Tapestry Inc

NYSE:TPR

Earnings Call Transcript 2018-Q2

[Operator]

Good day, and welcome to the Tapestry’s 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 Global Head of Investor Relations and Corporate Communications of Tapestry’s Andrea Resnick.

[Andrea Resnick, Global Head, IR and Corporate Communications]

Good morning and thank you for joining us. With me today to discuss our quarterly results and annual forecast are Victor Luis, Tapestry, Inc.’s Chief Executive Officer; and Kevin Wills, Tapestry 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-K and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors. Please note that 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 where noted.

You may identify these non-GAAP measures by the terms non-GAAP, adjusted for constant currency. The Company believes that presenting these non-GAAP measures is a 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 management’s evaluation of the business. You may find the corresponding GAAP financial information or metric as well as a 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 second fiscal quarter 2018 results for our three brands. Kevin Wills will continue with details on financial and operational results, and our outlook for the balance of FY18. 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&A session will end shortly before 9:30 a.m. We will then conclude with some brief summary remarks.

I’d now like to introduce Victor Luis, Tapestry’s CEO.

[Victor Luis, 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 outlets 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 improvement 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 pull back 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 improvement 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&A of about 30 million to 35 million in FY '18 and run rate synergies from both COGS and SG&A of approximately 100 million to 115 million 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 Dubin-Wander as President, North America and Fredrick Malm as President, Europe & International Wholesale. And at Kate Spade, we announced Nicola Glass as Creative Director, a proven leader in fashion accessories design who is 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 announced that David Kong has joined the company in the newly created role of Head of Tapestry Digital and Coach Brand Ecommerce. David will be responsible for accelerating growth and the long-term vision of Coach's ecommerce 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 two global strategic priorities. First, leveraging the opportunity 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 from 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 within expected closing date in the fiscal third quarter. As a result, we are 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 second quarter we estimate that the men's and women's premium handbag and accessory market which is over 40 billion grew at a high single digit rate globally, similar to the September quarter.

Now turning to results by brand. I would like to focus on second 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 material. 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 second quarter coach sales increase 2% both as reported an in constant currency lead by North America while the international business and aggregate also rose on both the reported and constant currency basis.

The brand's international constant currency sales growth was driven by increase in Europe, greater China, South East Asia and Japan. Globally we saw 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 reflect year-over-year as expected given the double-digit gains posted on last year second quarter fueled by currency weakness notably in the UK.

Moving to wholesale. Our North America shipments grew during the quarter driven by footwear. As expected, our sales at POS declined due to the rap impact of spring 2017 door closures which have not anniversaries while our total promotional event phase 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, such a playful print in the surprised and delighted our customers and while we continue to innovate leather craft launching quoting 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 Nappa leather. In handbags for holidays, we focused on cascading the level of innovation and fashion leadership which Stuart Vevers brings to our most elevated run way collections across the pyramids 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 tag, 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 used as a dual gender lifestyle brand.

Finally, in men's retail we saw success in gifting notable in core colors as well as in cold weather, and similar to women 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 emotional and functional attributes in our brand tracking survey among the broad premium markets.

As noted on our last call we launched Coach Create globally in Q2, a platform for clients that 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 in 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 for 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 250 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 grounding 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 Vevers and featured in Spring 2018 run way show.

We will continue to innovate across price brackets with the focus on maintaining balance in the assortment. We will introduce two new styles under $400 that combine up town allegiance with down town 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 compelling and feminine Mother's Day assortment brooded in animation in our iconic Tea Rose embellishment and featuring top styles including rogue to dinky.

Moving to outlook and starting with Q2. In tactful gifting destination key style launchers and the comprehensive 360-degree experience through cross category messaging drove our holiday performance. In handbags we were pleased by the positive response [indiscernible] 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 parts of metallic.

In December the Coach [indiscernible] capsule played on the trend right creature animations on bags, smaller the goods and fashion accessories. Black Friday included the fun plant story across both men's and women's product categories. Backpacks and tops were especially strong within the black Friday message.

Now looking to spring and outlet, we are enthusing innovation with new salivate launches across the board. We have a couple of exciting collaborations coming within the channel in the next few weeks and we will be leveraging inspiration from the 1941 runway looks. Overall, we're 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 million in the second quarter, down about 7% from the prior year on a pro forma basis, reflecting our strategic reduction of both wholesale disposition and/or surprised sales. Underlying comparable store sales trends were similar to the prior quarter with brick-and-mortar comps down 3% globally and total comps 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 the gifting assortment with a broader offer across price points and balanced color pallet. Within handbags our core groups performed well notably [Carmen Street] and Jackson street while backpacks and cross bodies both comps significantly.

The customer continued to response to the make-it-mine customization program which built the momentum and e-com as well since small leather goods, small wallets and cross bodies drove the biggest increases. And in ready to wear it was all about by now wear now with outerwear. sweaters and dress as the strongest categories. As noted in our last call we're especially excited about our trend in ready to wear and have been testing at different visual merchandizing approach. This test is focused on zooming retail stores by department rather than monthly introduction allowing for an easier category shopping experience. The original test doors continue 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 bag packs 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 levered [ph] events driving traffic into bricks and mortar. Similarly, in outlet we use 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 for the brand and celebrating our history and heritage. We also continue to further our learnings on the Kate Spade brand through 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 bench mark brand in this attribute.

And among the broad premium market we continue to see the Kate Spade resonate on the attributes of fissionable, 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're already taken steps to position the brand, building a foundation for solid and sustainable growth. As we look ahead for the Kate Spade for the balance of F18 we will continue to significantly promotional impressing by reducing surprise sales and pulling back on wholesale disposition. It's important to note that in the case of flash, we're not only pulling back on the number of events but also significantly reducing the circulation, no longer using flash sales as broad, widely advertise 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 nine new stores in Q2 and closed one.

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 and global markets.

Turning to Stuart Weitzman, sales rose 2% driven by the global direct business which in turn was fueled by distribution growth and global e-commerce. For perspective we did expect second 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 offering. Most importantly Giovanni Morelli's new creative direction is beginning to gain traction. His 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 and 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 second quarter financial results and guidance for fiscal 2018. Kevin?

[Kevin Wills, CFO]

Thanks Victor. Victor has just taken you through the highlight 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 '18. Before I begin please note the comments I'm about to make are based on non-GAAP results, corresponding 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 1.79 billion as compared to 1.32 billion in the prior-year, an increase of 35% driven by the acquisition of Kate Spade and organic growth. Coach net sales totaled 1.23 billion as compared to 1.2 billion in the prior-year, an increase of 2%. Kate Spade net sales totaled 435 million reflecting in part the strategic pullback in wholesale disposition and online flash.

Stuart Weitzman net sales totaled $121 million an increase of 2% and slightly ahead of guidance due to wholesale shipment time and favorability as mentioned.

Gross profit totaled $1.2 billion while gross margin 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 points impact due to bringing the women's footwear business in house. In addition, currency pressured the brands gross margin rate with 10 basis points in the quarter. As Victor mentioned we were 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 and prior year, benefiting in part from lower discount rates in the North American 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&A expenses totaled $785 million and represented 44% of sales as compared to 46.3% in the year ago period. SG&A was well controlled in the quarter and also benefited from a shift and expenses into the back half of the fiscal year.

Coach SG&A expenses totaled $485 million and represented 39.4% of sales compared to 40.9% in the year-ago quarter.

Kate Spade SG&A expenses were $183 million and represented 42.1% of sales. Stuart Weitzman SG&A expenses were $51 million, 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&A includes corporate costs, as outlined in our press release.

Operating income for the quarter was $411 million, 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 million, while operating margin was 29.4% versus 28.1% in the prior year. Operating income for Kate Spade totaled $92 million, while operating margin was 21.2%. Operating income for Stuart Weitzman was $24 million or 19.6% of sales versus 18.8% in the prior year.

Net interest expense was $22 million in the quarter as compared to $5 million 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 onetime transition tax on foreign earnings deemed to be repatriated and the measurement of the differed tax asset and liabilities resulting from the federal break reduction.

Net income for the quarter totaled $306 million as compared to $211 million 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 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 shift with the second half of fiscal year.

Now, moving to global distribution by brand. For Coach, we opened seven net locations globally primarily in Europe finishing the quarter with 967 directly-operated locations worldwide. For Kate Spade, we open eight net locations globally in the quarter with 284 directly-operated stores. And for Stuart Weitzman, we opened two stores and finished the quarter with 83, directly operating stores globally.

Turning to our balance sheet and cash flows. At the end of fiscal second quarter our cash and short-term investments were approximately $2.1 billion as compared to 1.8 billion in the prior year. Our total borrowings outstanding were $2.7 billion which consisted of $1.6 billion of senior notes and $1.1 billion in terms loans versus $600 million in senior notes a year ago.

In January we fully repaid $1.1 billion in term loans utilizing excess cash, consistent with our comments to conservative balance sheet management the 800 million six-month term loans was repaid maturity and the 300 million term loan was retired early. These actions resulted in a reduction of our leverage by a term on a debt to EBITDA basis.

In addition, as part of our appropriate capital structure management we will be filing a new shift registration statement this week as our prior shift expired in December 2017. While we have no plans on offer at this time an active shift registration statement allows us appropriate capital structure flexibility.

Inventory levels at quarter-end were $666 million including approximately $179 million associated with Kate Spade compared to ending inventory of $465 million a year ago. As previously communicated, we expected a higher inventory to sales ratio than has been our recent history due to elevated inventory levels of Kate Spade. We will protect the Kate Spade brand but 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 to fiscal 2018.

Net cash from operating activities in the second quarter was an inflow of $514 million, compared to an inflow of $366 million last year. Our CapEx spending was $78 million in Q2 versus $54 million last year. Free cash flow in the quarter was an inflow of $436 million versus an inflow of $312 million 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 eight-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 the focus on dividends.

Now moving to our 2018 outlook, consistent with our past practice the following guidance is presented on a non-GAAP basis, additional the Kate Spade guidance has provided subsequent to deal close on July 11th 2017.

Turning to our guidance, we continue to expect total revenues for tapestry in fiscal 2018 to increase about 30% versus fiscal 2017 to 5.8 billion to 5.9 billion 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 Weitzman sales.

In addition, we expect the acquisition of Kate Spade to add over 1.2 billion in revenue. The Kate Spade revenue projection includes the impact of a planned strategic pullback in the wholesale disposition in online plus channels and assumes a high single digit decrease in comps for the year. In addition, we're 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 million to 35 million.

These synergies are expected to offset in part the reduction in profitability from a strategic and delivered pullback of Kate Spade wholesale disposition in online flash sales channels. Taken together, Kate Spade business and resulting synergies are expected to add approximately a 130 million to a 140 million 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 the international distribution. Given our year to date operating income outperformance we can find these strategic investments while maintaining our annual operating income growth targets.

Net interest is now expected to be 75 million to 78 million for the year versus previous guidance of 80 million to 85 million reflecting the debt repayment in the third quarter. 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 US tax code as discussed. We expect our weighted average diluted shares outstanding for the year to be approximately 289 million. Overall, we are now projecting earnings per diluted share for the year in a range of $2.52 to $2.60, an increase of about 17% to 21% including mid to half single digit accretion from the acquisition of Kate Spade. We continue to expect CapEx to be approximately 325 million in fiscal '18.

As previously noted we naturally be incurring a number of one-time charges primarily associated with the Kate Spade acquisition and integration. These charges include such items as transaction fees and integration cost which includes severance, store closure costs and inventory valuation adjustments.

For the full year we currently anticipate pre-tax integration charges to be approximately 240 million to 250 million in fiscal '18 of which approximately 120 million to a 130 million is expected to be non-cash. In addition to such integration charges we also incurred 40 million in pretax acquisition transaction fees.

Finally, we are expecting to incur approximately 2 million of operational efficiency charges for full-year.

As outlined today we also expect to incur net of approximately 213 million in one-time charges as a result of the recent U.S. tax reform. These charges relate to the transition tax on foreign earnings being to be repatriated for approximately 315 million, partially offset by the remeasurement of deferred tax assets and liabilities under the new tax code of approximately 102 million. The actual amount of remeasurement and being repatriation tax may differ from this estimate due to among other things a change in the interpretations of revisions to U.S. tax code, changes in assumptions made in developing these estimates as as regulatory guidance that may be issued with respect to the applicable revisions to the U.S. tax code.

Finally turning to our fiscal '18 directly operated distribution plans for brand. For Coach we now expect to close in net of approximately five to 10 locations globally. The change versus previous guidance is primarily due to Japan where we planned 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 in 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 five 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 million to 115 million in fiscal 2019.

Overall, we remain very optimistic about our global opportunities and we're committed to driving long-term sustainable growth across the Tapestry portfolio of brands with a very healthy balance sheet to support our strategies.

I would now like to open it up to Q&A. Operator?

[Andrea Resnick, Global Head, IR and Corporate Communications]

Operator, we are ready for Q&A.

[Operator]

Your first question comes from Bob Drbul of Guggenheim Securities.

[Bob Drbul, Guggenheim Securities]

I just have two questions, I guess. The first one is you talked about the growth and 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 to keep call out Coach's outperformance in North America I was wondering if you could elaborate a little bit more on that first?

[Victor Luis, CEO]

Sure, as we have noted Bob, both last quarter and on this speakers notes that we just provided, we're providing global sales and comps and of course are committed to providing global category growth quarterly growth 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 was of course part fueled by our own sequential improvements and I will let Josh chime in a little bit on that.

[Josh Schulman, CEO and Brand President, Coach]

Hi 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 that are traffic in the malls that we see and heard about coupled with excellent execution on the part of our teams.

[Operator]

[Operator Instructions] Your next question comes from the line of Ike Boruchow of Wells Fargo.

[Ike Boruchow, Wells Fargo]

So, Victor maybe this one is 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 lastly, can you may be size the opportunity there longer term?

[Victor Luis, CEO]

Very excited about our witness development opportunities in that part of the world, as we mentioned in our speakers notes, we're actually taking some actions across a couple of market with two real key strategies there, first and foremost is around the Chinese consumer and that obviously relates most to what we're doing with Kate Spade, but also, we're very excited with the buyback of the business from China.

And the Kate Spade opportunity in that market, excuse me, and the Kate Spade opportunity in that market today it's not dramatically different quite frankly from where couch was when we purchase that business back in 2008 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 relationship 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 directly 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 smaller 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.

[Operator]

Your next question comes from the line of David Schick of Consumer Edge Research.

[David Schick, 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 talked about. Can you talk about the sourcing cost both on materials and labor as you look out through the balance of this year and longer term?

[Victor Luis, CEO]

We don't see much impact as we 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 chains 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 '19 run rate of a 100 million to 115 million 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 the next chapter.

[Operator]

Your next question comes from the line of Erinn Murphy of Piper Jaffray.

[Erinn Murphy, Piper Jaffray]

Great, thanks good morning and good quarter. I just wanted to focus a little bit on the logo transferring the second quarter. 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 if 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, thank you.

[Victor Luis, CEO]

Sure, I'll let Josh take that one.

[Josh Schulman, CEO and Brand President, Coach]

Good morning, so I think it's really important as we talked 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 re-introduction of signature which is a historic part of our brand as you know to our retail channel. And what we are seeing there is a part of 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 Stuart Vevers run way in September will only hit our retail stores as part of the March 1st, floor set.

The editorial response and the response from the wholesale community, our most elevated partners around the world has been terrific on that more elevated product. So, whether it’s a Harper's Bazaar or appearing in the Neiman Marcus catalog, the most elevated partners are excited about the way Stuart introduced it in conjunction with a collaboration with the key pairing archives. 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, a building on the organic demand that is by the way. I also want to clarify one point from your question, that the recruitment in our North America customer base rose during this period.

[Operator]

Your next question comes from the line of Anna Andreeva of Oppenheimer.

[Anna Andreeva, Oppenheimer]

We had more of a modeling questions, so I guess to Kevin as it relates to 3Q given the nights margin improvement at the Coach brand in 2Q, and sounds like you are very well positioned from innovation standpoint. Maybe talk about the P&L dynamics between the gross margin and SG&A. For Coach brand gross margin to be up in 3Q I'm not sure if you quantify the timing shift on expenses from 2Q and how should we think about the Easter shift benefit?

[Kevin Wills, CFO]

Good morning, as we think about the third and fourth quarter, we have given the guidance for the year. We would think from a modeling perspective the third quarter maybe in a flattish range and the gross margin with the fourth quarter up in part due to the softer gross margin performance we had in last year's fourth quarter.

And as you noted there was some timing shifts on the SG&A between the second quarter and the balance of the year. And we would expect the higher impacts of the SG&A probably in the third quarter versus the fourth quarter.

[Operator]

Your next question comes from the line of Oliver Chen of Cowen & Company.

[Oliver Chen, Cowen & Company]

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 a different revolutions happening including with luxury goods, so I'm wondering how you see that evolving and what your customer wants?

[Victor Luis, CEO]

On the broader supply chain question Oli, we have been may be one of the first certainly in our space to dedicate resources to trying to digitize the backend of the process, one of the first investments we made was really on 3D 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 the process that continues, you will be a hearing a little bit more about some experimentation that we're going to be doing with digitizing from front to back to increased speed and agility in our supply chain.

In terms of the front end of the business, you just heard this morning the recruitment that we have made of David Kahn who has just joined us, he will be playing a dual role firstly foremost leading e-commerce for our largest brand partnership with Josh who has as you all know a great passion for all things digital and driving the strategies for couch.

At the same time leveraging that platform David will play a key role across all brand looking for opportunities for us to leverage innovation along with our data laps team across our digital platforms.

Some of the areas that we have been thinking about and I think you know that we have an incredible asset in our data, we've made substantial investment over the last couple of years across all three brands in technology with a Hadoop database investment. We currently have over 120 million 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 customize manner but also in terms of how we think about leveraging machine learning for the inventory management process internally, these are all areas that we're having discussions on and working on right now, so very exciting space indeed.

[Operator]

Your next question comes from the line of Lindsay Drucker Mann of Goldman Sachs.

[Lindsay Drucker Mann, Goldman Sachs]

I had two quick one, first I was hoping you can comment on the tenor of promotions in the outlook channel for Coach and Kate, I think you mentioned it got better for Kate, which is 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 F19 and beyond once you have to deal guilty in sort of fully loaded number.

[Victor Luis, CEO]

I will let Josh chime in on the Coach promotion and gross margin in a minute but as you stated Lindsey in the case of Kate we really have been very, very focused on leveraging a much cleaner approach channels with the very important focus on reducing of course flash, not only in terms of number of events but also dramatic reduction in the actual circulation of our mainland's and as well as the work that we done across the disposition channel, so across Kate we seen very nice improvements in our gross margin and excited by what the future hold there as we head into a better inventory position in terms of quality of inventory in the second half and beyond and I will let Josh touch on that.

[Josh Schulman, CEO and Brand President, Coach]

Hi there, in the Coach brand as expected and 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 results of that in the gross margin performance that the team was able to achieve in the second quarter.

[Kevin Wills, CFO]

Good morning Lindsay, this is Kevin, as it relates to your question on the '19 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 is issued on some of the tax law changes.

Having said that on a preliminary basis we would estimate their 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 '18 effective tax rate in the 24 to 25 so you should think about fiscal year '19 maybe the 21 to 22% range. So about 300 basis points but again more work to come on that.

[Operator]

Your next question comes from the line of Mark Altschwager of Baird.

[Mark Altschwager, Baird]

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 backdrop 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 tram line.

[Victor Luis, CEO]

Sure, I'll let Josh answer that.

[Josh Schulman, CEO and Brand President, Coach]

Good morning, you know as you look at Q1 and Q2 you know obviously we had a variety of impacts in Q1 and then a nice inflection points 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.

[Operator]

Your next question comes from the line of Simeon Siegel of Nomura.

[Simeon Siegel, Nomura]

So, 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 the SG&A timing shift into the back half.

[Victor Luis, CEO]

I'll ask Kevin in a minute to talk about the SG&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 in 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 are also doing across categories that Coach and Kate together we could see things normalizing to a similar level of profitability.

[Kevin Wills, CFO]

On the SG&A we did not give specific numbers but we would anticipate majority of that impact being in Q3.

[Operator]

Our last question comes from the line of Scott Krasik of Buckingham Research.

[Scott Krasik, Buckingham Research]

Just a question on the footwear if you could you have it like for two collections now are in the process of the second collection. Just wondering what you have learned and how big we think that can be on a wholesale basis? And then what other types of brand should we index as to like whether Stuart Weitzman could be over a multiple number of years?

[Victor Luis, CEO]

I'm going to let Josh jump in here in a moment but as you suggest we are in the very early days learning a tremendous amount especially in terms of what is similar 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 where as Coach lumpy.

We have leveraged the lot of the lot of the fit technology of course across the Coach brand and now getting into what we could call the second inning of that rollout as I mentioned in my speakers note. So, I'll let Josh jump in, he is working very closely with the teams on the future strategy there.

[Josh Schulman, CEO and Brand President, Coach]

As Victor said I think we took a very delivered approach with the launch of footwear and so for the first season it was really establishing the codes of the house. And what in internally made Coach shoe has in terms of make and look, and really launched with a couple of key categories. What's hitting the stores now using expanded assortment focused on the direct classification and focused on enhanced rollout of sneakers. We are just opening our wholesale market here in network for the next season. And you will see more merchandising there along the thing good better best lines that we have in bag and introduction of other Coach from bags including the introduction of signature, in footwear again different classifications including cold weather more sport functions et cetera.

The other thing we have been delivered on is the distribution strategy. We started off with a tight number of wholesale orders in North America, taking doors down significantly from where the licensee had it. And now we are adding regions too so we will be launching in Europe as well where the brands will be placed in Kurt Geiger which is one of the preeminent footwear multi brand retailers in the UK and all of the best distribution in Europe as well. So, we are playing a long game here but we are excited about the next steps.

[Victor Luis, CEO]

And for those of you who haven’t yet had the opportunity and love the footwear category and I know there is one or two of you out there please do visit Stuart Weitzman stores in the months ahead as Giovanni's collection hits because I think you will find a lot of wonderful emotional products.

[Andrea Resnick, Global Head, IR and Corporate Communications]

Thank you. That concludes our Q&A and we’ll now turn it over to Victor Luis for some concluding remarks.

[Victor Luis, CEO]

Thank you, Andrea. As is 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 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.

[Operator]

Thank you for participating in today's conference call. You may now disconnect your lines. And have a wonderful day.