Tapestry Inc

NYSE:TPR

Earnings Call Transcript 2025-Q1

[Operator]

Good day and welcome to this Tapestry Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations, Christina Colone.

[Christina Colone, executive]

Good morning. Thank you for joining us.

With me today to discuss our first quarter results as well as our strategies and outlook are Joanne Crevoiserat, Tapestry's Chief Executive Officer; and Scott Roe, Tapestry's Chief Financial Officer and Chief Operating Officer.

Before we begin, we must point out that this conference call will involve certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes projections for our business in the current or future quarters or fiscal years. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to our annual report on Form 10-K, the press release we issued this morning and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance.

Non-GAAP financial measures are included in our comments today and in our presentation slides. For a full reconciliation to corresponding GAAP financial information, please visit our website, www.tapestry.com/investors, and then view the earnings release and presentation posted today.

Now let me outline the speakers and topics for this conference call. Joanne will begin with highlights for Tapestry and our brands. Scott will continue with our financial results, capital allocation priorities and our outlook going forward. Following that, we will hold a question-and-answer session, where we will be joined by Todd Kahn, CEO and Brand President of Coach. After Q&A, Joanne will conclude with brief closing remarks.

I'd now like to turn it over to Joanne Crevoiserat, Tapestry's CEO.

[Joanne Crevoiserat, executive]

Good morning. Thank you, Christina. And welcome, everyone.

As noted in our press release, our first quarter results exceeded expectations, showcasing the brand magic and operational excellence that are the foundation of our strategic growth agenda. Importantly, our strong and consistent performance is a credit to our exceptional global teams who continue to navigate the dynamic backdrop with focus and agility while positioning our brands and business for the future.

Touching on the highlights of the quarter. First, we achieved total revenue in line with prior year on a constant currency basis, outpacing our outlook and reflecting the benefits of our globally diversified business model, with continued solid growth at Coach. By geography, we achieved international revenue gains of 2% at constant currency, which included an increase of 27% in Europe and a 2% decline in the total APAC region. In Greater China specifically, sales declined 5%, consistent with the top end of our guidance range and ahead of the industry [ but ] included a sequential trend improvement throughout the quarter. Importantly, we are delivering a high level of innovation, relevance and value to consumers while continuing to invest in our brands, teams and platforms to support long-term growth in the region and with this important consumer cohort. And in North America, revenue declined 1% compared to last year, including an anticipated decrease in wholesale, while profit rose, driven by growth and operating margin expansion.

Second, we remained focused on building new and lasting relationships with consumers across our portfolio. During the quarter, we acquired approximately 1.4 million new customers in North America alone, with increases across all brands. Over half of these customers were Gen Z and millennials, consistent with our strategy to recruit younger consumers to our brands. And they continue to transact at a higher AUR than the balance of our customer base. At the same time, we improved lapsed customer reactivation in North America, which highlights our ability to successfully engage our existing customer base as we welcome new consumers to our brands.

Third, we delivered compelling omnichannel experiences, engaging our customers wherever they choose to shop our brands. To this end, we maintained strength in digital, which grew high single digits versus prior year and represented over 25% of revenue at accretive margins. Our digital business is underpinned by Tapestry's leading capabilities which have enabled us to enhance the customer experience across their purchase journey. Our global brick-and-mortar sales decreased at a low single-digit rate in the quarter, as expected, though we maintained strong profitability.

Fourth, we fueled fashion innovation and product excellence as we remained focused on bringing creativity, quality and compelling value to consumers around the world. This is clearly on display at Coach, where we delivered continued growth in handbags, with AUR gains, underscoring the vibrancy of the brand and product offering. Our success is also reflected in our strong gross margin, as we achieved a record first quarter gross margin, with further opportunity for expansion long term. Importantly, underpinning our margin gains is our agile supply chain, a key competitive advantage which enables us to deliver craftsmanship and value globally while effectively adapting to the rapidly evolving landscape.

Overall, we generated record earnings per share which exceeded our expectations, increasing at a double-digit pace compared to the prior year, while making strategic investments in our brands and business. Importantly, this outperformance enabled us to raise our guidance for the full year, consistent with our commitment to driving growth and shareholder value.

Before turning to a discussion of our results in more detail, I'd like to briefly address the pending acquisition of Capri. 2 weeks ago, the U.S. district court granted the FTC's preliminary injunction, which we believe is incorrect on the law and facts. We appealed the decision consistent with our obligations under the merger agreement. While we await that outcome, it's important to reiterate that we are in a position of strength and continue to focus on our compelling organic growth plan building powerful brands and delivering for our consumers.

Now moving to our results and strategies by brand.

Coach continued to deliver standout results, highlighting the enduring power and relevance of the brand and its distinctive expressive luxury positioning. Importantly, our teams are driving strong consumer engagement through innovative product, storytelling and experiences, fueling our brand heat and growth. To this end, during the quarter, we achieved 2% constant currency revenue gains at exceptional margins, highlighted by 330 basis points of gross margin expansion and a 90 basis point lift in operating margin, with meaningful runway for growth ahead.

Now touching on our progress in the first quarter, centered on our focus to deepen our connection with consumers to fuel continued [indiscernible] the brand. First, we grew our leather goods offering, led by our iconic handbag platforms and the success of new product introductions. The Tabby family once again outperformed, over-indexing with new and younger consumers and nearly doubling versus last year. The Tabby shoulder bag 26 continued to anchor the offering, and we further expanded the family with the introduction of Times Square Tabby. As we shared last quarter, based on the power of Tabby and in keeping with our commitment to put the consumer at the heart of all we do, we launched a test that brought the Tabby 26 to our outlet channel at full price. This test continues to exceed plan. And as a result, we rolled it out to more locations, with Tabby now available in over 200 outlet stores globally, again at full price. Importantly, the learnings from this test continue to inform our broader strategies for fiscal '25 and beyond as we explore additional opportunities to scale innovative products and marketing campaigns across channels.

In addition, during the quarter, we launched the New York family, featuring the Brooklyn and Empire bags, which surpassed our expectations globally and cemented their place as new pillars for the brand. The Brooklyn shoulder bag 20 at $295 was the top recruitment driver of Gen Z consumers, while the soft Empire carryall 40, at an AUR of $695, was a viral sensation on TikTok. Importantly, the New York family is incremental and differentiated with new minimalist branding and soft leather that's clearly resonating with consumers globally. In fact, the early success of Brooklyn earned it a spot on The Lyst, ranking second among the 10 hottest products.

Overall, Coach's growth in handbags and accessories continued to outpace the industry, which included mid-single-digit AUR gains globally, led by North America. And we see further runway longer term given our innovation pipeline and brand heat.

Next, we remained focused on fueling lifestyle, expanding the brands' reach [ and ] categories, including footwear, ready to wear and men's, where we are underpenetrated and have a right to win, by driving customer recruitment, purchase frequency and lifetime value. We have a strong pipeline of innovation, notably in footwear, with the launch of the new High Line sneaker in the current quarter.

Turning to marketing. We continued to have meaningful conversations with consumers through purpose-led marketing, driving cultural relevance and engagement with our brand. This fall, we launched a new campaign, Unlock Your Courage, featuring Coach ambassadors Elle Fanning, Nazha, Youngji and Charles Melton in a series of short films designed to inspire authentic self-expression consistent with our brand mission. Importantly, because of our efforts, we've seen significant gains in unaided awareness, share of search and purchase intent among Gen Z consumers in the U.S. and globally, reinforcing brand momentum and that our strategies are working. In addition, our campaigns and brand-building efforts are breaking through globally. To this end, during the quarter, we made the strategic decision to increase our top-of-funnel marketing investments across international markets, notably in China. This reinforces the confidence we have in our brand and product offering, driving greater consumer engagement and helping to drive outperformance versus the industry in China specifically.

In addition, we also drove brand desire through unique experiences. We connected with younger consumers in the world of gaming with a collaboration with Roblox and Zepeto. Since the launch, more than 12 million unique users interacted with our content; and we've seen an increase in brand consideration and purchase intent from consumers on the platform. Overall, our holistic brand-building activities helped to drive increases in new customer acquisition as we welcomed approximately 930,000 new customers to Coach in North America, a strong increase versus prior year. Of these new customers, approximately 60% were Gen Z and millennials, consistent with our strategy to recruit younger customers.

Looking ahead to holiday, we will continue to focus on brand building through customer engagement, executing our strategies with discipline. We are confident in our product pipeline, building on the traction we're driving in the business through the continuing success of Tabby, expansion of the New York family, the launch of newness within our Coach originals collection and a compelling assortment of seasonal novelty, reinforced by emotional marketing campaigns that amplify our brand purpose and product.

In closing. Coach is a storied brand driving modern relevance, fueled by a strong team methodically building sustainable growth. With customer understanding at the heart of our work, we continue to bring to life the brand's unique creativity, purpose and value to a new generation of consumers, with significant runway ahead.

Now moving to Kate Spade. During the quarter, we continued to reinforce our foundation for the future. While revenue declined as expected, profit margins again expanded versus prior year, led by continued gross margin expansion and diligent expense management. Moving forward, we have a clear imperative for growth. Last month, we welcomed new brand CEO Eva Erdmann to the organization. Eva brings a strong track record of leading global consumer luxury brands and driving consistent profitable growth. Eva and I share confidence in the meaningful opportunities at Kate Spade by bringing a sharpened focus on brand building and enhanced execution. Importantly, under Eva's leadership, the team is working with intention to advance our long-term strategies while acting with urgency to address the things we can immediately improve in support of this vision.

Now touching on our results for the quarter. First, we remained focused on strengthening the brand's core handbag offering, key to our growth agenda. In September, we launched [ a deco ] collection in specialty, which is over-indexing with new, younger consumers at strong AUR and margins, while the Phoebe and spade flower programs [ and ] outlet remained foundational. At the same time, we also recognized that we need to amplify this progress through more holistic brand-building initiatives, ensuring that we are [ distorting ] our efforts to telling more focused, cohesive and relevant brand and product stories to drive consumer engagement; and that work remains underway.

Turning to Kate Spade's lifestyle offering. During the quarter, we delivered strong growth in jewelry in keeping with our strategic intent. This growth was driven by millennial and Gen Z recruitment, and we see continued opportunity ahead. Next, we remain focused on maximizing the omnichannel opportunity to drive customer engagement and grow the brand. In keeping with this focus, in October, we launched a trial on Amazon with a range of products, including an emphasis on gifting. The initial learnings are promising. And we see an opportunity to leverage the platform's broad consumer reach, specifically with younger cohorts, as we've successfully done with Coach over the last year.

Turning to marketing. We are committed to fueling brand heat to drive consideration and accelerate customer acquisition. During the quarter, we acquired approximately 445,000 new customers to the brand, representing an increase versus prior year. That said, we need to drive stronger outcomes, particularly in our core category, to achieve our growth ambition. To that end, over the last quarter, our team launched new consumer insights ethnographic work to sharpen our focus and break through with the brand's target audience. And we've immediately implemented action plans for the holiday and into spring which will bring more focus to our execution, from our assortment to our styling as well as our storytelling efforts. Importantly, we will distort our marketing investment into upper funnel campaigns with more relevant messages for our target customer, capitalizing on the brand's strong unaided awareness in the U.S., to build greater brand desire and purchase consideration.

Finally, we also continue to operate with discipline and a focus on maintaining a healthy brand and business, which is foundational to our ways of working and highlighted by our continued growth and operating margin expansion in the quarter.

Touching on holiday. Our goal is to drive customer acquisition through focus and relevancy. To do this, we will lead with gifting, a hallmark of the brand, while launching a social-first campaign that will celebrate the joy of the holiday season in new and unexpected ways.

Overall, while results for Kate Spade met our expectations in the quarter, we're not satisfied with the performance; and we're sharpening our road map for long-term growth. This is a unique, purpose-driven brand with significant potential with consumers on a global scale. And we're leaning in with intention to deliver sustainable profitable growth.

Now turning to Stuart Weitzman. We drove revenue gains for the quarter, with growth in North America offsetting continued softness in Greater China. Importantly, though financial results remained challenged, we made progress in keeping with our strategic focus on brand building and delivering higher profitability long term.

Touching briefly on our focus areas across product and marketing. During the quarter, new styles, including the VINNIE pump and Naomi boot families, resonated with consumers, while growth in flats continued. In addition, we refreshed our iconic styles, which remain the bedrock of the brand. We launched new constructions to modernize and enhance the fit of key families, including Nudist and [ Stuart ]. Product innovation drove traction at wholesale, with the business growing double digits on both a POS and net sales basis in North America in the first quarter. Further, order bookings year-to-date are up nearly 30% to last year. This will support an improvement in revenue and profitability trends this year and beyond, consistent with our strategy to drive growth in this important channel for the brand and category.

Turning to marketing. During the quarter, we drove brand desire through emotional storytelling in keeping with the brand's purpose of inspiring strength and confidence. Following the brand's How Lovely to Be a Woman campaign launch, featuring new, talented and multifaceted brand ambassadors, we saw an increase in customer acquisition, Google Search and organic digital traffic in North America, which reinforce brand health and represent leading indicators of stronger business results in the future. For holiday, the key boot selling season, we are focused on delivering innovation across our icons and building on the early success of new introductions while driving sustained wholesale growth where there's momentum. In addition, we will continue to deliver purpose-driven marketing with the rollout of additional chapters of our How Lovely to Be a Woman campaign.

Overall, we continue to see long-term potential for the brand with an empowered team focused on driving customer engagement and improved financial results.

In closing. Tapestry delivered strong earnings growth in the first quarter, outperforming expectations. Our results continue to demonstrate the power of brand building, customer centricity and operational excellence. I want to reiterate my appreciation to our exceptional global teams, who continue to drive our success.

From this position of strength, we raised our outlook for the full year. We remain focused and confident in the bold ambition we have for our existing brands and business. I believe the best is yet to come for Tapestry.

Before turning the call over to Scott, I want to take a moment to recognize Andrea Resnick. This marks Andrea's 97th and final earnings call with Tapestry, ahead of her retirement later this year. Andrea joined the company to take it public and has had a truly amazing career. She is an institution at Tapestry and a legend in the IR and corporate communication world. Andrea created a gold standard for thoughtful and transparent communications, which have become a bedrock at our company. On behalf of everyone at Tapestry, we are grateful for her many contributions and wish her all the best in her next chapter.

With that, I'll now turn it over to Scott.

[Scott Roe, executive]

Thanks, Joanne. And good morning, everyone.

Our first quarter performance continued to build on our track record of consistent and disciplined execution. To this end, in Q1, we outperformed expectations across revenue, operating income and earnings, delivering strong EPS growth and cash flow generation despite the volatile backdrop.

Now moving to the details of the quarter, beginning with revenue trends on a constant currency basis. Sales were in line with the prior year and above our guidance for the quarter. These results were led by growth internationally, which grew 2% at constant currency. By region, Europe revenue grew 27% above last year, driven by increased local consumer spend and strong new customer acquisition, notably with Gen Z. In other Asia, revenue rose 10%, led by growth in Australia, New Zealand and South Korea, while Japan sales declined 4%. And in Greater China, revenue declined 5%, at the high end of our guidance range. During the quarter, we again delivered digital growth. And brick-and-mortar trends, while negative, improved throughout the quarter, supported by better traffic trends which continued into Q2. Despite the overall challenging market backdrop, we are confidently investing in the region, delivering compelling product and value and positioning our brands and business for long-term growth.

In North America, sales declined 1% compared to the prior year due to a planned decrease in wholesale, while North America direct was positive. Importantly, both gross and operating margins rose versus last year as we supported long-term brand health.

Now touching on revenue by channel for the quarter. Our direct-to-consumer business was in line with the prior year, which included a high single-digit increase in digital revenue and a low single-digit decline in global brick-and-mortar sales. Wholesale revenue was in line with prior year, which included international growth, including on digital platforms, where we continue to expand our reach.

Moving down the P&L. We achieved a record first quarter gross margin, delivering gross margin expansion of 280 basis points versus prior year. This year-over-year increase was driven by 180 basis points of operational outperformance, which exceeded plan, as well as a benefit of approximately 60 basis points from lower freight expense and a 40 basis point tailwind from FX.

Turning to SG&A. We continue to make ongoing strategic investments in our future. To this end, SG&A rose 3%, led by higher marketing spend versus prior year and expectations, in support of our brand-building initiatives. So taken together, operating margin increased approximately 90 basis points in the quarter, driving operating profit growth ahead of prior year and expectations.

And first quarter EPS of $1.02 exceeded our guidance and represented growth of 10%.

Now turning to our balance sheet and cash flows. We ended the quarter with $7.3 billion in cash and investments; and total borrowing of $7.3 billion, which reflects the bond financing related to the proposed acquisition of Capri of $6.1 billion. Free cash flow was an inflow of $94 million.

CapEx and implementation costs related to cloud computing for the quarter were $30 million. Inventory levels at quarter end were 9% above prior year, reflecting a higher level of in-transits consistent with expectations, as we continue to leverage [ the benefits of our supply chain navigating [ the Red Sea ] and port disruptions, with only modest impact. Importantly, as we enter the holiday season, our inventory is current and well positioned globally. And we continue to expect to end Q2 and the full year with inventory above prior year.

Turning to our dividend program. Our Board of Directors declared a quarterly cash dividend of $0.35 per common share, representing $80 million in dividend payments for the quarter. For the fiscal year, we continue to expect to return approximately $325 million to shareholders through the dividend, for an annual rate of $1.40 per share.

Now moving to our guidance for fiscal year '25, which is provided on a non-GAAP basis. We are raising our fiscal 2025 outlook, which incorporates our first quarter outperformance. We view this guidance as prudent and achievable as we remain clear eyed about the realities of the external environment, balanced with the opportunities we see for our business. For the fiscal year, we now expect revenue of over $6.75 billion, representing growth of approximately 1% to 2% versus prior year on a reported and constant currency basis.

Touching on sales details by region at constant currency. We expect high-teens growth in Europe, where we are underpenetrated and have strong traction. In other Asia, we anticipate mid-single-digit gains, while in Japan we're forecasting a low single-digit decline. In North America, we expect revenue to be approximately in line with to slightly above prior year as we continue to support a healthy business. And in Greater China, we expect revenue to be in the area of prior year.

In addition, our outlook now assumes operating margin expansion of over 50 basis points versus last year. We anticipate gross margin expansion to drive this increase due to improvements in both AUR and AUC. Both freight and FX are expected to have a negligible impact on gross margin changes in fiscal '25. On SG&A, we expect expenses to increase roughly in line with the pace of revenue growth for the year. Importantly, we're continuing to diligently control costs while investing in our highest-impact growth initiatives, including making incremental investments in marketing versus our prior outlook. For modeling purposes, you can expect a modest decline in corporate expenses versus prior year while making ongoing investments in our brands.

Moving to below-the-line expectations for the year. Net interest income is expected to be approximately $20 million, which incorporates the Fed's 50 basis point rate cut in September, with some further rate cuts assumed throughout the year. The tax rate is expected to be approximately 19%. And our weighted average diluted share count is forecasted to be in the area of 238 million shares.

Taken together, we're raising our EPS guidance to $4.50 to $4.55, representing mid-single-digit growth compared to last year and ahead of our prior guide of $4.45 to $4.50. Finally, we anticipate free cash flow of approximately $1.1 billion, excluding any deal-related costs.

And we expect CapEx and cloud computing costs to be in the area of $190 million. We expect around 2/3 of the spend to be related to store openings, renovations and relocations, with the balance primarily related to our ongoing digital and IT investments.

Touching on [ shaping ] for the year. We expect constant currency sales to be up slightly in the first half of the year, with low single-digit growth planned in the back half of the year. In Q2 specifically, we expect sales to grow in the area of 1% to 2% on a reported and constant currency basis.

Turning to operating margin. We expect expansion in both the first and second halves, with the first half expansion led by gross margin gains. And the second half increase is driven by SG&A leverage. Taken together, we expect balanced EPS growth of mid-single digits for the first and second halves, with Q2 forecasted to approach $1.70.

Now to briefly address the proposed acquisition of Capri. We are appealing the district court's order as required by our merger agreement and have paused all integration planning efforts during this period. Given the present dynamics, we are not reaffirming the financial aspects of the deal and we'll provide updated comments if and as appropriate.

With that, I'd like to share with you in more detail how we're thinking about our capital allocation priorities looking forward. Our capital allocation framework is focused on the goals of driving healthy growth and sustainable shareholder value. To do this, we have foundational commitments: first, to invest in our brands and businesses to support long-term sustainable growth. Second is our dividend. And we expect to maintain a rate of $1.40 per share in fiscal '25, with a goal over time of increasing our dividend at least in line with earnings to achieve the stated targeted payout ratio of 35% to 40%. Beyond these foundational commitments, our robust cash flow generation provides us with balance sheet flexibility for value creation. To note, we are firmly committed to our solid investment-grade rating and our long-term gross leverage target of below 2.5x. Keeping this long-term leverage target in mind, there's a clear opportunity to utilize excess free cash flow for share repurchases. We have contingency plans ready, pending the outcome of the appeal. And we believe our shares represent a compelling opportunity given the strong organic growth runway of our business. And this would represent our immediate priority should we be unable to move forward with the proposed acquisition of Capri.

And finally, consistent with our commitment to being disciplined financial operators and allocators of capital, we consistently evaluate opportunities for strategic portfolio management, utilizing our rigorous 4-lens framework to ensure all actions meet our strategic and financial growth criteria.

In closing. We delivered a successful quarter demonstrating our commitment to driving disciplined growth. We achieved record gross margin and EPS, with double-digit earning gains, as we remained focused on executing our compelling organic growth plan, positioning us to raise our outlook for the full fiscal year. Importantly, our distinctive brands, talented global teams, data-driven platform and strong cash flow are competitive advantages. Taken together, they provide us with strategic and financial flexibility to deliver accelerated organic growth and enhanced shareholder value in fiscal '25 and for years to come.

I'd now like to open it up and take your questions.

[Operator]

[Operator Instructions] Our first question comes from Bob Drbul of Guggenheim Securities.

[Robert Drbul, analyst]

Congratulations on a great quarter. I guess just the first question really is can you expand a bit more on the deal and a bit more of an update on the deal. And then in a deal break scenario, can you just talk through a bit more the vision for the company, your capital allocation priorities, including future M&A?

[Joanne Crevoiserat, executive]

Thanks, Bob. As you know, on the deal, we filed an appeal as we're required to do by our agreement. And that process is ongoing. As always, we're focused on our organic business and we're operating from a position of strength. And our outperformance in the first quarter and the outlook we raised for the full year are further evidence of our disciplined brand building and the particular strength we're seeing at Coach. And I do want to recognize the talented teams across the globe at Tapestry who are driving these outstanding results. Together, we have a bold vision for our existing business, and we have tremendous runway ahead. And our performance underpins our confidence in our organic growth potential, and our focus is on our largest value creation opportunities. Those are sustaining healthy growth at Coach while reigniting growth at Kate Spade. And I'm happy to share our thinking on capital allocation. Of course, we're awaiting the outcome of the appeals process which we're required to do, but in the meantime, I'll give you a little additional color on what Scott walked through on the call. In any scenario, we have foundational investments. And that includes investing in our organic business, and we have much more growth to unlock. And we have a commitment to maintaining our dividend, with a goal of increasing it over time.

Beyond these commitments and to directly address your question in a deal break scenario, let me give you 3 overarching principles that highlight both our balance sheet flexibility and our focus on shareholder return. First, we're firmly committed to our long-term leverage ratio and our investment-grade rating. Second, there is meaningful opportunity to resume share repurchases. This would be our immediate priority. Given our free cash flow generation, our growth prospects and our valuation, the buyback opportunity is extremely compelling. And third, strategic portfolio management: We will be disciplined with any actions. We continue to believe our platform can support more brands. And we look forward to proving that in the future, but to be clear, if this deal does not close, we do not expect any M&A in the near term. And before moving forward with M&A, we will ensure Coach remains strong and that we've returned to sustainable top line growth at Kate Spade. We are intensely focused on our existing business. And we're confident that we have the creativity, the capabilities and the culture at Tapestry to drive continued success.

[Operator]

We'll take our next question from Ike Boruchow of Wells Fargo.

[Irwin Boruchow, analyst]

2 questions from me. I'll piggyback off of Bob's. Just understanding, Joanne, very clear on what you were explaining on capacity, could you give us more specifics? Is it as simple as you guys were kind of annualizing around $700 million of buyback back when the deal was announced? You didn't buy back anything last year. You have nothing in your plan this year. Is it simple enough just to say, if the deal did not go through, we should kind of take that number times 2 and that's what our expectation would be for the appetite? And then the follow-up question is just on China, just kind of what you saw through the quarter. What's baked in for the second quarter? And just any high-level thoughts on the region would be great.

[Joanne Crevoiserat, executive]

Sure. Let me take the China question, first. And then I'll pass it to Scott to add some color on how we're thinking about share buyback. In Greater China, we landed and delivered a quarter at the top end of our guidance range, [ down 5 ]. Our performance in the region is outpacing the industry. I was just there a couple of months ago. I know Todd was just there a couple of weeks ago. And we continue to invest in the region. We're investing in marketing; and our products are resonating, the brand purpose, the storytelling. We're delivering exceptional value into the market. And we did see sequential improvement as we moved through the quarter and we saw that continue into Q2. And importantly, our digital trends were positive in the market. And I think that just speaks to how well our teams on the ground are meeting the customers where they are. They're agile. We've been in the market. And I think it speaks to the level of understanding that we have with the customer and the investments we continue to make in our platform and our capabilities. We remain confident in the long-term opportunity in China and in Asia overall. And I'd love to toss it to Todd, but maybe I -- all right, yes, I'll toss it to Todd to give you a little bit more color on what he's seeing in China. And then we'll toss it to Scott.

[Todd Kahn, executive]

Thanks, Joanne. And we won't forget your question, Ike, for Scott. We know how important that is to you, but in terms of China, we delivered a negative 3% in the quarter. That compares to the industry at double-digit over 20% drop. And as Joanne said to you, I've just come back from China. I spent a week there. I have come back more enthusiastic about China than I ever have been. And it really comes down to our brand positioning of expressive luxury and the value and values that our brands stand for really resonating with our target customer. And what I was very impressed with: I went to a small city called Wuxi, about 2 hours outside of Shanghai. When I say a small city, a city of over 7 million people. We have 3 stores there. We have the opportunity clearly to double our store count there because we're not restricted by maybe places where only traditional European luxury will go. We are able to go where the young people are, and our brand resonates. That story replicates itself in dozens of locations in China, so I see, over the next 1.5 years to 2 years, lots of distribution growth [ and ] opportunity in China. So now let's get to that little question you have about stock buybacks with -- to Scott.

[Scott Roe, executive]

Yes. That's -- I'm excited to talk about it, Ike. So I'll start by just reminding you and everybody what Joanne said and just point to our results. I mean we have a compelling organic story with growth, profit, free cash flow and essentially 0 net debt, so that means we've got a lot of capacity. And I guess another contextual point that I would point to is some of the bright lines that we've established. So we talked about remaining strong investment grade. That means a leverage target of less than 2.5x debt-to-EBITDA, but in this environment we wouldn't push the upper limit of that boundary. But it does mean we have a lot of capacity. And some have asked, what vehicles are on the table? Would we consider ASR or other things? Yes, we -- all vehicles are on the table. Should we be in a deal break scenario, then we'll come back with more specificity and give you better parameters around what that might look like.

[Operator]

We'll take our next question from Matthew Boss of JPMorgan.

[Matthew Boss, analyst]

Congrats on a really nice quarter.

[Joanne Crevoiserat, executive]

Thanks, Matt.

[Matthew Boss, analyst]

So Joanne, on market share gains at exceptional margins which you cited at the Coach brand, could you elaborate on the drivers of outperformance relative to what you're seeing in the category over the past 12 months? And maybe if you could just speak to recent global demand trends that you're seeing. And then Scott, gross margin, if you could just walk through the continued gross margin opportunities for the balance of this year and then just how best to think about opportunities remaining multi year.

[Joanne Crevoiserat, executive]

Yes. I'll kick it off, Matt, but also ask Todd to add a little bit of color on the Coach issues specifically, but as -- I look around the world. And what we see in our business is very consistently a consumer that is choiceful. And innovation and emotion, however, are continuing to win with consumers. And you have to break through with emotion. We have to deliver value in the way of innovation, great quality and craftmanship as we do; and understand where the customers are; and meet them where they are. And that's how we win. We've been very methodical at building the capabilities at Tapestry over time and investing behind our brands, and Coach is clearly winning. As you think about the category, the handbag and leather good category have been incredibly durable and resilient over decades. The category has grown mid-single digits over decades. In the last quarter, we do -- we did see the category slow and decline in Q1, but again, in that context, Coach is clearly winning. We believe we can grow both now and into the future. And we would expect the handbag category again to resume historic growth rates over time, but even now we expect that we can grow in this environment. And then we're building our business to be able to be even stronger as the category more fully recovers to historic growth rates, but I'm going to toss it to Todd to share what he's seeing at Coach.

[Todd Kahn, executive]

Thanks, Joanne. And I'm going to elevate for a second and really talk about Coach and really -- and, by extension, how Coach and Tapestry have always excelled [ at logic ]. Coach, though, is at its best when the magic is equally strong. I believe we are at one of those moments. And let me give you 2 proof points which I think speak volumes. First, our own employees are buying the Brooklyn bag in droves even though it's exempt from our traditional employee discount. And second, in my almost 17 years at Coach, I have never seen consumer demand for a new collection as I've seen for the New York collection, with literally tens of thousands of clients registering at stores and online to "notify" them when a particular colorway or size is back in stock. And the best part is we are not seeing the New York collection cannibalize the demand for our Tabby family. So when you think about long-term sustainable growth, one, we're acquiring new customers who are younger. Two, they're transacting more frequently at higher AURs. Three, we're creating tested, purpose-led campaigns that resonate with our target consumers. And four, we've increased our funding for those campaigns to allow

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spike in sustained cadence. And finally and maybe most importantly, we have meaningful platforms in our product assortment to continue this momentum for the quarters and years ahead, so I am very bullish on our future now. We're going to stay very close to the consumer. And I think you had a follow-up question on gross margin for Scott.

[Scott Roe, executive]

Yes, I got it. Boy, that's a great lead-in, though, Todd, in terms of giving the context of why we have such confidence in long-term gross margin growth, but a little bit of shaping, Matt: So remember. What a quarter, in Q1, for gross margin with 280 basis points. A couple of things to remember. First of all, we did see some benefits from freight. I -- it was highlighted in the prepared remarks, about 60 bps in the quarter. We see that turning to a very modest negative. And for the full year, it's really not much of an impact, but that did benefit Q1. Also, as expected, we know that there was some wholesale pressure in Q1, which abates as we go through the year. That's really just a timing year-on-year thing, but obviously that mix benefited us in Q1. That said, we expect gross margins to be up for the year, be the primary driver of our op margin expansion of about 50 basis points. And remember, in the shaping of the year, the first half gross margin will be the driver of our profit gain. And as we get in the second half, we start to see more leverage on the SG&A side; and that's a bigger contributor, in the second half, to op margin.

And as you look at the structural drivers. I mean Todd said it, right, AUR and AUC. AUR, investing in the brands, brand heat and our continued ability to get price over time, is on display right now. And AUC, which I still believe is one of the underappreciated drivers of the gross margin, is we use consumer insights and our world-class supply chain to drive efficiency, not cheapen product but to get more efficiency and lower the costs throughout the value chain. And that's an additional driver of gross margin that we see on an ongoing basis.

[Operator]

We'll take our next question from Lorraine Hutchinson of Bank of America.

[Lorraine Maikis, analyst]

Joanne, you spoke of a clear imperative for growth at Kate Spade. Can you diagnose the key reasons for its recent declines and then talk to a time line for stabilizing these sales trends?

[Joanne Crevoiserat, executive]

Well, thanks, Lorraine. We have a lot of confidence in the Kate Spade brand and the potential we see for the brand. And the opportunities we see are in brand building and really supporting the innovation that we're delivering. We have a clear bias for action. We were excited to welcome our new CEO, Eva, to the organization last month. And she is the perfect leader for the organization with a proven track record of building global luxury brands and building sustainable results. We have set an important foundation at Kate Spade. [ We're seeing ] expanded gross margins and operating margins, and that's important. We are introducing new product families that are resonating with the consumer. We need to reinforce this work and make that -- make those launches and that more impactful with brand building. We're also recruiting new customers to the brand. So the foundation is there. We need to accelerate and improve our execution. Eva will be sharpening our long-term strategic road map as well as improving execution. And we're acting with urgency to impact the things that we can immediately impact. And we covered those a little bit in the call, but that includes marketing, our upper funnel marketing; and how we reach and where we reach consumers; as well as the storytelling behind the big ideas. We're also making changes on styling and editing our SKUs to be more focused. Those are some of the immediate actions we're taking. And we're confident that we have a bright future ahead for Kate.

[Scott Roe, executive]

And Lorraine, it's Scott. Maybe just a quick build. We don't expect, though, growth in this fiscal year. We would expect the trend that we're seeing right now to be more or less in line for the balance of the year, just to be a little more specific.

[Operator]

We'll take our next question from Michael Binetti of Evercore.

[Michael Binetti, analyst]

So I guess, just one modeling quick question as you look at -- it looks like there was about a $12 million drag on wholesale in the quarter. Scott, I think you referenced it for a second there, maybe that it gets better through the year, but what was that? Is that just cycling the Amazon sell-in? And does that remain a drag for a couple of quarters? Maybe, just any context there? And then if we peel out that wholesale, it looks like Coach direct to consumer grew nicely. Are the -- maybe just some context on whether the underlying full-price and outlet stores are accelerating on an underlying basis.

[Scott Roe, executive]

Yes, sure. You mentioned one of the factors. We did have the pipe fill last year in Amazon. And frankly, Michael, it's just timing of orders and when products are dropping from a wholesale, so I would say, while it impacted the quarter, there's no new news here. It doesn't represent a fundamental change in the breakdown of the business or any kind of change from a strategic standpoint. And as we look at the year, we'll see that wholesale will grow, as will our direct to consumer. And I'll start and maybe throw it to Todd in terms of what we're seeing in terms of retail, but yes, we did see nice growth in our omnichannel, particularly in the online channel, in the first quarter. We expect that to build and even stronger in the Coach brand when we look at the overall direct-to-consumer business. So maybe, Todd, a little bit more there?

[Todd Kahn, executive]

Yes, sure. Thank you, Scott. In the first quarter, if I strip out the wholesale and the pipe fill from Amazon, Coach globally delivered 3% on constant currency. So we did better in our direct business. We are seeing good trends through the year, obviously led by the Empire -- the New York collection, with Empire and Brooklyn; and then of course, the strength of Tabby. We're really seeing great growth in North America. And while we talked about AUR growth, which again goes to brand health, we actually saw AUR growth across globally and in North America, so we're very excited to see the reaction to our product offering. And again I reinforce this customer acquisition vehicle through our purpose campaign is the future fuel. So as we continue to start bringing in new consumers to the Coach family, their lifetime value is so great. It really gives us long-term runway.

[Operator]

We'll take our next question from Paul Lejuez of Citigroup.

[Tracy Kogan, analyst]

It's Tracy Kogan filling in for Paul. I just had a follow-up on your comments on AUR. I think, Todd, you mentioned that it was up globally as well as in the U.S. And I was wondering if you can maybe give us a little more color on how that has varied regionally and what you're expecting for this year for AUR, any quantification you can give. And then what's driving the AUR increases? Is -- how much of it is like-for-like increases versus adding maybe some bells and whistles to the product?

[Todd Kahn, executive]

Yes. I mean we had mid-single-digit growth. And it was led globally, but it was led by North America. I foresee AUR growth continue throughout the year. It's really a little less about the bells and whistles. It's a couple of things. And as Scott mentioned and -- the unsung hero here is some of how we're going to market. Obviously we're discounting less. That's an important contributor to it, and newness with Brooklyn and the Tabby demand. That shapes our business in a different way. We're going to get -- we're going to test and see some of the benefit of putting Tabby at full price in outlet. I think that's a driver. We spend so much on upper funnel marketing. And when the focal point is the Tabby bag, the consumer comes in to all of our channels of distribution, looking for that. And one thing we're learning more and more is consumers don't see channels. They see brand, so when a consumer comes to Sawgrass Mills for the first time and maybe they're a tourist coming to that Miami area, or Woodbury Commons, and they're shopping -- [ that's their one ] shopping experience. They're coming cell phone in hand, with a picture of Tabby. They are prepared to pay full price and are so desirous of having that in that channel. So again, once you put everything in a customer-centric lens, you see things very differently than the historic norms of our industry.

[Operator]

We'll take our next question from Rick Patel of Raymond James.

[Rakesh Patel, analyst]

Can you talk about the shape of growth in North America? Q1 was down 1%. Guidance suggests a potential for modest growth this year. Just curious if you can provide color on the progression of growth and the drivers of the implied sequential improvement.

[Joanne Crevoiserat, executive]

So maybe I'll kick it off and toss it to Scott, but as we talked about, our trends in North America were in fact better than we expected, in the first quarter. And we continue to use discipline in managing the business. I would say also we're driving higher gross margins, operating margins and profit dollars while we're also acquiring new consumers to our brands, so we're operating with a great deal of discipline. The trend in the first quarter was impacted, as we just talked about, by the wholesale drag. And that's a headwind in the first quarter that doesn't repeat for the balance of the year, but maybe Scott, the shaping of that...

[Scott Roe, executive]

Well, I think you said it. Really the underlying trend, when you take out the noise from wholesale -- and I'll remind you that this is a relatively small quarter too, right? We do see slight growth [ and balancing ] the year as wholesale comes back to normal, if I use that word, and the continued underlying direct-to-consumer trends go through the balance of the year.

[Operator]

We'll take our next question from Mark Altschwager of Baird.

[Mark Altschwager, analyst]

I guess, first, just following up on the channel discussion for North America. Did digital outpace brick and mortar for both retail and outlet? And then what are your current thoughts on the distribution footprint for North America considering there appears to be some increasing product and consumer overlap between the channels?

And then separately, Scott, tariffs topic back on the front burner. Can you just remind us of the China sourcing mix, any material changes over the past few years for bags and other categories; and just bigger picture, how we should think about mitigation strategies?

[Joanne Crevoiserat, executive]

So let me take your question on digital. Our digital -- I'll start with our direct business. Our omnichannel business [ did grow ] or was in line with last year, in the first quarter. The digital growth offset a slight decline in our stores. So our important focus is on meeting the customer where they are. And our capabilities allow us to drive our business regardless of where the customer chooses to transact. These are key capabilities that I believe are a competitive advantage for Tapestry, so we're well positioned to meet the customer in digital spaces. That's what you saw in the quarter. And our focus continues to be on our omnichannel business. So again, omnichannel, in line with last year. And our wholesale business as well, in line with last year, but international growth really driving that wholesale business. And importantly, globally, the wholesale growth in international is driven by digital. And we grew in digital in China. So this underpins the opportunities that we see to meet the customer where they are. We're moving quickly to meet the customer where they are. And we're acquiring new customers in this channel, which is also very important for our brands going forward. So a big opportunity for us in customer acquisitions. We're acquiring younger customers in these channels. The digital channel for us is accretive in margins to our total, so those are all capabilities that are important today for our business, for our P&L but also long term for our brand

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freight lanes, whatever it might be, tariff regimes changing over time. So we're pretty well versed in managing through this. We'll see what comes in terms of specific tariffs and other

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[Unknown Analyst]

And as you think about the complexion of the brands and the growth opportunities go forward given the state of the consumer, how do you think of the balance between introducing newness in core collections and also existing collections? And how do you see pricing evolving, and the impact of margin, given the current sourcing complex that Scott just mentioned?

[Joanne Crevoiserat, executive]

Sure. I'll add my comments but then toss it to Todd for a little bit of color on what's in fact been working for us in terms of adding newness but also investing behind our icons. And that is a balance that we talk about and we managed, but the key is that we always have to deliver innovation even within our icons. And you see us building strength on strength in our icons at Coach. Tabby continues to get stronger because we're innovating on that platform. And the iconic original Tabby 26 continues to perform. And then we're introducing as well newness and innovation that is also working and in fact becoming new pillars for the brand. So as we think about AUR growth, it's a combination of this magic that Todd talked about of bringing the right product and the right innovation to market with the logic that we're bringing with consumer insights and understanding and all of the data and analytics we bring to bear across our assortment and then the investments we're making in marketing. And maybe I've stolen all of your thunder, Todd, but I'll toss it to you.

[Todd Kahn, executive]

I -- you left a little on the bone. So I think it's very foundational. If we go back 4 or 5 years, and Joanne and I were on this journey together. We cut the tail of sort of that very one-off product. That is foundational to building a future, so we really looked at the -- how productive every SKU was. And we recognized that the big families -- a good bag is a good bag globally. So once we started with that discipline, we then start adding the magic. And Tabby -- if you remember, I said to you in FY [indiscernible] Tabby was starting to slow down. We invigorated the family with [indiscernible] Tabby. That reinforced it. So we're very, very focused on keeping [indiscernible] families not for a quarter, not for a monthly drop but for years. We have to balance both the core -- because there's still millions of customers who have not yet benefited by owning a core Tabby, which I am keen on selling them. And our marketing people will continue to focus that in our global marketing campaigns. And then we have our creative teams led by Stuart Vevers who really keeps very top and center fashion trends. And you can see that evident in the New York collection, which is a completely different aesthetic than Tabby. We joked initially the New York bag, particularly the Brooklyn bag, didn't have the natural attributes of a great Coach bag. It's not adjustable. The functioning is not as robust as we often think of in a Coach bag. It's not structured. The branding is low key, yet it was exactly the right family for the time and our marketing campaign. And just the pickup is so strong, so now instead of just having a Tabby platform, a signature platform, we have this entire New York collection platform that I -- again, will invite and allow more people at compelling prices to come into the Coach family.

[Operator]

And we'll move next to Aneesha Sherman of Bernstein.

[Aneesha Sherman, analyst]

So I'm hearing a lot of optimism on organic growth, especially on the Coach brand. Going back to your Investor Day in 2022: Your guidance at the time was assuming growth in line with the market, which at the time was mid-single digits. Given your increased optimism on customer acquisition and new growth, are you now expecting to grow top line above the market? And then I also have a second question, around margin impact of your category mix, especially on Coach. You talked about the innovation pipeline moving into ready to wear, into footwear with the sneaker, et cetera. How do you think that's going to impact gross margins going forward? And is there an offset strategy for that?

[Joanne Crevoiserat, executive]

I'll start and then maybe toss it to Scott on some of your questions on category, but in terms of overall growth and growth versus the category, I think the reality is we are growing faster than the category right now. So we see an opportunity for us to grow. This is a tremendous category that consumers have an emotional connection to. It has proven to be resilient and durable over time. We love the category we're in, and we've sharpened our execution within our category. And you see that with Coach. We have a tremendous amount of runway in the category to continue to grow Coach

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I just talked about, the opportunities he's excited about, so we've got a lot of runway at Coach in the category. And then if you consider Kate Spade in the category as well, we see tremendous opportunity to continue to unlock growth in our organic business long term, so we're very optimistic. And then in terms of category, I will say one thing about category growth. And that is we see opportunity there. It will be incremental. And then I'll toss it to Scott to let you know how he's thinking about it.

[Scott Roe, executive]

Yes, that's really the point. I mean, like-for-like, we'll continue to grow margins. The structural drivers, AUR, AUC, are there. Certain categories just have different and sometimes lower gross margins, but from an operating margin standpoint, certainly we would see that as accretive. And overall we expect, even with this category growth, to maintain the exceptional margins that we enjoy today. That's our expectation.

[Operator]

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

[Joanne Crevoiserat, executive]

Well, thank you for joining us and for your interest in our story.

I want to leave you with 3 overarching messages today. One, we're operating from a position of strength, which is reflected in our first quarter beat and raise. Two, Coach is strong and has momentum. Our brand-building efforts and platform capabilities are working. And three, we are focused on our [ existing ] business and have competitive advantages that provide us with flexibility to accelerate our organic growth and drive significant value creation. I'm confident in our future. And I want to again thank our talented global teams for driving our success.

Thanks again, and have a great day.

[Operator]

This concludes Tapestry's Earnings Conference Call. We thank you for your participation.