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

Okay. I think we are on. Hi, everybody. Thanks for joining today live, and thanks for all of you who are participating virtually. We're really happy to end the day today with Tapestry. We have Joanne Crevoiserat here to sit with us and have a fireside chat about Tapestry, about the strategy and will be here to take your questions. So thanks for joining, Joanne.

Thanks for having me. And I have to say this is -- it's just so nice to be in person. So thank you for everybody who came out in the room, but thanks for everyone also tuning in on the webcast. If you'd like, I can jump right in.

Yes, it's great to be back. We were -- we canceled this in March of 2020, and we're really, really happy to be back in person. So thank you.

So Joanne, if we could just talk about the transformation of the Tapestry business, what do you think has been most impactful? And how has the multi-brand platform contributed to your results?

Yes. Again, Lorraine, it's been an interesting couple of years, and I do think it's interesting that this was the first probably conference that was canceled 2 years ago, and it's the first one we were back in person. And a lot has happened in that last 2 years for many of us for our consumers, too. If I go back to that time and think about where we were, we were embarking on a fundamental transformation of our business, thinking about how we needed to engage consumers with our brands and what we were seeing is the future. And at the time, we were seeing these trends develop in the market, consumer behaviors were changing, what they valued from brands was changing. And we were positioning our transformation efforts to enable us to have stronger consumer engagement in this, what we were considering the new world of retail where it was all headed. That came down to 3 fundamental principles that we saw back then that are even more true right now today. The first is we had to get closer to our consumers because consumer trends were moving fast than -- they're moving even faster now particularly in some markets like China, where we are, we see those consumer trends developing and moving very quickly. So getting closer to our consumers and understanding what they valued from brands, what they valued from our brands and delivering against that knowledge, that consumer knowledge was important. Leaning into digital, so those digital trends were moving quickly back then, and I know we all know they've accelerated quite a bit over the last couple of years and have become even more important and fundamental to how we engage consumers. Leveraging data and analytics was also part of that digital perspective that we had back then. But our focus was on how do we take the data that we have, and we're 90% direct-to-consumer business. We have a lot of data on our consumers, and we were focused on how we leverage that data and that knowledge across our value chain and our business, again, to strengthen that engagement between our brands and our consumers. And the third part of our transformation was all around agility. We have had a very successful business over a number of years and the way we saw consumer trends moving at the time requires companies' businesses to be more agile, to be more responsive to changes in trends because we were seeing those changes happen more frequently. So our focus in the transformation was to do just that to leverage the Tapestry platform to get closer to our consumers, leverage that data, leverage the digital and technology infrastructure that we've invested in over years to help support that engagement between consumers and brands. And our business over the last 2 years, it's been great to see the results of the work and the foundations that we've laid. We're acquiring new customers at increasing rates. I think we've talked about 11 million new customers over the last 18 months across our brands. We're engaging consumers in new ways on new social media platforms. We have new tools and technologies to bring that to bear. We're increasing our digital penetration, building a $2 billion digital business, tripling where we were pre-pandemic and seeing very strong engagement across all of our brands. So really pleased with the progress we've made. We think it's foundational, and we can build from here.

And what gives you the confidence in the health of the overall handbag and accessories category? And what's the outlook for the category going forward?

Yes. Again, it's been an interesting couple of years, right? We have the good fortune of playing in a category in a TAM that has been growing and historically have been a strong category with strong growth. I think going into the pandemic, this is a category handbags and leather, goods and footwear that has grown, was growing mid- to high single digits, very consistently. So seeing strong engagement from consumers going into the pandemic. And I think many people said during the pandemic, "Hey, everything shut down, nobody is going anywhere. Who needs a handbag?" But what we knew and was confirmed is that a handbag is an emotional purchase and consumers value the category and continue to engage. You can see that in North America and in China, both in the depths of the pandemic, but also most recently, where we -- it showed high intent to purchase in the coming 12 months. So we expect, not only is this a category that has been strong historically, I mean, it's a $90 billion category. We're already as a category at or above pre-pandemic levels as a category. So didn't really lose any ground as we came through the pandemic to where we are today and expecting that, that growth will continue at that mid- to high single-digit level coming out of the pandemic now.

Okay. What are you seeing in terms of consumer trends? Any shift in product styles or shopping preferences post pandemic?

Yes. It's great to be in person. So I will say that. We are seeing an optimistic consumer. We came through the second quarter with very strong results, in fact, exceeding our expectations in a very supply-constrained environment. As many know, we were working very hard to make sure we had the product to serve to our customers to that increasing demand we were seeing across all of our brands. I would say this is a holiday where it really proved that the consumer is strong, is optimistic and looking forward to being back in person. We're seeing in-person events driving the need for occasions. So I don't know how many of you have been to weddings, but weddings are back on the calendar and frankly, hard to schedule. So we're seeing a nice uplift in the business for occasions, not just bridal, but that's part of it. Weddings are part of it and in-person occasion wear. And we're also seeing back-to-office or return-to-office need. And our categories obviously benefit from those needs, and it's -- so we welcome the back to the real world.

Yes. I think we all do.

Yes.

There's a lot of debate around big ticket benefiting from outsized spending after stimulus checks were received. Did you see any change in your customer behavior in spring of 2021? And do you expect any impact that you lapped the receipt of these funds?

Yes. That's a question that we hear often. And what was interesting to us is the strength of the category all the way through the pandemic. And if you think about North America, which I think that question is really targeting the North American consumer, we are seeing a strong North American consumer. And even after the benefits of the stimulus stopped, we've seen our North America business continue to strengthen quarter after quarter. And our brand is continuing to drive. That's been the result of the work that we've done, the foundational work that we've done to be better at engaging consumers. Part of our transformation was not just about leveraging data and analytics and digital, but it was about understanding who our customer is, getting a real sharp focus on our target consumer and clarifying our brand positioning because each of our brands have very unique positioning in the market and speak to a target consumer. And we've improved our ability to reach those consumers and to speak to those consumers about our brands in very unique ways and distinctive ways where they are on different social media platforms, we're doing a lot of trial and testing and learning around that, and we're finding strong engagement from that, but that is what's driving the strengthening business that we see, both in North America but across the globe.

I'm going to move to a question that I never once got in my 20 years and all of a sudden, it's the #1 question I'm getting. Can you remind us your exposure to Europe and then Russia and the Ukraine, specifically?

Yes. Obviously, a good reason for the question these days. At a humanitarian level, I will just say that our concern is for the people of Ukraine and the impact that the situation over there is having. We've done a lot from a company standpoint in terms of donating to refugee and to support the refugee situation there and to support displaced people as well as matching donations from our people. And so that obviously is our primary concern. From a business perspective, we have very little exposure to the region. Europe, in total, is less than 5% of our business. We have no directly operated stores business in either Ukraine or Russia, and we have the small immaterial wholesale business. We've stopped shipments there, but it is immaterial to our total from a business perspective. But again, supporting the humanitarian efforts there, including through donations and philanthropy.

Thanks. So what are the major drivers of Coach's growth going forward? And how confident are you in the sustainability of the brand's margins?

Yes. We've been really pleased with the performance of Coach. Coach, as a brand, has been working through this transformation on really getting close to and sharpening its positioning in the market, getting close to its consumer, and really gaining traction at showing up where our consumers are and building and strengthening the business. Having said that, it's a big successful business with tremendous opportunities for continued growth. We've leaned into the digital business at Coach with much success. We're acquiring new customers through that channel. And increasingly, they're younger consumers. They're coming into the brand at average or higher AUR. So this is a quality new consumer we're attracting. And although we've built a strong business through digital, Tapestry wide, digital and for Coach, represents less than 1/3 of the business. So still a lot of runway in digital across geographies, both in North America and then across the world where actually our penetration internationally is much lower than it is in North America. So even more runway there. China for Coach represents a continued opportunity. We have a long history in China, and we're getting closer to the consumer. Our brand, the Coach brand, is very valued in the market. I think you can see that in our performance on Single's Day on Tmall in the region where Coach is the #1, was the #1 handbag brand during that very important shopping day. So it shows that the consumer values, the brand and the market and Coach represents and is positioned at the middle-class consumer and that's a growing consumer base and a growing market for the brand. So we have much further opportunity to penetrate in China and particularly with a market that's growing very rapidly. The men's business also represents an opportunity for growth. We see the men's business reaching $1 billion and have seen some traction in the business as we march towards that $1 billion business that we see is attainable. So a number of different levers of continued growth opportunity for Coach. And the sustainability of the margin performance Coach is delivering some of the highest margins in the industry and the performance has been really strong. It's not only sustainable, but those growth levers that I just talked about are all margin accretive businesses for the brand and for Tapestry. The digital business for us achieves higher margins than the respective brick-and-mortar businesses. So it's a tailwind on margins as is China in men. So those are all areas that represent growth opportunities but also accretive margins at very accretive margins. And I will also say, I need to talk about pricing power because AUR has been a win. And we've been focused on driving AUR higher average retails higher at Coach, even pre pandemic. And we've been doing that with a number of different levers, but it starts with knowing what our customers value and delivering against that value and being able to command higher pricing for our product. We've been on this journey for a long time. I think, 11 consecutive quarters at the Coach brand, but it's sustainable for a couple of reasons. One, we have new tools and analytics that are helping us better manage our inventories, better manage pricing, better target our market, and segment our marketing, which allows us to step away from promotional activity and drives higher AUR, higher margins. So that is one aspect of delivering higher margins and sustainably higher margins. I think the other thing that's happening in the market with average unit retail is in the context of the broader market. So I'm sure you've seen the pinnacle luxury players have been taking prices higher, and our brands, Coach, in particular, represents exceptional value in the marketplace for the consumer. We deliver beautiful, high-quality well-crafted product at a great price. And in the context of what a customer sees in the market as Pinnacle Luxury goes higher, it creates white space for our brands and creates the opportunity for us to drive prices higher, offsetting any potential inflation that we see and still delivering great value in the market for the consumer. So that's our focus. And our confidence is based on the experience we've had over the last few quarters, seeing little customer resistance to these price increases and a lot of acceptance of the brand.

Great. Then switching over to Kate Spade, you really saw a nice inflection last quarter. Revenues are back above 2019 levels. Were there any specific drivers to this performance? And then what are the drivers of your goal to achieve $2 billion in sales for the brand?

Well, the Kate Spade reached an important inflection point this quarter, but it has been building. So it wasn't a surprise to us, although the business outperformed our expectations during holiday -- during the holiday quarter, but not a surprise, I would say, as it has been building. Kate is a very unique brand, and we've spent time fundamentally positioning the brand against the core DNA of the brand. We've clarified the brand positioning. We've added talent to our organization, and Liz and her team are doing a great job with new merchandising, new marketing talent. We've reorganized the creative execution of the brand to get back to the roots of the brand, which is Kate Spade fundamentally is a great storytelling brand with a broad lifestyle appeal to our customers and frankly, a very passionate Kate Spade community. That consumer-customer community really value what Kate Spade represents and reaches out and is vocal, right? We see that in the viral TikTok videos, it's a very passionate fan base, if you will, of the Kate Spade brand. And we're doing a much better job delivering against the brand promise with the changes that we've made. We've reset the core foundation of the handbag offering. We talk about the Knott, which is a leather group actually my bag that I carry every day is a leather platform that the customers are -- have responded to. The spade flower is actually a signature platform. Kate Spade has never really had a signature platform and a handbag offering, that's such an important element of a core handbag offering. So we solidified the core foundation of the product offering. And we've redefined and clarified our brand position and are better leveraging our marketing tools and techniques to reach that consumer. And we see that in the customer acquisition, 5 million new customers acquired over the last 18 months to the brand. Equally importantly, 2 million customers reactivated in that time. So that tells us that with the reactivation, the strength of that reactivation that we're reaching the core Kate Spade customer that we're doing, and we're landing the right messages behind the brand and customers are coming back to the brand. And holiday, while it was an important inflection. So I think it is important to call out Kate Spade and the holiday quarter delivered growth 16% ahead of above pre-pandemic levels. So far above pre-pandemic levels, acquiring new customers, driving reactivation, and retaining customers at a greater rate. That's the right foundation and that gives us confidence, even more confidence in the brand's ability to reach $2 billion at higher -- high teens operating margin. So we have top line growth and bottom-line growth opportunities at Kate Spade.

Great. You touched on AUR improvements for Coach earlier, but maybe we could think about that for the company overall and talk about each of the brands, how far can prices go up from here? And then do you expect to give back any of the gains should the environment become more promotional from here?

How we think about AUR is much different today than it would have been 2 years ago. And I think we believe that we control our destiny here. And we've proven actually that we do control our destiny. And there's so much that we need to do -- the context of the market is important. And I just talked about what we're seeing in the context of the market, and that is the water level is rising on pricing and AUR. And that gives our brands an opportunity to, again, it's very important. We represent really tremendous value in the market. But in the context of a rising water line, we have an opportunity to continue to raise AUR and deliver that terrific value in the market. And in terms of controlling our own destiny, we are better understanding how we engage consumers. And the engagement isn't just on price and promotion, and that may be some of the historical things that brands may have relied on, but that's not where we are today. We are developing relationships with consumers that are deeper than just a price and a transaction. Being 90% direct-to-consumer allows us to know a lot about our consumers. We are not dependent on third-party data. We have first-party data that we can mine and continue to leverage to know more about the consumer and engage them with our brands. And we are better leveraging that data all -- I talked about the value chain. So we're leveraging that data in our product creation. We're still bringing that balance of magic and logic that creativity to how we create product, but we're also bringing the data in to understand who we're making that product for and what they value in the product? Is it function? Is it a motion? What are the functional needs? What are the emotional needs? And how are we delivering against them? And then if you think about down the value chain, how do we allocate that inventory? How do we set our assortment? What's the right number of SKUs, styles that we need to offer? We're leveraging data to help us with that. We're leveraging data and marketing and new tools, AI tools that help us segment the audience and target our audience at a more refined level. And we're leveraging data and pricing, which is also supporting AUR growth. So there's a lot that we own and control and that gives us confidence. And we've seen it. We've seen it paying off. We see a lot of pricing power across our brands. We've seen higher AUR at Coach for multiple quarters. And at Kate and at Stuart, I would say that story is just getting started. We have lots of runway ahead.

Great. And can you share any additional details on the continued acquisition of new customers?

Yes. The customer acquisition is certainly important. It's important to any brand, sort of the lifeblood right of how we do our business. And again, we've developed capabilities to engage consumers at a deeper level on new platforms. We've actually changed the way we work, not only harnessing the data, but empowering our teams to work differently to try to test and learn against new platforms and where we see things working, we're able to scale quickly. And in an environment where the consumer is moving very quickly, that's important. That's an important part of the capabilities that we've developed is empowering our teams, allowing them to test and be on new platforms. I'll give you an example. We were the first fashion brand to be on -- have a transactional site on Douyin, the TikTok in China. And the reason we were first there was because we had teams in the market empowered to try new places and that's -- those are places where our consumers are going. Some consumers are on Tmall, but some consumers are now in different social platforms. And how do we move quickly to put our brands and engage consumers where they are, and it's those capabilities that are helping us drive customer acquisition. And importantly, again, as we're acquiring customers, they're increasingly younger, which is important for our brands and they're coming in and transacting at average AUR higher, which means it's a high-quality consumer coming into our brands and engaging, and the lifetime value opportunity then exists. We're also retaining these customers at an increasing rate. So very encouraging for the future of all of our brands.

And if you step away from the near-term macro choppiness, how has your long-term view on the opportunity in China changed?

Well, I guess I would say it hasn't changed. In fact, the performance of that region through the pandemic has only strengthened our conviction and the possibilities and the growth opportunities that exist in the market. Again, our brands target that middle-class consumer. Our positioning in the market is great. We have both at Coach and at Stuart, which are brands that have a stronger presence in the market today, as I said, still resonate very strongly with the consumers in the market. They're valued in the market. We see that again on that Single's Day performance where both of those brands were the #1 brands in their respective categories. So there are brands that are valued by the consumer and again, represent important value in the market. And we have the knowledge because we've been in the market for so long, we're staying close to the consumer, and we have the maturity and depth of talent in the region to allow us to empower those teams to ensure that we stay ahead of -- in front of the customer where they are. We're being innovative in product and delivering product that is designed with local flavor. We're showing up on and innovating on social media, digital places increasingly in digital spaces where those consumers are. And through the pandemic, it's a consumer that has proved incredibly resilient. China was the first market to completely shut down and it bounced back very strongly. We had 35% growth in the last quarter above pre-pandemic levels in China. And while there is some near-term headwinds related to COVID, we expect, particularly with that middle class market, that market to continue to grow strongly and it represents tremendous growth opportunity across all of our brands.

And I wanted to focus on digital for a minute. You talked about the tremendous growth you saw during COVID. Can you talk about the initiatives that are fueling the go-forward outlook for that business?

Yes. The digital business has been -- it's been rewarding to see the amount of traction that we've had in such a short period of time. Our digital business is reaching scale -- considerable scale at approaching $2 billion this year. That's nearly triple where we were pre pandemic. So when we say things have moved quickly during the pandemic, that's an indication of how quickly the consumer is moving, consumer behaviors are moving. And I think that business is sticky. I think those behaviors will be sticky. It's like going back to the office. We're not going back to anything. There's a new way of working, right? We'll engage in the office sometimes, and we'll engage over Zoom sometimes. The consumer is the same way, and we've built capabilities. And the good news is that we've invested in a foundation to allow us to engage consumers and transact across these platforms. And even at $2 billion, this business represents less than 1/3 of our total business. So if you think about digital and the way the consumer shops there's tremendous opportunity for us to continue to leverage those assets and continue to grow in this channel. Again, it's a margin-accretive channel for us. And as we think about consumer behavior, we're thinking about what experiences we need to deliver to the consumer in this digital channel and how do we engage the consumer through these digital channels. And I'll leave you with one last thought. Our stores still matter. And most importantly, our store associates still matter. And we've -- as the consumers shifted to digital, it's been interesting to see them really reach out in value engagement with our associates. So our associates have shifted to having virtual shopping appointments with consumers. So the way I think we think about digital has to change because it's not just engaging with the website. It's engaging with our associates potentially on a social media site to understand styling advice or to complete their shopping journey. They may start it online and complete it in a store. But having the capabilities to engage customers in new ways is really where our focus has been, and we're adding new tools not only on the digital side, but we're giving our associates new tools and training to allow them to engage customers in this way.

And then as you look into 2023, can you provide some guardrails on how you're thinking about it?

Well, we're optimistic. We're really thrilled with the traction that we've had behind the acceleration program. We've created a strong platform for growth and a strong foundation for continued growth. Our focus was to transform our business model, to strengthen our engagement with consumers but with an eye on setting us up for accelerated growth. So how do we change the way we manage our business to strengthen the brand building investments that we're making and position us for accelerated growth going forward. So as we've come through the acceleration program, we're delivering higher operating margins. We have a more efficient operating model. But within that, we've also really shifted the investment to increase our investments in marketing and in digital. So those are what we consider the brand-building investments. And as we think about not only '22 and delivering, we're on track to deliver earnings per share this year that are 40% higher than pre-pandemic levels. We're also positioned as a company to continue to drive top line growth with these brand-building investments at stronger operating margins. So very optimistic, particularly given our performance.

And stronger sales growth, higher operating margin, better cash flow, can you talk a little bit about how you think about the balance sheet these days and what your potential use of cash might look like?

Yes. This is unlocked, an opportunity for us. We are cash-generative operation and even more cash generative than we were pre pandemic. So we're driving more efficiency. We're throwing off more cash that's allowing us. Now that we have better visibility coming out of the pandemic to lean into returning that cash to shareholders through both dividends and share repurchases, and you've seen us do that. We've committed to over $1.5 billion in return to shareholders this year alone. Our first priority is to invest in the business. I talked a lot today about all of the investments we've made in our capabilities to engage consumers with our brands. That's our first priority, but we're also leveraging a more efficient model, leaning into the brand-building investments but return cash to shareholders. And I should have said on our targets. We look forward to sharing more '23 targets at the end of our fiscal year and even longer-term targets at an Investor Day, hopefully, late summer or early fall.

Great. And then before we wrap up my questions, just maybe would love to get your view on Tapestry's 3 most significant competitive advantages?

I love this question. Our competitive advantages have to -- I mean, it starts with our people. I think we have the best team in retail. We're investing in our people. I think you saw us do that coming in through the pandemic, raising our minimum wage to $15 an hour, that engagement that our customer has with our associates is important and it's an important touch point for our brands. And we have a great team. We have a strong leadership team that -- our executive committee has been managing this business all the way through the pandemic and delivering really great results. And the world keeps throwing curve balls at us. I have a lot of confidence in our team from top to bottom that we've got a great team to manage that and to continue to engage our customers and our brands. The second advantage, I think, competitive advantage is our brands. All 3 of our brands are strong brands with unique positioning in the market and considerable opportunity for further growth. We have seen the customer really value our brands, reach out to our brands, even through the pandemic. And now that we're coming out into real world in real life, we think there's tremendous opportunity to drive continued growth and engagement with our brands. And last, I would say is the Tapestry platform. And we've spent a lot of time over the last 18 months building what is a scalable platform that we can leverage across all 3 of our brands, and it really is about the consumer insights, consumer knowledge and data that we have, harnessing that data and making it available for our brands to use to leverage to drive their growth. And that has been a game changer in terms of how we think about it. We're just at the beginning of that journey. And again, we have a lot of first-party data that we're harnessing, and we've got a lot -- there are new tools and technologies that are being developed and a lot of innovation in that space that we're able to take advantage of because of that rich data, but also the technology foundation and the digital foundation that we have as well as our supply chain, which has proven to be quite nimble as we've managed through unprecedented headwinds and challenges and we continue to face them, but we have a globally diversified supply chain that is part of that platform. And I already touched on talent, which would be the fourth part of that platform. So I think those 3, our people, our brands and our platform are a competitive advantage.

And we have a couple of minutes left. I don't know if there are any questions in the audience. We have one right back there.

I had a question about your use of influencers or marketing through influencers and which -- where you're seeing the best conversion rates in social media?

It's a great question. We have what we call a constellation approach to influencers, and I assume everybody heard the question. Do I need to repeat it?

No.

Okay. On influencers, the constellation approach is: one, where we have a brand ambassador, and that person probably has the biggest reach. But we also have influencers across different social media platforms that reach maybe smaller audiences but are more valued on those platforms and maybe target a more narrow consumer segment that speaks to the brand. But then I touched on our associates as influencers. This is something that we've developed. It sort of developed organically in terms of empowering our teams during the pandemic. We saw customers reach out to our associates, and our associates responding on social media, but to the point where they're becoming influencers of their own. They're creating followings of their own, and we've decided to package that, right? And provide tools and training for our teams. We've taken the idea that was cultivated organically sort of at a grassroots level and now started to bring that around the world and support it in a more important way. And what's interesting is authenticity with brand in terms of consumer engagement is more and more important these days, and we're seeing some of the highest engagement. We're taking that associate content and also making it available on our website. We're seeing some of the highest engagement with our associate content. And I think the next phase is turning our customers into our influencers and that's also coming. So that becomes more and more important, but it's not a one-size-fits-all answer.

Great. Well, Joanne, thank you so much for joining us today.

You're welcome. Thanks for having me.

Thanks. Welcome back.

Thanks.