Earnings Call: Q2 2018

Feb 6, 2018

Good day, and welcome to this Tapestry Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations and Corporate Communications at Tapestry, Andrea Schall Resnick. Good morning, and thank you for joining us. With me today to discuss our quarterly results and annual forecasts are Victor Luis, Tapestry Inc. Chief Executive Officer and Kevin Wills, Tapestry's CFO. Before we begin, we must point out that this conference call will involve certain forward looking statements, including projections for our business in the current or future quarters or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon a number of important factors, including risks and uncertainties, such as our ability to achieve intended benefits, cost savings and synergies from acquisitions, expected economic trends or our ability to anticipate consumer preferences, control costs, successfully execute our operational efficiency initiatives and growth strategies and the impact of tax reform legislation. Please refer to our latest quarterly report on Form 10 Q, our annual report on Form 10 ks and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors. Please note that the historical trends may not be indicative of future performance. Also, certain financial information and metrics that will be discussed today will be presented on a non GAAP basis. These non GAAP measures exclude certain items related to our operational efficiency plan, integration and acquisition related charges and the impact of tax reform legislation as well as the impact of foreign currency fluctuations were noted. You may identify these non GAAP measures by the terms non GAAP, adjusted or constant currency. The company believes that presenting these non GAAP measures is useful for investors and others to evaluate the company's ongoing operations and financial results against historical performance and in a manner that is consistent with the management's evaluation of the business. You may find a corresponding GAAP financial information or metric as well as the related reconciliation on our website, www.tapestry.com/investors and then viewing the earnings release posted today. Now, let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our 2nd fiscal quarter 2018 results for our 3 brands. Kevin Wills will continue with details on financial and operational results and our outlook for the balance of FY 2018. Following that, we will hold a question and answer session where we will be joined by Josh Schulman, Chief Executive Officer and Brand President of Coach and Todd Kahn, Tapestry's President and Chief Administrative Officer. This Q and A session will end shortly before 9:30 am. We will then conclude with some brief summary remarks. I'd now like to introduce Victor Luis, Tapestry's CEO. Good morning. Thank you, Andrea, and welcome, everyone. We are delighted to report a second quarter, which exceeded our internal expectations from both the top line and bottom line perspective, leveraging the strong holiday season in North America and the benefits of Tapestry's multi brand global model. As noted in our press release this morning, our results benefited from both organic sales growth at Coach and Stuart Weitzman, as well as the contribution of Kate Spade. Naturally, we were excited to drive positive global and North American comps for Coach as our inventory mix improved, notably in outlet, while our retail business was driven by innovation and improved domestic mall traffic for the first time in several years. We were also pleased to deliver better than expected results across financial metrics. Most notably, and as will be shared in more detail by Kevin, we experienced a significant sequential improvements in gross margin trend at Coach and outperformance at Kate Spade, where we carefully managed promotions across channels. The Kate Spade integration onto our operating platform continued smoothly during the quarter, as we executed on the strategic actions to position the brand for long term success. These included the pullback on flash sales and wholesale disposition, while taking substantial steps to unlock cost and operating synergies. We remain especially excited about the opportunities for the brand, both in terms of revenue growth, driven by distribution expansion and productivity and profitability improvements as we leverage our scale across our supply chain and corporate functions. As previously shared, we continue to expect to achieve synergies, primarily related to SG and A of about $30,000,000 to $35,000,000 in FY 2018 and run rate synergies from both COGS and SG and A of approximately $100,000,000 to $115,000,000 in fiscal 2019. This past quarter, we also made several key hires across our brands. Josh strengthened the leadership team at Coach with the appointments of Laura Dubenwander as President North America and Frederic Malm as President Europe and International Wholesale. And at Kate Spade, we announced Nicola Glass as Creative Director, a proven leader in fashion accessories design whose compelling vision for the brand as a leader in feminine accessories has the entire team excited for the next chapter. We are also pleased to announce that David Kong has joined the company in a newly created role of Head of Tapestry Digital and Coach Brand E Commerce. David will be responsible for accelerating growth and the long term vision of Coach's e Commerce business, while driving innovation and leveraging emerging trends to create new capabilities across all Tapestry brands. On the global business development front, we are thrilled to announce several important transactions today, focused on 2 global strategic priorities. 1st, leveraging the opportunities for our brands with the Chinese consumer globally, highlighted by the pending acquisition of the Stuart Weitzman business from our distributor in Northern China and taking operational control of our Kate Spade joint venture for Mainland China, Hong Kong, Macau and Taiwan. And second, unlocking the value of a multi brand operating model. To this end, we are excited to announce the buyback of the Coach business in Australia and New Zealand from our distributor, with an expected closing date in the fiscal Q3. As a result, we're creating a Tapestry multi brand hub and center of excellence in Australia, which allows for greater control of our brands and the structure and resources to drive growth across our portfolio in an important market. Importantly, given our strong year to date financial performance, we expect that we will be able to fund these strategic actions while maintaining our operating income growth targets for the year. Taken together with the anticipated benefits from the lower tax rate and interest expense, we expect to drive strong double digit adjusted earnings growth and exceed annual EPS guidance we set out for Tapestry at the beginning of the fiscal year. Moving to category trends, And as you know, given our new reporting structure, we have moved to a global category update. During the Q2, we estimate that the men's and women's premium handbag and accessory market, which is over $40,000,000,000 grew at a high single digit rate globally, similar to the September quarter. Now turning to results by brand. I'd like to focus on 2nd quarter performance and spring outlook for Coach, where we remain focused on elevating brand perception, driving fashion relevance and ensuring balance across our product offering in both price points and materials. As you know, there were a number of extraordinary events that had impacted Q1 performance, which were beyond our control, along with poor inventory mix in our outlet channel. However, as we entered Q2, we were able to address the inventory mix opportunities highlighted at the time and saw a strong inflection in both global comparable store sales and gross margin from our Q1 performance, with sales driven by an improvement across all productivity metrics, traffic, ticket trends and conversion. On a year over year basis, conversion remains positive, while traffic and ticket were essentially flat. Overall, for the 2nd quarter, Coach sales increased 2%, both as reported and in constant currency, led by North America, while the international business in aggregate also rose on both a reported and constant currency basis. The brand's international constant currency sales growth was driven by increases in Europe, Greater China, Southeast Asia and Japan. Globally, we saw our business with the Chinese consumer increase with notable strength in Japan, Continental Europe and other Asia markets. During the quarter, our global coach comp rebounded, rising 3%, led by North America outperformance as the inventory mix was corrected and mall traffic trends improved. Overall, Greater China comps rose with positive comps on the mainland and a significant improvement in trend in Hong Kong and Macau. Comps in Europe were flat year over year as expected, given the double digit gains posted in last year's Q2, fueled by currency weakness, notably in the U. K. Moving to wholesale. Our North America shipments grew during the quarter driven by footwear. As expected, our sales at POS declined due to the rapid impact of spring 2017 door closures, which have not anniversaried, while our total promotional event days in the channel declined 20%. However, we were pleased to once again have positive year on year performance in comp doors within our largest account. Our results are especially strong in those doors which have been renovated into the modern luxury concept. Our international wholesale revenue declined due in part to shipment timing, but rose at POS. Turning to Coach product performance and starting with retail. We offered a compelling holiday gift assortment with options across categories and price points in a wide selection of colors. Touches of playful prints and metallics surprised and delighted our customers, while we continue to innovate leather craft, launching quilting as a new technique. This novelty platform was offered across collections and silhouettes from Rogue and Dinky, as well as in a full range of small leather goods, crafted in luxurious, lightweight, mappa leather. In handbags for holiday, we focused on cascading the level of innovation and fashion leadership, which Stuart Beavers brings to our most elevated runway collections across the pyramid of price, occasion and function in both 1941 and our broader Coach assortments. Highlights of the quarter include great progress on our strategy to reinforce our assortment in the $300 to $400 price tier, including the Selena Grace bag, which launched at the end of Q1 and the Fulton Satchel. In addition, gifting items including whimsical branded canvas mascot tote bags were a hit with some key styles selling out within a few weeks. Likewise, our expanded range of small bags and small leather goods were well received and enhanced our position as a gifting destination. Beyond leather goods, we were excited about the great response to ready to wear across geographies, especially the significant penetration levels in Asian markets, where Coach has always been viewed as a dual gender lifestyle brand. Finally, in men's retail, we saw success in gifting, notably in core colors as well as in cold weather. And similar to women's, men's ready to wear growth exceeded expectations. Supporting our retail product initiatives, our holiday marketing focused on compelling product driven content and storytelling. We also continued to increase our focus on digital, where we drove strong engagement across channels. And we successfully amplified the Coach gifting message with our holiday campaign featuring Selena. What was particularly exciting was the continued recruitment gains in both our North America and global customer databases and across channels, in part reflecting our strategy to showcase the Selena collaboration to cut through to a broader audience. In addition, Coach continues to lead in key emotional and functional attributes in our brand tracking survey among the broad premium market. As noted on our last call, we launched Coach Create globally in Q2, a platform for clients to customize their bags either online or in store. In 36 stores worldwide, as well as online, we have the most complete expression of Coach Create, which allows customers to co create bags with signature details such as embossed leather tea roses or Prairie Rivets. This customization is done in store while the customer shops And in about 35% of our direct retail fleet worldwide, we now offer monogramming in our in store craftsmanship bar or monogramming station. We've been so encouraged by the results of Coach Create that we will be expanding the most complete expression of the concept to over 2 50 stores globally or about 40% of the direct retail store base by the end of the year. I wanted to spend a minute on our footwear initiative, which as you know, we took in house and launched this summer. Our fall collections, the first under our direct control included a focused assortment of 100 SKUs grounded in shearling and boots. At the end of Q2 in December, we launched pre spring with an expanded range of functions, including a broad sneaker assortment and the introduction of the dress classification. Both of these strategies resonated with our customers. As we head into spring, we continue to amplify the sport category, introduce signature and enhance the dress assortment. Looking ahead to spring for retail, we will re launch Signature in our retail channel in a powerful way. The updated version of our signature pattern is inspired and rooted in our history. But as has been reinterpreted by Stuart Beavers and featured in spring 2018 runway show. We will continue to innovate across price brackets with the focus on maintaining balance in the assortment. We will introduce 2 new styles under $400 that combine uptown elegance with downtown ease. And next week, we are looking forward to presenting our most elevated collection, Coach 1941 at New York Fashion Week. Finally, we will offer a compelling and feminine Mother's Day assortment rooted in animations in our iconic T. Rose embellishment and featuring top styles including Rogue and Dinking. Moving to outlets and starting with Q2, impactful gifting destinations, key style launches and the comprehensive 360 degree experience through cross category messaging drove our holiday performance. In handbags, we were pleased by the positive response to Lexi and Faye, elegant silhouettes which resonated with customers globally. In addition, we animated our chain family, which expanded our dressed up sensibility within the holiday assortment. Metallics, glitter and studding continued to have an increasingly important role in holiday with an expanded color palette rooted in cool pops of metallic. In December, the Coach Beers capsule played on the trend right creature animations on bags, small other goods and fashion accessories. Black Friday included a fun plaid story across both men's and women's product categories. Backpacks and totes were especially strong within the Black Friday message. Now looking to spring an outlet, we are infusing innovation with new Silhouette launches across the board. We have a couple of exciting collaborations coming within the channel in the next few weeks, and we'll be leveraging inspiration from the 1941 runway looks. Overall, we are thrilled with Coach's holiday performance. As we look forward to spring and beyond, we are well positioned to drive positive comparable store sales driven by compelling products, our differentiated modern luxury store experience and bold marketing campaigns across all of our channels and geographies. We are especially excited about our development and logo platforms and the leverage that we expect to get from the new spring Selena Gomez campaign and bringing these ideas to our core customers globally, given the current trend for highly differentiated logo products in the broader market. Moving to Kate Spade, sales totaled $435,000,000 in the 2nd quarter, down about 7% from the prior year on a pro form a basis, reflecting our strategic reduction of both wholesale disposition and flash or surprise sale. Underlying comparable store sales trends were similar to the prior quarter, with brick and mortar comps down 3% globally and total comp down about 7% impacted by reduced promotional sales online. Highlights of the quarter were the strength of innovation in retail, where we expanded our customization program and supported the expansion of the ready to wear visual merchandising test. Most importantly, we focused on a gifting assortment with a broader offer across price points and balanced color palette. Within handbags, our core groups performed well, notably Cameron Street and Jackson Street, while backpacks and cross bodies both comped significantly. The customer continued to respond to the Make It Mine customization program, which builds momentum in e com as well. In small leather goods, small wallets and cross bodies drove the biggest increases. And in ready to wear, it was all about buy now, wear now with outerwear, sweaters and dresses, the strongest categories. As noted in our last call, we are especially excited about our trend in ready to wear and have been testing a different visual merchandising approach. This test is focused on zoning retail stores by department rather than monthly introduction, allowing for an easier category shopping experience. The original test doors continued to outperform the balance of change during the quarter. And as a result, we rolled out the test to approximately 10 additional doors in Q2. We expect to expand this program throughout the second half of the fiscal year. And in outlet, we leveraged the opportunity around our gifting capsule as well as in backpacks and cross body silhouettes. We saw improved results from higher inventory levels notably in handbag sales with small leather goods and jewelry also performing well. As always, we had fun with our retail holiday marketing across direct mail, featuring our seasonal and Make It Mine campaigns, digital with our popular misadventure and talking shop videos on holiday dressing and online gift guide. Store events were held throughout the quarter with our leopard events driving traffic into bricks and mortar. Similarly, in outlet, we used on mall advertising, windows with updated creative and LED screens to drive traffic. We're very excited about the 25th anniversary campaign coming up this spring, leveraging some of the classic handbag styles for the brand and celebrating our history and heritage. We also continue to further our learnings on the Kate Spade brand through our U. S. Brand tracking survey fielded in December. Importantly, we saw the percentage of Kate Spade purchasers who are category drivers increase from the prior quarter. In addition, when compared to prior year, the percentage of women who believe carrying a Kate Spade handbag makes them feel put together increased among the broad premium market. Notably, Coach and Kate shared leadership among benchmark brands in this attribute. And among the broad premium market, we continue to see the Kate Spade brand resonate on the attributes of fashionable, feminine and fun. In fact, 85% of women believe Kate Spade handbags are fashionable and on trend, setting us up very well for the increased focus we shall be placing on core handbag innovation in the quarters ahead. Overall, we've already taken steps to position the brand, building a foundation for solid and sustainable growth. As we look ahead for Kate Spade for the balance of FY 2018, we will continue to significantly curtail promotional impressions by reducing surprise sales and pulling back on wholesale disposition. It's important to note that in the case of Flash, we are not only pulling back on the number of events, but also significantly reducing the circulation, no longer using flash sales as broad, widely advertised recruitment vehicles. Under the creative direction of Nicola Glass, we will accelerate innovation in the core handbag and accessories categories, along with ready to wear and tech, leveraging the Tapestry platform, notably our supply chain and product development capabilities. We have begun to review the store fleet and leverage opportunities to maximize the brand's global footprint. To this point, we opened 9 new stores in Q2 and closed 1. In addition to the winding down of Jack Spade, we continue to look for focus in our licensed portfolio, while we put our energy and team's efforts on the most significant women's opportunities, handbags, ready to wear, tech accessories and footwear, both domestically and internationally. We are very pleased to the initial response to the joint launch of our first smartwatch with Fossil and look forward to increasing our pace of innovation with this key licensing partner. And we will tailor the brand's creative and playful marketing messages, ensuring that it resonates in all key global markets, while remaining true to the brand's unique personality. We have begun to make progress against this initiative with the spring campaign launched just last week. Of course, we've also just announced taking operational control of the joint ventures for Greater China, which we believe is a huge opportunity for Kate and where we can leverage our regional brand building capabilities. I continue to partner with the terrific Kate Spade team as Interim CEO, as we continue to look to both capture synergies and more importantly, drive global resonance and growth. We are especially excited to support the execution of Nicola's vision for the brand as we bring our strategies to life in global markets. Turning to Stuart Weitzman. Sales rose 2%, driven by the global direct business, which in turn was fueled by distribution growth in global ecommerce. For perspective, we did expect 2nd quarter results to be essentially even on a year over year basis, given the extremely difficult compare with last year's 2Q. During the quarter, newer occasion categories performed well, including booties, weather and sneakers, as well as our developing handbag offer. Most importantly, Giovanni Marelli's new creative direction is beginning to gain traction. His This first collection of footwear and handbags featuring new brand codes and unique details was just presented at market and was very well received by wholesale partners in the editorial community. We were also excited to unveil a new Stuart Weitzman store concept at the brand's Rodeo Drive flagship this past month. We remain on track to drive double digit growth for the year at Stuart Weitzman as we continue to evolve the brand identity across global markets. The Stuart Weitzman team remains focused on innovation and capturing new occasions and wardrobing opportunities in footwear, while building credibility in the leather goods category. We are also looking at distribution opportunities globally, notably in select Asian markets where we want to capitalize on the rapidly growing demand for the brand. Key among these are China, where as I mentioned, we are in the process of buying back our Northern China business, which has been generating very strong results. Now, I'll turn it over to our CFO, Kevin Wills, for details on our Q2 financial results and guidance for fiscal 2018. Kevin? Thanks, Victor. Victor has just taken you through the highlights 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 2018. Before I begin, please note 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. Turning to the financial details. Net sales totaled $1,790,000,000 as compared to $1,320,000,000 in the prior year, an increase of 35% driven by the acquisition of Kate Spade and organic growth. Coach net sales totaled $1,230,000,000 as compared to 1 $200,000,000 in the prior year, an increase of 2%. Tate Spig net sales totaled $435,000,000 reflecting in part the strategic pullback in wholesale disposition and online flash. Stuart Weitzman net sales totaled $121,000,000 an increase of 2% and slightly ahead of guidance due to wholesale shipment timing favorability as mentioned. Gross profit totaled $1,200,000,000 while gross marketing was 67% as compared to 68.6% in the prior year. The addition of Kate Spade pressured our overall gross margin by approximately 120 basis points given the lower margin profile of the Kate Spade brand. Gross margin for Coach was 68.8% as compared to gross margin of 69% in the prior year. We experienced a negative 30 basis point impact due to bringing the women's footwear business in house. In addition, currency pressured the brand's gross margin rate by 10 basis points in the quarter. As Victor mentioned, we were very pleased with the sequential improvement in gross margin trend at Coach in combination with positive comparable store sales. Kate Spade gross margin was 63.3%. This performance was above our expectations in prior year, benefiting in part from lower discount rates in the North America outlet channel. Gross margin for Stuart Weitzman was 61.9% as compared to 64.4% in the prior year. The year over year decline was in part due to negative impact of currency of 170 basis points. SG and A expenses totaled 785,000,000 dollars and represented 44% of sales as compared to 46.3% in the year ago period. SG and A was well controlled in the quarter and also benefited from a shift of expenses into the back half of the fiscal year. Coach SG and A expenses totaled $485,000,000 and represented 39.4% of sales compared to 40.9% in the year ago quarter. Kate Spade SG and A expenses were $183,000,000 and represented 42.1 percent of sales. Stuart Weitzman SG and A expenses were $51,000,000 and represented 42.4% of sales as compared to 45.6% of sales in the prior year. In addition, please note that Tapestry's total SG and A includes corporate costs as outlined in our press release. Operating income for the quarter was $411,000,000 an increase of 40% versus the prior year, while operating margin expanded approximately 80 basis points to 23%. The addition of Kate Spade pressured our overall operating margin by approximately 60 basis points. Operating income for Coach was 361,000,000 dollars while operating margin was 29.4 percent versus 28.1% in the prior year. Operating income for Kate Spade totaled 92,000,000 while operating margin was 21.2%. Operating income for Stuart Watsman was $24,000,000 or 19.6 percent of sales versus 18.8% in the prior year. Net interest expense was $22,000,000 in the quarter as compared to $5,000,000 in the year ago period. The year over year increase was driven by higher debt levels associated with the Kate Spade acquisition. Our non GAAP effective tax rate for the quarter was 21.3% as compared to 27% in the prior year, reflecting, as mentioned, the U. S. Tax legislation changes. As outlined in detail in our press release, this does not include the one time transition tax on foreign earnings deemed to be repatriated and the remeasurement of the deferred tax assets and liabilities resulting from the federal rate reduction. Net income for the quarter totaled $306,000,000 as compared to $211,000,000 in the prior year with earnings per diluted share of $1.07 versus $0.75 As noted, our Q2 non GAAP EPS was significantly ahead of our expectations with the lower tax rate driving approximately half of the beat to our internal plan. The balance of the EPS favorability was due to higher operating income versus our projection with approximately half of this upside driven by operational outperformance and half due to timing shifts with the second half of the fiscal year. Now moving to global distribution by brand. For Coach, we opened 7 net locations globally, primarily in Europe, finishing the quarter with 967 directly operated locations worldwide. For Kate Spade, we opened 8 net locations globally, ending the quarter with 284 directly operating stores. And for Stuart Watsman, we opened 2 stores and finished the quarter with 83 directly operated stores globally. Turning to our balance sheet and cash flows. At the end of fiscal Q2, our cash and short term investments were approximately $2,100,000,000 as compared to $1,800,000,000 in the prior year. Our total borrowings outstanding were $2,700,000,000 which consisted of $1,600,000,000 in senior notes and $1,100,000,000 in term loans versus $600,000,000 in senior notes a year ago. In January, we fully repaid $1,100,000,000 in term loans utilizing excess cash. Consistent with our commitment to conservative balance sheet management, the $800,000,000 6 month term loan was repaid at maturity and the $300,000,000 term loan was retired early. These actions resulted in a reduction of our leverage by about a term on a debt to EBITDA basis. In addition, as part of appropriate capital structure management, we will be filing a new shelf registration statement this week as our prior shelf expired in December 2017. While we have no plans for an offering at this time, an active shelf registration statement allows us appropriate capital structure flexibility. Inventory levels at quarter end were $666,000,000 including approximately $179,000,000 associated with Kate Spade compared to ending inventory of $465,000,000 a year ago. As previously communicated, we expected a higher inventory to sales ratio than has been in our recent history due to elevated inventory levels at Kate Spade. We will protect the Kate Spade brand by not moving excess inventory into the disposition market, but rather by primarily flowing it into our own network into the second half of the year. Therefore, we continue to expect our inventory to sales ratio to improve as we move through fiscal 2018. Net cash from operating activities in the Q2 was an inflow of $514,000,000 compared to an inflow of $366,000,000 last year. Our CapEx spending was $78,000,000 in Q2 versus $54,000,000 last year. Free cash flow in the quarter was an inflow of $436,000,000 versus an inflow of $312,000,000 in the same period last year. Please note, based on current available regulatory guidance, we anticipate paying repatriation taxes on accumulated foreign earnings over an 8 year period starting in fiscal year 2019. Now turning to our capital allocation policy. Our long term priorities remain unchanged. First, 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. Now moving to our 2018 outlook. Consistent with our past practice, the following guidance is presented on a non GAAP basis. Additionally, the Kate Spade guidance was provided subsequent to the deal close on July 11, 2017. Turning to our guidance. We continue to expect total revenues for Tapestry in fiscal 2018 to increase about 30% versus fiscal 2017 to $5,800,000,000 to $5,900,000,000 with low single digit organic growth. This includes the expectation for low single digit Coach global comps and a low double digit increase in Stuart Watson sales. In addition, we expect the acquisition of Kate Spade to add over $1,200,000,000 in revenue. The Kate Spade revenue projection includes the impact of a planned strategic pullback in the wholesale disposition and online flash channels and assumes a high single digit decrease in comps for the year. In addition, we are continuing to project operating income growth of 22% to 25% versus fiscal 2017 driven by mid single digit organic growth, the acquisition of Kate Spade and estimated synergies of $30,000,000 to $35,000,000 These synergies are expected to offset in part the reduction in profitability from the strategic and deliberate pullback of Kate Spade wholesale disposition and online flash sales channels. Taken together, Kate Spade business and resulting synergies are expected to add approximately $130,000,000 to $140,000,000 to operating income. Importantly, and as previously discussed, we announced key business development initiatives today that allow each of our brands to take more direct control over their international distribution. Given our year to date operating income outperformance, we can fund these strategic investments while maintaining our annual operating income growth targets. Net interest is now expected to be $75,000,000 to $78,000,000 for the year versus previous guidance of $80,000,000 to 85,000,000 dollars reflecting the debt repayment in the Q3. The full year fiscal 2018 tax rate is now projected at about 19.5% to 21% as compared to prior guidance of 25% to 26%. The reduction from our previous guidance is primarily attributable to the recent revisions to the U. S. Tax code as discussed. We expect our weighted average diluted shares outstanding for the year to be approximately 289,000,000. Overall, we are now projecting earnings per diluted share for the year in the range of $2.52 to $2.60 an increase of about 17% to 21%, including mid to high single digit accretion from the acquisition of Kate Spade. We continue to expect CapEx to be approximately $325,000,000 in fiscal 2018. As previously noted, we naturally will be incurring a number of one time charges primarily associated with the Tate Spade acquisition and integration. These charges include such items as transaction fees and integration costs, which include severance, store closure costs and inventory valuation adjustments. For the full year, we currently anticipate pre tax integration charges to be approximately $240,000,000 to $250,000,000 in fiscal 2018, of which approximately $120,000,000 to $130,000,000 is expected to be non cash. In addition to such integration charges, we also incurred $40,000,000 in pre tax acquisition transaction fees. Finally, we expect to incur approximately $2,000,000 of operational efficiency charges for the full year. As outlined today, we also expect to incur net of approximately $213,000,000 in one time charges as a result of the recent U. S. Tax reform. These charges relate to the transition tax on foreign earnings deemed to be repatriated of approximately $315,000,000 partially offset by the remeasurement of deferred tax assets and liabilities under the new tax code of approximately 102,000,000 dollars The actual amount of the remeasurement and deemed repatriation tax may differ from this estimate due to, among other things, a change in interpretations of the applicable revisions to the U. S. Tax code, changes in assumptions made in developing these estimates, as well as regulatory guidance that may be issued with respect to the applicable revisions to the U. S. Tax code. Finally, turning to our fiscal 2018 directly operated distribution plans by brand. For Coach, we now expect to close a net of approximately 5 to 10 locations globally. The change versus previous guidance is primarily due to Japan, where we plan to close fewer doors based on performance. Also, following the acquisition of our businesses in Australia and New Zealand from our distributor, we will operate an additional 20 stores. For Kate Spade, we continue to expect to open 20 to 25 net new locations globally, while also taking operational control of approximately 50 stores across Mainland China, Hong Kong, Macau and Taiwan. And for Stuart Weitzman, we continue to expect approximately 5 net openings globally. In addition, we expect to directly operate approximately 20 doors in Northern China following a distributor buyback. In closing, we will grow both Coach and Stuart Weitzman in the year ahead, while successfully integrating Kate Spade, which we expect to be mid to high single digit accretive to our fiscal 2018 results. And as mentioned, we continue to expect to achieve run rate synergies of 100,000,000 dollars to $115,000,000 in fiscal 2019. Overall, we remain very optimistic about our global opportunities and we are committed to driving long term sustainable growth across the Tapestry portfolio of brands with a very healthy balance sheet to support our strategies. I'd now like to open it up to Q and A. Operator? Your first question comes from Bob Drbul of Guggenheim Securities. Hi, good morning. Good morning, Bob. Hi, Bob. Morning. I just had two questions. I guess the first one is you talked about the growth in the performance of the global premium handbag category. I was wondering if you could give us some insight into what you saw in the North American premium handbag category. And then the second part of it is specifically, I think you called out Coach's outperformance in North America. I was wondering if you can elaborate a little bit more on that first. Thank you. Sure. As we've noted, Bob, both last quarter and on this speaker's notes that we just provided, we're providing global sales and comps and, of course, are committed to providing global category growth quarterly go forward. That said, to your question, with a couple of significant players that have yet to report, it does appear that the North American premium handbag and accessory market grew at a mid single digit rate, which is an acceleration from the low single digit rate that we saw in the September quarter. And we believe that, that was, of course, in part fueled by our own sequential improvements. And I'll let Josh chime in a little bit on that. Bob, as Victor mentioned, in North America, we outperformed the global performance. And what we would say is that about one comp point either way would be similar and anything beyond that would be outperformance. And we were just so pleased with the results in North America. It was really across business units, stores and the Internet and across channels. And it was a combination, I would say, of better traffic in the malls that we've seen and heard about, coupled with excellent execution on the part of our teams. Great. Thank you very much. Thank you, Bhaskar. Your next question comes from the line of Ike Boruchow of Wells Fargo. Hi, good morning everyone. Congrats on a nice bounce back quarter. Thanks, Ike. Ike. So Victor, maybe this one's for you. I want to ask about more about the acquisition of the Kate Spade JV in Asia. Can you talk a little bit more about what the business looks like today, maybe some of the key similarities and differences you can draw back to when you took the Coach China business in house? And then just last, can you maybe size the opportunity there longer term? Sure. Very excited about our business development opportunities in that part of the world. I guess, as we mentioned in our speakers' notes, we're actually taking some actions across a couple of markets with 2 real key strategies there. 1st and foremost is around the Chinese consumer, and that obviously relates most to what we're doing with Kate Spade, but also that we're very excited with the buyback of the Stuart Weitzman business for Northern China. In the case of the Kate Spade opportunity in that market today, it's not dramatically different, quite frankly, from where Coach was when we purchased that business back in 2,008. And so we're very excited by the experience, of course, across our teams and the ability to help that brand grow. Terrific opportunity for distribution, of course, across both Tier 1, 2 and 3 cities, very developed infrastructure, which we know well, of course, with Coach having well north of 150 locations now in that market. We have terrific relationships with the trade and with distribution. And we're really focused now on putting in the right investments and talent of course and driving up awareness for the brand in that market not only in the Mainland, but also in Hong Kong, Macau and in Taiwan. And then the second part of our strategy, not direct we connected to your question, Ike, is what we're doing with the Australia, New Zealand buyback of Coach, which is really about leveraging a Tapestry multi brand model to allow us to successfully grow our brands in the small or medium sized markets where each of them independently would not have the scale to be managed directly. So very excited about that opportunity and look forward to sharing more on that with you in the future as well. Thanks. Thank you. Your next question comes from the line of David Schick of Consumer Edge Research. Hi, good morning. Thanks for taking my question. As you seem to be moving faster, maybe that's not fair, but faster, at least based on conversations we're already having this morning on doing what you do, buying back distribution, moving through your game plan on Kate and global synergy is part of what you've talked about. Can you talk about the sourcing costs both on materials and labor as you look out through the balance of this year and longer term? We don't see much impact as we've discussed in the past, David, for this year. Obviously, we've discussed and shared the inventory that we inherited, and we're working through that right across the second half. Of course, we are and have been working incredibly hard across our supply chain, both from a sourcing of materials perspective as well as from a labor perspective with all of our partners across the supply chain. And what we have shared with you, of course, is that when we think of the FY 2019 run rate of $100,000,000 to 115,000,000 dollars Approximately half of that should be COGS and Kate, of course, will benefit from that directly. So very excited about that. Just as importantly, we're really excited, of course, about the opportunity to grow top line, and that is a very significant work that the team is doing on maximizing the distribution for the brand, not only here in North America, but globally, but also bringing in the talent that we have. Nicola Glass is going to be wonderful. She's done this at scale. She's very experienced. She really understands the brand well. I've been partnering with her now for almost a month and I'm very excited with the rest of the team for the vision that she's creating for the Kate Spade brand and that's next chapter. Thank you so much. Thank you, David. Your next question comes from the line of Erinn Murphy of Piper Jaffray. Great. Thanks. Good morning and good quarter. Good morning, Erinn. I just wanted to focus a little bit on the logo trends during the Q2. Can you just talk a little bit about what you're seeing from a consumer perspective? Are you bringing in a new or a lapsed consumer? Were you seeing any traction in tourism? And then as you just think about the penetration rate within outlet and then as you launch within spring for full line, where do you see that going over time? Thanks. Sure. I'll let Josh take that one. Good morning. So I think it's really important as we talk about the logo trend to separate between the inventory issues that we experienced in outlet in Q1. As we moved into Q2, we were able to normalize our inventory in the ongoing carryover logo product that has always been a part of our outlet assortment. As we look forward, what we've been talking about is the reintroduction of Signature, which is a historic part of our brand, as you know, to our retail channel. And what we're seeing there is a part of a global movement in luxury brands toward a higher penetration of logo product. Now that has been absent from our retail assortments these past few years during the brand transformation. And that new product that appeared on Stewart Beavers runway in September will only hit our retail stores as part of the March 1 floor set. The editorial response and the response from the wholesale community, the most elevated our most elevated partners around the world has been terrific on that more elevated product. So whether it's Harper's Bazaar or appearing in the Neiman Marcus catalog. The most elevated partners are excited about the way Stewart introduced it in conjunction with a collaboration with the Keith Haring archive. We want to be very clear though that we're going to take a very measured approach and a very disciplined approach in how we reintroduce this into retail of building on the organic demand that is bubbling. I also want to clarify one point from your question that the recruitment in our North America customer base rose during this period. Thank you, Aaron. Your next question comes from the line of Anna Andreeva of Oppenheimer. Great. Thanks so much. Good morning, guys, and congrats. Really terrific results. We have more of a modeling question. So I guess to Kevin, as it relates to 3Q, given the nice margin improvement at the Coach brand in 2Q and it sounds like you're very well positioned from an innovation standpoint, Maybe talk about the P and L dynamics between the gross margin and SG and A. Could Coach brand gross margins be up in 3Q? I'm not sure if you quantified the timing shift on expenses from 2Q. And how should we think about the Easter shift benefit? Thanks so much. Thanks, Anna. Good morning. As we think about the 3rd Q4, we can give them the guidance for the year. We would think from a modeling perspective that the Q3 maybe is in the flattish range in the gross margin with the 4th quarter up in part due to the more softer gross margin performance we had in last year's Q4. As you noted, there was some timing shifts on the SG and A between the Q2 and the balance of the year. And we would expect a higher impact of the SG and A probably in the Q3 versus the Q4. All right. Thanks so much. Your next question comes from the line of Oliver Chen of Cowen and Company. Hi, thank you. Nice quarter. Good afternoon. Victor, on the digital frontier, what are your thoughts on key and near term and longer term priorities and your thoughts on the evolution of the supply chain digitally and as you approach digital as well as we think about both customer relationship management and fashion and big data and algorithms, What are your thoughts? There's a lot of different revolutions happening, including with luxury goods. So I'm wondering how you see that evolving and what your customer wants. Thank you. Thank you. On the broader supply chain question, Ali, we've been maybe one of the first certainly in our space to dedicate resources to trying to digitize the back end of the process. One of the first investments we made was really on 3 d technology to allow our design teams as well as our product development teams to work very closely with all of our vendors on the back end. And that is a process that continues. You'll be hearing a little bit more about some experimentation that we're going to be doing with digitizing from front to back to increase speed and agility in our supply chain. In terms of the front end of the business, you've just heard this morning the recruitment that we have made of David Kong, who has just joined us. He will be playing a dual role, 1st and foremost, leading e commerce for our largest brand in partnership with Josh, who has, as you all know, a great passion for all things digital and driving the strategies for Coach. At the same time, leveraging that platform, David will play a key role across all brands, looking for opportunities for us to leverage innovation along with our data labs team across our digital platforms. Some of the areas that we have been thinking about and I think, Ali, you know that we have an incredible asset in our database. We've made a substantial investment over the last couple of years across all three brands in technology with a Hadoop database investment. We currently have over 120,000,000 names in that database. And one of our key objectives is to leverage that data and recruiting the talent that allows us to obviously think about how we can not only approach consumers more directly in a more customized manner, but also in terms of how we think about leveraging machine learning for the inventory management internally. These are all areas that we're having discussions on and working on right now. So very exciting space indeed. Thanks for that update. Best regards. Thank you, Ali. Your next question comes from the line of Lindsey Druckermann of Goldman Sachs. Thanks. Good morning, everyone. Thanks for taking my question. I had 2 quick ones. First, I was hoping you could comment on the tenor of promotions in the outlet channel for Coach and Kate. I think you mentioned it got better for Kate, but just curious what you're seeing there generally? And then second, Kevin, I don't know if you're able to help us get some understanding of what the tax rate could be in FY 2019 and beyond once you have to deal with GILTI and a sort of fully loaded number? Thanks. Sure. I'll let Josh chime in on Coach promotion and gross margin in a minute. But as you stated, Lindsay, in the case of Kate, we really have been very, very focused on leveraging a much cleaner approach across channels with a very important focus on reducing, of course, flash, not only in terms of number of events, but also a dramatic reduction in the actual circulation of our mailings, as well as the work that we've done across the disposition channel. So across Kate, we've seen very nice improvements in our gross margin and excited by what the future holds there as we head into a better inventory position in terms of quality of inventory in the second half and beyond. And I'll let Josh touch on Coach. Hi, there. In the Coach brand, as expected, the North America outlet channel was more promotional in Q2, but far better than what we experienced in Q1. And I think you can see the result of that in the gross margin performance that the team was able to achieve in the second quarter. Good morning, Linda. This is Kevin. As it relates to your question on the 2019 taxes, as you know, there were a number of changes in the tax law. And we outlined in the press release this morning those changes that we think would have the most material impact on the business. We are currently in the process of working through all of those items. It's fairly complex. We've done a lot of work, but we will need until the end of this fiscal year to fully determine the final impact. Plus there may be additional regulatory guidance that's issued on some of the tax law changes. Having said that, on a preliminary basis, we would estimate our effective tax rate would go down by about 300 basis points versus what we would have expected. So by way of example, we originally guided fiscal year 'eighteen effective tax rate in the 24% to 25%. So you should think about fiscal year 2019, maybe the 21% to 22% range, So about 300 basis points, but again, more work to come on that. Great. Thank you. Thank you, Linde. Your next question comes from the line of Mark Altschwager of Baird. Great. Good morning. Thank you. Nice to see the recovery in Coach comps this quarter. Just wondering as you look at the first half and normalize for all the calendar shifts, weather disruptions, inventory issues, What do you view as the underlying comp rate at the Coach brand? And then looking into the back half, just given the favorable consumer back drop and some of the reduced promotional intensity you talked about, is there an opportunity to perhaps accelerate the Coach comp from that normalized first half trend line? Sure. I'll let Josh answer that. Good morning. As you look at Q1 and Q2, obviously, we had a variety of impacts in Q1 and then a nice inflection point in Q2. But as you spread them out, it's really a low single digit trend that we're seeing in the Coach brand. As we look to Q3 and beyond, we're confident in our assortments, and we're confident in the strategies that we have to continue driving a low single digit trend in coach comps. Your next question comes from the line of Simeon Siegel of Nomura Instinet. Thanks. Good morning. Congrats, guys. Victor, when you think about the long term profitability for Kate, it's obviously still early, but you're already making operational improvements. Are there any structural differences you see between Kate and Coach that would keep them from reaching Coach EBIT margins over the long term? And then just quickly, sorry if I missed it, did you guys quantify the SG and A timing shift into the back half? Thanks. I'll let Kevin in a minute talk about the SG and A timing shift. But in terms of Kate's long term profitability, over the long term, Simeon, I don't see a reason why it could not be at Coach levels. Obviously, today, with Kate Spade, we have a business that is more North America centric. We have a business that's slightly heavier and ready to wear, which is really structurally, I would say, some of the biggest differences. But long term, as we think about a handbag and accessories focused strategy, obviously, global growth and a lot of the work that we're also doing across categories at Coach and Kate together, we could see things normalizing to a similar level of profitability. Good morning, Simeon. On the SG and A, we did not give specific numbers, but we didn't anticipate the majority of that impact being in Q3. Great. Thanks a lot, guys. Thank you. Our last question comes from the line of Scott Krasek of Buckingham Research. Hey, everyone. Thanks for fitting me in. Good job. Just a question on the footwear, if you could you've had it, I guess, for 2 collections now or in the process of the 2nd collection. Just wondering what you've learned and how big we think that can be on a wholesale basis? And then what other types of brands should we index that to like what a Stuart Weitzman could be over a multiple number of years? Thanks. Sure. From a I'm going to let Josh jump in here in a moment. But as you suggest, we're in the very early days learning a tremendous amount, especially in terms of what is similar and what is different amongst our portfolio of brands, the largest of which you mentioned being Stuart Weitzman, which is really a different business model given that it's fully or mostly manufactured in Spain, whereas Coach Wompey. We've leveraged a lot of the FIT technology, of course, across the Coach brand and are now getting into what we could call the 2nd inning of that rollout, as I mentioned in my speakers' notes. I'll let Josh jump in. He's working very closely with the teams on the future strategy there. Good morning. As Victor said, I think we took a very deliberate approach with the launch of footwear. And so for the 1st season, it was really establishing the codes of the house and what an internally made Coach shoe has in terms of make and look and really launched with a couple key categories. What's hitting the stores now is an expanded assortment focused on the dress classification and focused on an enhanced rollout of sneakers. We're just opening our wholesale market here in New York for the next season. And you'll see more merchandising there along the same good, better, best lines that we have in Bags and introduction of other codes from bags, including the introduction of signature in footwear, again, different classifications, including cold weather, more sport functions, etcetera. The other thing we've been deliberate on is the distribution strategy. We started off with a tight number of wholesale doors in North America, taking doors down significantly from where the licensee had it. And now we're adding regions too. So we will be launching in Europe as well, where the brand will be placed in Kurt Geiger, which is one of the preeminent footwear multi brand retailers in the U. K. And all of the best distribution in Europe as well. So we're playing a long game here, but we're excited about the next steps. Yes. And for those of you who haven't yet had the opportunity and love the footwear category, and I know there's 1 or 2 of you out there, please do visit the Stuart Weitzman stores in the months ahead as Giovanni's collection hits because I think you'll find a lot of wonderful emotional product. Thank you. That concludes our Q and A. I'll now turn it over to Victor Luis for some concluding remarks. Victor? Thank you, Andrea. As is and has been our custom, I just want to thank all of you and just as importantly thank the 20,000 global employees who drive our performance and make what we've just announced possible. Our teams are all focused on great execution, bringing innovation to market and ensuring that consumers continue to engage with our great brands. And I certainly could not be more excited by the opportunity for our brands and for Tapestry as we continue to evolve as a house of desirable brands with very dedicated and talented global teams. Thank you. Thank you for participating in today's conference call. You may now disconnect your lines and have a wonderful day.