Q4 2025 Earnings Call Transcript

Good day, and welcome to this Tapestry conference call. Today's call is being recorded. 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.

Good morning. Thank you for joining us. With me today to discuss our fourth quarter and full year 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 a 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's CEO.

Good morning. Thank you, Christina, and welcome, everyone. Fiscal 2025 was truly a breakout year for Tapestry. We delivered $7 billion in revenue and operating margin of 20% and $5.10 in adjusted EPS. all growing meaningfully versus prior year.

Notably, we also achieved key targets we set at our Investor Day 3 years ago, namely to achieve over $5 in earnings, return more than $3 billion cumulatively to shareholders and drive best-in-class total returns. We delivered these results in the context of a rapidly evolving and uncertain macroeconomic landscape, reinforcing that our business and our exceptional teams are resilient, agile and built for growth. Our record results are more than numbers. Our success showcases that our strategies are working and that our systemic approach to brand building is capturing a new generation of consumers around the world.

Touching on the strategic highlights of the quarter and year. We powered global growth, delivering accelerated gains and outpacing the industry in our key regions of North America, China and Europe. We did this by building lasting customer relationships, highlighted by strong new customer acquisition. During the year, we acquired over 6.8 million new customers in North America alone, fueled by growth of Gen Z and millennial cohorts.

We are creating emotional connections and reaching new young consumers as they enter our category, key to driving lifetime value and healthy durable growth. We also delivered compelling omnichannel experiences, engaging with consumers wherever they interact with our brands to drive direct-to-consumer growth across channels. Our modern technology platform allows us to bring data-driven insights to our work. And in a world that is increasingly powered by digital, our human connections have never been more important.

Together, they are the foundation of our proven and profitable direct- to-consumer business model that is a core competitive advantage. And finally, we brought fashion innovation and product excellence to customers throughout the year, fueling brand relevance and desire led by Coach, where our brand heat and momentum are strong and growing. This is evident in our continued gains in AUR and gross margin. The creativity, craftsmanship and value we offer to consumers at scale have been and will continue to be differentiators of our brands and business.

As we look forward, we have proven our ability to navigate a complex and dynamic external backdrop, and we will continue to execute, leveraging the power of our competitive and structural advantages, our global scale, our compelling value proposition and the strong fundamentals of our business. Now moving to our results and strategies by brand, starting with Coach. Coach is a storied 85- year-old brand, and this fiscal year was the strongest in history. Our success is rooted in our brand-building capabilities.

We've been intensely focused on understanding our target Gen Z consumer and creating emotional connections that fuel brand desire, which have allowed us to reimagine a heritage brand for modern consumers. Coach is redefining what's possible when you blend consumer obsession with disciplined brand building and creativity. And this is translating into compounding and durable growth. For the year, Coach delivered a 10% increase in revenue at strong margins, capped by 13% constant currency top line gains in the fourth quarter with double-digit growth across our key markets, with North America up 16%, China up 22% and Europe up 12%.

Our global growth, led by outperformance in our core leather goods offering highlights that our unique expressive luxury positioning is resonating around the world. This is evident in our strong customer acquisition results as we welcomed over 4.6 million new customers to Coach in North America this year with over 1 million new customers in the fourth quarter, of which nearly 70% were Gen Z and millennials. Importantly, these customers are transacting at higher AUR and have a higher retention rate than the balance of our client base, demonstrating that these relationships are healthy and sticky.

Now touching on our fourth quarter results in more detail. First, we drove double-digit gains in leather goods with broad-based growth across our offering. The iconic Tabby family continues to outperform and resonate with new and younger consumers. Our core Tabby Shoulder Bag 26 continued to anchor the offering, while Chain Tabby and Quilted Tabby remain global successes.

Additionally, our New York family once again significantly exceeded expectations, proving to be a new and durable growth driver for the brand. Building on the strength of the New York platform in its first year post launch, we're continuing to expand the Brooklyn and Empire collections while introducing new styles within the New York family, driving innovation and relevancy with our target consumer. Further, we grew our archival-inspired Coach Originals collection with a Large Kisslock bag at $695, which in July once again sold out within minutes of launching online and within a day at stores, showcasing Coach's creativity and brand heat.

And finally, our bag charms and straps also contributed to our momentum, providing consumers with further opportunities for personalization and customization with the Cherry Bag charm remaining a particular Gen Z favorite as a way to enhance self-expression. Overall, Coach's growth in handbags and accessories continued to outperform the industry demonstrating our innovation pipeline and the compelling value and craftsmanship 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 gains in both AUR and units to drive our growth. Next, we grew our footwear business with a focus on sneakers, which drives lifetime value with our target Gen Z consumer. In the quarter, sneakers grew mid-single digits led by the High Line and Soho sneaker families, which are driving momentum and selling at one compelling price point across all channels, another clear indicator that our One Coach strategy is working. Turning to marketing.

We continue to drive cultural relevance through emotional storytelling that highlights our brand purpose and product offering. Coach's On Your Own Time campaign featuring the spring 2025 collection and starring global ambassadors Elle Fanning, Nazha, Koki and Youngji Lee continued to drive brand momentum across markets. Our sustained investment behind this campaign is in keeping with our strategy to deliver cut-through and continuous brand and product stories to consumers. We also added a second purpose campaign during the quarter, not just for walking in support of our Soho sneaker launch.

The campaign was inspired by our consumer insights, showcasing what consumers want from a sneaker today in the many facets of their lives. And finally, we cultivated desire for Coach through unique, authentic and immersive retail experiences. This is another example of how our teams are successfully turning insights into action. Our data continues to highlight that Gen Z consumers like to shop in the real world and in person with engaging experiences.

As a result, we brought new store concepts, pop-ups and food and beverage to consumers across the globe, expanding into nontraditional formats and locations to delight consumers and build interest for the brand. In addition, the learnings from this work will enable us to move with greater impact as we expand our store footprint and deliver new brand experiences in the future. In closing, Coach is driving standout results guided by a clear brand vision to be the world's most inclusive genuine and loved fashion brand. Our fiscal year '25 results highlight that we are building strong brand and cultural relevance, fostering emotional connections driven by product innovation and the creativity of our talented global teams who are operating with excellence, focus and intention.

From these exceptional results and this position of strength, we are confident in the future for this powerful iconic brand. Now moving to Kate Spade. Our actions to reset the brand for durable growth are underway. In the fourth quarter, performance was pressured as expected.

Revenue decreased 13%, while bottom line results reflected continued gross margin expansion as well as strategic reinvestment in brand marketing. As we've shared, we are in the early stages of this turnaround and will be focused on key leading indicators of progress informed by our experience at Coach. These include increasing unaided brand awareness and search interest, followed by an improvement in traffic and customer acquisition, which will ultimately compound to drive top line growth. We are tracking these KPIs with consistency and rigor, leaning in where we see traction and pivoting if necessary to ensure our success.

Overall, we are deliberately resetting the brand and backing it with disciplined investments. While these actions will pressure revenue and profitability in fiscal year '26, they are essential to strengthening the brand's foundation and unlocking sustainable profitable growth for the long term. Now let's touch on the quarter. Our first strategic priority is to fuel brand heat and relevancy by investing in marketing focused on our target Gen Z consumer.

And we took a step forward in the quarter with the launch of our spring campaign featuring influential Gen Z celebrities, Ice Spice and Charli D'Amelio. Initial reads were positive with strong organic engagement and a lift in consideration, consistent with our goal to reestablish Kate Spade as a top-of-mind brand for our target consumer. Our second key strategy is to strengthen our handbag offering, simplifying and elevating our assortment anchored in blockbuster families. During the quarter, we amplified the Deco collection in retail and the Kayla in outlet, which were featured as the heroes of our marketing campaign.

As a result, both families were the top-selling bags in their respective channels and over-indexing with new, younger consumers at strong AUR. And we're bringing more innovation to the assortment while we streamline our offering, reducing handbag styles by over 30% by fall, allowing us to stand behind our big ideas with clarity and intention. Importantly, we are bringing deeper consumer insights and methodical consumer testing to all aspects of this work to ensure greater relevancy throughout our assortment. Next, we are focused on maximizing omnichannel cohesiveness with a compelling consistent brand message across all consumer touch points.

Alongside efforts to create a more compelling consumer journey, we remain focused on driving higher full price selling, a building block to scale in a healthy way. In closing, fiscal year '26 is a year of investment for Kate Spade. We are taking strategic and financial steps to reset Kate Spade for long-term growth, applying our brand-building learnings from Coach and aggressively leaning into action to turn around the brand. While a turnaround takes time, we are confident in our path forward and the brand's opportunity for healthy and profitable growth.

Now turning briefly to Stuart Weitzman. As previously announced, we completed the sale of the brand to Caleres on August 4. This action was consistent with our commitment to be diligent stewards of our portfolio and disciplined allocators of capital. I want to thank the Stuart Weitzman teams for their work to support the brand and customers during this transition and wish them success as they build their next chapter of growth with Caleres. In closing, Tapestry achieved a record year as we are successfully connecting with a new generation of consumers around the world.

Importantly, we capped our future speed agenda, exceeding earnings targets with our strongest growth year and momentum building in our business. And while the external backdrop is increasingly complex, our growth proves that our competitive advantages enable us to adapt and thrive in any environment. Our foundation is strong and our focus is clear. Our performance underpins our confidence that we have the strategy, capabilities and team in place to scale and win with significant runway for growth and value creation.

I look forward to sharing our road map for continued growth at our Investor Day next month. I'll now turn it over to Scott.

Thanks, Joanne, and good morning, everyone. Looking back at our results for the fiscal year, we exceeded our outlook. Additionally, we delivered our earnings and capital return targets set at our last Investor Day 3 years ago. This is a testament to our disciplined execution and financial agility, reinforcing our strong foundation and commitment to durable long-term value creation.

In the year, we delivered revenue growth of 5% with 10% growth at Coach. We increased gross margins by 210 basis points, and we grew earnings per share by 19% versus last year while accelerating investments into our brands. Turning to the details of the fourth quarter. I'll begin with a discussion of revenue trends on a constant currency basis.

Sales increased 8% compared to the prior year and outperformed our expectations. These results reflect gains in North America and internationally. By region, North America sales increased 8% compared to the prior year, led by 16% growth at Coach. Importantly, both gross and operating margin in the region rose versus last year.

In Europe, revenue grew 10% above last year driven by growth in our direct channels with increased local consumer spend and strong new customer acquisition, notably with Gen Z. We continue to see significant opportunities to grow in the region given our positioning, momentum and low penetration in this large market. In Greater China, revenue growth accelerated ahead of our expectations, increasing 18% with growth across all channels, including notable strength in digital. Our strong performance in China underscores our strategic initiatives and investments are working, and our business remains well positioned for long-term sustainable growth.

In Japan, sales declined 11% amid a challenging consumer backdrop. And in other Asia, revenue decreased 1% as growth in Australia, New Zealand and South Korea was offset primarily by a decline in Malaysia. Now touching on revenue by channel for the quarter. We grew in each channel while achieving strong and increasing profitability.

Our direct-to-consumer business grew 6% compared to the prior year, which included a mid-teens percentage increase in digital revenue and a low single-digit increase in global brick-and-mortar sales. In wholesale, revenue grew in the quarter in keeping with our expectations and strategy to find targeted opportunities to expand our brand's reach with consumers. Moving down the P&L. We delivered a record fourth quarter gross margin of 76.3%, 140 basis points above prior year, driven by operational outperformance.

Our strong gross margin is a core element of our value creation model, providing us with flexibility and fuel to drive sustainable growth. As we've seen in the year, AUR growth is driving roughly 2/3 of our margin improvement with the balance coming from AUC, and we see both levers contributing to operational gross margin gains into the future. Turning to SG&A. Expenses rose 10%, driven by an increase in marketing expense, which was 13% of sales in the quarter, while we drove 120 basis points of leverage in the balance of the business.

So taken together, operating margin increased 30 basis points in the quarter, driving profit expansion of 10% over the prior year, which was ahead of expectations. And our fourth quarter EPS of $1.04 grew 12% over the prior year and exceeded our guidance. Now turning to our shareholder return programs. In fiscal '25, we returned $2.3 billion to shareholders, a testament to our strong organic business and robust cash flow generation.

This includes $300 million in dividend payments and $2 billion in an accelerated share repurchase program. This program is expected to result in an average purchase price of about $78 per share. And now before turning to the details of our balance sheet and cash flows, I'd like to reiterate our capital allocation priorities. We have 2 foundational commitments.

First, to invest in our brands and business to support long-term sustainable growth; and second, to return capital to shareholders via our dividend with the goal over time to increase the dividend at least in line with earnings. Consistent with this, the Board authorized a 14% quarterly dividend increase for an anticipated annual rate in fiscal '26 of $1.60 per share. Beyond these 2 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 was on display in fiscal '25 and remains a value creation driver going forward.

And finally, utilizing our rigorous our 4-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 2.5x. Now turning to the details of our balance sheet and cash flows.

We ended the quarter with $1.1 billion in cash and investments and total borrowings of $2.4 billion, representing net debt of $1.3 billion. This incorporated the paydown of bonds totaling approximately $300 million in April. At year-end, our gross debt to adjusted EBITDA was a full turn below our leverage target at 1.4x. Adjusted free cash flow for the year was an inflow of $1.35 billion, and CapEx and cloud computing costs were $153 million.

Inventory levels at year-end were 4% above prior year, excluding $92 million of Stuart Weitzman inventory reflected in assets held for sale on our balance sheet. This included the strategic pull forward of receipts in light of the current trade landscape. Our inventory continues to be current and well positioned globally and by brand. For fiscal '26, we expect inventory levels to be modestly down year-over-year on a reported basis.

Now before turning to our guidance, as you saw in our press release, we recorded a noncash impairment charge of over $850 million related to Kate Spade. This was based upon the current business trends, the outsized impact of tariffs, which disproportionately affects Kate Spade as the vast majority of its business is in the U.S. and the incremental investments we're making in support of profitable long-term growth. Now moving to our guidance for fiscal '26, which is provided on a non-GAAP basis. To start, I'd like to give some context by disaggregating the top line momentum we're seeing in the business and our focus on supporting revenue growth from the current dynamics impacting our profitability in the fiscal year.

First, on sales, our trends in the first quarter are strong. And in fact, we've accelerated into the new year, led by Coach with stronger full price selling. We are building the brand for continued healthy gains well into the future. This is our priority, and we're executing behind it.

Having said that, we are facing greater than previously expected profit headwinds from tariffs and duties with the earlier-than- expected ending of de minimis exemptions being a meaningful factor. In aggregate, the total expected impact on profitability this year from tariffs is $160 million, representing approximately 230 basis points of margin headwind. We're taking thoughtful actions to mitigate these impacts while continuing to deliver the compelling value, quality and innovation that is foundational to our brands. We're leveraging our agile supply chain to optimize our global manufacturing footprint, minimizing our tariff exposure where possible.

We are also working closely with our long-standing service providers to drive efficiencies. I remain confident in our ability to address these headwinds fully over time given the strength of our business and the agility of our supply chain. Overall, we view our guidance as prudent and achievable. All in, we expect to drive continued mid-single-digit revenue growth on a pro forma basis, deliver strong operating margins above prior year and return over $1 billion in capital to shareholders in the fiscal year.

And as we action our mitigation strategies on tariffs, we believe our longer-term earnings growth delivery will accelerate. Now turning to the details. This guidance excludes Stuart Weitzman from fiscal '26 expectations. For the fiscal year, we expect revenue to approach $7.2 billion.

This represents pro forma revenue to grow at a mid-single-digit rate on both a nominal and constant currency basis with FX planned to be an 80 basis point tailwind. Touching on sales details by region at constant currency on a pro forma basis. In North America, we expect revenue to increase mid-single digits. In addition, we expect growth in Europe in the area of 20%.

In Greater China, we expect to achieve high single-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. And by brand, this guidance incorporates high single-digit growth at Coach at constant currency.

At Kate Spade, we're embedding a high single-digit decline in revenue with sequential improvement planned in the second half of the year. In addition, our outlook assumes operating margin expansion. We anticipate gross margin to decline in the area of 70 basis points. This assumes operational gross margin expansion of 120 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 $160 million in the fiscal year, which assumes we mitigate 30% of the annualized run rate of $235 million. On SG&A, we expect expenses to be approximately even with prior year, resulting in at least 100 basis points of expense 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 80 basis points versus last year, reaching over 11% of revenue. We also realized 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 160 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 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%, and our weighted average diluted share count for the year is forecasted to be approximately 213 million shares, which includes the expectation for $800 million in share repurchases. Taken together, we expect EPS to be $5.30 to $5.45, representing 4% to 7% growth compared to last year, including over $0.60 of tariff and duty headwinds. Moving on, we anticipate adjusted free cash flow to approach $1.3 billion. And 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 related 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 tariff and duty impacts work their way through the P&L. Now to our current assumptions, we expect pro forma constant currency revenue to increase high single digits in the first half and low single digits in the back half.

For Q1 specifically, as mentioned, we started the year strong with revenue trends accelerating at Coach. As a result, we're anticipating a low double-digit total sales gain in the quarter. This includes a 70-basis point tailwind from FX. Turning to margin.

As we mentioned, we expect gross margin pressure for the year due entirely to tariff and duty headwinds, primarily in the second half. In Q1, we anticipate reported gross margins to increase by approximately 100 basis points. SG&A is expected to leverage both in the first and second halves, while in Q1 specifically, we expect slight deleverage on higher marketing expense. We expect operating margin expansion in the first half, driven by a Q1 increase of roughly 80 basis points.

In the second half, operating margins are planned in line with prior year despite tariff and duty pressure. Taking a prudent approach to our guidance, we expect EPS growth for the year to be led by the first half with Q1 forecasted to grow by more than 20% to approximately $1.25. So in closing, we delivered another record-breaking quarter and year, highlighted by strong top and bottom line growth. We achieved over $5 in EPS and returned more than $3 billion to shareholders over the last 3 years, consistent with the targets we outlined at our last Investor Day. This showcases our differentiated and highly cash-generative business model that has proven agile, resilient and adaptive to change.

Moving forward, we are confident in our brands, our people and our strategy. Our fundamentals are strong, and we have competitive and structural advantages that position us to drive durable growth and shareholder value in both the year ahead and for years to come. I'd now like to open it up and take your questions.

[Operator Instructions] Our first question is from Brooke Roach of Goldman Sachs.

Can you help us unpack your outlook for fiscal '26 and what you're seeing in the business right now? Specifically, can you talk about the strength at Coach and your strategies to mitigate the impacts of tariffs over time?

Thanks, Brooke, and I'll kick us off and start with the breakout year we just delivered, which I think illustrates the power of our business model and our strategies. And just to recap, this year, we delivered strong top line results with an inflection to mid-single- digit growth well ahead of the industry, and we capped the year with an even stronger fourth quarter. Importantly, we did this at increasing margins, meaning that we're growing in a healthy way and in a durable way. And we delivered earnings per share above $5, which is -- was our commitment 3 years ago amid an incredibly complex environment, which showcases the agility of our teams.

Importantly, our momentum continued. The Coach business accelerated into the first quarter. This all points to the fact that we're driving durable growth. This is our focus, and we are executing.

And in terms of fiscal '26, we expect continued growth. Our guidance calls for mid-single-digit top line growth and mid- to high single-digit earnings growth, inclusive of tariffs. And we're clear-eyed about the environment. We're incorporating the latest news on tariffs, both in how it could pressure consumers as well as the impact on our business.

And even with tariffs, we're continuing to expand our operating margin this year, and we're well positioned to fully offset the impact of tariffs over time. So we have momentum, and we see tremendous runway ahead. And I'll turn it to Todd to talk about the strength he's seeing at Coach.

Thanks, Joanne. As we noted, in the fourth quarter, we grew 13%. And what was important about our growth was it was broad-based in leather goods. And we grew in the key markets that we focused on North America, China and Europe.

And we delivered a 10% total year growth well ahead of the industry. What is even more impressive, I think, is where we're at right now. Our quarter-to-date, as Joanne mentioned, we've seen an acceleration from our exit rate in Q4, and that acceleration is coming with lower promotions year-on-year. In the quarter -- last quarter, we added 1 million new customers in North America, 70% were Gen Z and millennials.

Additionally, we added 1.7 million customers globally. And this strong traction with younger consumers is our future. We then turn to innovation and the value we offer our customers. And let me talk about one specific bag that was mentioned in our prepared remarks, our Kisslock bag.

That bag was launched by our Creative Director at last September's runway show. We've done 2 drops of that bag and last one sold out within hours. Since that last drop, we have 81,000 customers just in the United States who have registered to be notified when we're going to do another drop. And in fact, last week, we added another 4,000 customers when Sarah Jessica Parker was featured carrying the bag in just like that.

That's an example of the brand heat we're talking about. That's an example of the momentum that Coach has. So when I look at that, I look at our investment in the brand, particularly over the last 3 years and the resulting brand heat. And this places us in the best position to continue to grow AURs and mitigate duties and tariffs.

Thank you.

Our next question is from Ike Boruchow of Wells Fargo.

Let me add my congrats. One for Joanne, one for Scott, I believe. Just again, back to the accelerate. I mean, clearly, there's an acceleration in the business.

You're guiding 1Q above what you reported for 4Q. Todd gave some helpful comments. But maybe, Joanne, can you help us with the data or the new customer growth, anything you look at that gives you confidence in an ability to kind of lap the robust comps that really began during last holiday. Just curious how you kind of frame that.

And then, Scott, I just wanted to ask about tariffs. So I think 3 months ago, you gave some confidence in maintaining margin when you had about $90 million of headwind. Now it sounds like you've got more like $160 million with the new tariffs, but you're also kind of not guiding to mitigate any of that in your guide. So I guess the question is, is that highly conservative?

Do you still view an ability to maintain the margins is on the table? Has anything changed? Just curious your thoughts.

Well, thanks, Ike. And let me kick it off with your question around the consumer and new customer acquisition, which is a really important question, and it is the foundation of our growth, and it is the focus of our brands is to make sure that we're continually acquiring new customers to our brands. And that focus and those brand-building capabilities, we've been building those for years. And we're investing behind those capabilities, both in our technology infrastructure, but most importantly, the marketing investments that we're making.

And you see us continue to grow those investments. We expect to continue to acquire new customers to our brands. That is our focus. And what is important is that we're seeing this young consumer gravitate to our brand.

So the execution, particularly at Coach is at a very high level that the young consumer sees Coach as a brand for them in everything we do at every touch point. So that is what's driving the customer acquisition. And importantly, we're seeing these customers come back with more frequency. So our retention rates on these young customers are actually higher than our other cohorts, which I think bodes well for the durability of our growth.

We're going to capture these young customers at the point of market entry, and we're going to keep them and drive lifetime value. So that is fuel for our future growth. It's a foundation that we will continue to build on with more new customer acquisition. And that's how we're thinking about comping the comp.

We're just building a foundation and getting stronger from here.

And just before Scott answers, yes, sorry, I just want to give you one little tidbit that maybe helps demonstrate this. We are killing it with bag charms. And one of my questions was, I haven't seen a material move in [ UPT ]. But what we found out when we dug and looked at the data, they're coming back more frequently.

A young customer may buy the bag and then come back a week or 2 weeks later to actually buy a bag charm. So that gives us 2 opportunities to interact with them. And as Joanne and I have talked about in many calls, we have the best sales team in the world. Their ability to get them back in the store and sell them is so powerful in terms of our special sauce.

I just want to throw that tidbit. I know, Scott, you want to talk about tariffs and what we're going to do about them.

I can't wait, Todd. Thanks for the pass off. And I appreciate the way -- I appreciate the way you asked the question, by the way, because you're exactly right. I mean, of the $0.60 that impacted or is impacting our guidance, 2/3 of that, if we just went back 1 quarter, were not in effect, right?

And in fact, just a couple of weeks ago, the early termination of the de minimis came into vision. So you think about that $0.60, that's a onetime increasing cost, which is impacting our gross margins, but we have massive underlying strength even in our gross margins. And I'll just remind you, our operating margins are guided to expand even with the $0.60. So I guess you could say, if not for tariffs, add $0.60 to this guide, that's not the reality, though, right? I mean the tariffs are real, and we're going to fight our way through it.

One other perspective I would give you is, listen, we have momentum. And the first word in supply chain is supply. We're not going to sacrifice service to our business. We have great momentum.

We're taking share. We want to feed that momentum, and we don't want to take any knee-jerk reactions based on frankly, dynamic and ever-changing environment here as it relates to tariffs and duties and the landscape. So as we start to understand the rules of the game, I've never seen an organization that's better at playing that game and getting after it. So I have every bit of confidence that our gross margins and operating margins will continue to expand as we move into next year and beyond.

And I can't wait, hopefully you'll come and see the model and get a muffin in our Investor Day in about 3 weeks or so, and we'll give you more illumination into what that long-term guide path looks like.

Our next question is from Matthew Boss of JPMorgan.

So Joanne, at the Coach brand and the continued strength of the business, how best to think about the inflection in units that you're seeing despite the impact of lower promotions? And maybe how do you see the go-forward interplay between AUR and units as both contributors to the revenue build? And then Scott, just on gross margin, maybe -- could you give any elaboration on the phasing of gross margin for fiscal '26 or just any front half versus back half assumptions to consider?

Thanks, Matt. I'm going to kick it off briefly, but then turn it to Todd because I'd like him to talk about the Coach brand and our unit growth. But we have effectively reached the tipping point at Coach, where we've done the work to build the brand, and we're acquiring new and younger customers who are transacting at high AUR. We've cut the tail, the long tail of SKUs and stepped away from promotional activity that had a drain on units over the last few years.

But our business is incredibly healthy. And maybe with that, Todd, I'll let you finish the sentence.

Thanks, Joanne. Yes, I mean, not only did we cut the tail, but we're constantly improving it. So it wasn't a one-and-done exercise that we did 4 years ago or 5 years ago now, actually a little bit longer. We're constantly looking at our product offering, focusing and focusing.

One of the things about telling deeper and richer stories is doing it on fewer big ideas, and that's what's cutting through. So our guidance for the year has most of our growth coming through AUR growth. We believe units will continue to grow as well. So it's very powerful for us.

I am not interested in churn. We are interested in building long-term sustainable growth over the many years to come, and that's how we're doing it. We're going to continue to do it that way. And then one thing you'll hear us talk about at our Investor Day, we're going to see -- we're back in the business of growing stores.

Particularly in North America, you're going to see us talk about a growth in physical locations because one of the things our data points to is this younger consumer, they like being in the real world. They like shopping, they like interacting. That's how we can win. So I'm excited by -- you'll see us grow -- continue to grow AUR.

We're far from done, but you'll start seeing us grow units as well.

Yes. And a nice tie-in as I give you a little illumination on the gross margin phasing. Just picking up where Todd left, the advantage of our structurally high gross margins and the fact that we have a history of and a confidence in continuing to grow them is one of the things that makes that D2C work, right, is the profitability of our stores continues to increase, and that's really what's unlocking the opportunity for expansion and yet another growth factor as we look forward. I think we said a little bit of this in terms of the phasing.

But -- so think again about the impact of tariffs. So we've got underlying operational gross margin strength led by the AUR that Todd just talked about. That happens throughout the year. Remember, I also said in the prepared remarks that we brought a little inventory in ahead.

So it will take a while for that rabbit to work through the snake, right? So as the tariffs become effective and we sell through the lower tariff goods in the first half and then in the second half, you'll start to see those higher tariff goods start to hit the P&L. You're going to see stronger gross margins in the first half. I think we guided to a little over 100 basis points in Q1, for example, that's really driven by the operational strength that's structural and ongoing.

And then you'll see some of those tariffs start to hit in the second half. So your gross margins will be a little lower in the second half. But the other thing I would say is, as it relates to mitigation, as I said in my earlier comment to Ike, we've got a lot of plans in place. And now that we understand better the game board and what we're shooting for, those mitigation plans are well underway.

Some of those are quick. A lot of them take a little longer. So as we get into next year and beyond, you'll start to see more of those mitigations coming into effect in the gross margin line in '27 and '28.

Our next question is from Adrienne Yih of Barclays.

Adrienne Eugenia Yih-Tennant: Let me add my congratulations. I guess I'll start with kind of from just a structural modeling question. The last time that Coach brand was at these types of gross margins and north of 30% operating margins was sort of back 2005, 2006. So -- and I know that the wholesale was a bigger portion of the business. But Joanne and Scott, can you talk about -- and Todd, can you talk about structurally what is different today and what enables Coach to continue to kind of expand on both those line items? And then can you also, Todd, talk about kind of pricing as a mechanism to mitigate the tariffs. I haven't heard a lot of discussion about that. I know you did take some pricing earlier in the year. Is there a plan for the fall season? And is there another plan perhaps for spring of next year?

Yes. I'll go ahead. I think it since it was mostly all Coach. While I wasn't here in 2005, I was here just shortly thereafter.

We are a different company. We are more direct-to-consumer than in 2005. We have more geographic diversification than 2005. Again, back in that era, if you go pre-2010, 2012, we really had -- we were Japan and the U.S. Today, we have giant pillars of growth in China, in Asia. And now most recently, you see us do tremendous growth in Europe.

So I think structurally, we're in a far better place to deal with that. And it's a different kind of company. Second, the innovation that we're bringing to the table in terms of product offering. Stuart has been with us for about 11-plus years.

I feel in some ways, and he and I just walked through the showroom, I get the benefit of seeing the showroom many seasons ahead of what you get to see. And we both left there saying, this is the best we've seen the brand ever. Again, the consumer will vote. Hopefully, they'll be as enthusiastic, but we feel very good about that.

And then in our history, in our DNA at Coach, we always talked about blending magic and logic. Today, under the Tapestry engine. We took that and put it on steroids. We are more data-driven.

We have more insight. Again, we don't lose sight of the magic, but the magic is informed magic. So I feel very good. On price overall, we're going to continue to use our data to inform our pricing, and that's important.

Those opportunities, geography, channel, product mix is all working in our favor. And examples of the One Coach strategy, where we're bringing our collection product, Brooklyn, Tabby, other products like that into outlet stores, selling at full price. That gives you natural AUR growth. And it enhances what's already in the outlets because at the end of the day, the consumer sees brands, not channels.

So we're winning across a multitude of dimensions that will continue to allow us to take price, focus on the customer and grow from here.

Adrienne Eugenia Yih-Tennant: Great. Fantastic. Scott, one quick question. On the $800 million that you're now targeting for share repurchase activity, should we assume or think about that as the sort of new repo run rate? I know in the 2022 Analyst Day, sort of there was this notion of a consistent $700 million annually.

Yes. So I can't really go beyond what we've said right now, which is $800 million is this year. Here's what I'd ask you to take away. We got a really strong profitability and cash flow profile.

We're a full turn below our leverage target. We've got a lot of firepower, right? And so we know that share repurchases have been and will continue to be part of the value creation equation. $800 million is this year, and we'll be happy to give you an update in a few weeks at our Investor Day about a longer-term perspective. But I hope you take away, Adrienne, that we've got -- we're in a strong position, and we've got what I would argue is a shareholder- friendly capital allocation positioning here in the history of returning that cash to shareholders.

[Operator Instructions] Our next question is from Lorraine Hutchinson of Bank of America.

I was hoping to ask for more details on the drivers of the 160 basis points of operating SG&A leverage this year and then your thoughts on the longer-term opportunities to maintain that leverage or if the store rollout might offset some of this in the out years?

Yes. So that sounds like a meat question. So a couple of things. We did get a small benefit just foundationally from the Stuart Weitzman disposition, so roughly 20 basis points.

And I'll also tell you, we are increasing our investment in MAP spending or marketing, right, off an already record high base. We're continuing to invest. And even with that, we're finding leverage across the SG&A line, and that's one of the reasons why we can talk about margin expansion for the year. So a lot of it has to do with the productivity of the fleet that Todd just mentioned, right?

As we sell through and we're increasing our full price sales, we're increasing sales across all DTC channels. And when you do that, you get leverage in your 4-wall cost, the profitability is up, as we said, and that's a great driver of cost. And I would say on the -- if you want to say, "corporate costs," we're also being very diligent. We're investing in those things we think that matters, and those would be things like understanding the consumer on a deeper level, things like our customer data, our data fabric, our AI initiatives, some of the things we're doing around data and analytics and everything else, we're taking a pretty hard view and looking for efficiencies.

So that's the model, right? Invest in things that are difference making and will set up growth in the future, find efficiencies across the rest of the P&L. And that, coupled with a nice acceleration in gross -- top line growth to mid-single digits, that sets up that flywheel that we've been talking about.

Our next question is from Michael Binetti of Evercore.

I'm guessing this one will go to you, Scott. So could you just unpack the commentary on de minimis -- as I think about our conversations through the quarter, I know you guys are doing some scenario planning around tariffs rate -- tariff rates changing. But how are you guys leveraging de minimis in the past? And how does that change?

Maybe how much of the 230 basis point is from de minimis? I think that's kind of the surprise. I'm guessing that means perhaps that some warehousing capacity needs to move back into the U.S. Or maybe just a thought on what that means operationally?

And I'll follow it just by saying maybe just Europe, the growth rate a little slower in the fourth quarter relative to the first 9 months. Maybe just context on that and then the reacceleration to [ '20 ].

Okay. So without going too much into rabbit hole, so de minimis, as probably you're well aware, is really the ability to ship duty-free on e-commerce from outside of the U.S. into the U.S. market. And with the recent tax bill that was passed, it was scheduled to expire in 2027, which was our expectation until a couple of weeks ago when there was an executive order, which accelerated the removal of de minimis. And that was about 1/3 of the $0.60 that we talked about.

So what does that mean? That $900 million that we talked about before now is bigger, right? Because you had goods coming into the U.S. that were duty-free. Now they're subject to duty and they get the full impact of that -- the reciprocal tariffs that are now in effect, at least as we understand them at this point in time.

So that probably is a surprise to many. I don't know how many people are paying attention to de minimis, but that was an opportunity that we had taken advantage of. It was the law of the time, and now the law has changed. So we have to address that.

The good news is, as it relates to capacity and whatnot, as we think about our network, it's pretty agile and combination of owned and 3PLs. So I'm not saying it's nothing, but our ability to manage within that is not a significant disruptor, and we have plans underway to take advantage of that. That's not going to be a significant cost or interruption of service issue as we go forward. It's just more work for our supply chain team.

As it relates to the guide, this is a little different than we have typically guided in terms of philosophy because usually, what we do is we just say we're going to take the rates that we see and simply project those forward. We feel like as we're entering a new year, and we have great momentum as evidenced by our Q1 guide, we think it's prudent at this point in the year with the real estate of the entire year ahead of us and the full impact of tariffs and the dynamic environment out there to be prudent in our second half assumptions. So we have done that, right? We've been a little conservative in the second half in light of the overall consumer backdrop.

I want to be clear, has nothing to do with the trajectory of our business. We're not seeing any change in the consumer reaction. In fact, we've seen an acceleration in Q1. So could we do better in the second half? Let's see.

But we feel like being prudent at this early stage in our full year guidance is the right position.

Yes. And just to jump in, just a specific question on Europe, a slight reduction in Q4 versus the -- what we were achieving before that. That is all intentional on our part. That is making sure that the wholesale accounts that we deal with are appropriate for the brand. So that us being very intentional. It doesn't indicate any kind of slowdown in consumer demand.

Our next question is from Paul Lejuez of Citigroup.

It's Tracy Kogan filling in for Paul. As far as the acceleration you mentioned that's happening in 1Q, I was wondering if you could give a little more detail by region on that. And then secondly, what does your guidance assume in terms of the magnitude of price increases at the Coach brand?

Well, maybe I'll just...

Acceleration -- yes, go ahead. Go ahead..

Go ahead. No, I was just going to say...

The acceleration we're seeing is widespread, as Scott was saying, we both want to jump in on this because it's a fun party. Yes, the acceleration we are seeing is widespread. The Coach strategies are working globally, and we're driving our business globally. We're seeing nice customer response, and it's been very, very consistent in terms of acceleration.

In terms of price increase, maybe, Todd, I'll let you talk about how -- what you're assuming for AUR growth in the year.

Yes. Again, our AUR growth is projected to be mid- to high single digits throughout the year. So we feel -- and we feel very good about that growth when we really look at buy the bag, buy the style, by the silhouette. And again, putting more first full-price product into outlet automatically lifts our AUR as well. So we feel very good about the mix and where we can take AUR.

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

Thank you, Leo. I want to close by thanking our exceptional teams for delivering another record year and share 3 important takeaways from our results. First, we deliver on our commitments. This is on display with our fiscal '25 EPS of over $5, which we outlined 3 years ago.

Our strategies are working. Our business is agile and poised for growth. And we know this is key as we continue to build connections with consumers and execute with discipline in a dynamic landscape. Second, we have strong fundamentals and momentum, highlighted by the double-digit growth we're seeing at Coach, which accelerated at the start of this year.

And third, we have unique competitive and structural advantages to drive durable growth and shareholder value into the future. I want to thank you, everyone, who joined us today for your interest in our story. Thanks, and have a great day.

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