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Edited Transcript of TPR earnings conference call or presentation 9-May-19 12:30pm GMT

Q3 2019 Tapestry Inc Earnings Call

NEW YORK May 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Tapestry Inc earnings conference call or presentation Thursday, May 9, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrea Shaw Resnick

Tapestry, Inc. - Interim CFO, Global Head of IR & Corporate Communications

* Christina Colone

Tapestry, Inc. - VP of IR

* Joshua G. Schulman

Tapestry, Inc. - CEO & Brand President of Coach

* Victor Luis

Tapestry, Inc. - CEO & Director

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Conference Call Participants

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* Erinn Elisabeth Murphy

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Irwin Bernard Boruchow

Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst

* Oliver Chen

Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

* Simeon Avram Siegel

Nomura Securities Co. Ltd., Research Division - Executive Director & Senior Analyst

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Presentation

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Operator [1]

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

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Christina Colone, Tapestry, Inc. - VP of IR [2]

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Good morning, and thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Tapestry's Chief Executive Officer; and Andrea Shaw Resnick, Tapestry's Interim CFO. Before we begin, we must point out that this conference call will involve certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes projections for our business in the current or future quarters or fiscal years. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to our annual report on Form 10-K, the press release we issued this morning and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance. Non-GAAP financial measures are included in our comments today and in our presentation slides. You may find the corresponding GAAP financial information as well as the related reconciliations on our website, www.tapestry.com/investors, and then viewing the earnings release and the presentation slides posted today.

Now let me outline the speakers and topics for this conference call. Victor will provide an overview summary of our third quarter 2019 results for Tapestry as well as our 3 brands. Andrea will continue with details on the financial and operational results of the quarter and our outlook for the balance of FY '19. Following that, we will hold a question-and-answer session where we will be joined by Todd Kahn, Tapestry's President and Chief Administrative Officer and Chief Legal Officer; as well as Josh Schulman, CEO and brand President of Coach. Following Q&A, we will conclude with some brief summary remarks. I'd now like to turn it over to Victor Luis, Tapestry's CEO.

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Victor Luis, Tapestry, Inc. - CEO & Director [3]

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Good morning. Thank you, Christina, and welcome, everyone. As noted in our press release this morning, we are pleased with our third quarter performance, highlighted by increases in sales and gross margin on a constant currency basis in each of our 3 brands. Further, we continue to make key investments across our portfolio and to realize meaningful synergies from the successful integration of Kate Spade as we harness the power of our multi-brand model.

Taken together, adjusted EPS was in line with our expectations for the quarter. Some additional highlights by brand include another quarter of positive comps at Coach, led by international and e-commerce. A significant sequential comp improvement at Kate Spade with Nicola Glass' new collection resonating with consumers globally. And at Stuart Weitzman, results were consistent with our expectations with top line growth driven by our Buy Now Wear Now strategy and Spring newness.

We're also excited to announce the approval of a $1 billion share repurchase authorization, demonstrating our confidence in driving long-term sustainable growth and value. Through this program, we will optimize our capital deployment and enhance shareholder return while maintaining our financial and strategic flexibility. Importantly, we remain committed to our long-standing capital allocation priorities, supported by our strong balance sheet and free cash flow. First, investing in our brands and business; second, pursuing strategic acquisitions on an opportunistic basis; and third, returning capital to shareholders through dividend and share repurchase.

Now as is our practice, I'd like to discuss our progress on our strategic pillars. First, continuing to harness the power of our multi-brand model, which is unlike other portfolio holding companies in our space, with each of our brands targeting a unique consumer attitude within the attractive and growing accessories, footwear and outerwear markets. We are driving significant synergies on a shared platform with each brand leveraging Tapestry's core capabilities and infrastructure. To that end, we remain on track to achieve run rate synergies from both COGS and SG&A of approximately $100 million to $115 million in fiscal 2019, up from $45 million in fiscal year '18. We've also continued to make progress on building a scalable shared services model, including investments in systems and infrastructure to support our current and future growth opportunities. Our ERP implementation is well advanced with Phases 1 and 2 successfully completed and Phase 3 targeted to launch this summer.

We're also brand-led and consumer-centric. Our goal is to nurture authentic, innovative brands, thereby creating meaningful relationships with our customers by offering relevant products and experiences. And we are building a values-led culture based on optimism, innovation and inclusivity. Having both a strong culture and talented teams are critical to our success. We believe that anyone from anywhere can have the best idea and with hard work and determination, anything is possible. Our belief in meritocracy creates credible career opportunities and rewards for those who share our values and who want to be a part of and help shape our growing company. Nowhere are our values more apparent than in our comprehensive 2025 corporate responsibility goals recently launched. These goals across our 3 pillars of our people, our planet and our communities, solidify our commitment to social responsibility as we recognize our role as a leader in our industry to affect real measurable change. Further, we are committed to reporting to our stakeholders annually on our progress in achieving these goals.

Second, fueling innovation. Innovation is at our core and it's foundational to our success. Across each of our brands, we are focused on delivering distinctive newness and compelling product across categories and channels supported by our flexible and dynamic supply chain. Some examples of how we are working in new innovative ways include: at the beginning of April, we held our first open-source vendor fair. Over 3 days, we hosted 250 attendees from over 100 vendors around the world at our Hudson Yards headquarters. They presented their best ideas across leather, hardware and textiles to our design and product development teams from all 3 brands. We challenged our vendors to bring new ideas, and they came enthusiastically. This is an example of a new way we can work, benefiting from our scale as a multi-brand company.

In addition, we have also launched a series of design-led thinking pilots within our creative process, enhancing the individual talent and limitless imagination of our creative teams. Several cross-functional groups of product designers and developers, merchants and marketeers are involved in pilots this season. Design-led thinking minimizes the uncertainty and risk of innovation by engaging customers or users through a series of prototypes to learn, test and refine concepts. Design-led thinkers rely on customer insights gained from real world experiments, not just historical data or market research, leading to the discovery of often unforeseen functional and emotional needs.

Third, driving global growth. With an emphasis on underpenetrated markets through both new store openings and distributor buybacks on a selective basis. This quarter, we anniversaried the consolidation of Kate Spade's Greater China joint ventures in January and the buyback of Stuart Weitzman's operations in Northern China in mid-February and Coach's business in Australia and New Zealand in March. Since taking operational control of these markets, we've invested in key talent and infrastructure to support further development across our portfolio. These initiatives are allowing us to accelerate international growth and drive brand awareness. We also continued to integrate the buybacks of the Kate Spade operations in Singapore, Malaysia and Australia as well as the Stuart Weitzman business in southern China, which closed earlier this fiscal year. And we're excited to announce that just this week, we completed the acquisition of Stuart Weitzman's business in Australia, further leveraging our multi-brand hub in Sydney.

We are also continuing to maximize the opportunity with Chinese consumers globally across each of our brands. At Coach, our global business with Chinese consumers again rose, driven by domestic consumption. In fact, following our Shanghai fashion show and our recent handbag brand-tracking survey fielded in China this quarter, we saw an improvement in Coach's unaided awareness from 32% to 41% and aided awareness from 69% to 72%, driven by growth amongst millennials. We're also continuing to build awareness for both the Kate Spade and Stuart Weitzman brands, amplifying our brand messages with tailored marketing, introducing local brand ambassadors for the first time this quarter. And in the same China handbag brand-tracking survey, Kate Spade's unaided awareness was 4% versus 2% previously, while the brand's aided awareness improved from 11% to 16%, also driven by growth among millennials. Importantly, we've expanded our reach through the opening of new stores, utilizing the key learnings we've had from Coach's successful growth in the region. In fact, during the quarter, we opened 4 net Kate Spade locations and 7 Stuart Weitzman stores in Greater China.

And fourth, advancing our digital and data analytics capabilities. Digital touches every part of our business. In a world where technology is changing everything, investing in an industry-leading digital strategy is critical to our success. In keeping with this, I am pleased to announce that Noam Paransky has joined Tapestry as Chief Digital Officer, leading our company-wide digital strategy. Noam is a thought leader who has built his career around the digital experience in retail. He also brings expertise building digital innovation within multi-brand organizations. Joining us most recently from Gap Inc, where he was SVP of Digital and led digital sales and engagement channels for all of Gap Inc.'s brands. Prior to that, he spent 6 years at AlixPartners as a retail, digital and marketing expert, working directly with a number of retail and fashion brands, navigating the digital space. At Tapestry, Noam will focus first and foremost on refining and building a scalable, global digital platform to drive growth and efficiency for our brands. He'll play a key role as our enterprise leader to deliver an innovative omnichannel experience for all of our customer digital touch points, including our websites, marketing, social and digital in-store experience. Noam will also lead our digital innovation agenda, bringing new technology and ideas to support our brands to uniquely express their brand promise in new and compelling ways.

Touching on Data Labs. This quarter, we officially launched Tapestry's Data Labs portal, a centralized web platform that offers secure and seamless access to applications built in-house. This provides our internal teams with a personalized suite of data science and AI tools, tailored to maximize the impact on both their short-term and long-term strategies. Our portal also enables us to scale our applications such as our real estate and product portfolio tools to an expanded user base.

In addition, we developed a suite of application programming interfaces, or APIs, that can be integrated with other systems utilized by cross-functional partners on the front lines of our business. In the near future, the output from our algorithms will feed into our POS, clienteling and CRM platforms to further enhance the overall customer experience.

Overall, we are confident in the clarity of our vision, the strength of our team and the benefits of our global multi-brand platform. As we look ahead, we are committed to executing our strategic plan and achieving our near-term and long-range financial targets, including delivering double-digit operating income and EPS growth in FY '20.

Now turning to category trends. During the third quarter, we estimate that the men's and women's premium handbag and accessories market, which is now over $45 billion, grew at a high single-digit rate globally on an organic basis, consistent with the December quarter. In U.S. dollars, the growth rate was mid- to high single digits, given the appreciation of the dollar.

Now looking at specific brand performance, and starting with Coach. Global comparable store sales rose 1% in the third quarter, led by outperformance in our international channels and across our e-commerce platforms, consistent with the previous quarter. The drivers of our global bricks and mortars' comparable store sales were conversion, reflecting our strong product offering as well as traffic.

By region, we delivered overall positive comps across all of our international regions, including Europe, Japan, Greater China and other Asia. Comps in North America declined slightly, including negative impact of the shift in timing of Easter, the continued pressure from lower tourist spend as well as the ongoing volatility in Daegu or reseller activity.

Moving to wholesale. Our North America shipments were below prior year, including the negative impact of timing with the fourth quarter, while our business at POS increased despite a lower level of promotional event days. Our international wholesale revenue rose versus the prior year in Q3, while POS sales were modestly below prior year on the same basis.

There were many highlights of the quarter in keeping with our brand priorities. In retail, we continued to cascade leather goods innovation with the successful launches of the Parker Top Handle as well as the Charlie Carryall 40. Dreamer also remained a top family with new novelty introductions. Our Signature offering remains strong, comping the comp, anniversarying its relaunch in retail last spring. We were thrilled with the performance of novelty with our runway patchwork and denim assortment resonating with consumers. Our Japanese exclusive sakura cherry blossom collection also outperformed. We also saw momentum in lifestyle categories, driven by women's ready-to-wear and footwear, notably sneakers, with continued strength in the C143 runner as well as sandals. Additionally, we continued our partnership with Disney, which was included in our spring runway show and featured Dumbo across a playful collection of bags, ready-to-wear and accessories.

In outlet, we debuted a fresh, dual-gender key pairing collaboration across categories, and in women's handbags, launched the Coach Avenue carryall, continuing to infuse newness throughout the assortment. We also remain focused on introducing pinnacle product with higher AURs. This quarter, within the Edit assortment, we're pleased with the performance of the new Zoe carryall as well as the continued momentum in Abby, where we launched the new mini-silhouette. And, as in retail, we drove growth in Signature, while denim resonated across platforms and categories.

Footwear also outperformed, and we were excited by the traction experienced in loafers and sneakers. And consistent with our strategy to drive growth outside of our core women's bags and small leather goods categories, men's continued to comp across channels, driven by lifestyle, notably apparel and footwear as well as small leather goods. The launch of a new Coach logo in retro sports style as shown in our ad campaign featuring Michael B. Jordan, also proved a great success and outperformed expectations.

On stores, our customization program, Coach Create, which includes footwear and outerwear in addition to leather goods, continued to drive sales in Q3.

I'd also like to touch on our pop-up store initiative, which is another exciting way we're connecting with consumers in creating innovative, immersive experiences. These pop-ups showcase the product in interactive settings, allowing customers to engage with the brand in new ways. Thus far in FY '19, we've launched over 100 pop-ups globally, including a New York City subway installation at Le Bon Marché in Paris, a made-to-order Rogue shop at Neiman Marcus in Hudson Yards in New York and the Coach Create pop-up on the stage at Isetan Shinjuku in Tokyo, Japan, as well as a men's modern active installation at Aventura Mall in Miami.

On marketing, we are driving fashion authority, both from the runway and increasingly through cultural relevance and co-creation. For the February fashion show, Coach's Creative Director, Stuart Vevers, collaborated with artist Kaffe Fassett, known for his maximalist prints, which added color to the brand's already robust visual vocabulary.

Also in February, we were especially excited to launch a collaboration between Academy Award winner, Spike Lee, and actor, producer and global face of Coach, Michael B. Jordan. Shot last fall, this short film entitled, Words Matter, brings together 2 modern dreamers, who are known for challenging and redefining the American film landscape. While we were inspired to create the storytelling moment with a simple goal: to harness the power of our brand to speak up for inclusion and optimism. This is a universal message and represents the best of Coach.

We also launched a series of first-person videos, #wordsmatter, to spark a social conversation and inspire the greater community to share their own stories and personal points of view or why words matter. The series features the artist, WhIsBe; Nets player, Spencer Dinwiddie; Spike's children, Jackson and Satchel Lee, amongst others. And in another first for Coach, we debuted our Dream It Real podcast series in late April. These are unfiltered conversations featuring celebrity guests, thought leaders and inspiring young people talking about their dreams for themselves and for the future. This is an exciting moment as we continue our commitment to empowering young people. Our first episode featured Selena Gomez as she spoke about authenticity and self-acceptance. In our second, Michael B. Jordan joined us to speak about courage. Future episodes will feature Stuart Vevers as well as actors Maisie Williams and Ben Platt.

Overall, we are satisfied with Coach's performance in the quarter in light of the volatile tourist trends and Easter shift, notably impacting North America.

Moving forward, we remain focused on: first, delivering a heightened level of newness through the pyramid of fashion, price and occasion across channels and geographies; continuing to build on our established and authentic Signature platform; driving growth beyond our core bags and accessories; utilizing technology and digital to enhance and modernize the customer experience, notably through customization; and lastly, amplifying our marketing message that balances unexpected brand impact and broad appeal.

In summary, we are excited about the seasons ahead and remain confident in our largest brand's opportunity for growth.

Moving to Kate Spade. We drove a significant 8-point sequential improvement in comparable store sales to negative 3%. In both our brick-and-mortars and e-commerce channels, conversion accelerated from the prior quarter. Total sales rose 4% on a reported basis or 5% in constant currency, driven by new store distribution as well as the acquisition of the brand's operations in Singapore, Malaysia and Australia, which we've not yet anniversaried. We also made significant progress in keeping with our 5 strategic pillars: drive global growth, especially across Asia; introduce emotional and distinctive product platforms; launch lifestyle-focused branding; create immersive channel experiences; and leverage of the Tapestry platform.

As you know, this quarter, we launched Nicola Glass' Spring collection in our full price channels, where penetration levels met our expectations, driving our excitement with the customer response. In handbags, the Margot family has become a leading platform and the new Molly tote is a best-selling style globally. In addition, we remain delighted with consumers' reaction to the brand's new code, the enamel spade, across categories, including the Nicola handbag group and the heritage spade jewelry collection.

In March, we launched Polly, a soft, pebbled leather group, and initial reads have been strong. And just last month, we introduced Andi, a canteen bag, which is a modern take on a classic shape and is becoming a top seller.

In ready-to-wear, fit-and-flare dresses, feminine tweed, wear-to-work silhouettes, statement sweaters and on-trend jumpsuits are key wins. As expected, our results continued to be negatively impacted by the performance of the legacy carryover product, notably in handbags. Though we have made substantial headway in moving through this inventory. We've also had important key learnings, which will inform our future development.

In handbags, we see additional runway in satchels, in casual soft and sophisticated iterations. We also see opportunity for product extensions within the top-performing groups such as Margot and Molly. We will evolve our small leather goods offering further distorting our investment to small wallets and cardholders while also updating functionality.

In ready-to-wear, we will focus on chasing what's working, building on the attributes that the Kate Spade apparel and outerwear customers have come to expect, with compelling day to night styles. And we will introduce additional playful and emotional novelty items, both as permanent and limited-edition offerings. These are hallmarks of the brand that play well to the drop model that is driving millennial fashion shopping.

Now turning to the launch of our brand evolution across consumer touch points. In support of Nicola's debut collection, we launched a 360 global marketing campaign, amplifying the new creative vision and the brand's unique positioning of optimistic femininity. The campaign featured actresses, Julia Garner, Sadie Sink and Kiki Layne and was shot by famed photographer and longtime brand collaborator, Tim Walker. In fact, since the launch of the new Creative direction at the end of January through March, the number of new Instagram followers accelerated, increasing nearly 20% over the same period last year. While we also introduced our first-ever campaign tailored specifically for the China market, starring actress, Soon Yi, driving engagement on Weibo and WeChat. In addition, we also focused on our stores and digital channels, ensuring consistency with a new product brand vision and creating immersive channel experiences.

In keeping with our strategy, we made light touch renovations in key full price locations ending the quarter with over 100, the showcase of our new color palette and enhanced visual merchandising elements. These front-room reps leverage the brands new iconography in our specialty stores to appropriately showcase the new product in a cost-effective yet brand-enhancing way.

In addition, we also launched the new product, brand codes and imagery, across our digital and social platforms.

Importantly, we remain confident in the growth opportunities for the brand, supported by the successful integration of Kate Spade onto the Tapestry platform, leveraging our core capabilities. Key accomplishments include migrating the Kate Spade brand to the Tapestry supply chain, realizing significant synergies and clear product quality improvements. Attracting and retaining key operational and creative talent across the organization, laying the foundation for accelerated international growth through the direct control of the brand's businesses in Asia, notably, Greater China; driving brand heat and reinforcing brand health through both the launch of a new creative direction and the strategic curtailment of third-party promotional channels.

We also integrated Kate Spade's customer data across North America, Europe and Japan into the Tapestry customer data platform.

Overall, our third quarter performance, along with our continued progress on our strategic initiatives, underscores our confidence in delivering positive comps in the fourth quarter. Looking beyond FY '19, as previously noted, we continue to believe that Kate Spade can approach $2 billion in sales over our 3-year planning horizon at significantly higher operating margins.

Turning to Stuart Weitzman. We delivered another quarter of sales growth with revenue increasing 2% on a reported basis and 4% in constant currency. This reflects the progress the SW team has made in executing our FY '19 strategic priorities. We're broadening our footwear offering while maintaining our authority in iconic Stuart Weitzman styles. During the quarter, we experienced growth in our Buy Now Wear Now offering of booties while new classifications of platforms and wedges drove growth in sandals. Pumps also performed well, driven by the Mary Ann and the Leigh. Sneakers remained exceptionally strong fueled by success in the SW 612.

We're also driving growth beyond footwear, gaining credibility in handbags and leather goods. Handbags rose significantly in the quarter, albeit from a small base, and outpaced our expectations. We continue to see significant opportunity to grow the brand's handbag offering, given the complementary nature of the footwear and bag categories.

We're creating brand desire through bold and modern marketing. Our spring campaign, featuring Kendall Jenner, Yang Mi, Willow Smith and Jean Campbell, with its global relevance, highlights the brand's core attributes and values of fusing fashion, function and fit.

Stuart Weitzman continues to be a red carpet brand of choice, once again dressing many celebrities at this year's Oscars. Importantly, we are expanding globally with a focus on the Chinese consumer. In fact, this quarter, our business in China once again outperformed, and we remain intent on driving relevance awareness and increasing market share. We opened 7 new locations in Mainland China in our new, modern and elegant store concept. As planned, we also launched the capsule collection in collaboration with Yang Mi across an assortment of sandals, pumps and sneakers. Thalassa, the pearl-embellished sneaker, was a notable bestseller. In addition, performance was particularly strong on our e-commerce channels globally.

And finally, as our production levels and shipments have normalized, our focus is rebuilding our order book with our global wholesale partners to capture the in-season replenishment orders. This focus will support our objective of driving strong sales growth and improved profitability in the fourth quarter. In summary, we've made significant progress in evolving the brand's creative direction through product and marketing. We remain excited about the opportunities for Stuart Weitzman across geographies, classifications and categories and are confident in our long-term vision.

To recap, we have a clear vision, a strong team and a unique global multi-brand platform. Our model is distinctive. We're brand-led and consumer-centric with a culture built upon values of optimism, innovation and inclusivity. Each of our brands have differentiated attitudes, bringing diversification to our portfolio. At the same time, each can leverage Tapestry's core capabilities and infrastructure to drive meaningful synergies. Taken together, we are uniquely positioned to capture the vast opportunities within the attractive and growing global accessories, footwear and outerwear markets. With that, I will turn it to Andrea for the financial review of the quarter and our outlook. Andrea?

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Andrea Shaw Resnick, Tapestry, Inc. - Interim CFO, Global Head of IR & Corporate Communications [4]

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Thanks, Victor, and good morning, everyone. Victor has just taken you through our quarterly results and strategies. Let me now take you through some of the important financial details of the quarter as well as our outlook for the balance of fiscal year '19. Before I begin, please keep in mind that the comments I'm about to make are based on non-GAAP results. Corresponding GAAP results as well as the related reconciliation can be found in the earnings release posted on our website today.

Now turning to the financial results for Tapestry. Total sales for the quarter rose 1% on a reported basis to $1.33 billion while constant currency sales increased 2%, driven by growth across brands. Gross margin for the quarter rose 30 basis points to 69.2%. The expansion in our margin was driven by Kate Spade, which increased 90 basis points fueled by the realization of COG synergies as well as a 30 basis point increase in gross margin at Coach, which included 20 basis points of currency benefit. At Stuart Weitzman, gross margin declined 150 basis points, which included 210 basis points of pressure from currency. Therefore, on a constant currency basis, Stuart Weitzman's gross margin increased 70 basis points.

SG&A expenses totaled $780 million and represented 58.6% of sales as compared to $727 million and 55.0%, respectively, in the prior year. The increase in SG&A expenses was primarily driven as projected by new store distribution and a higher level of marketing expense at Kate Spade as well as costs associated with regional buybacks and a higher level of depreciation due to our systems implementation. Our operating income totaled $141 million in the quarter as compared to $184 million in the prior year while operating margin was 10.6% as compared to 13.9%, reflecting the higher level investment versus the prior year. Net interest expense was $11 million for the quarter as compared to $17 million in the prior year. Our effective tax rate was 6.8% as compared to 5.6% in the prior year's Q3. The tax rate was slightly below our expectations due to favorability associated with certain statute expirations and the geographic mix of earnings.

Taken together, our EPS was $0.42 in the quarter. Now moving to global distribution by brand. Across Tapestry, we opened a net of 17 stores internationally while closing 11 net locations in North America to end the quarter with 1,502 directly operated stores globally. By brand, we closed 3 net Coach locations, 1 net Kate Spade store and opened 10 net Stuart Weitzman locations. During the quarter, we were particularly excited to open new Coach, Kate Spade and Stuart Weitzman stores adjacent to our Tapestry corporate headquarters at Hudson Yards here in New York City. These locations, which are outperforming our expectations, manifest our latest store concepts and feature new elements across each of our brands.

Turning now to our balance sheet and cash flows. At the end of the third quarter, our cash and short-term investments were approximately $1.3 billion while our borrowings outstanding were $1.6 billion, consisting primarily of senior notes. Inventory levels at quarter-end were $811 million as compared to ending inventory of $714 million in the year ago period. The increase was primarily driven by a higher level of in-transits related to port congestion in Asia. Specifically, if companies have migrated production outside of China, infrastructure investments in key Asian ports, including the Philippines, Vietnam and Cambodia have simply not kept pace. And while this has not resulted in higher freight cost, it has resulted in longer lead times with more inventory on the water at any given time, which we would expect to normalize when we anniversary this in the second half of fiscal 2020.

Net cash from operating activities was an inflow of $3 million as compared to an inflow of $156 million a year ago. Our CapEx spending was $68 million versus $60 million a year ago. Free cash flow was an outflow of $65 million versus an inflow of $95 million in the same period last year.

For the first 9 months of FY '19, net cash from operating activities was $602 million as compared to $586 million last year while CapEx spending was $184 million versus $187 million last year. Therefore, on a year-to-date basis, free cash flow was an inflow of $418 million as compared to $400 million last year.

Now turning to our capital allocation policy. As Victor mentioned, our long-term priorities remain unchanged, supported by our strong balance sheet and cash flow. First, we will continue to invest in our brands in order to drive sustainable growth and value creation. Secondly, we will seek strategic acquisitions looking for great brands with opportunities for expansion. And finally, returning capital to shareholders. We are committed to our dividend and are pleased today to announce a $1 billion share repurchase authorization, underscoring our confidence in our long-term vision and focus on driving shareholder value.

In terms of guardrails, our primary objective is to offset future dilution related to share issuances under our employee compensation plan. We may, on an opportunistic basis, repurchase additional shares when market conditions are conducive. This plan will allow us to maintain strategic flexibility while supporting earnings per share growth and enhancing shareholder returns.

Now moving to our 2019 outlook. Consistent with our prior practice, the following guidance is presented on a non-GAAP basis and replaces all previous guidance.

Starting with sales, we expect total revenues for Tapestry in fiscal 2019 to increase at a low to mid-single digit rate from fiscal '18. This includes the expectation for positive low single-digit comp growth at Coach in the fourth quarter.

In addition, in Q4, we expect to achieve positive comps at Kate Spade as well as total sales growth at Stuart Weitzman.

In addition, we continue to project an increase in Tapestry's gross margin for the year, which does include a contraction in Q4. We continue to expect SG&A deleverage in FY '19 given the impact of regional distributor buyback activity and systems investments. Net interest expense is expected to be in the area of $50 million for the year. The full year fiscal 2019 tax rate is projected at about 18%. We expect our weighted average diluted shares outstanding for the year to be approximately 292 million, reflecting our year-to-date favorability. And overall, we're projecting earnings per diluted share for the year in the range of $2.55 to $2.60. We expect CapEx to be $320 million to $325 million in FY '19, which we would anticipate to be the peak level of spend over our planning horizon. In addition, in FY '19, we expect to incur nonrecurring pretax charges of approximately $35 million attributable to the company's ERP implementation efforts. We also expect to incur pretax integration and acquisition charges of approximately $80 million to $90 million.

Finally, turning to our FY '19 directly operated distribution plans by brand. For Coach, we continue to expect a modest net decrease in our store count in FY '19, due primarily to net closures in North America and Japan. For Kate Spade, we remain on track to grow the brand's directly operated store base by 60 to 70 net new locations in FY '19. Specifically, we continue to project 40 to 50 net new door openings, notably in international markets where we see significant opportunities for growth. We've also added 21 locations through the acquisition of the brand's operations in Singapore, Malaysia and Australia. And for Stuart Weitzman, we expect to add approximately 50 directly operated locations globally this fiscal year. This is based on approximately 30 net new openings, primarily in China. In addition, we've added 18 locations through regional buybacks, including 6 stores in southern China and 12 locations in Australia.

In closing, we are committed to executing our strategic plan in achieving our near-term and long-range financial targets, including delivering double-digit operating income and EPS growth in FY '20. We remain confident in the power of our brands, our multi-brand operating platform and the significant opportunities within the premium accessories, footwear and outerwear markets. At the same time, our strong balance sheet and cash flow provide us with important financial and strategic flexibility while enabling us to return capital to our shareholders through our dividend and recently announced share repurchase authorization. I'd now like to open it up to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Bob Drbul of Guggenheim.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [2]

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Victor, there was a lot of negative sentiment coming into the quarter given the issues that you've had with Stuart Weitzman and then followed by the issues with Kate Spade. Does the announcement of the share repurchase program suggest you're hitting the pause button here or rethinking this multi-brand strategy?

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Victor Luis, Tapestry, Inc. - CEO & Director [3]

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Got it. So quite a few parts to that question, Bob. Obviously in terms first and foremost, the strategy itself, the execution of the strategy and then now the buyback. First, on the strategy. All of the strategic rationale for our multi-brand strategy remains true as far as we're concerned. Whether that be the risk of being a single brand, single category business, which has the risk of overextending as has been the history for us and even some competitors here in the U.S. And of course, the leverage that we can bring across the platform with different categories, markets and brands. So I would say that absolutely not, we are not putting the pause button and are committed to our strategy of acquiring great brands that have solid growth potential.

In terms of the execution of the strategy, and I think you touched both on SW, Stuart Weitzman, and Kate. First, I'll start with Kate, the most recent acquisition. I think it's important for all of us to remember that, that is an acquisition that has been accretive from day 1. And I could not be prouder of the work that our teams have done in integrating that business onto the Tapestry platform. We've migrated supply chain, not only realizing significant cost synergies, we have very visibly improved product quality. We have the key talent in place, both from a management and a creative perspective. We have laid the foundation for solid international growth by buying back all of our businesses in Asia and are already making great progress there.

We reinforced brand health with the launch of a fresh creative direction that we are already seeing consumers react to. And lastly, as we announced last quarter, we integrated KS onto what is in essence a real world class SAP S/4HANA platform, first in the world in fact, and are already seeing the benefits of synergies from that. I think that any confusion between the carryover product having underperformed in the December quarter with the issues that we saw, which were much more purely executional issues that we talked about as it relates to SW, is really misplaced. And we've been very clear on that. SW was really a one-off transition. We had a founder who had been there for 30 or 40 years. And there was obviously a lot of opportunity on our side. From a supply chain perspective, we put now the team in place, have worked really hard. And I think go forward, we will begin to see the results of that in a much more sustainable long-term manner.

Look, saying all of that, the share repurchase clearly signals our confidence in our business, in our brands and their long-term value. And we have, obviously, a very strong balance sheet and the cash flow. And we clearly believe that we can optimize our capital to enhance shareholder returns while maintaining our strategic and financial flexibility. So we're excited about what the future holds.

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Operator [4]

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(Operator Instructions) Our next question comes from the line of Ike Boruchow from Wells Fargo.

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Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [5]

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Congratulations. Very, very nice quarter. I guess, Victor, when you were talking about the Coach business in North America, you referenced a few headwinds you're dealing with, and one of those points was the reseller market in North America. I'd love to get your perspective on the luxury resale market, what it means to you in your category, accessible luxury, et cetera. And just how you kind of think about that as a growing space that you now have to kind of contend with in North America?

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Victor Luis, Tapestry, Inc. - CEO & Director [6]

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Sure, sure. We know, Ike, that you've recently put out an interesting note on the topic, which of course, we've studied and we've been studying that whole phenomenon quite closely. In my notes, what we referenced in terms of reseller was really much more those who are reselling as parallel products to China, the Daegu. I think that's resale in what you are referencing in your note with much more of the U.S. platforms. I'll touch on in a moment. But let me allow first, Josh, to talk specifically to the Chinese Daegu resellers. And then I will touch much more on the U.S. based platforms, European based platforms that you've been talking a bit about. Josh?

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Joshua G. Schulman, Tapestry, Inc. - CEO & Brand President of Coach [7]

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So as we mentioned last quarter, we have been seeing this volatility in what we call the Daegu business, which are the Chinese resellers who have been purchasing from us to resell on the digital platforms in China. So from what we can tell, the reseller activity continues to be volatile and it remained a headwind in Q3. We've been analyzing the e-commerce platforms in China as well as news articles about what is happening with this market. And it appears that some of the smaller resellers may have exited or closed-up shop. What they are reacting to, we believe, is the changing regulations and the evolution of the digital platforms globally. For us, for the long term, the curtailment of this activity we see as a positive because keep in mind that our biggest focus and our primary goal is building Coach in the domestic markets with the domestic customer in China and with the domestic customer in North America. And we couldn't be more thrilled with the traction we're having in China, both in terms of the comp performance but also in terms of the brand tracking that Victor referenced in his earlier remarks.

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Victor Luis, Tapestry, Inc. - CEO & Director [8]

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Yes. And so more generally, on the resale market more broadly. We see it as an opportunity based on a lot of the research that we've had the teams digging into this quite some time now. A market that is about $24 billion globally. But the vast majority of that is still in watches and jewelry. Our own estimates are that about 5%, $1.5 billion more or less, is in handbags and accessories. We also see it as -- and this is more resale of used product now. I'm not talking about the parallel opportunity which is resale from lower-priced markets into Asia. But we see it as much more concentrated in Europe and the U.S. And we see it less of an opportunity in Asia where consumers are much more focused on new product and much more focused on taking advantage of the international price premiums to access new product at a discount.

In Europe and the U.S., we still see brick-and-mortar playing a very important role. In fact, our own studies show still 70% to 75% of this used product is going via brick-and-mortar stores with opportunity, of course, for more of it to go online. But this is not a new phenomenon. Look, before the current platforms, whether it was eBay and other marketplaces, this has been certainly a trend.

We've dug deep into the handbag and accessories space. And what we can share with you is that we see an average AUR that is really focused on traditional luxury brands, an average AUR that is about $1,000. And it's really more than anything focused on what we see as seasonal luxury fashion bags as a result. That would not be necessarily the main target for what we consider our core accessible luxury handbag customer who's really looking for a $300 to $400 handbag. And so if anything, we see it potentially taking some share from the new sales in Europe and the U.S. to the traditional luxury customers. That customer who's looking for the newest it bag that could be $2,000 to $3,000 is accessing it via some of these sites now at $1,000, $1,200, $1,300. Saying that, look, we're constantly following all of these formats. There are resellers, there is upcycling, recycling. There's rental formats. There's drops, limited editions, resale and consignment models. And for me, for the team, for all of us across our brands, the main insights that we're really leveraging here is the opportunity for us to continue to up our game in terms of increased collaborations. We're working on limited editions and drops. You heard in our speakers' notes and Josh and the teams as well as Kate and Stuart Weitzman now working increase only on pop-up stores and an increasing number of dotcom exclusives. All of this aligning with the experiences that millennials and Gen Zs drive. On the rental side, we have across a couple of our brands, especially, partnered very, very nicely with Rent the Runway, still a small opportunity. But we see that as a good way for us to continue to learn.

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Operator [9]

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Your next question comes from the line of Erinn Murphy of Piper Jaffray.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [10]

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My question is around Kate Spade and the operating income pathway. So you're reiterating the $100 million to $115 million of synergies today, which is $55 million to $70 million incremental this year. But when I just look at the Kate operating income this year, it's only up slightly on a dollar basis. So I'm curious with the pressures you're seeing in Kate this year, how much do you expect to recover next year? And then on the Kate Spade comp being positive in the fourth quarter, what are you currently seeing that's giving you that confidence?

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Andrea Shaw Resnick, Tapestry, Inc. - Interim CFO, Global Head of IR & Corporate Communications [11]

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Sure. I'll start, Erinn, on the question around operating income. And obviously, we have seen the COGS flow through and the significant growth we've had to date, including last year's fourth quarter as well as the first 3 quarters of this year. Where we have seen pressure, if you will, it's been of our choosing in that we're seeing significantly higher SG&A expenses associated with our buybacks, associated with our significant ramp in new store openings, et cetera. So we do expect that operating margin for Kate will grow as we move forward and we lap these investments. But this year, we've really seen that in the increase in SG&A investments. I think I'll turn it over to Victor on the positive comp question. Victor?

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Victor Luis, Tapestry, Inc. - CEO & Director [12]

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Erinn, of course, you know we don't discuss intra quarter comps. But what I would share is we are definitely tracking to our plan to drive positive comps. Some of what you've heard us talk about, of course, in terms of the increased penetration of Nicola's product is a key part of that. By the end of the third quarter, approximately 3/4 of the product in full price was newness. By the end of the fourth quarter, all of it in essence will be new product in the full price channel. And then in the outlet channel, we will be about 1/3 newness. And we're really excited by the consumer reaction.

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Operator [13]

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Your next question comes from the line of Oliver Chen of Cowen and Company.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [14]

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As we look at the Coach brand, what are your thoughts on long-term growth opportunity? And how that will pace relative to the handbag market, thoughts on pricing and categories? And what you prioritize for innovation there? A quick follow-up. The open-source vendor forum as well as design-led thinking, that sounded new to me as well as very interesting for driving some competitive advantages. I mean how would you articulate that moving forward in terms of what makes it different versus how you innovated in the past and how that may drive our models on a long-term basis?

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Victor Luis, Tapestry, Inc. - CEO & Director [15]

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Sure. Let me let Josh talk a little bit about Coach and what we're thinking long term or perhaps let me just start. I'll start and Josh will then jump in on Coach. But on open source and design-led thinking, which we are really leveraging across the Tapestry platform. As you know, we've been talking about innovation for quite some time. I think it's not just us. It's obviously invention and newness and the pace that is today required is vital for all businesses in an increasingly transparent world. We're looking for ways in which we can obviously engage differently with outside partners to increase and drive the level of that innovation. And one of the ideas that we started working on a year ago that we just executed, that really brought tremendous excitement to 10 Hudson Yards was actually reaching out to all of our current vendor base globally as well as new vendors and asking them to come for 3 days to our headquarters, present to all of our design teams, present to all of our merchants as well as product development and even marketeers in pods. So we had the small leather goods team for Coach combined with the PD people, combined with their marketeer part -- with their marketing partners and merchant partners across each of the categories across all 3 brands, go around for 3 days and meet with all of these vendors who came. And we asked them to bring us newness. We asked them to bring us new ideas and materials, executions, printing, hardware, leathers that we would then, as a company, take some bets behind. And it was exciting. I mean the teams come up with incredible opportunity now over the next quarters we will be able to see some of that actually executed into product and bets that we will be taking. With the opportunity for some of that to obviously, depending on the size of bets that we take, to partner with these vendors in this newness and actually drive some exclusive. So this will be an annual event. I'm actually now -- we were so happy with the results, Oliver, that we're thinking about allowing some of these vendor partners to leverage their visits to even in our building, perhaps partner with non-competitors to come in and drive a little bit of synergy for the fashion community here in New York.

As it relates to design-led thinking. Look, nothing more important than the absolute creative genius and imagination of our designers. We believe in that fully. But there are ways to drive innovation across the organization and new ways of working and design-led thinking as a process is one of these ways. It is based upon very deep consumer insights. It forces the designers, again, working with their merchants, PD and marketing partners to get out, talk to consumers with deep interviews, to gain those insights, test their ideas, come back and iterate in a very short period of time to, again, drive newness not only in function but also in emotional attributes that normally we would not have. And so we're excited about that. It resulted out of a experience with the Stanford design school. It is now a program that we're doing 2 pilots in, in the Coach brand that we will then leverage those individuals as catalysts to drive that process across the entire organization. So those are just 2 examples. We are working on a few others. We're going to test and learn. And as we see traction, we see it as driving, of course, newness and innovation across the organization, which is absolutely vital to our success. So on Coach, I'm going to let Josh jump in. Long-term growth for Coach, Josh?

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Joshua G. Schulman, Tapestry, Inc. - CEO & Brand President of Coach [16]

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Yes. As we think about long-term growth for Coach, from a product lens, it really comes from innovation as Victor was mentioning. And the way we think about that by category is within handbags, it's developing a new powerful core lines like we have now with Charlie, with Parker, with Dreamer that have a certain consistency about them but then can get updated in new platforms season after season. And increasingly, it's also about getting that balance between consistency and disruption. And so in this quarter, we talked about our collaboration with Disney and Dumbo and things like that, that surprise and delight the customer. Certainly, a lot of these pop-ups that we've been doing are important to drive disruptive messages around the brand as well.

Then from an emerging category perspective, we have 3 focus areas, which is footwear, where we're really starting to see a nice traction in that business, both within our own stores and within wholesale that's growing, driven by sneakers for both genders and booties for women and fashion sandals as well this season. Our men's business is also a focus. In men's, we have a clear path to $1 billion and that is getting an inflection from our association with Michael B. Jordan. And as we think about the way men are dressing today, in a more modern active sensibility, the importance of Signature and Logo in that business has been really powerful. And while still small and intended to remain a small percentage for us, our ready-to-wear business is growing as well, driven by outerwear. In terms of distribution growth, we see no net distribution growth. But geographically, a big focus on China, of course, and Europe, where we're starting to see some nice traction. In addition, of course, to everything we're doing digitally. So I hope that gives you some perspectives on the categories and the geographies that we're thinking about.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [17]

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Yes. That's really helpful. The last one on sustainability that was really a nice point of difference, Victor, how you've moved in that direction. Maybe just if you could just share with us the consumer insights around sustainability and why this matters to you and how it may play in to separating you from competitors.

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Victor Luis, Tapestry, Inc. - CEO & Director [18]

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Sure. Look, at the end of the day, Oliver, in simple -- to put it simply, it's just good business. Our teams care about it, our consumers care about it. And I think that as fiduciaries and good corporate citizens and good citizens within the communities that we live and work in, we think it's just the right thing to do, whether it be on how we treat our teams, how we treat and support the communities that we work in, and as well, of course, from the environment. We work with our vendor partners very closely. And I think that's putting out very, very clear targets for 2025 and coming out every single year and holding ourselves accountable to those targets by communicating them very clearly to all of you, to our teams and to the consumers who hold us accountable we felt was the absolute right thing to do, and we're really proud of the moves we are making there.

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Operator [19]

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Your final question will come from the line of Simeon Siegel of Nomura Instinet.

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Simeon Avram Siegel, Nomura Securities Co. Ltd., Research Division - Executive Director & Senior Analyst [20]

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Nice progress in the quarter. Victor, did you or can you speak to trends that you're seeing at full price versus outlets? And then just Andrea, maybe within just given the moving pieces and the Kate noncomp component, I guess, to buy-in, wholesale dispositions, what do we need to keep in mind into Q4 and next year for the sales to comp spread?

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Victor Luis, Tapestry, Inc. - CEO & Director [21]

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Yes. I think full price to outlet, as you know, of course, we deliver and only provide global comps. But in general, I would say that from a global perspective, Simeon, the reality is all of our businesses internationally have been very robust. I could not be prouder of the traction that we're seeing across Asia on all of our brands. And now from a much smaller base, of course, as you're all aware, in Europe. Really good and I would say across all channels really. Asia, of course, has now wholesale, but full price and outlet performing really well. And I would say that in Europe, the same is true with wholesale becoming an increasingly important part of our business across all 3 of our brands. In the U.S., I would say that our full price business is robust. I encourage you guys, especially for those of you who haven't, please come to Hudson Yards, and you'll see the most recent execution of the store formats for Coach, Kate Spade and Stuart Weitzman that we are tweaking and rolling out globally. Those stores are all doing incredibly, incredibly well. Really pleased with the performance of this new location for us, really significantly above our expectations for all 3, actually. And what I would say is that the opportunity in the outlet channel for increasing AUR is that we've been talking about that Josh has been talking about and the teams have been talking about, remains the real opportunity. And we are very, very focused on innovating there, on obviously, engaging with the consumer there and separating ourselves from the competition.

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Andrea Shaw Resnick, Tapestry, Inc. - Interim CFO, Global Head of IR & Corporate Communications [22]

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And I think, Simeon, as you look into the fourth quarter and you look beyond the fourth quarter, you're going to see both the Kate Spade organic comp growth augmented by significant noncomp growth. We will still be accelerating store openings next year. And in this last quarter, just as an aside, we already saw the China business outperform and contribute to our overall comps in terms of the fact that we brought them in Jan 1 of last year. So they did participate in the global comp number that we shared. So they were a driver of the improvement.

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Victor Luis, Tapestry, Inc. - CEO & Director [23]

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Yes. I would just add, Simeon, on that. You got 242 Coach doors in Greater China, we're at 54 for Kate, 39 for SW. We're only scratching the surface here. So a lot of opportunity. We're very excited about that.

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Christina Colone, Tapestry, Inc. - VP of IR [24]

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Thank you. That concludes our Q&A. I'll now turn it back over to Victor for some closing remarks.

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Victor Luis, Tapestry, Inc. - CEO & Director [25]

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Thanks to all of you as usual for joining us. And as is our custom, I just want to, again, thank our 21,000 strong team across the globe for all of their hard work and dedication and want to recognize my excitement for the great work being done, not only across our brands but as well across our very nascent and increasingly strong Tapestry platform. We have 3 amazing brands, each of them has a unique narrative and an exciting creative direction that we're committed to investing behind across our multichannel and our global platforms. And I am continually inspired by the resilience and the desire of our teams to drive great experience for our customers globally. Thank you.

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Operator [26]

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This does conclude the Tapestry earnings conference. We thank you for your participation, and you may now disconnect.