Earnings Call: Q2 2019

Feb 7, 2019

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 Andrea Resnick, Global Head of Investor Relations and Corporate Communications. Good morning and thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Tapestry's Chief Executive Officer and Kevin Wills, Tapestry's Chief Financial 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, including 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 ks, the press release we issued this morning and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors that could impact our future results and performance. Non GAAP financial measures are included in our comments today our presentation slides. You may find the corresponding GAAP financial information as well as the related reconciliations on our website, www.tapestry.com/investors, and then viewing the earnings release posted today and the presentation slides. Now, let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our 2nd fiscal quarter 2019 results for Tapestry as well as our 3 brands. Kevin Wills will continue with details on financial and operational results of the quarter and our outlook for the balance of FY 2019. Following that, we will hold a question and answer session where we will be joined by Todd Kahn, Tapestry's President and Chief Administrative Officer and Josh Schulman, CEO and Brand President of Coach. Following Q and A, we will conclude with some brief summary remarks. I'd now like to turn it over to Victor Luis, Tapestry's CEO. Good morning. Thank you, Andrea, and welcome, everyone. As noted in our press release this morning, during the Q2, our sales and gross profit rose successfully anniversarying the strong holiday results of the prior year. That said, this performance fell short of our expectations in the face of an increasingly volatile macroeconomic and geopolitical backdrop. Importantly and as expected, we generated significant synergies while also making material systems and strategic brand investments across our portfolio. Taken together, adjusted earnings per diluted share were even with the prior year. Across Tapestry, we made significant progress on our strategic pillars during Q2, notably maximizing the opportunity with the Chinese consumer globally. To this end, Coach held its first ever runway show in Shanghai, which was incredibly well received by the editorial community and generated more than 1,100,000,000 impressions. At Kate Spade and Stuart Weitzman, where we are focused on driving awareness in the region, we invested in key talent, infrastructure as well as marketing partnerships with Chinese brand ambassadors, while expanding our reach through the opening of new stores. While we understand that there are some continuing concerns around Chinese luxury spending, we view China's heightened emphasis on driving domestic demand as entirely aligned with where we are making our investments across brands. Indeed, we believe further investment in domestic markets with China, the most important, is the best hedge against volatility that may at times occur in tourist spending. Further, we were very pleased by the relative outperformance of all of our brands' China businesses this quarter. Our teams across Tapestry remained focused on executing our 4 strategic priorities. First, continuing to harness the power of our multi brand model. Our synergy capture was evidenced in part in the significant gross margin expansion we achieved in Kate Spade's 2nd quarter results. To that end, we remain on track to achieve run rate synergies from both COGS and SG and A of approximately $100,000,000 to $115,000,000 in fiscal 2019, up from $45,000,000 in fiscal year 2018. We've also continued to make progress on building a scalable shared services model, including investments in systems and infrastructure to support our current and future growth opportunities. During the quarter, we deployed the first phase of our ERP implementation, SAP's S4 HANA, successfully migrating our global finance functions for Tapestry, Coach and Stuart Weitzman. And just yesterday, we successfully transitioned Kate Spade to the S4HANA ERP system as well. Now that our S4 implementation is well advanced and with our experience operating as a multi brand holding company, we've identified additional opportunities to further streamline our organizational structure. We expect these incremental efficiencies along with a return on our brand investments to support our goal of double digit operating income growth in fiscal year 2020. 2nd, fueling innovation. Across all of our brands, we are focused on delivering distinctive newness and compelling product across categories and channels, supported by bold marketing campaigns and unique collaborations. We understand that innovation is what drives velocity of purchase in our key categories and having a nimble, flexible supply chain, which we leverage across brands enables us to deliver a higher level of innovation with increased frequency. Our commitment to innovation is clearly evident across our brands in our just introduced spring collections as well as the impactful marketing campaigns launched to support them. 3rd, driving global growth. We continue to integrate the recently completed buybacks the Kate Spade operations in Singapore, Malaysia and Australia, as well as the Stuart Weitzman business in Southern China in the Q2. We also invested in key talent and infrastructure in these markets to support business development across our portfolio. These initiatives will allow us to accelerate international growth and drive brand awareness. During the Q2, we added 40 net new stores across brands, including the acquired businesses. These new locations were primarily focused in international markets and took our directly operated total store count to 1496. Our business is now more direct than ever, allowing for a consistently high level of execution in our delivery of our brand experiences. In fact, we had over 100 and 70,000,000 visits to our stores and sites in the Q2 alone. And 4th, advancing our digital and data analytics capabilities. Across all brands, we are continuing to drive superior results for our online channels and remain committed to delivering a seamless online, offline experience. Our data labs team is focused on further strengthening and integrating our customer database platform and supporting customer relationship management programs in each of our brands, advancing data tools to drive aggregated business insights across the organization and innovating with advanced analytics to optimize key processes, for example, using machine learning on product allocation, pricing or promotion planning. The team is making substantial progress on these goals in helping us become even more data driven and predictive, building on the solid foundation we have created. Some of the key launches of this past quarter include a Tapestry real estate tool that allows our teams to analyze store density and identify white space in any geographic location, as well as measure cross channel migration of our customers. A Tapestry product portfolio tool that allows our brands management, merchandising and marketing teams to measure the performance of all our products across channels and regions against target priority segments, driving deep insights, which can inform future product launches. Moving forward, in light of our recent results and the uncertain global environment, we are revising our outlook for the balance of the fiscal year, which Kevin will touch on shortly. And while we were not satisfied with our 2nd quarter performance, we are proud of the continued progress on our key strategic priorities and confident that the investments we are making in our brands and our Tapestry platform will drive a return to double digit operating income and earnings per diluted share growth in fiscal 2020. Now returning to the 2nd quarter results and starting with category trends. During the Q2, we estimate that the men's and women's premium handbag and accessories market, which is now over $45,000,000,000 grew at a high single digit rate globally on an organic basis, a slight deceleration from the September quarter. In U. S. Dollars, the growth rate was mid to high single digits, given the appreciation of the dollar. We also wanted to share some highlights of our U. S. Brand tracking survey fielded in November December. Among the broad premium market and looking at emotional attributes, Coach is a leading brand in making women feel confident, original and smart, while Kate Spade leads in making women feel feminine, beautiful and fun. It is important to note that we saw gains in the brand affinities of both Coach and Kate. Specifically, among the broad premium market, the percentage of women who agree that Coach and Kate Spade are their most loved handbag brand and are brands that they would confidently recommend increased versus year ago. Looking at specific brand performance and starting with Coach, global comparable store sales rose 1% in Q2, led by outperformance in our international channels and across our e commerce platforms and reflected our compelling offering across categories. We were especially excited by the brand's increased traction with Chinese consumers globally, driven by domestic demand, partially offset by a decline in tourist spend. Further, we drove an increase in operating income through both gross margin expansion as well as SG and A leverage. Our goal for Holiday across all channels was to continue to elevate and differentiate the brand by offering innovation and emotion through our product assortment, marketing and the in store experience with a special focus on gifting for the season. There were many highlights of the quarter in keeping with our brand priorities. In retail, we successfully cascaded leather goods innovation from our fashion shows and global marketing campaigns with Parker, Charlie and Dreamer families, all of which remain strong drivers of the business in the 1st holiday season. We've continued to animate these families with new materials and shapes during the quarter. Likewise, we order. Likewise, we also reinforced Signature as a coveted brand icon by having the most significant presentation at retail in many years. In addition to the iconic tan coated canvas, we also introduced a metallic signature platform for a festive holiday take on logo and a new elevated jacquard print. As expected, our customers were excited to have Signature back in a meaningful way in their retail assortment. Most broadly during holiday, we transformed our stores into a festive gifting destination, featuring our whimsical party animals and emotional gifts across all price points. We also continued our momentum in women's ready to wear with strength in Shearling outerwear globally and particularly in China. In outlet, during the quarter, we increased the level and frequency of newness and novelty in the channel. We had multiple introductions in the edit, which represents the pinnacle of our outlet assortment. The best sellers included the new Cassidy Crossbody, the perfect day to evening bag, which was featured in many novelty iterations as well as the Abby Duffel and El Hobo, 2 shoulder bags in rich pebbled leather. The edit continues to achieve higher AURs globally. In addition, we pulsed multiple gifting messages during the season, including a strong component of festive glitter and metallic bags and small leather goods. We also had a disruptive Wizard of Oz collaboration, bringing the excitement of this holiday classic to a full lifestyle collection, including bags, small leather goods, ready to wear and soft accessories. Overall, Signature product continues to drive sales and our customer is responding to innovation within this assortment. We had multiple iterations of signature newness throughout the quarter, including an exclusive Black Friday capsule, juxtaposing signature against animal prints. In Q2, logo penetration rose over the prior year. And consistent with our strategy to drive growth outside of our core women's bags and small leather goods categories, men's continued to comp across channels and geographies, driven by lifestyle, notably outerwear and footwear, as well as small leather goods. In outerwear, shearling styles drove more than half of Q2 ready to wear sales. The November launch of the new Rivington family in bags also proved a great success. This family continues to be a focus as we move into spring and beyond. We were very pleased with the performance of our women's and men's footwear assortment globally. In retail, our strong growth was led by our sport and casual offerings, notably women's boots and booties as well as on trend sneakers across genders. In Q2, strong performance in the C143 sneaker continued across both women's and men's with an expanded offering coming for spring. In outlet, we were excited by the traction we experienced in women's boots and booties and men's sneakers. Our signature platform continued to perform well in both our women's and men's offering and across channels. In addition, we have made significant progress in driving our licensed categories, both in stores and in the broader market. Coach Fragrances gained momentum, moving up from the 27 rank to number 16 within the prestige fragrance division of the U. S. Department and specialty store market based on dollar sales, according to the NPD Group's point of sale data in the 12 months ending December 12, 2018. Further, last month, we announced a global multiyear licensing agreement with Incipio Group to launch mobile device accessories. A comprehensive range of Coach mobile accessories will release on coach.com and Coach stores worldwide beginning in the fall of 2019 and will be a key part of our holiday programs. We were also delighted with the growth we drove in e commerce with particular strength in our fullpriceretail.combusinessglobally. Of note, Q2 2019 was our best.comholidayperformance ever in North America. During the quarter, we also rolled out our new homepage design, which has seen terrific engagement results as well as enhanced personalization functionality through our product recommendations, which is driving strong conversion results. On stores, our customization program Coach Create continued to drive sales in Q2 as we accelerated our offering of customization options, now including footwear and outerwear in addition to leather goods. Customization was offered in 12 countries in 110 stores during holiday, supported by over 200 on-site craftspeople and by fiscal year end this service will be expanded to over 100 and 50 stores. Around 300 additional stores are serviced remotely with the millennial focus on personalization and authenticity is not surprising that this program is helping to engage and recruit the younger consumer. On marketing, our fun and festive 360 degree holiday campaign featuring whimsical holiday party animals and key product families resonated well and drove brand buzz. We continued to drive digital engagement with Selena Gomez's video content to launch holiday And we augmented the use of global imagery with local ambassadors with Guangxiatong in China and Kikomizuhara in Japan. As mentioned, a highlight of the quarter was our first ever Shanghai runway show, our first dual gender show outside of New York, which was live streamed and drew significant and positive global attention, both editorially and in media coverage overall. We will continue to leverage the halo from the show during the next few quarters, culminating with the in store launch of the Shanghai Collective, a series of collaborations with Chinese that was an integral part of the show. More recently, we've launched our partnership with Michael B. Jordan as the first global face of Coach Men's and held our first event with our philanthropic partner for the Coach Foundation, the Future Project. To celebrate the launch, Michael surprised students at Barringer High School in his hometown of Newark, New Jersey, generating national TV coverage and driving very positive engagement across social media platforms. Now to get into a bit of comp detail on the quarter. The drivers of our overall second quarter performance were fairly consistent with our previous trends, with global comparable store sales in bricks and mortar driven primarily by conversion, reflecting our strong product offering. As noted, we saw continued strength in our e commerce business globally. During the quarter, our global Coach comp remained solid, rising 1%, accelerating on a 2 year stack basis, led by our international markets. Greater China comps rose and accelerated from Q1 and importantly our business with the Chinese consumer increased globally. Japan comp was very strong, while our other Asia businesses were also positive with Korea the only exception. Finally, Europe comp returned to positive territory. North America also accelerated on a 2 year stack basis, but comps slightly negatively reflecting a difficult compare given last year's very strong holiday quarter performance. We understand that there's been a lot of focus on tourist flows as well as concerns related to Daigou or reseller activity. What we saw over the quarter was the anticipated and continued headwind from the tourist spending in North America. In addition, notably in outlet, we experienced volatility in the spending patterns of some of our customers believed to be resellers in advance of changes in e commerce laws on the mainland effective January 1. We know this type of activity is prevalent globally for luxury brands, which sell at premiums outside of their home markets. Ultimately, we believe this curtailment of reseller activity will have a long term benefit to our brand and our business. Importantly, at the same time, we've seen an acceleration in local customer demand in both the U. S. And Mainland China. Moving to wholesale. As expected, our North America shipments were slightly below prior year during the quarter due to shipment timing with the Q1 as well as the closure of certain department store accounts. On a POS basis, we comped up in the quarter despite the lower level of promotional event days. Our international wholesale revenue rose versus the prior year in Q2, excluding Coach Australia and New Zealand as that business has transitioned to a directly operated retail model. This reflected some shipment timing shift with Q3. At POS, sales were modestly below prior year on the same basis. Overall, we are satisfied with Coach's performance in the quarter in light of the tough compare volatile tourist trends, notably in North America. Moving forward, we remain focused on 1st, delivering a heightened level of newness throughout the pyramid of fashion, price and occasion across channels and geographies continuing to build on our established and authentic signature platform driving growth beyond our core bags and accessories, utilizing technology and digital to enhance and modernize the customer experience, notably through customization. And lastly, amplifying our marketing message that balances unexpected brand impact and broad appeal. In summary, we are excited about the spring season and remain confident in the brand's opportunities for growth go forward. Moving to Kate Spade, we made continued progress on our integration efforts and the execution of strategic initiatives. That said, our sales fell short of our expectations with 2nd quarter revenue totaling $428,000,000 down 1% versus prior year. Top line results were driven by new stores and the consolidation of Kate Spade China, offset by the deliberate pullback in disposition and the decline in comparable store sales, which fell 11% with our online business outperforming bricks and mortar stores. This comp softness reflected the lack of distinctiveness the final season from the brand's previous design team. Given the lack of newness for holiday and our excitement about the new creative direction, we made a deliberate decision to shift marketing dollars from both Q2 and Q4 into the current quarter in support of the launch of Nicola Glass' new collection. In fact, her spring collection was introduced in our full price channels just last week. And while early days, initial reads have been strong. In handbags, the Nicola Group featuring the Spade Twistlock hardware, a new brand code, is resonating globally. And Margaux, defined by its curved feminine silhouette and crafted from refined grain leather is also performing very well. Perhaps most exciting is existing customer on the journey with us. Overall, this performance underscores our confidence in achieving a significant inflection in the business with a return to positive comps. At Kate Spade, we continue to focus on our 5 strategic pillars. 1st, global expansion. We added 31 net new locations in Q2, including 15 acquired in Singapore and Malaysia and are on track to add 60 to 70 stores globally, including distributor buybacks. To date, our new doors are meeting or exceeding our expectations at high levels of productivity. 2nd, branding. We evolved our messaging to play to the brand's core attributes of fashionable and feminine, while addressing fun in a more universal way. In support of Nicola's debut collection, we cast actress Julia Garner, Sadie Sink and Keke Layne to star in our new Kate Spade New York campaigns for 2019. The 3 new faces personify the brand's promise of optimistic femininity. The campaign was shot by famed photographer and longtime brand collaborator Tim Walker and has launched globally to very positive reviews and engagement. 3rd, as we've discussed, we're introducing exceptional and aspirational product, upgrading quality through elevated materials and construction, while maintaining price, providing excellent value to our customers. And we've begun to create compelling and covetable brand icons and codes, such as the spade turn lock to make our product both instantly recognizable and more distinctive. 4th, we're creating immersive channel experiences and have started to roll out new retail and outlet concepts. In fact, of all the openings thus far in fiscal year 2019, all have reflected the new color palette, enhanced visual merchandising elements and merchandising by category of our evolved store model. In addition, we've made some light touch renovations in key existing full price locations, approximately 50 in total as of the end of January with a goal of touching approximately 90 locations globally by the end of this These front room wraps leverage the brand's new iconography in our specialty stores to appropriately showcase the new product in a cost effective yet brand enhancing manner. And 5th, we are leveraging the Tapestry platform and capturing synergies for Kate Spade through COGS and indirect savings as we optimize our supply chain, notably for bags and small leather goods from raw materials buying and manufacturing through transportation and logistics. The Kate Spade team is also tapping into Tapestry's resources and expertise such as global business development and store construction to accelerate growth and improve profitability over time. As we look ahead for Kate Spade, we continue to expect that it will be a year of solid revenue growth driven by new distribution, acquisitions and consolidations of distributor businesses and a return to positive comps during the second half and notably in the Q4 when all specialty products will evolve to new designs. And while we remain confident that Nicola's product will drive an inflection in the business, we have now built in a slightly more muted top line assumption for the balance of the year given the weaker than expected performance of the carryover products, which will be transferring to outlet. Importantly, as previously noted, over our 3 year planning horizon, we continue to believe that Kate Spade can approach $2,000,000,000 in sales at significantly higher operating margins. Turning to Stuart Weitzman, we were pleased to meet our objective of returning the brand to top line growth in the holiday quarter. This reflects the progress the SW team has made in executing our FY 2019 strategic priorities. 1st, we continue to evolve and refine our product development processes and supply chain, addressing the challenges that arose last spring. Importantly, production levels and shipments have stabilized, reflecting the investment in talent and processes as well as the added manufacturing capacity. Of course, we recognize that there is still work ahead to optimize our production and delivery schedules, especially for the global wholesale market to allow us to capture the in season replenishment orders. With the rollout of our world class Tapestry IS platform in the months ahead, the team is excited by the prospects of capturing this opportunity. 2nd, we're expanding our footwear offering in new classifications, while maintaining our authority in iconic Stuart Weitzman styles. During the quarter, we experienced growth in booties, loafers, sneakers and pumps, where we had notable product newness. 3rd, we are expanding globally with the focus on the Chinese consumer. We are encouraged by the brand's performance in China, where we've acquired our business from our distributor partner and are focused on driving awareness and increasing market share. This spring, we're particularly excited to launch a capsule collection in collaboration with Yang Mi, a leading celebrity and influencer in China. In fact, her first post for the brand on her own feed drove 48,000,000 views and was reposted 700,000 times in the week after launch. In addition, in January, prior to Lunar New Year, we opened an additional 7 locations on the mainland in our new modern and elegant store concept. 4th, we're driving growth beyond footwear, gaining credibility in handbags and leather goods. This quarter, we introduced the brand's new spring collection of handbags, which generated exceptional growth. We continue to see significant opportunity to grow the brand's handbag offering given the complementary nature of the footwear and bag categories. And 5th, we are creating brand desire through bold and modern marketing. We're thrilled to have just launched our new marketing campaign, introducing Kendall Jenner, Yang Mi, Willow Smith and Jean Campbell as the season's diverse cast of SW Women. This campaign with its global relevance highlights the brand's core attributes and values of fusing fashion, function and fits. In summary, we've made significant progress in addressing the challenges in our supply chain, while at the same time evolving the brand's creative direction through product and marketing. Overall, we would expect improvement in the second half versus the prior year with the 3rd quarter still pressured by investments and the 4th quarter approaching breakeven levels of profitability on strong sales growth. We remain excited about the opportunities for the brand across geographies, classifications and categories and are confident in our long term vision. Before handing the call over to Kevin for details on financial results and guidance for fiscal 2019, I would like to touch on our CFO transition. As we announced in November, tomorrow will be Kevin's last day with Tapestry. He has been a key member of our leadership team and I speak for the entire organization in wishing him success as he embarks on his next chapter in Tennessee. Until a new CFO is named, I am extremely excited to share that Andrea Resnick will serve as our Interim CFO. All of you know Andrea and her exceptional knowledge of the business and leadership will ensure that we do not miss a beat. Importantly, our strategic priorities remain unchanged with our experienced and proven teams across Tapestry focused on their execution. With that, I will turn it over to Kevin for the financial review of the quarter and our outlook. Kevin? Thanks, Victor, for your warm wishes. I have truly enjoyed my time at Tapestry and leading the exceptional finance team. And good morning, everyone. Victor has just taken you through our quarterly results and strategies. Let me now take you through some of the important financial details of the quarter as well as our outlook for fiscal year 2019. Before I begin, please keep in mind that the comments I'm about to make are based on non GAAP results. Corresponding GAAP results as well as the related reconciliation can be found in the earnings release posted on our website today. Now turning to the financial results for Tapestry. Total sales for the quarter rose 1% on a reported basis and 2% in constant currency to 1,800,000,000 dollars While we delivered growth over our solid prior year results, our performance fell short of our internal expectations due primarily to softness at Kate Spade where comparable store sales were impacted by the lack of newness in the last season under the previous design team. That said, we were pleased to generate growth in Coach, reflecting positive comparable store sales led by international outperformance as well as strong growth in our digital platforms. Holiday quarter. Turning to gross margin. Our gross margin for the quarter rose 10 basis points to 67% on the higher level of sales. The expansion in our margin was driven by Kate Spade, which rose 120 basis points fueled by the realization of COGS synergies as well as a 10 basis point increase in gross margin at Coach, which included 45 basis point of currency benefit. These increases were partially offset by a decline in gross margin at Stuart Weitzman of 3 80 basis points, which included 200 basis points of pressure from currency. SG and A expenses totaled $805,000,000 and represented 44.7 percent of sales as compared to 783,000,000 dollars 43.9 percent respectively in the prior year. The increase in SG and A expenses was driven as projected by costs associated with regional buybacks and JV consolidation, new store distribution at Kate Spade as well as a higher level of marketing at Coach. Our operating income totaled $402,000,000 in the quarter as compared to $411,000,000 in the prior year, while operating margin was 22.3% as compared to 23%, reflecting the higher level investment versus prior year. As projected, net interest expense was $13,000,000 for the quarter as compared to $22,000,000 in the prior year. Our effective tax rate was 20.3% as compared to 21% in the prior year's Q2. Taken together, our EPS was $1.07 in the quarter, even with prior year. Now moving to global distribution by brand. For Coach, we opened a net of 2 locations in the quarter. We opened 16 net new Kate Spade locations while acquiring 15 stores in Singapore and Malaysia. And for Stuart Weitzman, we opened 7 new locations in Q2. Turning to our balance sheet and cash flows. At the end of the second quarter, our cash and short term investments were approximately $1,500,000,000 while our borrowings outstanding were $1,600,000,000 consisting primarily of senior notes. As previously discussed, the reduction in our debt position as compared to the prior year as of Q2 reflects the repayment of $1,100,000,000 in term loans in January 2018. Inventory levels at quarter end were $732,000,000 as compared to ending inventory of $666,000,000 in the year ago period. The increase over prior year was primarily driven by regional buyback activity over the past 12 months. Net cash from operating activities was an inflow of $618,000,000 as compared to an inflow of $535,000,000 a year ago. Our CapEx spending was $61,000,000 versus $78,000,000 a year ago. Free cash flow was an inflow of 557,000,000 dollars versus $457,000,000 in the same period last year. Now turning to our capital allocation policy. Our long term priorities remain unchanged. 1st, we will continue to invest in our brands in order to drive sustainable growth and value creation. Secondly, we will seek strategic acquisitions looking for great brands with opportunities for expansion. And finally, returning capital to shareholders with a focus on dividends. Overall, our strong balance sheet will support our growth initiatives while allowing us to maintain strategic flexibility. Now moving to our 2019 outlook. As noted in our press release, in light of our 2nd quarter results and the uncertain global environment, we are revising our outlook for FY 'nineteen. Consistent with our prior practice, the following guidance is presented on a non GAAP basis and replaces all previous guidance. Starting with sales, we expect total revenues for Tapestry in fiscal increase at a low to mid single digit rate from fiscal 2018. This includes the expectation for low single digit growth at Coach, driven by continued positive low single digit comps. In addition, we continue to project an increase in Tapestry's gross margin for the year, although to a lesser degree than originally anticipated. That said, on a lower level of sales, we expect this improvement to be offset by SG and A deleverage given the impact of regional distributor buyback activity and systems investments. Net interest expense is expected to be in the area of $50,000,000 for the year. The full year fiscal 2019 tax rate is projected at about 18% to 19%. The increase over prior year is due primarily to the introduction of a new tax regime requiring a current inclusion in U. S. Federal taxable income of certain earnings of controlled foreign corporations known as GILTI. We expect our weighted average diluted shares outstanding for the year to be approximately 293,000,000. Overall, we are projecting earnings per diluted share for the year in the range of $2.55 to 2.60 dollars It is important to note that we continue to expect meaningful variability by quarter in the back half of the year. We're planning a higher level of SG and A growth in the Q3 based upon the timing of our reasonable buyback activity, new store opening plans and our investments in systems as well as the shift in Kate Spade marketing spend Victor mentioned. While in Q4, we expect revenue growth to accelerate as we gain traction at Kate Spade and Stuart Weitzman enable us to drive leverage. Therefore, taken together, we would expect operating income and EPS to decline in the Q3 while increasing in Q4. We still expect CapEx to be in the range of $300,000,000 to $325,000,000 in FY 2019, which we would anticipate to be the peak level of spend over our planning horizon. We expect to incur non recurring pre tax charges of approximately $35,000,000 attributable to the company's ERP implementation efforts. We also expect to incur pre tax integration acquisition charges of approximately $80,000,000 to $90,000,000 The increase versus our prior estimate includes expenses associated with the organizational streamlining Victor mentioned, which will result in cost savings in FY 2020 and beyond. Also reflects the higher cost of purchase accounting related to distributor buybacks. Finally, turning to our fiscal year 2019 directly operated distribution plans per brand, which are unchanged. For Coach, we continue to expect a modest net decrease in our store count in FY 2019 due primarily to net closures in North America and Japan. For Kate Spade, we remain on track to grow the brand's directly operated store base by 60 to 70 net new locations in FY 'nineteen. Specifically, we continue to project 40 to 50 net new door openings, notably in international markets where we see significant opportunity for growth. We've also added 21 locations to the acquisition of the brand's operations in Singapore, Malaysia and Australia. And for Stuart Weitzman, we expect to open approximately 30 net new locations this fiscal year, primarily in China. In addition, as previously announced, following the successful buyback of the brand's business in Northern China in FY 2018, we acquired the brand's operations in Southern China, where there are a total of 6 locations. Beyond this fiscal year, we're also pleased to have entered an agreement to buy back the Stuart Weitzman business in Australia, which is expected to close by this summer. In closing, we are focused on balancing near term transitional challenges with our longer term goals. We remain confident in the power of our brands, our multi brand operating platform and our targeted double digit operating income and EPS growth outlook for FY 2020. Importantly, we have a healthy balance sheet to support our strategic priorities and a strong team to drive results. I'd now like to open it up to Q and A. Thank you. The floor is now open for questions. And your first question is coming from Bob Drbul of Guggenheim. Hi, good morning. Good morning, Bob. I actually have two questions this morning. I think the first one, given these results and the updated outlook for 2019, what gives you the confidence in the double digit operating income and EPS growth in 2020 and your ability to operate this multi branded model? And my second question is, when you think about the Kate Spade positioning right now, what gives you the confidence in Kate's inflection? What are you seeing quarter to date? Can you give us a little bit more detail around that piece? Thanks. Sure. Thanks, Bob. First, I think to your first question in terms of guidance for FY 2020, there are 2 important themes as we target mid single digit top line growth with the double digit operating income and EPS growth. The first theme is lapping key investments that we've made and the second theme is traction from the brand investments that we've made specifically around Stuart Weitzman and of course, Kate. So more specifically, as we enter Q4 of this fiscal year, we will have lapped all of the strategic brand investments, especially in Asia, where we bought back, as all of you are aware, distribution for Kate Spade and Stuart Weitzman. And by the end of Q3, that will mostly be behind us. And I can share with you all of that. I've spent some time with those teams on the ground in December. And we have really talented and very focused teams there. And we're getting Ladies and gentlemen, we apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Hello, operator, can you hear us? Yes, we can hear you now. Okay, great. Thank you. Sorry about that everyone. We lost one of our mics here for some reason. I'm just going to start at the beginning, Bob, with your question because I'm not sure when we lost the line on that first mic. But as I was suggesting, 2 very important themes. 1 is lapping the key investments that we've made and 2 is the traction that we are getting from the key brand investments that we're making specifically around Stewart and Kate And more specifically around those two themes, as we enter the Q4, we will have comped all of distribution buybacks in Asia, especially in the key China market for both Stuart Weitzman and Kate Spade. And as I was sharing, I'm not sure if you guys heard during the call, but I've just visited those teams in December and can share my excitement not only by the strength of the talent that we have on the ground and the investments that we've made in structure, but the performance that they are already driving for us, which of course we start comping from the Q4. Also, as you heard in our speakers' notes, we're really pleased with the successful implementation of the SAP S4 HANA platform. We were the first and are the first company globally to be on this new version of SAP. It started with the HIB limitation in finance for Tapestry Coach and Stuart Weitzman early last quarter and just this week. In fact, we're in day 2. We have implemented the entire foundation of this platform in Kate Spade, including supply chain, logistics and the systems and cost savings that we expect from that and system efficiencies have given us the confidence along with the continued experience that we have in operating as a multi brand model to look for more efficiencies in the organization, which we discussed as well and Kevin touched upon as we move forward. As a result, I would say Q4, we will be closer to the growth rate that we actually expect in FY 2020 having comped both the strategic investments and benefiting from the brand inflections that we expect in Stuart Weitzman as we comp last year's issues that we experienced. You saw some of that already in the last quarter as well as Kate Spade. And what I can share with you in regards to Kate Spade, obviously, we normally don't talk about comp within the quarter and I won't talk holistically, but I can definitely share with you that in Kate Spade, we're really pleased with the launch. We're entering the 2nd week here and we have seen a definite inflection. By the end of the third quarter, we will have 50% of the products in the full price channel will be complete newness. And by the end of the Q4, 100 percent of the product will be complete newness. And that's what we really experienced here in Kate Spade was a lack of newness. The teams were focused on driving just that and driving innovation. We made a decision, as you heard in the speakers' notes, Hopefully, some of you have followed the launch, whether it be on social media and look at the very positive engagement that we're seeing, overwhelmingly positive, encourage you to go whether it be Facebook, whether it be Instagram and see the reaction that we're getting. And there's a few things that I would share so far as early highlights. 1st and foremost, handbags incredibly well received, especially pleased by the fact that the iconography has been especially pleased. We have discussed over and over the need for platforms that can drive sustainable long term growth. And the new branding on Kate Spade is exactly that. And we're seeing the consumer react to that very, very positively. You're seeing that across ready to wear. You're seeing that across handbags. You're seeing that across jewelry as well, which excites us. Secondly, ready to wear. Ready to wear is a very important part of the Kate Spade business, much more so than our other businesses. And in the case of the new launch, we're really excited that that's resonating well. And that is the most important point that we can make in terms of taking the consumer along with us on the Kate Spade journey under Nicholas direction. So that as well excites me. And what we saw in the Q2 and actually beginning from September was that the product and the lack of newness, especially in our full price channels and our full price, meaning full price brickandmortarandfullprice.com. And that's what really led to the drop in comp and where the newness is coming in was truly global and truly a reflection of the product. So hope that gives you some color, Bob, and to the others on the call as well. Great. Yes. Thank you. Thank you. In the interest of time, we do ask that you limit yourself to one question. Your next question comes from Erinn Boruchow of Wells Fargo. Hi, good morning, everyone, and good luck, Kevin, and congrats to Andrea. Thank you. So I guess I wanted to have my question be on the gross margin line. Kate Spade, you guys talked about carryover inventory given the sales performance this holiday into the Q3. What kind of a gross margin impact should we be thinking about for Kate Spade in the Q3? Could Kate gross margins be down? And then also, you had talked about the Coach gross margin being a little less optimistic on that for the fiscal year. Just kind of can you talk about that, the promotional environment, what exactly the puts and takes are there? Kevin? Yes. On the Cape Cape, Harold, we did comment obviously in the speakers' notes and we expect that to put some incremental pressure on the Q3 results. We've not given specific margin guidance by quarter. And on Coach, again, due to the promotional nature of the North American business, we have expected some pressure there as well. So taken together, that was one of the reasons that we were looking to reduce the guidance for the back half. Yes. And I would just add I would just add one thing. Look, obviously, with the lack of performance of the product that was in stores, we could have easily been much more promotional, gotten rid of that inventory. We made a very clear decision not to be more aggressive in the full price channels, not only to create, of course, an overhang with consumers as we launch new product, but more specifically because we had tremendous confidence in the new products coming in. And we have a lot of confidence that that product can and will work effectively well in the outlet channel as we enter this quarter and beyond. And relative to the total business, we think that impact will be minimal. Okay. Thanks. Thank you. Your next question is from David Schick of Consumer Edge Research. Hi, good morning. Thanks for taking my question. You called out Parker and some of the other platforms that were working. Is anything changing with cycle time in the industry and how long one of these platforms matters and iterates? And just sorry to sort of follow on to these Kate questions. Does the repositioning as you do that and you have more data, do you think about the real estate portfolio any differently there? Thank you. Thank you. I'll ask Josh to first talk a little bit about Coach specifically and life cycles and then I'll touch on Kate. Good morning. So I think it's an interesting question about cycle signs and how and in how we're dropping product more frequently in different ways, surprising and delighting the customers. At the same time, when you have an important platform like Signature, that is part of something that is not a seasonal trend. That is something that you can really build over the course of many years. And I would say that's one of the things that we're most proud of in our product performance right now, has been the very deliberate way that we've launched Signature over the past year, which is now in the high teens globally in our retail channel. And we're continuing to sustain higher AURs in Signature and the customer is really responding. So the answer to your question is both. She wants fashion, she wants newness, but for the brands where she has a very close affinity and a deep love, she wants to wear that icon proudly. And so we're seeing both impacts on our business. Yes. And David, relative to Kate and the evolution of that brand and its impact on the real estate, I think we're all aware of the key investments, of course, that we've talked about over the past year. 1st and foremost, reducing both the flash sales model as well as the urban disposition channel to the tune of 100 $1,000,000 which is a key investment that we should think about in terms of long term brand health. Secondly, in terms of the physical and other channels go forward, Kate's footprint is much tighter, I think very relatively clean. We're incredibly pleased with the new store format that we've launched and the performance that we're seeing there. So we're being very thoughtful about how we leverage that go forward and a tremendous amount of attention right now in terms of the new door growth is on, of course, Asia with a specific focus on China, where we're seeing very solid performance. Again, couldn't be happier with that team and the work that they are doing. And we start comping that business of course in the months ahead. Thank you. Your next question is from Erinn Murphy of Piper Jaffray. Great. Thanks. Good morning. My question is around just the overall category and Coach's position in it. I think you said the category grew high single digits and Coach was up 1.5%. I'm curious to see where from a global perspective you're seeing some of the share loss relative to where the growth is in the category? And then what are the levers that you think are actionable to kind of reaccelerate the Coach brand relative to where the market is growing today? Thank you. Sure. Thank you, Aaron. Great questions. Overall, we have not seen a change in theme, Aaron, from the last few quarters. I would say that globally, this past quarter, most of the growth is coming or outsized growth coming especially from Asia, China domestically being and continuing to lead. And I would say that a lot of the growth is coming from a couple of the traditional European brands that are driving outsized dollar performance. With the U. S. This past quarter having grown closer to a low single to mid single digit rate relative to the high single digit rate that we saw globally with a slight deceleration from the September quarter. In terms of what drives this, at the end of the day, Aaron, it is the same things we've discussed that has a lot to do obviously with brands connection and emotion, innovation and consumers and driving desirability with consumers. Everything that we've been doing for the past several years, obviously, we're in a very different situation with very different distribution than the traditional European luxury brands has been focused just on that. We have work still ahead of us, but continue to be incredibly satisfied with the progress made and of course never fully satisfied with the realization that it never ends and there's a lot ahead of us. And I'm really excited by what Josh and the team have planned for the next 12 months in terms of both product and marketing and of course couldn't be happier with the work that Nicola and Anna are doing on Kate. Again, I highly encourage you guys to go and experience that over this quarter and next as everything rolls out. And of course, Geraldo and the team at Stuart Weitzman, when we think about the progress in just 12 months getting back first to deliveries and then kicking off this quarter with a really innovative marketing campaign, encourage you guys to stay tuned for that one because there's more coming. And the Yang Mi collaboration for China, very exciting where that's getting again tremendous buzz. So very just excited by the brand work being done and us getting a return on those investments. Thank you. Your next question is coming from Oliver Chen of Cowen and Company. Hi, thank you. Regarding the Coach brand and the go forward for merchandise margin, what are your thoughts on merchandise margin with respect to what you're seeing with tourism spending and balancing, making sure you're offering a great value to the customers? And at the Kate Spade brand, with distinctive newness and, the rebalancing that's happening with new products, could you just give us color on what happened with the product mix and the average unit retail and number of transactions or thoughts around what the new product is versus what wasn't enough newness within those accesses? Thank you. Sure. Let me start first with Kate. There's not a tremendous shift, Ali. So this was not about a price repositioning by any means. There were 2 very important themes here. Newness in terms of really innovative and I would say emotional products for the consumer, creation of brand recognizable platforms that allow us to then bring those across different categories and create sustainable long term growth platforms within branding is absolutely vital to that and we're on our way in nothing but 2 weeks of course. But I think if you all go online and you see the reaction and you see how consumers are responding to the spade logo and how we're beginning to play with that in print and hardware and in other branding applications, could not be happier by that and very pleased that the consumer is seeing the Kate Spade emotional attributes and I talked about that on our speakers' notes as remaining consistent and of course we'll test those every 6 months go forward, but very excited by the initial results there. So really no mix, I would say. The key drivers for us have been of course the synergies that we've been able to drive. So the theme and the strategy has been very consistent. New products, more emotional products, greater perception of value at greater perceived quality at similar price points and mix to where we had been in the past. I'll let Josh touch a little bit on Coach merchandise or gross margins in terms of any impact from tourists. Josh? Yes. So for the full year, we continue to anniversaring some of the key cost benefits we got from GSP last year. Speaking more specifically about the product strategy that drives the gross margin, as we've talked about on several of these calls, we really have the line architecture around good, better, best both for retail and for outlet. And I think in our retail channel, you've seen the work that we've done this past year in the 300 to 400 price segment, particularly around Parker and Charlie and some of those lines that have become quite significant. And now you're starting to see the impact of Dreamer and some of the latest introductions. We're very excited about Harmony coming online at somewhat higher price points as well. And it's really the same for us in outlet too. And so you can see the price architecture there, how we have focused on marketing the edit, marketing our Pinnacle lines. And we're really learning a lot about what the outlet customer will pay from that exercise and how we can influence future collections based on that. When we think about that on a global basis, often it is our international customer, our customer and our Chinese customer at home that he is most willing to pay for the top of the pyramid product with the highest AURs, whether that's in handbags or in ready to wear and so forth. So we're feeling good about the work we're doing and we always want to keep the balance. So there's always something to be done. There are always product holes to fill in when you're dealing with such a broad consumer. Thank you. And your next question is from Mark Altschwager of Baird. Just a follow-up on Coach for Josh or Victor. So you mentioned pressure from reduced sales to resellers in Coach outlet. Furthermore, Coach marketing and distribution strategy is really aimed at capturing sales in Mainland China. So I'm wondering, to the extent of the changes in tourist shopping patterns have a structural component, what, if anything, needs to be done to right size the North American outlet footprint? I would say 1st and foremost on the resellers in the Daigou market, we all know of course, that this is something that exists across all brands relative to the price difference with their home markets. I've been experiencing this since I entered the luxury goods business in 1994 in Japan. So nothing absolutely nothing new. It's driven by economics, driven by arbitrage and very, very difficult to control. Most brands, ourselves included, have limits in place to try to manage this thing. But quite often, there are indeed organized groups who come in and buy a very small quantities one at a time and are leveraging, of course, the arbitrage in pricing. The key for us is that given the change and for us the entire industry is the change and we don't know how well it's going to be enforced, but given the changes in law in China, specifically the Chinese government is trying of course to drive domestic consumption. They've made a few changes, the most important change of which is requiring all of these Daigou to register very much in learning stages here to some extent. But overall, what we've seen is that the law will now make the digital platforms liable for this, which is driving some change in the flows, whether it's movement from some digital platforms in China to the more social platforms where they sell or in some cases, some individuals getting out of the business completely. And for us, the key there is 1st and foremost, long term, we think it's absolutely amazing. Obviously, it will help our brand as the Chinese government looks to protect our IT and they've been great partners overall over the years to us when we've looked to protect our IT specifically as it relates to, of course, online and fake product. And secondly, of course, for us, the key has been to leverage the investments that we're making in Mainland China. We've talked about that, I think, throughout the whole morning and of course for the past year, whether it be the investments we've made in Coach and continue to make, including the significant fashion show as well as buying back our businesses at Kate and Stuart Weitzman. We're very committed to it. We think that that's the long term path. We don't see a change as a result of any of that to our North American outlet footprint, where these folks are active happen to be the most important markets where we're in. And so we don't see any impact at all to the real estate footprint. Thank you. Today's final question is coming from Simeon Siegel of Nomura Instinet. Great. Thanks, guys. Just quickly, I don't know if you gave any color on where you expect inventory over the rest of the year. And then just there were some comments on watches. I believe it's relatively small part of your business. Any way to quantify how big that business is for Coach and Kate? Thanks. Yes. In terms of the watch business, as you suggested, very small. We are, I think, really pleased with the work that both Movado and Fossil are doing and trying to bring new technology into it. It has never been significant for us in our own stores and remains a pretty small business. On the license front, what we're now really excited by it from a bigger presence perspective and category, of course, our sunwear both in our stores and globally with Luxottica as well as, of course our fragrance businesses and there and of course we have Safilo for Kate in sunwear, but really pleased with the fragrance business and the work that InterContinental is doing there for the Coach brand. In terms of new licenses, I did we did touch on the fact that we've signed with Incipio, really pleased with the work they've done for Kate. And we know that they're going to be a great partner for the Coach brand overall. As it relates to inventory, as noted in our prepared remarks, we ended the quarter with inventory up about 10% year over year. However, if you remove the inventory associated with the regional buyback activity, our inventories were up approximately 3% for the year. So we feel good about inventory as we head into the second half. Thank you. That will conclude our Q and A. I'll now turn it over to Victor Luis for some concluding remarks. Victor? Thank you, Andrea. Thank you, everyone. Let me first thank Kevin again for all of his wonderful work over the past almost 2 years with us as we've laid down the foundation for Tapestry and I want to thank and congratulate Andrea as she steps in to this interim role who we have and we have a tremendous amount of confidence in her and of course the team supporting us. Thank you all for joining us. And as is our custom, I want to thank the 20,000 strong Tapestry team members across the world for the wonderful job that they're doing and all of the hard work that they're putting in. While it continues to be early days in our multi brand journey, could not be prouder of the solid foundation that they continue to lay and the hard work they are putting in. Thank you. Thank you. This does conclude the Tapestry earnings conference call. We thank you for your participation. You may now disconnect.