Tapestry Inc

NYSE:TPR

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to this Tapestry conference call. Today's call is being recorded. [Operator Instructions]

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

[Christina Colone, executive]

Good morning. Thank you for joining us. With me today to discuss our third quarter results as well as our strategies and outlook are Joanne Crevoiserat, Tapestry's Chief Executive Officer; and Scott Roe, Tapestry's Chief Financial Officer and Chief Operating Officer.

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

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

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

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

[Joanne Crevoiserat, executive]

Good morning. Thank you, Christina, and welcome, everyone. As noted in our press release, our third quarter earnings results outperformed expectations, reflecting an unwavering commitment to disciplined brand building and operational excellence. Our talented global teams continued to advance our long-term initiatives, fueling innovation and consumer connections while successfully harnessing the power of our customer engagement platform to navigate the dynamic backdrop with focus and agility.

Touching on the highlights for the quarter. First, we delivered total revenue in line with the prior year on a constant currency basis, consistent with the low end of our guidance range. These top line results were led by international growth of 3% at constant currency, which included increases of 19% in Europe, 15% in other Asia and 2% in Japan, with each region expanding versus the prior year fueled by traction with tourists.

And Greater China as anticipated, sales declined 2% against last year's strong revenge spending. We remain confident in the long-term opportunity in China despite a more gradual recovery in the region than originally expected, and we continue to invest in our brands, teams and platforms to support our growth.

Finally, in North America, revenue declined 3% compared to last year, amid a challenging consumer backdrop. Importantly, we are continuing to drive a healthy business, underscored by significant gross margin expansion compared to last year and our plan.

Second, we continue to put the consumer at the center of everything we do to drive engagement and emotional connections with our brands. In the quarter, we acquired approximately 1.2 million new customers in North America alone, of which over half were Gen Z and millennials, consistent with our strategy to recruit younger consumers to our brands. And we continue to see new customers transact at higher AUR than the balance of our customer base. At the same time, we improved lapsed customer reactivation in North America.

Third, we delivered unique omnichannel experiences with a focus on driving brand desire, consumer connections and cultural relevance. We launched immersive retail experiences across brands globally with highlights that include the continued rollout of the Coach Play concept and Kate Spade's successful renovation of the Gotemba outlet in Japan. And just last month, we introduced the Stuart Weitzman shop-in-shop in Nordstrom in New York City. We believe these locations drive awareness and customer acquisition, notably with younger cohorts.

Further, we maintained our strong digital positioning with sales more than 3x above pre-pandemic levels, which represented over 25% of revenue. Importantly, our digital business is underpinned by Tapestry's data-rich platform and leading capabilities, which has enabled us to seamlessly meet consumers where and how they're shopping across their purchase journey.

Fourth, we fueled fashion innovation and product excellence by delivering compelling assortments to consumers with particular success at Coach, where we drove handbag AUR gains at constant currency. Importantly, this focus also continued to drive operational gross margin expansion, helping to fuel our highest third quarter gross margin in nearly 2 decades. We understand innovation wins with consumers, and we are committed to bringing creativity, quality and compelling value to customers around the world.

Overall, we generated third quarter operating income and earnings above expectations, driven by stronger-than-anticipated margins, highlighting the power of brand building, consumer centricity and operational agility. We achieved these results while making strategic investments in our brands to support healthy, sustainable growth into the future.

Now turning to highlights across each of our brands, starting with Coach. Our team delivered another strong quarter with the power of the brand's unique expressive luxury positioning once again on display. We continued to infuse innovation across all customer touch points driving engagement, cultural relevance and emotional connections with customers globally. Importantly, the success of our strategies, together with consistent execution is evident in our financial results, with revenue growth at constant currency, significant gross margin expansion and profit gains with further runway ahead.

Now touching on some details of the third quarter. We continue to drive growth in our handbag offering, led by our iconic platforms. The Tabby family delivered another quarter ahead of expectations and nearly doubled versus last year. The introduction of our Quilted Tabby was an incredible success fueled by the top-selling Black Tabby with brass hardware at a premium AUR of $550. At the same time, core Tabby styles remain strong, and we see further opportunity ahead across the entire family. While we continue to animate this family, we're leaning into key styles including Quilted Tabby and see further opportunity ahead.

Across the balance of the assortment, our Timeless Willow and Rogue families remain foundational volume drivers. And we augmented our offering to build relevance with younger consumers, including the Coach Original Swing Zip which has gone viral on social media as well as the Ace Tote, both of which over-indexed with Gen Z customers.

Overall, our creative and innovative products supported an increase in global handbag AUR at constant currency, including growth in North America.

Looking forward, we see continued runway longer term, given our innovation pipeline and brand heat. At the same time, we advanced our focus on building out the lifestyle assortment to expand the brand's reach with consumers with the goal of powering customer recruitment, purchase frequency and ultimately, customer lifetime value. In footwear, sales rose against last year, reflecting success in our core styles, notably the low line sneaker as well as strength in newness, including our Brynn sandal.

In men's, the Gotham, Charter and recently launched Hall families led in the quarter. And in ready-to-wear, we debuted classic denim styles contributing to the strong success of denim across all categories in keeping with market trends.

Next, we created purpose-led storytelling, building meaningful emotional connections with brand. We again blended purpose and product with our spring Find Your Courage campaign, inspiring consumers to embrace confident self-expression. The campaign takes place between the physical and virtual worlds, brought to life with the help of members of the Coach family, including Lil Nas X, Camila Mendes, Young-ji Lee and Wu Jinyan as well as our newest member, imma, a virtual model and digital creator.

Further, we launched deeply unique and immersive retail experiences across the globe, engaging the consumer across all 5 senses. We took Coach Play to Tokyo, opening our largest concept store yet on Cat Street which celebrates the brand's heritage, self-expression and local Japanese culture. Importantly, the store resonates with younger consumers and has outperformed expectations.

In March, we launched the brand's first full-service restaurant at the Grand Indonesia Mall in Jakarta, highlighting Coach's expanding presence in Southeast Asia and our strategy to connect with consumers through experiences beyond product. Overall, the brand's marketing and focus on omnichannel experiences helped to drive new customer acquisition, including nearly 800,000 new customers in North America, of which nearly 60% were Gen Z and millennials. And we've seen gains in unaided brand awareness in the U.S. per our brand tracking work, underscoring that our investments in brand building are working.

Finally, we continue to build our sub-brand, Coachtopia, our reimagination of the product creation process to evolve our vision of circularity, which has driven incremental brand relevancy and desire. During the quarter, we launched the Road to Circularity, a Coachtopia docuseries that explores how we're reimagining waste as a valuable raw material. And in April, we unveiled Coachtopia's inaugural store in Hainan, an initiative that combines our mission of sustainability and our commitment with investing in brand building in China and with Chinese consumers. While Coachtopia remains a small portion of the assortment, we're excited by the momentum we're building specifically with younger audiences.

In closing, Coach is fueling consumer desire, bringing expressive luxury to life while driving sustainable, healthy profit growth that funds investments in brand building. We are confident in the future and the tremendous potential for this iconic brand.

Now moving to Kate Spade. During the quarter, while top line results were challenged as anticipated, profit exceeded expectations in prior year, led by continued gross margin expansion and disciplined expense management. Importantly, we advanced our strategic agenda, sharpening our execution to bring enhanced innovation to consumers. And where we've offered newness, we've seen our customer respond. This progress reinforces our path forward as we build a more profitable business while remaining focused on driving the top line growth required to realize the long-term potential of the brand.

Now touching on our strategic priorities and results in more detail. First, we remain focused on strengthening the brand's core handbag foundation, a requirement to win in today's dynamic consumer backdrop. During the quarter, we broadened the core assortment across channels through new introductions, including the Suite Work Tote, [ CB ] and Spade Flower Signature programs. Importantly, newness drove higher customer recruitment, AUR and gross margin versus the balance of the offering.

At the same time, the performance of newness also reinforces our sense of urgency to refresh our carryover families, which remain pressured. To this end, the pipeline of handbag newness will continue to increase into fiscal year '25, building on the progress we're seeing today and supporting the brand's runway for enhanced revenue and profitability. And as we innovate our core handbag offering, we will also continue to deliver emotional lifestyle assortments, a differentiator for the brand. During the quarter, we delivered growth in jewelry, which is a key recruitment vehicle and profit driver for the brand.

Now turning to our second strategic focus area, powering the omnichannel experience to drive customer engagement. As you know, we recently launched a dedicated Kate Spade outlet.com site, replacing the brand's Surprise site and providing a more seamless way for outlet consumers to discover and shop the brand online. As a result of this effort, our outlet omnichannel customer penetration increased in the quarter and remains an opportunity to drive customer lifetime value over time.

Further, by bringing a more unified experience to consumers across all brand touch points, we can continue to more efficiently scale our marketing and merchandising efforts, supporting our goal of driving sustainable direct-to-consumer growth.

Third, we are focused on creating emotional marketing that fuels brand relevance and heat. During the quarter, we launched a new global campaign, Time to Spring, anchored in the brand codes of joy, color in New York City, which garnered significant media impressions and strong engagement on social platforms. Our marketing investments supported the acquisition of approximately 400,000 new customers to the brand in North America. Moving forward, we will continue to distort our marketing efforts to top and mid-funnel activations that support brand building and growth.

And finally, we will maintain a commitment to operational excellence, positioning the brand for long-term success, this focus has underpinned the brand's meaningful gross margin and profit expansion this year and is embedded in our strategies and ways of working for the future. Overall, we continue to advance our long-term strategies with a relentless focus on accelerating our progress. Our path forward is clear, and our vision for the brand and its potential is unchanged.

Turning to Stuart Weitzman. Results in the quarter were pressured, reflecting headwinds in the brand's two key markets of North America and Greater China. Despite the challenged financial performance, we remain focused on supporting brand health by investing in product and marketing to drive growth and profitability long term.

Touching briefly on these focus areas. During the quarter, we expanded our assortment of casual styles in keeping with market trends. This included new block heels, wedges, ballet flats and loafers, which are performing particularly well across key full-price wholesale accounts, supporting strong sales gains at POS in North America. Further, our fall and pre-spring wholesale bookings are up meaningfully, reflecting our progress in delivering product innovation and relevancy.

Further, we continued to build out new categories with the launch of the brand's men's collection and an expanded sneaker assortment. At the same time, our handbag collection, while still a small portion of the assortment, drove growth at high AUR.

Now turning to marketing. During the quarter, we drove relevance by tapping into cultural moments to amplify our key product strategies. For example, we launched our pre-spring collection with the backdrop of Palm Beach and leveraged a multifaceted influencer approach to reinforce our recently-launched sneaker offering with Sofia Richie Grainge, Suki Waterhouse and Jenna Dewan showcasing Stuart Weitzman trainers.

As a result of these efforts, U.S. Google search queries for the brand increased while consideration also rose in the U.S. per YouGov. Overall, the Stuart Weitzman team is leaning in to accelerate progress and enhance profitability longer term through relevant, differentiated product and emotional marketing to fuel brand desire.

In closing, Tapestry delivered third quarter earnings ahead of expectations, successfully advancing our strategic agenda to power our iconic brands to move at the speed of the consumer in an ever-changing environment while investing in our future. We remain confident in our vision and the significant long-term opportunity to drive sustainable organic top and bottom line gains and meaningful shareholder value.

Before turning the call over to Scott to discuss our financial performance and outlook in more detail, I'd like to provide an update on our pending acquisition of Capri. First and foremost, we remain excited by the opportunity to expand our house of powerful brands, positioning Tapestry as a leader in innovation. The combined company will bring significant benefits to customers, employees, partners and shareholders around the world.

By investing in and growing Capri's brands, we will bring more innovation to more consumers globally, positioning us to better compete within the growing over $200 billion global luxury market for handbags, accessories, footwear and apparel. Further, through this combination, we will be a home and incubator for talent, driving our purpose-led and people-centered mission and continuing to elevate employee and consumer experiences.

With regard to the transaction time line, following unconditional approval from the European Commission and regulatory approvals in China and Japan, the FTC filed a suit on April 22 to block the proposed acquisition. We remain confident in the merits and pro-competitive, pro-consumer nature of this transaction and look forward to presenting our strong legal arguments in court. Our time line always contemplated the potential for litigation, and we continue to expeditiously work to close the transaction in calendar year 2024. In the meantime, and as always, we remain focused on continuing to execute on our current business and strategic growth agenda.

I'll now turn it over to Scott.

[Scott Roe, executive]

Thanks, Joanne, and good morning, everyone. As Joanne mentioned, our fiscal Q3 operating income and EPS exceeded expectations, demonstrating our disciplined execution and agility. Importantly, we significantly expanded gross margin and generated strong free cash flow while investing in future growth drivers for our brands and business.

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 at the low end of our guided range. These results were led by 3% growth internationally, driven by gains in Japan, other Asia and Europe, even as we anniversaried growth from the prior year.

In Japan, sales grew 2%, and in other Asia, revenue rose 15% with growth in each country in the region, notably Korea and Malaysia. In Europe, growth continued with revenue 19% above last year. And in Greater China, as expected, revenue declined 2% as we lapped last year's resurgence in traffic and spend following the end of COVID-related restrictions in the region. In North America, sales declined 3% compared to the prior year amid a challenging consumer backdrop, though gross margin rose significantly and outperformed plan as we supported brand health.

Now touching on revenue by channel for the quarter. Our direct-to-consumer business declined 4% due to declines in North America and Greater China. And in wholesale, revenue grew over 20%, led by strength in international, supported by our strategic growth initiatives on digital platforms.

Moving down the P&L. We delivered the strongest third quarter gross margin in nearly 2 decades, which was ahead of our expectations and 190 basis points above last year. This year-over-year expansion was driven by the benefit of 100 basis points from lower freight expense, FX tailwinds as well as operational outperformance.

SG&A was relatively flat with last year and favorable to our forecast on both a dollar and rate basis, reflecting operational savings as we continue to tightly control costs while making ongoing strategic investments in our brands, people and business platforms. In addition, SG&A benefited from an expense timing shift of approximately $20 million into the fourth quarter, primarily relating to marketing.

So taken together, operating margin expanded 110 basis points, and operating income rose 6% compared to the prior year, well ahead of plan and third quarter EPS of $0.81 beat our expectations by approximately $0.15 fueled by an operational beat as well as the previously mentioned favorable expense timing shift worth roughly $0.06.

Now turning to our balance sheet and cash flows. We ended the quarter with $7.4 billion in cash and investments and total borrowings of $7.7 billion which reflects the bond financing related to the planned acquisition of Capri. Free cash flow for the quarter was an inflow of $79 million. CapEx and implementation costs related to cloud computing were $29 million.

Inventory levels at quarter end were 12% below the prior year, underscoring our focus on disciplined inventory management and driving inventory turn. Looking forward, our inventory is well controlled and current, and we continue to leverage the benefits of our supply chain, navigating the Red Sea disruption with only modest impact, which has been incorporated into our outlook. Importantly, we expect to end Q4 with inventory in line with the prior year, well positioned into fiscal year '25.

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 at an annual rate of $1.40 per share, a 17% increase compared to last year.

Now moving to our guidance for fiscal year '24, which is provided on a non-GAAP basis and does not include any potential impact from the planned acquisition of Capri. We are maintaining our fiscal year '24 EPS outlook supported by the third quarter's outperformance while taking a prudent approach to the fourth quarter planning. For the year, we're modifying our top line outlook to incorporate more moderate trends in both North America and Greater China across brands. That said, our EPS outlook is unchanged, supported by stronger margin results and a commitment to being disciplined stewards of our brands.

Moving to the fiscal year in further detail. We expect revenue of over $6.6 billion, approximately in line with the prior year on a reported basis and representing growth of about 1% on a constant currency basis. Moving to sales details by region at constant currency. In North America, we expect revenue to decline slightly versus last year. In Greater China, we anticipate low single-digit sales growth. In Japan, revenue is forecasted to grow mid-single digits, while Other Asia is expected to increase at a low double-digit rate. And in Europe, we anticipate low double-digit growth.

In addition, our outlook assumes operating margin expansion of 110 basis points. We anticipate gross margin to expand approximately 230 basis points, which includes a benefit from moderating freight costs of roughly 130 basis points. On SG&A expenses, we expect deleverage of roughly 120 basis points, reflecting reinvestments in our brands, people and business in support of growth initiatives.

Moving to below-the-line expectations for the year. Net interest expense is expected to be approximately $12 million, which incorporates higher yield on cash and investments compared to the previous outlook. The tax rate is expected to be approximately 20%, and our weighted average diluted share count is forecasted to be in the area of 233 million shares. So taken together, we continue to expect EPS of $4.20 to $4.25 representing 8% to 9% growth versus last year.

Finally, before contemplating any deal-related costs, we still anticipate free cash flow of approximately $1.1 billion, and we expect CapEx and cloud computing costs to be in the area of $140 million. This forecast includes nearly half of the spend to be related to store openings, renovations and relocations mostly in Asia, with the balance primarily related to ongoing digital and IT investments.

Quickly touching on our outlook for the fourth quarter specifically. Our guidance implies an expected sales decline in the area of 1% at constant currency or roughly 3% below the prior year on a reported basis including an FX headwind of approximately 150 basis points. Further, we anticipate an operating margin decline in the area of 50 basis points, which incorporates the expectation for continued strong gross margin gains, offset by higher SG&A in part due to the negative impact of the expense timing shift from the third quarter. Taken together, EPS for the fourth quarter is forecasted to be in the area of $0.85.

Now to outline our capital allocation priorities looking forward, which are unchanged. First, we will invest in our brands and businesses to support sustainable growth. Second, we will utilize our strong free cash flow for rapid debt repayment. We're committed to maintaining a solid investment-grade rating. To this end, we initiated a long-term leverage target of less than 2.5x on a gross debt to adjusted EBITDA basis and expect to achieve that within 2 years of the Capri transaction close.

Finally, we will return capital to shareholders through our dividend. Importantly, we believe our strong cash flow profile provides us with further opportunity for investment and capital return. Following the achievement of our leverage target, over time, we expect to increase our dividend with the goal of achieving our stated target payout ratio of 35% to 40% and see the opportunity to resume share repurchases in the future.

Before closing, I'd like to touch on the acquisition of Capri and reiterate our confidence in the excellent strategic fit and value creation opportunity it presents. We believe the transaction will enhance our strong organic growth and TSR potential, supported by double-digit EPS accretion on an adjusted basis, enhanced cash flow more than $200 million of cost synergies and compelling ROIC, accelerating benefits for our consumers, employees, partners and shareholders for years to come.

In closing, for the quarter, we built on our track record of operational excellence, driving margin and EPS outperformance against a challenging demand backdrop, advancing our long-term growth initiatives and controlling the controllables. In addition, we generated strong free cash flow while continuing to invest for the future. Our consistent earnings delivery demonstrates the power of our operating model and talented global teams.

Looking forward, we remain confident in our vision and in our ability to realize it with a steadfast commitment to drive sustainable, profitable growth and shareholder returns. I'd like to now open it up for your questions.

[Operator]

[Operator Instructions] We'll take our first question from Bob Drbul of Guggenheim.

[Robert Drbul, analyst]

I was wondering -- can you talk a little bit more just about your -- the confidence that you have in your ability to maybe hit the FY '25 Investor Day EPS target of $5 given I guess, the environment, the backdrop in the second half performance?

[Joanne Crevoiserat, executive]

Sure. Maybe, Bob, starting with this year, fiscal '24, I want to acknowledge that we just delivered a strong earnings fee in our third quarter. And we reiterated our outlook for fiscal '24, that's an important step in getting to our fiscal '25 target. And I would say despite the dynamic environment that we've operated in since sharing those targets 3 years ago, we remain confident in our ability to deliver the earnings target we set. That really reflects our commitment to brand building and our track record of disciplined execution, both of which are driving our results. And hats off to our teams around the world who are maniacally focused on serving our customers with the agility required in this environment.

And what gives us confidence, I would say, Coach, our largest brand, is in a position of strength. Expressive luxury is driving new customer acquisition, new and younger customer acquisition and strong engagement globally. We have brand heat and a pipeline of innovation to come. And I am pleased with the execution and the discipline that's allowed us to grow profit even in a challenged environment.

So we do have a sense of urgency to drive stronger top line growth across our portfolio. We remain focused on those initiatives and investments that will fuel that long-term growth and we see tremendous runway ahead, but maybe I'll turn it over to Scott to share a little more detail.

[Scott Roe, executive]

Sure, Joanne. I'll just start with reiterating what Joanne said, we are on track to deliver the Investor Day EPS targets, even despite a more modest top line. And how are we doing that? Through consistently driving gross margin outperformance, coupled with disciplined expense control. And just remember that $5 is impacted by the pause in share repurchases, which we quantified about $0.35 impact and now FX is working against us a bit.

But the best evidence that we can achieve this $5 as adjusted going forward is to look at what we're doing right now. We've already done it. Our performance over the last 3 years, we delivered double-digit EPS CAGR even in a challenged market. And look at this year, we're on track to deliver high single-digit earnings growth, even on flat sales in fiscal '24.

And so as you look forward, I'm not providing explicit guidance here, but just to give you some idea of our expectations, we'll continue to focus on the factors in our control. Operational gross margin drivers remain intact. Inventories are well controlled and current. And we're continuing to focus on tightly managing our SG&A, investing in growth drivers, finding leverage throughout the P&L.

And I think one of the things you see on display is really, we've remade this P&L to a more variable model since 2019 pre-pandemic. And that allows us to invest, but also to flex the act when we see challenging market conditions, such as what we're experiencing right now. So when I put that together, these factors all reinforce our confidence in our ability to achieve that $5 as adjusted that we laid out as a commitment in our Investor Day.

[Operator]

We'll move next to Ike Boruchow of Wells Fargo.

[Irwin Boruchow, analyst]

Congrats on the quarter in a tough [ space ]. I guess a question and a clarification. I guess maybe, Scott, just can you give us a little -- unpack Q4 a little bit more, specifically Coach North America and China expectations that are embedded in that quarterly guide.

And then I just wanted to make sure I understand. So when you have said the double-digit accretion on the deal for some time. I guess what I'm trying to understand is, is that a year 1 number? I mean I think we all know that since the deal went through. I think that company's EBITDA, at least on the Street estimates have been cut 30%, 40%. So is that more of a multiyear accretion expectation? Or is that a year 1 double-digit accretion number that you guys are kind of talking to. I'm just trying to understand more.

[Scott Roe, executive]

Yes. Sure, Ike. Maybe I'll start with the second, just to knock that one out. It obviously depends on the timing of when we close. But we're talking about a first year accretion. There's seasonality in the business, and there's some variability there. But yes, on a full year basis, we expect that double-digit EPS if you look at the calendar year. What gets a little tricky is when you close and where we're at in our year. But if you look at a 12-month period, that duration, that's what we're speaking to.

And as it relates to what's in the guide, I think you asked about China and Coach and -- so first of all, remember, in the second half, this has been a strange quarter-by-quarter, if you think about China. So in Q2, we were up against the COVID compares. We had really high growth. In the back half, we're up against revenge spending, which puts pressure on the China business.

So if you look at Q4, it's in the area of down double digits from a China standpoint year-on-year. But let me remind you, for the full year, we're growing at a low single-digit rate, even with all that noise in China for the full year.

And as it relates to Coach, maybe I'll throw it over to Todd to comment on Coach.

[Todd Kahn, executive]

Thanks, Scott. Again, we feel very good about where we're at Coach. As you saw this quarter, we delivered our highest gross margin in almost 20 years. And we see continued growth. We're not chasing the last dollar. We're being very disciplined and prudent, but we're growing with the people we want to grow with.

In North America, Joanne mentioned, we grew 800,000 new consumers, 60% are young, Gen Z and millennials. And what's exciting about that is that is the future fuel for sustainable long-term growth. So I'm pleased where we're at. I'm pleased with what we're going to deliver in the year in total and how -- and what it means for our future.

[Operator]

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

[Matthew Boss, analyst]

So Joanne, could you elaborate on the progression of North America demand, for the Coach brand, maybe as the third quarter progressed and more recent trends that you've seen fourth quarter to date? And then, Scott, to your bottom line confidence, could you speak to the drivers of the roughly 200 basis points gross margin expansion in the fourth quarter and just runway for operational gross margin multiyear?

[Joanne Crevoiserat, executive]

Sure. I'll kick it off with an overview of North America, and it's really a continuation of what we've been seeing in the market. The consumer is being more choiceful despite some positive factors in the market. Certainly, the labor market is a positive in the market. We do see consumer confidence is low in North America, likely impacted by sticky inflation.

And so we are seeing an overall more cautious consumer. But in that context, we're seeing innovation continue to win, and Coach has been doing a phenomenal job at delivering innovation. And we're being quite disciplined in terms of how we manage our business for the long term, and our expectations for the business to reflect that.

Where we're meeting the high bar, we're winning. We're driving higher gross margins. Todd just mentioned, highest gross margin in nearly 2 decades. We're driving higher AUR. We're delivering the innovation, and we're acquiring more new consumers to brands. And those new consumers are transacting at higher AUR and higher gross margin. As we see the business unfolds, we're planning prudently to continue to build our brands for the long term.

And then maybe for the second part of your question, Scott, pass it to you.

[Todd Kahn, executive]

Scott, you're on mute, I think.

[Scott Roe, executive]

Thank you, Todd. Sorry about that. Yes. So in the fourth quarter, we're going to grow almost 200 basis points in terms of gross margin, I'd say for the full year to -- if you just think about the overall performance, 230 basis points for the full year, which includes about 130 basis points of freight. So that freight benefit, we said, starts to wane as you move through the year, but it's still a contributor in Q4.

As you think about going forward, as I said in an earlier comment, the gross margin drivers are still intact, right? We are investing in our businesses. We are increasing our marketing investment consistently over time. It's about triple where it was several years ago, and that engagement with the consumer gives us confidence in our ability to continue to get them to vote. The consumer is in charge, they decide that they continue to vote in terms of our products and the AUR that comes with that as well as opportunities on the cost side. We see that we have AUC benefits that we're achieving this year, and we see that continuing on a go-forward basis.

[Operator]

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

[Lorraine Maikis, analyst]

Joanne, you just discussed the challenging macro environment in North America. Are conditions deteriorating enough to cause you to change your strategy? Would you give up some of this gross margin strength to give some of the value back to consumers and drive sales growth?

[Joanne Crevoiserat, executive]

Absolutely not. We are and have been really focused on brand building and building our brands and creating emotional connections with consumers. First, we know that the category we play in is both durable and resilient and powers -- the category powers through downturns historically because the consumer has an emotional connection with it, and we see strong growth in the category going forward.

And we want to be sure that our brands are well positioned regardless of the macro environment as strong brands. And that's been our work for the last 4 years, and we're gaining traction. We offer incredible value in the marketplace to consumers, and that won't change.

The -- where we represent and how connected consumers are to our brands continues to grow, their affinity for our brands continue to grow, and that's where we're investing. That's been -- it's not just about gross margin and the product and the innovation that we're delivering, but it's also about the marketing investments we're making to reach consumers, the investments in digital to reach consumers where we are. And that's the virtuous flywheel that we've been developing, and it's working. So we'll remain committed to it.

[Operator]

We'll take our next question from Brooke Roach of Goldman Sachs.

[Brooke Roach, analyst]

As you think about the opportunity for Tapestry to gain share in North America against this challenged macro, can you talk a little bit more about the innovation pipeline you have on the horizon, and how you're thinking about engaging customers between the outlet and the value-focused channels relative to the full-price channels and what you're seeing there currently?

[Joanne Crevoiserat, executive]

Yes. Innovation is winning, that's what I will say. And we're very focused on delivering the innovation that consumers respond to and recognize. It starts with knowing the customer. And again, our direct-to-consumer platform, our data and analytics capabilities and our consumer insights capabilities are what helped fuel this innovation, right? We're staying close to consumers. And their behaviors and their preferences change rapidly. They have changed over the last 4 years, and I expect they'll continue to change.

And so we're connecting with consumers, understanding consumers at a deeper level and then building product and experiences that speak to consumers. That's the innovation that wins. And we're doing that exceptionally well at Coach. And maybe I'll pass it to Todd to share some of his insights on innovation.

[Todd Kahn, executive]

Thank you, Joanne. I couldn't be more excited with what I see, what we're seeing now both in our stores. But I have the benefit and the privilege of walking through our showrooms and seeing what we're going to deliver 9 months from now. And what we're seeing is innovation across all price points. We're not just innovating at the top. We're innovating at our value channel, and at our retail channel. And we're doing some really interesting things.

We talk a lot about the strength of Tabby. One of the things you're going to see when you visit stores in June, we're going to take Tabby at full price to 100 outlet stores in North America. Because what we recognize is we're spending quite a bit on marketing our image, leaning in on Tabby.

Consumers don't always see the difference like we see between an outlet store and a retail store. And we're taking those Tabbys, they will be sold at full price in outlet because the consumer is coming in with their iPhones and say, I want this bag. And we want to make sure we deliver what our customers want wherever they shop. And that's what's so exciting.

And ultimately, yes, we talk a little bit about the overall backdrop, but we're an emotional category. And what we've seen, we haven't seen any degradation in consumers at our economic levels. So again, we win when we deliver newness, when we deliver a motion when we have purpose-led campaigns. You're seeing that at Coach. This year, we will end over $5 billion. It's the first time in over a decade where Coach has done that, but we're ending at $5 billion in a very healthy, sustainable way. And that's what I feel so good about our future.

[Operator]

Our next question is from Michael Binetti of Evercore ISI.

[Michael Binetti, analyst]

Congrats on a nice quarter. I have two. I guess, if we think about what's baked into the guidance you just gave us for fourth quarter and some of the dynamics and what it could mean as we look to the second half of the calendar year, Scott, would you mind helping us think through maybe the upside and downside scenarios after your fourth quarter? Or maybe the puts and takes around the multiyear revenue CAGRs you spoke to at the 2022 Analyst Day in regards to fiscal '25?

And then on the AUR comments that you guys made earlier, I know you mentioned some confidence in the ability to keep driving AUR -- handbag AURs. Maybe walk us through some of the drivers that you look at to build to that. We've heard, I guess, as earnings season starts and retailers maybe pointing some concerns that the luxury brands have taken too much pricing on handbags and may need to start moderating a bit.

Have you seen anything in the marketplace yet? What levers do you think about in your business if you need to kind of defend pricing if you do see that spread to luxury brands that's provided a nice umbrella that you've spoken to over the last few years starts to reverse a little?

[Joanne Crevoiserat, executive]

Yes. Let me speak to the second part of that first, maybe then, Scott, toss it to you. As it relates to AUR and margin growth, you've seen us consistently deliver. We've been on this path even -- we started even before the pandemic. And it really starts with understanding customers and what customers value. I mean AUR at the end of the day is a function of what's sold, not what's offered.

So we're -- ultimately, it's the consumer's decision. You mentioned the top of the market. The top of the market has moved price considerably higher. And in that context, the value that we deliver to consumers is incredibly stronger. And so as we play within the dynamics of this very fragmented market where the consumer has a lot of choice, we have an opportunity to know the consumer better, understand what they value and deliver that value in the form of innovation. And that's what's been driving AUR and our gross margin growth over the last few years. And those are deeply embedded capabilities at Tapestry and that's how we're winning.

So that's why we expect to be able to continue to do this. The value that we deliver in the marketplace is incredibly strong. We know our consumers, and we can then take those insights and deliver innovation behind it. And then maybe, Scott, over to you.

[Scott Roe, executive]

Yes, sure. Michael, you're probably not surprised. We're not giving any guidance on '25, right? So I would just repeat a couple of things that I said earlier. First of all, there's agility in the model, it's on display. It has been since the Investor Day and our ability to deliver earnings on a lot of different conditions and difficult backdrop.

The other thing I'd say is we continue to invest in the brands, continue to invest in marketing, but we're also reading and reacting, right? And so I'll give you an example. We talked about -- in this last quarter, we had made a decision within our brands to spend more on the top of the funnel and less on the bottom of the funnel. That can hurt sales in the short term.

You get bottom-of-the-funnel sales, but from the quality of sales and the acquisition of new customers, which you saw 1.2 million in the quarter, about half of which are millennial and Gen Z. That really speaks to confidence in the future, and these are some proof points that help us or give us confidence that we can grow both top line and bottom line in the future.

[Operator]

Our next question is from Oliver Chen of TD Cowen.

[Oliver Chen, analyst]

The Coach gross margin continues to really impress. What are your thoughts longer term? And should you invest more just to make sure you're being proactive about how well you're doing there? And as you think about pricing, it continues to impress as well. What are you seeing with elasticity? And how are you thinking about like-for-like relative to mix? The Tabby momentum is really impressive.

Lastly, about the geographies. Would love your thoughts on the China customer. Relative to U.S., China has been fairly mixed with some of the macros in housing and traffic being general concerns. Meanwhile, we've seen a linear U.S. customer. Just would love thoughts on that.

[Joanne Crevoiserat, executive]

Todd, do you want to kick us off with the Coach gross margin and your long-term outlook? And then I'll follow up with the -- on the China piece.

[Todd Kahn, executive]

Perfect. Thanks. Yes, we feel good, Oliver, about our gross margin and the sustainability of our growth margin. Now obviously, this was a standout quarter. I want to make sure no one expects every quarter to be 77%, but we like the neighborhood, and we're delivering on an annual basis. And we are investing. I mean, again, when we talk about investing, we're investing in the quality of our product. We're investing in marketing.

If you think about it, historically, Coach spent 3% on marketing. We're spending over 8% on marketing today. And as Scott indicated in the last question, we've shifted even more recently how we're spending in that marketing. We're spending more and more on top-of-funnel marketing to tell stories, to create more connection with our consumers. We're doing that because we believe in the long-term sustainability and the customer acquisition that, that brings to the brand.

In terms of pricing, I mean, we touched on this a little bit, but I feel -- and Joanne touched on this, but I think in terms of AUR, at Coach brand specifically, we feel very good about sustaining AUR growth for 4 reasons. Again, it goes back to innovation and storytelling, something I've talked about over and over again. A motion always trumps price. Consumers have hundreds of choices. Every day, we win because we connect with them emotionally.

Third, traditional European luxury dominates the category. And when we compare our product with that traditional European luxury, the consumer is seeing the value, and that's very important.

And lastly, something that Scott always touches on, we're so disciplined in our inventory. We are -- our whole structure, if you think about the last 4 years, Joanne led this, we reduced our SKU count dramatically, and we leaned in on important families. And that takes a lot of the pressure off that constant churn on fashion. That's what you're seeing with Tabby, that's what you're seeing with Willow, Rogue. We have families that are sustainable, that are emotional, that the consumer connects with.

[Joanne Crevoiserat, executive]

Thanks, Todd. Yes, thank you. And Oliver, related to the consumer in China, like many others, we're seeing macro headwinds. There are -- there is lots of noise in the numbers. Last year, we're lapping shifts in the New Year holiday during the quarter, but also importantly, that post-COVID revenge spending.

I do think it is important to note that our outlook for the year continues to expect low single-digit growth for the year in China. So the quarterly flow of that has been quite dynamic, but we still expect growth for the year. And our view on the long-term opportunity in China has not changed. And our team -- we have tremendous teams on the ground. We've been in the market, as you know, for two decades, over two decades and our teams are doing an excellent job building our brands and connecting with consumers in this dynamic environment.

I was just in the market two weeks ago. I was meeting with teams and our partners in the region. The teams are showing agility and moving with the consumer as their shopping behaviors and preferences shift. And you saw some of our wholesale outperformance in international was related to how our teams are reading where the consumers are moving and making sure we're showing up and our brands are connecting with consumers where they are. We are seeing consumer desire for our brands continue to be strong, and purchase intent in our category is still high with consumers. So we continue to invest in the market and brand building activities to support that long-term potential that we see.

[Operator]

Our next question is from Mark Altschwager of Baird.

[Mark Altschwager, analyst]

So Coach continues to demonstrate its ability to drive stable results despite the choppier macro. So the tools and playbook really seem to be working. So what do you think is holding back Kate at this stage? Is there a wholesale story going on there? And do you think that the success at Coach and the success you're having with younger customers is having an impact on Kate at this point?

[Joanne Crevoiserat, executive]

No, our opportunities with Kate, and I appreciate the question, Mark. At Kate, we are focused on building a stronger brand and a bigger brand. We see tremendous potential in the future for Kate. And we're doing both building the profitability of the brand as well as establishing a stronger brand with our consumers.

So in the quarter, you saw us expand gross margin, operating margin and profit versus last year. It exceeded our expectations. So the discipline management of the business remains intact. We're executing with discipline, and that is embedded in our ways of working going forward. So we're focused on increasing the profitability of the brand. And from that base, also an opportunity to grow the top line.

And in that, we see an opportunity to increase the -- or improve the execution in 3 areas, and we've talked about this. One is strengthening the core handbag foundation. Coach has 80 years of archives that we're pulling from and really driving. Kate is building those core handbag ideas. And the delivering of innovation, you've heard that as a theme at Tapestry, where we're really winning and where we see the customer respond is when we're delivering newness and innovation in our assortments.

And that's what we're focused on delivering. And we're increasing that newness and innovation at Kate. Where we're delivering that, it's working. And that newness and innovation will grow, as we've mentioned, into fiscal '25.

We're also focused on the omnichannel experience. We launched outlet.com. We have more omnichannel customers for that seamless experience. And driving more emotional marketing. We're talking about shifting our investments into top of funnel. So all the things that Todd just talked about at Coach are things we're applying to Kate. Kate is in earlier innings. And we continue to have confidence in the runway that we see ahead for the brand. We're being disciplined about our execution and building the profitability while we continue to execute on the things that will drive and help us achieve that long-term brand ambition.

[Mark Altschwager, analyst]

And maybe one more quick one for Scott on fiscal '25. The agility in the model came up a couple of times today. Is sales growth needed to hit the earnings goals? Just trying to better understand the range of scenarios you're contemplating there.

[Scott Roe, executive]

Yes. So again, I'm not going to get into that level of specificity, but let me be clear, we expect to grow, right? We've got the building blocks in place. We're acquiring consumers that we believe have a strong lifetime value. We're putting the investments in marketing and behind the business, and we've got an innovation pipeline. So we'll come back and give you more soon, but we do expect to grow. That said, we've demonstrated this year that even on no growth essentially, flat business, we can and have the levers to deliver profitability.

So a combination of both those things that give me a lot of confidence. Think about what this model does as it's been remade and the efficiency that we've been talking about as we achieve the growth that we expect to in the future. And this becomes a profit and a cash machine on an even higher level than the commitments that we've made publicly.

[Operator]

[Operator Instructions] We'll move next to Rick Patel of Raymond James.

[Rakesh Patel, analyst]

Really good control of SG&A. Can you talk about which levers you pulled in the quarter to pare back the growth there and touch on how we should think about OpEx going forward in terms of areas where you see opportunity for better control versus areas you need to make more investments in?

[Scott Roe, executive]

Yes. Maybe I'll start. Listen, we continue -- the model really hasn't changed. We continue to invest in our people's -- in our people, capability and in marketing. And those are the areas that you see that we invested in the quarter. And we're finding it levered, really. Throughout the rest of the P&L, I'd remind you about 2/3 of our rents now have a variable component. And again, we're spending about 9% in terms of marketing. So that's -- that really isn't a change and we've been pretty consistent in the way we're looking at that from a go-forward standpoint.

[Operator]

This does conclude our question-and-answer session. I'd be happy to return the call to Joanne for concluding remarks.

[Joanne Crevoiserat, executive]

Well, thank you. And thank you for joining us and for your interest in our story, and thank you to our incredible teams around the world who continue to drive our results against the dynamic backdrop.

Our disciplined approach to brand building and our commitment to operational excellence were once again on display in the third quarter. We're delivering innovation for consumers and driving profit and earnings growth. I'm confident in our future and the significant opportunity to drive sustainable growth and shareholder returns.

Thanks, again, and have a great day.

[Operator]

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