Release Date: August 15, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Tapestry Inc (TPR, Financial) delivered total revenue growth of 1% on a constant currency basis, led by international growth of 6%.
- The company acquired over 6.5 million new customers in North America, with over half being Gen Z and millennials.
- Tapestry Inc (TPR) achieved its highest annual gross margin in over 15 years, driven by operational efficiencies and strategic investments.
- The digital business remains strong, with sales more than three times pre-pandemic levels, representing nearly 30% of revenue at accretive margins.
- Coach brand achieved record annual revenue, surpassing $5 billion, with significant growth in handbags and accessories.
Negative Points
- Revenue in North America declined by 1% compared to the previous year, reflecting a challenging consumer backdrop.
- Greater China revenue declined by 10% in the fourth quarter, impacted by a more challenging consumer environment.
- Stuart Weitzman brand faced significant challenges, with disappointing financial results due to external pressures in North America and Greater China.
- The pending acquisition of Capri is facing headwinds due to Capri's recent underperformance, raising concerns about the integration and financial returns.
- SG&A expenses rose by 3% in the fourth quarter, primarily due to increased marketing expenses, impacting operating margin.
Q & A Highlights
Q: When you look at your results in comparison to Capri's recently, given that underperformance, can you just talk about your commitment to the deal and your thinking? Has it changed around the level of financial returns?
A: (Scott Roe, CFO & COO) The level of underperformance at Capri is disappointing and surprising, particularly in terms of profitability and cash flow. However, we see this as an execution opportunity. Despite Capri's recent results, the combination remains a strong strategic fit and financially accretive to our baseline EPS. We have increased conviction in the synergies and the long-term value creation under our ownership.
Q: Have you done enough work to believe that there's upside to the synergy target you initially guided to for the Capri deal? And what is Plan B if the deal does not go through?
A: (Joanne Crevoiserat, CEO) We have both strategic and financial strength and flexibility at Tapestry. Plan A is the Capri transaction, which we see as a significant value creation opportunity. However, if the deal does not go through, our strong free cash flow and valuation make buybacks a compelling option. (Scott Roe, CFO & COO) We have even more conviction in the synergies, potentially exceeding the initial $200 million target.
Q: Could you elaborate on the current health of the Coach brand in North America and any changes in customer behavior?
A: (Joanne Crevoiserat, CEO) The consumer remains choiceful, and innovation and emotion continue to win. We acquired 6.5 million new customers this year, with strong brand building and innovation driving our success. (Todd Kahn, CEO & Brand President, Coach) Coach delivered slight growth in North America with exceptional margins, driven by expressive luxury, product innovation, and compelling storytelling.
Q: Can you touch on Kate Spade and the need for further investment to fuel a turnaround?
A: (Joanne Crevoiserat, CEO) We expect to build on the foundation set over the last few years and focus on accelerating top-line growth. We will continue to invest in brand building and innovation while expanding margins and improving top-line performance.
Q: Can you elaborate on the health of your brands in the China marketplace and the most important drivers of a return to growth?
A: (Joanne Crevoiserat, CEO) We are building a healthy business in China despite macro headwinds. We expect the market to be in line with fiscal '24 but remain bullish on the long-term opportunity. (Todd Kahn, CEO & Brand President, Coach) We see significant growth potential in China, particularly in second and third-tier cities, and are well-positioned to meet consumer demand with our value proposition.
Q: Can you unpack the trends at Coach's full price versus outlet channels?
A: (Todd Kahn, CEO & Brand President, Coach) We are seeing progress in all channels and are blurring the lines between full price and outlet. Consumers are channel-agnostic, and we are meeting them where they are, including selling full-price products in outlet locations.
Q: Regarding capital allocation priorities, which brands and geographies are priorities for investment?
A: (Joanne Crevoiserat, CEO) We rigorously evaluate investment opportunities, focusing on brand building, distribution, and leveraging our technology and digital capabilities. Geographically, we see opportunities in Asia, particularly China, Other Asia, Japan, and Korea, as well as continued growth in North America and Europe.
Q: Expectations for year-one accretion from the Capri deal seem moderated. Can you expand on your assumptions for year one and the path to target leverage ratios?
A: (Scott Roe, CFO & COO) While the starting point for Capri is different due to recent performance, we remain confident in accretion and the long-term value creation opportunity. The underlying Tapestry business is performing well, and we have increased conviction in the synergies.
Q: What gives you conviction that Michael Kors will work under Tapestry's platform, and how does pricing leverage in China compare to the US?
A: (Joanne Crevoiserat, CEO) We see Michael Kors as an iconic brand with a lot of consumer love. Under our ownership, we can reinvigorate the brand through innovation and leveraging our platform. (Todd Kahn, CEO & Brand President, Coach) Coach offers incredible value in China compared to traditional European luxury, and we are well-positioned to compete and grow in that market.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
