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Edited Transcript of TPR earnings conference call or presentation 15-Aug-19 12:30pm GMT

Q4 2019 Tapestry Inc Earnings Call

NEW YORK Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Tapestry Inc earnings conference call or presentation Thursday, August 15, 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. - Global Head of IR & Corporate Communications

* Christina Colone

Tapestry, Inc. - VP of IR

* Joanne C. Crevoiserat

Tapestry, Inc. - CFO

* 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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* Alexandra E. Walvis

Goldman Sachs Group Inc., Research Division - Research Analyst

* Erinn Elisabeth Murphy

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

* Irwin Bernard Boruchow

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

* Jamie Susan Merriman

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Mark R. Altschwager

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Oliver Chen

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

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

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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 and annual results are Victor Luis, Tapestry's Chief Executive Officer; and Andrea Shaw Resnick, Tapestry's Global Head of Investor Relations and Corporate Communication. 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, including 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 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 of our fourth quarter and full year 2019 results for Tapestry as well as our 3 brands. Andrea will continue with details on the financial and operational results and our outlook for FY '20. 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; Josh Schulman, CEO and brand President of Coach; and Joanne Crevoiserat, Tapestry's recently appointed CFO. 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, 2019 was a year of meaningful evolution for Tapestry. Importantly, we made significant progress on our strategic initiatives against the difficult retail backdrop in North America.

Touching on results by brand. We achieved solid and consistent performance at Coach, which speaks to the success of our transformation strategy, driving brand health and vibrancy. For the year, Coach's international and digital channels led while the brand also outperformed its direct competition in North America. Coach's performance is key for 2 important reasons. First, Coach is the core of Tapestry. We understand that driving sustainable growth at Coach is essential to the success of our company overall. Therefore, we are incredibly proud of the brand's results in spite of the volatile backdrop. Second, this performance reinforces our strategic intent to diversify our acquired brands across geographies and channels.

Turning to Stuart Weitzman. We made advancements across product, people and processes, returning the business to top line growth. The SW team remains focused on driving improved profitability in the year ahead.

At Kate Spade, we launched a new creative vision for the brand. And while there have been some green shoots, we clearly need more time to drive an inflection to positive comps, especially given the brand's exposure to the competitive and traffic-challenged North America market. We acknowledge that there are opportunities and are addressing those areas with a sense of urgency.

As we look ahead, we're revising our outlook for FY '20 to reflect the current trends in our business, notably at Kate Spade. We believe this is prudent, particularly in light of the uncertain environment in North America and while we build the brand's awareness in global markets. Importantly, with continued momentum at the Coach brand, our priority is to fuel an acceleration in our acquired businesses to unlock the power of our multibrand platform. Therefore, while our long-term vision is unchanged, we are modifying our capital allocation policy in fiscal 2020, dedicating our resources to driving organic growth and do not expect to pursue strategic acquisitions. We are focused on balancing the investment in our brands to drive growth with a return to capital -- with a return of capital to shareholders. To this end, we plan to increase the capital we return to shareholders, repurchasing approximately 300 million of common stock while maintaining our annual dividend, resulting in a total payout of nearly $700 million. Overall, we remain steadfast in our vision and our focus on maximizing the benefits of our global multibrand platform.

Now turning to our FY '19 milestones and FY '20 priorities across our strategic pillars. First, we made significant progress in reinforcing the foundation of our distinctive multibrand platform in fiscal 2019. We generated the anticipated synergies from the integration of Kate Spade into our portfolio, which funded in part our key strategic initiatives. Through this point, we made material investments in Tapestry's infrastructure, implementing Phases 1 and 2 of our ERP system in FY '19 with the third and final phase just launched last week, all without business interruption. We could not be prouder of our teams for their diligence and hard work throughout this multiyear project.

We launched comprehensive 2025 corporate responsibility goals, recognizing our role as a leader in our industry to affect change and solidifying our commitment to social responsibility. These goals are consistent with the values-led culture that we're building. And we brought in key new Tapestry leaders: Noam Paransky, Chief Digital Officer; Tom Glaser, COO; and most recently, Joanne Crevoiserat, as our CFO, to help set and execute our strategic agenda.

Looking ahead to FY '20, we are focused on leveraging the investments we've made in our platform. Specifically, our investments in our ERP system will help to drive standardization across the organization. In addition, we are excited to benefit from Tom Glaser's unique and deep operational experience in multibrand, multicategory fashion supply chains. One of our key initiatives led by Tom, will be to identify opportunities to improve our demand to production planning cycle while increasing our speed to market across categories. This is especially important as we accelerate product innovation and the number of customization programs within our brands. It will also be important as we bring the Kate Spade footwear business in-house in the second half of the fiscal year, which I will touch on shortly.

Next, driving global growth. In FY '19, we expanded our international presence through both distributor acquisitions and new store openings in key regions. This allows us to directly control and drive our business internationally, capitalizing on our scale and market knowledge across brands. Importantly, we also gained traction with Chinese consumers globally, which as of FY '19 represented a high teens percentage of Tapestry's sales and where we see tremendous opportunity for growth. Throughout the year, we drove awareness for our brands with targeted events and marketing campaigns featuring locally relevant influencers, a first for Kate Spade and Stuart Weitzman. And perhaps the most significant highlight of FY '19 was Coach's first-ever runway show in Shanghai, which garnered 1.6 billion impressions.

Turning to FY '20. Capturing growth with the Chinese consumers for all brands remains a key strategic initiative. Our focus will be creating seamless and innovative experiences, both off-line and online as we continue to translate each of our brands' key messages into locally relevant content, which takes us to digital and Data Labs, where we are building the skills and capabilities that truly differentiate us from the competitive set.

During the fiscal year, we officially launched Tapestry's Data Labs portal, a personalized suite of data science and AI tools that are changing the way we use and interact with data, providing access to those on the front lines of our business. As mentioned, we recently welcomed Noam Paransky as our new Chief Digital Officer to lead our company-wide digital innovation agenda. He will play a key role as our enterprise leader to deliver innovative omnichannel experiences across all our customer digital touch points. His objective is to create a scalable Tapestry global digital ecosystem comprised of people, process and technology to enable global teams to act locally with greater agility and at greater velocity. Noam has hit the ground running. We are excited to announce the launch of China next.

This is an agenda focused on the China market. Adding fuel to our digital leadership on Sina Weibo and WeChat, this initiative connects 2 of Tapestry's key strategic priorities: driving digital innovation and growing our business with Chinese consumers. And not only are we focused on driving local engagement, we expect our China-next digital innovation agenda to provide learnings that we can leverage on a global scale. Overall, driving advancements in digital and Data Labs will be an important area of focus in FY '20, and we look forward to updating you on our progress in the quarters ahead.

And finally, brand innovation. Nothing is more important than this. As a brand-led and consumer-centric company, our goal is to nurture authentic innovative brands to capture the opportunities within the attractive and growing premium bags and small leather goods footwear and outerwear categories. We estimate that these combined categories total $95 billion and grew at a high single-digit rate on an organic basis in FY '19. This growth was led by bags and accessories, which topped an estimated $50 billion and grew at an estimated high single-digit rate in FY '19 or a mid- to high single-digit rate in U.S. dollars, given the appreciation of the dollar, for both the fourth quarter and the year.

With that, I'll move into our performance by brand, starting with Coach. Global comparable store sales rose 2% in the fourth quarter led by outperformance in our international channels and across our e-commerce platforms, consistent with the previous quarter. The drivers of our positive global brick-and-mortar comparable store sales were conversion, reflecting our strong product offering as well as traffic. This was Coach's seventh consecutive quarter of comp store sales growth. By region, we delivered overall positive comps across all of our international regions, including Europe, other Asia, Greater China and Japan. Our international wholesale business also rose on a POS basis in the quarter. Comps in North America were flat to the prior year, accelerating sequentially, including the positive impact of the shift and timing of Easter, along with a negative impact of continued pressure from lowest tourist spend as well as ongoing volatility in Daegu or reseller activity. In addition, our North America wholesale shipments were above prior year and our business at POS increased despite a lower level of promotional event days. We are particularly proud of the brand's sequential improvement in North America in light of the weakened traffic trends in both outlet and full-price retail malls. We believe this speaks to the vibrancy of the brand, which is outperforming its direct accessible luxury peers, fueled by innovation across channels and products, marketing and in-store experience.

Looking at our progress against brand strategies for FY '19, we drove leather goods innovation across the pyramid of fashion, occasion and price. In retail, our signature assortment comped the comp, reflecting the continued demand for this most proprietary brand icon. While an outlet, we benefited from our good, better, best strategy in our core women's handbag business. We fueled brand momentum and sales through collaborations, drops and pop-ups, including Disney x Coach, and most recently, the Rexy Remix, a collaboration with Chinese artists, which was featured on the runway of our Shanghai fashion show. During the year, we had over 130 pop-ups, engaging with our customers in a new way.

We gained traction in lifestyle categories, including footwear and ready-to-wear, while growing our men's business to almost $900 million at POS. These initiatives were supported by compelling marketing campaigns, which balanced our position as a fashion authority while broadening our messages. We launched Michael B. Jordan as the first global ambassador of Coach Men's and post innovative, culturally relevant and disruptive messages throughout the year. We also drove e-commerce growth and digital innovation globally as we continue to enhance our omnichannel capabilities. Overall, we saw strong double-digit increases in the brand's followers on Instagram, WeChat and Weibo.

Moving forward in FY '20, we will first accelerate product innovation and disruption; second, drive fashion authority through cultural relevance, tapping into celebrities and influencers; third, inject excitement into stores with light touch, high-impact refreshes; and fourth, fuel digital innovation and e-commerce growth, benefiting from the enterprise initiatives underway.

In summary, we are excited about the seasons ahead and remain confident in our largest brand's opportunity for continued growth as we look to accelerate innovation and relevance globally.

Moving to Kate Spade and focusing on the fourth quarter. Total sales rose 6% on a reported basis and 7% 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 have not yet anniversaried. Comparable store sales fell below our expectations, declining 6% on an aggregate basis. Conversion comp in our bricks-and-mortars business accelerated on a sequential basis and was positive for the quarter, reflecting the emerging positive signs we are seeing with Nicola's new product offering. However, traffic comp was significantly under pressure against the challenging backdrop in North America and compounded by the anniversarying of the difficult comparison following the passing of the brand's founder, which drove unusually high traffic as discussed last year. Conversely, our international business was essentially in line with our expectations, and on a relative basis, significantly outpaced the performance in North America, including positive comps in Greater China.

Turning to product. While the penetration of Nicola's collection was consistent with our expectations in both retail and outlet, clearly, overall sales were not on plan. We feel strongly that we have the right strategic and creative direction based on customers' response to the brand's new iconic elements and strength we're seeing in select handbag offerings such as the Margaux, Molly and Nicola families, and most recently, the introduction of Polly. We've also experienced traction in jewelry and ready-to-wear. However, we were missing breadth of choice in key silhouettes such as wear-to-work satchels as well as in the diversity of material ways. In addition, during the quarter, we introduced previous retail best-selling styles into the outlet channel, Cameron Street and Jackson Street, which did not perform as expected. In short, while we find a balance across silhouettes and full price, the outlet channel is in need of a much more substantial amount of distinctive newness than we planned.

Looking forward, our overarching objectives for Kate Spade remain unchanged, leveraging the brand's unique positioning of optimistic femininity and leadership in the attributes of fashionable and fun. That said, we felt it was important to provide you with some additional color on the specific actions underway to immediately address the areas of opportunity. First, we are applying our product and merchandising learnings by launching additional satchels in keeping with the brand's feminine aesthetic, updated in modern and relevant ways. We're introducing new designs in a broader range of high-quality materials that provide the structure, durability and functionality that the Kate Spade brand is known for. We also believe there is an opportunity in crossbodies and backpacks given the hands-free trend in the market. We're bringing in additional witty and emotional novelty items, which have been hallmarks of the brand, both as permanent and limited-edition offerings. We're also planning to launch product collaborations across categories to drive excitement and buzz.

For holiday, we're launching a new make-it-mine personalization program in both specialty stores and on our e-commerce site, which will feature an updated multifunction bag and accessories offering, designed to appeal to a broad audience. We're also excited by the footwear opportunity for the brand as we take the business in-house from our licensed partner, Steve Madden, beginning in the calendar 2020. We showed our new spring collection at FFANY just last week, and the response was very positive as buyers describe the offering as relevant, fun, exciting and truly lifestyle in addressing many usage occasions.

For stores, we're continuing to expand our distribution with a focus on international markets. That said, we are deliberately pulling back on the number of new store openings for the brand while we focus on maximizing awareness and productivity. In marketing, we will drive brand awareness and aspiration with bold collaborations with global and local celebrities and influencers, leveraging the power of social media and PR buzz across markets. In outlet, we're leaving no stone unturned. We're looking at product design, branding, merchandising, in-store experience and on-mall and direct e-mail marketing. In product, we're focused on accelerating the pace of newness with an assortment that is more clearly differentiated from the Saffiano-heavy competitive set. This will also include the launch of new materials, branding elements and collaborations unique to the channel. We're also building out the successful Nicola-designed Eva group. With these measures in place, we have a comprehensive plan to drive an inflection in the business. Overall, we are acting swiftly and decisively, applying our learnings to drive positive change, and we remain confident in our direction and the $2 billion opportunity for improved profitability.

Turning to Stuart Weitzman. In FY '19, our priority was to return the brand to top line growth, addressing to production challenges we faced exiting FY '18. I'm pleased that we were successful in doing this with revenue increasing 17% in the fourth quarter on a reported basis and 20% in constant currency, driving the mid-single-digit gain for the year. We made important advancements in several key areas. In product, we focused on fit and construction, creating foundational pieces that were consistent with the brand's DNA. We broadened our footwear offering while maintaining our authority in iconic Stuart Weitzman styles. We also introduced brand-new coats that we will build upon in the seasons and years ahead. We gained further credibility in handbags and leather goods, which remains an area of opportunity for the brand. We also drove international expansion, particularly in China, where we doubled our store footprint, including the acquisition of our business in Southern China. And we completed the buyback of our operations in Australia, where we will leverage Tapestry's multibrand hub. Finally, we evolved the brand's marketing, featuring a cast of new and culturally relevant global brand ambassadors, distorting our investment to digital.

Looking ahead to fiscal 2020, our strategic pillars include: first, enhancing our systems and processes to improve profitability. Key to this would be optimizing the supply chain in the wake of our 3 -- of our Phase 3 S/4 go live; second, maintaining the brand's boot and sandal authority while expanding our footwear expression, especially in flats and sneakers in keeping with current trends. This is paramount as we look to recapture the brand's leadership position in top-tier wholesale accounts. To this end, we were pleased with the initial positive feedback we received from our department store partners during the brand's spring market presentation last month; third, driving credibility in handbags through exceptional functionality and differentiated design and branding; fourth, fueling customer desire through marketing, increased brand awareness globally and acquiring new customers; and fifth, expanding globally with a focus on China, building on our current momentum.

In summary, we've made significant progress in sharpening the focus of the brand's core strengths and we remain excited about the opportunities for Stuart Weitzman.

To recap, we have a clear vision and a unique global multibrand 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.

Before I turn it over for the financial review, I would like to welcome our CFO, Joanne Crevoiserat, to the team. I know that many of you have had the opportunity to work with her throughout her career. We're delighted that she's joined Tapestry. She has extensive financial and operational experience with established retailers and global brands and brings a unique perspective and important skill set to our company. I'm confident that she is the right person to lead our strong finance team as we execute our strategic initiatives and long-term vision. Joanne?

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Joanne C. Crevoiserat, Tapestry, Inc. - CFO [4]

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Thanks, Victor. I'm very excited to be here at Tapestry working with the talented teams across the globe as we execute our brand and growth strategies. I'm also looking forward to reconnecting with many of you on the line and meeting those new to me who follow our story in the months ahead.

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Victor Luis, Tapestry, Inc. - CEO & Director [5]

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Thank you, Joanne. And before turning it over to Andrea, I'd like to recognize her for her hard work and energy over the last several months that she has held the position of interim CFO. Andrea wears many hats within our organization. She is a mentor to many and a key business partner to me and our leadership team with an unparalleled understanding of our company and its history. On behalf of our entire leadership team, thank you, Andrea, for your endless energy in leading the finance team in this period.

With that, I'll now turn the call over to Andrea for a discussion of our financial results as well as our outlook for fiscal year '20.

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Andrea Shaw Resnick, Tapestry, Inc. - Global Head of IR & Corporate Communications [6]

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Thanks, Victor, for those kind words, and good morning, everyone. Victor has just taken you through the highlights and strategies. Let me now take you through some of the important financial details as well as our outlook for fiscal year '20. 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 reconciliations can be found in the earnings release posted on our website today.

As Victor mentioned, it was an evolutionary year for the company. We entered FY '19 understanding that it would be one of significant strategic investment as we built the foundation of our multibrand platform. We also anticipated and achieved meaningful synergies from the successful integration of Kate Spade, in part funding these investments. At the same time, we delivered ongoing top and bottom line increases at Coach, the core of our house. That said, we did not drive the intended growth at Kate Spade and face incremental industry-wide promotional headwinds in the North America outlet channel. Overall, our EPS was in line with our most recent guidance.

Now turning to some key financial details of the fourth quarter. Sales in the quarter rose 2% on a reported basis and 4% in constant currency with disparate results by brand. We continue to drive positive same-store sales at Coach and delivered strong sales growth at Stuart Weitzman, lapping a challenging quarter from a year ago, while Kate Spade comps declined 6% in Q4. Consolidated gross margin declined 60 basis points versus prior year. For context, we did project and guide to a gross margin contraction for the quarter, pressured by Kate Spade, given the brand's difficult prior year compare, which included the financial benefit of unusually high full-price selling following the founder's passing as well as the initial realization of synergy. In addition, Kate Spade's gross margin was further pressured by incremental promotional activity year-over-year, particularly in the North America outlet channel. In contrast and importantly, both Coach and Stuart Weitzman delivered gross margin expansion over the prior year.

SG&A expenses rose 2%, in line with the top line increase. Operating income declined 3% and represented 14.6% of sales as compared to 15.3% in the prior year. Our EPS of $0.61 was $0.01 above last year and consistent with the implied guidance range for the quarter, reflecting in part a lower-than-expected tax rate. We also commenced our buyback period program during the quarter as reported, repurchasing approximately 3.4 million shares of common stock at an average cost of $29.31 for a total of $100 million.

Now moving to global distribution. As highlighted in our press release across Tapestry, we added a net of 108 locations in FY '19, driven by international expansion at Kate Spade and Stuart Weitzman, including a total of 69 net new openings and 39 stores acquired through regional distributor buybacks. We ended the year with 1,540 directly operated stores globally.

Turning to our balance sheet and cash flows at the end of the fiscal year, our cash and short-term investments were approximately $1.2 billion while our borrowings outstanding were $1.6 billion, consisting primarily of senior notes. Inventory levels at year-end were $778 million, an increase of 16%, reflecting in part the unusually low ending inventory balance at Kate Spade in the prior year, given the magnitude of full-price selling following the founder's passing. In addition, as discussed on our last earnings call, we've continue to experience port congestion in Asia, which has resulted in a higher level of in transit. Importantly, we are confident that we can strategically manage our inventory given its currency and our multichannel distribution model. We have a plan to work through our inventory specifically at Kate Spade in a programmatic manner during the first half of fiscal '20, which has been contemplated in our gross margin guidance.

For the full year, net cash from operating activities was an inflow of $792 million as compared to an inflow of $997 million a year ago. Our CapEx spending was $274 million versus $267 million a year ago. CapEx spend came in favorable to our expectations primarily due to the timing of cash payments which shifted into fiscal 2020. Free cash flow for the year was an inflow of $517 million versus an inflow of $729 million last year. And in FY '19, we returned a total of approximately $490 million to shareholders through our dividend as well as our recently instituted share repurchase program, representing approximately 95% of our free cash flow for the year.

Now turning to our capital allocation policy. As Victor mentioned, while our long-term priorities remain unchanged, supported by our strong balance sheet and cash flow, we are modifying our policy in the near term, dedicating our resources to driving organic growth while returning capital to shareholders through our dividend and share repurchase program. To that end, in fiscal 2020, we do not expect to pursue strategic acquisitions.

Now moving to our 2020 outlook. Consistent with our prior practice, the following guidance is presented on a non-GAAP basis and replaces all previous guidance.

Starting with Q1, we're projecting revenue in the first quarter to be slightly below prior year. This reflects low single-digit comp growth at Coach. Kate Spade comps are expected to decline at a high teens rate based on the current traffic trends we're seeing in the business and as we address the product and merchandising challenges. We would also expect Stuart Weitzman to post an operating loss in this -- its smallest quarter, reflective of wholesale shipment timing. We're forecasting gross margin for Tapestry to be slightly pressured in the quarter, impacted by FX, notably at Coach, while SG&A is expected to increase driven by new store openings and higher depreciation associated with our systems investment. Taken together, we expect Tapestry's EPS to be [$0.35] to $0.37 in Q1.

Now turning to our full year outlook. We expect total revenues for Tapestry in fiscal 2020 to increase at a low single-digit rate from fiscal '19. This includes the expectation for low single-digit growth at Coach, driven by continued positive low single-digit comp. We expect Kate Spade to deliver low to mid-single-digit sales growth, driven by distribution. At Stuart Weitzman, we expect solid sales growth for the year. In addition, we're projecting a modest decline in Tapestry's gross margin for the year, including the negative impacts associated with bringing Kate Spade's footwear business in-house, along with pressure from currency. Our gross margin forecast also incorporates the impact of U.S. tariffs on imports from China, including the 25% tariff on handbags and small leather goods currently in place as well as the recently announced 10% tariff on the list of $300 billion of goods expected to go into effect on September 1 for categories such as footwear and ready-to-wear.

As you know, we have a diversified manufacturing base and our exposure to China is relatively limited for handbags and small leather goods, where we've migrated our production. And while footwear and ready-to-wear are smaller but fast-growing categories for Tapestry, we do have more exposure currently to China. We expect SG&A growth to be approximately in line with top line growth. As you know, we've made several important investments in our multibrand model and our brands over the last few years, which are foundational to our long-term success. These include new store openings and regional buybacks as we focus on expanding our brand and directly managing the customer experience in key international markets, and system, to allow us to drive sustainable growth in an increasingly digital world.

Net interest expense is expected to be in the area of $45 million to $50 million for the year. The full year fiscal 2020 tax rate is projected to be in the area, 17.5%. And overall, we're projecting earnings per diluted share to be roughly even with prior year. This incorporates the expectation of share repurchases of approximately $300 million in fiscal '20. We expect CapEx to be approximately $300 million for the year, which includes the shift in cash payment from 4Q '19 as mentioned.

Touching briefly on our FY '20 directly operated distribution plans across Tapestry. Our distribution expansion efforts will focus on international market. By brand, we expect little change in our Coach directly operated store count with closures in North America offset by modest net openings internationally. Stuart Weitzman, we expect to open a net of 15 to 20 locations globally. And at Kate Spade, we're projecting 30 to 40 net openings in FY '20. As noted in our press release this morning, this represents a modestly slower pace of openings at Kate Spade as compared to FY '19 and our prior projection as we strategically focus on maximizing the brand's productivity.

In closing, we are focused on executing our vision supported by a strong balance sheet and cash flows, providing us with important financial and strategic flexibility while enabling us to return meaningful capital to our shareholders.

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 Securities.

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

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Joanne, welcome and congratulations. Best of luck.

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Joanne C. Crevoiserat, Tapestry, Inc. - CFO [3]

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Thanks, Bob.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [4]

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I guess I'd like to focus just on the Kate Spade brand for a minute. Victor, are you still confident about Kate's brand health? And I guess when you look at the results this quarter, how did you not see it coming? And how will you fix it? And when you look at it, contrasting it to the strong Coach brand performance, can you just talk a little bit about that as well?

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Victor Luis, Tapestry, Inc. - CEO & Director [5]

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Okay. Thank you, Bob. Maybe I'll start with contrasting with Coach to Kate, and then Josh can support at the end on Coach's performance, which, of course, is really outperforming not only here in the U.S. but truly globally against our more direct competitive set. Could not be prouder of that team and the work that they're doing. They're really hitting on all cylinders.

On Kate, as you all know, we saw a significant improvement in the third quarter. And really, many emerging signs of the traction post the launch of Nicola's collection. We saw positive conversion comps. We launched the new core family in Margaux, followed by Polly, which is really checking. And increasingly, we received really positive signs across categories, especially ready-to-wear and jewelry with the iconography working well that we launched. As we entered Q4, we were optimistic. Of course, we were supported by the Easter shift and with the amount of newness that we had coming in starting in the outlet channel. What we saw though was through May into June, but especially beginning in May was rapid deterioration in the North American environment, traffic declined. And especially in the outlet channel, this led to increasing promotion across competitors. And in fact, I would say across the channel. And as all of you know, Kate is disproportionately impacted given its nascent international footprint and its dependence on North America relative to Coach brand.

In addition, I would add that Kate simply did not have the level of distinctive newness that we needed to drive conversion in that channel, especially given the decreasing traffic. And especially against the Saffiano heavy competition. For context, when we transformed the Coach brand, one of the strategies that we took early on when Stuart joined was to take top-selling previous full-price collections. We reengineered them. We launched them in outlet, and we really drove terrific AURs. In the case of Nicola, you've heard us talk Nicola's collections. You've heard us talk about the fact that approximately 30% of the outlet product was Nicola-designed product. Of that 30% of the total, 2/3 or 20% of the total or slightly more actually were as we had done with Coach, taking previous full-price top sellers which Nicola reengineered, retouched, added some functionality and brought into the channel, specifically collections Cameron Street and Jackson Street, which are today still core to our business and unfortunately are not performing as we expected. And the key learning there is that they were just not perceived as new enough in the outlet channel, especially as they were Cameron Street. Saffiano-based collections are not able to compete with some of the major competitors who have really been promotional in those key platforms. And what we began to see basically is with that pressure and with the continued traffic pressures, the collections are simply still not pulling their weight and now we're prioritizing gross margin, and quite frankly, longer-term brand health. The good news, so what do we see? First, Eva, which was 100% designed by Nicola and is under 10% of the total outlet, is truly outperforming and gives us a lot of confidence as we bring in tremendous amounts of distinctive newness over the next months and quarters. And we're also pleased with the performance that we're seeing outside of North America, especially in Asia and in Greater China, where we're seeing positive comps and is a key area of investment for us.

So key steps, Bob, to the second part of your Kate question and what are we working on, what are we doing. So look, with a great sense of urgency, the Kate Spade team is really focused on, first and foremost, product. In the full-price channel, I would say it's much more tweaking the collections, really getting in high-function styles that are focused on our key wear-to-work consumer. In outlet, it's truly about distinctive innovation, both in silhouettes, materials. And I would say even in branding as we continue to diversify collections. And then in both channels, we're looking to truly leverage novelty, which is a key part of the brand while launching coming up in the second quarter, Make It Mine. And I think as you heard in my notes, Q3, the launch of footwear and taking a lot of learnings from what's happening across brands and those that are truly engaging effectively with consumers. We have a tremendous amount of activation in store as well as collaborations coming up.

On the marketing side, you guys will hear us talk a lot about leveraging influencers and celebrity. Stay tuned there. We have 1 or 2 announcements in the not-too-distant future on key partnerships there. And in stores, the focus right now is truly on driving productivity. We're going to be doing some light-touch investments, especially in the most productive part of our outlet fleet. And there, you're going to see us look at fixture productivity, signage and window package renewals as we look to truly drive a much bigger change in the eye of the consumer.

Turning to brand health. Saying all of that and that gives you, I think, a little bit of synopsis on where we were, what we saw, steps that we're taking and now looking at brand health. Look, we just finished recently May into June a global brand tracker. We interviewed thousands of consumers here in North America across all of our brands and the competitive sets. And we are confident in the health of the brand and it actually gave us confidence in the creative direction and Nicola's vision. We continue to be very strong in a very unique position. We lead in the key emotional attributes of fashionable, fun and feminine and the key is really in tweaking our execution in some of those areas. And I remain very confident in Kate being a $2 billion opportunity and being so at gross margins that are going to be similar to Coach in like categories and that remains our clear vision.

As I mentioned relative to Coach, Bob, could not be prouder of Josh and the team and what they're doing in that brand because as I said, they're really hitting on all cylinders. I'll let Josh talk a little bit about what he's seeing both globally and here in North America as that brand truly, I think, outperforms the direct competition in a very strong way. Josh?

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Joshua G. Schulman, Tapestry, Inc. - CEO & Brand President of Coach [6]

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Thank you, Victor. So how we're thinking about innovation at Coach is really at the heart, I think, of how we've been able to drive the 7 consecutive quarters of positive comps and the gross margin expansion that we've been able to see this year. And so I'll share a little bit about how we're thinking about driving this balance of consistency and disruption within the brand -- really across 3 pillars. So the first is we have to consistently innovate in our core. We have to every day in every channel have our core product at good, better, best price points with product excellence and innovation there. I think the best example of that, that we've talked about on numerous calls and that you've seen in our stores is the relaunch of Signature, which is now into its second year and is continuing to drive high AURs in our retail channel, actually higher AURs than leather. And we have examples of that of the innovation in core product in our outlet channel as well, whether that has been the Edit at-best pinnacle prices or whether that has been new introductions like Jes, really speaking to our broad customer around the world.

The second pillar is more about the disruption and that is -- and I call that collaboration or co-creation. And during this year, we have had an unprecedented number of activations, pop-ups, drops, capsules where we are either collaborating with a third party or driving innovation around important cultural moments. So in this quarter, in this most recent quarter, we did 360 activations around Mother's Day, particularly important in North America where it's the visual, it's the product, it's the whole experience. We've done third-party partnerships, we did artist collaborations with a series of Chinese artists, which we called the Rexy Remix, which we rolled out in our retail channel. In outlet, we did a collaboration all around '80s video games, Pac-Man, Ms. Pac-Man. And these are traffic-driving collaborations. And so when we do these activations, they have really helped us and I think you see that this quarter. They helped us in a traffic-challenged environment drive the traffic to Coach in the malls, in the full-price malls and in the outlet malls.

And then the third pillar, I would say, is around acceleration. So there's innovation, collaboration and acceleration. And acceleration is really for our categories where we're -- we consider our growth categories. So our men's business, which is approaching $900 million, our footwear business and our ready-to-wear business and how do we have distinct strategies to drive growth in those areas. And I think what you're starting to see is you're starting to see how those 3 pillars can work together consistently back to buy marketing that is no longer just about one seasonal fashion message but about something much broader, which is driving a cultural relevance through marketing. And so you see, we have a mix of global ambassadors like a Michael B. Jordan or a more regional ambassador like a Kiko Mizuhara in Japan and driving those messages across the digital channels and using those digital channels as really the hub of an ecosystem that brings the customers into the stores. And so we can't be complacent. It's competitive out there but we have a pretty exciting pipeline ahead of these types of innovations and activations.

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Victor Luis, Tapestry, Inc. - CEO & Director [7]

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Yes. And I think I would just close to wrap up on those points there. Please, if you haven't had the opportunity, do take a couple of visits to a couple of key outlet stores in your region and walk the competitive set, compare with Coach's execution and you'll, I think, very easily understand a lot of the great work that Josh has just explained, impacting across all channels at once. And we're on that journey with Kate and I'm very confident in that team's ability with Anna and Nicola and very talented folks they have supporting them to execute accordingly.

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Operator [8]

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(Operator Instructions) Your next question comes from the line of Irwin Boruchow of Wells Fargo.

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Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [9]

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This is a 2-part -- 2 quick questions on Kate. On the store growth pullback, Victor, is that tied to any specific region? Or is that broad-based globally just overall? And then I appreciate all the guidance on the year for the business, but is there any chance you could give a little bit more color on your view of Kate for the year as you progress? You kind of gave us some comp expectations for Q1. Can you help us how you're thinking about how that business should progress through the year, both comp and on operating profit metrics, anything that you're comfortable sharing? And most specifically, are you targeting a positive comp at some point this fiscal year?

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Victor Luis, Tapestry, Inc. - CEO & Director [10]

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Sure. Thanks. In terms of the openings, really, our focus is on productivity. I mean we were planning above 40 locations for the year. We're still planning between 30 and 40. We're just being much more selective. And with a continued focus on Asia and especially in China, where we are seeing the opportunity, of course, to leverage those investments as part of our greater programs to build brand awareness there, which clearly remains the #1 single growth opportunity for that brand and for us from an awareness perspective.

In terms of Kate and -- through the year and comps, first and foremost, I think we gave guidance that we're expecting low to mid-single-digit sales growth, driven by distribution. At this point, I won't be making a call on the exact timing of positive comps, particularly given the dependence of Kate Spade on what is a challenged North America environment. Of course, we expect clear improvement throughout the year as significant newness hits, and of course, as we enter a period of easier compares once we get into Qs 2, 3 and 4. But at this point, I would say that you should expect our confidence in the mid- to single-digit total growth driven by distribution.

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Operator [11]

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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 & Senior Research Analyst [12]

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I guess my question is around the EBIT dollar guide. I guess you moved from what would have been roughly $95 million of incremental EBIT growth and now it looks like EBIT dollars are slightly down for the year. Can you just help us walk through the moving parts by brand? Is that all Kate Spade? Are there incremental investments? And are you still expecting Coach and Stuart Weitzman in that guide to be positive contributors to EBIT dollars?

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Andrea Shaw Resnick, Tapestry, Inc. - Global Head of IR & Corporate Communications [13]

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Sure, Erinn. So in terms of the primary change, absolutely correct. It's really coming from Kate Spade where we now have taken down top line growth through a combination of lower-than-originally-expected comps as well as the modification in our store opening schedule. As you know, we had 40 to 50 originally planned. Now we have 30 to 40 as Victor just mentioned. Those are the primary reasons -- the primary delta from where we work. And then of course, we do still have elevated SG&A, specifically at the Kate brands associated with the new store openings that we opened this year as well as we won't anniversary the buyback until the end of the first quarter. So it is really primarily coming from the Kate Spade brand. We are looking for operating income generation at Stuart Weitzman, although the first quarter will be probably a similar operating loss to what we exited fourth quarter. And of course, Coach is, I would say, steady as she goes or he goes.

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Operator [14]

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Your next question comes from the line of Alex Walvis of Goldman Sachs.

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Alexandra E. Walvis, Goldman Sachs Group Inc., Research Division - Research Analyst [15]

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I wanted to ask a question about the decision to bring footwear in-house at Kate Spade. And I wonder if you could reflect on the same strategy at Coach, how that's progressed versus your plan and what's worked well there and why the decision to do that with Kate now and how that could be an opportunity in ways it could differ from the Coach experience.

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Victor Luis, Tapestry, Inc. - CEO & Director [16]

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Sure. Very clear opportunities, Alex, for us. We've taken basically the last, I would say, 2 to 3 years to establish a very solid product development, production capacity in footwear in Asia. Incredibly pleased to have with us Tom Glaser, who comes, of course, from a very deep experience in that space supporting our teams as we look to truly get best-in-class in all of these categories, so he'll provide key leadership. And we have a team at Kate that has experience in doing this and I can tell you we've just shown the first Kate collection at FFANY as well, of course, Coach and Stuart Weitzman. We're just basically wrapping up a week of markets here in New York across all 3 brands. And what I can share with you is that in all 3 brands, the reaction has been superb. Kate is his first collection. If I compare to Coach's first collection 3 years ago, it's really taken a leap forward, whether it's from a design perspective, silhouette style perspective, excuse me, in usage occasion and in terms of product development, leveraging pricing and developing -- and the development capacity that we established with Coach over the last 3 years, I believe, to the Kate first season with a lot more confidence than we entered Coach 3 years ago.

I would also add that this season at FFANY, Josh and the Coach team have taken a very substantial leap forward. We've been operating now for a few months, Josh and his team have, with some new third-party development capabilities, especially in the core sneaker business, which as many of you know is driving a huge trend in footwear. We just showed a new collection, which have been incredibly well received at wholesale and by our own teams. So fully excited by that.

And for those of you who follow on Instagram and maybe have Stuart Weitzman on your feeds, you'll see the new sneaker collection that they just launched, the Daryl, which is really new to them given that they were a sandal and boot resource. I'm very excited, of course, as we enter fall/winter given that they are such a strong boot resource but it's truly a good reflection of Eraldo and that team's move to also diversify and bring new usage occasions to the brand. So this is a great platform. I think we're really coming into our own. And I speak with a good level of confidence on that. Look, in the first year financially, there's a small investment that takes place but really minor. From year 2, this thing becomes much more accretive than the royalty. It was a timely business relative to the Coach license that we took back. We're very thankful to the partners that we had at Madden and their predecessors but now it really is about us leveraging this key strategic category along with core handbags and accessories and outerwear as core drivers for all of these investments that we're making in our own direct distribution and with key third-party partners.

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Operator [17]

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Our 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 [18]

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Regarding Kate Spade, what are your thoughts regarding the customer reception of the newness ahead and how the sequencing may go as customers look to the changes? Also I would love your thoughts on the coats of the Kate Spade house and how you evaluated how those are performing or tweaks you may make? And then finally, regarding Kate, just ensuring that there's a great level of distinctiveness versus Coach and that the segmentation is how you want it, that would be great to hear those -- your thoughts.

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Victor Luis, Tapestry, Inc. - CEO & Director [19]

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Yes. Great questions. Look, Kate has a really unique positioning. And in many ways, I would say, first and foremost, from an attitude perspective, definitely considered on the fashion and given its stronger reliance on ready-to-wear traditionally and other accessory categories include jewelry, tech, much -- skews much younger and much more millennial than Coach does. And I would say has a very strong, in the handbag space, a very strong -- and I'm talking here in North America now because we're very much in early stages of building this business outside of Japan internationally, very strong suburban consumer who sees it as a key wear-to-work resource and we're really focused on providing that functionality. I think that relative to differences between Coach and Kate, the teams are completely separate. Nicola and her world, they don't come in and look at the Coach collections from Stuart. Stuart doesn't go over and look at the Kate collections. Obviously, in the fashion world, they're following general trends but I think you'll see whether it's in product and functionality and if you were to go to the full-price stores, it's probably a good place to visit whether right across from each other here at the Hudson Yards mall here in Manhattan where you can see Coach and Kate -- the Kate experience and the Coach experience are very, very different. Kate speaking to her customer with its very specific coats and femininity that I'm going to talk to in a minute and Coach to its customer with a much more urban fashion take. And I would say Stuart's leverage of Coach is much more house of leather coats.

If we look at Kate and the coats that we've launched and I think I touched upon this in my remarks in terms of our ability to compete effectively in the outlet channel, Kate has traditionally depended on a few, very core coats. First and foremost, from a material perspective, it has been about Saffiano. From a silhouette perspective, it has been about satchels and wear-to-work type of styles. And from a branding perspective, it's really been about that Kate Spade New York meta-lockup which is on these products. These are traditional coats. They're used by many brands across the spectrum and the issue is just that. One is Saffiano, in and of itself, in a material way is facing challenges in terms of the ability of brands to distinguish themselves from one another. And then when you have the price competition come in on that, it becomes even more challenging.

So what we're seeing in terms of the coats that we launch, first and foremost, new materials, new pebbled leathers. You'll see new nylon executions. You will see in the future new textile executions, PVC executions, much more different branding executions. You've seen Nicola, especially in the full price part of the business which has been well received, leverage a more universal coat that is uniquely owned by us, which is the Spade, turning that into hardware, turning that into different lockup executions which is going to give us diversity in the iconography of the brand. And now we're leveraging all of that into the outlet channel which we're really excited about.

And I would just say that when we look at, as you know, Oliver, because we've talked about this a few times in the past, we have an extensive database. We capture north of 85% of customer transactions across our brands. And what I can share with you is that the overlap in the database between Coach and Kate Spade consumers is truly less than 5%. So I'm not as concerned about that at all as I am about Kate being true to its DNA yet continue to modernize itself, continuing to give the Kate Spade core customer distinctive newness that she can engage with and that differentiates it from all of the competitive set.

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Operator [20]

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Your next question comes from the line of Mark Altschwager of Baird.

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Mark R. Altschwager, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [21]

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Just, I guess, a few quick ones for me, kind of housekeeping here. But what is the share count implied in the flat EPS guide for fiscal 2020? And then how should we be thinking about free cash flow? I guess based on your current outlook, could you do more than the $300 million on the buyback without increasing your net leverage ratios? And then finally, I was hoping you could touch on inventory levels by brand. Any pockets of excess inventory that you need to work through in the short run here?

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

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Sure. So Mark, on the share count, think of anything between 282 and 286, depending on when we buy that $300 million worth of stocks over the course of the year. We are committing to $300 million right now and that's all, I think, we're willing to submit to.

And then in terms of your third question on cash flow, could we do more without tripping any leverage issues? Yes, we could based on our projections of cash flow for the year.

Oh, and sorry, on the inventory. So inventory was up. As you know, that 16% on a 2-year stack, I think that was around 8.5% for total Tapestry on pro forma basis, if you include Kate in the 2-year comparison. Kate was actually down about 10% over the 2-year period because of the low levels of inventory as we exited 4Q last year, given the full-price selling that we have seen and a little bit of delayed delivery. We had projected it. We saw an increase in in-transit. We talked about port congestion last quarter. I would reiterate that now. In terms of where that excess is, on the lower levels of sales, you can assume obviously that we have a little bit more than we'd like to have on Kate Spade. We are very confident that we can strategically manage through this. It's going to be a balance on brand health versus promotional activity. So we want to be very strategic in that but we feel good given the currency of the inventory that we can work through that in the first half of the year.

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Operator [23]

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Your next question comes from the line of Jamie Merriman of Bernstein.

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Jamie Susan Merriman, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [24]

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Victor, in your comments about Kate, you mentioned some of the initiatives that you have in terms of things like bringing in satchels and crossbody, et cetera. Can you just give us a sense of the timing of some of those initiatives given the length of your supply chain and speed? When would you expect those initiatives to start to help?

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

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I think in the full-price channel really is what I was referring to there because I do think we're very much in inventory in that type of style. We don't have enough diversity -- in outlet, we don't have enough diversification in outlet from a material and branding perspective as well as bringing in, I would say, incremental silhouettes to the core satchels, where we are very much in inventory. In full price, there's definitely an opportunity there and you're going to see us bring those in. In fact, every month over the next 4 to 5 months, we have 2 to 3 families launching in the next 2 to 3 months that we expect to be very significant players along with Margaux, which today is our key and most successful family in the full-price channel.

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Andrea Shaw Resnick, Tapestry, Inc. - Global Head of IR & Corporate Communications [26]

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That will conclude 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 [27]

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Thank you, everyone, for being with us. As is our custom, I just want to take the opportunity to thank our teams across the globe for their hard work and dedication. Couldn't be prouder of their commitment and all of their efforts as we've had an amazing year of building the foundation that will certainly serve as the key to our growth for years ahead. I have a tremendous confidence in them and look forward to working and partnering with them to drive growth off of this foundation that we built. Thank you.

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Operator [28]

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Thank you. This does conclude today's Tapestry conference call. You may now disconnect your lines, and have a wonderful day.