Q4 2024 Earnings Summary
- Tapestry's Coach brand achieved record annual revenue exceeding $5 billion, surpassing previous highs from 11 years ago, with gross margins over 76%, which is 600 basis points above FY'19. This success is driven by product innovations like the Tabby and Brooklyn bags, appealing to younger consumers, and strong operational execution, positioning the brand for sustainable long-term growth. ,
- Tapestry has strong free cash flow averaging around $1.2 billion, providing financial flexibility for strategic investments, potential share buybacks, and the capacity to pursue value-enhancing acquisitions like Capri Holdings. Management expresses increased conviction in potential synergies from the deal, which is expected to be accretive to EPS and offer double-digit ROIC over the planning horizon. ,
- Management is very bullish on the mid- and long-term growth prospects in China, viewing it as the best regional opportunity, especially for the Coach brand. Due to its strong positioning and opportunities in second and third-tier cities, Coach offers an attractive value compared to traditional European luxury, which can drive significant growth in the coming years. ,
- Macro headwinds in China are impacting Tapestry's business, with no growth expected in the China market in fiscal 2025, potentially limiting overall revenue growth.
- Continued investment is required in Kate Spade to drive top-line growth, implying potential increases in expenses and uncertain returns, as the brand needs to amplify marketing efforts to connect with consumers.
- The planned acquisition of Capri Holdings brings execution risk, as Capri has reported "surprising and disappointing" results, and integrating underperforming brands may challenge Tapestry's financial performance.
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Commitment to Capri Deal
Q: Has Capri's underperformance changed your commitment to the deal?
A: Despite Capri's recent disappointing results, Tapestry remains firmly committed to the acquisition. Management views the underperformance as an execution opportunity, noting that Michael Kors still has operating income in the high teens. The deal remains a strong strategic fit, expected to be accretive to baseline EPS and offer double-digit ROIC over the planning horizon. -
Synergy Expectations
Q: Is there upside to the synergy targets initially guided?
A: Tapestry has even more conviction in achieving synergies greater than $200 million from the Capri acquisition. While not providing a specific number, management suggests potential upside and plans to provide more details upon closing the deal. -
Plan B if Deal Fails
Q: What is Plan B if the Capri deal does not go through?
A: If the acquisition does not proceed, Tapestry highlights its strong free cash flow of approximately $1.2 billion. After dividends of around $325 million, there would be over $800 million of excess cash, which could be used for share buybacks given the current valuation. -
Year 1 Accretion Expectations
Q: How have expectations for year 1 accretion changed given Capri's performance?
A: Management acknowledges that Capri's results adjust the starting point for the acquisition but remains confident in accretion. They still see a compelling value creation opportunity and will provide more details on EBITDA, free cash flow, and leverage targets upon closing the deal. -
Coach Brand Health
Q: How is the Coach brand performing in North America?
A: Coach delivered slight growth in North America in Q4 at incredible margins, led by the retail full-price business. The brand focuses on expressive luxury targeting Gen Z, product innovation like the successful Tabby and new Brooklyn bags, and compelling storytelling in marketing. -
Gross Margin Outlook
Q: What's the gross margin outlook and any change in promotional landscape for 2025?
A: Gross margin benefits are driven by structural advantages like AUR and continued efficiencies in the supply chain affecting AUC. Management expects operational benefits to continue, with AUR growth contributing to margin expansion. -
China Market Outlook
Q: What's the outlook for the China market?
A: Despite macro headwinds, Tapestry grew in fiscal '24 in China and expects the market to be in line with '24 for fiscal '25. The company remains very bullish on China's mid- and long-term prospects, seeing it as the best opportunity for meaningful growth. -
Kate Spade Investment
Q: Does Kate Spade need further investment to fuel a turnaround?
A: Tapestry plans to continue investing in Kate Spade to accelerate top-line growth while expanding margins. The focus is on brand building through innovation and holistic marketing campaigns, aiming to improve top-line performance without sacrificing margin progress. -
Full-Price vs Outlet Trends
Q: What are the trends at full price versus outlet for Coach?
A: Coach is seeing progress in all channels and is blurring the lines between them. By offering full-price products like the Tabby bag in outlets, the brand meets consumers where they are, providing great value across the entire fleet. -
Capital Allocation Priorities
Q: Which brands and geographies are priorities for investment?
A: Tapestry rigorously evaluates investments, focusing on brand building and distribution. Opportunities are seen in Asia (particularly China, Japan, and Korea), Europe, and North America, investing where returns are strongest. -
Q4 Margin Trends
Q: Any takeaways from Q4 margin trends for FY25?
A: The margin compression at Coach in Q4 was due to timing of expenses, primarily marketing, and isn't indicative of a trend. Management expects Coach's exceptional margins to continue, with opportunities to invest and grow gross margins.
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