Q1 2025 Earnings Summary
- 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.
- 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.
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue (YoY Change) | Q1 2025 | Down ~2% on a constant currency basis | Down ~0.4% YoY from 1,513.2M in Q1 2024To 1,507.5M in Q1 2025 | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Category downturn in handbags and leather goods | No explicit references to a downturn in prior quarters; category was generally described as resilient and growing. | Acknowledged a slowdown in the category, with Coach still outperforming. Management believes the category will rebound over time. | New acknowledgement of a market-wide softening, suggesting a shift in category sentiment. |
Coach brand performance & AUR growth | Consistently strong performance and brand momentum in prior quarters, powered by the Tabby platform and elevated AUR. | 2% constant-currency revenue growth, with mid-single-digit AUR gains globally. The Tabby family continued to outperform. | Continued strength in brand performance and pricing power. |
Kate Spade brand challenges | Persistent top-line pressure in earlier calls, though better margins and efforts to refresh core handbags were highlighted. | Sales declines and no expected top-line growth for FY25; focusing on stabilization, brand building, and marketing. | Ongoing challenges but with renewed corrective actions. |
Stuart Weitzman brand progress | Mixed performance previously; expansions in sneakers, handbags, and wholesale signaled attempts to boost relevance. | Revenue gains in North America but softness in China. Still challenged financially; concentrating on long-term brand building. | Slow progress with targeted initiatives to improve profitability and brand resonance. |
China market expansion & outlook | Historically bullish on China’s long-term potential despite quarterly fluctuations and macro headwinds. | Greater China revenue declined by 5%, yet outperformed the double-digit industry drop; continuing to invest in distribution growth. | Short-term softness but maintains optimistic long-term view. |
Macroeconomic headwinds in NA & China | Persistent challenging consumer environment and uneven recovery in China noted in earlier calls, with similar caution in NA. | North America revenue down 1% on planned wholesale pullback; China down 5% but ahead of peers, reflecting heightened caution. | Continued headwinds but Tapestry shows relative resilience. |
Capri Holdings acquisition | Previous quarters noted regulatory reviews, Capri underperformance, but $200M+ synergy potential. Approvals in EU, China, Japan were granted. | FTC granted a preliminary injunction; Tapestry filed an appeal and paused integration. Plans to repurchase shares if deal fails. | Regulatory hurdles overshadow synergy potential; deal’s future remains uncertain. |
Younger consumer strategies | Consistently targeted Gen Z and millennials with digital engagement, youth-friendly products, and brand-building initiatives. | Acquired 1.4M new NA customers, over half Gen Z/millennials. Used Roblox/Zepeto collabs to enhance brand engagement. | Continued success in recruiting younger consumers via innovative campaigns. |
Inventory management & operational discipline | Prior calls stressed disciplined inventory and cost control, leading to margin expansion and stable product flows. | Inventory 9% above last year but described as well-positioned; delivered record Q1 gross margin from operational outperformance. | Sustained focus on operational efficiency, slight inventory buildup attributed to timing. |
Data-driven customer & digital strategies | Earlier quarters emphasized robust e-commerce, data-rich marketing, and omnichannel investments driving customer engagement. | Digital up high single digits, over 25% of revenue. Leveraged gaming platforms and data insights to attract younger cohorts. | Ongoing expansion of digital reach and data utilization for customized consumer experiences. |
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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.