflects realistic expectations given the macro uncertainty. Our eyes are wide open, and we have a prudent plan, and we will manage our business prioritizing long-term brand health. As always, our North Star, we’re staying close to our customer. We have the proven agility to meet what we see as increasing demand across our brands.

Great. Thank you very much. Good luck.

Thanks.

We will take our next question from Ike Boruchow of Wells Fargo.

Hey, good morning, guys. Scott, I just wanted to follow up to Bob’s question. Can you unpack the guidance a little more? I think you broke out a little bit on North America and China being weaker in constant currency versus your original plan. Kind of just curious of what exactly was the plan before versus today. And then as you kind of approach the guide, like do you think this is appropriately derisked based on what you’re seeing in the market, level of conservatism built in? Anything there would be great?

Sure, Ike. Good morning. I am happy to take that. So first of all, maybe a little bit of context or a reminder really what our basis for guidance was coming into this year, 90 days ago. And as it relates to China, we’ve seen what COVID-related lockdowns look like. We had said we modeled a modest and slow recovery based on experience that we’ve had in the region before and similar kind of situations, and we expected that to begin and continue throughout the year. What we saw just another perspective. In the fourth quarter, we were down 35% in China, and we just delivered. First quarter, it’s down 10%. That’s actually a little better than our expectations for China. And we were progressing well against that improvement until the PRC Congress at which time we saw our business take a bit of a step back. Since that time, we’re back on the recovery on a slow basis and gives us confidence. So what we’ve done is delayed our China recovery, essentially think about pushing it out a quarter so that in the second quarter, we inflect back to growth and for the full year, kind of high single digits for the full year. We also reflected the trends we’re seeing. We’re not trying to outguess the market and project either a big, good or bad inflection points. Our North America business was modestly below expectations, and we’ve taken that trend that we see and projected that forward for the balance of the year. Conversely, rest of Asia was stronger, right? It’s really doing well. Some of that anniversarying the COVID related shutdowns, but the trend in the business is good and we projected that forward. And lastly, given the volatile environment and some pressure, I guess, cautious position, we’re being aggressive on cost, and we’re being cautious on hiring. We’re looking at each cost carefully, but at the same time and importantly, continuing to invest in the long-term of our business. We’re investing in marketing, we’re investing in those digital and the capabilities that we believe are differentiating over time. And I think this guidance, at least in my opinion, really speaks to the disciplined operation of this team and this group as we’re able to offset some – a little bit of top line pressure and offset it with some actions that we’ve taken. And really from a currency-neutral standpoint, we’re holding our guidance and from an operational standpoint and just adjusting for the strengthening of the U.S. dollar, which is about $0.20 in EPS for the year.

Thank you.

And I’ll just add, Ike, as we think about China, as Scott mentioned we pushed out our expectations for that recovery based on the trends that we’re seeing in the market and some continued COVID disruption in the second quarter. We’ve pushed that out to the back half of the year, but when we expect the gradual recovery. But we have positioned, and what you’ve seen in our guidance is even if we don’t see that recovery, we still have a path to the low end of our guidance if things don’t improve to our expectations in the China market. So we’re managing our business. As I said, we’re disciplined operators and we’re managing our business around the globe to drive outcomes and to drive the growth that we expect, and that’s reflected in our outlook.

Great. Good luck.

Our next question is from Lorraine Hutchinson of Bank of America.

Thank you. Good morning. You made mention of the increasingly promotional environment. Can you just provide an update on your promotional strategy and pricing strategy? And with that, can you speak to the customer reaction to the most recent price increase in August?

Yes, why don’t I kick it off broadly and then maybe Todd can give you some color on what we’re seeing at Coach. But across all brands, we drove AUR increases in the first quarter. This has been a consistent focus of ours, and that continues. We see more opportunity to drive AUR increases. Customers are recognizing the value we deliver across our brands. We still continue to see pricing power. As we think about the promotional environment, even in Q1, we’re already seeing it intensify, but we are being disciplined in how we manage and respond. There are so many levers under our control, and we continue to drive healthy brand growth. We’re delivering product innovation that supports sustained higher AUR. The second quarter is always promotional. We expect there will be promotions, but we also expect to be disciplined and as we go through the balance of the year to continue to drive AUR growth. But Todd, why don’t you add color on what you’re seeing at Coach.

Thank you, Joanne. I think what we saw in the first quarter and what we had anticipated was a return to increasing AUR in handbags. And we did that both in North America and globally. We achieved that, one, through price increases ticket, and also, we were very disciplined in our promotional cadence. We have not seen any pushback from our customers on our pricing increases. And I think it comes down to three reasons: one, the innovation in our product. That has really set us apart from so many of our nearing competitors. Second, the compelling and our purpose-led brand storytelling through our expressive luxury lens. And as we start giving that life, the product really and the brand, it sets itself out in a different format than perhaps others. And then third, when we think about the inherent value of the Coach brand, even after 3 years of AUR growth, we compare our price points to traditional European luxury. The delta today is greater than any time in our history. So, the intrinsic and inherent value that our clients are seeing is there. So, we are excited by the path and the journey we set out, and we anticipate seeing further AUR growth throughout our fiscal year.

Thank you.

Our next question is from Matt Boss of JPMorgan.

Great. Thanks. Joanne, so could you speak to new customer acquisition trends? And more so underlying demand trends that you saw in North America as the first quarter progressed. Any material change in customer behavior you have seen in North America so far in the second quarter at direct-to-consumer or wholesale? And Scott, just in North America, if you could just elaborate on the change that you are making in terms of the back half of the year trend rate from a constant currency revenue perspective, maybe relative to what you were thinking three months ago?

Yes. Let me start with the consumer and what we are seeing, Matt. We are continuing to see and welcome new consumers to our brands, 1.4 million new customers in North America. And we are also focusing on accelerating against our large file of existing customers. And what we saw in the quarter was really successful execution behind those objectives. And the result of our execution, leveraging all the data and understanding of the customer, along with our strong go-to-market strategies was more active customers engaging with our brands. We saw higher spend per customer through more units per transaction. We are seeing higher overall spend and higher frequency driving that. So, really successful quarter in terms of how we are engaging customers, both new and existing. And the other thing that we are seeing in the trends, we are seeing a softening in North America and just related to the consumer backdrop. But we are also seeing customers becoming more omnichannel. We are welcoming a lot more customers back in our stores. We are seeing traffic. We are seeing traffic increase to our store channel, and we are thrilled to be welcoming more customers back to our stores, because as we grow this omnichannel customer, a customer who shops across both channels, we see that customer being much more productive, spending 2. 5x more. So, in terms of the consumer, while the backdrop we see is softening, and we have seen that in the macro environment, we are seeing strength in terms of how we engage consumers and how they are spending and it’s a good sign for us in the future in terms of our ability to drive lifetime value as we increase our omnichannel customers.

And Bill, I just want to add one thing for the Coach brand. Since Courage to Be Real campaign, we have seen an increase in new customers. Now, we are only a month in. So, I don’t want to start calling full success, but we have seen a material positive change from our September to October, new customer acquisition. And we do believe it is because our campaign is resonating.

Yes. And Matt, just to address your question directly as well, it’s about $200 million is the impact of the moderation in North America, and that takes us from prior guide of low to mid-single to down slightly, which is in line with the trend that we see today. Wholesale timing can change that. We were up slightly in the first quarter. So, there is a little noise quarter-to-quarter. But I think the important thing being 90% direct-to-consumer is the trend that we are seeing in Q1 is what we projected. And to the earlier comment, we are not trying to be heroic. We are not trying to outguess the market. We are trying to reflect what we see on the ground today on a go-forward basis, and we are making prudent and appropriate adjustments accordingly in order to maintain the currency neutral guidance, as we said earlier.

We will take our next question from Michael Binetti of Credit Suisse.

Hey guys. Thanks for the outlook. So, I know you already mentioned you raised price by 6% in August. You got the AUR back to positive, nice to see, especially in North America. What are you contemplating for North America as I guess, through the year, but as we look to calendar ‘23, you have a competitor saying they are going to raise prices in spring the pause after that. And I guess more near-term resale platforms are saying they are seeing signs of trade down. I think some of the luxury department stores are saying that they are seeing aspirational customers that entered the luxury categories over the last few years start to slow. I am curious about how the push and pull of that affects you as an aspiration brand?

Yes. We have – I will kick it off and maybe then, Todd, you can add some color. We are not reacting to what’s happening outside, but are really focused on engaging consumers. Our focus is on running our business in a healthy way and delivering the value that our consumers expect. And that’s a strategy that has been working for us over many years. Over the last 3 years, we have really focused on the things that we can control and delivering great value for our consumers. There are a lot of dynamics that are playing out in the business. At the end of the day, our brands represent tremendous value in the marketplace from consumers, and we are seeing pricing power. And we intend to continue our focus on delivering innovation, leveraging data to understand our consumers even better. And we do see opportunity we continue to drive price and AUR through this year and as we deliver into the future, driving margin accretion as well. So, Todd, I will let you add some color on what you are seeing in your plans for the Coach brand.

Thank you, Joanne. As we said in our Investor Day, looking through this lens of and really manifesting expressive luxury, I think looks at as a part. And we – to remember – to remind everyone, we are the Coach brand is almost 90% direct-to-consumer. So, our interaction and the data we get from our consumer is so powerful for us. And we have been on this journey, not just in one quarter, but we have really focused on our growth on AUR and driving promotional cadence down materially. And so when you take that lens, when you take what we did with the acceleration program, and reduce our SKUs and focused on our families and elongate those family and then bring innovation, one example that we mentioned, that Joanne mentioned in our prepared remarks was Coachie [ph] the word Coachie which had an AUR of over $800. And that goes to the fact that at the end of the day, emotion will always trump price. It will always connect people with emotional product. And that compares to – when you talk about traditional luxury, the average price points are so materially different that both in good times and in maybe more challenging times, I think the Coach value stands out and is very compelling to our customers.

Yes. And I want to just add on the back of that, that also we are seeing this across all of our brands. We are seeing it for Coach, and we have significant runway at both Kate Spade and Stuart Weitzman, where we continue to talk about how this emotional product, understanding our consumer is driving higher AUR. And we cited examples of the Lady Leopard collection at Kate Spade, driving that emotional connection with consumers and driving AUR higher. So, we absolutely have runway ahead, particularly at Coach and in Kate and Stuart as well.

Thanks.

Our next question is from Oliver Chen of Cowen & Company.

Hi, Joanne, Scott and Todd. Regarding full price relative to outlet, what are you seeing with traffic trends, anything noteworthy, particularly as inflation continues to be an issue for the consumer? And then as we think about pricing analytics and SKU management, what inning are you in there? How is it interplaying with the prospects for continued AUR progress? Thank you.

So, why don’t I start, and then Joanne, since you used the baseball metaphor will clean up afterwards. But first, we are seeing great traffic in both channels, particularly in stores. And as we have seen the consumer in North America is returning to stores. And one of the things we like about our model is stores are highly profitable for us. Digital is highly profitable for us. And we are looking to maximize the opportunity, be where the customer wants to be. And we also love having them back in our stores because the opportunities to up-sell and to create that connectivity is always most significant in the store format. In terms of innings, I think we are more at this point, cricket than baseball. This is a long, long game that we are going to be playing. And we are going to continue to find opportunities to continue to drive value. And I think we will have pricing power at Coach for a very long period of time. And we are also really extending the full lifestyle of the brand. And that opportunity, as we have talked about, in men’s and footwear and ready-to-wear and all gender programs is really where I see us winning in the future.

And Oliver, I think you talked about our – you touched on our analytics platform and how that’s helping us drive. These are programmatic changes that we have made to really leverage the vast amount of information we have about our customers. We are learning about our customers, and we will continue to leverage that in our – and managing our assortment. Our SKU productivity is at some of the highest levels we have seen, because of these new capabilities. Importantly, as we optimize our assortments, we are understanding at a customer level where the assortment is resonating, what items are used are great recruiting tools for new customers and some of our target customer groups. We talked about the Bandit as a great recruiting tool for the Gen Z consumer. So, it’s informing so much of our execution as well as analytics around pricing. I would say we are still in early innings. I like Todd’s reference of cricket versus baseball. We think about it as an infinite game. And the more we learn about consumers, the more we are able to deliver against what they value and the better we are at executing and delivering AUR increases and growth overall for our brands.

Okay. And lastly, Future Speed, where do you see the most opportunity for continued agility as test, read and react and lead times are so important to manage dynamically? Thanks a lot. Best regards.

Yes. Thank you. Speed and agility is really the name of the game, and it has been for the last couple of years. I think we have been exercising those muscles for a few years and continue to perform. We are seeing demand trends shift around the globe with real outperformance in rest of Asia. The fact that our international business was up double digits including China, overcoming the drag that we are seeing because of the COVID disruptions there, I think is a testament to our ability to react and respond to the changes we are seeing around the world. And as we think about the drivers of future speed, it starts with deepening engagement with our consumers. We saw that in the first quarter. We are delivering – we are also delivering product innovation and excellence. We are building a more omnichannel business. We are seeing that with our customers coming back to our stores. Seeing increasing omnichannel, and we are driving global growth. So, all of the pillars of our future strategy are intact, and we believe that is the unlock for future growth and value creation.

Our next question is from Mark Altschwager of Baird.

Thank you. Good morning. I will focus in on Kate here for my question. Nice acceleration in sales growth there, including North America. So, just curious, any other callouts on what drove that positive divergence and whether you are also baking in softer North American trends for that brand over the balance of the year. And then switching to margin, SG&A did track a little bit higher than in sales there. Just any other color you can share on the operating margin range that’s embedded in your guidance for the year at Kate? Thank you.

Thanks Mark. Let me start, and then I will flip it to Scott to unpack some of the margin drivers. But overall, we continue to make progress at Kate Spade. We are really pleased with the growth we delivered, 10% constant currency, including growth in North America. We are seeing strength across the globe, in Japan as well. It’s a continuation of our focus on customer centricity and brand building. We are focused on being more emotional, more lifestyle and more global. And we saw all of that come to play in the quarter, continued success in our assortment. We have continued to deliver innovation. but also we are seeing traction behind our core offering. So, that continues to be a good sign. And the AUR growth is a good testament to how the customers are responding to the innovation that we are delivering at Kate Spade. So, we feel really good about the progress we are making there. We continue to be confident and we are on track to deliver our $2 billion goal and beyond at high-teens operating margins. And we are making investments to make sure that we continue to deliver behind that. But I will turn it to Scott to unpack the operating margin piece.

Yes. Thanks Joanne. And Mark, just taking it up where Joanne just left off. First of all, gross margin, just remember the factors that we have talked about at the Tapestry level certainly are relevant here. You talked about FX pressures, the dynamics around freight that we have been talking about now for multiple quarters are pressuring us in the short-term, but we would argue transitory and importantly, AUR growth and pricing power are alive and well at Kate Spade and our ability to maintain those margins over time. We remain confident in the gross margin side. And I think we even talked about this a little bit last quarter. This is an investment year for Kate. As they are coming on to the capabilities of our platforms, we believe these are differentiators for all of our brands on a go-forward basis. And some of those implementations in key bringing them on to those digital and analytical platforms this year is showing on the P&L and SG&A load, I would say, on an incremental basis or on a marginal basis, we continue to see the progress in profitability. And we still have confidence that they are on a path to that high-teens operating margin that Joanne just reaffirmed a minute ago.

Thank you.

We will take our next question from Brooke Roach of Goldman Sachs.

Good morning and thank you so much for taking our questions. Joanne, Scott, I was wondering if you could talk a little bit about the health of the brands that you see in China and the competitive environment in that region outside of the lockdown and the COVID restrictions. What are you seeing within your brand health? What are you seeing in sales trends? And how is the competitive and promotional environment in that region specifically? What gives you confidence that you will be able to return to the levels of growth that you have embedded in your second half forecast as the lockdowns begin to ease? Thank you.

Yes. Let me start and then maybe Scott can reiterate what we have reflected in our outlook. But as expected, revenue in Greater China was pressured in the first quarter due to the headwinds associated with the zero COVID policy and COVID outbreaks. We do now expect a delayed recovery. We had been calling for a recovery in the market. We are shifting that out a quarter, but we continue to expect growth for the full year. And remember, as we get into the back half of our year, we will start to lap some of the lockdowns from a year ago. But our view on the long-term opportunity in China hasn’t changed. We continue to see significant long-term opportunity across each of our brands. And I think an important data point is in this lead up to the 11/11 holiday, we continue to see strong engagement with our brands in their channels. And our brand health signals in the market, we continue to do a lot of research in the market. Our brand health signals are still good. So, our long-term thesis is intact. We are managing through some headwinds, and that’s been reflected in our outlook.

Not much to add, except I would just say, Brooke, that also from an inventory positioning, quality and quantity, as we have taken it down, we have also been proactive in our adjustments of inventory. So, we don’t – we feel pretty good about the inventory situation also in China as we – even with the adjustments that we have made.

Thank you. That concludes our question-and-answer. I will turn it over to Joanne for some concluding remarks. End of Q&A:

Thank you and thanks all of you for joining us and your interest in our story. We delivered a better-than-expected quarter and maintained our earnings outlook for the year on a currency-neutral basis. A real big thank you to our teams around the world who continue to drive our results. Our performance highlights the strength of our brands and our ability to effectively navigate near-term challenges by staying agile. And we remain focused on delivering for our customers through the holiday season and beyond. Most importantly, we have a clear strategy to drive significant long-term sustainable growth across our portfolio, and we are confident in the runway ahead. So, thanks everyone. Have a great day.

This does conclude the Tapestry earnings conference call. We thank you for your participation. Have a great day.