Tapestry - Earnings Call - Q1 2026

Executive Summary

• Record Q1 FY26 results and a beat-and-raise: revenue $1.70B (+13% YoY; +12% cc), non-GAAP EPS $1.38 (+35% YoY), with gross margin expansion to 76.5% and non-GAAP operating margin to 20.9%. Consensus was $1.64B revenue and $1.26 EPS; both were exceeded*.
• Coach led performance: +22% reported revenue (21% cc), broad-based strength across NA (+18% pro forma cc), Europe (+32%), Greater China (+19%), and DTC up mid-teens; Kate Spade declined 8% as reset continues.
• Guidance raised: FY26 revenue to ~$7.3B (from “approach $7.2B”), non-GAAP EPS to $5.45–$5.60 (from $5.30–$5.45), gross margin decline improved to ~50bps (from ~70bps), while maintaining net interest ($65M) and tax (~18%).
• Capital return catalyst: buybacks increased to ~$1.0B (from $800M); $500M repurchased in Q1 at ~$106/share; dividend maintained at $1.60/year. Near-term Q2 shaping: pro forma sales +~7%, EPS ~$2.15, operating margin +~80bps despite tariff headwinds.

What Went Well and What Went Wrong

What Went Well

• Coach momentum: +22% reported (+21% cc) to $1.43B, with mid-teens handbag AUR and unit growth, double-digit footwear, and strong Gen Z acquisition; “we're winning… driving sustainable compounding growth” (CEO).
• Margin leverage: non-GAAP gross margin 76.5% (+120bps YoY) and operating margin 20.9% (+200bps YoY), driven by operational improvements (+170bps) and Stuart Weitzman divestiture (+70bps).
• Strong DTC and new customers: pro forma DTC revenue +16% cc, mid-teens growth in digital and stores; 2.2M new customers globally, ~35% Gen Z share.

What Went Wrong

• Tariff/duty headwinds: ~230bps gross margin headwind embedded for FY26 (~$170M impact), including de minimis elimination; mitigation plans underway but phased.
• Kate Spade reset: revenue down 8%, with intentional discount reduction pressuring top-line; brand KPIs improving but turnaround will take time (profit loss expected for FY26).
• Japan softness: Q1 pro forma sales down 7–10% cc amid challenging consumer backdrop; FY26 guide embeds high-single-digit decline.

Transcript

Operator (participant)

Hey, and welcome to this Tapestry conference call. Today's call is being recorded. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star two. At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations, Christina Colone.

Christina Colone (Head of Investor Relations)

Good morning. Thank you for joining us. With me today to discuss our first-quarter results, as well as our strategies and outlook, are Joanne Crevoiserat, Tapestry's Chief Executive Officer, and Scott Roe, Tapestry's Chief Financial Officer and Chief Operating Officer. Before we begin, we must point out that this conference call will involve certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes projections for our business in the current or future quarters or fiscal years. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to our annual report on Form 10-K, the press release we issued this morning, and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance.

Non-GAAP financial measures are included in our comments today and in our presentation slides. For full reconciliation to corresponding GAAP financial information, please visit our website, www.tapestry.com, investors, and then view the earnings release and the presentation posted today. Now, let me outline the speakers and topics for this conference call. Joanne will begin with highlights for Tapestry and our brands. Scott will continue with our financial results, capital allocation priorities, and our outlook going forward. Following that, we will hold a question-and-answer session where we will be joined by Todd Kahn, CEO and Brand President of Coach. After Q&A, Joanne will conclude with brief closing remarks. I'd now like to turn it over to Joanne Crevoiserat, Tapestry CEO.

Joanne Crevoiserat (CEO)

Good morning. Thank you, Christina, and welcome, everyone. Our first quarter marked a powerful start to our next chapter of growth. We increased pro forma revenue by 16%, adjusted operating margin by 200 basis points, and earnings per share by 35% versus last year, all surpassing expectations. We achieved these gains while making strategic investments in the long-term growth drivers of the business. This outperformance positioned us to increase our outlook for the year, reinforcing that our advantages are structural and sustainable. Now, touching on the strategic highlights of the quarter, we meaningfully advanced our Amplify Growth agenda as outlined at our Investor Day in September. We built emotional connections with consumers, acquiring over 2.2 million new customers globally in the quarter, driven by Gen Z.

By connecting with consumers early in their journey, we're building lifetime value and reinforcing a competitive advantage: our ability to attract and retain new generations to our brands. Next, we delivered fashion innovation and product excellence led by Coach, where our brand is strong and growing. This is evident in the accelerated growth we achieved in our core leather goods offering. The combination of craftsmanship and value we offer to consumers continues to be a differentiator of our brands and business. We powered global growth through compelling experiences, driving double-digit gains in North America, China, and Europe, far outpacing the industry. Our direct-to-consumer business model enables us to connect with consumers wherever they choose to engage with our brands while gathering real-time insights that underpin data-driven decisions.

This is key to how we scale with focus and impact, and it was on display in the first quarter as we achieved strong growth in stores and online. As always, our talented teams are the driving force behind our results, delivering with creativity and discipline and building the capabilities that set us apart today and into the future. Overall, we are delivering standout performance against an uncertain external backdrop with a business that is healthy and positioned for long-term growth. Now, moving to our results and strategies by brand, Coach delivered an exceptional first quarter, highlighted by a 21% increase in revenue at expanding margins. We drove double-digit top-line growth across our key markets, with North America increasing 26%, China up 21%, and Europe growing 39%. These broad-based gains and outperformance versus the industry demonstrate that our unique expressive luxury positioning is resonating around the world.

This is evident in our strong customer acquisition results, as we welcomed over 1.7 million new customers globally to Coach, a strong increase over prior year led by Gen Z. Our new and younger customers are transacting at higher AUR and have a higher retention rate than the balance of our client base. They are also influencing all generations as we achieve growth in acquisition and retention among both Gen Z and non-Gen Z cohorts, a clear signal of our growing brand resonance and reach. Now, to discuss our first-quarter results in more detail, we drove strong double-digit gains in leather goods, where we have multiple platforms powering our growth. Our icons continued to lead, consistent with our strategy. In particular, the Tabby, New York, and Terry families outperformed, driven by accelerated Gen Z customer recruitment.

Further, the large Kitzlof bag remained a highly coveted and viral success, a clear demonstration of our brand desire and the creativity of our teams. Bag charms and straps also continued their strong momentum, providing consumers with further opportunities for personalization, customization, and self-expression. Overall, Coach's growth in handbags and accessories highlights the innovation and value we offer in the luxury market. With these advantages, we drove mid-teens handbag AUR growth for the quarter, led by North America. Further, handbag units also rose in the quarter globally and in North America, despite lower promotional activity at the brand. Looking forward, we expect continued gains in both AUR and units, showcasing the diversified drivers in place to support healthy and sustained growth. To this point, we have a strong pipeline of innovation.

This was clearly reflected in the brand's Spring 2026 runway show presented at New York Fashion Week in September, which received outstanding reviews and social buzz. Next, turning to footwear, we delivered double-digit growth in the quarter, fueled by sneakers and the continued success of the Highline and Soho families across channels. Footwear is a long-term growth opportunity for Coach, given our brand strength and the category's relevance with our target consumer. Touching on marketing. We continue to drive cultural relevance through emotional storytelling that showcases our brand purpose and product offering. During the quarter, we launched our fall campaign, Revive Your Courage, inspired by insights gained from our engagement with Gen Z around the world. The campaign featured global ambassador Elle Fanning and two new ambassadors, Korean rapper, songwriter, and producer Soyeon, and Japanese songwriter Lilas, two artists breaking boundaries and reshaping culture in their own ways.

In addition, our Not Just for Walking Footwear campaign highlighted our Soho sneaker and featured Audrey Noona, the singing voice of Mira, in the Netflix hit film K-Pop Demon Hunters. This campaign continued to support strong demand for our product offerings and cultural relevance for our brand. Our marketing execution exemplifies the brand's hallmark magic and logic in action. By using data-driven insights to scale creativity, we are enhancing the efficacy of our campaigns, expanding our reach, and enabling our growth. Finally, we are fueling brand desire through distinctive, immersive retail experiences that resonate with today's consumer. This quarter, we launched two new Coach coffee shops in North America, at Jersey Gardens and Woodbury Commons, tapping into the importance of experiential retail, especially among younger audiences. These activations go beyond marketing. They're driving longer dwell times, commercial momentum, and deepening emotional connections with the brand.

Looking ahead to holiday, we're leaning into proven drivers of the business. To this end, we will bring new animations to Tabby, expand the New York family, launch newness within our Coach Originals collection, and deliver a compelling assortment of seasonal novelty brought to life through marketing campaigns that connect brand, purpose, and product. In closing, Coach continues to deliver standout results, guided by a bold brand vision to be the world's most inclusive, genuine, and loved fashion brand. With the consumer at the heart of everything we do, our talented teams are operating with focus and purpose, turning insights into action and impact. By blending creativity with disciplined brand building, we've reimagined this iconic brand for the next generation of consumers, driving sustainable compounding growth. Now, moving to Kate Spade. Our actions to reset the brand for durable and profitable growth are underway.

In the first quarter, revenue trends improved sequentially to down 9%. At the same time, we continue to back our turnaround efforts with disciplined investments, taking the strategic steps necessary to strengthen the brand's foundation for long-term growth. Importantly, in the first quarter, where we placed our strategic focus and investments, we drove progress as tracked against the leading KPIs we've previously outlined. We saw a lift in consideration with our fall campaign and delivered an improvement in Gen Z acquisition trends driven by handbags. While still early in the turnaround, the improvement in these KPIs are signs that we are executing our strategies, and they are beginning to take hold. To touch on our strategies and the results of the quarter in more detail.

Our first strategic priority is to fuel brand heat through our uplifting luxury positioning to become top of mind and relevant with our target consumer, the Gen Z connector. In the quarter, we launched our fall campaign, Spark Something Beautiful, featuring influential Gen Z celebrities Ice Spice, Charli D'Amelio, Leavitt, and Rain Judge. The campaign had strong organic engagement as the most watched video on social channels for Kate Spade and drove higher brand consideration and purchase intent. This campaign will continue into holiday, building with festive additions as we remain focused on driving cut-through by increasing brand media through a spike and sustained strategy. Next, we advanced our strategy to build handbag blockbusters with a consumer-informed assortment that is more relevant and focused. During the quarter, we made important progress. Our handbag blockbusters outperformed the balance of the offering with higher AUR and strong Gen Z acquisition.

This is another example of how our strategic focus is translating into early green shoots in the business. In Q1, we launched Duo, the hero of our fall campaign, which became the top-performing style in retail, winning with consumers on versatility and value. We also successfully introduced the 454 family in outlet, an on-trend silhouette reimagined from our archives. At the same time, we continued to animate Deco and Kala, pillars of the assortment that are supporting new Gen Z acquisition. As we continue to bring more innovation to the offering, we are streamlining, reducing handbag styles by 40% by holiday, allowing us to stand behind our big ideas with clarity and intention. Importantly, we are embedding deeper consumer insights and a rigorous test-before-we-invest approach to all aspects of our work, ensuring that methodical consumer testing drives greater relevancy and impact across the entire assortment.

Finally, touching on our third strategic pillar, to maximize compelling omnichannel consumer experiences. A critical part of this work involves removing deselection barriers with cohesive messaging that builds the brand through desire. We are moving in the right direction, evidenced by the higher full-price selling we delivered in the quarter, a building block to scale in a healthy way. We know that staying disciplined on discounting will impact our top-line results, especially in promotional and highly competitive time periods like holiday, and we are committed to this strategy as we position ourselves for sustainable growth over the long term. Overall, we are strengthening the brand's foundation for long-term profitable growth. While turnarounds take time, Kate Spade is a unique brand with significant runway. To unlock this potential, we have a focused strategy, targeted investments, and clear KPIs to track our progress.

We remain confident in our path forward and the brand's opportunity to deliver sequential improvement in the back half of the fiscal year and return to profitable growth in fiscal year 2027. In closing, Tapestry achieved a record quarter, and we raised our outlook for the year, exemplifying the strength of our model. Our amplified growth agenda is working, and our structural advantages are enduring. We operate in a large market where our runway is significant, and we have the strategy, capabilities, and team in place to drive durable growth and value creation for years to come. Our vision to give more people the power to bring their own style and story into the world is fueled by our systemic approach to brand building. This is what guides us and drives our success. I'll now turn it over to Scott.

Scott Roe (CFO and COO)

Thanks, Joanne, and good morning, everyone. Our first-quarter performance reflects the compounding momentum behind our strategic growth initiatives and the discipline of our execution. In Q1, we outperformed expectations across revenue, operating income, and earnings, delivering record sales and EPS. In the quarter, we achieved pro forma revenue growth of 16%, led by 21% growth at Coach. We drove adjusted operating margin expansion of 200 basis points, and we delivered adjusted earnings per share of $1.38, an increase of 35% versus last year. Turning to the details of the first quarter, I'll begin with a discussion of revenue trends on a pro forma constant currency basis. Sales increased 16% versus the prior year and outperformed our expectations. These results reflect strong global momentum. By region, North America's sales accelerated, increasing 18% compared to the prior year, led by 26% growth at Coach. Importantly, both gross and operating margin in the region also rose versus last year.

In Europe, revenue grew 32% above last year, with increases across all channels led by growth in our direct business. Strong new customer acquisition, particularly among Gen Z, and increased local consumer spending continued to fuel our momentum. Given our market positioning and low penetration, we see significant opportunities for further growth in this large and attractive market. In Greater China, revenue outperformed our expectations, increasing 19% with notable strength in digital. Our strong performance in China underscores that our strategic initiatives and investments are working, and our business remains well-positioned for long-term sustainable growth. In other Asia, revenue increased 3%, led by growth in Australia, New Zealand, and South Korea. In Japan, sales declined 10%, as expected, amid a challenging consumer backdrop.

Now, touching on revenue by channel for the quarter, we delivered gains across all channels, fueled by direct-to-consumer growth of 16% compared to the prior year, which included a mid-teens % increase in both digital and global brick-and-mortar sales at strong and increasing profitability. Moving down the P&L, we continued to drive healthy margin expansion versus the prior year, delivering a first-quarter gross margin of 76.5%, 120 basis points above prior year. This expansion was driven by operational improvements of approximately 170 basis points, as well as a benefit from the divestiture of Stuart Weitzman of 70 basis points. These tailwinds were partially offset by a negative tariff and duty impact of 70 basis points and a currency headwind of 60 basis points.

Our strong gross margin remains a core element of our value creation model, supported by our agile supply chain, which delivers craftsmanship at scale, a core competitive advantage of Tapestry. Turning to SG&A, expenses rose 11%, driven primarily by an increase in marketing investment, which represented 11% of sales. Even with this investment, we drove 80 basis points of expense leverage, reflecting our disciplined cost control while growing our top line. Taken together, operating margin expanded 200 basis points in the quarter, driving profit expansion of 24% over the prior year, which was ahead of expectations. Our first-quarter EPS of $1.38 grew 35% over the prior year and exceeded our guidance. Now, turning to shareholder returns. Starting with our dividend, our board of directors declared a quarterly cash dividend of $0.40 per common share, representing $83 million in dividend payments for the quarter.

Additionally, during the first quarter, we spent $500 million to repurchase over 4.7 million shares. In fiscal 2026, we now expect to return $1.3 billion, or 100% of expected adjusted free cash flow to shareholders through dividends and share repurchases. This includes approximately $300 million in dividend payments for an annual rate of $1.60 per share, as well as $1 billion in share repurchases, which is an increase from our original outlook of $800 million. Our significant return of capital to shareholders is a testament to our strong organic business and robust cash flow generation and underscores our confidence in the future. Before turning to the details of our balance sheet and cash flows, I'd like to reiterate our capital allocation priorities, which are unchanged. We have two foundational commitments.

First, to invest in our brands and business to support long-term sustainable growth and to return capital to shareholders via our dividend, with the goal over time to increase the dividend at least in line with earnings growth. Beyond these two foundational commitments, our robust cash flow generation provides us with balance sheet flexibility for value creation. This includes the opportunity for share repurchase activity, which includes our previously announced $3 billion share repurchase authorization. Finally, using our rigorous four-lens framework, we consistently evaluate opportunities for strategic portfolio management. Importantly, and as previously communicated, before moving forward with any acquisitions, we will ensure Coach remains strong and Kate Spade has returned to sustainable top-line growth. These clear capital allocation priorities are underpinned by our firm commitment to a solid investment-grade rating and maintaining our long-term gross leverage target of below two and a half times.

Now, turning to the details of our balance sheet and cash flows. We ended the quarter with $743 million in cash and investments and total borrowings of $2.64 billion, including $240 million outstanding borrowings under our newly established commercial paper program. Together, this represented net debt of $1.9 billion. At quarter end, our gross debt to adjusted EBITDA leverage ratio was 1.5 times, a full turn below our target. Adjusted free cash flow for the quarter was an inflow of $103 million, and CapEx and cloud computing costs were $38 million. Inventory levels at quarter end were 1% below prior year on a reported basis and up high single digits, excluding the impact of Stuart Weitzman. As we enter the holiday season, our inventory continues to be current and well-positioned globally and by brand.

For fiscal 2026, we continue to expect inventory levels to be modestly down year over year on a reported basis. Now, moving to our guidance for fiscal 2026, which is provided on a non-GAAP basis and excludes the impact of Stuart Weitzman from our fiscal 2026 expectations. We are raising our fiscal 2026 outlook, which incorporates our first-quarter outperformance and our momentum quarter to date. We view this guidance as prudent and achievable, balancing the realities of an uncertain external environment with the significant opportunities we see for our business. Now, turning to the details, for the fiscal year, we expect revenue to be in the area of $7.3 billion, representing pro forma growth of 7%-8% on a nominal basis, or 6%-7% in constant currency, with FX planned to be a 70 basis point tailwind.

Touching on sales details by region at constant currency on a pro forma basis, in North America, we now expect revenue to increase mid to high single digits. In Europe, we expect growth in the area of 20%. In Greater China, we now expect to achieve low double-digit growth over the prior year. In Japan, we're forecasting a high single-digit decline, and in other Asia, we anticipate high single-digit gains. By brand, this guidance now incorporates low double-digit growth at Coach. At Kate Spade, we continue to embed a high single-digit decline in revenue for the year, with sequential improvement planned in the second half. In addition, our outlook assumes operating margin expansion of approximately 50 basis points. We anticipate gross margin to decline in the area of 50 basis points and improvement from our prior outlook.

This assumes operational gross margin expansion of 140 basis points due primarily to improvements in AUR, slightly offset by an FX headwind of 20 basis points. Further, we expect to realize a 60 basis point structural tailwind to gross margin from the disposition of Stuart Weitzman. Offsetting these planned margin drivers is a 230 basis point headwind from incremental tariffs and duties, which incorporates the timing of policy implementation, product sell-through, and mitigating actions underway. For context, this is a headwind of $170 million in the fiscal year, which assumes we mitigate 30% of the annualized run rate of $250 million. I remain confident in our ability to offset these headwinds fully over time, given the strength of our business and supply chain. On SG&A, we expect at least 100 basis points of leverage. This reflects our diligent expense control, partially offset by ongoing growth-focused investments in our strategic priorities.

To this end, we expect marketing as a percentage of sales to increase around 90 basis points versus last year, reaching over 11% of revenue. We will also realize a 20 basis point benefit to expenses from the sale of Stuart Weitzman. All in, this means operational SG&A leverage is expected to be at least 170 basis points. For some texture on operating profit by brand, we anticipate Coach will maintain its operating margin even with tariff pressure and continued brand investments. At Kate Spade, we continue to expect a modest profit loss given the outsized tariff impacts and brand investments, as mentioned. Moving to below-the-line expectations for the year, net interest expense is expected to be approximately $65 million. The tax rate is expected to be approximately 18%.

Our weighted average diluted share count for the year is forecasted to be approximately 212 million shares, which includes the expectation for $1 billion in share repurchases. Taken together, we now expect EPS to be $5.45-$5.60, representing 7%-10% growth compared to last year. Moving on, we anticipate adjusted free cash flow of $1.3 billion. Finally, we expect CapEx and cloud computing costs to be in the area of $200 million. We anticipate about 60% of the spend to be related to store openings, renovations, and relocations, with the balance primarily relating to our ongoing IT and digital investments. Touching on the shaping for the year, to start, given the dynamic nature of the rapidly shifting market, it's important to note we could experience volatility by quarter, notably within profit as the tariff and duty impacts work their way through the P&L.

Now, to our current assumptions, we expect pro forma constant currency revenue growth throughout the year, led by the first half. For Q2 specifically, we're anticipating a pro forma total sales growth in the area of 7%, which includes an FX tailwind of nearly 50 basis points. This incorporates the expectation for low double-digit revenue growth at Coach, or mid-20% growth on a two-year stack basis, consistent with Q1, and a mid-teens revenue decline at Kate Spade. Turning to margin, we anticipate reported gross margin in Q2 to decline by approximately 50 basis points due entirely to tariff and duty headwinds, while SG&A is expected to leverage by over 100 basis points in the quarter. Together, we expect operating margin to increase roughly 80 basis points in the quarter. In the second half, operating margins are planned in line with prior year despite tariff and duty pressure.

Finally, taking a prudent approach to our guidance, we expect Q2 EPS to grow high single digits to approximately $2.15. This includes a projected tax rate in the area of 20% for the quarter. In closing, we delivered another record-breaking quarter, highlighted by strong top and bottom line growth. This outperformance positioned us to raise our outlook for the year, clear evidence of the power of our amplified growth agenda and our disciplined and consistent execution. Moving forward, our foundation is strong, and we have competitive and structural advantages to fuel durable growth and sustainable value creation in the year ahead and for years to come. I'd now like to open it up for your questions.

Operator (participant)

At this time, if you would like to ask a question, please press Star 1 now on your telephone keypad. To withdraw yourself from the queue, you may press Star 2. Our first question comes from Ike Boroshow of Wells Fargo. Your line is open. Please go ahead.

Ike Boruchow (Managing Director)

Hey, good morning. Thanks for the question. I guess high level, I'd like to start maybe Joanne. Just can you elaborate more on the drivers of the accelerated growth that you're seeing and really more about the sustainability of the momentum? I know compares are going to start getting more difficult for you come holiday. Really, at Coach specifically, what gives you the confidence that you can sustain double-digit revenue growth as you start to cycle those comparisons? Thanks.

Joanne Crevoiserat (CEO)

Good morning, Ike. This was a powerful start to our amplified growth agenda. Our results are clearly differentiated in the market, and I'll start by sending a thank you to our teams who continue to focus on what matters, and that is delighting consumers all around the world.

To comment on the durability of our results overall, the beat and raise that we delivered this quarter reinforces that our advantages are structural and they're sustainable over the long term. At our investor day, we highlighted that we play in an attractive TAM with massive headroom, and we're focused on that new customer acquisition at point of market entry. As we showed in the first quarter, we're winning with this next generation of consumers, and that's expanding the market. We're taking share, but it's also giving us the opportunity to drive higher lifetime value. This is compounding. We're seeing increases in both acquisition and retention, and I think that's an important point to note. We're managing the business for the long term.

We're continuing to invest behind these capabilities at scale, which is expanding our competitive moat, and it's ensuring that our performance continues well into the future. Let me turn it to Todd to talk about the durability of the Coach momentum more specifically. Todd.

Todd Kahn (CEO and Brand President of Coach)

Thanks, Joanne. Good morning. Let me give you five proof points to support my conviction for long-term sustainable growth. They are the key five P's of our business. These P's are foundational to how we win in our space. First, it starts with product. The innovation pipeline of our product that our designers and merchants are developing is remarkable. You saw it on display at our most recent fashion show in September, and I have the benefit of seeing our development a year in advance. It will continue to build on our icon strategy, and the product is fantastic. Second is our people.

We are nearly 90% direct-to-consumer, and our people know how to engage our customers on a global scale. A few weeks ago, I participated in our Asian Store Manager Conference. The enthusiasm and shared understanding of our mission and our brand positioning empowers and uplifts our people. Third is place. Because of our focus on Gen Z, we know that they love to shop in the real world, and our almost 1,000 directly operated stores are the environments to best express the world of Coach. Additionally, we are no longer restricted to only traditional malls and outlets and have the right to win in new locations where Gen Z shop. Fourth, promotion or marketing. Our purpose-led storytelling resonates with our consumers. In Q1, we spent almost 11% on marketing, a 43% increase in actual dollars from the prior year.

Since our marketing activities are primarily focused on customer acquisition, that does not immediately take place in the quarter. This investment future-proofs new customer acquisition. Finally, price. Our brand position of expressive luxury and the sweet spot of the $200-$500 range ensures that we have room to grow AURs while maintaining our compelling value proposition. Overall, I feel great about our growth potential. We're just hitting our strides, and not only will we comp the comp, but the path to $10 billion is well within our sights.

Ike Boruchow (Managing Director)

Thank you, guys.

Operator (participant)

Our next question is from Matthew Boss of JP Morgan. Your line is open. Please go ahead.

Matt Boss (Equity Research Analyst)

Thanks, and congrats on a great quarter. Scott, at the Coach brand, 21% revenue growth represented 800 basis points of acceleration on the two-year stack. I think every single geography accelerated sequentially. First, can you break down the drivers of the material two-year inflection this quarter? Second, is there anything beyond just prudent macro planning that you've embedded in the back half guide, which embeds moderation on that two-year stack?

Scott Roe (CFO and COO)

Yeah. Hey, Matt. Thanks for the question. First of all, I just remind you what Joanne and Todd just said about the structural advantages, the fact that this is a methodical approach to brand building, and you see it on display. Maybe I'll give you some numbers behind some of that growth inflection that we saw in Q1. You're right. We grew 21% in Coach in Q1 and 26% in North America. We also talked about AUR being at mid-teens. What that means is we had a significant inflection in units. This has been a multi-quarter pattern that we've seen with.

For a while, we were talking about growth without the units and driven by AUR. We've now seen a meaningful acceleration in units. I think tying that back to more than 2 million new customers acquired, who we know are transacting at higher AURs and driving more transactions in the Coach franchise, that's driving both AUR and unit growth. Then geographic expansion, right? We grew significantly, as you mentioned, in every one of our major geographies, really led by North America and China. For the Coach brand, almost 40% in Europe, which is a huge opportunity. Putting those things together, continued AUR growth opportunities, new customer acquisition, and an inflection in units, significant geographic growth, that's one of the things that allowed us to have a beat and raise, take our guidance up.

Remember, we're talking about now double-digit growth on top of double-digit growth one year ago, right, based on the guidance we have. You asked about the balance of the year. We're one year in. We're 25% through the year. Our biggest quarter of the year is coming up with holidays. I'll just take you back and remind you how we guided to the year. We looked at what we could see in the current quarter in Q1, and we also looked at the two-year stack. Our balance of the year is the same approach that we entered this year, which is we're fairly consistent on a two-year stack. The reality is in Q1, we saw a significant inflection. Quarter to date, we see that trend continue.

Even though it's early in the quarter, we still, we're not through the peak months in holiday, but we see nothing in our business that gives us any concern. We just feel like 25% of the year, it's prudent to maintain that. Let's get through holiday. We'll come back, we'll reevaluate, and we'll give you guys an update on the picture for the balance of the year.

Matt Boss (Equity Research Analyst)

Great color.

Todd Kahn (CEO and Brand President of Coach)

I know you asked the question for Scott. I will tell you, you know our brand is one of we say what we do and we do what we say. We said that in our investor day. We tend to have a conservative outlook, but I want to reinforce it as the person running the brand. As Scott said, we feel very good about our positioning, where we're at, what we're seeing in the quarter.

We're the first quarter in, we're a team way ahead, but we got a lot of game to still play. That's how we prepare you, but I feel very good about where we're at.

Matt Boss (Equity Research Analyst)

Sounds great. Thanks, Todd.

Operator (participant)

Our next question is from Alex Straiten of Morgan Stanley. Please go ahead. Your line is open.

Alex Stratton (Research Director and Senior Analyst)

Perfect. Thanks so much. I just wanted to focus quickly just on the gross margin pieces in the year. It looks like you're assuming gross margin falls a bit after expansion in the first quarter. Can you just walk through kind of the puts and takes and the factors there and the shape if there's a difference from 2Q to 4Q? Then maybe just one for Joanne, just on industry trends. I think some experts are calling for a luxury resurgence.

Just curious how you think about any implications for your business there or maybe what you're focused on from just an industry dynamics perspective. Thanks so much.

Scott Roe (CFO and COO)

Yeah, Alex, I'll start on your specific gross margin question. First of all, this is very consistent the way we've guided our gross margin, our understanding of the cost of tariffs. We've got our arms around that. It's essentially unchanged. I'll remind you, we're making progress, and we just took our gross margin guidance up by 20 basis points for the year. Very strong performance in the first quarter. We continue to make progress against the impact of tariffs and have great confidence in our ability to grow our gross margins as we go into 2027. I'll remind you, even this year, with those tariff pressures, we're growing our operating margins.

If you look at the second half, about two-thirds of the pressure versus last year is tariff-related. Again, that's not new news. That's unchanged. There's a little bit of noise on tax based on some timing issues in the second half.

Joanne Crevoiserat (CEO)

I'll pick up the second part of your question, Alex. Our business is strong and growing, and we've been growing through what I would call a dynamic landscape. To your point, what we're seeing in the background or in the market more generally is that the handbag category inflected to growth in the last quarter. There is a more constructive backdrop developing, particularly in places like China where we saw it also inflect to growth with 1% growth in the market we estimate. We welcome a more constructive environment, but that doesn't define our actions.

We laid out a very compelling plan going forward and how we're building our business with this strong building on the emotional connection consumers have in the category, but building those emotional connections to our brands. That's what's driving and powering our growth. You saw us grow through really difficult when the market was down. We were putting up substantial growth, and we're continuing to outperform the market very consistently. We are seeing a customer who is resilient. They are being choiceful and cautious, as we've talked about before, but they're active around the world. Where we're delivering innovation and emotion, we are winning. That success is attracting more young consumers to the brand. They're coming in in a healthy way. We're actually seeing them come back with more frequency.

Our retention rates are higher among Gen Z, but they're also higher and growing in non-Gen Z cohorts. Coach is really firing on all cylinders. Maybe I'll toss it to Todd to give you some color on how he's thinking about the market and our growth going forward.

Todd Kahn (CEO and Brand President of Coach)

Thanks, Joanne. I like to say we play our own game. We're happy to see the category grow. That's why we love this category. The durability of it is fantastic. 1% globally, but we grew 21%. North America, we grew 26%. We think the category grew 4%. It is exactly what Joanne said. It is about bringing new customers into the category. We're achieving this incredible top-line growth at some of our best margins in history. I had to go back 20 years, and I still couldn't find a better first quarter overall than what we delivered.

The good news is we're playing our own game. We love our brand positioning. We're bringing in new customers into the brand. That's how we're going to keep winning.

Alex Stratton (Research Director and Senior Analyst)

Thanks a lot. Good luck.

Todd Kahn (CEO and Brand President of Coach)

Thank you.

Operator (participant)

Our next question is from Adrian Yee of Barclays. Your line is open.

Adrian Yee (Director and Senior Equity Analyst)

Good morning. Let me add my hearty congratulations to the entire team throughout. Joanne and Todd, kind of more of a kind of thematic question on the European market. Europe has historically been kind of extremely discerning, hard to penetrate. You really seem like you're at kind of a tipping point in the positive direction. Todd, what is going on in terms of kind of the brand positioning, the younger audience. How much of the marketing are you spending in Europe? What's the kind of potential kind of penetration there?

Scott, can you just kind of talk about Kate's merchandise margin progress, excluding the tariff impact? We seem to have seen some stabilization in promotional activity, at least at the markdown side of things. I'm wondering if that's an accurate reflection of the merch margin there. Thank you.

Todd Kahn (CEO and Brand President of Coach)

Great. Thanks for the question. You're right. We've seemed to materially inflect in Europe. I love seeing that 39% growth in the quarter. What's really working is what's working globally. Our value proposition and our purpose campaigns are cutting through. Again, what I said earlier, we're playing our own game. We're not just chasing a traditional European model. We are building this through customer acquisition, youth, incredible value. We're opening stores not just on high streets where we look for adjacencies. We're building it digitally. We're building it where the customer is. We feel very good.

We have a lot of potential in Europe. Again, we're doing it at fantastic margins. I do not want to give you how big is big yet, but we feel very good about where we're going and the opportunities. What I often say is a great bag is a great flag, and it's a great bag in London, Shanghai, or New York.

Scott Roe (CFO and COO)

Yeah, and Adrian, I'll address your question on Kate Spade. I'm glad that you asked it that way because, yeah, we're taking care to reduce discounting in the Kate Spade brand. We know that has an impact on the top line, but we also know that's the formula for long-term sustainable growth. We are making progress. We're early days. When you look at the margin pressure, it's really two things, right? It's the tariffs, which we're even more disproportionately at impact at Kate.

It is, frankly, the investments we're making in customer engagement and all of these factors together are focused toward long-term growth at Kate.

Adrian Yee (Director and Senior Equity Analyst)

Fantastic. Thank you very much. Best of luck.

Operator (participant)

Our next question is from Michael Benetti of Evercore. Your line is open.

Michael Binetti (Senior Managing Director)

Hey, guys. Thanks for taking my question. Appreciate all the help here today. I want to ask you on the AUR versus units. You touched on this a little bit. Thanks for the detail. It was notable that this was the first quarter where the units really seemed to have inflected relative to the total growth at Coach, 21% for Coach, mid-teen AUR. As you build to the rest of the year, and the comments that you gave us for the rest of the year, Scott, should we think about continuing that wider spread of Coach total growth AUR, so similar big unit spread like that?

Is that truly incremental upside to the revenue that you were planning earlier in the year? I'd love to just ask on Kate Spade, what's driving the sequential improvement in North America? I thought it was notable that you just said you are accelerating revenues there while reducing promos a little bit. How long does that promotional holdback continue? Is there a scenario where Kate North America could return to positive one quarter this year?

Scott Roe (CFO and COO)

I would say tactically on the first question, we've said as part of our guidance that we expect a balance between AUR and units. I would say the magnitude of the inflection in Q1 is significant and is a good indicator of the potential for improved outlook on the second half. It's a very encouraging sign that points in the right direction.

We have not fully baked in that level of inflection for our guide, but should that continue, then that would be a good thing for us.

Michael Binetti (Senior Managing Director)

Okay.

Joanne Crevoiserat (CEO)

On Kate, Michael, the actions to reset the brand are underway. Our focus is on resetting our foundation for durable and profitable growth going forward. As you noted, reducing our discounting footprint is an important part of that. Where we focused our strategy and investments this quarter, we did drive progress. We saw a lift in consideration from our fall campaign. We saw improvement in Gen Z acquisition trends driven by handbags. Our handbag blockbusters are outperforming at higher AUR. Importantly, we are seeing an improvement in full price sell-through as well. That is helping with the improvement. We know turnarounds take time. We are confident in our path forward. We expect to deliver.

Sequential improvement in the back half of this fiscal year while holiday will be impacted by our reduction of discounting. We expect a return to profitable growth in fiscal year 2027.

Michael Binetti (Senior Managing Director)

Thanks a lot for the help.

Operator (participant)

Our next question is from Bob Derval of VTIG. Your line is open. Please go ahead.

Bob Drbul (Managing Director and Consumer Retail Analyst)

Hi. Good morning. Just a couple of questions on the product side. Just the footwear business and Coach and then the charms business. Are those consistent globally as well? Just curious on the penetration with both of those categories.

Scott Roe (CFO and COO)

Hey, Bob. Thank you. Yes. The short answer. Our more mature markets, China and North America, we have more space for footwear. We are seeing particularly our focus on sneakers is winning globally. It is winning across both genders, so we feel very good about that.

The long-term value of that customer acquisition, we know if they come to the brand through footwear, we tend to get them as a multiple purchase across multiple categories. We love that. We love the bag charms. You'll see us have a fulsome presentation for the holidays, everything from the beloved cherries to our plushy bag charms, whether it's a mini Rexy, a carrot, or other things that I don't fully understand, but the young consumer does, which is much more important. We feel very good about those add-ons, and they're meaningful. What we love about it is, while it may not always be a UPT driver at the point of sale when they buy the bag, they're often coming back a week or two later to buy the charm, to buy something else. That gives us another bite at the apple.

What I love is our salespeople know how to convert if we get them back a second time.

Bob Drbul (Managing Director and Consumer Retail Analyst)

Thank you.

Scott Roe (CFO and COO)

You're welcome.

Operator (participant)

Our next question is from Anisha Sherman of Bernstein. Please go ahead. Your line is open.

Aneesha Sherman (Senior Analyst)

Thank you so much. I want to dig into the topic of AURs a little bit more and more focused on the short term. You have talked about the long-term opportunity to keep raising AURs at your investor day, and that makes sense. More short term, you did a mid-teens AUR raise led by North America specifically, and now North America is coming up against those tougher compares with mid-teens for Q2 to 4. I know you do not specifically target AUR, but how are you thinking about the risk of that AUR growth in North America starting to moderate into these tougher compares and more difficult consumer sentiment environment?

And then perhaps the second part of this, perhaps for Scott, AUR is the single biggest driver of your gross margin guidance. If you were to see that AUR growth come in a little bit lower than expected, are there other levers on margin that you can lean on to maintain your margin guidance, or could it be a risk to gross margins as well? Thank you.

Joanne Crevoiserat (CEO)

Maybe I'll kick it off. Anisha, and start with just the big picture here. Our AUR growth is driven from our understanding of the consumer, the balance of magic and logic. There are a lot of factors that go into our ability to drive this AUR growth.

The creativity that our teams are bringing, it's not just knowing the consumer, but it's what you do with that information and bringing the creativity together, understanding the consumer and delivering incredible innovation into the marketplace is driving our AUR growth. Also, what's driving it is our ability to step away from discounting. The way we use data to make better, higher quality decisions contributes to our better management of inventory, which contributes to a cleaner presentation for the consumer. They start to build on each other. That is the more functional, I guess, description of our AUR growth and the disciplines that underpin our AUR. Maybe I'll send it over to Todd to talk about the more emotional.

The magic side of the business and how we're thinking about driving AUR growth, both from the innovation we're delivering, but also how we're managing the brand across channels. Todd?

Todd Kahn (CEO and Brand President of Coach)

Thanks, Joanne. Joanne really focused on the big drivers. It is an emotional business, and we have that opportunity to continue to engage emotionally with our customer. One of the structural changes here, which we talked about at our investor day, that is going to be a driver for AUR, even when we comp the comp in a meaningful way, is our one Coach strategy. Remember what we introduced. We talked about bringing collection product into some of our largest stores globally. If we can get them, and we're seeing it win, we're seeing the consumer trade up because the consumer comes in, whether it's a Woodbury Commons, a Sawgrass, Bicester Village, they want to come.

When they're in those magnificent outlet stores that have the service levels of any Coach store globally, they want to buy the Tabby bag. They want to buy Brooklyn, and they're buying them. That has a wonderful effect of lifting our overall AUR globally. Additionally, as something Joanne highlighted, we have far less promotional than ever before. That raises the floor. We do not have to give up the sweet spot of that $200-$500 to still have massive AUR growth in the quarters and years to come. What we have to do is just do what we're delivering now. One Coach, lower discounting, continue to innovate.

Scott Roe (CFO and COO)

Yeah, and I think, Anisha, you had a question for me about margin sustainability of AUR, etc. First of all, just an observation.This is a team that really is focused on gross margin, in case you haven't noticed. This is the vernacular of our organization. We talk about it a lot. Growth is number one, but gross margin's right behind it. I think you see that in the results. We're looking at it very carefully. A question we frequently get asked is kind of the opposite side of this, is given the size of the AUR. Should we even take more? I'd say we're getting it pretty right. When you look at the inflection of units and a 15% or mid-teens AUR growth. We're looking very carefully and listening to our consumers. They ultimately decide what they're going to pay. I think we're getting it fairly right, right? When you look at the inflection of the business.

We're finding ways to grow AUR, but we're also growing units. This is our moment, right? We're grabbing significant share, and we're looking at this very carefully. Do we have other levers? Yeah, we do. We didn't even talk about AUC. We've got the best supply chain in the business. We're always fighting for cost opportunities very closely with the merchants and the brand teams. We are finding those opportunities, right? We're driving efficiency throughout the business. We have a lot of levers to protect our gross margin over time. The most important thing is making sure that what Todd mentioned, that value equation that the consumer sees and is relating to is in balance and that we're delivering innovation and superior product, which they're willing to pay for. That's number one, and that's the thing that we're maniacally focused on right now.

Aneesha Sherman (Senior Analyst)

Thank you. Very helpful.

Operator (participant)

Our next question is from Brooke Roach of Goldman Sachs. Your line is open.

Brooke Roach (VP of Equity Research)

Good morning, and thank you for taking our question. Joanne, Scott, Todd, I was hoping you could speak to customer acquisition and retention that you're seeing across various income cohorts. Are you seeing the same strength with a value-sensitive customer across the portfolio, particularly an outlet, beyond the success that you're seeing in the collection strategy? Thank you.

Joanne Crevoiserat (CEO)

Yeah. Great question, Brooke. I know on everybody's mind. And what's been powerful about our model is we are seeing strong customer acquisition, strong retention across not only Gen Z, but all age groups. And we're not seeing any meaningful difference between income cohorts in the performance of our business and our brands.

The platform that we have, we reach a broad cross-section of consumers with our brands, and we're winning with all consumers right now.

Brooke Roach (VP of Equity Research)

Great. Thanks so much.

Joanne Crevoiserat (CEO)

You're welcome.

Operator (participant)

Our next question is from Mark Altschweger of Baird. Your line is open. Please go ahead.

Mark Altschwager (Senior Research Analyst)

Great. Thanks for taking my question. I wanted to follow up on the one coach topic. Any more color that you can share on the performance of the collection product in outlet? Where is that mix? Where do you think it can go? And just relatedly on the real estate pipeline. Given the one coach initiatives here, maybe speak to where you see the opportunity regionally and how you're thinking about different store formats. Thank you.

Todd Kahn (CEO and Brand President of Coach)

Great. We're really pleased. I mean, we're only about a year in.Introducing for the first time last summer, a year ago summer, we introduced Tabby in some outlets. Today, it is more than just Tabby. It is really talking about the full lifestyle of Coach. You see us then followed up with one Coach strategy in sneakers. You are going to see us do similar things with some of the tertiary categories. Jewelry this spring will become more and more one Coach price points. You are going to see us penetrate quite substantially. I do not want to put a number out there yet. Let us deliver it. We feel very good that this is going to be a meaningful contributor to growth. On real estate, what we said to you in September at our investor day is we see a lot of growth coming from international. 70% of our future growth is going to come from international. We have.

Inorganic growth, particularly in China. We're going to launch probably close to 100 stores in the next three years. Remember, as Scott forewarned, if you model it, these are going to be some smaller format stores. What I love about our strategy, which is very different from our historic norms, is this idea we have the right to win in places and neighborhoods and locations we had never played before. That is a global phenomenon. You are going to see us introduce stores and new store formats and food and beverage, particularly Coach coffee shops and outlets. Those are all going to be incremental to our growth. We are going to do a lot of experimenting.

One thing you can bank on from this team, we fundamentally, and I think Joanne and I both said this four or five years ago, we believe that stores are profit centers, not marketing activity. Our stores are going to open. They're going to be profitable. They're going to be engaging, and they're going to attract a new consumer.

Mark Altschwager (Senior Research Analyst)

Thank you.

Operator (participant)

Thank you. That concludes our Q&A. I'm going to turn it over to Joanne Crevoiserat for some concluding remarks.

Joanne Crevoiserat (CEO)

Thank you, Leo. As we shared this morning, this quarter's outperformance reinforces that our amplify strategies are not only working, they're winning. I want to, again, thank our talented global teams for their creativity, discipline, and relentless drive. These standout results are yours. Looking forward with strong fundamentals and momentum, we are focused and committed to delivering sustainable growth and lasting shareholder value.

Thank you for your continued interest in Tapestry and for joining us today.

Operator (participant)

This concludes Tapestry's earnings conference call. We thank you for your participation.