TAPESTRY, INC. TPR

Coach delivered a breakout quarter with 10% constant currency revenue gains, driven by exceptional margins including 270 basis points of gross margin expansion and a 210 basis point lift in operating margin. This success is underpinned by strong Gen Z customer acquisition, robust performance in core leather goods (e.g., Tabby family doubling, New York family exceeding expectations), and global outperformance, particularly in North America and Europe, alongside a return to growth in Greater China. The brand's focus on innovation, compelling value, and emotional storytelling continues to resonate with consumers, driving strong brand heat and desire, as evidenced by its recognition as the world's fifth Hottest Brand by The Lyst.

Despite profit results meeting expectations, Kate Spade's revenue declined 10% in the quarter. Under new CEO Eva Erdmann, the brand is undergoing a multi-quarter journey to reset for sustainable, profitable growth. This involves streamlining the product offering by reducing handbag styles by over 15% by fall, decreasing promotional activity, and accelerating marketing investments into upper-funnel, purpose-driven campaigns. The strategy aims to rebuild brand relevancy, drive new customer acquisition, and focus on building blockbuster handbag families, leveraging learnings from Coach's success.

Tapestry's international revenue rose 7% at constant currency, significantly outpacing expectations across all regions. Europe led with an impressive 42% growth, driven by increased local consumer spend and strong Gen Z customer acquisition. Greater China returned to growth, rising 2% in the quarter, attributed to improved brick-and-mortar traffic and positive digital trends, demonstrating the effectiveness of strategic initiatives and investments in the region. Other Asia also saw 11% growth, while Japan experienced a 5% decline.

The company achieved a record second quarter gross margin, expanding 280 basis points YoY and well ahead of plan. This expansion was primarily driven by 260 basis points of operational outperformance, complemented by a 20 basis point benefit from lower freight expense. Management attributes this to sophisticated strategies in Average Unit Retail (AUR) and Average Unit Cost (AUC), coupled with investments in brand love and compelling product offerings, which provide flexibility to accelerate investments while delivering strong profit growth.

Following the termination of the Capri merger, Tapestry executed a $2 billion accelerated share repurchase (ASR) program. Combined with an expected $1.40 per share dividend for FY25, the company is positioned to return over $2 billion, or more than 100% of free cash flow, to shareholders in fiscal year 2025. The capital allocation strategy prioritizes investing in brands for long-term growth and consistent dividends, while maintaining a strong balance sheet with a long-term gross leverage target below 2.5x and $800 million remaining on prior share repurchase authorization.

Tapestry successfully acquired approximately 2.7 million new customers in North America, with over half being Gen Z and millennials who transact at higher AURs and exhibit strong retention rates, particularly at Coach. Digital channels grew high single digits, representing about one-third of revenue, while global brick-and-mortar sales saw low single-digit growth. The company emphasizes compelling omnichannel experiences, leveraging capabilities to enhance customer engagement across all touch points, including successful Coach Play concept stores that drive higher Gen Z traffic and dwell times.