Title

Presentation

Tapestry, Inc. beats earnings expectations. Reported EPS is $1.03, expectations were $0.89.

Operator: Good day and welcome to this Tapestry Conference Call. Today’s call is being recorded. 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.

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 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 10K, the press release we issued this morning, and our other filings of 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 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 Q&A, Joanne will conclude with brief closing remarks. I’d now like to turn it over to Joanne Crevoiserat, Tapestry’s CEO.

Joanne Crevoiserat: Good morning. Thank you Christina and welcome everyone. As noted in our press release, our record third quarter results outperformed expectations, reinforcing our position of strength. Our talented global teams drove accelerated top and bottom line growth against an increasingly complex backdrop, clearly demonstrating the power of consistent brand building and our connections with consumers around the world. Touching on the highlights of the quarter. First, we powered global growth with total revenue gains of 8% at constant currency, outpacing guidance fueled by 15% growth at Coach. By geography, international revenue rose 8%, led by an increase of 35% in Europe, where our business has strong momentum and the opportunity for continued growth is significant.

In addition, we delivered a sales increase of 4% in the total APAC region. In Greater China specifically, revenue growth accelerated, rising 5% as we continue to confidently invest behind our long-term growth agenda in the region and with this important consumer cohort. And in North America, revenue increased 9% compared to last year, and gross and operating margin continued to expand, reinforcing our commitment to driving a healthy business. Second, we built new and lasting relationships with consumers around the world. In North America specifically, we acquired over 1.2 million new customers in the quarter, representing strong growth versus last year. And of these new customers, two-thirds were Gen Z and Millennials. We are capturing consumers who are entering the category for the first time, which is instrumental to fueling enduring relationships, customer lifetime value, and sustainable growth.

New Gen Z and Millennial consumers continue to transact at higher AUR than the balance of our customer base, and we achieved a meaningful increase in year one retention rates among Gen Z consumers at Coach, a key indicator that these relationships are sticky. Third, we delivered compelling omnichannel experiences, delighting consumers across all touch points with our brands. To this end, we maintain strength in digital, which grew at a mid-teens rate versus prior year and represented approximately 30% of revenue at accretive margins. Our global brick and mortar sales rose at a mid-single digit rate in the quarter at strong and increasing profitability. Overall, our direct to consumer operating model is a clear differentiator and competitive advantage, driving real-time consumer understanding and agility.

Fourth, we fueled fashion innovation and product excellence as we continue to deliver creativity, quality, and compelling value to consumers around the world. This is on display at Coach, where we delivered strong and broad-based growth, highlighting the vibrancy of the brand and product offering. Our commitment to disciplined brand building is also reflected in our strong gross margin, which continued to expand in the quarter. Importantly, our globally scaled and diverse supply chain is a key competitive advantage, enabling us to deliver craftsmanship to consumers while navigating the shifting backdrop, which Scott will discuss in more detail shortly. Overall, we generated record third quarter earnings per share, which exceeded our expectations and increased 27% compared to the prior year.

This outperformance positioned us to increase our outlook for the fiscal year. We’re on track to deliver fiscal year 2025 earnings in the area of $5 per share, consistent with the outlook we provided nearly 3 years ago at our Investor Day, despite the rapidly changing global landscape. This is a testament to the power of our strategies, the agility of our operating model, and the resilience and focus of our teams. These advantages are driving our success today, and I’m confident they will continue to underpin our growth long term. Now moving to our results and strategies by brand. Coach delivered another standout performance with accelerated growth in the third quarter, driving 15% top line gains as the brand’s expressive luxury position continues to resonate with consumers.

We believe that the momentum we have unlocked is enduring and that Coach’s success is compounding. We continue to build on our strong brand and cultural relevance driven by product innovation and the creativity of our talented global teams, who are operating with excellence, focus, and intention. The Coach vision is clear to be the world’s most inclusive, genuine, and loved fashion brand, and it is this vision that guides our strategies and fosters a brand purpose that cuts through with consumers. And our success is evident in our results. We are driving meaningful new Gen Z customer acquisition through our outstanding product offerings, authentic brand values, and deep understanding of our target consumer. We are winning in our core leather goods category, where we’re outpacing the industry, and we’re doing this on a global scale with strong top line momentum and exceptional margins, which increased nearly 100 basis points versus prior year.

Now, touching on the highlights of the third quarter in more detail. First, we drove double-digit gains in leather goods where we have multiple platforms for growth. The iconic Tabby family once again led over-indexing with new and younger consumers, building strength on strength. The Tabby shoulder bag 26 continued to anchor the offering while the new Chain Tabby was a global success. Additionally, our New York family significantly outpaced expectations, cementing itself as a new growth driver for the brand, with styles ranging from the viral Brooklyn Shoulder bag 28 at $295 to the Soft Empire Carryall 40 at $695. Further, we grew our archival inspired Coach Originals collection with the introduction of the large Kiss Lock Bag at $695, which sold out within minutes of launching online and within a day at stores.

And finally, our Bag Charms and Straps added to our success, providing consumers with further opportunities for self-expression with the Cherry Bag Charm remaining a Gen Z favorite. Overall, Coach’s growth in handbags and accessories continue to outpace the industry, a testament to the brand’s heat, innovation pipeline, and the compelling value and craftsmanship we offer in the luxury market. With these advantages, we drove mid-teens handbag AUR growth led by North America. Looking ahead, we are confident in the potential for further sustainable AUR increases. Next, we remain focused on fueling footwear, which drives lifetime value with our target Gen Z consumer. In the quarter, footwear grew mid-single digits, bringing new and younger consumers to the brand.

Growth in the category was led by the successful launch of the Soho sneaker and the continued momentum of the Highline sneaker. Building on our one Coach learning agenda, both sneakers are offered at consistent price points between retail and outlet channels, enabling us to amplify our innovation and big ideas with consumers. Turning to Marketing. We continue to drive cultural relevance through emotional storytelling that highlights our brand purpose and product offering. During the quarter, Coach launched On Your Own Time, a campaign introducing Coach’s spring 2025 collection and starring global ambassadors Elle Fanning, Nazha, Koki, and Youngji Lee. This campaign was inspired by our ongoing discussions with Gen Z consumers across the world and shares a powerful message about having the courage to set the pace of your own life.

This campaign is continuing to deliver strong uplifts and consideration and purchase intent across markets. And as we deepen our learnings with each campaign, we are strengthening both our bold storytelling and our media execution. This strategy is driving the acceleration of sustainable customer acquisition and brand growth, and it’s working globally at scale. In addition, we also cultivated enthusiasm for the brand through unique and immersive retail experiences. Our Coach Play concept stores continue to outperform with higher Gen Z traffic, longer dwell times, and higher return frequency. We’re taking these learnings to bring the highest impact elements of this concept to our store fleet more broadly. Overall, our holistic brand building activities help to drive increases in new customer acquisition as we welcomed nearly 900,000 new customers to Coach in North America, of which nearly 70% were Gen Z and Millennials.

And at the same time, our retention rate with the Gen Z cohort also meaningfully increased, reinforcing that we’re building lasting relationships with our consumers in support of durable growth. In closing, Coach is strong in delivering differentiated results by fostering emotional connections and delivering exceptional value to consumers. Powered by Tapestry’s growth engine, we will continue to invest in brand building and innovation to drive long-term sustainable growth, bringing this iconic brand to new generations of consumers. Now, moving to Kate Spade. In the third quarter, revenue was pressured, declining 12% at constant currency, while profit met our expectations driven by continued gross margin expansion. As we’ve shared, our work to reset the brand is underway, and we’re making decisions today to drive sustainable growth long term.

We know this work will take time, particularly in the context of a more uncertain backdrop. However, the actions we need to take are clear, and we are executing with focus and urgency. Our strategies are informed by Tapestry’s growth model with a focus on building brand heat, relevant product innovation, and compelling experiences. As we build a healthier brand, we will be closely tracking leading indicators of progress along the way, informed by our learnings and success at Coach. These include first, increasing unaided brand awareness and search interest followed by an improvement in traffic and customer acquisition, which will ultimately compound to drive top line growth. Now turning to the strategic details. First, we’re committed to fueling brand heat and relevancy through cohesive storytelling and incremental investments in brand media.

In April, we launched our spring campaign which featured Ice Spice and Charli D’Amelio, 2 very influential and relevant Gen Z celebrities. This is a further step toward a more effective spike and sustained marketing strategy that will enable us to reestablish Kate Spade as a top of mind brand for our target audience. Next, we continue to prioritize strengthening and elevating our handbag offering, bringing more innovation, focus, and relevancy to our assortment. We are advancing our work to build blockbuster handbag families. During the quarter, we continued to amplify the Deco collection and retail and the Kayla and Kip in outlet, which over-indexed with new younger consumers at strong AUR and margins, and we see further opportunity for these families going forward.

And as we bring more innovation to the assortment, we’re also working to streamline our offering by reducing handbag styles by over 15% by fall and continue to clear de-selection barriers through improved styling, ensuring our big ideas cut through with consumers. Overall, we’re focused on creating distinctive product that is consumer informed, grounded in Kate Spade’s unique brand DNA, and modern and relevant today. Next, we’re working to maximize omnichannel cohesiveness with a compelling consistent brand message across all consumer touch points. As part of our efforts to improve the customer experience and fuel brand health, we are committed to reducing promotional activity and delivering continued gross margin expansion. As previously shared, reducing the level of promotional activity is a key building block to scale in a healthy way globally over the long term, as we build for the future and connect with consumers on our brand values beyond simply price.

In closing, we are advancing our efforts to reinvigorate Kate Spade. The brand has a legacy of creativity, joy, wit, and warmth, and we will build on this unique heritage while modernizing its expression, guided by a sharpened focus on our consumer. The steps to do this will take time, but we are confident in the potential and path forward. Importantly, the strength of our platform provides us with the experience, discipline, and brand building capabilities to execute these strategies while delivering enhanced results overall. Our focus is clear, and we are committed to unlocking the untapped growth and value creation opportunities for this iconic brand. Now, turning briefly to Stuart Weitzman. As previously announced, we entered into a definitive agreement to sell the brand to Caleres, and we continue to expect the transaction to close this summer, subject to customary closing conditions.

As diligent stewards of our portfolio and disciplined allocators of capital, this ensures that all our brands are positioned for long-term success and that we maintain a sharp focus on our largest value creation opportunities. At the same time, we are pleased that we found Stuart Weitzman a home in Caleres, an ideal owner to guide its next chapter of growth. In closing, Tapestry delivered another standout quarter with accelerated sales and earnings growth that positioned us to increase our outlook for the year. I want to thank our extraordinary teams for driving these strong and differentiated results. Moving forward, the external backdrop has become increasingly complex. That said, in the face of uncertainty, our purpose is unwavering to stretch what’s possible for our brands and business.

To do this, we will harness our proven competitive and structural advantages that have allowed us to adapt and win in any environment, namely our global scale and an attractive industry. The compelling value we offer to consumers and the strong fundamentals of our business. I’m confident in our future and the meaningful opportunity to deliver durable growth and shareholder value. I’ll now turn it over to Scott.

Scott Roe: Thanks Joanne and good morning everyone. Our third quarter results exceeded our outlook, building on our track record of consistent execution as we unlocked accelerated growth. We delivered record third quarter revenue and earnings per share while generating over $1 billion in adjusted free cash flow year to date. Now, moving to the details of the quarter, beginning with revenue trends on a constant currency basis. Sales increased 8% to the prior year and outperformed our expectations. These results reflect gains in North America and internationally. By region, North American sales increased 9% compared to the prior year led by strong double-digit growth at Coach. Both gross and operating margin rose versus last year as we supported long-term brand health.

In Europe, revenue grew 35% above last year, with growth across all channels driven by increased local consumer spend and strong new customer acquisition, notably with Gen Z. In Greater China, growth continued with revenue rising 5%. Our sequential acceleration was driven by both digital and stores with each channel delivering growth. Our differentiated results in China clearly demonstrate that our strategic initiatives and investments in the region are yielding returns with our brands and business positioned for long-term sustainable growth. And in other Asia, revenue rose 14%, led by growth in Australia, South Korea, and Thailand, while Japan’s sales declined 2%. Now, touching on revenue by channel for the quarter. Our direct to consumer business grew 9% compared to the prior year at constant currency, which included a mid-teens percentage increase in digital revenue and a mid-single digit increase in global brick and mortar sales.

And wholesale revenue grew in the quarter in keeping with our expectations and strategy to find targeted opportunities to expand our brand’s reach with consumers. Moving down the P&L, we delivered a gross margin of 76.1%, representing our highest quarterly gross margin in over 15 years. This was ahead of plan and 140 basis points above prior year driven by operational outperformance. Our strong gross margin performance is a core element of our value creation model, providing us with flexibility and fuel to drive long-term growth. Turning to SG&A, expenses rose 7% and were even with prior year on a rate basis. This included increased brand building investments and higher compensation costs offset by leverage on fixed costs. As compared to expectations, there was a benefit of approximately $20 million or $0.05 primarily related to marketing timing with the fourth quarter.

Taken together, operating margin increased 140 basis points in the quarter, driving profit expansion ahead of expectations and 16% over the prior year. And our record third quarter EPS of $1.03 grew 27% over prior year and exceeded our guidance. Now, turning to our shareholder return programs. As previously announced, in November, we executed a $2 billion accelerated share repurchase program, which remained underway during the fiscal third quarter. In addition to the ASR program, we had $800 million remaining under our previous share repurchase authorization. Together with our dividend, which is expected at $1.40 per share for the year, we’re positioned to return over $2 billion or more than 100% of adjusted free cash flow to shareholders in fiscal 2025, a testament to our strong organic business and robust cash flow generation.

And now before turning to the details of the balance sheet and cash flows, I’d like to reiterate our capital allocation priorities, which are unchanged. We have 2 foundational commitments. First, to invest in our brands and business to support long-term sustainable growth, and second, to return capital to shareholders via our dividend, with the goal over-time to increase the dividend at least in line with earnings to achieve our stated target payout ratio of 35% to 40%. Beyond these 2 foundational commitments, our robust cash flow generation provides us with balance sheet flexibility for value creation. This includes the opportunity for share repurchase activity, which is on display this year. And finally, utilizing our rigorous forward lens framework, we consistently evaluate opportunities for strategic portfolio management.

Importantly, and as previously communicated, before moving forward with any acquisitions, we will ensure Coach remains strong and Kate Spade has returned to sustainable top line growth. These clear capital allocation priorities are underpinned by our firm commitment to a solid investment grade rating and maintaining our long-term gross leverage target of below 2.5 times. Now, turning to the details of our balance sheet and cash flows. We ended the quarter with $1.1 billion in cash and investments, and total borrowings of $2.7 billion representing net debt of $1.6 billion. At quarter end, our gross debt to adjusted EBITDA was 1.6 times. In addition, after our quarter end, we repaid our April 2025 bonds at maturity, totaling $303 million. Adjusted free cash flow for the third quarter was an inflow of $135 million and CapEx and implementation costs related to cloud computing were $36 million.

Inventory levels at quarter end were 6% above prior year excluding $87 million of Stuart Weitzman inventory reflected in assets held for sale on our balance sheet. Our inventory continues to be current and well positioned globally and by brand in support of our growth ambition. Now moving to our guidance for fiscal 2025, which is provided on a non-GAAP basis. We are raising our fiscal 2025 revenue, earnings and cash flow outlook. We continue to view this outlook as prudent and achievable, and we remain clear-eyed about the realities of the external environment, balanced with the opportunities we see for our business. For the fiscal year, we now expect revenue of approximately $6.95 billion representing growth of 4% versus prior year on a reported basis, including an expected currency headwind of nearly 50 basis points.

Touching on sales details by region at constant currency. In North America, we now expect revenue to increase 3% to 4%. In addition, we still expect growth in Europe in the area of 30% where we are under-penetrated and have strong traction. In Greater China, we remain on track to achieve low single-digit growth over the prior year. And in other Asia, we continue to anticipate high single digit gains while in Japan we’re now forecasting a mid single-digit decline. In addition, our outlook assumes operating margin expansion of approximately 100 basis points versus prior year. We anticipate gross margin expansion to drive this increase due to improvements in both AUR and AUC. Both freight and FX are still expected to have a negligible impact on gross margin changes for the full year.

On SG&A, we expect expenses to increase above the pace of revenue growth driven by increased marketing expense. While we remain diligent with respect to overall expense control, we continue to make deliberate growth focused investments in our strategic priorities. Moving to below the line expectations for the year, net interest expense is now expected to be approximately $25 million. The tax rate is now expected to be approximately 17.5%, and our weighted average diluted share count for the year is forecasted to be approximately 223 million shares. So taken together, we’re raising our EPS guidance to be in the area of $5 representing high-teens growth compared to last year and ahead of our prior guide of $4.85 to $4.90. This guidance fully embeds all trade policies as of April 10th.

Incremental tariffs are expected to have an immaterial impact on fiscal 2025 results based on the timing of our fiscal year end. Moving on, we now anticipate adjusted free cash flow of approximately $1.3 billion and finally, we expect CapEx and cloud computing costs to be in the area of $160 million. We anticipate about half of the spend to be related to store openings, renovations, and relocations with the balance primarily related to ongoing digital and IT investments. Touching on the shaping of the fourth quarter. To start, given the dynamic nature of the rapidly shifting market, it’s important to note that our revenue trends quarter to date are in line with our Q3 results. However, while we’ve seen no slowdown in our business to date, we’re taking a more conservative approach to the quarter to go outlook.

For the quarter, we are estimating revenue to grow at a mid single-digit rate on both a reported and constant currency basis. Further, we’re forecasting operating margin to be in the area of prior year, which incorporates the expectation for continued gross margin gains offset by higher SG&A costs, including the previously mentioned marketing expense timing shift from the third quarter. So taken together, we’re modeling Q4 EPS to be over $0.95. Before closing, I want to provide some additional context on our business in light of tariffs and the shifting global trade landscape. First, as it relates to our supply chain, our products are primarily manufactured in Vietnam, Cambodia, and the Philippines. These countries taken together represent 70% of our production, including Vietnam, which accounts for one-third of our total production.

Conversely, we have very limited manufacturing exposure to China with less than 10% of our production in the region across all categories. This primarily includes manufacturing for jewelry and ready to wear with negligible exposure in our core leather goods category. As a point of reference, over the past 12 months, roughly $900 million of our cost of goods sold was related to product imported into the U.S. Touching on our tariff mitigation strategies, we’re taking thoughtful actions to protect the compelling value, quality, and innovation we offer to consumers. To share some color, we pulled forward inventory receipts ahead of the incremental tariffs going into effect in April. In addition, we’re leveraging our agile supply chain to optimize our global manufacturing footprint, minimizing our tariff exposure where possible.

We have scale and long-standing relationships with our service providers, and we’re actively working together to unlock efficiencies. And most importantly, I want to thank our supply chain organization. Their deep global trade expertise, operational excellence, and culture of continuous improvement allowed us to take swift action in the face of this uncertainty. Overall, while we are not immune to external factors, we’re in a position of strength with structural advantages. Our fundamentals are strong, and our business has momentum with compounding growth fueled by innovation, customer acquisition, and AUR gains. In closing, we delivered another record breaking quarter highlighted by accelerated top and bottom line growth, and we raised our outlook for fiscal 2025 and are on track to achieve EPS in the area of $5 while returning over $3 billion to shareholders over the last 3 years, consistent with the target we outlined in our September 2022, Investor Day.

Moving forward as we face an increasingly complex environment, we remain confident in our brands, our people, and our strategy with a differentiated and highly cash generative business model that has proven agile, resilient, and adaptive to change. We’ll continue to focus on the factors within our control, operating with a commitment to discipline and consistency to deliver long-term growth and shareholder value. I’d now like to open it up for your questions.

Operator: [Operator Instructions] Our first question is coming from Ike Boruchow of Wells Fargo. Your line is open.

Ike Boruchow: Hey, good morning everyone. Really, really strong quarter. Good to see it. I guess this very high level maybe for Joanne, what’s driving it? I mean, especially at the Coach brand, I just don’t think you guys have put up numbers like this in 20 years. What’s driving it? And how are you thinking about the business in the future in a more dynamic environment? Can the brand sustain this kind of heat? Just kind of curious your thoughts?

Joanne Crevoiserat: Well, good morning Ike, and thanks. We did deliver a standout quarter, and I think one that illustrates the power of our business model and the unique strengths and structural advantages that we have to navigate in really any environment. To your point, in the quarter, we delivered accelerated top and bottom line growth that exceeded our expectations, and we did this at increasing margins, and that enabled us to raise our outlook for the year. And there are really 4 key structural advantages that we think about as we think about navigating a dynamic environment and those are also the things that helped contribute to our success to date and I would say the first is that we’re building strong emotional connections with consumers and we play in a category in handbags that have proven to be durable over time because of the emotional connection that consumers have with our category.

I think second is our high margins and strong cash flow and our direct to consumer model. These fundamentals insulate us from some tariff exposure, but also allow us to read demand signals sooner and allows us to react sooner and that brings in our diversified and agile supply chain. You know, this supply chain was built over decades and it’s proven we’ve navigated disruptions in the past both on the supply side and on the demand side. And I think underpinning it all is the value that we’re delivering in the global market. We are delivering incredible, exceptional innovation I can say at compelling value, and customers are responding, which helped us deliver the results from the quarter, the beat and raise for the year. And I do think it’s notable that we’re on track to deliver $5 in earnings per share.

That’s consistent with the targets that we set at our Investor Day in 2022. Our teams have done an excellent job navigating through volatility and delivering on the commitment we made 3 years ago, and that gives us confidence that we’re in a position of strength, and it shows our ability to adapt and win in all environments.

Ike Boruchow: Great, congrats.

Joanne Crevoiserat: Thanks Ike.

Operator: Our next question is coming from Lorraine Hutchinson of Bank of America. Your line is open.

Lorraine Hutchinson: Thank you. Good morning. It was encouraging to hear that the 2025 outlook would have an immaterial impact from tariffs. If the environment stays where it is today, can you provide some guard rails around what 2026 impacts might look like?

Scott Roe: Yeah, Lorraine, I’ll take that. This is Scott. So first of all, I think you can appreciate our longstanding and consistent practice. We’ll give you guidance on next year at the end of our next fiscal, which will be our fourth quarter. But there are some things I can say that might help you a little bit. First of all, remember we’ve taken a number of actions already to mitigate impacts of tariffs. I mentioned that in my prepared remarks, but some of those are we brought some inventory in ahead of times before effective dates. We’re looking at optimizing across our diverse supply chain with a very agile team that’s informed by the insights of, I would say a crackerjack trade expertise that’s allowing us to optimize across that diverse supply chain.

And lastly, we’re working with our suppliers. We have scale and we have long-standing relationships, strategic relationships with very important suppliers, and we’re working collaboratively to find opportunities to mitigate the cost of any potential tariffs. But there are a few things we won’t do. We’ll never sacrifice innovation or quality as we think about trying to find those mitigating actions. And I also mentioned in the prepared remarks and in some of the documents that we gave you, just some ways to dimensionalize potential exposures to tariffs. So, about $900 million of cost of goods sold is related to imports into the U.S. market. So obviously, if you do simple math, a 10% incremental tariff across the board would be $90 million. Now that’s unmitigated, right?

That’s before any of those actions that I talked about. And we’ve made substantial inroads already at finding mitigations against those — any potential exposure that we might see. So, everything I’ve said here is related to the cost side. And if you think about gross margins, remember, independent of costs, we also have a long-standing history of AUR gains, right? So you think about mitigating the cost side, coupled with our brand building, consumer engagement and our ability to raise AURs over time, because we’re delivering a more compelling value, that gives us confidence in our ability to maintain margins. Maybe, Todd, little more on the AUR side of that equation.

Todd Kahn: Sure, Scott. Thank you. Again, one thing we don’t do, we’re not just looking at cost to deal with AURs, we have compelling reasons to increase AURs. And just for grounding everyone, in the last 5 years, we’ve been able to raise our global AURs at Coach in 18 of those quarters. That should give you a lot of confidence in what’s happening at Coach. And I will say with real conviction the brand heat today is at its best in the last 5 years. We have real momentum at Coach. And you see it in a number of ways. We talk about brand heat, which is really desirability. We talk about innovation. And I’ll give you 2 quick examples. In this last quarter, we had a really fantastic product in both retail and in outlet. And in outlet, we launched a collection called Powder Pink.

We had lines outside our door. This is not during a Black Friday or a holiday period. This is just for a collection that we launched, and it was millions of dollars of result in literally 10 days. Similarly, with our launch at retail of our Crystal Sync collection, just compelling product. And what gives me so much future confidence is we know these results and based on the data that we see, our innovation pipeline will continue to get better and better. So, I feel very good about not only the brand heat, the innovation, the quality, but absolute value that we’re offering our clients. Again, you’ve heard me talk about this before, but in a world where 20 years ago Coach would play and European luxury, traditional European luxury was 2x our price points.

Today, they’re 10x. That just gives me more and more confidence globally that our value proposition cuts through across the world. And you see that in markets like Europe and Asia, and of course, the 20% we delivered in North America.

Operator: Our next question is coming from Matthew Boss of JPMorgan. Your line is open.

Matthew Boss: Great, thanks and congrats on a really nice quarter. Maybe 2 parts. Joanne, if you could elaborate on the new customer acquisition that you cited. It seems like it’s really driving the inflection in North America and just some of the retention metrics that you’re seeing and initiatives around that. And then Todd, I wanted to circle back, maybe just forward-looking, how you see the merchandising assortment position today to take continued market share? And maybe if you could just assess the product and the relative value at Coach, maybe relative to luxury or just what you’re seeing. Is it trade in? Trade down? Maybe just elaborate on the market share acceleration that you’re seeing.

Joanne Crevoiserat: Sure, Matt. I’ll kick it off, and I’m glad you called out new customer acquisition. This is a metric and KPI that we’ve been focused on from the beginning of our transformation. And I used to say new customer acquisitions is like oxygen for brands. But we’ve been quite intentional about going after new customer acquisition and importantly acquiring a new and younger consumer to our brands for a couple of reasons. One, it was clear that by 2030, most of the consumption in our category was going to be Gen Z and Millennials. So, we knew we had to appeal to a younger generation of consumers with all of our brands. So, we began to become more intentional about it. And we really put the consumer at the center of everything we do, and we call out new customer acquisition every quarter intentionally.

And that’s what everybody in our company is really focused on, how do we engage more consumers and engage them with deeper emotional connections to our brands. So that we’re not just selling a bag at a price, we’re connecting these consumers to our brands on an emotional level. And that’s what proves to be durable over time. And the exciting thing about acquiring a young consumer is that the lifetime value opportunity is long. And we — so we see that. But we also see young consumers influencing all age groups. So, we haven’t forgotten about our entire customer mix. We love all of our customers. And when we talk about our growth, we’re seeing growth across age groups, across income demographics, but our focus on acquiring a new and younger consumer is breathing a lot of life into our brands, a lot of relevance into the way our brands show up in the world.

And again, because these young consumers are so connected, digitally connected across the world, honestly, they’re driving choice for all generations and influencing all generations. So, that’s helping us drive our brand heat. And you mentioned retention rates, we’re actually beginning now, and we called it out this quarter to see these young consumers coming back with higher frequency. So the year 1 retention rate of Gen Z at Coach is going up, it’s higher. And that is a great sign for us as we talk about this lifetime value and the durability of this business over time. It’s a great leading indicator of what’s to come for Coach. So, we have a lot of confidence in the future. And I’ll pass it to Todd talking about the positioning of Coach.

Todd Kahn: Thank you, Joanne. Just one thing on the customer. In addition to capturing these 900,000 new customers, 70%, as we noted, were Gen Z and Millennial. I believe we’re bringing new customers into the category. And I think that’s incredibly important. We are very focused on point of entry, because as Joanne mentioned, if you get them at point of entry, their lifetime value really increases. Now, in terms of people coming into the market that you mentioned — I’m sorry?

Joanne Crevoiserat: The products.

Todd Kahn: Yes, yes, the products, sorry, our merchandising position, it’s interesting. I think anybody who buys a Coach bag is buying up regardless of where they came from, because the absolute value is there. So, we’re clearly taking market share across the spectrum. When the category is growing at globally 1%, let’s say, and we put up — sorry, when the category is growing in North America at about 1% and down globally, when we put up these kind of numbers, we’re clearly taking market share. And I think it’s coming across the board. And I’ll give you one proof point that gives me a lot of confidence. We’ve talked about the list index, which talks about the hottest brands globally. In the holiday quarter, we moved from 15 to 5 on the list index.

In the last quarter, the first calendar quarter of this year, we moved to 4. I’m not going to do an editorial for who those other brands are, but we are really one of the only American, North American-based luxury brand. That tells you a lot about the consumer behavior, because the list index not only measures sales, it measures search, it measures intent to buy and relevance, and I feel very good. And one of the things we’ve done the last 5 years and you’ve seen us do is we’re focused on these big families, these big ideas, whether it’s [indiscernible], whether it’s Tabby, whether it’s the New York family. And what that allows us to do is to keep bringing innovation in a consistent way. So, the merchandising strategy becomes very clear and very compelling for our customers.

And again, I emphasized that in the first question we had, but the compelling value globally is really resonating. I said often I don’t like the idea of somebody having to say 3 or 4-month salary to buy a handbag, okay, that has never been Coach’s DNA. We want to make people feel confident. We want them to feel good about their purchase and buy something of true value that represents value. And I think that gives us a lot of confidence in the future.

Operator: We’ll take our next question from Michael Binetti of Evercore ISI. Your line is open.

Michael Binetti: Congrats on a great quarter. Just a couple from me. On the gross margin, nice to see the beat in the quarter. As I think about the contribution, Kate Spade coming in a little above the 100 basis points for the company that you guided to, Coach a little below. Is that how you planned it? Or were there any new dynamics that enhance the Coach brand to think about? And can you talk a little bit about the Coach brand gross margin outlook from here? What’s embedded in 4Q? I know Scott, you said it was operational improvements, but what’s embedded in 4Q and then just the puts and takes after fiscal 2025, excluding the tariffs? I know we still have a lot to learn there. And then I guess on AURs. I know Todd gave us some thoughts through the product lines.

It’s very obvious, and we’ve all learned the lesson I’m not questioning you guys on the AUR growth here. But can you — Scott, could you break down those drivers of the acceleration a little bit from the finance side? And I know you said there’s further opportunities for expansion, but just a few thoughts on how you start to lap these 2 mid-teens AUR quarters in a row now as we think about our models after the call today, since it’s taken such a nice step up in the last couple of quarters?

Scott Roe: Yes. Boy, there was a lot there Michael. I can always count on you when I hear your name [indiscernible] I know you’re coming my way. So first of all, I’m not sure exactly what you were saying on the gross margin. But listen, one of the reasons for our beat versus guidance is gross margin strength, and it’s all driven by operational. And a lot of that is AUR, but also AUC. Again, I would say AUC is underappreciated part of our story. So, we’ve been consistent in finding opportunities to find efficiency, never at the expense of quality or innovation, but we’re finding AUC opportunities. But a lot of the strength is in AUR, and it’s all the things that Todd just said. So, there’s no magic in there. There’s no big mix.

There’s no other extraneous things. It’s solid fundamentals here. Four yards and a cloud of dust. We’re continuing on AUR. And so where is it coming from? It’s coming from both merchandising. It’s less about like-for-like price, right? I mean there is some of that, of course, and we don’t think cost plus. I hope that came through and what Todd said, right? We’re looking at value and innovation. So, as we merchandise new products and new drops and new colors, and continue to refresh and update and innovate around our iconic products, we’re always finding opportunities to test whether that value and innovation is working with the consumer and make sure that we have the right price value relationship. And so far, because of the brand heat and all the things that are being delivered, particularly in the Coach brand, we’re seeing that there’s been zero resistance from a price standpoint and we’re generally using our data and analytics to find the right — to find that right balance and make sure we don’t get too greedy and also that we just have the right relationships.

So, that’s one of the reasons we have confidence, right? The combination of brand heat, understanding the consumer receptivity to that price value relationship and being very sensitive to that. And we think we’ve got that dialed in pretty good, and that gives us confidence in the future. So, I don’t know if I’m answering your question. As it relates to Kate, I think Kate is a really nice story of the machine, right, in the sense of supply chain, finance, working with the brand teams to even in what we would say has been a tough backdrop from a demand and top line standpoint. We’re focused on quality. This is something you’ve heard us say along for quite a while, not chasing the last dollar. Some of the actions we’re taking honestly do even have some top line impact.

But we’re continuing underneath that to manage inventory well and continue to grow our gross margin. So, we look at that as an indicator or a green shoot for the future, and that’s an important metric that we keep an eye on.

Todd Kahn: Sorry, I just want to jump in, just to clarify the Coach gross margin comment you made, because my team will never forgive me if I don’t. We achieved 79% gross margin this last quarter, probably the — I believe the highest gross margin in Coach’s history for the third quarter. So, we feel very good about this neighborhood that we’re in, and we’ll continue to be in this neighborhood.

Michael Binetti: Great job, okay. Thanks a lot guys for all the detail.

Todd Kahn: Thanks Michael.

Operator: Our next question is coming from Brooke Roach of Goldman Sachs. Your line is open.

Brooke Roach: Good morning and thank you for taking my question. How are unit volumes trending at the Coach brand, both in North America and internationally? Given the strong growth in AUR that you’ve seen, what do you think is the right medium to long-term balance between AUR and unit growth?

Todd Kahn: I guess I’ll take that. We’re bringing new clients to our business. And over time, you’ll continue to see us grow units. But this AUR that we’ve had, we’ve grown so materially since I’ll take a starting point of 2019. We’re behind 2019. But in 2019, our AUR was about 70% lower than it is today in North America. So, each of these interactions, as I always say, one client, one customer that we interact with. I am very pleased that we are selling less product on promotion. That’s just a general truism that creates sustainable brand growth. And because of that and because of these new customers, we’re going to see a — not only AUR continue to grow, but we will start seeing units to grow as well. But again, the brand positioning is one of strength. And the fact that we are not just pumping units into the market to create sales volume gives me sustainable long-term growth.

Brooke Roach: Great, thanks so much.

Todd Kahn: You’re welcome.

Operator: Our next question is coming from Rick Patel of Raymond James. Your line is open.

Rick Patel: Thank you and congrats on the strong execution. Can you unpack your performance and strategy across Coach full price and outlet just given the evolving macro? How do you maintain the momentum you have while remaining nimble given consumer preferences could be subject to change in the coming months?

Todd Kahn: Thanks for the question. It’s very interesting. We’ve been talking a lot about our performance across the fleet. And we’ve talked to you a little bit about our One Coach strategy where we’re putting more and more what was historically full-priced product in traditional outlets at full price, and it’s resonating with the consumer. As we’ve seen over and over again, we want to be consumer-centric, not channel centric. And what that means is when somebody comes into a Sawgrass Mall outside of Fort Lauderdale [indiscernible], that might be the only mall they go to. It might be their best mall in the area. It might be the mall that they’re visiting as a tourist. They come in knowing they want the Tabby bag. And so we’re giving them that opportunity at full price across the channel.

And we’re extending that One Coach concept into other categories like footwear. Footwear has been something that we’re very, very focused on, but not just chasing any trends in footwear. We’re very focused on sneaker business. And this last quarter, we launched our Soho sneaker at $145 across all channels at one price point. It’s resonating really strongly, particularly with that young consumer we’re going after. So, you’re going to see us blur the lines more and more across channels, because the value proposition is there. It’s there. It’s compelling. It’s recognized by the consumer. So, I think you’ll hear us talk continue to build on the momentum of this One Coach idea, and blurring the channels, again, putting that consumer at the heart of everything we do.

Rick Patel: Thanks very much.

Operator: Our next question is coming from Dana Telsey of Telsey Group.

Dana Telsey: Congratulations on the nice progress. With the uptick in acceleration in digital and store sales that you saw this quarter, — the marketing obviously is very effective, how do you think about marketing by channel and what you’re looking at? And as you look even towards next year a little bit, remodels of stores, opening new stores, what do you see as the balance of where you’re looking to show up given the competitive moat that you’re building around the Coach brand?

Joanne Crevoiserat: Well, maybe I’ll kick it off and then toss it to Todd to give you some details on Coach specifically. But I appreciate you noting that we grew in our direct channels, we think our direct business is in a competitive advantage, Dana. And we do — we are able, through our direct business, to meet consumers wherever they are. And that includes having the strong digital capabilities as well as really compelling in-store experiences. So, we grew in both channels this quarter, strong growth in digital and growth in stores and at increasing profitability across channels. So, we think that’s a competitive advantage for us and we care about the experiences that we deliver to consumers in each of those channels, making sure that those channels are fit for purpose in terms of what — how the customer interacts with our associates, their discovery, their brand discovery, the inspiration we provide.

So, we spend a lot of time on that. And you asked about our media investments. And I would say marketing overall, we talk a lot about the fact that we’ve increased our marketing and brand-building investments over time. I think I went back to pre-pandemic levels, we were at 3% to 4% of our sales at one time, and we’re approaching 10% of our sales now invested in marketing and brand building. And as we’ve built the capabilities, the brand-building capabilities and the experience and expertise to drive these investments into places that are driving high returns, we are very intentional about those media investments, and where we show up with what content and based on where the customer is in their journey. And that’s not something will ever be done with.

This is a process of continuing to improve our execution behind our media strategies and investments. What I can say, what is on display is the compounding effect of these strategies, and you can see that at Coach, as we continue to hone those capabilities, we’re seeing the compounding effect of the brand building and the brand heat we’re driving at Coach. In addition to all the other things that need to come together to deliver a great customer experience, including the creativity and product and the store experience and the digital experiences. And we’re investing in store experiences as well, and maybe I’ll pass it to Todd, and he can share a little bit about the — some of the excitement that’s happening there.

Todd Kahn: Thanks, Joanne. And one thing about the marketing, as Joanne noted, historically, Coach spends about 3%. Today, we’re — as Joanne said, we’re spending 10%. But I will say over the last couple of years, we’ve refined our thinking. We’ve gotten so much better at this. We are really spending across the funnel, and we’re elongating our stories to have deeper, richer stories, because to cut through. One of the things we talk a lot about is you have to create sustainability and constant messaging. So years ago, we would have new messaging every month. Today, we fundamentally do 2 campaigns annually and drive that — over and over again. So, we talk about spike and sustain, it’s something we’re doing very well. In terms of the physical locations, it’s very interesting.

Gen Z particularly — and maybe it’s because so many of their formative years were in COVID restrictions, they love being in stores. They love experiential retail. So, you’ve seen us roll out some new concepts like Coach Play. You’ve seen us lean into food and beverage with Coach coffee shops that we started in Asia, and now we’re bringing to the U.S. And you’re going to see us again continue to evolve our store design to speak in an authentic way, in an approachable way to this younger consumer, but also in a luxury way. We believe in this concept of Expressive Luxury. Expressive Luxury doesn’t lose sight of the luxury component of what we do, because our product — we have fashion shows, our creative director is always thinking about new ideas, new concepts.

We’re not following trends, we’re creating trends. So, we feel very good about where Coach is and what we’ll do in the future.

Operator: Our next question is from Mark Altschwager of Baird. Your line is open.

Mark Altschwager: Good morning, thank you for taking my question. First with Coach, I was hoping to get a little bit better sense of some of the regional drivers. Is it the same product that’s hitting at the same time across the globe here? And then China, obviously nice momentum currently. Just how are you navigating the risk of consumers potentially souring on U.S. brands?

Joanne Crevoiserat: Maybe I’ll pick up the last part of your question and start with China, and then I’ll toss it to Todd for the regional — the broader regions for Coach. But to your point, our business accelerated in Greater China in the third quarter, growing mid-single digits. We’re seeing that broad-based growth, right? Growth in digital and in stores, across city tiers, and we are driving Gen Z acquisition. And I will say that’s in a market, to your point, that has been in our category, pressured. Some of the numbers we see is that the market was down double digits in our category, but yet we’re growing. And we’re doing that because we’re acquiring a new and younger consumer, and we’re delivering incredible value and innovation to that consumer.

And it is a discerning consumer in China, and we’re seeing momentum building there. So, we continue to see China as an important region. We’re confident in the long-term opportunity, and we’re staying close — importantly, staying close to consumers so that we can read and deliver what they want, what they need. And we’re not seeing any signs, in our business or in our global consumer work, of pressure on anti-American sentiment. Again, we’re seeing strong engagement from consumers continued new customer acquisition and we’re delivering growth in China. And in China, we expect to deliver low single-digit growth for the year with continued acceleration in the fourth quarter. So, our business is on track in China. We have great teams on the ground building the business.

We were just there a few weeks ago talking to the teams in the region and we feel good about the opportunities ahead. And now, I’ll toss it to Todd to talk about maybe more color on China, but also what’s happening in the other regions.

Todd Kahn: Yes. Thank you, Joanne. One of, I think, the reasons we’re winning is we redid our strategy on regionalization. A great bag is a great bag everywhere. And Tabby and Empire and Teri, these are winning with our target consumer because of, first, the fact that we’re going after — and we have clarity, we have a news, our creative, our marketing people are always going after the customer. And the value has been well translated across all regions. One data point that gives us confidence, Gen Z are the most homogeneous generation ever to come about. Because what they’re seeing, when we put Bella Hadid and put a bag on her that looks compelling, it’s compelling in Shanghai, it’s compelling in Paris, it’s compelling in New York and it’s desirable.

And what that allows us to do is take our marketing dollars instead of constantly trying to regionalize stories and spread it so thinly, we’re able to concentrate. And it’s a little bit of a merchandising balance, to believe that every business unit needs a 30% tail of product. So one of the things we did 5 years ago, we started to cut the tail of that special product that gives us — that creates that beautiful Coachonomics flywheel of more gross margin, less markdown, more focused on liked product that allows us to lean in on what’s winning globally. So, we feel very good about this strategy, and it is working. And it allows us to capture new customers globally.

Operator: That concludes our Q&A. I will now turn it over to Joanne Crevoiserat for some concluding remarks.

Joanne Crevoiserat: Well, I want to close by first thanking our exceptional global teams for not only delivering a standout third quarter, but for the strong results they’ve consistently delivered over the last 5 years. As you heard, we accelerated top and bottom line growth in the third quarter and raised our outlook for the year, showcasing the strength and resiliency of our brand and our business. And while the environment is uncertain, we are well prepared and well positioned. We have momentum, strong margins and cash flow, a flexible direct-to-consumer model and agile supply chain and we offer compelling value at global scale. These advantages are underpinning our success today, and I’m confident they will continue to drive durable growth into the future. Thank you, everyone, who joined us today for your interest in our story. Thanks and have a great day.

Operator: This concludes Tapestry’s earnings conference call. We thank you for your participation.