Q3 2026 Earnings Call Transcript

Good day, and welcome to this Tapestry conference call. Today's call is being recorded. [Operator Instructions] 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 third 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 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. Our standout third quarter reflects the compounding benefits of our Amplify strategy. With the consumer at the center of everything we do, we are consistently translating insights into action at scale, delivering exceptional results with pro forma revenue growing 23% at constant currency, operating margin expanding 490 basis points and earnings per share increasing 62% versus prior year, each exceeding our expectations.

This outperformance allowed us to confidently increase our outlook for the year, underscoring that our advantages are structural and sustainable. The enduring strength of our business has been built with intention and is reflected in our results, underpinned by a commitment to deep consumer connection, disciplined growth and sustained value creation. I want to recognize our exceptional global teams. Our performance is a testament to their passion, curiosity, creativity and agility.

Now turning to the strategic actions from the quarter, which are driving our results today and continuing to expand our competitive advantages into the future. First, we built emotional connections with consumers acquiring over 2.4 million new customers globally in the quarter, driven by an increase in Gen Z. This continues to be a key driver of our growth as engaging consumers earlier supports higher repeat purchasing and lifetime value. Importantly, our Gen Z consumers have higher retention rates than the balance of cohorts highlighting the opportunity to build lasting relationships and meaningful value creation into the future.

We also drove growth with our existing customer base, demonstrating broad-based strength. Together, these dynamics reinforce a durable and repeatable competitive advantage, our ability to consistently attract and retain new generations of consumers to our brands. Next, we delivered fashion innovation and product excellence, led by Coach, where the brand is strong and resonating globally. Importantly, we accelerated growth in our core leather goods offering, with healthy and diversified growth drivers in place, reflected in both higher AUR and unit volume.

The combination of craftsmanship, creativity and value we offer to consumers at scale continues to be a clear competitive advantage and a structural strength of our business. And we powered global growth through compelling experiences, delivering double-digit gains in North America, Greater China and Europe, significantly outpacing the industry and growing market share in each of these regions. Our DTC-led business model creates a direct connection with our customers, enabling more relevant brand building and deeper insights, which together drive consistent execution and sustainable growth. This was evident again this quarter as we achieved over 20% growth in stores and online at strong and increasing profitability.

Overall, we delivered another record quarter, highlighted by double-digit top and bottom line gains, demonstrating a differentiated business model built for high-quality and long-term growth. Now moving to our results by brand. Turning to Coach. The brand delivered another exceptional quarter with constant currency revenue growth of 29% and increasing profitability.

We are executing our strategies with consistency, rooted in our blend of Magic and Logic, which is the creativity and passion of the Coach teams around the world paired with our systemic approach to understanding the consumer. There are several key indicators, reinforcing the strength of the brand and the durability of its growth. Customer acquisition once again drove our top line growth this quarter, with Coach welcoming 2 million new customers to the brand, a significant increase over the prior year. Gen Z acquisition accelerated meaningfully and their influence extended across generations, fueling broader new customer growth.

Further, we saw strong and broad-based gains with our existing customer base. Together, these trends highlight the legacy of Coach and the relevancy of its expressive luxury position as the brand continues to build enduring consumer relationships that transcend generations. Our core leather goods assortment continued to lead with unit volumes increasing over 20% and AUR growing at a low double-digit rate, demonstrating multiple drivers of sustainable growth in our core. And momentum was strong across key geographies, including North America, up 27%; Greater China, rising 58%; and Europe, increasing 27%, highlighting the global resonance of the brand and the effectiveness of our regional strategies.

Overall, Coach is bringing new consumers into the category and growing the market. And with a large TAM, we have under 1% share and meaningful opportunity ahead. Now to cover our third quarter results in more detail. Our creative teams are delivering innovation that is clearly resonating with consumers.

Our icons continued to outperform consistent with our strategy with broad-based strength across our assortment. The Tabby franchise remained a standout while the New York family, including Brooklyn, Empire and the newly launched Chelsea drove strong Gen Z acquisition. Teri, Laurel and Rowan also delivered outsized gains, reinforcing Coach's leadership in its core category. Importantly, Coach's accelerated growth in leather goods highlights the timeless values of the brand and the value we offer in the luxury market.

Looking forward, we believe our strong product pipeline and innovation supports further gains in both AUR and units, reinforcing the diversified drivers of healthy and sustained growth while never compromising our value proposition, a hallmark of the brand. Next, turning to Footwear. We delivered accelerated growth of approximately 20% in the quarter fueled by sneakers with the continued success of the Soho family. This family is resonating across channels, demonstrating the traction of the One Coach strategy beyond leather goods.

Footwear remains a long-term growth opportunity for Coach, given our brand strength, low share of the market and the categories relevance to our target consumer. Touching on marketing. Our strategic investments continue to generate compounding benefits this quarter, reflecting a disciplined long-term approach to brand building at scale. We increased marketing spend by approximately 50% versus the prior year, with a continued shift to our top-of-funnel brand building to support sustained customer acquisition.

Our spring campaign continued to build emotional connections with Gen Z consumers globally. Leading with insight and not just product, Explore Your Story was inspired by Gen Z's desire to turn to books and storytelling to find depth, community and a sense of self in an increasingly complex digital world. The campaign featured our global ambassadors, including Elle Fanning, Storm Reid, Paige Bueckers, and K-pop artist, So-yeon. On all metrics, this campaign is winning with our target consumer.

Additionally, to support growth acceleration in China and in celebration of Lunar New Year, we partnered with CLOT, a world-renowned Chinese streetwear brand. The collaboration came to life through a fully immersive experience, bringing together gaming, a cafe, a bespoke collection shop and daily community activations. This engagement highlights the strength of our brand and a deepening understanding of the Chinese consumer that together represent a meaningful and lasting source of competitive advantage in the market. Collectively, these actions are driving cultural relevance and customer acquisition and reinforce our growing moat around consumer understanding and sustainable demand creation in our most significant markets.

And finally, we are strengthening brand desire through distinctive, immersive retail experiences that elevate how consumers engage with Coach. During the quarter, we continued to roll out our new expressive luxury store concept globally. These stores are delivering higher traffic in dwell times, particularly with Gen Z reinforcing our strategy to scale this concept to more locations moving forward. We also opened 3 new Coach play stores in Japan and North America, locations that are fully immersive and localized.

And we continue to open additional Coach coffee shops as we harness the power of the brand to engage with consumers in new and relevant ways. In closing, Coach continues to deliver outstanding results, reflecting the clarity of our brand vision and an unwavering focus on the consumer. Importantly, these results speak to the future as they are fueled by proven strategies, intentional investment, exceptional execution and structural advantages that enable us to consistently connect with consumers across generations and geographies. This reinforces our conviction that Coach will be a $10 billion brand over time with best-in-class margins, grounded in our commitment to nurture and build on what makes the brand iconic, enduring and loved by consumers around the world.

Now moving on to kate spade. Our actions to strengthen the brand for long-term sustainable growth are underway. In the third quarter, revenue declined 11%. Top line trends improved sequentially, though fell slightly below expectations, which included pressure from our strategic pullback in promotions at retail.

At the same time, gross margin and profitability exceeded plan, even with continued strategic brand investments to support a return to profitable growth. As we continue the work to unlock the full potential of kate spade, what gives us confidence is that where we focus and invest, we see signs of progress. This is true across brand consideration, handbags performance and customer acquisition as we welcomed 400,000 new customers to kate spade in the quarter. We also know that turnarounds take time and the path to long-term growth is not always linear.

We are continuing to track the leading indicators of growth informed by our success and learnings at Coach. This gives us earlier visibility to evaluate where our efforts are taking hold and where we need to adjust our execution and investment, ensuring that progress is continued, tangible and sustainable. Now turning to our strategic initiatives in more detail. First, we remain committed to fueling brand desirability supported by marketing.

Our Spark Something Beautiful campaign continued this quarter and drove a lift in both consideration and purchase intent, proof that when consumers see our brand and content, we see traction. We also know that we need more consumers to engage with our content as unaided brand awareness more broadly has not yet improved. And this is a key part of driving acquisition and ultimately, growth. As a result, we're scaling our marketing efforts to expand the reach of our campaigns while increasing activations with creators to support broader visibility and increased brand relevancy with our target audience.

Next, we continue to build handbag blockbusters with a more focused assortment grounded in consumer insights. During the quarter, handbag blockbusters, led by the Duo and Margot outperformed the balance of the offering with strong Gen Z recruitment at higher AUR. The Duo Mini seen on Kendall Jenner sold out in stores and online, clear evidence that when we bring together consumer insights, creativity, value and cultural relevance, we are driving desire and demand for the brand. Overall, with a more targeted and relevant handbag offering, we drove higher full-price selling and handbag AUR growth at constant currency, consistent with our strategy.

Moving forward, there is more work to do to strengthen our creative execution, and we are focused on bringing more innovation and distinctiveness to our assortment to drive stronger results at scale as we continue to build for durable growth. Finally, touching on our third strategic pillar, maximizing compelling omnichannel consumer experiences. We enhanced both our in-store and digital experiences, simplifying the customer journey and elevating engagement. As a result, Net Promoter Scores increased versus prior year, indicating that the consumer is both recognizing and valuing the enhanced shopping experience.

In addition, our light-touch renovation test continued to deliver a lift in conversion and ADT and outperformed the balance of the fleet. We plan to expand this format to additional locations in North America by fiscal year-end. To close, kate spade is an iconic brand that holds a distinct place in the fashion and luxury consumer landscape. We made continued progress this quarter, and we remain intensely focused on the path to profitable growth.

The leading indicators tell us that we're moving in the right direction. We also know there is more work to do to further improve our execution while scaling what is working today. We have the right strategies in place and remain confident in the meaningful long-term potential for the brand. Before turning it over to Scott, I'd like to leave you with these overarching takeaways.

Tapestry delivered another record quarter and raised our outlook for the year. We are a consumer-obsessed organization of passionate brand builders with an agile, data-driven operating model. This is who we are and it's driving our results. From this position of strength, we are navigating a dynamic external environment with strategies that are proven and structural advantages that compound over time.

We're moving confidently into the future with an unwavering focus on the consumer, applying our blend of magic and logic with discipline to deliver the creativity and value that together drive durable global growth and long-term value creation. I'll now turn it over to Scott.

Thanks, Joanne, and good morning, everyone. In Q3, our revenue, operating income, earnings and free cash flow outperformed our expectations, each growing double digits versus prior year and further reinforcing the structural, durable and diversified drivers of our growth. Turning to the details of the third quarter. I'll begin with a discussion of revenue trends on a pro forma constant currency basis.

Sales increased 23% compared to the prior year and outperformed our expectations. These results reflect strong global momentum. By region, North American sales rose 20% compared to the prior year, fueled by a 27% increase at Coach with growth, market share gains and operating margin expansion ahead of plan. In Europe, revenue grew 21% above last year, driven by strength in our direct business, which was fueled by strong new customer acquisition, particularly among Gen Z.

Growth continues to come through local consumer spending, contributing to strong market share gains in the region. Europe remains a significant opportunity for further growth given our low penetration and market position. And before moving on, I want to touch on the disruption in the Middle East. First, by saying that the safety and security of our people and consumers are a top priority.

The region, which is operated through a distributor model represents less than 1% of our sales. And while we are closely monitoring the situation, we do not anticipate a material direct impact to our business at this time. Now turning to Greater China. Revenue rose 55%, growing ahead of expectations and driving significant market share gains.

This outperformance was fueled by accelerated customer acquisition and broad-based growth across channels led by digital. During the key Chinese New Year holiday, we meaningfully exceeded our plan as we continue to win with Gen Z consumers, cutting through with creativity, relevant activations and focused investments in the region. Looking forward, we remain well positioned to drive strong momentum in this large and important market. In Other Asia, revenue increased 16%, led by growth primarily in South Korea and Australia.

And in Japan, sales declined 10% as expected, driven by an intentional pullback in promotions. Now touching on revenue by channel for the quarter. We delivered gains across channels, fueled by direct-to-consumer growth of 23% compared to the prior year. This included an increase in digital of approximately 25% and over 20% growth in global brick-and-mortar sales with all channels at strong and increasing profitability.

Moving down the P&L, we continue to drive healthy margin expansion versus the prior year delivering a third quarter gross margin of 76.9%, 80 basis points above our prior year. This was driven by operational expansion of approximately 190 basis points as well as a favorable impact from the divestiture of Stuart Weitzman of 70 basis points. These benefits fully offset a negative tariff and duty headwind of approximately 180 basis points, which included a 150 basis point negative impact on Coach's gross margin and a 440 basis point negative impact on kate spade's gross margin. And as compared to our plan, Tapestry gross margin was 180 basis points better than our forecast, with approximately half of the upside due to stronger operational performance and half due to lower tariffs.

As a reminder, we have not implemented any price increases in direct response to tariffs, reflecting our disciplined and consumer-focused pricing strategy. Overall, 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. Our expenses rose by 13% and leveraged by 410 basis points, inclusive of a 160 basis point increase in marketing, which represented 12% of sales.

The leverage we drove in the quarter reflects our strong operational discipline and focused approach to reinvestment to drive long-term growth. So taken together, operating margin expanded 490 basis points in the quarter driving profit expansion of 55% over the prior year, which was ahead of expectations. And our third quarter EPS of $1.66 grew 62% over the prior year, also exceeding 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 $81 million in dividend payments for the quarter. Additionally, during the third quarter, we bought back $150 million worth of stock for a year-to-date total of $1.05 billion or approximately 9.3 million shares repurchased at an average stock price of approximately $112. In fiscal '26, we now expect to return approximately $1.6 billion or approximately 100% of our expected adjusted free cash flow to shareholders through dividends and share repurchases. This includes over $300 million in dividend payments for an annual rate of $1.60 per share as well as $1.3 billion in share repurchases, which is an increase from our prior outlook of $1.2 billion.

Our significant return of capital to shareholders reflects the strength of our organic business, including our robust and consistent free cash flow, which is a differentiator of our model, providing flexibility to invest in growth while delivering meaningful returns to shareholders. And now 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 2 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 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 under our previously announced $3 billion share repurchase authorization. And finally, utilizing 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 2.5x. Now turning to the details of our balance sheet and cash flows. We ended the quarter with nearly $1.1 billion in cash and short-term investments and total borrowings of $2.4 billion. Together, this represented net debt of $1.3 billion.

At quarter end, our gross debt to adjusted EBITDA leverage ratio was 1.1x, more than a full turn below our long-term target. Adjusted free cash flow for the quarter was an inflow of $229 million, and CapEx and cloud computing costs were $50 million. Inventory levels at quarter end were 3% below prior year on a reported basis, excluding the impact of Stuart Weitzman. In fiscal '26, we continue to expect inventory levels to be down modestly year-over-year on a reported basis.

Importantly, our inventory continues to be current and well positioned globally. Now moving to our guidance for fiscal '26, which is provided on a non-GAAP basis and excludes the impact of Stuart Weitzman from our fiscal '26 expectations. We are raising our full year guidance, incorporating our third quarter outperformance, along with a stronger outlook for the fourth quarter. Now turning to the details.

For the fiscal year, we now expect revenue to be in the area of $7.95 billion, representing pro forma growth of 16% in constant currency 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 now expect revenue to increase mid-teens; in Europe, we expect growth in the area of 20%; in Greater China, we now expect to achieve growth of over 30%; in Japan, we're forecasting a high single-digit decline; and in Other Asia, we anticipate low double-digit gains. And by brand, this guidance now incorporates growth of over 20% at Coach.

At kate spade, we now expect a low double-digit decline. In addition, our outlook now assumes an operating margin of approximately 23%, which is up approximately 300 basis points compared to last year and 120 basis points above our prior outlook. We now anticipate gross margin to increase approximately 110 basis points, a meaningful improvement from our prior outlook. This assumes operational gross margin expansion of roughly 190 basis points due primarily to improvements in AUR.

Further, we expect to realize a 60 basis point structural tailwind to gross margin from the disposition of Stuart Weitzman. These planned margin drivers are expected to fully offset a headwind from tariffs and duties in the area of 120 basis points as well as a modest FX headwind. This outlook embeds current U.S. trade policies and excludes any potential impact from IEEPA refunds on tariffs paid. On SG&A, we expect leverage of 190 basis points favorable to our prior outlook.

This reflects our diligent expense control, partially offset by ongoing growth-focused investments. To this end, we expect marketing as a percentage of sales to now increase around 190 basis points versus last year, an increase of 60 basis points from our prior guidance and now approaching 13% of revenue. We will also realize a 20 basis point benefit to expenses from the sale of Stuart Weitzman. For some texture on operating profit by brand, we anticipate Coach will expand its operating margin.

And at kate spade, we continue to expect a modest profit loss, reflecting outsized tariff impacts and brand investments. Moving to below the line expectations for the year. Net interest expense is expected to be approximately $60 million. The tax rate is expected to be approximately 17.5% and our weighted average diluted share count for the year is forecasted to be approximately 210 million shares, which includes the expectation for $1.3 billion in share repurchases.

Taken together, we now expect EPS to be in the area of $6.95 representing growth over 35% compared to last year and ahead of our prior outlook of $6.40 to $6.45. Moving on, we now anticipate adjusted free cash flow to approach $1.6 billion. And finally, we continue to expect CapEx and cloud computing costs to be in the area of $200 million. We anticipate around 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. Briefly touching on the shape of the year, our outlook implies balanced first and second half top line growth at the Tapestry level and by brand.

At Coach, this is low 20s growth and down low double digits at kate spade. For Q4 specifically, our guidance embeds pro forma revenue growth of low double digits on both a reported and a constant currency basis. This incorporates a low teens growth rate at Coach, ahead of our prior expectation and representing growth of roughly 30% on a 2-year stack basis. And at kate spade, we expect a high single-digit decline in the fourth quarter.

Turning to operating margin. We expect expansion of approximately 60 basis points, driven by a gross margin increase in the area of 130 basis points, partially offset by higher SG&A, which reflects strategic investment in brand building with an increase of over 300 basis points in marketing to drive long-term growth. And Q4 EPS is forecasted to be approximately $1.20, an increase of over 15%, including a tax rate of roughly 18%. In closing, we delivered another outstanding quarter with strong top and bottom line outperformance and significant cash flow generation, underscoring the compounding and diversified drivers of our growth.

From this position of strength, we raised our outlook for the year, reinforcing our confidence and reflecting our disciplined and consistent execution. Supported by clear and proven competitive and structural advantages, we are well positioned to deliver sustainable value creation for years to come. I'd now like to open it up for your questions.

[Operator Instructions] Our first question comes from Bob Drbul with BTIG.

Congratulations on another great quarter, meaningful beat and raise. So based on your guidance, with the FY '26 EPS guidance in the area of that $6.95, I think that's what, 35% versus last year and 23% operating margin, you're on track to deliver on your Investor Day targets 2 years ahead of plan. So given this outperformance and your current expectations, can you help us think about the growth trajectory for FY '27 and beyond?

And to your question, where do we go from here? We're just getting started. As we talked about at our Investor Day, we've reframed our TAM, our addressable market, and we have low share of a large TAM. And our goal is clear and unchanged to deliver durable growth that's defined for us as mid-single-digit revenue growth as a floor, well ahead of the category at best-in-class margins, which we expect will deliver exceptional TSR.

And our performance this year and this quarter only gives us more confidence. So let's talk about what's driving our growth. The foundation that we talked about that we covered at our Investor Day is our transformation into a truly consumer-obsessed organization for passionate brand builders. And we're enabled by this agile, data-driven operating model that's driving innovation and impact across our business.

This is now embedded at Tapestry. And our goal is to connect with new generations of consumers around the world. This is the fuel in our growth engine. And again, we shared a massive opportunity that we have across a large global addressable market.

There is so much more room to grow, and our strategies are working. You can see that in our results this quarter. And we've done it with intention. We've built with intention and an eye toward the future.

We're growing today in a healthy way. We're winning in our core leather goods category at higher margins and higher AUR. And we're seeing growth across generations and across geographies. And to your point, our guidance does -- this year does have us delivering our Investor Day targets 2 years ahead of plan across both revenue and earnings, and we're not finished.

That's the best part. As we look to the future, we see significant opportunity to continue to build on our successes. We have structural advantages that allow us to grow in a dynamic environment. We play in an emotional category.

We deliver great value, I think, unmatched value in the market with high margins and strong free cash flow that allow us to invest at scale, and we're investing today to drive growth in the future. You can see that in investments in product innovation with a strong product innovation pipeline. We're investing in marketing. We're investing in consumer experiences with new store formats.

All of these investments are supporting our long-term growth opportunity. And while our teams are focused today on delivering a strong end of the fiscal year, we're moving forward with confidence.

We'll move now to Ike Boruchow with Wells Fargo.

I'll throw this one to maybe Scott and/or Todd. I guess Coach -- so Coach's growth is obviously exceptional. I think you raised over 20% for this year now. I guess my question is, how should we be thinking about the expectations for next year at Coach?

I know it's a little bit early, but at Coach specifically, what are the growth rates that give you confidence for anniversarying a year as robust as this? And I guess what kind of visibility do you have as we think about a more normalized growth rate for the brand in '27 and into the future?

Yes, Mike -- Ike, thanks for the question. I'll start before I turn it over to Todd. By the way, Mike and Ike my favorite candy from my childhood, if you wonder where the reference came from. Joanne mentioned it, we're confident in mid-single-digit growth at the Tapestry level.

That's our algorithm from Investor Day, and that's really underpinned by at least mid-single digit at Coach as a floor. And I'll just start by reminding you of what gives us confidence. So what is -- what underpins that algorithm. So first of all, it's AUR growth.

And we've said that we believe that we can sustain over a long period of time, AUR growth of at least inflation plus a point. And as it relates to units, that's the focus on new customer acquisition. And we're investing behind increasing our sufficiency, increasing our reach and continuing to acquire those new customers, and you saw 2.4 million in the quarter we just reported. So the combination of AUR and units will be part of the growth algorithm.

And on top of that, we see 1 to 2 points from new door expansions in our LRP. So all those things together give us great confidence in at least our floor of mid-single digits. So Todd, maybe a little more color on the strategies behind that.

Thanks, Scott. I want to go back to what we talked about last quarter, where I shared with you my confidence performance indicators and those CPIs, again, this quarter were outstanding. Think about this for a minute, 2 million new customers, fantastic performance in every one of our major markets: North America, China, Europe. As Scott just mentioned, AUR and unit growth and just fantastic and great product innovation.

So building on these exceptional results, let's address the long-term sustainable growth for our 85-year-old heritage brand. Something that Joanne talked about, but we have to keep reinforcing the TAM. And when we talk about the TAM, we're talking about our point of market entry of the Gen Z and soon Gen Alpha. And this group is just massive.

We can literally add millions of new customers every quarter for the next 10 years, and we'll just scratch the surface. Second, our credibility and innovation in our core leather goods product is exceptional. We build on a consistency and a clarity of design that has been honed under an extremely stable and experienced team led by our Creative Director, Stuart Vevers. Third, our price and brand positioning of expressive luxury is truly the goldilocks of brand positioning in our industry.

On the one hand, we're aspirational in design, fashion and quality, yet extremely approachable in price positioning. Fourth, our methodology to marketing is different and rare and it's working. We don't just simply look and say, here is a bag, let's go sell it. We look and seek out consumer insight and craft a story around that consumer insight that makes our brand and our storytelling even more compelling.

And we don't just do that once or twice a year, we do it consistently throughout the year, and we back it by significant financial muscle. Coach is approaching $1 billion annual spend in marketing, and we're doing that in a way that is attracting new customers into our brand. That's that Coachenomics flywheel that we often talk about. That's a level of spend that few in our industry can match.

And finally, our investment in stores and experience, coupled with our operational excellence will continue to raise the bar. And you see that in our launching of our new expressive luxury design stores. We're going to touch a majority of the fleet over the next couple of years and our One Coach initiative that brings innovation to the industry. So when you put all that together, I love the setup for next year and the years ahead.

And I have more conviction now that the Coach goal of $10 billion at best-in-class margins is more attainable than ever.

And quick build on that. I didn't answer your other question about what are we seeing quarter-to-date. Quarter-to-date, we're right in line with the guide that we just gave. So what we see right now gives us confidence in the guide that we gave for the fourth quarter.

We'll move on to Matthew Boss with JPMorgan.

Congrats on another great quarter. Two questions. So Joanne, could you elaborate on the compounding flywheel effect of this new customer acquisition at the Coach brand? I know we've obviously touched on it, but maybe if there's a way to walk through the unlock that you've seen in the North American file and then the inflection that's now clearly underway in China?

And just what does it mean for units, which I think still remain below pre-pandemic levels today? And then for Scott, just to Joanne's comment on we're just getting started, what does that mean for operational gross margin drivers in terms of AUR, AUC, just how to think about operational gross margin from here?

Well, thanks, Matt. I'll kick it off talking about the consumer, particularly the young consumer. And first, I will say that our entire organization has become focused on how to maintain relevance with this consumer. So it starts with an insatiable curiosity about what is relevant and how do we meet them where they are.

And what's important about the young consumer and our brands, both Coach and kate, is this is an authentic place. When we talk to consumers, we hear stories over and over and over again about remembering their purchase of the first bag and how important that milestone is in their life. We want to earn the right to be our consumers' first luxury bag purchase. And when we're at our best, we're growing the market because we're bringing more consumers into the market, and we're seeing that now.

Just to touch on the environment for a minute. You saw our growth in North America this quarter, over 20% growth, 27% at Coach, 20% at Tapestry. These are numbers that are fueled by new customer acquisition. But what's also important to note is we actually saw the market also grow.

We think the North America buyer market for handbags and leather goods grew mid- to high single digits. So we're seeing a consumer who is engaged in the category. And by the way, those market -- that market data is true in China and in Europe. We're seeing improvement in the sort of the context overall.

But our strategies of getting behind a real focus on the Gen Z consumer is driving our business with new customer acquisition. We're also seeing higher retention rates with this customer. So they're coming back with more frequency. This is a customer that is very engaged with our Coach brand.

And we love the new customer, this young customer for a number of reasons. First, when we capture that first luxury bag purchase, we engender brand love for a lifetime. Those are the stories I just mentioned. Second, we have an opportunity to drive higher lifetime value.

That's just math, right? When we capture them early, we can retain those relationships over a long period of time. And we're focused on doing just that. And the data today tells us we're doing a good job.

That means we have to deliver the innovation and quality and value that they respect and respond to every time they interact with our brand. So we're at every touch point, making sure that we're delivering a quality experience, whether it's the storytelling we're doing, the product we're delivering or the experiences in store and online. And as we're doing that, we're seeing a customer that's sticky, gives us a chance to drive higher lifetime value. The other important thing about the younger generation is that they have a reverse influence on all generations.

So not only are we fueling this customer acquisition flywheel, but this customer is influencing all generations. So we're seeing growth in new customer acquisition in non-Gen Z, and we're seeing growth with our existing customer base. So the flywheel effect, it compounds and amplifies. And that is allowing us to drive brand heat, higher gross margins, invest more in marketing, and you see us do that and invest more in store experiences.

And that's what creates the flywheel and compounding effect. Maybe turn it to Scott on the drivers of growth.

Yes. I love to talk about gross margin. So -- and the story is great here as well, right? If you think about what are those drivers, I kind of mentioned it earlier, right?

First of all, AUR, driving our AUR, but within reason, right? I mean we're not being too aggressive. We value that $200 to $500 price point, as Todd has said repeatedly. That said, we still have a lot of headroom.

If you look at our prices, they're just about where they were 15 years ago. And there's a lot of room to run, coupled with what Joanne was just alluding to, the brand love, right, and reinvesting back in the brand and getting noticed. So we're bringing innovative product, and we're bringing newness, which commands higher prices. At the same token, that doesn't work unless people know you're there.

So that's why we are reinvesting in awareness, and that's helping to drive our AUR. AUC is -- and by the way, AUR is also structural, right? I don't want to forget that. So as we grow internationally, we're going to drive our AUR and also the One Coach initiative that Todd has mentioned, is also a driver of AUR.

AUC, one of the things I'm particularly proud of. We got the best supply chain in the industry, in my opinion, right? And we're delivering a superior product that I'll put up against anybody, but we're doing it at scale, and we're doing it smarter than many because we're makers at heart. And we know how to engineer and make a product that most importantly, has a better outcome for the consumer.

It feels better, looks better and works better, but we're also doing it more efficiently. And that allows us opportunities not to make it cheaper but to make it smarter and to drive AUC and to work smarter across our business. And then that -- those are the primary drivers of gross margin, but I also want to talk about op margin. You didn't ask that question.

But this reinforcement in marketing, the flywheel that Joanne mentioned allows us to invest significant amounts of money in marketing and increase our reach, but we're getting tremendous leverage across the rest of the P&L. So leverage is another big driver of op margin even with our continued investment underscoring our pricing and our ability to take gross margin.

We'll move on to Adrienne Yih with Barclays.

Adrienne Yih-Tennant: Congratulations. So well done in a very dynamic, I'll say, environment. So with that, Todd, I'm going to start with you because I really wanted to go back to kind of like the structure that you've put in place over years and decades in terms of continuing to push forward with the innovation process on the Tabbies and the New York franchises and the Kiss Lock. How do you balance that kind of pushing on kind of that forward edge of risk taking when the environment looks a little bit dicey. And then how do you balance that with kind of core franchises and bringing all this newness? I've seen the Kiss Lock sell out, I think it's probably 4 times now, and we're waiting for the next batch of it. So just keeping that side of that tempo...

Adrienne, you know somebody.

Adrienne Yih-Tennant: I know Stuart.

I'm sorry, but...

Adrienne Yih-Tennant: Go ahead. Go ahead on that.

Finish this.

Adrienne Yih-Tennant: No. Well, the follow-up was that you're taking that and you're taking it to a market that's very competitive in Europe and that strength continues to grow. So it was kind of for both you and Joanne. So what is the driver that's really kind of turning on kind of Europe at this point?

Okay. So let me start...

Todd will start. Yes, the details on innovation.

Yes. In so many ways, and I think it goes back to the stability and the clarity that Stuart and the entire Coach team brings. We -- over the last 6 years, we've become very focused on who the customer, this timeless Gen Z customer, our sweet spot of who we're designing for. So that's when we talk about data and how we use data.

It's still -- what I always say is the most important thing is for our creators to have an informed gut. We're not outsourcing design nor are we outsourcing our commercial excellence to AI just yet. We are driving a business that is very connected to consumers. And I appreciate how much you recognize the innovation we're bringing.

But in so many ways, we're doing it under -- with fewer SKUs. We're doing it in a much more controlled manner than ever before. And we're doing it by amplifying major families. Recently, we added to the New York family a Chelsea bag that spoke to this young consumer in a very authentic way in that $300 price point.

So we're building on platforms that are very meaningful and give a clear point of view and perspective. When you walk into a Coach store, you know you're walking into a Coach store. When you see a Tabby bag on someone's shoulder, you see a definitive brand code with the C that is ownable and exclusive to us and then the quality. So that ability to amplify on the platforms we have is very significant.

And then we do things where we intentionally have drops that sell out very fast. We had a pink drop that I thought was going to last between the third and fourth quarter. I think it lasts days, not weeks. Those are good problems to have.

It shows how much brand heat exists in our -- in what we're doing. So we feel very good about that. You're going to continue to see innovation. I get this fantastic benefit of seeing product often a year before and just could not be more excited.

Every time I walk into the showroom, before I see it, I have a little trepidation, can it actually get better? And every time it gets better and better and better and with greater clarity of vision. On your Europe question, all of the attributes of the Coach expressive luxury and this authenticity and talking to the consumer is working in Europe. And one of the best things I could tell you to do is we'll go to Selfridges on Oxford Street over the next couple of weeks and look at the celebration of Rexy, our Coach mascot, and just the pure fun and enjoyment we bring to the category.

It's a wow, and the consumer is responding. So -- and when you think about Europe and you think about all the growth we've had, I think we've had 11 quarters of double-digit growth. We're still literally fundamentally talking about Europe and France and eye drops throughout the rest of Europe. Europe has a lot of countries and a lot of runway for us.

We'll move on to Michael Binetti with Evercore.

Congrats on a great quarter. Let me just ask one on the near term and then maybe one more a little bit longer term. Just I just want to confirm what we heard before on the quarter-to-date commentary for Coach. I think you said it was running low double digit -- sorry, low teens, Scott, in line with the guidance.

Some of the data we see in China is still pretty strong in April. So maybe just some context on what drives that deceleration from the high 20s last quarter. Or if there's anything to remind us about in the cadence for the quarter of last year and fourth quarter that we should be thinking about as we shift through the near term? And then, Joanne, when the Gen Z cohort really cycles into the existing customer bucket, really starts becoming a bigger and bigger share of that bucket.

What does the North America algorithm look like as that consumer shifts from being a large share of new customers being the majority of that existing customer bucket, like I said. And what does the spending profile turn into in that existing customer bucket as that demo mixes up over time?

Yes. I'll start, Michael. Let me just talk a little bit about our guide, what it means in Q4 and just remind you of some of the prepared remarks in terms of some context. But I want to be clear, we took up our guide for Coach in Q4, all right?

Based on even coming off an exceptional Q3, we increased our expectations for Q4. And as I said earlier, based on what we're seeing in the business and our progress to date and the underlying signals, we have even more confidence in our growth in the Coach brand and thus the increase in the guidance. And remember, a few other things. We said from the beginning of this year in our initial guidance, it would be quarter-by-quarter, there would be some noise or there would be some dynamics. And we see that in the second half.

I said in my prepared remarks, we have a balanced first half, second half on a 1-year stack, over 20% growth on a 2-year stack, over 30% growth and even on a 2-year stack, slight acceleration in the back half. But the calendar dynamics, just a few reminders of what those are. So first of all, Q3 had the benefit of the Lunar New Year outperformance, a little earlier timing of Easter. And I'm going to refer back to something Todd said, which is maybe underappreciated.

We had a normal cadence for us as we have a new seasonal product launch like the pink signature that he referred to earlier, and it launches in Q3 and then it sells through Q3 and Q4. Well, guess what, it sold through better. And we saw more of those sales coming out of Q4 and into Q3. That's a great signal for the brand. That is a really strong underscore of the performance, but it does create some dynamics between the 2 quarters. So I'll leave it where I started it.

We see confidence or we have confidence in Coach, and that's what gave us the confidence to increase the guide even on what was an exceptional Q3 performance.

That's right. And maybe I'll build on that with your question about Gen Z. The fundamentals in our business remain very strong. And this is really an important part of it, and that is that this new consumer that we're acquiring, I talk about new customer growth is the fuel in our growth engine, and it is powering our growth engine.

But what is, maybe underappreciated is the compounding benefit we get as these customers become part of our existing file, and we're seeing that growth in existing customers as well. So the metrics that we're tracking are both how are we -- how effective are we at acquiring that new customer, but also what are their repeat rates? Are they coming back to the brand more frequently, and we are seeing that. So as they join the brand, we see that stronger engagement, and that's the compounding effect we see in the flywheel.

And part of the reason the Coach business has inflected so much, and that will continue to power our business into the future. It's why we have confidence. We're not going to take our eye off the ball on new customer acquisition. We continue to stay really close to the customer.

There is no complacency in our business. We're staying very focused because these customers, what they value, how they shop, how they behave, that all changes constantly. And Todd mentioned it earlier, and soon there will be Gen Alpha, and they'll be part of this new customer acquisition strategy. So that's the formula for us.

It's acquire that new customer, do it in a quality way and make sure that we can retain that customer and build that lifetime value over time. And we see that with compounding benefits for our business.

We'll move now to Laurent Vasilescu with BNP Paribas.

Just 2 quick questions, if I may. Scott, since you love to answer gross margin questions. We are seeing inflation in nylon, polyester, cotton and there's less visibility in leather goods in terms of just [ leather ]. Curious to know what you're seeing in terms of inflation.

And if there is inflation, are you anticipating to raise pricing? And then, Joanne, I think you mentioned you continue to see great traction in the expressive luxury concept. Can you maybe unpack a little bit about what you're seeing in terms of store productivity versus the rest of the store base?

Yes. I'll hit the first part on that on gross margin. What are we seeing in inflation, I think, was petrochemicals, those kind of things. So, so far, Laurent, not much.

The one area where we've seen impacts right now that are clear and present are on fuel surcharges. Those are not material to us at this point in time, but we are seeing some modest cost pressure there. As it relates to more foundational things, we are a leather goods house. So the petrochemicals other than moving our product from A to B is not as relevant as maybe some of the other categories.

But it's something we're watching closely. I think the longer these, whatever you want to call it, travails go on, then we'll continue to watch where those pressures might show up. But as of now, we haven't seen too much. I'll turn it, I think, to Todd on the productivity of stores.

Yes. Thank you. Early days as we start launching our expressive luxury format. And when you think about the Coach fleet, we really have an expressive luxury, which is a more feminine, more inclusive design look and feel to the stores.

There are elements of play. We have a pure-play format. And then we also have Coach coffee shops. All of it is in the service of creating environments that are compelling, that are engaging, that give a full experience.

And so far, again, early days, we always see more productivity. When we redo the stores, it's compelling, and we'll learn from them. Very simple ideas like our craftsmanship bar used to be a bar. It's the -- our craftsmen stood behind the bar and engaged with the customer.

Today, we're using roundtables. Why? Because it's co-creation. It allows the customer to sit with a craftperson to individualize a bag.

Our coffee shops, this week, I think we'll have the sixth one in North America. The lift not only in the number of coffee and related product we sell, but the linger time and the overall performance of stores that are attached to coffee shops is magnificent. So we have a lot of good formats to engage this customer. It's based on consumer insight.

We know Gen Z love shopping in the real world, and we're going to give them something compelling to come see not just once, not just twice, but very frequently.

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

Thanks, Leo. Tapestry delivered another standout quarter, and we raised our outlook for the year, which is a reflection of proven strategies, disciplined execution and durable structural advantages that compound. We move forward with confidence, guided by our blend of Magic and Logic and an unwavering focus on the consumer. Together, these are the foundations of sustainable growth and long-term shareholder value.

And to our global teams, this performance is yours. Thank you for the creativity and passion you bring to our work and to our customers around the world. And everyone who's joined us this morning, thank you for your interest in Tapestry, and have a great day.

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