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Tapestry, Inc. is a New York-based company that operates as a house of iconic accessories and lifestyle brands, including Coach, Kate Spade, and Stuart Weitzman. The company is dedicated to innovation and authenticity, offering distinctive products and customer experiences across various channels and geographies . Tapestry's revenue is primarily generated through direct-to-consumer channels, including retail stores and e-commerce, as well as wholesale and licensing businesses .
- Coach - A global fashion house known for its accessories and lifestyle collections, contributing significantly to the company's net sales.
- Kate Spade - A global lifestyle brand recognized for its colorful and bold designs, playing a major role in the company's offerings.
- Stuart Weitzman - A luxury footwear brand that adds to the company's diverse portfolio with its high-end shoe collections.
What went well
- Tapestry's Coach brand is outperforming the market, growing faster than the category, and acquiring younger customers who transact more frequently at higher Average Unit Retail prices (AUR). This success is driven by innovative products like the Brooklyn bag and New York collection, which have seen unprecedented demand without cannibalizing existing products like the Tabby family.
- The company achieved a record gross margin expansion of 280 basis points in Q1 and expects to maintain exceptional margins going forward, even as they expand into new categories. Structural drivers such as increasing AUR and efficient cost management (AUC) are contributing to ongoing gross margin improvements. Tapestry is confident in its financial position, with strong free cash flow and plans for potential share repurchases, indicating a commitment to shareholder returns.
- Tapestry's digital and omnichannel capabilities are a competitive advantage, contributing to growth and higher margins. Digital sales grew high single digits, offsetting a slight decline in stores, and are accretive to margins. The company is successfully acquiring new, younger customers through digital channels, including in China, supporting long-term brand growth.
What went wrong
- Uncertainty surrounding Tapestry's proposed acquisition of Capri, due to legal challenges and a pause in integration planning, may hinder the company's strategic growth plans and create operational disruptions.
- Expansion into lower-margin categories such as ready-to-wear and footwear could negatively impact gross margins, potentially diluting overall profitability.
- Potential increased tariffs on Chinese imports pose a risk to Tapestry's sourcing mix and cost structure, which may affect margins if tariffs are implemented.
Q&A Summary
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Deal Update and Capital Allocation Priorities
Q: Can you update us on the deal and capital allocation if it fails?
A: We've filed an appeal as required, and the process is ongoing. Regardless of the outcome, we're focused on our organic business and operating from a position of strength. In a deal break scenario, our capital allocation priorities are: maintaining our investment-grade rating with leverage below 2.5x debt-to-EBITDA ; resuming meaningful share repurchases as an immediate priority due to our compelling buyback opportunity ; and disciplined strategic portfolio management, with no near-term M&A expected if the deal doesn't close. -
Share Buyback Capacity
Q: What's the specific buyback capacity if the deal doesn't proceed?
A: We have significant capacity due to strong free cash flow and essentially zero net debt. While we aim to maintain leverage below 2.5x debt-to-EBITDA and our investment-grade rating, we won't push the upper limit in this environment. All vehicles, including ASRs, are on the table. We'll provide more specifics if the deal doesn't close. -
China Sales Performance
Q: How did China perform this quarter, and what's the outlook?
A: In Greater China, we delivered at the top end of our guidance range, down 5%. Our performance outpaced the industry, which declined over 20%. We saw sequential improvement through the quarter and into Q2, with positive digital trends. We remain confident in the long-term opportunity in China and are investing accordingly. -
Coach's Market Share Gains
Q: What drove Coach's outperformance and market share gains?
A: Coach is winning due to innovation, emotional connection with consumers, and disciplined brand building. Despite the handbag category declining in Q1, we believe we can grow both now and in the future. Investments in capabilities and understanding customer needs are fueling our success. -
Gross Margin Outlook
Q: What's the outlook for gross margins this year and beyond?
A: Gross margin was up 280 basis points in Q1. We expect gross margins to increase for the year, driving about 50 basis points of operating margin expansion. Structural drivers include AUR (average unit retail) increases through brand investment and AUC (average unit cost) reductions via supply chain efficiencies. -
Kate Spade's Turnaround
Q: Why is Kate Spade declining, and what's the stabilization timeline?
A: We're confident in Kate Spade's potential. Opportunities lie in brand building and supporting innovation. We've welcomed a new CEO, Eva, to sharpen our strategy and execution. Immediate actions include enhancing marketing, storytelling, styling, and SKU editing. We don't expect growth this fiscal year but anticipate trends to remain consistent. -
North America Growth
Q: What's the outlook for growth in North America?
A: North America trends were better than expected in Q1. Underlying direct-to-consumer business shows slight growth as wholesale normalizes. We expect the wholesale headwinds from Q1 not to repeat, supporting modest growth this year. -
Average Unit Retail (AUR) Increases
Q: How is AUR growing, and what's driving it?
A: AUR grew mid-single digits globally, led by North America. Drivers include less discounting, strong demand for new products like the Brooklyn and Tabby bags, and effective upper funnel marketing. We expect AUR growth to continue throughout the year. -
Channel Performance and Digital Growth
Q: Did digital sales outpace stores, and what's the distribution outlook?
A: Our omnichannel business was in line with last year, with digital growth offsetting slight declines in stores. We're focused on meeting customers where they are, and digital channels are accretive to margins. We're leveraging our capabilities to drive customer acquisition and engagement. -
Tariff Impact and Sourcing Strategy
Q: How might tariffs impact you, and what's your sourcing mix in China?
A: We've diversified our sourcing, with China now less than 10% of our manufacturing. We're experienced in managing supply chain changes and have strategies to mitigate potential tariff impacts.
Guidance Changes
Quarterly guidance for Q2 2025:
- Sales growth: 1% to 2% (no prior guidance)
- EPS: $1.70 (no prior guidance)
Annual guidance for FY 2025:
- Revenue: Over $6.75 billion (1% to 2% growth) (raised from approximately $6.7 billion )
- Operating Margin: Expansion of over 50 basis points (raised from 50 basis points expansion )
- Gross Margin: Expected to expand (no change from 40 basis points expansion )
- SG&A Expenses: Increase roughly in line with revenue growth (raised from roughly in line with prior year )
- Net Interest Income: Approximately $20 million (no change from $20 million )
- Tax Rate: Approximately 19% (no change from 19% )
- Weighted Average Diluted Share Count: 238 million shares (no change from 238 million shares )
- EPS: $4.50 to $4.55 (raised from $4.45 to $4.50 )
- Free Cash Flow: Approximately $1.1 billion (no change from $1.1 billion )
- CapEx and Cloud Computing Costs: $190 million (no change from $190 million )
- Sales Growth by Region: Various growth rates by region (no change from various growth rates by region )
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Given the district court's preliminary injunction on the Capri acquisition and your subsequent appeal, how will a potential deal break impact your capital allocation priorities, and what specific actions are you planning to enhance shareholder value in that scenario?
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With Kate Spade experiencing revenue declines and profit margin expansion primarily driven by cost management, what immediate steps are you taking to reignite top-line growth for the brand and address any execution challenges?
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In North America, you reported a 1% sales decline due to a planned decrease in wholesale, which impacted the quarter but is not expected to repeat; can you elaborate on how you plan to drive sequential improvement and achieve modest growth in this region for the rest of the fiscal year?
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Despite a 5% revenue decline in Greater China, you've increased top-of-funnel marketing investments in the region; how confident are you in seeing a return on these investments given the challenging market conditions, and what metrics are you using to measure success?
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Inventory levels at quarter-end were 9% above the prior year due to higher in-transits; how are you managing the risk of excess inventory, especially entering the holiday season, and what strategies are in place to align inventory levels with consumer demand?
Q1 2025 Earnings Call
- Issued Period: Q1 2025
- Guided Period: FY 2025
- Guidance:
- Revenue: Over $6.75 billion, growth of 1% to 2% .
- Operating Margin: Expansion of over 50 basis points .
- Gross Margin: Expected to expand .
- SG&A Expenses: Increase roughly in line with revenue growth .
- Net Interest Income: Approximately $20 million .
- Tax Rate: Approximately 19% .
- Weighted Average Diluted Share Count: 238 million shares .
- EPS: $4.50 to $4.55 .
- Free Cash Flow: Approximately $1.1 billion .
- CapEx and Cloud Computing Costs: $190 million .
- Sales Growth by Region: Various growth rates by region .
- Quarterly Sales Growth: Q2 sales growth of 1% to 2% .
- EPS Growth: Mid-single digits, Q2 EPS of $1.70 .
Q4 2024 Earnings Call
- Issued Period: Q4 2024
- Guided Period: FY 2025
- Guidance:
- Revenue: Approximately $6.7 billion .
- Regional Sales Growth: Various growth rates by region .
- Operating Margin: Expansion of 50 basis points .
- Gross Margin: Expansion of 40 basis points .
- SG&A Expenses: Roughly in line with prior year .
- Net Interest Income: Approximately $20 million .
- Tax Rate: Approximately 19% .
- Weighted Average Diluted Share Count: 238 million shares .
- EPS: $4.45 to $4.50 .
- Free Cash Flow: Approximately $1.1 billion .
- CapEx and Cloud Computing Costs: $190 million .
- Sales Shaping for the Year: Flat in first half, modest growth in second half .
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: FY 2024
- Guidance:
- Revenue: Over $6.6 billion .
- EPS: $4.20 to $4.25 .
- Operating Margin: Expansion of 110 basis points .
- Gross Margin: Expansion of 230 basis points .
- SG&A Expenses: Deleverage of 120 basis points .
- Net Interest Expense: Approximately $12 million .
- Tax Rate: Approximately 20% .
- Weighted Average Diluted Share Count: 233 million shares .
- Free Cash Flow: Approximately $1.1 billion .
- CapEx and Cloud Computing Costs: $140 million .
- Regional Sales Guidance: Various growth rates by region .
- Fourth Quarter Specific Guidance: Sales decline of 1% at constant currency .
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: FY 2024
- Guidance:
- Revenue: Approximately $6.7 billion .
- EPS: $4.20 to $4.25 .
- Operating Margin: Expansion of 100 basis points .
- Gross Margin: Gains of 200 basis points .
- SG&A Expenses: Deleverage of 100 basis points .
- Net Interest Expense: Approximately $20 million .
- Tax Rate: Approximately 20% .
- Weighted Average Diluted Share Count: 233 million shares .
- Free Cash Flow: Approximately $1.1 billion .
- CapEx and Cloud Computing Costs: $190 million .
- Regional Sales Growth: Various growth rates by region .
- Third Quarter Specifics: Revenue in line with prior year, EPS of $0.65 .
Recent developments and announcements about TPR.
Financial Actions
Debt Issuance
Tapestry, Inc. has recently created a direct financial obligation by issuing $750,000,000 aggregate principal amount of 5.100% senior unsecured notes due 2030 and $750,000,000 aggregate principal amount of 5.500% senior unsecured notes due 2035. These notes were issued under an Indenture dated December 11, 2024, with U.S. Bank Trust Company, National Association, as the trustee. The issuance of these notes represents a significant financial obligation for Tapestry, Inc., which could impact the company's balance sheet and financial health by increasing its liabilities and interest expenses. The covenants in the Indenture limit the company's ability to create certain liens, enter into sale and leaseback transactions, and merge or consolidate, which could affect its operational flexibility .
New Share Buyback Program
Tapestry, Inc. has announced a new buyback program as part of its financial strategy. The company has closed a $1.5 billion senior unsecured notes offering, which includes $750 million of 5.100% senior notes due 2030 and $750 million of 5.500% senior notes due 2035. The proceeds from this offering, along with cash on hand, will be used to repay outstanding loans and borrowings under its credit facilities, which were utilized to fund share repurchases under the company's accelerated share repurchase agreements .
New Share Buyback Program
Tapestry, Inc. has announced a $2.0 billion accelerated share repurchase (ASR) program. The company has entered into agreements with Bank of America N.A. and Morgan Stanley & Co. LLC to repurchase shares of its common stock. The ASR program is part of Tapestry's expanded $2.8 billion share repurchase authorization. The company plans to return over 100% of its free cash flow to shareholders in Fiscal 2025 through dividends and share repurchases. An initial delivery of 28.4 million shares is expected on November 26, 2024, representing about 80% of the shares to be repurchased. The final settlement is expected by the first quarter of Fiscal 2026, ending September 27, 2025 .
Dividend Policy
Tapestry, Inc. (NYSE: TPR) has announced that it will maintain its annual dividend rate of $1.40 per common share for Fiscal 2025. The company is committed to increasing its dividend at least in line with earnings growth over time to achieve a target payout ratio of 35% to 40% .
New Share Buyback Program
Tapestry, Inc. has announced a new $2 billion share repurchase program. This program allows the company to repurchase shares on the open market, in privately negotiated transactions, or through accelerated share repurchase programs. The company plans to fund these repurchases with a combination of cash on hand and proceeds from debt .
Legal & Compliance
- Tapestry, Inc.: The company involved in the legal proceedings.
- Bank of America, N.A.: Acts as the Administrative Agent.
- BofA Securities, Inc. and Morgan Stanley Senior Funding, Inc.: Serve as Joint Bookrunners and Joint Lead Arrangers .
- Tapestry, Inc. has entered into a Term Loan Credit Agreement dated November 21, 2024, with various lenders, including Bank of America, N.A. as the Administrative Agent. This agreement outlines the terms and conditions under which the company can borrow funds .
- The agreement includes various sections detailing the commitments, loans, and borrowings, as well as the responsibilities and rights of the lenders and the company .
- The agreement includes provisions for indemnification, where Tapestry, Inc. is required to indemnify the Administrative Agent and each Lender against certain losses, claims, damages, and liabilities .
- There are also clauses related to the maintenance of properties and insurance, compliance with laws, and the payment of obligations, which, if not adhered to, could result in a Material Adverse Effect on the company .
- The agreement specifies conditions under which lenders can request compensation or require the company to pay additional amounts, which could impact Tapestry's financial obligations .
Legal Proceedings
Summary of Legal Matter Involving Tapestry, Inc. (TPR):
Key Parties Involved:
Nature of the Proceedings:
Potential Financial or Operational Consequences:
Overall, the legal matter involves a complex financial arrangement that could have significant financial and operational implications for Tapestry, Inc. if the terms are not met or if certain adverse events occur.
Note: This summary is based on the current legal documents and agreements as of November 21, 2024, and does not account for any future changes or developments in the legal proceedings.