Good day and welcome to this Tapestry Conference Call. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, today’s call is being recorded.

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

Good morning. Thank you for joining us. With me today to discuss our second quarter results as well as our strategies and outlook are Joanne Crevoiserat, Tapestry’s Chief Executive Officer; and Scott Rowe, 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 would now like to turn it over to Joanne Crevoiserat, Tapestry’s CEO..

Good morning. Thank you, Christina and welcome everyone. As noted in our press release, we delivered record second quarter earnings despite the challenging backdrop. During the key holiday season, where brand magic, compelling product and operational excellence are required to win with consumers, we outperformed expectations.

This is a direct reflection of our talented teams and the benefits of our globally diversified business model, which continue to fuel innovation and customer engagement across our portfolio.

Importantly, we remained disciplined stewards of our brands, which is underscored by gross margin expansion, as well as the ongoing investments we are making to support our long-term growth agenda. Now touching on the strategic and financial highlights of the quarter.

First, we powered global growth, delivering low single-digit constant currency revenue gains excluding greater China, which experienced incremental pressure associated with COVID. These results were led by double-digit sales increases in Europe, Japan and other Asia, which together outpaced our expectations.

In North America, as expected, we realized the slight decline in revenue, amid a difficult consumer backdrop. We did this while driving higher gross margin, operating margin and profit dollars compared to both prior year and pre-pandemic levels, underscoring our commitment to brand building and operating discipline.

In Greater China, sales declined 20% on a constant currency basis. This was below our expectations as we like many others experienced greater than anticipated COVID-related disruption.

That said, following the change in the COVID containment policy in China, we experienced a meaningful improvement in traffic trends, driving a positive Lunar New Year performance and a solid start to the third quarter. Second, we continued to build lasting customer relationships.

During the quarter, we acquired nearly 2.6 million new customers in North America alone. Importantly, these customers transacted at higher AUR than the balance of our customer base. At the same time, nearly half of these customers were millennial and Gen Z consistent with our strategy to attract younger consumers.

We also drove higher average spend across our customer base, which included an increase in units per transaction, reflecting the rising traction of our lifestyle offering and focus on solidifying our brands as gifting destinations during the holiday season.

Third, we delivered seamless omni-channel experiences harnessing the power of our direct-to-consumer business model and highlighting our ability to meet consumers where they are shopping. Excluding Greater China, we drove a low single-digit increase in direct-to-consumer sales at constant currency.

This was fueled by a mid single-digit growth in brick-and-mortar sales as consumers embraced a return to in-person experiences. We lean into this shift welcoming more customers to our stores around the globe, where we leveraged our expertise and world class field teams to deliver exceptional customer experiences.

Given this dynamic, our digital business declined low single digits as anticipated. With that said, digital sales were 3x ahead of fiscal '19 levels, and represented one-third of total revenue, underscoring the continued importance of this channel. Next, we've continued to invest in our platform capabilities.

In fact, this marks the first holiday season that all our brands were on our digital enterprise platform, which was designed to enhance engagement and simplify the customer journey.

In addition, we leverage new data analytics capabilities to optimize our product allocation processes, such as utilizing artificial intelligence to forecast customer demand, and better position inventory and stores.

This led to an increase of inventory availability and help to ensure our product was in the right place at the right time, as we match supply with demand to help deliver superior customer experiences. Before moving on, I want to recognize the incredible work of our teams across the organization.

Their ingenuity and partnership drove our results and importantly fueled omni-channel engagement across our brands. Fourth, on a constant currency basis, we drove handbag AUR gains globally and in North America.

This reflects a blend of magic and logic, our commitment to driving fashion, innovation and product excellence informed by analytics and consumer research. Together this supported our ability to drive gross margin expansion in the quarter, allowing us to capitalize on lower freight costs and drive the savings to the bottom line.

Overall, we generated second quarter earnings well above expectations supported by stronger-than-anticipated margins. On a currency neutral basis, EPS rose 10%, which we accomplished despite headwinds in China, and continued investment in our platform capabilities and our brands.

Building on this performance, we are raising our earnings outlook for the fiscal year, demonstrating the power of brand building and customer centricity augmented by an agile operating model and financial discipline.

In addition to our financial progress, I'm proud of the work we've done to continue to advance our corporate responsibility strategy, which we're calling the fabric of change.

Last month, we published our 10th annual corporate responsibility report, highlighting our progress and launching new and bolder ambitions to support an increasingly equitable and sustainable future for our business and our planet. Now turning to the highlights across each of our brands, starting with Coach.

In the second quarter, our revenue outperformed expectations while driving an increase in operating margin to over 31%, despite facing incremental headwinds from Greater China. We advanced our strategic initiatives which fueled our results.

First, we remain focused on our core leather goods as we continue to build equity in our most important families, while simultaneously introducing emotional newness into the offering. Our iconic platforms Willow, Tabby and Rogue drove our handbag performance in the quarter.

Willow remain the number one handbag family with a timeless aesthetic and compelling functional silhouettes. Rogue was again a top seller with notable strength in North America at premium AUR. The Tabby collection continued to resonate with consumers led by outperformance in the core shoulder bag.

We continue to animate this family introducing new colorways and fabrics including Shearling to add depth and excitement. And following its strong launch in the first quarter, Bandit, outperformed expectations and was the key recruitment vehicle with approximately 40% of shoulder bag sales coming from new customers at strong AURs.

Based on the consumer demand we've seen, we are further investing behind this collection which is emerging as an iconic family. At the same time, we fueled innovation through trend right launches with a focus on appealing to younger consumers. We relaunched the Demi bag, an icon from our archives, and a blend of organic cotton and recycled polyester.

We also continue to lean into the micro and mini handbag trend including our studio baguette and mini Tabby, which resonated with Gen Z consumers. These examples showcase the innovation we're delivering to translate fashion trends into our brand language.

Overall, our product assortment fueled a mid-single-digit constant currency gain in handbag AUR, both globally and in North America. Importantly, our brand strength and pricing discipline helped to drive gross margin expansion in the quarter.

Second, we focused our marketing investments on brand building activities to create emotional connections with consumers harnessing the brand's unique purpose. Our first Courage to be Real campaign featuring Global Ambassador, Lil Nas X, cut through with consumers with its message of confidence and authenticity.

Following the launch last September, the campaign video has approximately 350 million views, and we’ve seen improvements in purchase consideration for Gen Z consumers per YouGov.

In addition, we continue to test and learn new ways to engage consumers on digital channels in keeping with our multifaceted marketing strategy designed to increase customer lifetime value. For example, we utilized an array of YouTube shorts to deliver high-impact brand and product stories.

As a result of these efforts and our innovative product offering, we acquired nearly 1.5 million new Coach customers in North America alone. Importantly, these customers entered the brand at a higher AUR than the balance.

Third, we drove double-digit top line gains in our lifestyle offering at constant currency, an area of long-term opportunity for the brand. In footwear, outsized growth was led by trend-right styles, including the Leah Loafer and the Men's Low Line sneaker as well as boots and booties across genders.

In men's, revenue growth was fueled by our core leather goods families, notably the Gotham, League, Charter and Hitch.

And in ready-to-wear, we continue to see success in both men's and women's styles featuring iconic branding across outerwear, including puffers with Signature C as well as our cut and so gifting items adorned with Rexy, our brand's favorite mascot.

Fourth, we focused on creating omni-channel experiences that resonate with consumers by communicating our brand's purpose of self-expression. We launched an array of in-person experiences, including a one-of-a-kind Coach Mart in Japan inspired by the region's iconic local convenience stores.

At the end of December, our collaboration was a beloved White Rabbit candy brand debut in China in anticipation of the Lunar New Year holiday, celebrating the year of the rabbit. We amplified this multi-category collaboration through exciting activations and including an experiential event at the Bund in Shanghai.

We are also connecting with new customer segments through immersive online environments and high-impact content to allow Coach's physical world to have greater reach. This included partnerships with digital artists, 3D installations and high-profile physical retail locations and hyper-local mobile games.

In closing, we delivered a solid holiday quarter, highlighted by margin expansion despite the challenging backdrop. Our success is rooted in our strategy of bringing expressive luxury to life through a clear understanding of our target consumer and an unwavering commitment to our brand purpose. Coach is truly unique.

It's a brand that enables confidence, self-expression and authenticity with products crafted to last. Building on the strong foundation, we are confident in our ability to write the next great chapter of profitable growth for this iconic brand. Now moving to Kate Spade. We delivered second quarter revenue ahead of our expectations.

These results were driven by outperformance during peak selling periods, including a record Thanksgiving week and CyberMonday event in North America.

Importantly, we continue to invest in and advance the brand strategic priorities, becoming more emotional, more lifestyle and more global to drive lasting customer relationships and deliver balanced and sustainable growth. Touching on the details of the quarter.

First, we created emotional connections with consumers through a focus on delivering an innovative and distinct offering. To this point, we reinforce the pillars of our handbag collection, highlighted by the Knott and Katy families, which continue to fuel our performance.

And in December, we introduced the Gramercy, which has delivered strong performance and has over-indexed with new customers, underscoring the opportunity to expand the silhouette going forward. In addition, we launched new branding through a chenille monogramming platform on our Manhattan [indiscernible].

Given the success of this style, we're expanding our logo offering with further iterations of the Spade flower across the assortment, which we believe represents an important platform for future growth and innovation. We also amplified our novelty offering, a differentiating element of our assortment and an important vehicle for brand storytelling.

Our Zebra collection was particularly successful, while the candy-themed offering was a hit with consumers. At the same time, the [indiscernible] slingback pump, which featured a champagne corkill [ph] was a top-performing style within footwear.

Overall, our product initiatives, coupled with our use of data to deepen our understanding of consumer preferences, supported mid-single-digit handbag AUR growth at constant currency both globally and in North America despite more normalized promotional levels.

This season, the North America consumer was more value-driven, over-indexing during holiday sale periods, which resulted in promotions that were above the prior year, though below 2 years ago.

Importantly, we delivered overall gross margin improvement as we continue to manage the business for the long-term, balancing brand health and inventory management. Second, we remain focused on our strategy of becoming more lifestyle, delivering mid-teens revenue growth in the assortment.

Importantly, we continue to see the customers who enter the brand through these categories are our highest value customers demonstrating the importance of lifestyle as a long-term driver of sustainable growth.

In ready-to-wear, our collection of festive sweaters and skirts for the holiday season as well as trend-right outerwear pieces helped fuel mid-single-digit sales growth. And in footwear, our evergreen styles, notably boots and booties, led our performance, while jewelry delivered growth with strength across core and fashion pieces.

Third, touching on marketing. We expressed the unique world of Kate Spade leaning into the power of brand storytelling and community. Our Have A Ball campaign reinforced Kate Spade's Joy Colors life purpose in a celebratory spirit, highlighting the brand as a gifting destination for the holiday.

We synchronized activations to amplify our message across touch points, including global pop-up center around our candy collection, which were successful in attracting new customers. From a digital perspective, we continue to diversify across social platforms, notably TikTok and YouTube where we focused on engaging with a younger consumer.

Taken together, our impactful marketing helped to fuel the recruitment of approximately 1 million new customers in North America with these customers continuing to enter the brand at a higher AUR than the balance. Additionally, we saw an overall increase in spend per customer.

Importantly, we are engaging with consumers through our social impact effort, which connects our customers to our brand beyond product. Our purpose focuses on women's empowerment and mental health. As such, we have broadened our brand work to reach younger and more diverse audiences, notably through our social impact council.

Finally, in keeping with our priority of becoming more global, we remain focused on meeting our target consumer where they shop around the world. To this end, we continue to roll out our new store concept, which began with our Marina Bay Sands Store in Singapore in October.

Since then, we have expanded the concept further to Taipei and Chicago where we have seen strong initial reads. In closing, we continue to make important progress in advancing Kate Spade's strategic growth agenda. It is a global lifestyle brand synonymous with optimism and joy, a differentiated positioning with global relevance.

As we enter the brand's 30th anniversary year, we have an appreciation for its past and confidence in the future. With an unwavering eye on our consumers and our unique DNA, we will continue to drive innovation while investing in capabilities to support sustainable, profitable growth. Turning to Stuart Weitzman.

Revenue declined in the quarter, impacted by the brand's significant exposure to China as well as a decrease in wholesale, reflecting in part a reduction in off-price shipments as we remain focused on tight inventory management and brand elevation. Importantly, in our North America direct business, sales rose mid-single digits. Turning to the details.

We made further progress on our strategy to win with heat and improve brand awareness. First, we curated an assortment of high motion product across occasion wear and casual styles. We continue to lead with our iconic styles as we build out the offering to engage with a wider set of consumers.

Soho remained atop collection with notable success among younger customers given the family's on-trend lug sole. The Stuart, a new staple in our offering, resonated across age groups, while the iconic land styles acted as a strong recruitment tool. Additionally, we were pleased with the consumer response to our handbag launch.

While a small assortment, the top handle style sold at an AUR of over $700 with engagement from both new and existing clients. Second, we focused on brand building in the wholesale channel, notably in international markets. We created high-impact activations across key accounts globally from London to Dubai.

And after a successful pop-up at La Rinascente [ph] in Milan, we are now moving into a permanent space on the designer floor there in mid-February. Third, we fueled bread heat by delivering impactful marketing campaigns, amplifying our brand purpose to celebrate women who stand strong.

The debut of Kim Kardashian as our global ambassador helped to drive an improvement in customer trends driving growth in new customers, including outsized gains with millennials. Looking to the balance of the year, we are innovating on our approach to connect with consumers and increase awareness.

In February, we're set to launch our Kids Super collaboration, followed by a styling series utilizing influencer marketing to highlight our spring collection. Overall, we are progressing against our strategies to build brand awareness and offer products that spark desire.

We are continuing to navigate the significant profit headwinds the brand is facing from pressures in the highly penetrated Greater China region, though remain focused on delivering a profitable fiscal year. In closing, our foundation is strong and our runway is significant.

We are staying agile and disciplined in a volatile environment to successfully navigate current headwinds and at the same time, drive forward our long-term growth agenda.

Importantly, we are well-positioned in attractive, durable categories, amplified by our digitally enabled direct-to-consumer platform, which powers our iconic brands to move at the speed of the consumer. We are confident that our competitive advantages and strategy will continue to drive sustainable growth and value for all our stakeholders.

With that, I will turn it over to Scott, who will discuss our financial results, capital priorities and fiscal '23 outlook.

Scott?.

Thanks, Joanne, and good morning, everyone. As Joanne mentioned, we delivered solid results in the face of a volatile backdrop as we focused on the factors within our control.

We achieved revenue of over $2 billion, while realizing the operating margin ahead of expectations and grew earnings per share 10% against last year, excluding $0.11 of currency pressure. At the same time, we returned $272 million to shareholders, demonstrating our commitment to enhancing long-term value.

Turning to the details of the quarter, I'll start with revenue, which will be shared on a constant currency basis, unless otherwise noted. Sales declined 2%, which included pressure in Greater China as a result of the COVID-19 pandemic. Excluding Greater China, revenue increased 1%, led by outperformance in the balance of our international regions.

In Japan, revenue increased 10%, while Other Asia grew 29%, driven by strength across Singapore, Malaysia, Australia, New Zealand and Korea. These trends were again led by traction with local customers. At the same time, sales to tourists improved versus the prior year that remained well below pre-pandemic levels, highlighting future opportunity.

In Europe, sales were 20% above last year, fueled by higher international tourist traffic, notably from the Middle East and within Europe as well as continued growth with local customers. For Greater China, sales declined 20%, which was below our forecast due to incremental pressure associated with COVID impacting both stores and online.

As Joanne mentioned, following the lifting of certain government restrictions in December, we've seen a meaningful improvement in traffic Q3 to date, notably during the Lunar New Year holiday.

Therefore, as we approach guidance, we maintained the expectation for a strong sequential improvement in the second half of the year, albeit from a lower second quarter base. Overall, we still expect strong double-digit growth in the second half to fuel an increase for the fiscal year at constant currency. Turning to North America.

Sales declined by 2% for both the total region and our direct business, in line with our guidance for a low single-digit decline. Importantly, we delivered North America operating income ahead of forecast and realized handbag AUR growth at both Coach and Kate Spade, underscoring our focus on brand health. By channel, our direct business declined 2%.

That said, excluding Greater China, direct revenue grew low single digits, which included a mid-single-digit increase in stores fueled by continued traffic improvements and a low-single-digit decline in digital. And in wholesale revenue was 3% below the prior year.

Moving down the P&L, we delivered gross margin ahead of our projection and 50 basis points ahead of prior year. This year-over-year expansion included approximately 130 basis points of favorable freight offset by 100basis points of FX headwinds and the negative impact from lower penetration of high-margin China business.

Therefore, excluding these impacts, gross margin was still ahead of prior year, driven by operational outperformance. SG&A declined 1% and was slightly favorable to our prior outlook.

In the quarter, we continued to prioritize high return initiatives, including platform investments and brand building activities underscored by mid-single-digit growth in our marketing spend. So taken together, operating margin and operating income were ahead of forecast.

EPS grew 2% compared to the prior year or 10% on a currency-neutral basis and was favorable to forecast due to operational outperformance as well as a $0.03 tailwind from a more moderate year-over-year FX impact. Now turning to the balance sheet and cash flows.

We ended the quarter with $846 million in cash and investments and total borrowings of $1.67 billion. There were no borrowings outstanding under our $1.25 billion revolver. Free cash flow for the quarter was an inflow of $552 million, including CapEx and implementation costs related to cloud computing of $102 million.

As anticipated, inventory at quarter end was 30% above prior year. We are pleased with our sequential progression in the quarter and the quantity and quality of our current inventory. We continue to expect to end fiscal year '23 with inventory up single digits compared to the prior year. Moving now to our capital allocation priorities.

We continue to plan for approximately $1 billion in shareholder returns in fiscal 2023, which includes share repurchases of $700 million including $300 million bought back in the first half, including $200 million in the second quarter as planned and dividend payments totaling approximately $300 million.

This is based on an annual dividend rate of $1.20 per share, which represents a 20% increase over the prior year. Our priorities remain unchanged. First, we are investing in the business to drive long-term profitable growth; and second, we are returning capital to shareholders through dividends and share repurchases.

In the future, we believe our platform is scalable and would evaluate M&A that is accretive to our organic TSR plan. Now moving to our guidance for fiscal 2023. We've raised our earnings expectation, incorporating three key changes versus the prior outlook.

First, our outlook now reflects the second quarter's operational outperformance of approximately $0.08. Second, we are including a more moderate headwind from currency, which provides a $0.10 benefit versus our previous guidance.

And third, as previously noted, we've incorporated the expectation of more modest growth in Greater China for the fiscal year based on the incremental pressure we experienced in the second quarter. We've rebased our second half outlook given the lower Q2 results, which equates to roughly $0.10 of negative impact versus our prior guidance.

Overall, our ability to increase our earnings outlook despite a volatile external environment, highlights the resilience and agility of Tapestry's operating model. So let's run through the details of our outlook, which replaces all previous guidance. For the fiscal year, we expect constant currency revenue growth of 2% to 3%.

On a reported basis, we anticipate sales to be approximately $6.6 billion, which represents a slight decline compared to the prior year, including roughly 300 basis points of FX headwinds. Touching on sales details by region at constant currency.

In North America, our guidance continues to contemplate a low single-digit decline in the second half of the year, consistent with year-to-date trends. In Greater China, as previously mentioned, we expect a slight increase in the fiscal year.

In Japan, we now expect mid-teens growth, while Other Asia is forecasted to grow approximately 35% reflecting strength in the second quarter and the continuation of these trends into the second half. In Europe, we continue to anticipate low double-digit gains.

In addition, our outlook includes a year-over-year operating margin decline of over 70 basis points, which contemplates FX pressure of approximately 115 basis points. We expect the majority of this FX headwind to flow through the gross margin line.

We anticipate gross margin slightly ahead of the prior year, largely reflecting favorable freight costs relative to prior expectations.

Compared to fiscal '22, gross margin incorporates the benefit of moderating freight costs of 130 basis points as well as AUR growth, which is being partially offset by the previously anticipated rising input costs for materials as well as the negative impact of FX, as mentioned.

On SG&A, we continue to anticipate deleverage for the year, reflecting growth-driving initiatives, including increased marketing expenses to fuel long-term customer value, investments in digital and the planned 2023opening of our new fulfillment center in Las Vegas partially offset by proactive actions we've taken to reduce our expense base.

Moving to below the line items, which are consistent with our prior guidance, net interest expense for the year is anticipated to be approximately $30 million to $35 million a significant decline versus fiscal '22, reflecting the benefit of our cross-currency swap agreements. Tax rate is expected to be approximately 20%.

This represents an increase against last year, primarily due to the anticipated geographic mix of earnings. Weighted average diluted share count is expected to be in the area of 242 million shares. This reflects approximately $700 million in share repurchases expected in the fiscal year as noted.

Taken together, we project EPS of $3.70 to $3.75 representing high single-digit growth compared to the prior year, which includes a year-over-year currency headwind of approximately $0.40. Finally, we now expect CapEx and cloud computing costs to be in the area of $300 million.

This decrease from the prior outlook is due to the timing of store openings and renovations in Asia, mainly in China, some of which have been deferred to fiscal year '24.

Given the shift, we now expect approximately one-third of this spend to be related to openings and renovations with the balance dedicated to our ongoing digital and IT initiatives, including investment related to our new fulfillment center in Las Vegas.

As previously outlined, given the volatile environment and last year's atypical comparisons, we continue to expect significant variability by quarter.

Specifically, we project revenue and earnings growth to be back half weighted, helped by the planned return to growth in Greater China and lower freight costs on a year-over-year basis, providing a tailwind to margin.

Drilling down in the third quarter, we expect revenue to increase 3% to 5% in constant currency, which includes gains in Greater China. On a reported basis, we anticipate sales to be up slightly, including a negative impact of approximately 350 basis points from FX.

We expect EPS to approach $0.60, representing a strong year-over-year increase despite a currency headwind of approximately $0.10 versus the prior year. So in closing, we delivered record second quarter earnings, outperforming expectations and are raising our earnings outlook for the year despite a volatile backdrop.

In addition, we remain on track to return $1 billion to shareholders in fiscal '23, underscoring the strength of our balance sheet and significant cash flow generation. Importantly, our performance reinforces our competitive advantages and validates our strategy.

As we look forward, we remain focused on delivering against our long-term priorities to drive sustainable growth and shareholder returns. I'd now like to open it up for your questions..

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

Hi. Good morning and congratulations on a solid quarter and a really tough environment. Joanne, what trends are you seeing in China, if you could maybe just talk about more recent trends and how things have developed? And Scott, can you unpack exactly how you're approaching this with some more numbers in your guidance around China? Thanks..

Well, thank you, and good morning, Bob. We certainly have seen a meaningful trend change in Greater China from the second quarter to the third quarter. We had an encouraging start with a solid Lunar New Year driven by sequential improvement in traffic trends in the market.

And quarter-to-date, our business is trending roughly in line with last year, and our guidance, which Scott will cover in more detail in a minute at a high-level, assumes light growth in the market for the quarter and a recovery in China through the balance of the year.

And we are seeing some green shoots with respect to domestic travel, including in Macau and in Hainan, which are important destinations. However, international travel is still down, and we see that as further opportunity going forward. Overall, seeing very encouraging signs of recovery in the short-term.

And we are confident in the long-term opportunities for China as a growth vehicle for our brands and the category at large as we move forward. But Scott, turn it to you for unpacking our guidance assumptions..

Yes. Sure, Joanne, and good morning, Bob. If you look at the impact that China had on our outlook for the year, our projections, it's about $65 million. And just unpacking that in the second quarter, we had an expectation of being down about 10%.

In reality, we were down about 20% based on the more extensive COVID-related impacts that we mentioned in the prepared remarks, that's worth about $20 million.

And as you look at then taking the recovery curve that we had previously projected and rebase lining it off of that lower Q2 starting point, we then expect to continue to see meaningful improvement throughout the balance of the year, returning to growth in Q3 and up about 20% or more than 20% actually in the fourth quarter is where the comps get a little easier versus COVID a year ago.

And that's where it's a little more than $40 million in the second half or about $0.10 in terms of earnings. And we are really encouraged just to build on what Joanne said and the start that we've had. Lunar New Year started off strong for us, and we are tracking well against that progression.

And I would also just say, let's not lose the bigger picture here because while we have reflected what we see in China, and that has had a slight kind of negative impact.

The business remains strong throughout all geographies, and I think this is a real testament to the resiliency and diversity of our model as even with these dynamic demand and revenue impacts that we continue to see, we are managing the business for the long-term, you see our gross margins being strong, inventory is in great position, and we were able to raise our earnings even with these dynamic impacts that we've seen in China.

So I feel really good about the future there..

Great. Thank you..

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

Hey, good morning. Scott or Joanne, not sure who this is for, but two things quickly. First, on pricing, so AUR is up mid-single-digits again this quarter.

Just -- anything you're seeing on pricing, any resistance that you've seen at all in the back half, are you assuming AUR continues to increase? And then just real quick, I know it's a smaller part of your business, about 10% on the wholesale channel.

Can you just kind of comment POS trends you saw heading into holiday, what you're seeing quarter date. Any big changes there? I know there's been some stuff going on with some of your competitors. Just curious, again, knowing it's smaller. Just curious what you guys have been seeing with your brands. Thanks..

Yes. I will pick that up, Ike. As it relates to AUR, we did drive mid-single-digit AUR increases in the handbag category this quarter, both globally and in North America. And I think that's a testament to our focus on brand building and staying close to our consumer and the balance we have of delivering magic and logic.

We've gotten behind our most important product categories, our icons -- our iconic product. We are delivering compelling creative innovation into the marketplace. And we see the customer responding. And we will continue to manage stay close to the customer and manage the business in a healthy way as we move forward.

As it relates to overall handbag pricing, we do see opportunity to continue to grow AUR into the future across our brands. I will let Todd comment on that in a minute. Actually, maybe, Todd, you can touch on both subjects, ….

Sure..

… but as it relates to your question on wholesale, Ike, to your point, we are 90% direct-to-consumer. And we control our destiny with our direct -- we love this relationship that we have with our customer. It allows us to stay close to move very fast with the customer as we see the customer moving.

And it gives us a lot of data that we can then leverage to improve our execution and what we -- and how we go to market. Overall, our wholesale business was down low single digits for the quarter. So while there was some pressure, it was manageable and again, a very small part of our business overall, but Todd, I will pass it to you..

Great. Thank you, Joanne. Just let me do the wholesale first. Just to reground us for Coach, obviously, our largest brand, North America wholesale represents less than 4% of our business. So it's an important business. We value our relationships with our wholesale partners, but it doesn't drive our business.

And as Joanne said, we've migrated to really of being a direct-to-consumer business, understanding our customers in a much more profound and deeper way and love that relationship and the long-term value we can create.

Regarding handbags, we were very happy with the mid-single-digit constant currency handbag growth we saw globally and in North America, which is an important point. And one of the things we always focus on is emotion trumps price. And we have offered incredibly emotional product for our consumers.

One of the great examples I can give you is, right now, we’ve a heart-shaped leather bag in outlet. It can I think hold a big iPhone, but I'm not 100% certain of that. We sell that for around $199 and I think I'm on fumes right now in terms of inventory.

Compare that to our City Tote, which is a phenomenal high-functioning tote, which average AUR of 150. So this idea that we can, as long as we create emotional product that resonates with the consumer, the example I gave you in particularly over indexes with the younger consumer. So we are really excited by that.

We will continue to allow us to grow our AURs and not just in handbag and not just in small leather goods, but we see lots of opportunity in men, lifestyle and footwear..

Okay..

Our next question is from Lorraine Hutchinson of Bank of America..

Thanks. Good morning. I wanted to get your insight on the promotional environment. You called out a more promotional -- some more promotional selling at Kate.

What are you seeing at the Coach brand? And what is your outlook for both brands in the second half and beyond?.

Well, maybe I will kick it off and then again, have Todd weigh in on the Coach brand. What I will say is, as we think about the environment that we saw in Q2, particularly this is really a North America focused comment, definitely seeing a more cautious consumer through Q2.

We delivered a slight revenue decline which was a continuation of our first quarter trends and the macro environment is challenging. And this holiday, we saw what I would call a more normalized promotional environment versus a year ago when we were -- and many were supply constrained.

This holiday, we delivered record Thanksgiving week and Cyber Monday sales results, which I think shows that consumers were value-driven and they were more selective in their spending outside of those peak periods. So it was a reversion to what I would call more normalized traffic patterns in the environment in North America.

But even in that context, we just talked about it, we drove higher handbag AUR in North America, which is a testament to the product innovation and the data driven business model that we are applying and we've been disciplined in our approach to managing our brands and our business for the long-term that allowed us to deliver higher gross margin, operating margin and profit dollars versus last year in North America despite the softer demand environment and the external pressures we are seeing.

So we are continuing to take a prudent approach to running and forecasting the business with an eye on continuing to build our brands for the long-term. And I will pass it to Todd on Coach..

Thanks, Joanne. It is a promotional environment. We know that particularly in the holiday quarter, it always has been.

What separated us, I think, is the journey we've been under for the last couple of years in focusing on our icons, reducing the tail of our products that drive markdown expectations and liability and leaning in on expressive luxury and leaning in on purpose and leaning in on values. And that is evidenced by our gross margin.

So we didn't have the pressure that we had to deal with, and I feel very good that that's going to continue. Again, it goes back to this idea that we can separate ourselves when we focus on our customer, focus on our product, create a storytelling around the product that really is compelling.

And ultimately, being 90% direct-to-consumer, we have a greater opportunity to control our own destiny..

Our next question is from Matthew Boss of JPMorgan..

Great. Thanks and congrats on another nice quarter. So maybe a two-part question. So, Joanne, could you speak to maybe the cadence of top line as the second quarter progressed.

How best to think about trends you're seeing notably in North America at the Coach brand maybe post holiday? And then, Scott, as we think about gross margin, is there a way to break down the driver of the 50 basis points gross margin upside in the second quarter? And then if you could just quantify or maybe even directionally help walk through some of the key puts and takes for gross margin in the second half outlook, I think that would be really helpful..

Yes. Well, I will take the first part of the question, and it's an interesting question. The cadence of the quarter, I would say, if we're talking about North America specifically, and we could talk about globally, but North America specifically, the cadence of the quarter was more normalized.

I think a year ago, we all saw a pull forward in demand as many, and we were supply constrained. And as I just mentioned, this year, this holiday, we saw a more normalized cadence where customers were shopping during the peak periods. Importantly, we were welcoming so many more customers back into our stores, which was fabulous.

And obviously, we are well-positioned with a great team to take advantage of those changes and trends.

Obviously, the conditions in China played out much differently than we expected and impacted the cadence of the business on a more global scale with softness in December when they were reopening and the changes in the COVID containment policy and COVID infections impacted that market.

So a lot of different changes, some we anticipated, some we didn't. But our teams really moved with agility to deliver for our customers and manage the business in a really healthy way.

Even in the face of the shifts, we were delivering higher AUR in our handbag category, we saw the resilience continue to see the durability of that category with our consumers and we delivered higher gross margin and exceeded our expectations for profitability as well.

Scott?.

Yes. Just taking it from there, Matt, the second quarter being really was what we would call operationally related. So it was the combination of price increases versus a discount. So as we said, discounts may be a little elevated versus the strange year last year when we were under unit constraints and supply issues.

This is, as Todd and Joanne said, more normalized, and we are operating with discipline, and we said we would even -- we are not going to chase the last revenue dollar just to drive top line. We are really focused on the long-term health of the business, and Todd said, focus on a motion versus just price.

And you see that reflected in the second quarter. And as we turn to the full year, I think we outlined it in the prepared remarks, but freight has gotten a bit better for us, FX as well and some of the operational impacts. So we took our gross margin guidance up slightly in the second half.

And as you see that, it's about 130 basis points benefit now for the full year. And remember, that's for freight. And remember, in the first quarter, that freight was negative. So the 130 reflects the negative in the first half and some of the benefits we are seeing in the second half.

So that benefit continues to grow as we move through the second half and what should be a tailwind as we go into next year..

[Operator Instructions]. We will move next to Michael Binetti of Credit Suisse..

Hey, guys. Congrats on a great quarter. I want to just ask you -- when you think about -- what do you think are the most important things for your teams to focus on to get North America back to positive growth here? I'm sure that's the discussion you're having. On AUR, you mentioned smaller handbags. You've heard a little bit about that.

I wonder if that trend continues, that become a pressure on continuing to report the nice positive AURs we had. But more importantly, last quarter you lowered revenues a bit and you held the EBIT margin nicely. Now you're raising, but there's a lot of moving parts. As you look at the second half plan, Scott, I guess, two things.

Where do you see opportunities for upside? And if you're able to tap those numbers, do you think you need to bring some of those costs back that you may have removed earlier to stabilize EBIT for us? Or maybe just help us think about flow-through..

Yes. Let me kick us off with how we're thinking about driving growth into the future, particularly in North America, but also globally.

I think as we leverage our direct-to-consumer model and our platform, one of the things that we're really focused on is making sure that we drive growth with our customer file, both an acquisition as well as average spend per customer, which you saw in the second quarter, a continuation of that trend.

So leveraging that direct relationship that we have with our customer and staying close to that customer and driving more. So that means that we have to show up where they are. We have to be investing in marketing, taking advantage. So that's first, deepening our relationships with our customers. Second is delivering compelling product and innovation.

And we're focused on that and doing that every day. And maybe Todd can talk about some of the great innovation that's happening at Coach, and delivering compelling omni-channel experiences. So this was a quarter where we saw customers come back into our stores.

And we have the advantage of having two very profitable channels to meet our customers where they are. And that customer is increasingly omni-channel, shopping across both channels. So those are the real keys to -- and I should say that omni-channel customer is spending more with us. They're our highest lifetime value customers.

So leaning into our customer relationships, our product and product innovation, including our lifestyle categories for growth and meeting them where they are in an omni-channel basis. And all of those things you can see came to bear in the second quarter.

And as we continue to further our strategic agenda going forward, we think that will drive our growth. But maybe toss it to Todd to talk about Coach..

Thanks, Joanne. A couple of things to reinforce. First, we did add 1.5 million new customers that Coach this last quarter in North America at average higher AURs. So we are -- the expectation of the AUR and where they enter the brand is different than in years past. Second, as I said before, emotion always comes price.

So when we think about bag size, the correlation between -- yes, if you have a very large bag, typically you have a higher AUR. But some of our highest AUR bags, as I indicated, with the heart bag in outlet.

But if you take Bandit, if you take Tabby, if you take some of these beautiful bags these families that are iconic that we add texture and different materials, we command higher AURs, whether it's Shearling or Pillow tabu [ph] or other opportunities to take a family, create an icon and expand on it and grow our AUR.

So again, I am not as concerned by whether we sell large bags or small bags, I'm concerned about bringing in a customer, creating a connectivity and making sure we have them and that they believe that the Coach brand represents their values, and that will create a sustainable, profitable growth for us in the future..

Yes. And, Michael, I guess, adding on to what may be our longest question of the morning, you asked me what inflection points you catalyst could be for upside in the second half.

And I'd just point you back to -- or remind you how we've approached from initial guidance all the way through now halfway through the year, is we are taking the trends that we see, and we are projecting them forward, right? So whether it's North America down low-single-digits, it's -- I think, now have spend a lot of time on what our assumptions are in China.

From a top line standpoint, obviously, that could be better. Could China get open up and come back faster, it could. Could it be slower? It could. I think we've got reasonable estimates, same with North America, right? Our business has been very consistent. We haven't predicted a big up or down.

And so as that dynamic continues to evolve, we know our brands are strong. We are running for the long-term, and we are going to adapt to whatever demand environment we see. We are not trying to force it or push it, and we are maintaining those strong gross margins. So any upside we do see, will come through on the bottom line.

On the other side, investments are largely in our control.

And I hope you've seen that we've been disciplined at trying to both be prudent in light of a very dynamic environment, while at the same time, maintaining investments on what we think are going to drive us in the long-term, whether it's a little more than 8% from a marketing standpoint, even a little higher than that in the second quarter.

And continuing to invest in our capabilities around digital, data analytics, et cetera. Those are obviously within our control, but we think this quarter is a great testament to the fact that those are paying off. So we will continue to be prudent, managing our expenses as carefully as we can while not sacrificing the long-term.

And as Todd and Joanne said, one of the biggest things that gives me confidence in the future is that gross margin as we continue to manage the price increases and being diligent on the discounting. We see those gross margins coming in and we see that for the quarter, and we see that for the full year..

Thanks a lot. Got it. Appreciate it..

Yes..

Our next question is from Brooke Roach of Goldman Sachs..

Good morning and thank you so much for taking our question. A lot of ground covered, but my question today is for Scott.

Can you comment on your inventory position by brand and geography given the slower rate of recovery in China? As you think about the cadencing of inventory rebalancing, where do you expect that to trend for the remainder of the calendar year? Thank you..

Yes, Brooke, I would love to answer that question. I would say the big picture here is no new news, right? We've talked about the quality and the quantity of inventory being well-positioned and coming into our peak holiday season, we felt good about it. And the answer is, we still do. We are up about 30%.

We said by the end of the year, we'd be up single digits. If you can expect sequential improvement as you move through the third, and I told you where we expect to end for the fourth quarter. And it's funny, on China, a quarter ago, we were talking about do we have too much inventory in China and now is at reopen do we have enough inventory in China.

Again, I would say this points to the diversity of our -- and flexibility of our model. We've got bonded ware houses. We're able to, within some degree, reposition inventory. We've got inventory in China. We feel good about the quality of that inventory.

And as that starts to reopen, we think we are really well-positioned there as return to growth in the second half in China..

Thank you..

Our next question is from Oliver Chen of Cowen..

Hi, thank you. Great quarter. With CDP, the customer data platform has been pretty impressive.

How does that intersect with pricing? And also it's been very positive that the new customer that you're seeing are coming in higher AURs? What are some of the factors underpinning that? And then on the future of the platform, less is more and thinking about Bandit versus Willow, Tabby and Rogue.

What's the head for platform development and SKUs as you continue to rationalize and do more with less than decomplicate the product matrix. Thanks..

Thanks, Oliver. The consumer and the consumer data that we have are -- have been a real meaningful driver. In terms of our understanding of our consumer and where they are and their expectations for our brands, we're leveraging that data in a number of different ways.

We are leveraging it through the full value chain from product creation as we understand and do market mapping and understand what our consumers are looking for from our brand as well as from our product, including the younger consumer and we are leveraging it as we think about how we market and which products resonate with which consumer bases.

We have, importantly, a technology infrastructure that allows us to harness this data and really embed it into the decision making that's happening day-to-day. And as we see those, it does show us opportunities to drive higher lifetime value.

We understand how customers are coming into our brands, what they're likely to purchase next in terms of driving frequency and how we engage them more fully in our brand and not just in one product at one price. And I think you've seen that through the second quarter. That is, again, a huge advantage of our direct-to-consumer platform.

We are continuing to build on the platform, and we are applying new technology every day. And having a modern technology infrastructure allows us to move very quickly to apply new technology, to allow us to utilize that data even better. And I think our results show it.

It's new customer acquisition, but you also see it in increased spend per customer as we lean into the learnings from that and our teams leverage it throughout the business. And Todd, I don't know if you want to take the SKU -- SKU question on Coach..

Yes. Overall, again, it's so amazing what we are able to see and do with the platform we have with Tapestry and how rich the data is. And we are really understanding how best to animate the individual icon. So we are testing ideas earlier.

Our merchants, our creative teams, we're bringing in our timeless Gen Z customer to influence some of that very early. So a great example is Tabby and Shearling in the quarter did exceptionally well. And when I walked through the showroom looking at fall next year, we took some of that learning and how to amplify it.

We also recognize that this idea of time placed and occasion matters. So how we focus on each time place and occasion, one of the opportunities we identified in outlet was to have a compelling backpack. And again, that you'll see the icon being launched in the fall, which will be incredible. I'm actually been wear-testing it. I love it.

So, we see these opportunities. I know Joanne is going to say I'm not the timeless Gen Z customer, but internally, I am. But we really look at that, and the data is informing and it doesn't just inform on the hind-sighting, it informs upfront. So as we get better, as we understand it, it informs our pricing. It informs our promotions.

It informs our placement. It really informs everything we do. So I'm very excited by the platform. I'm very excited by the opportunity to continue to animate existing icons without constantly trying to create new icons every year, which would have been the historic norm..

Thanks, Todd. You’re timeless and congrats on [indiscernible]..

Thank you..

Our next question is from Mark Altschwager of Baird..

Good morning. Thanks for squeezing me in. So I guess along the same line as is what you were just discussing there, Coach North America, in line with your expectations, driving new customers, higher AUR. Kate, you did mention that, that customer appeared to be a bit more price sensitive.

Why do you think Kate is showing more -- the Kate customer is showing more price sensitivity versus Coach? Is this a function of a younger consumer on average? Are there data and analytics capabilities that you're leveraging at Coach today that you're not at Kate, so you can potentially close that gap over time? Just curious of any insights there and how it might impact durability of growth in Coach versus Kate? Should the macro backdrop moderate as the year unfolds? And then just a real quick one for Scott, inventory tracking in line with your plans.

With the bigger picture, can the business achieve inventory turns at levels that you saw pre-COVID? And how would we think about the time line and opportunity there? Thank you..

Thanks, Mark. We feel great about Kate and the progress that we are making. And I think some of the points that you made in terms of who the customer is. We acquired 1 million new customers at Kate over the quarter. We drove handbag AUR growth in the quarter. The environment was, I would say, more normalized from a promotional standpoint.

And while the promotions were higher than last year. Last year, the Kate business was extremely supply constrained. So I would say that would be an anomalous year. The promotional levels were still lower than 2 years ago at Kate Spade. And we are applying the same tools across our platform between Coach and Kate.

But one of the key differences is Coaches icon strategy has deep history and heritage. And at Kate, we've been building out our core handbag platform with success, but we are still in building mode at Kate. Again, we called out really encouraging signs.

We talk about the core platform, the Knott and the Katy as we've been developing a more solid core foundation there. Those continue to perform. We introduced a new leather program, Gramercy that's off to a great start. Additionally, Kate has, in its history, never really had a signature platform, and we've really been leaning into the spade flower.

We talked about Monogram platform that we had. And again, that's another platform that we can continue to leverage at Kate to continue to build resilience into the model and durability into the model at Kate in addition to the novelty, et cetera, that is such an important part of the Kate DNA.

So the teams are making progress at Kate Spade and building on the foundation. We have a very passionate customer base at Kate Spade. And we are expanding that customer base. We are seeing higher spend per customer. We're leveraging the full complement of lifestyle categories.

We saw mid-teens growth in lifestyle categories at Kate, which we think is an important driver of long-term customer value as we go forward. So we feel good about the progress at Kate and we are investing in the future because we are confident in the future runway ahead..

Yes, Mark, just to address your question on churn.

The short answer is, yes, we think as we work through the very unusual dynamics that we've seen at play this year with elongated lead times by an early disruptions in supply demand stuff, all the things that we've been talking about now over the last number of quarters, We are targeting, and we would expect a return to pre-COVID churn levels as we move into the next year.

I don't know exactly when we hit those levels, but that's certainly in our line of sight, and that's certainly our intent. And I can tell you internally, we are focusing on that just about every time we get together from Todd from Joanne from myself. So that's our expectation, and that's what we're driving to..

Thank you..

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

Thank you, and thank you for joining us and for your interest in our story. Today, we delivered record holiday earnings, outperforming our expectations and positioning us to raise our outlook for the fiscal year. A huge thank you to our talented team around the world who continue to drive our results.

Importantly, our performance highlights Tapestry's competitive advantages, the power of our iconic brands and strong consumer engagement platform as well as our globally diversified direct-to-consumer business model.

We have a clear strategy to drive significant long-term sustainable growth across our portfolio, and we're confident in the runway ahead. Thanks again, and have a great day..

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