Tapestry, Inc. (TPR) Q2 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary highlights strong financial performance, with significant revenue growth in key regions and brand momentum. The Q&A section reveals management's confidence in sustaining growth through strategic initiatives like AI implementation and customer acquisition. Despite some unclear responses, the overall sentiment is positive, supported by increased shareholder returns and operational discipline. The positive guidance and strong regional performance suggest a favorable stock price movement in the short term.

Key Financial Performance

Pro forma revenue growth 18% year-over-year increase, driven by strong global momentum and strategic actions.

Adjusted operating margin Expanded by 390 basis points year-over-year, attributed to operational efficiencies and disciplined execution.

Earnings per share (EPS) Increased by 34% year-over-year to $2.69, exceeding expectations due to strong revenue growth and margin expansion.

Coach revenue Increased by 25% year-over-year, driven by customer acquisition, strong demand for leathergoods, and growth in key geographies like North America (27%), Greater China (37%), and Europe (26%).

Kate Spade revenue Declined by 14% year-over-year, reflecting deliberate actions to reset the brand and reduce promotional activity.

Gross margin Increased by 110 basis points year-over-year to 75.5%, supported by operational efficiencies and the divestiture of Stuart Weitzman.

SG&A expenses Rose by 8% year-over-year but leveraged by 270 basis points, reflecting focused reinvestment in marketing and operational discipline.

North America sales Increased by 17% year-over-year, led by 27% growth at Coach, with share gains and margin expansion.

Greater China revenue Increased by 34% year-over-year, driven by broad-based growth across channels and market share gains.

Europe revenue Grew by 22% year-over-year, reflecting strength in the direct business and market share gains.

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Operating Highlights

Fashion innovation and product excellence: Coach led the way with strong demand for leathergoods, driven by higher AUR and unit volume. Key products like the Tabby franchise and new launches such as the Margot family in footwear contributed to growth.

Footwear growth: High single-digit growth in footwear, driven by sneakers and new launches like the Margot family.

Global market share gains: Double-digit revenue growth in North America, Greater China, and Europe, significantly outpacing the industry.

China-specific collaboration: Launched a collaboration with CLOT, a leading Chinese streetwear brand, to enhance market relevance in China.

Customer acquisition: Acquired 3.7 million new customers globally, with a focus on Gen Z, enhancing repeat purchasing and lifetime value.

Direct-to-consumer model: Achieved double-digit growth in stores and online with strong profitability.

Marketing investments: Increased marketing spend by 40% to drive long-term demand creation, focusing on Gen Z and reducing promotional messaging.

Retail experience enhancement: Introduced unique store formats and remodeled locations to elevate consumer engagement and brand desirability.

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Risk or Challenges

Kate Spade revenue decline: Revenue declined 14% in the second quarter, partly due to deliberate actions to reset the brand through a pullback in promotional activity. This reflects challenges in maintaining growth while implementing a turnaround strategy.

Tariff and duty impacts: Tariffs and duties negatively impacted gross margins, with a 140 basis point impact on Coach and a 520 basis point impact on Kate Spade. This creates financial pressure and limits profitability.

Kate Spade profitability: Kate Spade is expected to report a modest profit loss for fiscal '26 due to outsized tariff impacts and brand investments, indicating ongoing financial challenges.

Japan sales decline: Sales in Japan declined 6% in the second quarter, driven by an intentional pullback in promotions, which could affect market share and revenue in the region.

Marketing investments: Marketing expenses increased by approximately 40% year-over-year, representing 11% of sales. While this supports long-term brand building, it adds to short-term cost pressures.

Kate Spade assortment reduction: Handbag styles were reduced by 40% during the holiday season to focus on big ideas, which could limit product variety and consumer choice in the short term.

Economic and regional risks: Revenue growth in Greater China and Europe is strong, but economic uncertainties and regional risks could impact future performance in these key markets.

Coach's reliance on Gen Z: Coach's growth is heavily reliant on Gen Z customer acquisition, which could pose a risk if preferences shift or competition intensifies.

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Guidance & Outlook

Revenue Expectations: For fiscal '26, revenue is expected to exceed $7.75 billion, representing pro forma growth of approximately 15% on a nominal basis or 14% constant currency. By region, North America revenue is expected to increase low double digits, Europe by around 20%, Greater China by over 25%, Japan to decline high single digits, and other Asia to grow low double digits. By brand, Coach is expected to grow high teens percentage, while Kate Spade is expected to decline high single digits.

Operating Margin: Operating margin expansion of approximately 180 basis points is anticipated for fiscal '26. Gross margin is expected to increase by about 20 basis points, with operational gross margin expansion of roughly 180 basis points. SG&A leverage is expected to improve by approximately 160 basis points.

Earnings Per Share (EPS): EPS for fiscal '26 is forecasted to be between $6.40 and $6.45, representing growth of over 25% compared to last year.

Capital Expenditures: CapEx and cloud computing costs are expected to be around $200 million for fiscal '26, with 60% allocated to store openings, renovations, and relocations, and the remainder for IT and digital investments.

Free Cash Flow: Adjusted free cash flow for fiscal '26 is anticipated to be approximately $1.5 billion.

Marketing Investments: Marketing expenses are expected to increase by around 130 basis points, approaching 12% of revenue, to support long-term demand creation and brand building.

Shareholder Returns: The company plans to return $1.5 billion to shareholders in fiscal '26 through dividends and share repurchases, including $1.2 billion in share repurchases and over $300 million in dividend payments.

Second Half Revenue Growth: Total pro forma revenue is expected to increase at a low double-digit rate in the second half of fiscal '26, representing over 20% growth on a 2-year stack basis. Coach is expected to grow mid-teens in the second half, while Kate Spade is expected to decline mid- to high single digits.

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Shareholder Return Plan

Quarterly cash dividend: $0.40 per common share, representing $81 million in dividend payments for the quarter.

Annual dividend rate: $1.60 per share, with over $300 million in dividend payments expected for fiscal '26.

Share repurchase in Q2: $400 million spent to repurchase approximately 3.6 million shares.

Year-to-date share repurchase: $900 million spent to repurchase approximately 8.3 million shares at an average stock price of $109.

Fiscal '26 share repurchase outlook: $1.2 billion in share repurchases, increased from the prior outlook of $1.0 billion.

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Key Q&A

Q:What gives you confidence in delivering the fiscal '26 earnings guide of $6.40 to $6.45, which is 15% higher than the forecast 3 months ago?

A:Joanne Crevoiserat highlighted the systemic approach to building brands and business for sustainable growth, driven by understanding consumers, delivering compelling products, and investing in customer acquisition. Scott Roe added that operational discipline combined with growth has created a powerful model, with increased marketing investments, gross margin improvements, and strong cash flow of $1.5 billion, all contributing to confidence in future growth.

Q:What gives you confidence that the Coach brand can sustain its strong growth momentum in North America despite tough comparisons?

A:Todd Kahn expressed confidence based on strong performance during the critical holiday period with lower promotions, exceptional margins, and increased marketing. He cited strong consumer acquisition, particularly among Gen Z, balanced growth across product categories, and significant runway in units as key factors supporting long-term growth.

Q:Can you elaborate on the strength and outperformance in China and Europe?

A:Joanne Crevoiserat noted significant share gains in China driven by new customer acquisition, particularly among Gen Z, and strong digital growth. In Europe, the focus is on disciplined brand building and attracting young local consumers. Todd Kahn added that targeted marketing and a tactical city approach in China, along with expansion into new markets like France in Europe, are driving growth.

Q:Can you provide more detail around AUR and the opportunities going forward?

A:Joanne Crevoiserat emphasized that AUR growth is driven by brand heat, innovation, and quality, with new customers entering at higher AURs. Todd Kahn added that the $200 to $500 price range offers room for growth, with product animation and mix contributing to AUR increases. He stressed maintaining value and avoiding artificial promotions to drive sustainable growth.

Q:How is Tapestry harnessing the power of AI, and what are the expected benefits?

A:Joanne Crevoiserat explained that AI tools are embedded across the value chain, from product development to marketing. Designers use AI to iterate on sketches and speed up product development, while marketing teams leverage AI for consumer insights and content creation. Scott Roe noted that over half of the $200 million CapEx is allocated to technology, with AI driving both efficiency and growth.

Q:Are you seeing any signs of demand slowdown in signature styles like Tabby and Brooklyn?

A:Todd Kahn stated that demand remains strong and balanced across product categories, with icons like Tabby and Brooklyn continuing to fuel growth. He emphasized that the focus is on sustainable growth through customer acquisition and retention rather than artificial promotions.

Q:What is driving the gross margin outperformance, and how are you thinking about the opportunity in the back half of the year?

A:Scott Roe attributed gross margin outperformance to AUR growth and supply chain efficiencies. He noted that the impact of tariffs will be more pronounced in the second half of the year but expressed confidence in mitigating actions and continued gross margin improvements in fiscal '27 and beyond.

Q:What is driving the acceleration in unit growth, and what do you see as durable?

A:Todd Kahn highlighted customer acquisition as the primary driver of unit growth, with younger customers showing higher retention rates. He noted opportunities in categories like footwear, which have higher purchase frequency, and emphasized a focus on sustainable growth without relying on promotions.

Q:How do you instill a culture of innovation while ensuring no product families dominate sales?

A:Todd Kahn explained that the creative team focuses on balancing relevance to Gen Z with the Coach brand identity. The team avoids chasing trends and instead creates them, ensuring a balanced product portfolio where no single family accounts for more than 10% of sales.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the long-term SG&A leverage potential despite being asked about it. They also did not elaborate on the exact timing and scale of AI-driven demand-side payback, leaving some aspects of these topics unclear.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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TPR Report

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