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

Hello, and welcome. I'm Jamie Merriman, Bernstein's U.S. Softlines and Specialty Retail analyst. And I'm thrilled to be joined this morning by Joanne Crevoiserat, Tapestry's CEO. Joanne, thank you so much for being here today. Again, virtually, while I wish it was in-person. But I want to turn it over to you for your opening remarks.

Great. Thank you, Jamie. It's really great to be here today. And just to start with a few brief opening comments. When we just came off reporting our third quarter, it really was a standout third quarter, demonstrating the continued progress we're making behind our Acceleration Program, which reemphasizes the power of our brands and the power of the platform, the Tapestry platform. In addition, in the third quarter, with those results, we've raised our outlook for our fiscal year '21, which incorporates not only the year-to-date outperformance, but also a higher expectation and outlook for the fourth quarter that we're in right now. So we're very pleased also to be on track to outpace pre-pandemic EPS for this fiscal year despite the external headwinds we faced all year. So terrific performance and execution by the team, but we're confident the changes we're making are foundational to our business and will support long-term sustainable growth. And the changes that we've made will support structurally higher profit margins over time. We are transitioning to an important time, I think, in the economy, but also an important period for the company, where we can maintain sustainable demand-driven growth and build on this foundation that we've created, and we've built this, this past year, given the improving backdrop. We have a number of competitive advantages. I'm hoping we'll get into some of these. I'm sure we'll get into some of these today. Our brands, our product, our platform and our direct-to-consumer model. We also are very pleased that we now have a leadership team in place, and we're laser-focused on our long-term opportunities. Those areas of focus includes our brands. Over the past year, we've really strengthened our clarity behind our brands and strengthen the brand positioning. We're focused on consumers. We'll talk a little bit about customer recruitment, and we've had some success there, But also retention and reactivation, really a focus on driving lifetime value with our consumers. We're all about data, leaning into data in digital. And we're leveraging data in new ways across our platform and really embedding it in our process and our decision-making, which is changing how we work. And as it relates to the organization because we're embedding data, we also have to empower our teams and change how they work, how we work together across functions. And then we continue to maintain a focus on our channels, particularly digital and China for growth, and we see that continuing in the future. So as we've come through this past year, we've made a lot of foundational changes to our business. We're emerging from the pandemic stronger as a company and very well positioned to drive the growth in the future. And although we won't go into details on fiscal year '22 outlook, we'll provide those details in August after our fourth quarter. The environment does remain volatile. We're seeing COVID resurge in different parts of the world. We're confident that the team we have in place and the foundations that we've built and a focus on capturing market share and investing behind healthy brand growth over time will allow us to leverage the changes we've made and fuel top -- both top and bottom line growth going -- long-term going forward. So I'm looking forward to the conversation today, Jamie, and I'll welcome your questions.

Great. Thanks, Joanne. You touched on a lot in those opening comments, that I definitely want to dig back into, and I thought, to start, you talked about sustainability. And so I think one of the things that has been so impressive has been the robust improvements that you've delivered in AUR, at both Coach and Kate Spade. So can you talk first about what has driven those increases? Is it lower promotions? Is it higher prices? And how much upside do you still see ahead?

Yes. It really comes down to having a sharper focus on our consumers. We went and created the Acceleration Program. There were 3 key aspects of that Acceleration Program that we got behind as an organization. The first was really being laser-focused on our consumer and understanding our consumer, leveraging data in new ways. The second was to leverage data in new ways and lean into digital capabilities. And the third was to change the way we operated, right, to become a more agile organization. And I think that the changes that we've seen and driven in AUR are sustainable because we are closer to our consumer, and we're embedding that consumer research and understanding into our product creation processes. So we're delivering great product that resonates with our consumer. That's job one for us. But then we're also leveraging data to make decisions to allow us to, as an example, reduce our SKU count. So we've structurally embedded data and analytics into our process to allow us to say what is the optimal assortment and cut off the unproductive tail of our SKUs. And we've talked about some of the traction we've made there, reducing SKU counts between 30% and 50% across our brands, very substantial, and that allows us to buy depth behind the things that matter, and it cuts off the tail, reducing the need to promote our way through low productive SKUs. And then I will say, inventory management has been a real cornerstone and a real strength as we've come through the pandemic. Our teams got laser-focused on what we needed from an inventory perspective. We've got a very strong supply chain and well-diversified supply chain. And through all of the changes during the year, we've gotten behind better inventory management practices, delivering product where we needed it, in the channels we needed it, where we saw demand and being able to move very quickly. So inventory management is now part of our incentive programs. So all of our teams are very focused on driving inventory productivity. As I said, the use of data being foundational and structural now embedded in our processes helps us maintain more productive assortments, and it's sustainable because these are processes that are now ingrained in our business model.

That's great to hear. Maybe shifting gears a little bit away from pricing to investments. I think based on the guidance, it sounds like SG&A in your current or fourth quarter is expected to be above pre-pandemic levels given some reinvestments back in the business. So can you give us a sense of what areas you are reinvesting in? And how we should think about that relative to the $300 million in gross run rate savings that you've talked about in fiscal '22.

Yes. We did take some bold actions as we came through the pandemic with a focus on changing our operating model and becoming more agile. And that was the genesis of the $300 million in gross run rate savings that we expected. We knew we needed to make our operating model more streamlined. And there are savings resulting from that. But our focus was really to change the way we work and take layers out of the organization to think differently about how we wanted to engage consumers in the future. And you saw us exit some store locations and even markets that were unproductive as part of changing our operating model. And as we streamlined our operating model, we have had and delivered success. We feel great about, and we are on track to deliver the $200 million in gross SG&A savings in this year, and that's gross. It has always been our intent to then leverage those savings and enable investment in places where we see the consumer moving. So how do we need to engage consumers in the future? And that's been the focus. That was the focus as we started. It was actually pre-pandemic as we approached these changes. And frankly, the pandemic caused us to be a little more bold in the decisions we're making and accelerate a lot of that progress, so that we could move faster to meet consumers where they are. So again, a lot of success in taking costs out, both structurally through our organization and operating model and also through our store network and raising the profitability expectations we have on our -- in our productivity expectations for our stores, our store fleet. But then going forward, investing in places that we knew we could see high returns. And those places we're finding, are in marketing and increasingly in digital. So those are the 2 areas of investment. Certainly, there are variable costs on the sales outperformance that we've had that are reflected in our absolute -- our net results. But the fundamental structural changes we've made have enabled us to continue to invest in the things that will drive growth long term, both in marketing and in digital.

Okay. Great. And so I guess putting those together, your margin expansion has been extremely impressive. So it sounds as though -- or maybe you can just talk about how sustainable you think those -- the strength of the margins that you've realized recently will be? And how high do you think operating margins can go, ultimately?

Yes, we're really pleased, as I mentioned, to be achieving higher operating margin levels than pre-pandemic levels and achieving operating margin growth over pre-pandemic level even in this year. And the changes, again, are foundational. They're a result of the work and the execution by our teams behind our Acceleration Program. And we have an opportunity to sustain these, as I talked about with AUR. These changes have been foundational, and we're changing the way we work and how we're informed by the decisions we've made, which have allowed us to step away from promotional activity, drive stronger gross margins as well as we just touched on SG&A and the leverage we're seeing on SG&A. We have an opportunity to sustain best-in-class margins at Coach, and we see runway ahead to improve margin, the margin performance of both Kate Spade and Stuart Weitzman. And I think the year-to-date performance really underscores that traction. We're seeing this play out in the year-to-date -- in our year-to-date results. The expectation for exceeding pre-pandemic levels this year, which implies certainly higher operating margin levels. But as we inflect on the top line, we expect that we'll be able to grow top line and deliver operating leverage moving forward.

Okay. Great. And maybe shifting gears to that top line inflection and the top line opportunities. Can you talk about what you see as the key opportunities for each brand to drive market share gains going forward?

Yes. We have a tremendous amount of runway ahead of us with our current portfolio, which is a great place to be. And again, we continue to invest in our Tapestry platform to allow our brands to achieve even higher heights than they could on their own. And with Coach, we've seen tremendous traction in the digital space this year and have a lot of runway left ahead as we've seen the acquisition of new customers and driving lifetime value from our new customers. Again, these customers that we're acquiring in the digital space this year have been younger on average. So it's an increasingly younger consumer, which bodes well for the long-term health of the brand. We also see continued opportunity in runway in China, particularly at Coach. So I would say the 2 really strong opportunities at Coach on the top line or to drive -- continue to drive digital globally as well as our business overall in China. As I mentioned, the margins are best-in-class in our Coach business, and we believe we have an opportunity to grow that top line but maintain these best-in-class margins. At Kate Spade, we're at the beginning of our journey here with Kate in terms of clarified brand positioning, and it's been great to see the traction we're getting with the better execution behind product and marketing at Kate Spade, again, acquiring new customers. So we believe there's an opportunity to drive lifetime value and further customer acquisition as well as reactivating our core customers. So we had a 40% increase in reactivation rates last quarter alone. So not only did we acquire 300 new customers, we're reactivating that core customer base. And we can see it in the TikTok viral nature of some of the products. At Kate Spade, we're really tapping into the heart of that Kate Spade business and who that Kate Spade community is very passionate. So we have meaningful opportunities to drive top line growth as well as margin expansion at Kate Spade over our planning horizon. And Stuart Weitzman, our priority is to return to profitability, and we're making progress there. We're leaning into China. So Stuart Weitzman has -- I should have mentioned Kate Spade has a very strong digital penetration today, but we see that as an opportunity and almost -- and a very small business in China. So plenty of runway as we resolidify that business in the North America and Japan markets where we're stronger, but opportunity to grow globally at Kate. And Stuart, as a stronger business in China in terms of penetration for its own business, but relatively small overall, so continue to see an opportunity to grow in China to exit unprofitable doors and markets. You saw us take bold action this year to drive more profitability, and we're making a lot of progress on that front. And we're strengthening our position in North America, and you saw us talk about our wholesale partnerships improving with the expansion in 90 doors in Nordstrom. So a lot of things -- opportunities at Stuart Weitzman to continue to drive growth.

Okay. Great. I guess the next question is just maybe to take a little bit of a step back. And can you talk about what you see as Tapestry's just key competitive advantages in the current environment in the long term. I think you talked about some of them in terms of what you've done with the Acceleration Program, but I'd love to get your thoughts there.

Yes. I touched on a little bit earlier, but we see Tapestry as a platform that allows our brands to stretch further than they could on their own. And the capabilities that we have that we continue to invest in on the Tapestry platform are really 4 -- in 4 key areas. The first is consumer insights and consumer insights are like gold these days, right? How we collect and leverage the information that we know about our consumers and create -- drive that to create value in each of our brands. I mean we know a lot about consumers around the world. Across all of our brands. And we're leveraging those insights to be better and deliver better product and experiences for our consumers. So consumer insights in the Tapestry platform is a key competitive advantage. We also have a globally diversified supply chain. I touched on that earlier. And our ability to navigate through the pandemic has been -- the execution from our teams behind that has been tremendous. And you can see that in our results as well. Our ability to capture demand that's out there, and that demand shifted quite a bit across the year, but we were able to deliver. We were able to deliver newness, and we were able to deliver newness where our customer was and how they were shopping. And we also have scalable global operations, so that supply chain and global operations footprint is a competitive advantage that all of our brands draw from. And then a technology infrastructure. I don't think that can be understated -- I'm sorry, overstated. I don't think that can be overstated in the world today, right? The technology is so important to delivering for consumers. We have a technology infrastructure. We've invested in state-of-the-art ERP system that's scalable. We're building digital capabilities that all of our brands can leverage globally. And those capabilities are increasingly important to engage consumers. So as we developed our Acceleration Program, we knew that consumer engagement was shifting, even pre-pandemic into the digital spaces, and we knew we had to be prepared to engage consumers in that way. Now that has accelerated tremendously in the last year. So those investments become critically important. And then the fourth piece is access to global talent. So the ability to build talent and grow our talent across all of our brands across the globe is a distinct competitive advantage, and we offer more opportunities for our teams to grow and learn than any one brand could on their own. So those are -- those represent, I think, a competitive advantage for our business. I would also say our strong direct-to-consumer model. We are responsible for -- we're in control of our fate, right? We directly communicate to consumers. And in this world, where consumer engagement and brand engagement is so important, to have that direct one-on-one conversation to understand your consumer and deliver and be there. I think that is a competitive advantage as well. And certainly, our strong balance sheet allows us to continue to invest in all of these capabilities. I think the performance year-to-date has given us more confidence that we can continue to leverage all of these assets for the benefit of our brands and our growth going forward.

Okay. One of the things you talked about was the talent. And so I wonder if you can just reflect on company culture? And how that has changed either under the Acceleration Program or under your leadership?

Yes. In many ways, we're a different company today than we were even a year ago. The pandemic has caused us to change, but we're also a fashion company. And trend changes happen quickly, right? So if somebody wants to ask me what's the trend going to be in 5 years? And how do you prepare for it? Well, I have no idea what the trend will be 5 years from now, but I can tell you how we prepare for it. And this is what we were talking about in terms of the way we need to engage consumers. We know that trends are happening faster and faster in order to compete and stay ahead with innovation. Even innovation and technology, we can't work in old ways. We have to work in new ways. So part of our restructuring and the changes that we've made have been about reducing layers in the organization and pushing decision-making down into the organization so that we can move faster. And so empowering our teams has become a real rallying cry. I think it's energizing to our teams. We've had to clarify our strategy. So everybody knows where we're going, but then give people the opportunity to make decisions. And increasingly, what we're doing is we're seeing cross-functional teams of people come together to make decisions. We've provided frameworks in terms of testing and learning to allow them to really lean in and move quickly to innovate and test and learn and scale the wins. And some of these cross-functional teams I've talked about. But in marketing, we have a cross-functional team that consists of a data analytics associate, a finance team member, a marketing creative, a marketing strategy person, and they get together and ideate behind the learning agenda of perhaps it's reactivating our customer base. How do we do that? Where do we show up, what platforms? And we run tests and we measure those tests and the things that work, we scale, the things that don't work, frankly, we learn a lot from. So as an organization, we're much more structured to drive decision-making lower in ways that allow our teams to make decisions quickly and move forward. And I think in terms of answering that question of what the fashion trend will be in 5 years, I don't know. But we need to have an organization, and our goal is to have an organization that will understand that and be able to react and respond quickly. And that's really been the focus of our Acceleration Program.

Okay. Great. Maybe just to pivot a little bit to the industry more broadly. Can you talk about -- and maybe this is a little bit like asking what the fashion trend is in 5 years is going to be like. But can you talk a little bit about what your expectations are for the industry coming out of the pandemic? And how you think that may differ by geography?

Well, I'm thrilled that we're talking about coming out of the pandemic, which I think a year ago, we were all hopeful for. And the fact that you attended a wedding this past weekend was fabulous news, I think people are back into life events again, things like weddings, and it is nice to see as the world sort of opens up. But coming in pre-pandemic, are categories that we play in, principally handbag, small leather were categories that were growing mid- to high single digits historically, very consistently. So we saw the consumer really engaging with this category coming into the pandemic. And in fact, even in the pandemic, we were surprised to see the level of engagement that was maintained when people were in full lockdown, right? We saw it in our digital business, and things like -- I tell the story all the time, but there was a yellow full priced pineapple-shaped bag in July last year, when everybody was in lockdown, which was our best seller at Kate Spade. And nobody needed a pineapple bag while they were in lockdown, but there's an emotional connection, an emotional purchase to those products. So we saw tremendous engagement through the pandemic with the category. We also fielded research both in China and in North America and continue to see strong purchase intent in the coming 12 months. So consumers were telling us that in the coming 12 months, they intended to purchase handbags. It was #2 on, I think, the list behind hygiene products of categories they intended to purchase. So our expectation is that coming out of the pandemic, we'll continue to see that reversion to the mid- to high single-digit growth rates in the category. And we're seeing that in places like China, where the market has recovered and reopened, and we're seeing strong growth in digital spaces as well as continued growth and growth in bricks-and-mortar, so a consumer who's back and engaging with the category again.

Great. Good to hear. Can you talk a little bit about the competitive environment in what you're seeing? And I guess part of that question, and certainly, the question that I hear from investors is if your closest competitors start to resume more normal promotions? And I appreciate that you talked a little bit about sustainability of your AUR improvement already. But can your own AUR improvements hold in that environment?

Yes. We're very focused on what we can control, certainly, and there's a lot within our control. And I think that's been a lot of the learning in the last year. The things that we control is, really understanding our consumers. So how are we taking that understanding in those learnings and building it into the product that we deliver. What are her emotional needs and functional needs? And how are we meeting those emotional needs around the creativity and newness that we're delivering with our product and the functional needs of, this you need a tote, this you need a cross-body, is it hands-free, a backpack, what are we delivering to her and why? And so really understanding our customers, it's interesting because we've taken the learnings of our market segmentation and really begun to embed them in the product creation process. So we step back a few. And we got some traction on this even before the pandemic, in Coach, we started to see AUR improvement. Well, that was because our designers and our merchants were in focus groups with our consumer, and they were making changes to the product based on what they heard and what they understood from the consumer. So this isn't something that we've just figured out. It's something that we started to really embed in process. And again, the changes that we've made with data and better understanding where we allocate our assortment around the world, who we put that product in front of in terms of our store fleet is much more efficient and data driven. And then that allows us, and I touched on the inventory management, allows us to control the actions that really drive the need to promote and allows us to step away from promotional activity. It supports higher AUR because our consumers understand and value what we're delivering, right, if we're starting with them in mind. And I will say also that we're getting much better at understanding how to talk to our consumers and where. So our marketing is all part of this equation, right? How do we drive traffic? Where do we and how do we talk to our consumers and about what, leveraging the data and analytics on that, leveraging test and learn, as I mentioned earlier, to make sure that we're showing up in the right platforms, for our consumers. And those are the things that we control, and we've seen tremendous traction in supporting higher AUR.

Okay. Great. And maybe just to continue down the path of the data and digital discussion. I think one of the questions, again, that I hear a lot is about how digital performs as, again, knock on wood, traffic starts to come back? So can you just talk a little bit about what you're seeing in North America in terms of digital as, again, hopefully, knock on wood traffic continues to recover?

Yes. The digital business has grown tremendously over the past year for somewhat obvious reasons when the stores were closed, consumers relied on digital. We leveraged that digital platform to reach our consumers. In fact, it's grown on a trailing 12-month basis, it's now $1.5 billion business for us. So more than doubled in a year. So a huge change in 1 year. But what we have seen is digital, we call it, we say digital is an and, not an or. And the reason we say that is because we're actually acquiring new customers on digital channels. So it's not a customer that was and only in a store, and now they're shopping online. This is -- we're now exposed to new customers, and we're engaging new customers online. And that's been true as we -- in China that has reopened, as I mentioned, we've seen growth -- continued strong growth in digital channels as well as growth in brick-and-mortar over pre-pandemic levels. When you talk about North America, what we've done is certainly looked at markets that have reduced mask requirements and lifted restrictions, markets like Texas, where we've seen, again, continued strong digital penetration even as the store traffic has returned. So we see -- we definitely see digital as an and, that customers will continue, and we expect them to continue and engage digitally even as we see and welcome customers back in the physical environment.

Okay. And in terms of those new customers that you have acquired, are you already making progress in terms of turning them into repeat customers? Or what's the path to do that?

Yes. We're actually seeing very healthy signs behind the customers that we've acquired. So number one, it's been great to see the level of engagement, right, of new customers who are exposed to the brand, maybe some for the first time. And come in and engage with the brand, we are seeing a higher frequency in terms of return rate. So these customers are happy. And with the products they've been delivered, they'd come back again into the brand at a faster rate. I mentioned they're increasingly younger, so maybe not a surprise on these platforms, but we're seeing a growing number of millennial and Gen Z consumers. And we're leading with the value of our products and not promotions. So these consumers are coming in at AURs that are equal or higher than our base customer business. So this is a very healthy business that we're building on digital, and we're seeing consumers return more frequently. So we're very focused on continuing to drive lifetime value from these new -- all of our customers, but particularly these new customers. And what's also important is, this is a healthy business. I think that's so important to underscore, it also comes at very healthy margins. So our digital margins are higher than their respective brick-and-mortar margins. So as we see the natural trend of consumers and the increasing penetration of digital in our business, it's accretive to our operating margins overall.