Tapestry, Inc. (TPR) Earnings Call Transcript & Summary

Good morning, everyone, and thanks for joining us. We're very happy to have Tapestry's CEO, Joanne Crevoiserat, with us this morning for a fireside chat. We plan to use the time for Q&A. If you have any questions, feel free to add them into the system. But for the most part, Joanne and I will be tackling some of the more pertinent and interesting nuances of the Tapestry story. And so Joanne, welcome. Thanks for coming today.

Thanks, Lorraine. It's great to be here.

I want to start off with the Acceleration Program. Can you talk about the key elements of the program and update us on any progress so far?

Sure. It probably makes sense to take a step back. It was more than a year ago, pre-pandemic, that we started talking about changes we wanted to make in our business, to do business in what we were -- and to compete in what we were calling the new world of retail at the time, and where we saw trends going. And as we ran our diagnostic in really a wide aperture of areas that we wanted to improve in terms of execution in our business, it came down to 3 key parts. One was really sharpening our focus on the consumer, getting even closer to the consumer than we had been, leveraging data and leading in digital with a digital-first mindset and transforming our company into a leaner organization, but one that was more responsive so that we could be more agile in responding to trends we saw coming in the marketplace. And as we identified these opportunities, we're about to roll out a lot of transformation work in the organization right as COVID hit. And as you might imagine, we took a step back and said, "Wait a minute, do we want to do this, given all of the things that are happening in the backdrop?" And if you think about the things that COVID has accelerated, it only gave us more conviction and actually a higher sense of urgency to move more quickly and more boldly in this direction. And the pandemic has accelerated all the trends that we've seen, that we were seeing in the marketplace. And our first half results really show the traction that we're getting on some of these areas of focus. We had triple-digit growth in our digital business over the first half of this -- our fiscal year, which really shows that the focus on digital is really paying off and gaining traction with consumers. In those channels, we're creating new customers. So over 1.5 million new customers in the second quarter alone through digital channels. So we're out there and acquiring new customers who are increasingly younger customers. Our digital business, just to sort of put it in context, has grown to a scale of $1.3 billion on a trailing 12-month basis at the end of our fiscal year. It's more than double what it was a year ago. So we're moving very fast into this space. And we're doing other things that are -- like deploying data and analytics tools and embedding that in our decision-making processes across the company, and that's allowing us to expand AUR and gross margin. So a number of areas where we're seeing traction from the Acceleration Program and it's really a foundation that we're laying to allow us to take market share going forward at higher levels of profitability.

That's great. And what do you view as Tapestry's key competitive advantages in the current environment and then over the long term?

Yes. I would say from a Tapestry perspective, there are many competitive advantages. First, we play in a pretty attractive category, right, the premium handbag, accessories and footwear categories. Our strong categories and continue to have strong engagement with consumers. At Tapestry, we have a high direct-to-consumer penetration. So we own a lot of that relationship with our consumer. We have a very low wholesale penetration, less than 10% of our business. So owning that relationship is important. And we have a global business with real strength in China, a market that continues to grow, and we see a lot of opportunity there. And I mentioned the strength in digital as well, a technology footprint and digital capabilities globally and a strong balance sheet that allows us to continue to invest in our business. And when I think about Tapestry as a platform, we have 3 strong incredible brands on our platform with Coach, Kate Spade and Stuart Weitzman, all with unique positioning in the market. And the way we think about the Tapestry platform, that's our competitive advantage. That platform allows us to drive scale across those brands. First in consumer insights, where we have a lot of information and knowledge about consumers in our space across our categories and across our brands and across the world. So our brands leverage all of that consumer insight for the benefit of our brands. We have a technology backbone as a Tapestry platform that allows our brands to do more than they could do on their own. And these digital investments continue to be incredibly important in terms of how our brands engage consumers. We have a robust and global and diversified supply chain around the world our brands benefit from. And we have global talent that is -- the brands have access to global talent. We're able to grow our talent across brands, across regions, which is, we think, a competitive advantage.

I wanted to ask a question about the health of the over -- the overall health of the handbag space and what you're expecting as vaccines are disseminated. Do you think we'll see this retail renaissance or roaring '20s as we return to normal life across the globe?

Yes. We're incredibly fortunate to play in this handbag space. It's a category that has been growing pre-pandemic. It was growing in the mid- to high single-digit -- at the mid- to high single-digit levels pretty consistently pre-pandemic. And even in the pandemic, we're seeing consumers engaged with the category. We've done -- first of all, our business really supports that. Our digital business and the fact that we continue to see consumers -- new consumers into our brands and consumers transacting and engaging on digital channels. And in China, where the business and the economy has more recovered, we see strong growth in the category in that market. And we've run a lot of research. We do a lot of customer research, and we've done consumer research, both in China and in North America, in the middle of the pandemic and asked consumers about purchase intent in the next 12 months. So really trying to understand how consumers were thinking in the moment, but how they were thinking about the future. And the handbag and small leather category ranked in the top 3 categories of intent to purchase going forward like behind like cleaning products and hygiene products. So it's so interesting how engaged our consumers are. And what we find is it's really an emotional purchase for that consumer. They really have an emotional connection to the product and an emotional connection to the brands. And they see it as a treat for themselves. And I'll give you a couple of examples. I remember in the summer, last summer, in the middle of COVID, we were just coming out of lockdowns, one of our best-selling items at Kate Spade was a full-priced pineapple handbag. And [ it's what she ] needed in the middle of the summer, a full priced pineapple handbag, but it brought that consumer a little bit of joy, and it was a little bit of a treat. And so that's how we see consumers continuing to engage with the category.

That's a great example. So it sounds like the category is very healthy. Can you talk about the key opportunities across your brands to drive market share gains within their categories?

We continue to have and see tremendous runway ahead for the brands in our portfolio, and we're very focused on unlocking that organic growth. At Coach, the opportunities are -- continue to be very strong. And I would say our first half performance is evidence of the opportunity to really gain new customers in the brand. And at Coach, we've talked about the fact that we're really leaning into digital channels as a huge opportunity for us and acquiring over 1 million new customers in the last quarter alone. And these customers we're acquiring to the brand are increasingly younger customers, which I think has -- gives us a lot of optimism around where we're headed with the brand and how we continue to engage consumers. We still have a tremendous amount of runway in China as well, where the brand has been for a couple of decades. We have a strong engagement there and high awareness, but we continue to see opportunity, particularly in the digital channel in that market, where the consumer is very fashion-engaged, but also very digitally engaged. And we saw on 11/11 this past quarter, Coach, the #1 handbag in small leather brand on that Tmall platform during that holiday. So strong awareness, but a lot of runway ahead still in China on digital in our core markets with the Coach brand. And at Kate Spade and Stuart Weitzman, in both of those brands, we have an opportunity to really reengage our core consumers, and we're seeing traction on reactivation rates there as we get back behind that brand DNA. And those brands, and I would say Coach is delivering some of the best-in-class margins, and we continue to expect those to be sustained. And in Kate Spade and Stuart Weitzman, we expect to continue to grow in those -- regaining those lost customers and acquiring new customers to those brands, but also at higher levels of profitability in those brands.

Great. And we've seen a big acceleration of the shift in consumer preferences as a result of the pandemic. How do you think fashion and consumer behavior evolved throughout this? And how do you view the retail space as we emerge? Will these trends stick around? Or will they -- will we all revert back to what we used to do?

Well, overall, I would say I'm optimistic. And I do think some of the trends will be around and be here to stay. Certainly, we've seen a shift in consumer shopping behaviors and where they choose to engage with brands. And that would -- those were trends we were seeing pre-pandemic, and they very much accelerated through the pandemic. Our digital business is a testament to that. The fact that we've grown triple digits, doubled the size and increased the scale and the penetration of that digital business. We do think that some of those shopping behaviors will be there. So brands need to be able to meet customers where they are. And that's as we focus on getting close to our consumers, it really is about meeting them on their journey where they are. And I'll talk in a minute about some of the innovation we've brought to bear. But I'm thinking through the pandemic, we've also seen a trend towards casualization and that's something that's reflected in our product as we stay close to the consumer and understand what they are looking for in terms of their needs, emotional and functional needs, for our products. Those are the things that we talk about. But we've also seen an elevation of values. I think with all the social unrest in the last year, consumers are increasingly putting their money behind brands whose values align with their own. And it is very important to have a brand and be very clear about what you stand for as a brand, so consumers can make those choices and make them clearly. We had a tremendous amount of innovation in -- over the past year in how we engage consumers, how we reach them, what social media platforms we're on. Our associates are increasingly becoming influences -- influencers of their own because they're engaging consumers through virtual appointment, shopping appointments. So it's not just about the engagement that you have with a customer in a store anymore, it's a store associate reaching a consumer on a digital platform. And those digital platforms are changing and evolving. We were the first fashion brand to do a live stream and transact business on the TikTok of China, as an example. So really innovating and learning how to and where to meet consumers as we engage with them going forward.

Great. And then just focusing on the numbers a little bit. Second quarter bottom line results were really strong despite the continued revenue headwinds. How sustainable are these results? And what level can margins reach, maybe both for Tapestry overall and then for each of the brands?

As we [ exit the ] pandemic and we're rolling out our Acceleration Program, we knew that we would have pressured revenues this year. And I think every fashion brand and every retailer is looking at the same potential outcomes. And we moved pretty quickly, and we took bold action to fundamentally change our business model. And we expected that this year would be a year of efficiency-led profit growth. We're driving a lot of efficiency in our model. But at the same time, we were focused on making the investments and reorganizing our company in a way that positioned us to be able to take market share in a post-COVID world. So we went into this disruption, I guess I would call it, with an eye on how we wanted to do business and operate in the future. And that has really been borne out in our results. This year, we focused on managing the things that were under our control, managing inventories, bringing our assortments in line to make sure that we were taking cost out, but also putting our investments behind the things that matter, which allowed us, as we got close to the consumer and understood what they were looking for in our assortments, allowed us to step away from promotional activity and supported AUR growth. So we're able to grow margins, gross margins. At the same time, we took a lot of cost out of our model, both within our corporate headcount and how we reduced layers in our organization to help us be more agile. And we also structurally made changes in our fleet. We've talked about closing some locations and raising the threshold for profitability, our expectation on profitability of our store fleet. And those are sustainable changes that we've embedded in our process. We have data and analytics we're leveraging throughout the value chain to help us make smarter decisions and support our margin -- our gross margins. And the changes that we've made to our operating model are foundational and can continue. So we're in a position this year to be reaching pre-COVID profit levels this year, even with depressed top line revenues. And we're also in a position to take market share going forward. And we expect, as we grow the top line and market share growth, we'll be able to do that and realize tremendous operating leverage and achieve higher levels of profitability as we move forward.

And so on the other side of that, I just wanted to ask about investments, where you're focusing your investments going forward. Are you shifting more towards the digital channel? Where do stores come into play? And I guess, are there enough savings to offset all the investment you need to transform your business on a go-forward basis?

Yes. The great news about Tapestry is that we have been consistently making investments, particularly in the digital space and in technology. So we are fortunate to have a very state-of-the-art ERP system under our belt already and have made investments and continue to make investments in the digital space. So we continue to expect to invest, and we have leveraged a tremendous amount of rigor in our process, ask anybody in our organization. We're investing in those projects that deliver the highest risk-adjusted return. And increasingly, as we look forward, those will be our digital projects. So we'll continue to support the digital side of the business. And having said that, I will say that we think stores still matter. And we have raised our thresholds for profitability expectations for stores. And we'll continue to test and learn behind the store fleet to make sure we can drive productivity and profitability. But we think that physical touch point for the consumer continues to be important. The role of the store is changing. We're increasingly adding omnichannel capabilities. That's part of our investment strategy, so that we can engage consumers with that physical touch point, but also embedding the digital experience as well.

And just following up on the digital side. I think you mentioned the recruitment of 1.5 million new customers to North America. What's driving that acquisition? And are you seeing customers migrate from stores to online? And how do you expect to continue to drive new customer recruitment even after the stores are back open?

This is a great question. We get this often. And we see digital as an amplification of our stores. We're actually not seeing as much crossover from stores to digital. We are finding digital as a way to acquire new customers. So we play in a pretty broad space to a broad audience, and our consumers are omnichannel consumers. And I think we all are. These days, we've learned how to find and engage brands and discover brands and style online. And even in the fashion world, a way that's being reflected and revealed to consumers is increasingly in digital channels. So the world has changed, and we continue to see tremendous opportunity in the digital space. And I think the one thing about our digital business that's important to know, not only is we're not seeing it cannibalize, if you will, our brick-and-mortar business, but our digital business is more profitable than our brick-and-mortar business. So I do think that's a foundational element that's important to understand. We're leveraging the digital business to acquire new customers and retain and continue to engage customers and in addition to our brick-and-mortar stores. And as we do that, it's a tailwind to our operating margins because the digital business actually performs at higher operating margins than our brick-and-mortar. But again, as I said, we think stores are still important, and we're excited for -- to welcome our customers back to our stores as we recover from the pandemic. We've seen really nice traction in China, where -- a market where we've seen that happening. We continue to drive strong digital growth in China, but we are also driving growth in brick-and-mortar stores. So it's an and, and not an or on the digital business.

Okay. I wanted to ask about the coachoutlet.com strategy. How is this strategy different than the one in the past? And how do you ensure its brand-accretive and not just business-accretive?

Yes. There's a comparison that we often get to a digital business that we had in the past on our flash sale site. And the 2 things are quite different. The flash sale site was just that, a flash sale property that continue to drive promotional messaging consistently to consumers. And that has -- that does wear on brands. What we're experiencing now and how we're doing our business now, as I mentioned, the world has changed from those days to how consumers engage online. And the reality is consumers are omnichannel consumers. And we need to be in digital spaces to engage our customers more fully. That's the expectation that our consumers have. So as we get close to our consumer, that has to be part of the equation. But it also can be and should be a brand-accretive engagement -- point of engagement. And as we manage our outlet.com site, we're doing that increasingly stepping away from promotions at higher AUR and higher gross margins because we're able to step away from the promotional messaging, really talk about the value of our product. And that's what consumers are responding to. And as I mentioned, this digital business for us has proved accretive because it is a place where we're acquiring new customers. So these were customers who may not have gotten in a car to drive to an outlet store who appreciate the quality of our product and the value that it represents and are now engaging with the brand. And as I said, another point of optimism for our brand is these customers are increasingly younger so it's a great opportunity for us to engage a younger consumer to our brand in a very healthy way. And we have a long history of maintaining an outlet business and a regular priced business with differentiated product that is brand-accretive. And we're really thrilled with the performance of our outlet.com business.

Do you worry about cannibalization? Maybe -- how can you determine if the customer bases continue to remain distinct?

Well, we know our customer. And so we spend a lot of time talking about who our customer is and measuring exactly that and watching how our customer migrates across our brand and across our omnichannel properties. We also spend a lot of time talking about and developing distinct product and experiences for consumers. So as we get closer to our consumer, the objective is to really know who those consumers are and deliver distinct value and experiences for those consumers. And that's what's been driving our business. We've talked a little bit about the success we've had in driving AUR higher in, particularly in Coach, and that's been driven by getting to know the outlet customer specifically, and we're seeing a lot of that growth in outlet AUR and knowing what that customer values in a product, intentionally designing the product for that customer. And we're seeing tremendous traction in terms of being able to move AUR higher related to that. So that's the way we think about distinction between and knowing our customer. And again, we're getting a lot of traction on those, and we still have a lot of runway.

And just to follow up on the AUR point, we've seen AURs increasing across the space. And you mentioned the pullback in promotional activity has certainly helped. When the environment normalizes, how do you see this trend playing out? And are there any other factors that are driving that higher AUR?

This is another example of that I'm thrilled to go into the detail of because it's an outcome that we had expected based on the actions that we've been taking across our business. And so some of the specific actions we're taking have been related to inventory management. So inventory management is a very important element in ensuring that we can maintain AUR, that we have strong sell-through of our product. Our teams have done a tremendous job working through this disruption. And we've had very significant disruption in demand, and the recovery has happened in a sort of a choppy way across different regions, in different channels. And our teams have moved very quickly to move our inventory around, reflow inventory and ensure that we have the supply that match demand coming through what was a pretty disruptive time. And that's one element of driving AUR higher so that we match that supply and demand equation. But we've also -- I talked a lot about -- earlier about embedding data and analytics across our value chain. We're increasingly leveraging data and analytics in our decision processes, and it starts with our overall assortment. So we have narrowed our assortment and cut off the tail, if you will, of our assortment. Those unproductive SKUs that drive the need to promote through to sell through those items. So as we got more focused, we leverage data better, and that's embedded in our decision-making process. We've also leveraged data to understand where -- once we have the assortment framework, where we send a product around the world by store based on consumer preferences in those stores, which was a new way of allocating our assortments around the world. And that has driven higher sell-throughs and higher AUR. It might be obvious. If you walk into a store and you see product that's relevant to you as a customer, we're going to sell through that product a little bit faster. So that's supporting our higher AUR. And then promotional activity. We're leveraging data and analytics to help us understand when we need to and when we can pull off of the promotional levers. So those are all working together and support this AUR growth that we're seeing. The actions we're taking were quite intentional, and as I said, expecting these outcomes. And it's been really nice to see the traction that we're getting, and they're embedded in our processes. So they will be sustainable as we move forward.

Just moving on to China. You posted 30% growth in your most recent quarter. And it's been exciting to see the recovery in that business. What are the key areas of focus in that region to continue to drive these sales gains?

I mentioned earlier, China is an incredible market, and trends move very quickly there. It's a very fashion-engaged consumer in China, as I mentioned, and a very digitally engaged consumer. And we -- as we get closer to our consumer everywhere, especially China, we have to stay close. We've been in the market for a couple of decades with the Coach brand, which gives us -- we have the really great seasoned teams that are on the ground in the market executing. So the strength of our teams there gives us a huge advantage to stay close to the consumer and then deliver in a way that, that consumer will respond. And that is increasingly delivering relevant product in the marketplace. And again, the fashion-engaged consumers responding to the bead bag, as an example, is something that we've rolled out globally, but that consumer continues to engage with the icons, the Stuart Weitzman iconic product. Stuart Weitzman has high penetration in that market. The 5050 boot, when we give it a lug sole, which is a new trend, that consumer really responds. So staying close to the consumer and understanding what they're looking for in a product is important, but then also engaging them where they are, not only in stores but on digital channels. And I mentioned that Coach was the #1 handbag brand on Tmall platform during 11/11. Stuart Weitzman was also the #1 luxury footwear brand on the Tmall platform on 11/11. So really understanding how to engage those consumers. And I also touched on the marketing that we've been doing, the influencers, the live streaming and the ability to move quickly when we see the consumer move, and that's what led to the Coach brand being the first fashion brand on the TikTok of China and the Dalian platform with live streaming. So it really is around innovation, both in product and in how we reach consumers.

I wanted to focus on just Kate Spade for a minute. You've shared your goal to be a $2 billion brand. What inning are we in? And are you seeing any specific green shoots that highlight the opportunity of the brand?

Yes. The Kate Spade brand has tremendous runway, and we still have confidence in the brand's long-term potential. The team is making changes in the brand, really crystallizing the brand's purpose and returning it to the core strength of the brand. We've seen really important green shoots. We've recruited new customers to the brand. We recruited 500,000 new customers to the brand through digital channels. In the second quarter, Kate Spade -- actually, that consumer is -- Kate Spade has the highest digital penetration of all the brands on our platform. So it's already highly penetrated in the digital space, and we're recruiting new customers through that channel and continue to engage lapsed customers. And one of the things we talked about was in the second quarter alone, we had a 40% increase in lapsed customers to the brand. So that gives us an understanding that we are reaching our core consumer base and reengaging them. And that's through smarter marketing techniques. I haven't talked about our test and learn programs and marketing, but we've embedded a test-and-learn framework, and we're ideating and scaling the wins. And so the teams are increasingly able to reach and spend our marketing dollars more wisely, but also understand how to reach consumers in a new way. And then foundationally, we're working on the product and really stabilizing and moving forward the core leather goods. We launched an all-day tote as part of our core offering that's been doing well and getting traction. We've talked about the spade flower platform, which is a signature platform that the Kate Spade brand really hasn't had a strong signature platform to leverage. And that spade flower that we launched a few months ago continues to perform, and that's a platform we think we can continue to build on. And additionally, there are other categories. Kate's a full lifestyle brand. So there are other categories like jewelry and footwear that we can continue to -- that they are important parts of the brand that can continue to grow. So we saw those categories perform well in the second quarter, and we are optimistic in the future of the brand.

Great. And then moving on to Stuart Weitzman. How do you define success for the brand, both in the near and the long term?

Well, same with Stuart Weitzman. We are continuing to focus on our core, the core of the brand, getting back to what the brand is known for. That brand is known for fashion and fit. So it's that combination of having style and delivering comfort, which I think we walked away from a little bit, and we're getting back behind that. And we're seeing increasingly the ability to reengage lapsed customers as well as attracting new customers to the brand. But we also got focused with Stuart Weitzman on the geographies that matter. We did walk away from unproductive markets so that we could increase our focus on North America and increase our focus on China, which are increasingly important for the brand. We're getting focused on the iconic products in the brand. I mentioned the boots and booties and sandals, which Stuart Weitzman is known for. We're looking at our assortments with a lens of casualization so that we can, again, as we know our consumers, delivering that fashion and fit in a way that customers are looking for in their lives today. I mentioned the 5050 boot, which we updated with the lug sole, which was a more casual trend in the market that really performs. So the teams are staying close to the consumer, focusing on the important parts of the market where we can drive productivity. And we are expecting to increase profitability for the brand. And in the first half of the year, we saw a nice improvement. So we're on track and we're on pace.

Great. On capital allocation, you paid down your revolver in January. Have any of your near- or long-term priorities changed after that? And then when do you plan to reinstate the dividend and start the buyback program again?

Yes. For capital allocation, we are -- our first focus, as I mentioned, as we navigated through the pandemic was to stabilize our cash flow generation and get back to sustainable top and bottom line growth and free cash flow generation. And it's nice to say that we're just a couple of quarters out of the pandemic when we were just reopening all of our stores, and we have now fully paid down our revolver as of January. So a really good position to be in. The business has stabilized, and the cash flow is strong. Our focus as we're moving forward is, first and foremost, to invest in our business as it has been. And that's increasingly true in digital, in the digital space and digital capabilities and omnichannel. And then as you mentioned, paying down the revolver, that was an area of focus. And then as we move forward, returning cash to shareholders and reinstating some of those programs would be on our list. We are -- as we entered into COVID, had a covenant relief. We [ received ] covenant relief through this pandemic. We're still working our way through that, and that ends at the time we file our 10-K. So we're prohibited from doing anything until we get to the end of our fiscal year and file that 10-K. But then our priorities would be to continue to look to pay down debt and then return to our shareholder return programs.

And then what are Tapestry's priorities in terms of sustainability and ESG?

ESG, it's a great question because it is -- it has been -- and I don't get that question a lot. And it's such an important part of the foundation of our company. It's interesting, as we created Tapestry as a company a few years ago, we knew that ESG was really part of the fabric of the company. So we created our program actually calling it Our Social Fabric. . And as we think about ESG and Our Social Fabric, it is really around our people first, our communities and our planet. And under our people, it really is about improving leadership representation of underrepresented groups. So [ Edie and I ] is a core part of how we think about that. And we've increasingly engaged all of our leadership team. We all have goals around moving us forward in that space. So we're very engaged there. And under our communities, it's about the impact that we have as a company on our communities and the positive impact that we can have through our philanthropy efforts and also through volunteer efforts and the impact we're making in our supply chain for the people who are making our product. And then on our planet, as we think about the impact we have on our planet, it's about reducing our carbon footprint as well as increasing traceability through our supply chain. So those are the foundational elements of our ESG program. We have developed goals around that and as I said, increasingly holding ourselves accountable and every leader in our organization accountable for making progress.

Great. Okay. That's exciting. Well, Joanne, we are about out of time. I wanted to thank you for coming today and participating and giving us your insight, and I look forward to doing this in person sometime soon.

Yes. I'm looking forward to that as well, Lorraine. Thank you very much.

Thanks.