Tapestry Stock

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.

Good morning. Thank you for joining us. With me today to discuss our fourth quarter and full year results, our strategies and our 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.

Good morning. Thank you, Christina, and welcome, everyone. Fiscal 2026 was a defining year for Tapestry. We meaningfully exceeded expectations achieving the 3-year revenue, operating margin and earnings per share commitments we established at our Investor Day 2 years ahead of plan. We delivered strong growth and record results while continuing to invest in our brands, our people and the capabilities that will shape our future.

More important than what we accomplished is what we've built. Through intentional choices, disciplined execution and a deep understanding of the consumer we have built a stronger, more focused organization, who, every day, bring our Amplify strategy to life, delivering creativity, value and relevance at scale, strengthening our connections with consumers. These efforts continue to compound extending our competitive advantage while driving durable growth and long-term shareholder value. In a world where consumer expectations, technology and competitive dynamics continue to evolve, the combination of our direct consumer relationships, data-driven decision-making, global scale and agile operating model has become increasingly valuable and differentiated. With that, let me touch on some highlights for the year.

We achieved revenue of $8 billion, growing 17% on a pro forma constant currency basis, expanded operating margin by 340 basis points to over 23% and increased earnings per share by 38% to $7.05. Growth was fueled by customer acquisition as we welcomed 11 million new customers to our brands, led by Gen Z. Importantly, we accelerated growth in our core leather goods category with AUR and unit growth.

Luxury leather goods remains one of the most attractive categories within the consumer space because of its enduring demand, compelling economics and significant runway for growth. In addition, we delivered broad-based double-digit growth across key regions, gaining share and expanding the market.

Our agile, direct-to-consumer led operating model drove double-digit revenue growth and increasing profitability across both digital and stores.

Further, Tapestry is committed to embracing AI to enhance the magic of our people and our brands. To that end, we continue to build proprietary technology and AI capabilities that differentiate how we operate and empower our teams. During the year, we secured our first AI patent building on our previously patented data fabric technology. Together, they reflect our culture of innovation and more than a decade of investment in data, decision intelligence and enterprise technology.

Overall, our fiscal year '26 results demonstrate the power of our approach to brand building. We continue to win with consumers at the point of market entry welcoming younger customers who transact at higher AURs, have stronger retention and influence purchasing behavior across generations. This reinforces our confidence that our greatest opportunities lie ahead. Now moving to our results by brand.

Coach delivered another strong quarter with constant currency revenue growth of 14% and increasing profitability. This capped an exceptional year and reinforced the enduring strength of our iconic 85-year-old brand. Several factors underscore the durability of our growth. We drove new customer acquisition around the world, welcoming over 2 million new consumers in the quarter and nearly $9 million for the full year. Growth was led by Gen Z whose influence extended across generations. At the same time, existing customers continue to drive strong sales.

Underpinning these results is Coach's consumer-led approach, consistently translating deep consumer insights into action to build lasting emotional connections with the brand.

Our core leather goods assortment continued to lead in Q4 with handbag AUR increasing at a mid-teens rate and unit volumes roughly in line with the prior year, both consistent with expectations and our deliberate strategy to prioritize brand health and reduce promotions. For the year, handbag AUR rose mid-teens and units increased low double digits demonstrating the multifaceted nature of our growth. Looking ahead, we continue to see opportunity to grow both AUR and units while staying true to the values and the value proposition that define Coach.

Further, our strong results continued across key geographies in the fourth quarter, including North America, up 10%; Greater China rising 30% and Europe increasing 25%, highlighting the global resonance of the brand. Coach is bringing new consumers into the category and growing the market. Given the strength of the brand and our large addressable market, we continue to see a clear path to Coach becoming a $10 billion brand.

Now to cover our fourth quarter results in more detail. Our creative teams continue to execute with clarity and purpose, delivering product innovation that is resonating with consumers. Our icons continued to outperform, consistent with our strategy with broad-based strength across the assortment. The New York family, including Brooklyn, Empire and Chelsea, along with the Tabby and Teri families drove strong Gen Z acquisition and reinforced Coach's leadership in its core category with a robust innovation pipeline ahead. Structurally, we concentrate product innovation behind core families that build over time while remaining disciplined in our pursuit of growth.

More broadly, our results reflect the strategic choices we've made to strengthen the brand. Perhaps the most significant has been our One Coach strategy. By deliberately blurring the traditional industry lines between retail and outlet channels, bringing collection product at full price into outlet and unifying our digital experience through a single coach.com, we've aligned our approach with how consumers shop today creating a stronger, more consistent global expression of the brand. This has driven customer acquisition, higher AURs and growth around the world.

Next, turning to footwear. We delivered high teens growth in the quarter with increasing demand from Gen Z. Sneakers continued to fuel the growth driven by the success of the Soho family, along with continued strength of Margot. Footwear remains a long-term growth opportunity for Coach, given our brand strength, low share of the market and the categories relevance to our target consumer.

Turning to marketing. Our strategic investments continue to generate compounding benefits this quarter. We increased marketing spend by approximately 20% versus the prior year with a continued shift toward top-of-funnel brand building to support sustained customer acquisition.

Coach's Explore Your Story campaign continued to resonate, supporting increased unaided awareness and reinforcing Coach's top of mind presence among Gen Z. Building on this momentum, we launched &Coach, a campaign co-created with Gen Z that celebrates moments of becoming and the confidence a Coach bag can champion along the way. Additionally, our partnerships extended Coach's reach into new communities and cultural conversations as we launched the second season of our WNBA partnership, strengthening the brand's connection at the intersection of fashion, sports and culture.

Collectively, these actions are reinforcing Coach's cultural relevance and driving customer acquisition. More importantly, they strengthen a competitive advantage, a deep understanding of the consumer and an ability to consistently translate those insights into demand creation at scale.

And finally, we deepen consumer engagement through distinctive brand experiences. We continue to roll out our expressive luxury store concept globally. These stores are driving higher traffic and longer dwell times, particularly among Gen Z consumers, supporting our plan to expand the concept to impact approximately 80% of our traffic by fiscal year '30. In addition, Coach Play continues to serve as both a destination for consumers and a source of inspiration for our broader store strategy. New Coach Play locations in Chicago, Atlanta and Lumiere in Paris are helping build brand desire with our target consumers.

Together, these investments reflect our conviction that physical retail remains one of our most powerful opportunities to express the brand as consumers invite us into their world to share important moments in their life extending the connection well beyond a transaction.

In closing, my confidence in the future of Coach is grounded in the combination of an iconic brand, a deep understanding of today's consumer and an organization that continues to thoughtfully steward and evolve the brand, preserving what makes it distinctive while ensuring it remains relevant for new generations of consumers. I believe that combination positions Coach for continued leadership, meaningful growth and long-term value creation.

Turning to Kate Spade. Our strategy for Kate Spade has been deliberate and phased, streamlining the business, solidifying the foundation and positioning the brand to scale. At its core, that means building greater brand desire and relevance to drive sustainable, profitable growth.

In fiscal year '26, we remain disciplined in executing that strategy, making choices that improve the quality of the business. Although top line progress was more gradual than we planned, our experience has given us greater clarity on where consumers are responding where our investments are driving results and where we need to focus going forward.

Now turning to our strategic pillars and fourth quarter results. First, we are committed to fueling brand desirability supported by marketing. During the fourth quarter, we focused on increasing the reach and relevance of our full funnel marketing activities, which resulted in higher brand consideration among Gen Z and our latest U.S. brand health tracker.

In addition, our first creator led YouTube campaign drove an increase in purchase intent well ahead of the platform benchmark showing traction in our work. We also know that we need more consumers to engage with our content as unaided brand awareness more broadly has not yet improved. And this is a key part of driving acquisition and ultimately growth.

As we enter fiscal year '27, we'll build on these learnings through creator partnerships and activations that drive brand awareness and desire. We're also pleased to welcome Alison Badea as Chief Marketing Officer, who brings deep brand-building experience from the luxury and beauty industries.

Next, we continue to build a more focused assortment grounded in consumer insights. Our handbag blockbusters, led by the Margot, 454 and Duo families contributed to continued improvement in handbags and drove customer acquisition, particularly among Gen Z consumers.

We welcomed over 450,000 new customers during the quarter and approximately 2 million for the full year, with these consumers transacting at higher AURs in the balance of the customer base, a foundational element of our strategy.

Finally, we continue to focus on creating compelling omnichannel experiences. Our light touch renovation program designed to bring more color and emotion to our stores continue to drive a lift in sales through improvements in conversion and average transaction value, and we're expanding those learnings across additional locations.

Looking ahead, as we move from streamlining to solidifying our foundation and preparing to scale, we're focused on further strengthening our creative execution and product and storytelling. The appointment of Jonathan Saunders, as Executive Creative Director working alongside Eva will advance our efforts to bring uplifting luxury to life for a new generation of consumers with the distinctiveness of joy and femininity inherent in this iconic brand.

To close, Kate Spade has significant long-term potential, and our conviction in that opportunity remains unchanged. We continue focusing our efforts and investment behind the initiatives that are strengthening the brand and positioning it for sustainable, profitable growth over time.

Before turning it over to Scott, I'd like to come back to Tapestry's vision to give more people the power to bring their own style and story into the world. Throughout fiscal 2026, we realized that vision by welcoming millions of new consumers to our brands, deepening our relationships with existing consumers and delivering the creativity, value and relevance that inspire self-expression across generations and geographies. Our success is by design. We will continue to stay curious, remain focused and earn the trust of consumers every day. This is how we will continue to build advantages that compound delivering durable growth and long-term shareholder value.

With that, I'll now hand it to Scott.

Thanks, Joanne, and good morning, everyone. As Joanne highlighted, we achieved the financial commitments we established at Investor Day 2 years ahead of plan, driving a step change in our earnings power and cash flow generation. From this stronger foundation, we entered fiscal 2027 confident in our ability to deliver mid-single-digit annual revenue growth, continued operating margin expansion and low double-digit EPS growth, consistent with our long-term commitments.

Importantly, our competitive advantages translate into a differentiated financial model. We operate in an attractive category with durable demand and compelling margin characteristics. As we continue to welcome new customers to our brands and category, we generate higher quality growth and strong cash flow supported by disciplined capital allocation. That combination gives us the power and flexibility to consistently invest in the business while returning meaningful capital to shareholders.

With that, let me walk through our fourth quarter results in more detail, starting with revenue trends on a pro forma constant currency basis. Sales increased 11% compared to the prior year, highlighted by strong global momentum. North America sales rose 7% compared to the prior year, driven by a 10% increase at Coach, where we continue to drive healthy growth at expanding gross margins. In Europe, revenue grew 19% versus last year, fueled by continued strength in our direct business and robust new customer acquisition, particularly among Gen Z.

Local consumers continue to drive growth, contributing to meaningful market share gains in the region. Given our relatively low penetration, we believe Europe remains a compelling long-term growth opportunity.

Now turning to Greater China. Revenue rose 28%, driven by broad-based growth across channels, led by digital and strong customer acquisition. We are winning with Gen Z consumers through compelling creativity and relevant activations, contributing to significant market share gains. Given the size of the opportunity and the momentum we're seeing in the business, we're continuing to make strategic investments in the region, positioning us for long-term growth in this important market.

In other Asia, revenue increased 22%, led by growth in South Korea and Australia. And in Japan, sales declined 4%, as expected, reflecting our intentional pullback in promotions.

Now touching on revenue by channel for the quarter. Our D2C led model continued to drive strong results with direct-to-consumer revenue increasing 11%. Digital sales grew approximately mid-single digits, while global brick-and-mortar sales increased in the mid-teens. Importantly, all channels delivered strong and increasing profitability.

Moving down the P&L. We continue to drive healthy gross margin expansion, delivering a fourth quarter gross margin of 78.1%, up 180 basis points versus last year. This was driven by an operational increase of 170 basis points as well as a favorable 60 basis point impact from the divestiture of Stuart Weitzman. These benefits more than offset a tariff and duty headwind of approximately 60 basis points, including approximately 30 basis points at Coach and approximately 250 basis points at Kate Spade.

Overall, our strong gross margin remains a core element of our value creation model supported by an agile supply chain that enables us to deliver craftsmanship at scale, one of Tapestry's key competitive advantages.

Turning to SG&A. Expenses increased 8% while leveraging 80 basis points versus last year. This was inclusive of a 130 basis point increase in marketing, which represented 14% of sales in the quarter. Together, this reflects strong operational discipline and our continued ability to invest behind growth while expanding profitability.

Overall, operating margin expanded 250 basis points in the quarter, driving a 25% increase in operating income and exceeding our expectations. Fourth quarter EPS of $1.32 increased 28% versus last year, also exceeding our guidance despite a headwind of more than $0.05 from a higher tax rate versus plan due to a number of discrete items.

Now turning to shareholder returns. In fiscal '26, we returned $1.7 billion to shareholders. This included $326 million in dividends and $1.35 billion in share repurchases, representing approximately 11.5 million shares at an average price of $1.18 per share. Turning to fiscal '27, we expect to return another $1.7 billion to shareholders. Our Board approved a 16% increase in the dividend to an annualized rate of $1.85 per share and we expect to repurchase approximately $1.35 billion of shares, underscoring our confidence in the future.

Our ability to return significant capital to shareholders while continuing to invest for growth reflects the strength of our business and the consistency of our free cash flow.

And now before turning to the details of our balance sheet and cash flows, I'd like to reiterate our capital allocation priorities, which are unchanged. We have 2 foundational commitments. First, to invest in our brands and business to support long-term sustainable growth and to return capital to shareholders via our dividend with the goal over time to increase the dividend, at least in line with earnings growth. Beyond these 2 foundational commitments, our robust cash flow generation provides us with balance sheet flexibility for value creation. This includes the opportunity for share repurchase activity under our previously announced share repurchase authorization.

And finally, utilizing our rigorous 4-lens framework, we consistently evaluate opportunities for strategic portfolio management. Importantly, and as previously communicated, before moving forward with any acquisitions, we will ensure Coach remains strong and Kate Spade has returned to sustainable top line growth. These clear capital allocation priorities are underpinned by our firm commitment to a solid investment-grade rating and maintaining our long-term gross leverage target of below 2.5x.

Now turning to the details of our balance sheet and cash flows. We ended the year with nearly $1.2 billion in cash and short-term investments and total borrowings of $2.4 billion, representing net debt of $1.2 billion. Our gross debt to adjusted EBITDA leverage ratio was 1.1x, more than a full turn below our long-term target. Adjusted free cash flow totaled $1.86 billion for the year, and CapEx and cloud computing costs were $217 million. Inventory levels at year-end were 4% below prior year, slightly below expectations due to a shift in receipt timing into Q1. For fiscal '27, we expect inventory levels to increase year-over-year in support of our growth ambition.

Now moving to our guidance for fiscal '27, which is provided on a non-GAAP and comparable 52-week versus 52-week basis. Our full year guidance remains consistent with the long-term financial algorithm we established at Investor Day.

Now turning to the details. For the fiscal year, we expect revenue of $8.4 billion to $8.5 billion, representing mid-single-digit growth on a nominal and constant currency basis. FX is expected to be at 40 basis point tailwind for the year.

Touching on sales details by region on a constant currency basis. As we've previously discussed, our long-term algorithm contemplates disciplined growth in North America and an increasing contribution from international markets, where our brands remain underpenetrated, and we see substantial opportunity over time. In North America, we expect revenue to increase low single digits. In both Europe and Greater China, we expect growth of mid-teens. In Japan, we're forecasting a return to growth. And in other Asia, we anticipate high single-digit gains. By brand, this guidance incorporates high single-digit growth at Coach and a high single-digit decline at Kate Spade.

In addition, our outlook assumes operating margin expansion of 50 basis points to nearly 24%, driven by both an increase in gross margin and SG&A leverage. This reflects our continued ability to invest behind our brands while expanding profitability. We expect gross margin to increase by approximately 30 basis points, driven by operational improvements and favorable geographic and brand mix. Embedded in our outlook is the assumption for a mid-20s percent tariff rate on U.S. imports for fiscal '27 resulting in a roughly net neutral P&L impact year-over-year, including mitigating actions.

On SG&A, we expect approximately 20 basis points of leverage, reflecting disciplined expense management while continuing to invest behind brand growth.

For some texture on operating profit by brand, we expect Coach to maintain its best-in-class operating margin of nearly 36%. At Kate Spade, we expect a modest operating loss, reflecting continued investment in the brand. Corporate expenses are expected to leverage for the year, a trend we expect to continue.

Moving to below the line expectations for the year. Net interest expense is expected to be approximately $55 million. The tax rate is expected to be approximately 18.5%, and our weighted average diluted share count for the year is expected to be approximately 203 million shares. Taken together, we expect EPS of $7.80 to $7.90, representing low double-digit growth versus the prior year.

As a reminder, our guidance is provided on a comparable 52-week basis. Fiscal 2027 includes a 53rd week, which is expected to contribute approximately 1 percentage point of annual revenue growth and have neutral impact on operating margin.

Moving on, we anticipate adjusted free cash flow to approach $1.7 billion. And finally, we expect CapEx and cloud computing costs to be in the area of $300 million or 3% to 4% of revenue. This reflects a step-up in investment to support future growth, including incremental investment in Coach's store fleet through new openings and renovations. Approximately 70% of our spend will be related to growing and enhancing our fleet with the balance primarily supporting our ongoing technology and digital investments.

Before turning to the first quarter, let me briefly comment on our approach to guidance and the shape of the year. Our current quarter guidance reflects our latest thinking, while the balance of the year embeds in aggregate the long-term financial algorithm we've established. On the phasing of the year, keep in mind that we continue to operate in an environment of macro uncertainty and evolving tariff dynamics alongside shifts in the cadence of our marketing investments. As a result, quarterly profitability will be uneven, with tariffs providing a modest benefit in the first half of the year before becoming a headwind in the second half.

Generally, revenue is forecasted to grow high single digits in the first half of the year and mid-single digits in the second half with Q4 above Q3 given prior year compares. From an EPS standpoint, we're incorporating low double-digit growth in both the first and second half.

Touching on Q1 guidance specifically. We expect revenue growth of high single digits on both a nominal and constant currency basis versus prior year pro forma revenue. This includes low teens growth at Coach, which represents mid-30s growth on a 2-year stack basis. And at Kate Spade, we've embedded a low double-digit decline.

Turning to margins. We expect gross margin to increase by 120 basis points in Q1, offset by higher SG&A due entirely to continued increases in marketing, resulting in operating margin in line with prior year. Taken together, Q1 EPS is forecasted to be approximately $1.55 a low-teens increase.

In closing, fiscal 2026 demonstrated both the quality and potential of our business. We achieved Tapestry's revenue, operating margin and EPS commitments established at our Investor Day 2 years ahead of plan, while continuing to invest in our brands, capabilities and future growth and returning $1.7 billion to shareholders. We enter fiscal 2027 with confidence. Our outlook is consistent with the long-term financial algorithm we established at Investor Day, reflecting the durability of our model and the quality of our growth.

The strength of our category, our brands and our operating model gives us the power and flexibility to consistently invest for growth while returning meaningful capital to shareholders. These advantages continue to compound driving durable growth and long-term shareholder value. I'd now like to open it up for your questions.

[Operator Instructions] We'll take our first question from Matthew Boss with JPMorgan.

Congrats on a nice quarter. So Joanne, you delivered a very strong fiscal '26 and are guiding the first quarter to continued strong growth, particularly at Coach, but the full year outlook does embed some moderation as the year progresses. Could you just walk us through how you're thinking about the setup for fiscal '27, including current demand at the Coach brand relative to that low teens guide for the first quarter? And what gives you confidence in the durability of growth in the back half and beyond from here?

Matt, we're incredibly confident in the durability of our growth. And as we think about the setup for fiscal '27, I'll just step back and provide a little context. As you mentioned, we had a strong fiscal '26 where we achieved our Investor Day commitments 2 years ahead of plan while strengthening the company for the long term, and this is a critical point because we see that our greatest opportunities are still ahead of us. In fiscal '27 and beyond, we're growing from a higher base while maintaining our algorithm, the algorithm that we rolled out at our Investor Day, we're maintaining that algorithm for durable growth into the future.

And more important than the results we delivered last year, which are incredible. It's the business we built to deliver them. Over the last several years, we've strengthened our brands, we've deepened our direct consumer relationships, and we've expanded our global reach and build differentiated capabilities, as I said in my prepared remarks, in data, decision intelligence and AI. We also meaningfully improved profitability and cash generation, which increases our capacity to invest behind future growth. These are the capabilities that matter because they extend beyond a single quarter. They help us translate those consumer insights to action at scale and deliver that creativity, the value and the relevance to consumers around the world.

So as we enter fiscal '27, we see that strength continuing led by Coach where our performance remains strong across new and existing customers and in our core category, our core leather goods category.

So the takeaway is that fiscal '26 demonstrated the power of our strategy and our Q1 and fiscal '27 outlook reinforces our confidence in the durability of what we've built into the future. But I'll turn it over to Scott to cover the details and the cadence of our guidance.

Just building on what Joanne just said. We had a great '26, and we're a bigger business, we're more profitable. We're generating more cash which really puts us in a position of strength as we think about our entry into '27 and the guide. And our outlook reflects that confidence but also discipline in how we give guidance and how we plan.

Q1 does capture our current estimates for the business. We expect low-teens revenue growth at Coach. That's consistent with what we delivered in Q4. So the momentum continues. And importantly, our full year guide doesn't require us to keep that same level of growth at Coach for the balance of the year. So we believe, as we sit here today, that's a prudent approach.

For fiscal '27, we expect mid-single-digit revenue growth, continued operating margin expansion and low double-digit EPS growth. At Tapestry, that's consistent with the long-term framework we established at our Investor Day from a meaningfully higher base. At Coach, we continue to expect growth above our Brands Investor Day framework at best-in-class margins. So we're comping the comp. So put it simply, Q1 reinforces our confidence. We've built the full year outlook to reflect the breadth, flexibility and discipline of the model that we've built.

We'll move on now to Alex Straton with Morgan Stanley.

Congrats on a great quarter. I wanted to focus from a guidance perspective on what you're assuming from a unit versus AUR perspective after such strong AUR growth in recent years. And can you also just dive into in the fourth quarter if units were flat and kind of what was driving that?

First time participate with Scott. We love the mix on AUR and units that we delivered in the fourth quarter. And I think, again, what's important is the quality of our sales. We are very focused durability and quality. And what you saw in the fourth quarter is a lot of our growth came from AUR, and we were in line on units, which was by design. We had fewer promotion days in the fourth quarter.

And one of our strategies that we talked a lot about, you heard it in Joanne's prepared remarks is our One Coach strategy. Remember what One Coach allows us to do. It recognizes the consumer, sees brands and not channels. So that has allowed us to put our collection product in our outlet stores, obtaining higher AURs and [indiscernible]. And you're going to continue to see that.

So throughout the year ahead, we'll see AUR games across the globe, and you also see unit gains. But what we're not going to do, we have no need to do is churn units to make our numbers. And you see that in this world-class gross margin that we're maintaining. So I feel very good about our mix. And ultimately, as we continue to bring new customers into the category, because remember, Coach is growing the category globally. That will, over time, increase our unit counts as well.

Yes. And I'll just make a quick build on Todd's comment, Alex. First of all, Q4 came exactly like we expected as it relates to units. Remember, we had some shifting of timing promotional events and also we had exceptional sell-through in Q3, which took some of those units from Q4 to Q3. So as it relates to the unit dynamic that occurred exactly as we expected. Actually, we beat the guide in total and actually did a little bit better on an overall basis for Coach.

And I just want to reiterate going forward. Our expectation, what's embedded in our guidance assumes both unit and AUR growth in '27 and beyond.

We'll move on now to Ike Boruchow with Wells Fargo.

A couple of questions. I'll fit into one question on North America. So basically, Coach North America, you guys have been moderating off of the big growth rates that you put up pretty smoothly. I think it was mid-20s in the first half, mid-teens in the back half. I'm just curious how you're thinking about the normalization of domestic growth at Coach. And to that point, up 10% in the fourth quarter. How much of a headwind was there to North America growth on some of the ships you had called out last quarter? And then what kind of North America growth underpins that first quarter low teens global Coach guide you guys gave?

Yes. We love the position we have at Coach in North America. And again, when Scott just indicated some of the North America foundational, we had an outstanding third quarter and took a lot of units. And then in the fourth quarter, we intentionally reduced our promotion base. So we feel very good about our North America growth. We're going to -- you're going to see us grow. We grew beyond the category in the fourth quarter. So that's an important milestone.

And what we love is what we said we were going to do. We're 2 years ahead of our plan. We are delivering something on a much higher base. We took the global floor up from mid-single digits to high single digits for this year. And remember what we told you we would do. 70% of our growth is coming internationally. That said, we love our North America position, and you're going to continue to see us grow in North America, but we're going to -- we're growing on a very large base, and we're going to grow very intentionally not degrading the brand, not degrading our margin and continuing to focus on bringing new customers into the category.

A quick build on the numbers. If you look at the Coach guide for North America, again, as Todd said, it's really above our Investor Day expectations for '27. And a little bit more on that. If you look at the 2-year stack for North America Coach in both Q4, Q1 and the full year guide, it's about 30%, right? So we're comping the comp. We're consolidating the exceptional growth from last year and compounding that as we look forward into '27, and that's embedded in our guide here.

So the strong momentum in Coach continues, and we have a lot of confidence in our growth. Not only in Coach overall, but in Coach North America specifically.

We'll move on now to Michael Binetti with Evercore.

First off, let me just say thanks for bringing us out to headquarters tomorrow. Look forward to seeing you guys learning about AI. Can I just ask a little clarification on a question. Should we think about a 30% 2-year stack on the North America Coach business in the first quarter. And then we just kind of pencil that through the rest of the year is kind of hold best stability against those tough compares that continue through the year.

And then maybe just a little bit on the gross margin bridge. I think it implies almost no expansion after first quarter despite, I think, a lot of the growth coming from the Coach brand, from China, from the high gross margin categories? Maybe just a bit of a bridge on the growth throughout the year?

Yes. So we can't wait for you guys to come a couple of dozen of our closest friends going to see what we're doing in the AI world and and really talk about how this is really a competitive advantage for Tapestry. Joanne mentioned it, and we're excited to talk about it because we think it's truly a part of the moat of what makes Tapestry special.

Yes. So for gross margins, listen, it's going to be a little lumpy through the year. We also talked in my prepared remarks about the impact of tariffs, which are benefiting the first half and that tailwind in the second half, kind of a push on a year-on-year basis. I think the important thing to take away here is we are growing gross margin about 30 bps for the year, it's implied in our guidance. And the structural drivers of gross margin, which we talked about over and over, the strength of our brands, AUR, AUC, the fact that international margins are higher and we're growing more outside the U.S., all those structural drivers are unchanged and remain just as true today as they have been.

As we sit here today, we think the guidance we've given is prudent looking how much real estate we have, but don't take away from that, any change in terms of those structural growth drivers. They're still in place.

Okay. And then the North America?

In terms of North America, well, I think you reiterated what I said in terms of -- we see low single-digit growth in North America, overall, that's consistent with our long-term algorithm. But as I said earlier, Coach at mid-single digit in both Q1 and for the full year is really above our expectations, and really continues the momentum that we've seen in North America specifically.

We'll move on now to Bob Drbul with BTIG.

I was just wondering if we could shift a bit and spend some time just expanding on the international growth. I guess, specifically in Europe and in China, sort of what you're seeing in both markets and just the expectations on how to drive those businesses for this -- in fiscal '27 and beyond?

Thanks, Bob. Maybe I'll start and then pass it to Todd for some color. We just reported a strong fourth quarter and an amazing fiscal year. Our business was strong around the world, and we're seeing broad-based strength. We just talked a lot about the strength we're seeing in North America, and we see that continuing for Coach with further growth ahead. But as we look forward, international does become a larger contributor to our growth, and we see continued opportunity. So in China, as an example, we delivered over 30% growth on the year in China. We're driving that through new customer acquisitions that growth is broad-based across the market.

And we are well outpacing the industry in China, and we see tremendous opportunity as we move forward in China to continue to drive growth just based on our relatively low brand awareness in the market and the opportunity that we see for further penetration, more new customer acquisition and the traction that we have, particularly with the young consumer.

And if I shift to Europe, the opportunity is the same. We have relatively low penetration in the market. We are gaining traction with a local and younger consumer, and we have an opportunity to continue to drive growth in Europe as well. But maybe, Todd, send it to you for a little bit more color on how you're thinking about that growth.

Thanks, Joanne. Let's -- I'll kick off where you left off Europe. I mean we've had multiple years of double-digit growth. And truly early innings. When we even talk about Europe, we're only penetrated in any material way into the U.K. and some wholesale in the marketplace. We now are taking France. We opened a new store in Lumiere, a Coach Play Store, which is the heart of where young people shop. It's a good beacon for our brand, but the 35 or 40 countries that we can still tackle in Europe gives us a huge runway.

And what's important about the Coach brand positioning in Europe, and in China is the value and value proposition. The absolute underlying value of our product, our bags is cutting through and it's clear. That's why we're winning, and that's why we're competing. And we're supporting that by incredible storytelling and marketing. And if I go to China now, we underinvested in China over the years. Today, we're trying to bring our marketing in line with our overall marketing expense. And that is the fuel that creates demand in the market. So our marketing is a driver of business.

And what I love is our position in China, again, I'll remind everybody, we've been there for 25 years. We have deep roots in China. We have rich teams in China who understand the culture, we make sure that our brand, our product offering resonates with that customer, and we're also not limited because of our expressive luxury position to simply go where traditional European luxury goes. We go where the Gen Z customers want to shop. That's a huge unlock for us, and you're going to see us grow materially in China, in Europe and continue to grow in rest of Asia as well.

We'll move on now to Jay Sole with UBS.

You talked a lot about your confidence and maintain the momentum at Coach brand. Can you talk a little bit more about product. Like I say, the Brooklyn family has been such a great product franchise for the brand. Can you talk about some of the ideas you have -- that you have confidence in the future and what we're going to see from a product standpoint that give you that confidence that the momentum can continue?

Sure. I'll even open the aperture just a bit -- a little bit about my confidence because I want to remind everybody, we're an 85-year-old brand. And even as an 85-year-old brand, this last year, we recruited 9 million new customers. That's powerful. But we're not resting on our history or relying on our momentum. What gives me confidence overall is the clarity that we bring to all facets of our business, the clarity of our purpose, our customers, our product, our marketing, our people and our culture. And I will say that clarity is greater today than any time in my 19 years here at Coach and quite honestly, greater than anything I've seen in 30 years in this industry. And it does start with our purpose. And I know sometimes with this crowd and the investment crowd talking about purpose, your eyes sometimes glass over, but it matters. Our purpose and our courage to be real, and our aspiration of being the most inclusive authentic and loved fashion brand matters to our people, and it is a rallying cry and it drives outcomes. That leads to our customers.

We have clarity of who we are designing for. At this point of market entry, where you heard Joanne and Scott talk about, which is a large TAM that we can go after 25 million women turning 18 every year in the markets we play that could afford our bags, which leads back to your -- the essence of your question, which is our product. And what Stuart Vevers and our design teams and our merchant teams are doing is phenomenal. We are building on diverse yet very clear platforms of product. We talk about our [ ICON tabu]. We have a lot of runway to continue to evolve Tabby, and we have not seen any slowdown in Tabby.

Similarly, our New York family. Brooklyn is doing extraordinarily well. And again, it's a multichannel concept that we sell at full price across many different. Frankly, all of our different avenues of sale. And even under the New York family, we've expanded ideas like our Chelsea bag, which all of a sudden was only a year old, but is now appearing on the top 10. So these very large platforms as well as Teri, we sometimes refer to them as TNT here, which has led to this explosive growth. We feel very good about our product offering and our assortment backed by our marketing stories.

So net-net, the product is strong, the clarity of our messaging is strong. And I think we have an incredible setup, not just for the year ahead, but for our aspirations of $10 billion. And I'm starting to think about how much further we go beyond $10 billion.

We'll move on now to Adrienne Yih with Barclays.

Congrats, very nicely done. Todd and/or Joanne, I'm probably going to stay on that topic. When I look at the metrics that you reported, I expected the ones on the P&L the one that really surprised it was nicely to surprising was the customer acquisition. To me, that represents sort of future demand and kind of gives me some confidence about this flywheel. So that being said, can you talk about just the white space in pricing, entry level pricing, the Gen Z that you're going after? And then geographies?

Because when I look at it, I just don't -- I can't come up with a really good competitor on any of those fronts. So can you talk about how you think -- who do you look over your shoulder and you're worried about just to talk about that.

And then also for Scott, what's the implied advertising as a percent of sales for the FY '27 because that's kind of also helping the flywheel? And then also on the guidance, is Coach North America for mid-single digit? Is that for Q1? Or is that for the year or for both Q1 and the year?

We've got a lot in there, Adrienne. I'm going to kick it off. I think this will be a 3 parter. I'll kick it off and I'll pass it to Todd for a little bit of color if there's anything left after I talk, and then Scott will clean it up with some of your guidance questions. You're hitting on the kernel that is driving our growth, and that is new customer acquisition. We have become just obsessed with our customer. This customer obsession starts with understanding them and then delivering product and marketing and storytelling and experiences that are relevant to our target customer. And that muscle, that brand building muscle that we're building at Tapestry, it's a playbook that is repeatable. We continue to invest in the capabilities to deepen our understanding of the consumer and then move from insight to action.

And that's where it matters for our customers to deliver something that our customers that resonates with them that they fall in love with. And these new customers who were acquiring, we talked about 11 million new customers in the last fiscal year are joining at higher-than-average AUR. They're a younger consumer base, this point of market entry strategy that we have not only is an opportunity to retain these customers and drive lifetime value. But what we're finding and what we know, I think we all know that the young consumer, the youngest generation influences all generations, and we're seeing that play out in our business because our existing customer base is also growing.

So the flywheel of driving new customer acquisition and then giving them such a terrific experience that they come back. We're seeing those retention rates among the highest retention rates in our customer file. So they're loving our brands, they're staying with our brands, and they're influencing all generations, and we're continuing to invest behind those capabilities so that we can continue to drive that flywheel.

It's happening in North America. We spent a lot of time talking about North America growth today, but we also see a tremendous opportunity in international markets to drive new customer acquisition. We're bringing more customers into the market. So we're growing the market, and we're growing our share. And that's a phenomenal place to be. Todd, I don't know if there's anything you want to add from a color perspective.

You touched on so many good things. But I do want to tackle the one thing you didn't talk about, which is competition. And for me, there are no barriers of entry in our space, but that's just a truism that we recognize every day. It almost doesn't matter. What we -- the most we are building are about that connective tissue to our customer where we spend 12% on advertising. And I think my marketing team will be mad because I use the word advertising, it's not advertising. It's story building, it's brand driving. It's not just go buy our bag. It's a richness that makes it compelling.

When we say we're going to invest in our store fleet and refurbish, we are going to tackle 80% by traffic of our store fleet between now and FY '30. That's an investment into the future that makes us relevant and continues to attract that younger consumer globally. And that's why we're so excited about this rollout of expressive luxury. So couple that with the fact that we are an 85-year-old brand. September, Stuart is going to show a fashion show celebrating our 85th anniversary. Those are things that are hard to replicate.

And that's why I -- finally, I go back and talked a lot about our culture. Our winning culture, a team that understands a team that's been together, we have stability of leadership, we have stability of design. Those are important drivers of long-term profitability. So I love our setup. We are going to be very focused on that $200 to $500 space. Yes, we have some amazing bags above that. But that clarity of brand positioning is what is driving our customer acquisition and retention. Scott, I don't know if I left you anything.

All right. You left me a little bit. There was a spoiler alert. You threw out the 12% is indeed a set of demand creation that's both in -- we hit that in '26, and we're building upon that. It's the flywheel we talked about, right? Our -- we grow gross margins. We have discipline across the rest of the business so we can invest back in things like demand creation, which are the engine that drive our new customer acquisition, doing all of that with 50 basis points of operating margin expansion.

So 12%, another data point there, it's about $1 billion in advertising. So you think about where we were 5 years ago versus today in terms of demand creation. That's a big number because to Todd's point, while there's no barriers to entry, there are barriers to scale and those barriers are getting higher. And companies who have a business model that can reinvest and create demand in the way that we can, with this is the moment we prepared for, for a long time, really sets us apart and is a competitive advantage.

And I'm glad you asked for clarification on Coach. I want to try to be very clear here. So Coach, we expect in Q1 to grow mid-single digits. We also expect full year Coach to grow at mid-single digits. And the point I made earlier is we're comping the comp or compounding on the growth. So whether we look at North America Q4 last year, Q1 this year or full year this year, that's about a 30% 2-year comp for North America. So not only are we a much bigger business, we're growing significantly on top of that big business.

And when you think about Todd, you got a huge North American business, over $4 billion, we can talk about percentages. This is real growth. And at our margins and at the flow-through that we have based on the efficiency of the model, it's a really important part of our financial story. One of the reasons we have confidence is a North American Coach business.

And just to be abundantly clear because I want to make sure we're talking mid single digits in North America for the Coach brand; we're talking in the first quarter, low teens; and for the full year for the Coach brand overall, we are talking high single digits. I didn't want any of my BU heads to think they got off the hook on the phone call. So those are the floors that we've set for this year. And I think our track record of beating out the floors are quite substantial.

Your track record is great indeed.

We'll move on now to Mark Altschwager with Baird.

Just first on marketing. You did not delever as much as you had guided in the fourth quarter. Could you just clarify how much of that is shift in timing versus realizing some greater efficiencies and how that then plays into fiscal '27? And then separately, the CapEx step up, the reinvestment in the fleet, how should we be modeling or thinking about net door growth for Coach in fiscal '27? And how does that play out by region?

Yes. So I'll take the first part of that, Mark. Yes, listen, with marketing, there's always a little bit of timing. And we created a model, I'll get back to the flywheel that allows us the flexibility to be opportunistic and lean in when the data tells us we have opportunities, but we don't just spend to spend. Also timing of things like production and whatnot can be a little bit different on a quarter-by-quarter basis. So you're right, we came in with a little more leverage in marketing. We still spend a lot of money, and I'll remind you, we spent 12% of sales in 2026.

I think the much bigger issue as you look going forward is we are and will continue to invest in marketing as a key part of our demand creation and it's a key part of driving a native brand awareness, which is a key to new customer acquisition. So the flywheel is intact, and we will continue to invest in marketing. And I think Todd is going to want to say something about the fleet, but just give you some numbers. Between 40 and 50 doors is our expectation on a net basis at Coach. And you're right, we have stepped up a bit our CapEx. But still, as we look at our overall guidance -- our overall expectations from Investor Day, still very much in line as we look at our forward CapEx spending.

And I'll remind you, we've got a lot more cash, too. So our free cash flow is significantly higher even with these investments. But Todd, to you, maybe a little color on what you're doing.

Yes. I love that this year, we will go over the 1,000 door count for Coach globally, and 75% of those 50 doors that Scott talked about will be international, 25% will be domestic. But remember what we're doing, we are elevating the fleet with our expressive luxury design. We started a design that we introduced in the first 6 months of last year, we pause, which was really smart. What we did was we listened to the consumer. We evolved our thinking. And now based on that data and that input, we're able to go roll it out, sometimes slow to smooth, smooth to fast. We're going to be able to go much faster now that we have clarity of what the design looks like, how it operates and how the consumer responds.

In addition, we're adding 1 for MSA, no more than 1 per MSA, what we call our play concepts. And you'll see the most recent version of that was in Paris. You have a new one that we did in Chicago, one in Atlanta. So again, these beacons of Coach, which allows the consumer to interact, some of those play ideas then evolve into expressive luxury. So I feel very good about investing in the fleet. One of the things we know, Gen Z love being in the real world. And if our stores -- and I want our stores to be as engaging as the product, and that's what the expressive luxury design is doing for us.

So I'm very excited about the future growth of being a direct-to-retailer and seeing our stores, and I hope you get to visit many of them in the upcoming year.

Thank you. That concludes our Q&A. I will now turn it over to Joanne Crevoiserat for some concluding remarks.

Thanks, Liam. I want to close by reiterating my confidence in the future. The strength of our results and more importantly, the strength of our organization are driving durable growth and long-term shareholder value. Our advantages continue to compound, and I believe our greatest opportunities are ahead of us. So our global teams, thank you for the creativity, focus and commitment you bring every day. Your work is reflected in everything we've accomplished and in the opportunities we're creating for the future. And everyone who joined us today, thank you for your interest in Tapestry. Have a great day.

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

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.

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.

Good morning. Thank you, Christina, and welcome, everyone. Our standout third quarter reflects the compounding benefits of our Amplify strategy. With the consumer at the center of everything we do, we are consistently translating insights into action at scale, delivering exceptional results with pro forma revenue growing 23% at constant currency, operating margin expanding 490 basis points and earnings per share increasing 62% versus prior year, each exceeding our expectations. This outperformance allowed us to confidently increase our outlook for the year, underscoring that our advantages are structural and sustainable. The enduring strength of our business has been built with intention and is reflected in our results, underpinned by a commitment to deep consumer connection, disciplined growth and sustained value creation. I want to recognize our exceptional global teams. Our performance is a testament to their passion, curiosity, creativity and agility.

Now turning to the strategic actions from the quarter, which are driving our results today and continuing to expand our competitive advantages into the future. First, we built emotional connections with consumers acquiring over 2.4 million new customers globally in the quarter, driven by an increase in Gen Z. This continues to be a key driver of our growth as engaging consumers earlier supports higher repeat purchasing and lifetime value. Importantly, our Gen Z consumers have higher retention rates than the balance of cohorts highlighting the opportunity to build lasting relationships and meaningful value creation into the future. We also drove growth with our existing customer base, demonstrating broad-based strength. Together, these dynamics reinforce a durable and repeatable competitive advantage, our ability to consistently attract and retain new generations of consumers to our brands.

Next, we delivered fashion innovation and product excellence, led by Coach, where the brand is strong and resonating globally. Importantly, we accelerated growth in our core leather goods offering, with healthy and diversified growth drivers in place, reflected in both higher AUR and unit volume. The combination of craftsmanship, creativity and value we offer to consumers at scale continues to be a clear competitive advantage and a structural strength of our business.

And we powered global growth through compelling experiences, delivering double-digit gains in North America, Greater China and Europe, significantly outpacing the industry and growing market share in each of these regions. Our DTC-led business model creates a direct connection with our customers, enabling more relevant brand building and deeper insights, which together drive consistent execution and sustainable growth. This was evident again this quarter as we achieved over 20% growth in stores and online at strong and increasing profitability. Overall, we delivered another record quarter, highlighted by double-digit top and bottom line gains, demonstrating a differentiated business model built for high-quality and long-term growth.

Now moving to our results by brand. Turning to Coach. The brand delivered another exceptional quarter with constant currency revenue growth of 29% and increasing profitability. We are executing our strategies with consistency, rooted in our blend of Magic and Logic, which is the creativity and passion of the Coach teams around the world paired with our systemic approach to understanding the consumer. There are several key indicators, reinforcing the strength of the brand and the durability of its growth. Customer acquisition once again drove our top line growth this quarter, with Coach welcoming 2 million new customers to the brand, a significant increase over the prior year. Gen Z acquisition accelerated meaningfully and their influence extended across generations, fueling broader new customer growth.

Further, we saw strong and broad-based gains with our existing customer base. Together, these trends highlight the legacy of Coach and the relevancy of its expressive luxury position as the brand continues to build enduring consumer relationships that transcend generations. Our core leather goods assortment continued to lead with unit volumes increasing over 20% and AUR growing at a low double-digit rate, demonstrating multiple drivers of sustainable growth in our core. And momentum was strong across key geographies, including North America, up 27%; Greater China, rising 58%; and Europe, increasing 27%, highlighting the global resonance of the brand and the effectiveness of our regional strategies. Overall, Coach is bringing new consumers into the category and growing the market. And with a large TAM, we have under 1% share and meaningful opportunity ahead.

Now to cover our third quarter results in more detail. Our creative teams are delivering innovation that is clearly resonating with consumers. Our icons continued to outperform consistent with our strategy with broad-based strength across our assortment. The Tabby franchise remained a standout while the New York family, including Brooklyn, Empire and the newly launched Chelsea drove strong Gen Z acquisition. Teri, Laurel and Rowan also delivered outsized gains, reinforcing Coach's leadership in its core category. Importantly, Coach's accelerated growth in leather goods highlights the timeless values of the brand and the value we offer in the luxury market.

Looking forward, we believe our strong product pipeline and innovation supports further gains in both AUR and units, reinforcing the diversified drivers of healthy and sustained growth while never compromising our value proposition, a hallmark of the brand.

Next, turning to Footwear. We delivered accelerated growth of approximately 20% in the quarter fueled by sneakers with the continued success of the Soho family. This family is resonating across channels, demonstrating the traction of the One Coach strategy beyond leather goods. Footwear remains a long-term growth opportunity for Coach, given our brand strength, low share of the market and the categories relevance to our target consumer.

Touching on marketing. Our strategic investments continue to generate compounding benefits this quarter, reflecting a disciplined long-term approach to brand building at scale. We increased marketing spend by approximately 50% versus the prior year, with a continued shift to our top-of-funnel brand building to support sustained customer acquisition. Our spring campaign continued to build emotional connections with Gen Z consumers globally. Leading with insight and not just product, Explore Your Story was inspired by Gen Z's desire to turn to books and storytelling to find depth, community and a sense of self in an increasingly complex digital world. The campaign featured our global ambassadors, including Elle Fanning, Storm Reid, Paige Bueckers, and K-pop artist, So-yeon. On all metrics, this campaign is winning with our target consumer.

Additionally, to support growth acceleration in China and in celebration of Lunar New Year, we partnered with CLOT, a world-renowned Chinese streetwear brand. The collaboration came to life through a fully immersive experience, bringing together gaming, a cafe, a bespoke collection shop and daily community activations. This engagement highlights the strength of our brand and a deepening understanding of the Chinese consumer that together represent a meaningful and lasting source of competitive advantage in the market. Collectively, these actions are driving cultural relevance and customer acquisition and reinforce our growing moat around consumer understanding and sustainable demand creation in our most significant markets.

And finally, we are strengthening brand desire through distinctive, immersive retail experiences that elevate how consumers engage with Coach. During the quarter, we continued to roll out our new expressive luxury store concept globally. These stores are delivering higher traffic in dwell times, particularly with Gen Z reinforcing our strategy to scale this concept to more locations moving forward. We also opened 3 new Coach play stores in Japan and North America, locations that are fully immersive and localized. And we continue to open additional Coach coffee shops as we harness the power of the brand to engage with consumers in new and relevant ways.

In closing, Coach continues to deliver outstanding results, reflecting the clarity of our brand vision and an unwavering focus on the consumer. Importantly, these results speak to the future as they are fueled by proven strategies, intentional investment, exceptional execution and structural advantages that enable us to consistently connect with consumers across generations and geographies. This reinforces our conviction that Coach will be a $10 billion brand over time with best-in-class margins, grounded in our commitment to nurture and build on what makes the brand iconic, enduring and loved by consumers around the world.

Now moving on to kate spade. Our actions to strengthen the brand for long-term sustainable growth are underway. In the third quarter, revenue declined 11%. Top line trends improved sequentially, though fell slightly below expectations, which included pressure from our strategic pullback in promotions at retail. At the same time, gross margin and profitability exceeded plan, even with continued strategic brand investments to support a return to profitable growth. As we continue the work to unlock the full potential of kate spade, what gives us confidence is that where we focus and invest, we see signs of progress. This is true across brand consideration, handbags performance and customer acquisition as we welcomed 400,000 new customers to kate spade in the quarter.

We also know that turnarounds take time and the path to long-term growth is not always linear. We are continuing to track the leading indicators of growth informed by our success and learnings at Coach. This gives us earlier visibility to evaluate where our efforts are taking hold and where we need to adjust our execution and investment, ensuring that progress is continued, tangible and sustainable.

Now turning to our strategic initiatives in more detail. First, we remain committed to fueling brand desirability supported by marketing. Our Spark Something Beautiful campaign continued this quarter and drove a lift in both consideration and purchase intent, proof that when consumers see our brand and content, we see traction. We also know that we need more consumers to engage with our content as unaided brand awareness more broadly has not yet improved. And this is a key part of driving acquisition and ultimately, growth. As a result, we're scaling our marketing efforts to expand the reach of our campaigns while increasing activations with creators to support broader visibility and increased brand relevancy with our target audience.

Next, we continue to build handbag blockbusters with a more focused assortment grounded in consumer insights. During the quarter, handbag blockbusters, led by the Duo and Margot outperformed the balance of the offering with strong Gen Z recruitment at higher AUR. The Duo Mini seen on Kendall Jenner sold out in stores and online, clear evidence that when we bring together consumer insights, creativity, value and cultural relevance, we are driving desire and demand for the brand. Overall, with a more targeted and relevant handbag offering, we drove higher full-price selling and handbag AUR growth at constant currency, consistent with our strategy.

Moving forward, there is more work to do to strengthen our creative execution, and we are focused on bringing more innovation and distinctiveness to our assortment to drive stronger results at scale as we continue to build for durable growth.

Finally, touching on our third strategic pillar, maximizing compelling omnichannel consumer experiences. We enhanced both our in-store and digital experiences, simplifying the customer journey and elevating engagement. As a result, Net Promoter Scores increased versus prior year, indicating that the consumer is both recognizing and valuing the enhanced shopping experience. In addition, our light-touch renovation test continued to deliver a lift in conversion and ADT and outperformed the balance of the fleet. We plan to expand this format to additional locations in North America by fiscal year-end.

To close, kate spade is an iconic brand that holds a distinct place in the fashion and luxury consumer landscape. We made continued progress this quarter, and we remain intensely focused on the path to profitable growth. The leading indicators tell us that we're moving in the right direction. We also know there is more work to do to further improve our execution while scaling what is working today. We have the right strategies in place and remain confident in the meaningful long-term potential for the brand.

Before turning it over to Scott, I'd like to leave you with these overarching takeaways. Tapestry delivered another record quarter and raised our outlook for the year. We are a consumer-obsessed organization of passionate brand builders with an agile, data-driven operating model. This is who we are and it's driving our results. From this position of strength, we are navigating a dynamic external environment with strategies that are proven and structural advantages that compound over time. We're moving confidently into the future with an unwavering focus on the consumer, applying our blend of magic and logic with discipline to deliver the creativity and value that together drive durable global growth and long-term value creation.

I'll now turn it over to Scott.

Thanks, Joanne, and good morning, everyone. In Q3, our revenue, operating income, earnings and free cash flow outperformed our expectations, each growing double digits versus prior year and further reinforcing the structural, durable and diversified drivers of our growth.

Turning to the details of the third quarter. I'll begin with a discussion of revenue trends on a pro forma constant currency basis. Sales increased 23% compared to the prior year and outperformed our expectations. These results reflect strong global momentum. By region, North American sales rose 20% compared to the prior year, fueled by a 27% increase at Coach with growth, market share gains and operating margin expansion ahead of plan. In Europe, revenue grew 21% above last year, driven by strength in our direct business, which was fueled by strong new customer acquisition, particularly among Gen Z. Growth continues to come through local consumer spending, contributing to strong market share gains in the region. Europe remains a significant opportunity for further growth given our low penetration and market position.

And before moving on, I want to touch on the disruption in the Middle East. First, by saying that the safety and security of our people and consumers are a top priority. The region, which is operated through a distributor model represents less than 1% of our sales. And while we are closely monitoring the situation, we do not anticipate a material direct impact to our business at this time.

Now turning to Greater China. Revenue rose 55%, growing ahead of expectations and driving significant market share gains. This outperformance was fueled by accelerated customer acquisition and broad-based growth across channels led by digital. During the key Chinese New Year holiday, we meaningfully exceeded our plan as we continue to win with Gen Z consumers, cutting through with creativity, relevant activations and focused investments in the region. Looking forward, we remain well positioned to drive strong momentum in this large and important market. In Other Asia, revenue increased 16%, led by growth primarily in South Korea and Australia. And in Japan, sales declined 10% as expected, driven by an intentional pullback in promotions.

Now touching on revenue by channel for the quarter. We delivered gains across channels, fueled by direct-to-consumer growth of 23% compared to the prior year. This included an increase in digital of approximately 25% and over 20% growth in global brick-and-mortar sales with all channels at strong and increasing profitability. Moving down the P&L, we continue to drive healthy margin expansion versus the prior year delivering a third quarter gross margin of 76.9%, 80 basis points above our prior year. This was driven by operational expansion of approximately 190 basis points as well as a favorable impact from the divestiture of Stuart Weitzman of 70 basis points. These benefits fully offset a negative tariff and duty headwind of approximately 180 basis points, which included a 150 basis point negative impact on Coach's gross margin and a 440 basis point negative impact on kate spade's gross margin.

And as compared to our plan, Tapestry gross margin was 180 basis points better than our forecast, with approximately half of the upside due to stronger operational performance and half due to lower tariffs. As a reminder, we have not implemented any price increases in direct response to tariffs, reflecting our disciplined and consumer-focused pricing strategy. Overall, our strong gross margin remains a core element of our value creation model, supported by our agile supply chain, which delivers craftsmanship at scale, a core competitive advantage of Tapestry.

Turning to SG&A. Our expenses rose by 13% and leveraged by 410 basis points, inclusive of a 160 basis point increase in marketing, which represented 12% of sales. The leverage we drove in the quarter reflects our strong operational discipline and focused approach to reinvestment to drive long-term growth.

So taken together, operating margin expanded 490 basis points in the quarter driving profit expansion of 55% over the prior year, which was ahead of expectations. And our third quarter EPS of $1.66 grew 62% over the prior year, also exceeding our guidance.

Now turning to shareholder returns, starting with our dividend. Our Board of Directors declared a quarterly cash dividend of $0.40 per common share, representing $81 million in dividend payments for the quarter. Additionally, during the third quarter, we bought back $150 million worth of stock for a year-to-date total of $1.05 billion or approximately 9.3 million shares repurchased at an average stock price of approximately $112. In fiscal '26, we now expect to return approximately $1.6 billion or approximately 100% of our expected adjusted free cash flow to shareholders through dividends and share repurchases. This includes over $300 million in dividend payments for an annual rate of $1.60 per share as well as $1.3 billion in share repurchases, which is an increase from our prior outlook of $1.2 billion. Our significant return of capital to shareholders reflects the strength of our organic business, including our robust and consistent free cash flow, which is a differentiator of our model, providing flexibility to invest in growth while delivering meaningful returns to shareholders.

And now before turning to the details of our balance sheet and cash flows, I'd like to reiterate our capital allocation priorities, which are unchanged. We have 2 foundational commitments. First, to invest in our brands and business to support long-term sustainable growth and to return capital to shareholders via our dividend with the goal over time to increase the dividend at least in line with earnings growth. Beyond these 2 foundational commitments, our robust cash flow generation provides us with balance sheet flexibility for value creation. This includes the opportunity for share repurchase activity under our previously announced $3 billion share repurchase authorization. And finally, utilizing our rigorous four-lens framework, we consistently evaluate opportunities for strategic portfolio management.

Importantly, and as previously communicated, before moving forward with any acquisitions, we will ensure Coach remains strong and kate spade has returned to sustainable top line growth. These clear capital allocation priorities are underpinned by our firm commitment to a solid investment-grade rating and maintaining our long-term gross leverage target of below 2.5x.

Now turning to the details of our balance sheet and cash flows. We ended the quarter with nearly $1.1 billion in cash and short-term investments and total borrowings of $2.4 billion. Together, this represented net debt of $1.3 billion. At quarter end, our gross debt to adjusted EBITDA leverage ratio was 1.1x, more than a full turn below our long-term target. Adjusted free cash flow for the quarter was an inflow of $229 million, and CapEx and cloud computing costs were $50 million. Inventory levels at quarter end were 3% below prior year on a reported basis, excluding the impact of Stuart Weitzman. In fiscal '26, we continue to expect inventory levels to be down modestly year-over-year on a reported basis. Importantly, our inventory continues to be current and well positioned globally.

Now moving to our guidance for fiscal '26, which is provided on a non-GAAP basis and excludes the impact of Stuart Weitzman from our fiscal '26 expectations. We are raising our full year guidance, incorporating our third quarter outperformance, along with a stronger outlook for the fourth quarter.

Now turning to the details. For the fiscal year, we now expect revenue to be in the area of $7.95 billion, representing pro forma growth of 16% in constant currency with FX planned to be an 80 basis point tailwind.

Touching on sales details by region at constant currency on a pro forma basis: in North America, we now expect revenue to increase mid-teens; in Europe, we expect growth in the area of 20%; in Greater China, we now expect to achieve growth of over 30%; in Japan, we're forecasting a high single-digit decline; and in Other Asia, we anticipate low double-digit gains. And by brand, this guidance now incorporates growth of over 20% at Coach. At kate spade, we now expect a low double-digit decline.

In addition, our outlook now assumes an operating margin of approximately 23%, which is up approximately 300 basis points compared to last year and 120 basis points above our prior outlook. We now anticipate gross margin to increase approximately 110 basis points, a meaningful improvement from our prior outlook. This assumes operational gross margin expansion of roughly 190 basis points due primarily to improvements in AUR. Further, we expect to realize a 60 basis point structural tailwind to gross margin from the disposition of Stuart Weitzman. These planned margin drivers are expected to fully offset a headwind from tariffs and duties in the area of 120 basis points as well as a modest FX headwind. This outlook embeds current U.S. trade policies and excludes any potential impact from IEEPA refunds on tariffs paid.

On SG&A, we expect leverage of 190 basis points favorable to our prior outlook. This reflects our diligent expense control, partially offset by ongoing growth-focused investments. To this end, we expect marketing as a percentage of sales to now increase around 190 basis points versus last year, an increase of 60 basis points from our prior guidance and now approaching 13% of revenue. We will also realize a 20 basis point benefit to expenses from the sale of Stuart Weitzman. For some texture on operating profit by brand, we anticipate Coach will expand its operating margin. And at kate spade, we continue to expect a modest profit loss, reflecting outsized tariff impacts and brand investments.

Moving to below the line expectations for the year. Net interest expense is expected to be approximately $60 million. The tax rate is expected to be approximately 17.5% and our weighted average diluted share count for the year is forecasted to be approximately 210 million shares, which includes the expectation for $1.3 billion in share repurchases. Taken together, we now expect EPS to be in the area of $6.95 representing growth over 35% compared to last year and ahead of our prior outlook of $6.40 to $6.45.

Moving on, we now anticipate adjusted free cash flow to approach $1.6 billion. And finally, we continue to expect CapEx and cloud computing costs to be in the area of $200 million. We anticipate around 60% of the spend to be related to store openings, renovations and relocations with the balance primarily related to our ongoing IT and digital investments.

Briefly touching on the shape of the year, our outlook implies balanced first and second half top line growth at the Tapestry level and by brand. At Coach, this is low 20s growth and down low double digits at kate spade. For Q4 specifically, our guidance embeds pro forma revenue growth of low double digits on both a reported and a constant currency basis. This incorporates a low teens growth rate at Coach, ahead of our prior expectation and representing growth of roughly 30% on a 2-year stack basis. And at kate spade, we expect a high single-digit decline in the fourth quarter.

Turning to operating margin. We expect expansion of approximately 60 basis points, driven by a gross margin increase in the area of 130 basis points, partially offset by higher SG&A, which reflects strategic investment in brand building with an increase of over 300 basis points in marketing to drive long-term growth. And Q4 EPS is forecasted to be approximately $1.20, an increase of over 15%, including a tax rate of roughly 18%.

In closing, we delivered another outstanding quarter with strong top and bottom line outperformance and significant cash flow generation, underscoring the compounding and diversified drivers of our growth. From this position of strength, we raised our outlook for the year, reinforcing our confidence and reflecting our disciplined and consistent execution. Supported by clear and proven competitive and structural advantages, we are well positioned to deliver sustainable value creation for years to come. I'd now like to open it up for your questions.

[Operator Instructions]

Our first question comes from Bob Drbul with BTIG.

Congratulations on another great quarter, meaningful beat and raise. So based on your guidance, with the FY '26 EPS guidance in the area of that $6.95, I think that's what, 35% versus last year and 23% operating margin, you're on track to deliver on your Investor Day targets 2 years ahead of plan. So given this outperformance and your current expectations, can you help us think about the growth trajectory for FY '27 and beyond?

And to your question, where do we go from here? We're just getting started. As we talked about at our Investor Day, we've reframed our TAM, our addressable market, and we have low share of a large TAM. And our goal is clear and unchanged to deliver durable growth that's defined for us as mid-single-digit revenue growth as a floor, well ahead of the category at best-in-class margins, which we expect will deliver exceptional TSR. And our performance this year and this quarter only gives us more confidence.

So let's talk about what's driving our growth. The foundation that we talked about that we covered at our Investor Day is our transformation into a truly consumer-obsessed organization for passionate brand builders. And we're enabled by this agile, data-driven operating model that's driving innovation and impact across our business. This is now embedded at Tapestry. And our goal is to connect with new generations of consumers around the world. This is the fuel in our growth engine. And again, we shared a massive opportunity that we have across a large global addressable market. There is so much more room to grow, and our strategies are working. You can see that in our results this quarter. And we've done it with intention. We've built with intention and an eye toward the future.

We're growing today in a healthy way. We're winning in our core leather goods category at higher margins and higher AUR. And we're seeing growth across generations and across geographies. And to your point, our guidance does -- this year does have us delivering our Investor Day targets 2 years ahead of plan across both revenue and earnings, and we're not finished. That's the best part. As we look to the future, we see significant opportunity to continue to build on our successes. We have structural advantages that allow us to grow in a dynamic environment. We play in an emotional category. We deliver great value, I think, unmatched value in the market with high margins and strong free cash flow that allow us to invest at scale, and we're investing today to drive growth in the future.

You can see that in investments in product innovation with a strong product innovation pipeline. We're investing in marketing. We're investing in consumer experiences with new store formats. All of these investments are supporting our long-term growth opportunity. And while our teams are focused today on delivering a strong end of the fiscal year, we're moving forward with confidence.

We'll move now to Ike Boruchow with Wells Fargo.

I'll throw this one to maybe Scott and/or Todd. I guess Coach -- so Coach's growth is obviously exceptional. I think you raised over 20% for this year now. I guess my question is, how should we be thinking about the expectations for next year at Coach? I know it's a little bit early, but at Coach specifically, what are the growth rates that give you confidence for anniversarying a year as robust as this? And I guess what kind of visibility do you have as we think about a more normalized growth rate for the brand in '27 and into the future?

Yes, Mike -- Ike, thanks for the question. I'll start before I turn it over to Todd. By the way, Mike and Ike my favorite candy from my childhood, if you wonder where the reference came from. Joanne mentioned it, we're confident in mid-single-digit growth at the Tapestry level. That's our algorithm from Investor Day, and that's really underpinned by at least mid-single digit at Coach as a floor. And I'll just start by reminding you of what gives us confidence. So what is -- what underpins that algorithm.

So first of all, it's AUR growth. And we've said that we believe that we can sustain over a long period of time, AUR growth of at least inflation plus a point. And as it relates to units, that's the focus on new customer acquisition. And we're investing behind increasing our sufficiency, increasing our reach and continuing to acquire those new customers, and you saw 2.4 million in the quarter we just reported. So the combination of AUR and units will be part of the growth algorithm. And on top of that, we see 1 to 2 points from new door expansions in our LRP. So all those things together give us great confidence in at least our floor of mid-single digits. So Todd, maybe a little more color on the strategies behind that.

Thanks, Scott. I want to go back to what we talked about last quarter, where I shared with you my confidence performance indicators and those CPIs, again, this quarter were outstanding. Think about this for a minute, 2 million new customers, fantastic performance in every one of our major markets: North America, China, Europe. As Scott just mentioned, AUR and unit growth and just fantastic and great product innovation.

So building on these exceptional results, let's address the long-term sustainable growth for our 85-year-old heritage brand. Something that Joanne talked about, but we have to keep reinforcing the TAM. And when we talk about the TAM, we're talking about our point of market entry of the Gen Z and soon Gen Alpha. And this group is just massive. We can literally add millions of new customers every quarter for the next 10 years, and we'll just scratch the surface.

Second, our credibility and innovation in our core leather goods product is exceptional. We build on a consistency and a clarity of design that has been honed under an extremely stable and experienced team led by our Creative Director, Stuart Vevers.

Third, our price and brand positioning of expressive luxury is truly the goldilocks of brand positioning in our industry. On the one hand, we're aspirational in design, fashion and quality, yet extremely approachable in price positioning.

Fourth, our methodology to marketing is different and rare and it's working. We don't just simply look and say, here is a bag, let's go sell it. We look and seek out consumer insight and craft a story around that consumer insight that makes our brand and our storytelling even more compelling. And we don't just do that once or twice a year, we do it consistently throughout the year, and we back it by significant financial muscle. Coach is approaching $1 billion annual spend in marketing, and we're doing that in a way that is attracting new customers into our brand. That's that Coachenomics flywheel that we often talk about. That's a level of spend that few in our industry can match.

And finally, our investment in stores and experience, coupled with our operational excellence will continue to raise the bar. And you see that in our launching of our new expressive luxury design stores. We're going to touch a majority of the fleet over the next couple of years and our One Coach initiative that brings innovation to the industry. So when you put all that together, I love the setup for next year and the years ahead. And I have more conviction now that the Coach goal of $10 billion at best-in-class margins is more attainable than ever.

And quick build on that. I didn't answer your other question about what are we seeing quarter-to-date. Quarter-to-date, we're right in line with the guide that we just gave. So what we see right now gives us confidence in the guide that we gave for the fourth quarter.

We'll move on to Matthew Boss with JPMorgan.

Congrats on another great quarter. Two questions. So Joanne, could you elaborate on the compounding flywheel effect of this new customer acquisition at the Coach brand? I know we've obviously touched on it, but maybe if there's a way to walk through the unlock that you've seen in the North American file and then the inflection that's now clearly underway in China? And just what does it mean for units, which I think still remain below pre-pandemic levels today? And then for Scott, just to Joanne's comment on we're just getting started, what does that mean for operational gross margin drivers in terms of AUR, AUC, just how to think about operational gross margin from here?

Well, thanks, Matt. I'll kick it off talking about the consumer, particularly the young consumer. And first, I will say that our entire organization has become focused on how to maintain relevance with this consumer. So it starts with an insatiable curiosity about what is relevant and how do we meet them where they are. And what's important about the young consumer and our brands, both Coach and kate, is this is an authentic place.

When we talk to consumers, we hear stories over and over and over again about remembering their purchase of the first bag and how important that milestone is in their life. We want to earn the right to be our consumers' first luxury bag purchase. And when we're at our best, we're growing the market because we're bringing more consumers into the market, and we're seeing that now.

Just to touch on the environment for a minute. You saw our growth in North America this quarter, over 20% growth, 27% at Coach, 20% at Tapestry. These are numbers that are fueled by new customer acquisition. But what's also important to note is we actually saw the market also grow. We think the North America buyer market for handbags and leather goods grew mid- to high single digits. So we're seeing a consumer who is engaged in the category. And by the way, those market -- that market data is true in China and in Europe. We're seeing improvement in the sort of the context overall.

But our strategies of getting behind a real focus on the Gen Z consumer is driving our business with new customer acquisition. We're also seeing higher retention rates with this customer. So they're coming back with more frequency. This is a customer that is very engaged with our Coach brand. And we love the new customer, this young customer for a number of reasons.

First, when we capture that first luxury bag purchase, we engender brand love for a lifetime. Those are the stories I just mentioned. Second, we have an opportunity to drive higher lifetime value. That's just math, right? When we capture them early, we can retain those relationships over a long period of time. And we're focused on doing just that. And the data today tells us we're doing a good job. That means we have to deliver the innovation and quality and value that they respect and respond to every time they interact with our brand. So we're at every touch point, making sure that we're delivering a quality experience, whether it's the storytelling we're doing, the product we're delivering or the experiences in store and online. And as we're doing that, we're seeing a customer that's sticky, gives us a chance to drive higher lifetime value.

The other important thing about the younger generation is that they have a reverse influence on all generations. So not only are we fueling this customer acquisition flywheel, but this customer is influencing all generations. So we're seeing growth in new customer acquisition in non-Gen Z, and we're seeing growth with our existing customer base. So the flywheel effect, it compounds and amplifies. And that is allowing us to drive brand heat, higher gross margins, invest more in marketing, and you see us do that and invest more in store experiences. And that's what creates the flywheel and compounding effect. Maybe turn it to Scott on the drivers of growth.

Yes. I love to talk about gross margin. So -- and the story is great here as well, right? If you think about what are those drivers, I kind of mentioned it earlier, right? First of all, AUR, driving our AUR, but within reason, right? I mean we're not being too aggressive. We value that $200 to $500 price point, as Todd has said repeatedly. That said, we still have a lot of headroom. If you look at our prices, they're just about where they were 15 years ago. And there's a lot of room to run, coupled with what Joanne was just alluding to, the brand love, right, and reinvesting back in the brand and getting noticed.

So we're bringing innovative product, and we're bringing newness, which commands higher prices. At the same token, that doesn't work unless people know you're there. So that's why we are reinvesting in awareness, and that's helping to drive our AUR. AUC is -- and by the way, AUR is also structural, right? I don't want to forget that. So as we grow internationally, we're going to drive our AUR and also the One Coach initiative that Todd has mentioned, is also a driver of AUR.

AUC, one of the things I'm particularly proud of. We got the best supply chain in the industry, in my opinion, right? And we're delivering a superior product that I'll put up against anybody, but we're doing it at scale, and we're doing it smarter than many because we're makers at heart. And we know how to engineer and make a product that most importantly, has a better outcome for the consumer. It feels better, looks better and works better, but we're also doing it more efficiently. And that allows us opportunities not to make it cheaper but to make it smarter and to drive AUC and to work smarter across our business.

And then that -- those are the primary drivers of gross margin, but I also want to talk about op margin. You didn't ask that question. But this reinforcement in marketing, the flywheel that Joanne mentioned allows us to invest significant amounts of money in marketing and increase our reach, but we're getting tremendous leverage across the rest of the P&L. So leverage is another big driver of op margin even with our continued investment underscoring our pricing and our ability to take gross margin.

We'll move on to Adrienne Yih with Barclays.

Congratulations. So well done in a very dynamic, I'll say, environment. So with that, Todd, I'm going to start with you because I really wanted to go back to kind of like the structure that you've put in place over years and decades in terms of continuing to push forward with the innovation process on the Tabbies and the New York franchises and the Kiss Lock. How do you balance that kind of pushing on kind of that forward edge of risk taking when the environment looks a little bit dicey. And then how do you balance that with kind of core franchises and bringing all this newness? I've seen the Kiss Lock sell out, I think it's probably 4 times now, and we're waiting for the next batch of it. So just keeping that side of that tempo...

Adrienne, you know somebody.

I know Stuart.

I'm sorry, but...

Go ahead. Go ahead on that.

Finish this.

No. Well, the follow-up was that you're taking that and you're taking it to a market that's very competitive in Europe and that strength continues to grow. So it was kind of for both you and Joanne. So what is the driver that's really kind of turning on kind of Europe at this point?

Okay. So let me start...

Todd will start. Yes, the details on innovation.

Yes. In so many ways, and I think it goes back to the stability and the clarity that Stuart and the entire Coach team brings. We -- over the last 6 years, we've become very focused on who the customer, this timeless Gen Z customer, our sweet spot of who we're designing for. So that's when we talk about data and how we use data. It's still -- what I always say is the most important thing is for our creators to have an informed gut. We're not outsourcing design nor are we outsourcing our commercial excellence to AI just yet.

We are driving a business that is very connected to consumers. And I appreciate how much you recognize the innovation we're bringing. But in so many ways, we're doing it under -- with fewer SKUs. We're doing it in a much more controlled manner than ever before. And we're doing it by amplifying major families. Recently, we added to the New York family a Chelsea bag that spoke to this young consumer in a very authentic way in that $300 price point. So we're building on platforms that are very meaningful and give a clear point of view and perspective.

When you walk into a Coach store, you know you're walking into a Coach store. When you see a Tabby bag on someone's shoulder, you see a definitive brand code with the C that is ownable and exclusive to us and then the quality. So that ability to amplify on the platforms we have is very significant. And then we do things where we intentionally have drops that sell out very fast. We had a pink drop that I thought was going to last between the third and fourth quarter. I think it lasts days, not weeks. Those are good problems to have. It shows how much brand heat exists in our -- in what we're doing.

So we feel very good about that. You're going to continue to see innovation. I get this fantastic benefit of seeing product often a year before and just could not be more excited. Every time I walk into the showroom, before I see it, I have a little trepidation, can it actually get better? And every time it gets better and better and better and with greater clarity of vision. On your Europe question, all of the attributes of the Coach expressive luxury and this authenticity and talking to the consumer is working in Europe.

And one of the best things I could tell you to do is we'll go to Selfridges on Oxford Street over the next couple of weeks and look at the celebration of Rexy, our Coach mascot, and just the pure fun and enjoyment we bring to the category. It's a wow, and the consumer is responding. So -- and when you think about Europe and you think about all the growth we've had, I think we've had 11 quarters of double-digit growth. We're still literally fundamentally talking about Europe and France and eye drops throughout the rest of Europe. Europe has a lot of countries and a lot of runway for us.

We'll move on to Michael Binetti with Evercore.

Congrats on a great quarter. Let me just ask one on the near term and then maybe one more a little bit longer term. Just I just want to confirm what we heard before on the quarter-to-date commentary for Coach. I think you said it was running low double digit -- sorry, low teens, Scott, in line with the guidance. Some of the data we see in China is still pretty strong in April. So maybe just some context on what drives that deceleration from the high 20s last quarter. Or if there's anything to remind us about in the cadence for the quarter of last year and fourth quarter that we should be thinking about as we shift through the near term?

And then, Joanne, when the Gen Z cohort really cycles into the existing customer bucket, really starts becoming a bigger and bigger share of that bucket. What does the North America algorithm look like as that consumer shifts from being a large share of new customers being the majority of that existing customer bucket, like I said. And what does the spending profile turn into in that existing customer bucket as that demo mixes up over time?

Yes. I'll start, Michael. Let me just talk a little bit about our guide, what it means in Q4 and just remind you of some of the prepared remarks in terms of some context. But I want to be clear, we took up our guide for Coach in Q4, all right? Based on even coming off an exceptional Q3, we increased our expectations for Q4. And as I said earlier, based on what we're seeing in the business and our progress to date and the underlying signals, we have even more confidence in our growth in the Coach brand and thus the increase in the guidance.

And remember, a few other things. We said from the beginning of this year in our initial guidance, it would be quarter-by-quarter, there would be some noise or there would be some dynamics. And we see that in the second half. I said in my prepared remarks, we have a balanced first half, second half on a 1-year stack, over 20% growth on a 2-year stack, over 30% growth and even on a 2-year stack, slight acceleration in the back half. But the calendar dynamics, just a few reminders of what those are.

So first of all, Q3 had the benefit of the Lunar New Year outperformance, a little earlier timing of Easter. And I'm going to refer back to something Todd said, which is maybe underappreciated. We had a normal cadence for us as we have a new seasonal product launch like the pink signature that he referred to earlier, and it launches in Q3 and then it sells through Q3 and Q4. Well, guess what, it sold through better. And we saw more of those sales coming out of Q4 and into Q3. That's a great signal for the brand. That is a really strong underscore of the performance, but it does create some dynamics between the 2 quarters.

So I'll leave it where I started it. We see confidence or we have confidence in Coach, and that's what gave us the confidence to increase the guide even on what was an exceptional Q3 performance.

That's right. And maybe I'll build on that with your question about Gen Z. The fundamentals in our business remain very strong. And this is really an important part of it, and that is that this new consumer that we're acquiring, I talk about new customer growth is the fuel in our growth engine, and it is powering our growth engine. But what is, maybe underappreciated is the compounding benefit we get as these customers become part of our existing file, and we're seeing that growth in existing customers as well.

So the metrics that we're tracking are both how are we -- how effective are we at acquiring that new customer, but also what are their repeat rates? Are they coming back to the brand more frequently, and we are seeing that. So as they join the brand, we see that stronger engagement, and that's the compounding effect we see in the flywheel. And part of the reason the Coach business has inflected so much, and that will continue to power our business into the future. It's why we have confidence.

We're not going to take our eye off the ball on new customer acquisition. We continue to stay really close to the customer. There is no complacency in our business. We're staying very focused because these customers, what they value, how they shop, how they behave, that all changes constantly. And Todd mentioned it earlier, and soon there will be Gen Alpha, and they'll be part of this new customer acquisition strategy. So that's the formula for us. It's acquire that new customer, do it in a quality way and make sure that we can retain that customer and build that lifetime value over time. And we see that with compounding benefits for our business.

We'll move now to Laurent Vasilescu with BNP Paribas.

Just 2 quick questions, if I may. Scott, since you love to answer gross margin questions. We are seeing inflation in nylon, polyester, cotton and there's less visibility in leather goods in terms of just [ leather ]. Curious to know what you're seeing in terms of inflation. And if there is inflation, are you anticipating to raise pricing? And then, Joanne, I think you mentioned you continue to see great traction in the expressive luxury concept. Can you maybe unpack a little bit about what you're seeing in terms of store productivity versus the rest of the store base?

Yes. I'll hit the first part on that on gross margin. What are we seeing in inflation, I think, was petrochemicals, those kind of things. So, so far, Laurent, not much. The one area where we've seen impacts right now that are clear and present are on fuel surcharges. Those are not material to us at this point in time, but we are seeing some modest cost pressure there.

As it relates to more foundational things, we are a leather goods house. So the petrochemicals other than moving our product from A to B is not as relevant as maybe some of the other categories. But it's something we're watching closely. I think the longer these, whatever you want to call it, travails go on, then we'll continue to watch where those pressures might show up. But as of now, we haven't seen too much. I'll turn it, I think, to Todd on the productivity of stores.

Yes. Thank you. Early days as we start launching our expressive luxury format. And when you think about the Coach fleet, we really have an expressive luxury, which is a more feminine, more inclusive design look and feel to the stores. There are elements of play. We have a pure-play format. And then we also have Coach coffee shops. All of it is in the service of creating environments that are compelling, that are engaging, that give a full experience.

And so far, again, early days, we always see more productivity. When we redo the stores, it's compelling, and we'll learn from them. Very simple ideas like our craftsmanship bar used to be a bar. It's the -- our craftsmen stood behind the bar and engaged with the customer. Today, we're using roundtables. Why? Because it's co-creation. It allows the customer to sit with a craftperson to individualize a bag.

Our coffee shops, this week, I think we'll have the sixth one in North America. The lift not only in the number of coffee and related product we sell, but the linger time and the overall performance of stores that are attached to coffee shops is magnificent. So we have a lot of good formats to engage this customer. It's based on consumer insight. We know Gen Z love shopping in the real world, and we're going to give them something compelling to come see not just once, not just twice, but very frequently.

That concludes our Q&A. I will now turn it over to Joanne Crevoiserat for some concluding remarks.

Thanks, Leo. Tapestry delivered another standout quarter, and we raised our outlook for the year, which is a reflection of proven strategies, disciplined execution and durable structural advantages that compound. We move forward with confidence, guided by our blend of Magic and Logic and an unwavering focus on the consumer. Together, these are the foundations of sustainable growth and long-term shareholder value. And to our global teams, this performance is yours. Thank you for the creativity and passion you bring to our work and to our customers around the world. And everyone who's joined us this morning, thank you for your interest in Tapestry, and have a great day.

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

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.

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 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.

Good morning. Thank you, Christina, and welcome, everyone. Our second quarter outperformance demonstrates the compounding impact of our Amplify strategies. During the key holiday period, we delivered pro forma revenue growth of 18%, expanded adjusted operating margin by 390 basis points and grew earnings per share by 34% versus prior year, each exceeding our expectations.

These standout results, combined with the momentum in our business enabled us to confidently increase our outlook for the year. Reinforcing that our advantages are structural and sustainable in underscoring our commitment to driving durable growth and value creation. I want to recognize our exceptional global teams, their passion, creativity and disciplined execution made these results possible.

Now turning to the strategic actions from the quarter. Actions that are delivering results today, while advancing our long-term growth ambition. First, we built emotional connections with consumers, acquiring over 3.7 million new customers globally in the quarter, driven by a strategic focus on Gen Z. This continues to be central to our healthy top line growth, as engaging consumers earlier in their purchase journey enhances repeat purchasing and lifetime value over time.

We also drove growth with our existing customer base, demonstrating broad-based strength. These dynamics reinforce a durable competitive advantage, our ability to consistently attract and retain new generations of consumers to our brands.

Next, we delivered fashion innovation and product excellence, led by Coach, where desire and demand for the brand are strong. And we're winning in our core with our leathergoods offering leading our growth, driven by higher AUR and unit volume. The combination of craftsmanship, creativity and value we offer to consumers at scale continues to be a clear competitive and structural advantage of our business and brands.

And we powered global growth through compelling experiences, delivering double-digit gains in North America, Greater China and Europe, significantly outpacing the industry and growing market share in each of these regions.

Our direct-to-consumer model keeps us close to our customers, allowing a deeper understanding of their needs and enabling more relevant brand building, which, together with the agility of our teams, sharpens execution and fuels growth. This was evident again this quarter as we achieved double-digit growth in stores and online at strong and increasing profitability. Overall, we delivered record quarterly results with a business that is strong, differentiated and well positioned for the future.

Now moving to our results by brand. Turning to Coach. The brand delivered another exceptional quarter with revenue increasing 25% and margins expanding. Growth accelerated from the first quarter on a 1- and 2-year basis with several key indicators reinforcing the strength of the brand and the durability of its growth.

Customer acquisition once again drove top line gains, welcoming 2.9 million new customers to the brand this quarter. Rising meaningfully over the prior year, led by continued growth with our target Gen Z consumer. Our relevance with Gen Z is influencing all other generations, and we're driving healthy gains from existing customers, reflecting broad and increasing brand desire and reach.

Growth was led by our core leathergoods assortment where we have deep expertise and clear differentiation with broad-based strength and no single-family accounting for more than 10% of sales.

Within leathergoods, growth was well diversified with both average unit retail and unit volumes increasing at mid-teens rates, demonstrating multiple drivers of sustainable growth in the core. And momentum remains strong across key geographies, including North America, up 27%, Greater China rising 37% and Europe increasing 26%, highlighting the global resonance of the brand and the effectiveness of our regional strategies.

With a large total addressable market of nearly 2 billion consumers, including 275 million at the point of market entry, we have under 1% share and meaningful opportunity ahead. Coach continues to benefit from its expressive luxury positioning combining 85 years of heritage, craftsmanship, creativity and value to build enduring customer relationships and support sustained growth.

Now to discuss our second quarter results in more detail. Our creative teams are delivering compelling innovation to consumers through a blend of magic and logic that are the hallmarks of our brand. Our icons continued to lead consistent with our strategy. In particular, the Tabby franchise, the New York family, including the Brooklyn and Empire and Teri, Juliet, and Laurel outperformed, driven by accelerated Gen Z customer recruitment. By animating our proven hero silhouettes through new color ways, materials such as crystals and sizes, we built on our leadership in our core category and delighted our consumers during the key holiday season.

Importantly, Coach's accelerated growth in leather goods highlights the enduring values of the brand and the value we offer in the luxury market. Looking forward, we have a strong product pipeline that we believe supports gains in both AUR and units, reinforcing the diversified drivers in place to support healthy and sustained growth, while never compromising the value proposition we offer to consumers, a key structural advantage.

Next, turning to footwear. We delivered high single-digit growth in the quarter, fueled by sneakers with the continued success of the Soho family. Building on our footwear assortment that is designed with the timeless Gen Z consumer in mind, we also successfully launched the Margot family, featuring sandals and sling bags. Footwear remains a long-term growth opportunity for Coach, given our brand strength, low share of the market and the category's relevance to our target consumer.

Touching on marketing. The compounding benefits of our strategic brand investments were evident during the quarter with a clear focus on long-term demand creation. We increased marketing spend by approximately 40% versus the prior year with a continued shift to our top-of-funnel brand building to support sustained customer acquisition. This sustained investment in fueling brand desire, supported accelerating customer acquisition during the quarter even as we meaningfully reduced promotional messaging during the most discount-driven period of the year, demonstrating both our commitment to the strategy and its effectiveness.

Importantly, we continue to prioritize building emotional connections with Gen Z consumers globally through The Gift for New Adventures campaign. A new holiday campaign, positioning the brand as the ultimate destination for gifts that spark confidence and self-expression in the year ahead. The campaign featured a diverse global cast, including Oscar-nominated actor, Elle Fanning, actors Charles Melton and Koki and K-pop Rapper, Soyeon, building cultural relevance and reach across key markets.

In addition, to support growth acceleration in China, we launched a collaboration with CLOT, a leading Chinese streetwear and lifestyle brand. The partnership bridges heritage and street sensibility, fusing Coach's expressive spirit with CLOT's disruptive approach to daily wear, reinterpreting iconic Coach silhouettes through a China-specific streetwear lens.

Collectively, these actions reflect a disciplined, long-term approach to brand building at scale, deepening cultural relevance, accelerating consumer acquisition at point-of-market entry and reinforcing a growing brand moat around consumer understanding and sustainable demand creation.

And finally, we are strengthening brand desire through distinctive, immersive retail experiences that elevate how consumers engage with Coach. We continue to bring expressive luxury to life through unique store formats including our newly remodeled stores in Ginza, Yorkdale, Macau, and the Mall of Dubai. These locations reinforce brand desirability, while providing valuable insights that will inform our future store investments and expansion. Our Coach coffee concepts at Jersey Gardens and Woodbury Commons also continue to perform ahead of expectations, resonating especially well with younger consumers.

In closing, Coach continues to deliver standout results, guided by a clear brand vision and a deep focus on the consumer. Our teams are operating with purpose and discipline, translating insights into meaningful action and impact. Importantly, this performance reinforces our conviction that Coach will be a $10 billion brand over time with best-in-class margins and an unwavering commitment to what makes the brand iconic, valued and loved by consumers around the world.

Now moving to Kate Spade. Our results for the quarter matched expectations from strategy to financial outcomes. In the second quarter, revenue declined 14%, reflecting in part, deliberate actions to reset the brand through a pullback in promotional activity. At the same time, we made incremental investments to advance the turnaround underway, remaining focused on strengthening the brand's foundation for long-term growth.

Once again, where we placed our focus on investments, we drove progress as tracked against the leading KPIs we've previously outlined. We saw a lift in brand consideration with our holiday marketing campaign and delivered an improvement in Gen Z acquisition trends driven by handbags. While still early in the turnaround, the improvement in these KPIs are signs that we are executing our strategies and they're beginning to take hold.

To touch on our results of the quarter in more detail. Our first strategic priority is to fuel brand heat through our uplifting luxury positioning to become top of mind and relevant with the Gen Z Connector, our target customer. In the quarter, we stood behind our Spark Something Beautiful campaign featuring influential Gen Z celebrities. We updated the campaign with a holiday twist to make it festive, while reinforcing a cohesive message over time. This campaign drove an improvement in purchase intent among Gen Z consumers, reinforcing our investment in brand building.

Next, we advanced our strategy to build handbag blockbusters with a consumer-informed assortment that is more relevant and focused. During the quarter, we made important progress, our handbag blockbusters, the Duo, Kayla, Margot, and 454, outperformed the balance of the offering with higher AUR and strong Gen Z acquisition. This is another example of how our strategic focus is translating into early positive signs in the business.

And as we've discussed, we've also brought more focus to the assortment, reducing handbag styles by 40% this holiday, allowing us to stand behind our big ideas with clarity and intention, while supporting a reduction in promotional activity, an increase in full price selling and handbag AUR growth. These actions are consistent with our commitment to building a healthier brand.

Finally, touching on our third strategic pillar to maximize compelling omnichannel consumer experiences. A critical part of this work involves removing deselection barriers with cohesive messaging that elevates the brand and builds desire. As part of this work, we tested updates to the visual experience and merchandising in 10 locations. These stores experienced a lift in conversion in ADT and outperformed the balance of the chain. We plan to bring this format to additional locations in North America by fiscal year-end.

Overall, we are strengthening the fundamentals at Kate Spade to drive sustainable, profitable growth. This is a unique brand with heritage, distinctive positioning and meaningful long-term opportunities. With disciplined execution, the benefit of continued learnings from Coach's success and Tapestry's brand-building capabilities, we're acting with focus to realize the brand's full and significant potential.

In closing, Tapestry achieved another record quarter, and we raised our outlook for the year, showcasing the power of our Amplified growth agenda and that our structural advantages are enduring. As we move forward, we do so with momentum and confidence, we have the strategy, capabilities and team in place to drive growth and value creation for years to come.

I'll now turn it over to Scott.

Thanks, Joanne, and good morning, everyone. In Q2, we outperformed expectations across revenue, operating income and earnings, delivering record sales and EPS. In the quarter, on an adjusted basis, we achieved pro forma revenue growth of 18%, led by 25% growth at Coach. We expanded operating margin by 390 basis points, and we delivered earnings per share of $2.69, an increase of 34% versus last year.

Turning to the details of the second quarter. I'll begin with a discussion of revenue trends on a pro forma constant currency basis. Sales increased 18% compared to the prior year and outperformed our expectations. These results reflect strong global momentum. By region, North America sales increased 17% compared to the prior year, ahead of plan and led by 27% growth at Coach, driving share gains. Importantly, we did this while expanding both gross and operating margins in the region.

In Europe, revenue grew 22% above last year, driven by strength in our direct business and reflecting market share gains in the region. Strong new customer acquisition, particularly among Gen Z and increased local consumer spending continued to fuel our momentum. Given our market positioning and low penetration, we see significant opportunities for further growth in this large and attractive market.

In Greater China, revenue outperformed our expectations, increasing 34% driven by broad-based growth across channels and continued market share gains. Digital was a notable contributor with Coach ranking as a top-performing brand over the Double 11 period. Our results reflect the impact of our steadfast strategies and investments, and we are well positioned to drive sustained momentum in this key region.

In other Asia, revenue increased 12%, led by growth primarily in Australia and South Korea. And in Japan, sales declined 6%, as expected, driven by an intentional pullback in promotions.

Now touching on revenue by channel for the quarter. We delivered gains across channels, fueled by direct-to-consumer growth of 17% compared to the prior year. This included an increase in digital of approximately 20% and a mid-teens percentage increase in global brick-and-mortar sales, with all channels at strong and increasing profitability.

Moving down the P&L. We continue to drive healthy margin expansion versus the prior year, delivering the second quarter gross margin of 75.5%, 110 basis points above prior year. This was driven by operational expansion of approximately 250 basis points, as well as a benefit from the divestiture of Stuart Weitzman of 50 basis points. These benefits fully offset a negative tariff and duty impact of 190 basis points, which included approximately a 140 basis point impact on Coach's gross margin and a 520 basis point impact on Kate Spade's gross margin.

Overall, our strong gross margin remains a core element of our value creation model supported by our agile supply chain, which delivers craftsmanship at scale, a core competitive advantage of Tapestry.

Turning to SG&A. Expenses rose by 8% and leveraged by 270 basis points, reflecting our focused approach to reinvest in the business, notably in marketing, which represents 11% of sales, while maintaining strong operational discipline. So taken together, operating margin expanded 390 basis points in the quarter, driving profit expansion of 31% over the prior year, which was ahead of expectations. And our second quarter EPS of $2.69, grew 34% over the prior year, also exceeding our guidance.

Now turning to shareholder returns. Starting with our dividend, our Board of Directors declared a quarterly cash dividend of $0.40 per common share, representing $81 million in dividend payments for the quarter. Additionally, during the second quarter, we spent $400 million to repurchase approximately 3.6 million shares for a total of $900 million or approximately 8.3 million shares repurchased at an average stock price of $109 year-to-date.

In fiscal '26, we now expect to return $1.5 billion or 100% of expected adjusted free cash flow to shareholders through dividends and share repurchases. This includes over $300 million in dividend payments for an annual rate of $1.60 per share, as well as $1.2 billion in share repurchases, which is an increase from our prior outlook of $1.0 billion. Our significant return of capital to shareholders is a testament to our strong organic business and robust cash flow generation and underscores our confidence in the future.

And now before turning to the details of our balance sheet and cash flows, I'd like to reiterate our capital allocation priorities, which are unchanged. We have two foundational commitments. First, to invest in our brands and business to support long-term sustainable growth and to return capital to shareholders via our dividend with the goal over time to increase the dividend at least in line with earnings growth.

Beyond these two foundational commitments, our robust cash flow generation provides us with balance sheet flexibility for value creation. This includes the opportunity for share repurchase activity under our previously announced $3 billion share repurchase authorization.

And finally, utilizing our rigorous 4 lens framework we consistently evaluate opportunities for strategic portfolio management. Importantly, and as previously communicated, before moving forward with any acquisitions, we will ensure Coach remains strong and Kate Spade has returned to sustainable top line growth. These clear capital allocation priorities are underpinned by our firm commitment to a solid investment-grade rating and maintaining our long-term gross leverage target of below 2.5x.

Now turning to the details of our balance sheet and cash flows. We ended the quarter with nearly $1.1 billion in cash and investments and total borrowings of $2.4 billion. Together, this represents a net debt of $1.3 billion. At quarter end, our gross debt to adjusted EBITDA leverage ratio was 1.2x more than a full turn below our long-term target. Adjusted free cash flow for the quarter was an inflow of $1.0 billion and CapEx and cloud computing costs were $54 million. Inventory levels at quarter end were 4% below prior year on a reported basis and up mid-single digits, excluding the impact of Stuart Weitzman.

As we enter the second half of the fiscal year, our inventory continues to be current and well positioned globally and by brand. For fiscal '26, we continue to expect inventory levels to be down modestly year-over-year on a reported basis.

Now moving to our guidance for fiscal '26, which is provided on a non-GAAP basis and excludes the impact of Stuart Weitzman from fiscal '26 expectations. With the critical holiday period behind us, we are raising our full year guidance, incorporating our Q2 outperformance and a stronger second half outlook.

Now turning to the details. For the fiscal year, we expect revenue of over $7.75 billion, representing pro forma growth of approximately 15% on a nominal basis or 14% constant currency with FX planned to be a 70 basis point tailwind.

Touching on sales details by region at constant currency on a pro forma basis. In North America, we now expect revenue to increase low double digits. In Europe, we expect growth in the area of 20%. In Greater China, we now expect to achieve over 25% growth versus the prior year. In Japan, we're forecasting a high single-digit decline and in other Asia, we now anticipate low double-digit gains.

And by brand, this guidance incorporates high teens percentage growth at Coach. At Kate Spade, we continue to embed a high single-digit decline in revenue for the year, with sequential improvement planned for the second half. In addition, our outlook assumes operating margin expansion of approximately 180 basis points. We now anticipate gross margin to increase in the area of 20 basis points, a meaningful improvement from our prior outlook and completely mitigating the impact of tariffs. This assumes operational gross margin expansion of roughly 180 basis points due primarily to improvements in AUR.

Further, we expect to realize a 60 basis point structural tailwind to gross margin from the disposition of Stuart Weitzman. These planned margin drivers are now expected to fully offset a nearly 200 basis point headwind from incremental tariff and duties, as well as an FX headwind of 20 basis points.

On SG&A, we expect leverage of roughly 160 basis points favorable to our prior outlook. This reflects our diligent expense control, partially offset by ongoing growth-focused investments. To this end, we expect marketing as a percentage of sales to increase around 130 basis points versus last year, approaching 12% of revenue. We also realized a 20 basis point benefit to expenses from the sale of Stuart Weitzman.

For some texture on operating profit by brand, we anticipate Coach will expand its operating margin even with tariff pressure and continued brand investments. At Kate Spade, we continue to expect a modest profit loss given the outsized tariff impacts and brand investments, as previously mentioned.

Moving to below-the-line expectations for the year. Net interest expense is expected to be approximately $65 million. The tax rate is expected to be approximately 17% and our weighted average diluted share count for the year is forecasted to be approximately 211 million shares, which includes the expectation for $1.2 billion in share repurchases. Taken together, we now expect EPS to be $6.40 to $6.45, representing growth over 25% compared to last year and well ahead of our prior outlook of $5.45 to $5.60.

Moving on, we anticipate adjusted free cash flow in the area of $1.5 billion. And finally, we expect CapEx and cloud computing costs to be in the area of $200 million. We anticipate about 60% of the spend related to store openings, renovations and relocations, with the balance primarily related to our ongoing IT and digital investments.

Touching on the shaping of the back half of the year. For context, we raised our second half outlook based on the momentum in the business. We expect total pro forma revenue to increase at a low double-digit rate in the back half, which represents over 20% growth on a 2-year stack basis, in line with the first half. This embeds mid-teens growth versus prior year at Coach in the second half or over 30% growth on a 2-year stack basis, consistent with the first half. At Kate Spade, we're continuing to incorporate a mid- to high single-digit decline in the second half compared to the prior year.

For Q3 specifically, our sales trends to date remain strong and support the higher outlook we've given today. And from a modeling standpoint, we've incorporated a total sales increase in the area of 14% on a pro forma constant currency basis. FX is planned to be more than 150 basis point benefit to nominal sales. By brand, Coach has planned up high teens on a constant currency basis versus prior year, while Kate Spade is expected to decline high single digits.

Turning to operating margin for the quarter. We expect expansion in the area of 70 basis points with over 150 basis points of SG&A leverage, offsetting a decline in gross margin due entirely to tariff-related headwinds. Q3 EPS is forecasted to be approximately $1.25, an increase of over 20%, including a tax rate of roughly 14%.

So in closing, we delivered another record-breaking quarter, highlighted by strong top and bottom line growth. From this position of strength, we raised our outlook for the year, a clear reflection of our proven strategies and our disciplined and consistent execution. Moving forward, our business is strong, and we have competitive and structural advantages to fuel durable growth and sustainable value creation for years to come.

I'd now like to open it up for your questions.

[Operator Instructions] Our first question comes from Matthew Boss of JPMorgan.

Congrats on a great quarter and this morning's material beat and raise.

Thanks, Matt.

So your fiscal '26 earnings guide of $6.40 to $6.45, 15% or $0.80 higher than your forecast just 3 months back. Roughly 22% operating margin, that's roughly 2 years ahead of your Investor Day time line. So Joanne, what are you seeing today that gives you confidence in this delivery? And what do you see as the path to continued or ongoing revenue and margin drivers from here?

Well, thanks, Matt, and good morning. This was truly a standout quarter, but it reflects the power of our strategies, our brands and our business model. The results we're delivering reflect our systemic approach to building our brands and our business for healthy and sustainable growth. And our efforts, as you can see, are compounding. These are outcomes of the work we've been doing methodically over years. It starts with deeply understanding our consumer and then bringing the magic or in Tapestry fashion, bringing the magic and the logic together to deliver compelling product and experiences to consumers.

And then investing to scale our efforts, and that's driving customer acquisition, which is strong around the world. And that's what's driving our business today. And not only are we delivering healthy growth with expanding operating margins, as you pointed out, we're also increasing our marketing investments that are driving new customer acquisition both for today but also for the future.

So what gives us confidence in the future is that our strategies and our execution are working. And we outlined at our Investor Day last September, we have a massive TAM with low share, and we're applying these disciplines around the world, we see a tremendous opportunity into the future to drive consistent and durable growth. And this momentum we have, we're confident in our capabilities and our brands and our team, and the financial outcomes are evident in our second quarter results, but I'll turn it to Scott to unpack what that means for our outlook.

Yes. Thanks, Joanne, and thanks for the question, Matt. I would just say this is a moment we prepared for. So we've been known for operational discipline for quite a while. But what you see in the results in Q2 and the outlook for the year is a new gear of growth. And when you add growth on top of this operational discipline, what you have is a really powerful machine.

Just a few highlights I would point out. So thanks for the recap. $0.80 EPS increase, that's 15% over the prior guide. And $0.50 of that is the beat in Q2. But importantly, we also took up the second half by $0.30. And that's really based on the top line, right? So we took, again, the beat in Q2 on the top line and increased the second half. So now at 14% constant currency growth for the year, we've got a balance on a 2-year stack, first half versus second half based on the confidence we see in the future.

And not only are we incorporating double-digit top line growth and operating margin with the investments in marketing that we mentioned, but also importantly, in this outlook, we're increasing our gross margin guide. So that means we've fully mitigated the impacts of tariffs this year based on the actions that we've taken and the strong AUR gains.

And lastly, when you put all that earnings and growth together, it's a cash machine. So $1.5 billion. That's $200 million better than we guided last quarter. And we're returning all of that $200 million, 100% of our free cash flow back to you, the shareholders, via additional repurchases. And I think that just speaks to the strength of the model and frankly, our confidence in the future.

But here's the best part, we're not done. You asked about the future. Think of this new guide fiscal '26 as the base -- the rebaseline for growth going forward. We've established mid-single-digit revenue and double-digit earnings EPS as our baseline. That's our floor. And with that, we see expanding gross margins and operating margins from here. Why? Global opportunities led by international that's accretive to margins, gross margin expansion driven by AUR and AUC, SG&A leverage based on the growth we see, operational discipline while we're investing back in marketing. So this new gear of growth with operational discipline from our standpoint, yields exceptional TSR as you look forward.

Congrats again, best of luck.

Thanks, Matt.

Thanks, Matt.

We'll now move on to Brooke Roach with Goldman Sachs.

What gives you confidence that the Coach brand can sustain its strong growth momentum in North America, particularly as you begin to cycle very tough comparisons?

Yes. Maybe I'll let Todd jump in.

I'm happy to take this question. I'm very confident in our growth momentum in North America and all over the world. And my confidence is grounded in facts and experience. I appreciate that there was some concern about our ability to comp the double-digit growth in the quarter, but not only did we comp the comp in the most critical holiday period, we did it the right and sustainable way with lower promotions, exceptional margins and a 40% increase in marketing, which is primarily designed to create desirability for the brand in the future, not simply in the quarter.

We were able to achieve these results because of the exceptional talent and passion of the seasoned Coach teams around the world. Every day, they drive the business and are focused on our consumers. It is their efforts that will deliver our $10 billion ambition in the future at best-in-class margins.

Now let me turn -- let's look at what I call our Confidence Performance Indicators or CPI. First, we introduced at our Investor Day and Joanne mentioned earlier, we look at the TAM very differently. It's not just about swapping dollars from other brands, but the number of consumers we can bring into Coach and the category, and we're clearly doing that.

When you examine the TAM through that lens, in North America, our market share is single digits. And globally, it's below 1%. Second, our focus on acquisition, particularly with Gen Z and soon Gen Alpha. Not only are we winning with them, but they provided our brand with a heat halo that positively affects all other ages. So when we talk about gaining 2.9 million consumers in the quarter, the highest in our history, if we simply hold retention rate, it will have a compounding benefit in the future.

Third, our growth is overwhelmingly coming from our core category, women's leathergoods. That said, it is extremely balanced across families and brand codes that can be built on and Amplify, with no single family accounting for more than 10% of our sales. Fourth, AUR units equally contributed to the quarter. Our AUR today is where the brand was 15 years ago and 5 to 10x below traditional European luxury. That said, we are clear-eyed in our sweet spot of the $200 to $500 price point to ensure we can continue to attract young consumers.

On units, we have significant runway. We are still below our pre-pandemic levels, 20% globally and 25% in North America. So to wrap it all up, our CPIs are strong and gives us the confidence that we will deliver long-term healthy growth into the future.

We'll now move on to Ike Boruchow with Wells Fargo Securities.

Congrats on my end as well. Maybe for Scott, 2 regional questions. First, China, 25% plus from low double, pretty impressive. Can you elaborate on the strength and outperformance you're seeing in that region? Is it share? Is it category? Is it both?

And then I wanted to also ask, even though you didn't raise it, Europe holding at 20%, it's still pretty impressive. And there's actually several brands that have been reporting that have been talking down Europe a little bit given what they've been seeing recently. Can you just comment on what you're seeing in the European market, how you're bucking the trend and just how your kind of viewing the macro in that region?

It's Joanne. Maybe I'll jump in here and talk about strategically how we're thinking about international. As we talked about in our Investor Day, our international markets represent a considerable opportunity for us. And I think what you're seeing around the world is the global resonance of our brand and the effectiveness of our regional execution. We have teams on the ground, and we're building capabilities.

So to your point, we did accelerate in China in the quarter. We -- China continues to represent long-term opportunity for our brand. We performed well ahead of our expectations, but we're also well outpacing the industry in China. So I'll pause there for a second and say what is driving our growth and our share gain -- significant share gains in the market is new customer acquisition, which is being led by Gen Z. So a consistent theme around the world. We are seeing growth across channels in China, digital led the growth, which means we're meeting our customer where they are on the ground. And to your point, our updated guidance, we do expect over 25% growth for this year. We are growing share. But again, it continues to represent a significant long-term opportunity for us.

And I'll touch on Europe, but then I'm going to toss it to Todd to give you a little bit of color of how we bring this to life because I think that's important. Europe is a consistent story, right? We have an opportunity to grow penetration in Europe. It's low penetration for us today, and we see long-term opportunity to continue to build our penetration in Europe. And we're taking the same strategies of doing diligent and disciplined brand building and attracting a local consumer that's who's driving our growth, and it's a young consumer again.

And the tactics and execution on the ground in each of these regions has been at a very high level, getting to know their customers. And then as I say, bringing that magic and logic together to deliver compelling product and experiences.

But maybe, Todd, you can add a little color on how that's coming to life.

Thanks, Joanne. Let's go around the world in 60 seconds. But first, China, as Joanne said, first, let's remember, we're building on an incredible base. We've been there for over 2 decades. We have hundreds of stores. We are very close to the Chinese consumer. We integrate our marketing campaigns to make sure they're responsive to the Chinese consumer needs.

And I do think what continues to resonate is the idea that our value and values cut through. And then our relevancy, most recently, we did a collaboration with CLOT, a very cool streetwear brand in China that reinforced all of those attributes of Coach. So we feel very good. You'll see us re-up more marketing in China in a very targeted city approach, not global across all of China, but very tactical. And we measure it, and we see it works. And then it gives us the confidence to put more money in.

In Europe, it's such a fun and terrific story. Our team in Europe is doing a sensational job. And when you really look at Europe, we talk about Europe, but realistically, we're in England and a little bit elsewhere. So the opportunity to continue to expand, France is going to be our next big push. And there, we're doing things in so many right ways. We see a big wholesale opportunity.

So I think you know from Joanne, Scott and myself, we don't like key money, and we don't like buying temples for real estate. So we love the approach of going into youthful neighborhoods where the stores can make money and/or wholesale and digital. And that approach is winning. And again, what is so important, the consumer sees the value of our offering. And ultimately, I think it will allow us to grow for many years in more and more countries in Europe.

We'll now move on to Rick Patel with Raymond James.

I'll add my congrats as well. Can you provide a little more detail around AUR and the opportunities going forward? How do we think about the benefit from pricing? And is there anything to flag in terms of sales mix towards larger bags or certain quality materials that could be a swing factor for AUR moving forward?

I'll just hit the top of the waves, but let Todd talk about what's really driving AUR growth at Coach.

But AUR at Tapestry is about driving healthy growth, and we are driving healthy growth. We're driving AUR growth in the quarter. We've been doing that consistently, and it's a function of brand heat and the investments we're making in our brands, the innovation we're delivering and the quality that we deliver. I think the value proposition of our brands is unmatched in the marketplace.

So AUR for us is not just a reaction to cost. It really is thoughtful about how we deliver a strong value proposition to consumers. And at the end of the day, AUR is a math equation. It's how the consumer votes, right? AUR is the average unit retail of where they're placing their dollars. And we continue to stay close to consumers to make sure we understand and leverage those insights into the product and experiences we're delivering, and we're seeing our customers respond. New customers are coming in at higher AURs. So we're driving healthy growth, and we've got a great innovation pipeline to keep it going. But Todd, do you want to touch on that?

Sure. Thank you. Again, all the things that Joanne said are so relevant. And -- but when you go down one more level. First, let's talk about our sweet spot, that $200 to $500 range. That's a lot of range to continue to take price where it makes sense. We also are constantly animating product. And that animation, we do it in a way that the consumer sees the value, and that's how we get it. This is not a march up to just increase AURs on like-for-like 10%, 10%, 10%, which we're seeing other people do, and we know what happens there.

So our task is to really always reflect back on value. We also benefit from mix. Mix is a big driver here. You've heard me talk about our One Coach strategy, bringing collection product into outlet stores raises AURs. We also are seeing a really interesting phenomenon, which is our customer, they may come in dietary as their first bag. Their next bag is often a higher AUR bag opportunity because they've had such a great experience with Coach, they are aspiring to be even better. And that is so powerful for us.

But there's 2 things that are important truth that I want to make sure everybody realizes. One, we are not going to compromise our value to drive AUR. We will always ensure that the value of the product is there. Similarly, we're not going to artificially drive units through promotion. That balance is how we achieve optimal results consistently over many quarters and years. Thank you.

We'll move now to Adrienne Yih with Barclays.

Great. Huge congratulations, really powerful. The -- really kind of the message that's coming through here very clearly is that the model itself and the 10, 15 years of discipline is actually your moat. And so Joanne, with that, having said that, it seems like you've always been sort of forward on your forward foot in terms of what's coming next and where to invest. So from an IT perspective, how are you harnessing sort of the power of AI? How much of the CapEx IT is in these AI foundational investments? And how quickly can you see sort of some of the demand side payback, not necessarily the cost side efficiency?

And then for Todd, the Kisslock I saw was back in stock in January. And then you mentioned that no product families are more than 10%. So really, I guess my question is, what's coming for newness this year? And how do you instill this culture of innovation, right, without letting any of these particular franchises get bigger than 10%. A lot of times, we kind of get risk averse when we're doing a little bit too well. So just what have you instilled in the entire creative organization that allows you to unleash that creativity?

Thanks, Adrienne. Great question on AI. And I assume that I was going to get a question on AI today.

So I would say this is something that, as you mentioned, it's a competitive advantage for Tapestry. We are a direct-to-consumer business. We have a lot of data, and we've been working on harnessing that data and leveraging tools. So we're already applying AI tools across the value chain from product development, as you know, to inventory management to pricing to marketing, AI tools are embedded.

And what we've been focused on at Tapestry is putting the tools in the hands of the decision-makers in our organization, which is so critically important. And that is where I think that is the moat to have our teams understand, trust it and leverage those tools and those insights to make better decisions at Tapestry. And you're right, it does drive efficiency, but it's also driving growth.

And we've invested for many years in these capabilities. In fact, we have a patented data fabric. So this is not new to Tapestry. I do think it's a competitive advantage. What that does is it positions us well to adopt new technology. And our teams are insatiably curious. They're testing and learning with these tools, and it is driving more efficiency, but it's also driving creativity. And I'll give you just a couple of quick examples.

We have designers that are leveraging AI. They'll do a sketch. So there is still a human and a need for design eye, right? They do a sketch. But what AI helps is they can iterate on that sketch. They can do color multipliers. They can make design tweaks much faster than we could in the past. So the speed and the process of design inception and the idea through getting samples and working it through our process increases. And when speed increases in our supply chain and that product development time line, that leads to better outcomes for our consumers and drives our growth.

We're also using it in marketing to harness consumer insights and ideate on content creation based on those insights. Again, human in the loop, that human creativity and translation of the insights to creative content is important. But these AI engines are helping us speed up the process of creating AI, do some testing, learn faster. And that speed is paying off in content creation as well. These tools are new, and our teams are aggressively testing and learning, and we'll see where it takes us. But we are well positioned to continue to drive with AI tools and with data.

Fantastic.

Maybe just a quick build, Adrienne, too, you asked about the investment. So of our $200 million of CapEx, we said -- over half of that was related to our stores and the remainder is in technology. That's not a real big number in a company that our size. It's because of what Joanne said. A lot of that tech debt is behind us, and we have the foundation. So it's more of a change management philosophy opportunity for us as opposed to a big investment challenge in terms of adopting AI. Sorry, Todd, over to you.

No worries. One of the most pleasurable aspects of my job is to sit with Stuart, our Creative Director, our merchants and see what's coming. And the -- last night I did a walk-through for future product, it's just so good. You'll see it some of it next week at our runway show, which is where we push the envelope, new ideas, new innovation comes about.

And what I love and what you've seen over the last probably almost dozen shows is the commercial aspect of our shows, taking down ideas from runway and making them big commercial ideas is how we're winning on product. And Stuart and the merchants are incredibly focused on making sure it's relevant to a timeless Gen Z consumer, while at the same time, putting it through the lens of, is it Coach.

We don't just chase trends -- quite honestly, our team creates trend. And they're doing that with this consumer in mind. And this is the essence of what we've been saying probably 25 years now, balancing logic and magic. It's really good. If you like the Kisslock, you're going to love some of the new sizes that's coming in. I'm probably saying more than Stuart wants me to say at this point, but it's really good.

Fantastic. Congrats again.

Thank you.

We'll move now to Bob Drbul with BTIG.

I think this is for Todd, but generally, are you seeing any signs of demand slowdown in some of your signature styles like Tabby and Brooklyn, especially as you -- if there's competitor silhouettes that have been launched. And can you just talk a little more about your innovation? Do you think that it's strong enough to drive incremental growth from where we are?

Yes. Thanks, Bob. That's a good follow-up question to the one I just got. It's really interesting. Some of you have followed us for a long time, there was a period of time where maybe one silhouette or one colorway was pervasive. That's not the case today. Today, we are so well balanced. And it was interesting, we were hindsighting literally earlier this week with our merchants and global buyers on the results of the last quarter, and we were looking at the future buys for the balance of this year and into next year.

And when we honed in a Tabby, the New York family and Teri, I looked at the team a little mystically, and I said, T&T equals explosive growth. That's where we are. That's what you'll see. These are icons that will continue to fuel what we're doing.

We'll now move on to Dana Telsey with Telsey Advisory Group.

We'll move on to Mark Altschwager with Baird.

Congrats on the amazing results here. Scott, just on gross margin, can you talk about what's driving the outperformance on the operational side and how you're thinking about the opportunity there in the back half of the year? The guidance seems to incorporate maybe a bit of conservatism there given the first half results, but trying to better understand some of the puts and takes and the timing.

Yes, sure. Thanks for the question, Mark. Operational improvements, as we call them, are really driving the gross margin outperformance. So what does that mean? AUR is the biggest part of that. Also, we do have mitigating actions in the supply chain. Frankly, most of those start to accelerate as we get into next year. There are some mitigating actions related to tariffs that we see this year, but the lion's share of that next year.

And maybe I'll just give you a little bit of shaping. But before I do, let's not bury the lead. We just took up our outlook for gross margin year-over-year this year, fully offsetting the impact of tariffs on a full year basis. And as we've said since Liberation Day, right, there's going to be quarter-by-quarter timing that's going to be a little noisy and messy, and we see that both in the guide for this year and as we think about going forward.

And the reason for that is we -- at the time that the tariffs were imposed, you have inventory on hand, which needs to sell through and then the tariff goods as they come in, it takes a while for them to sell through. So we'll see the majority of that tariff impact for this year start to hit in the second half, specifically in Q3 and Q4, a little bit into next year and then you start to comp those impacts. And then again, compounding AUR gains along with some of the mitigating actions, which accelerate next year.

So all those things together give us the confidence this year to give a full year guide of an increase in gross margin and also have the confidence to say next year, even off that base, we have confidence that we'll be able to continue to increase our gross margins as we look at fiscal '27 and beyond.

We'll now move on to Michael Binetti with Evercore ISI.

Let me add my congrats on this. I'm just curious on the units versus AUR. There was a lot of quarters in a row where the total growth at Coach looked exactly like the AUR growth in that mid-teens. And then last quarter, we saw the unit contribution looks like increased to about mid-singles, and now we're here in the mid-teens. Can you just talk to us a little bit about what's driven that acceleration and what you see is durable there?

And then I guess, Scott, looking out at the long-term model, earlier, someone mentioned you're getting close to your earnings guidance for '28 and the year is 2026 right now. I think '28 was guided to about $4.2 billion in SG&A. You'll get close this year, but SG&A is now guided to about 54% of revenues. So should we still think about SG&A at 55% of revenues on a higher base in '28, or as we move to this new revenue level, is there a potential to show better leverage in the out years versus the plan?

Yes. You want me to start with the second. Yes. I'll take the exciting part first, Todd, and then I'll give you the more pedestrian part, just kidding, of course.

So -- yes, Michael, I'm not -- we're not going to give new guidance right now, as you can imagine. I appreciate your recognition that we are moving ahead. And I'd just point you back to one thing that I would -- I hope is evident now is we found a new gear of growth, right?

And as you think about how you think about Tapestry, how you think about this model. We've definitely moved into a higher echelon of growth. We talked about mid-single digits being our floor, and we're certainly moving or performing ahead of that.

What it means for the future, I think you should take confidence, but we're not going to -- I'm not going to get into giving specifics. As it relates to SG&A, I will say this. As we continue to grow with the operational discipline that we have in this organization, we would expect to continue to leverage in all non-growth-enhancing parts of the P&L.

So there will be leverage as you think about going forward with the accelerated growth. We also have said consistently, we intend to keep investing back into the business and specifically in marketing. So do I expect leverage over time? Yes. In terms of what that looks like, we'll give you shaping as we -- as we get to the end of this year and look into next year.

Yes. And when we look at unit growth, in handbags, they were both mid-teens, and we feel very good about that. Again, it goes back to this customer acquisition engine that we're driving. So that's driving units. We're not churning units on promotion. And that creates much more sustainable long-term growth for us. That's why I point out that unit count from FY '19 is still materially down.

So if you think about the math for a minute, 2.3 million new -- 2.9 million new customers in the quarter. Again, retention rates, one of the things we've talked about, I'm giving a conservative guidance that the retention rates stay the same. What we're seeing with the younger customers, they actually are coming back a little bit more frequently. So that is a good news.

But even if you take the conservative retention rate, as we keep acquiring more and more customers and they maintain their retention rate, our unit count will go up. Then you take opportunities like that's one of the things we like about footwear. The frequency of footwear purchases is higher than handbags.

So if we get them in through a handbag, they like footwear. Our productivity in our stores go up, our unit count goes up and overall connectivity with our customer and the brand is sustainable for a long period of time. So we've got a lot of room to go on units. But remember the 2 truisms I said, we're not going to drive artificially units through promotions. We're going to keep playing our game successfully over time, and I think that's how we'll win.

Congrats again on the quarter.

Thank you.

Thanks, Michael.

Thank you. That concludes our Q&A. I will now turn it over to Joanne Crevoiserat for some concluding remarks.

Thanks, Leo. As we shared this morning, our outperformance reflects the power of Tapestry, the result of deliberate strategies and disciplined execution over time that are driving our growth today and position us for the future. And I especially want to thank our exceptional global teams. This performance is yours, and it reflects the creativity and passion you bring for our customers every day.

With strong fundamentals and momentum, we're moving forward with confidence, and we're focused on delivering sustainable growth and long-term shareholder value. Thank you for your interest in Tapestry and for joining us today.

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

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 your the Global Head of Investor Relations, Christina Colone.

Good morning. Thank you for joining us. With me today to discuss our first 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.

Good morning. Thank you, Christina, and welcome, everyone. Our first quarter marked a powerful start to our next chapter of growth. We increased pro forma revenue by 16%, adjusted operating margin by 200 basis points and earnings per share by 35% versus last year, all surpassing expectations.

We achieved these gains while making strategic investments in the long-term growth drivers of the business. This outperformance positioned us to increase our outlook for the year, reinforcing that our advantages are structural and sustainable. Now touching on the strategic highlights of the quarter. We meaningfully advanced our AMPLIFY growth agenda, as outlined at our Investor Day in September.

We built emotional connections with consumers, acquiring over 2.2 million new customers globally in the quarter, driven by Gen Z. By connecting with consumers early in their journey, we're building lifetime value and reinforcing a competitive advantage our ability to attract and retain new generations to our brands.

Next, we delivered fashion innovation and product excellence, led by Coach, where our brand is strong and growing. This is evident in the accelerated growth we achieved in our core leather goods offering. The combination of craftsmanship and value we offer to consumers continues to be a differentiator of our brands and business. We powered global growth through compelling experiences, driving double-digit gains in North America, China and Europe, far outpacing the industry.

Our direct-to-consumer business model enables us to connect with consumers wherever they choose to engage with our brands while gathering real-time insights that underpin data-driven decisions. This is key to how we scale with focus and impact, and it was on display in the first quarter as we achieved strong growth in stores and online.

As always, our talented teams are the driving force behind our results, delivering with creativity and discipline and building the capabilities that set us apart today and into the future. Overall, we are delivering standout performance against an uncertain external backdrop with a business that is healthy and positioned for long-term growth.

Now moving to our results and strategies by brand. Coach delivered an exceptional first quarter, highlighted by a 21% increase in revenue at expanding margins. We drove double-digit top line growth across our key markets with North America increasing 26%; China, up 21% and Europe growing 39%. These broad-based gains and outperformance versus the industry demonstrate that our unique expressive luxury positioning is resonating around the world.

This is evident in our strong customer acquisition results as we welcomed over 1.7 million new customers globally to Coach, a strong increase over prior year, led by Gen Z. Our new and younger customers are transacting at higher AUR and have a higher retention rate than the balance of our client base. They are also influencing all generations, as we achieved growth in acquisition and retention among both Gen Z and non-Gen Z cohorts, a clear signal of our growing brand resonance and reach.

Now to discuss our first quarter results in more detail. We drove strong double-digit gains in leather goods, where we have multiple platforms powering our growth. Our icons continue to lead consistent with our strategy. In particular, the Tabby, New York and Teri families outperformed driven by accelerated Gen Z customer recruitment.

Further, the large kits lost bag remained a highly coveted and viral success, a clear demonstration of our brand desire and the creativity of our teams. Bag charms and straps also continued their strong momentum, providing consumers with further opportunities for personalization, customization and self-expression.

Overall, Coach's growth in handbags and accessories highlights the innovation and value we offer in the luxury market. With these advantages, we drove mid-teens handbag AUR growth for the quarter, led by North America. Further, handbag units also rose in the quarter globally and in North America despite lower promotional activity at the brand.

Looking forward, we expect continued gains in both AUR and units, showcasing the diversified drivers in place to support healthy and sustained growth. To this point, we have a strong pipeline of innovation. This was clearly reflected in the brand's Spring 26 runway show presented at New York Fashion Week in September, which received outstanding reviews and social buzz.

Next, turning to footwear. We delivered double-digit growth in the quarter, fueled by sneakers and the continued success of the High Line and SoHo families across channels. Footwear is a long-term growth opportunity for Coach, given our brand strength and the category's relevance with our target consumer.

Touching on marketing. We continue to drive cultural relevance through emotional storytelling that showcases our brand purpose and product offering. During the quarter, we launched our fall campaign, Reviver Courage, inspired by insights gained from our engagement with Gen Z around the world. The campaign featured Global Ambassador L. Fanning and 2 new ambassadors, Korean Rapper, songwriter and producer, [ So yan ]; and Japanese songwriter [ Lilas ], 2 artists breaking boundaries and reshaping culture in their own ways.

In addition, our not just for walking footwear campaign highlighted our SoHo sneaker and featured [ Audrey Mona ], the Singing Voice of Mira in the Netflix hit film, [ K-PopDeemon hunters ]. This campaign continued to support strong demand for our product offerings and cultural relevance for our brand.

Our marketing execution exemplifies the brand's hallmark Magic and Logic in action. By using data-driven insights to scale creativity, we are enhancing the efficacy of our campaigns, expanding our reach and enabling our growth. And finally, we are fueling brand desire through distinctive, immersive retail experiences that resonate with today's consumer.

This quarter, we launched 2 new coach coffee shops in North America at Jersey Gardens and Woodbury Commons, tapping into the importance of experiential retail, especially among younger audiences. These activations go beyond marketing. They're driving longer dwell times, commercial momentum and deepening emotional connections with the brand.

Looking ahead to holiday, we're leaning into proven drivers of the business. To this end, we will bring new animations to Tabby, expand the New York family launch newness within our Coach originals collection and deliver a compelling assortment of seasonal novelty brought to life through marketing campaigns that connect brand, purpose and product.

In closing, Coach continues to deliver standout results, guided by a bold brand vision; to be the world's most inclusive, genuine and loved fashion brand. With the consumer at the heart of everything we do, our talented teams are operating with focus and purpose, turning insights into action and impact. By blending creativity with disciplined brand building, we've reimagined this iconic brand for the next generation of consumers, driving sustainable compounding growth.

Now moving to Kate Spade. Our actions to reset the brand for durable and profitable growth are underway. In the first quarter, revenue trends improved sequentially to down 9%.

At the same time, we continue to back our turnaround efforts with disciplined investments, taking the strategic steps necessary to strengthen the brand's foundation for long-term growth. Importantly, in the first quarter, where we placed our strategic focus and investments, we drove progress as tracked against the leading KPIs we've previously outlined.

We saw a lift in consideration with our fall campaign and delivered an improvement in Gen Z acquisition trends driven by handbags. While still early in the turnaround, the improvement in these KPIs are signs that we are executing our strategies, and they are beginning to take hold. To touch on our strategies and the results of the quarter in more detail, our first strategic priority is to fuel brand heat through our uplifting luxury positioning to become top of mind and relevant with our target consumer, the Gen Z connector.

In the quarter, we launched our fall campaign, Spark Something Beautiful, featuring influential Gen Z celebrities, [ Ice Spice, Charlie DeMillo, Lava and Rain Judge ]. The campaign had strong organic engagement as the most watched video on social channels for Kate Spade and drove higher brand consideration and purchase intent. This campaign will continue into holiday building with festive additions as we remain focused on driving cut-through by increasing brand media through a spike and sustained strategy.

Next, we advanced our strategy to build handbag blockbusters with a consumer-informed assortment that is more relevant and focused. During the quarter, we made important progress. Our handbag blockbusters outperformed the balance of the offering with higher AUR and strong Gen Z acquisition. This is another example of how our strategic focus is translating into early green shoots in the business.

In Q1, we launched Duo, the hero of our fall campaign, which became the top-performing style in retail, winning with consumers on versatility and value. We also successfully introduced the 454 family in outlet and on-trend silhouette reimagined from our archives. At the same time, we continued to animate DECO and Kayla pillars of the assortment that are supporting new Gen Z acquisition.

And as we continue to bring more innovation to the offering, we are streamlining reducing handbag styles by 40% by holiday, allowing us to stand behind our big ideas with clarity and intention. Importantly, we are embedding deeper consumer insights and a rigorous test before we invest approach to all aspects of our work, ensuring that methodical consumer testing drives greater relevancy and impact across the entire assortment.

Finally, touching on our third strategic pillar, to maximize compelling omnichannel consumer experiences. A critical part of this work involves removing deselection barriers with cohesive messaging that builds the brand through desire, and we're moving in the right direction, evidenced by the higher full price selling we delivered in the quarter, a building block to scale in a healthy way. We know that staying disciplined on discounting will impact our top line results, especially in promotional and highly competitive time periods like holiday, and we are committed to this strategy as we position ourselves for sustainable growth over the long term.

Overall, we are strengthening the brand's foundation for long-term profitable growth. While turnarounds take time, Kate Spade is a unique brand with significant runway. To unlock this potential, we have a focused strategy, targeting investments and clear KPIs to track our progress. We remain confident in our path forward and the brand's opportunity to deliver sequential improvement in the back half of the fiscal year and return to profitable growth in fiscal year '27.

In closing, Tapestry achieved a record quarter, and we raised our outlook for the year, exemplifying the strength of our model. Our Amplify growth agenda is working, and our structural advantages are enduring. We operate in a large market where our runway is significant, and we have the strategy, capabilities and team in place to drive durable growth and value creation for years to come. Our vision to give more people the power to bring their own style and story into the world is fueled by our systemic approach to brand building. This is what guides us and drives our success. I'll now turn it over to Scott.

Thanks, Joanne, and good morning, everyone. Our first quarter performance reflects the compounding momentum behind our strategic growth initiatives and the discipline of our execution. In Q1, we outperformed expectations across revenue, operating income and earnings, delivering record sales and EPS.

In the quarter, we achieved pro forma revenue growth of 16%, led by 21% growth at Coach. We drove adjusted operating margin expansion of 200 basis points and we delivered adjusted earnings per share of $1.38, an increase of 35% versus last year.

Turning to the details of the first quarter. I'll begin with a discussion of revenue trends on a pro forma constant currency basis. Sales increased 16% versus the prior year and outperformed our expectations. These results reflect strong global momentum. By region, North America sales accelerated, increasing 18% compared to the prior year, led by 26% growth at Coach.

Importantly, both gross and operating margin in the region also rose versus last year. In Europe, revenue grew 32% above last year, with increases across all channels, led by growth in our direct business. Strong new customer acquisition, particularly among Gen Z and increased local consumer spending continued to fuel our momentum.

Given our market positioning and low penetration, we see significant opportunities for further growth in this large and attractive market. In Greater China, revenue outperformed our expectations, increasing 19%, with notable strength in digital. Our strong performance in China underscores that our strategic initiatives and investments are working and our business remains well positioned for long-term sustainable growth.

In other Asia, revenue increased 3%, led by growth in Australia, New Zealand and South Korea. And in Japan, sales declined 10% as expected, amid a challenging consumer backdrop. Now touching on revenue by channel for the quarter. We delivered gains across all channels, fueled by direct-to-consumer growth of 16% compared to the prior year which included a mid-teens percentage increase in both digital and global brick-and-mortar sales at strong and increasing profitability.

Moving down the P&L, we continue to drive healthy margin expansion versus the prior year delivering a first quarter gross margin of 76.5%, 120 basis points above prior year. This expansion was driven by operational improvements of approximately 170 basis points as well as a benefit from the divestiture of Stuart Weitzman of 70 basis points. These tailwinds were partially offset by a negative tariff and duty impact of 70 basis points and a currency headwind of 60 basis points.

Our strong gross margin remains a core element of our value creation model, supported by our agile supply chain, which delivers craftsmanship at scale, a core competitive advantage of Tapestry.

Turning to SG&A. Expenses rose 11%, driven primarily by an increase in marketing investment, which represented 11% of sales. Even with this investment, we drove 80 basis points of expense leverage reflecting our disciplined cost control while growing our top line. So taken together, operating margin expanded 200 basis points in the quarter, driving profit expansion of 24% over the prior year which was ahead of expectations, and our first quarter EPS of $1.38 grew 35% over the prior year and exceeded our guidance.

Now turning to shareholder returns. Starting with our dividend, our Board of Directors declared a quarterly cash dividend of $0.40 per common share, representing $83 million in dividend payments for the quarter Additionally, during the first quarter, we spent $500 million to repurchase over 4.7 million shares. In fiscal '26, we now expect to return $1.3 billion or 100% of expected adjusted free cash flow to shareholders through dividends and share repurchases.

This includes approximately $300 million in dividend payments for an annual rate of $1.60 per share as well as $1 billion in share repurchases, which is an increase from our original outlook of $800 million. Our significant return of capital to shareholders is a testament to our strong organic business and robust cash flow generation and underscores our confidence in the future.

And now before turning to the details of our balance sheet and cash flows, I'd like to reiterate our capital allocation priorities, which are unchanged. We have 2 foundational commitments. First, to invest in our brands and business to support long-term sustainable growth and to return capital to shareholders via our dividend with the goal over time to increase the dividend at least in line with earnings growth.

Beyond these 2 foundational commitments, our robust cash flow generation provides us with balance sheet flexibility for value creation. This includes the opportunity for share repurchase activity, which includes our previously announced $3 billion share repurchase authorization,

And finally, using our rigorous 4-lens framework, we consistently evaluate opportunities for strategic portfolio management. Importantly, and as previously communicated, before moving forward with any acquisitions, we will ensure Coach remains strong, and Kate Spade has returned to sustainable top line growth. These clear capital allocation priorities are underpinned by our firm commitment to a solid investment-grade rating and maintaining our long-term gross leverage target of below 2.5x.

Now turning to the details of our balance sheet and cash flows. We ended the quarter with $743 million in cash and investments and total borrowings of $2.64 billion, including $240 million outstanding borrowings under our newly established commercial paper program. Together, this represented net debt of $1.9 billion.

At quarter end, our gross debt to adjusted EBITDA leverage ratio was 1.5x, a full turn below our target. Adjusted free cash flow for the quarter was an inflow of $103 million and CapEx and cloud computing costs were $38 million. Inventory levels at quarter end were 1% below prior year on a reported basis and up high single digits, excluding the impact of Stuart Weitzman.

As we enter the holiday season, our inventory continues to be current and well positioned globally and by brand. For fiscal '26, we continue to expect inventory levels to be modestly down year-over-year on a reported basis. Now moving to our guidance for fiscal '26, which is provided on a non-GAAP basis and excludes the impact of Stuart Weitzman from our fiscal '26 expectations.

We are raising our fiscal 2026 outlook, which incorporates our first quarter outperformance and our momentum quarter-to-date. We view this guidance as prudent and achievable, balancing the realities of an uncertain external environment with the significant opportunities we see for our business.

Now turning to the details. For the fiscal year, we expect revenue to be in the area of $7.3 billion representing pro forma growth of 7% to 8% on a nominal basis or 6% to 7% in constant currency with FX planned to be a 70 basis point tailwind. Touching on sales details by region at constant currency on a pro forma basis, in North America, we now expect revenue to increase mid- to high single digits.

In Europe, we expect growth in the area of 20%. In Greater China, we now expect to achieve low double-digit growth over the prior year. In Japan, we're forecasting a high single-digit decline. And in other Asia, we anticipate high single-digit gains. And by brand, this guidance now incorporates low double-digit growth at Coach.

At Kate Spade, we continue to embed a high single-digit decline in revenue for the year with sequential improvement planned in the second half. In addition, our outlook assumes operating margin expansion of approximately 50 basis points. We anticipate gross margin to decline in the area of 50 basis points an improvement from our prior outlook. This assumes operational gross margin expansion of 140 basis points due primarily to improvements in AUR slightly offset by an FX headwind of 20 basis points.

Further, we expect to realize a 60 basis point structural tailwind to gross margin from the disposition of Stuart Weitzman. Offsetting these planned margin drivers is a 230 basis point headwind from incremental tariffs and duties, which incorporates the timing of policy implementation product sell-through and mitigating actions underway. For context, this is a headwind of $170 million in the fiscal year, which assumes we mitigate 30% of the annualized run rate of $250 million. I remain confident in our ability to offset these headwinds fully over time given the strength of our business and supply chain.

On SG&A, we expect at least 100 basis points of leverage. This reflects our diligent expense control, partially offset by ongoing growth-focused investments in our strategic priorities. To this end, we expect marketing as a percentage of sales to increase around 90 basis points versus last year, reaching over 11% of revenue.

We will also realize a 20 basis point benefit to expenses from the sale of Stuart Weitzman. All in, this means operational SG&A leverage is expected to be at least 170 basis points. For some texture on operating profit by brand, we anticipate Coach will maintain its operating margin even with tariff pressure and continued brand investments. At Kate Spade, we continue to expect a modest profit loss given the outsized tariff impacts and brand investments, as mentioned.

Moving to below the line expectations for the year. Net interest expense is expected to be approximately $65 million. The tax rate is expected to be approximately 18% and our weighted average diluted share count for the year is forecasted to be approximately 212 million shares, which includes the expectation for $1 billion in share repurchases.

Taken together, we now expect EPS to be $5.45 to $5.60, representing 7% to 10% growth compared to last year. Moving on, we anticipate adjusted free cash flow of $1.3 billion. And finally, we expect CapEx and cloud computing costs to be in the area of $200 million. We anticipate about 60% of the spend to be related to store openings, renovations and relocations with the balance primarily relating to our ongoing IT and digital investments.

Touching on the shaping for the year to start, given the dynamic nature of the rapidly shifting market, it's important to note we could experience volatility by quarter, notably within profit as the tariff and duty impacts work their way through the P&L. Now to our current assumptions, we expect pro forma constant currency revenue growth throughout the year, led by the first half.

For Q2 specifically, we're anticipating a pro forma total sales growth in the area of 7%, which includes an FX tailwind of nearly 50 basis points. This incorporates the expectation for low double-digit revenue growth at Coach or mid-20% growth on a 2-year stack basis, consistent with Q1 and a mid-teens revenue decline at Kate Spade.

Turning to margin. We anticipate reported gross margin in Q2 to decline by approximately 50 basis points due entirely to tariff and duty headwinds while SG&A is expected to leverage by over 100 basis points in the quarter. Together, we expect operating margin to increase roughly 80 basis points in the quarter.

In the second half, operating margins are planned in line with prior year despite tariff and duty pressure. And finally, taking a prudent approach to our guidance, we expect Q2 EPS to grow high single digits to approximately $2.15. This includes a projected tax rate in the area of 20% for the quarter.

In closing, we delivered another record-breaking quarter, highlighted by strong top and bottom line growth. This outperformance positioned us to raise our outlook for the year, clear evidence of the power of our Amplify growth agenda and our disciplined and consistent execution.

Moving forward, our foundation is strong, and we have competitive and structural advantages to fuel durable growth and sustainable value creation in the year ahead and for years to come. I'd now like to open it up for your questions.

[Operator Instructions]-- our first question comes from Ike Boruchow of Wells Fargo.

I guess high level, I'd like to start. Maybe, Joanne, just can you elaborate more on the drivers of the accelerated growth that you're seeing and really more about the sustainability the momentum? And I know compares are going to start getting more difficult for you come holiday. And really, a Coach specifically, what gives you the confidence that you can sustain double-digit revenue growth as you start to cycle those comparisons?

This was a powerful start to our AMPLIFY growth agenda. Our results are clearly differentiated in the market. And I'll start by sending a thank you to our teams who continue to focus on what matters, and that is the lighting consumers all around the world.

But to comment on the durability of our results overall, the beat and raise that we delivered this quarter reinforces that our advantages are structural, and they're sustainable over the long term. At our Investor Day, we highlighted that we play in an attractive TAM with massive headroom, and we're focused on that new customer acquisition at point of market entry.

And as we showed in the first quarter, we're winning with this next generation of consumers, and that's expanding the market. We're taking share, but it's also giving us the opportunity to drive higher lifetime value. And this is compounding. We're seeing increases in both acquisition and retention.

And I think that's an important point to note, and we're managing the business for the long term. We're continuing to invest behind these capabilities at scale, which is expanding our competitive moat and it's ensuring that our performance continues well into the future. But let me turn it to Todd to talk about the durability of the Coach momentum more specifically. Todd?

Thanks, Joanne. Let me give you 5 proof points to support my conviction for long-term sustainable growth. They are the key 5 Ps of our business. These Ps are foundational to how we win in our space. First, it starts with product. The innovation pipeline of our product that our designers and merchants are developing is remarkable.

You saw it on display at our most recent fashion show in September. And I have the benefit of seeing our development a year in advance, and it will continue to build on our ICON strategy and the product is fantastic. Second is our people. We are nearly 90% direct-to-consumer, and our people know how to engage our customers on a global scale.

A few weeks ago, I participated in our Asian store manager conference. The enthusiasm and shared understanding of our mission and our brand positioning empowers and uplifts our people. Third is place. Because of our focus on Gen Z, we know that they love to shop in the real world and our almost 1,000 directly operated stores are the environments to best express the world of Coach.

Additionally, we are no longer restricted to only traditional malls and outlets and have the right to win in new locations where Gen Z shop. Fourth, promotion or marketing our purpose-led storytelling resonates with our consumers. In Q1, we spent almost 11% on marketing, a 43% increase in actual dollars from the prior year. Since our marketing activities are primarily focused on customer acquisition, that does not immediately take place in the quarter.

This investment future-proofs new customer acquisition. And finally, price. Our brand position of expressive luxury and the sweet spot of the $200 to $500 range ensures that we have room to grow AUR while maintaining our compelling value proposition. So overall, I feel great about our growth potential. We're just hitting our stride.

And not only will we comp the comp but the path to $10 billion is well within our sight.

Our next question is from Matthew Boss of JPMorgan.

Congrats on a great quarter. So Scott, at the Coach brand, 21% revenue growth represented 800 basis points of acceleration on the 2-year stack. I think every single geography accelerated sequentially. So first, can you break down the drivers of the material 2-year inflection this quarter?

And then second, is there anything beyond just prudent macro planning that you've embedded in the back half guide, which embeds moderation on that 2-year stack?

Yes. Matt, thanks for the question. So first of all, I'd just remind you what Joanne and Todd just said about the structural advantages, the fact that this is a methodical approach to brand building and you see it on display. But maybe I'll give you some numbers behind some of that growth inflection that we saw in Q1.

So you're right, we grew 21% in Coach in Q1 and 26% in North America. And we also talked about AUR being up mid-teens. So what that means is we had a significant inflection in units. And this has been a multi-quarter pattern that we've seen with -- for a while, we were talking about growth without the units and driven by AUR, we've now seen a meaningful acceleration in units.

And I think tying that back to more than 2 million new customers acquired who we know are transacting at higher AURs and driving more transactions in the coach franchise that's driving both AUR and unit growth. And then geographic expansion, right? We grew significantly, as you mentioned, in every one of our major -- every one of our major geographies, really led by North America and China, but for the Coach brand, almost 40% in Europe, which is a huge opportunity.

So putting those things together, continued AUR growth opportunities, new customer acquisition and an inflection in units, significant geographic growth. That's one of the things that allowed us to take our -- to have a beat and raise, take our guidance up. And remember, we're talking about now a double-digit growth on top of double-digit growth 1 year ago, right, based on the guidance we have.

And you asked about the balance of the year. So we're 1 year in, we're 25% through the year, and our biggest quarter of the year is coming up with holidays. So I'll just take you back and remind you how we guided to the year, we looked at what we could see in the current quarter in Q1, and we also looked at a 2-year stack. So our balance of the year is the same approach that we entered this year, which is we're fairly consistent on a 2-year stack.

The reality is in Q1, we saw a significant inflection. And quarter-to-date, we see that trend continue, even though it's early in the quarter. We still -- we're not through the peak months in holiday, but we see nothing in our business that gives us any concern. We just feel like 25% of the year. It's prudent to maintain that.

Let's get through holiday. We'll come back. We'll reevaluate and we'll give you guys an update on the picture for the balance of the year.

I know you asked the question for Scott. I will tell you, our brand is one of -- we say what we do and we do what we say. We said that in our Investor Day. And we tend to have a conservative outlook, but I want to reinforce it as the person running the brand.

As Scott said, we feel very good about our positioning, where we're at, what we're seeing in the quarter. We're the first quarter in, we're team way ahead, but we've got a lot of games to still play. So that's how we prepare you, but I feel very good about where we're at.

Our next question is from Alex Straton of Morgan Stanley.

Perfect. I just wanted to focus quickly just on the gross margin pieces in the year. So it looks like you're assuming gross margin falls a bit after expansion in the first quarter. Can you just walk through kind of the puts and takes and the factors there and in the shape, if there's a difference from 2Q to 4Q? .

And then maybe just one for Joanne, just on industry trends. I think some experts are calling for a luxury resurgence. So just curious how you think about any implications for your business there? Or maybe what you're focused on from just an industry dynamics perspective.

Yes, Alex, I'll start on your specific gross margin question. So first of all, this is very consistent the way we've guided our gross margin, our understanding of the cost of tariffs or we've got our arms around that. It's essentially unchanged. I'll remind you, we're making progress.

And we just took our gross margin guidance up by 20 basis points for the year. Very strong performance in the first quarter. So we continue to make progress against the impact of tariffs and have great confidence in our ability to grow our gross margins as we go into '27.

And I'll remind you, even this year, with those tariff pressures, we're growing our operating margins. So if you look at the second half, about 2/3 of the pressure versus last year is tariff related. Again, that's not new news. That's unchanged. And there's a little bit of noise on tax based on some timing issues in the second half.

And I'll pick up the second part of your question, Alex. Our business is strong and growing, and we've been growing through what I would call a dynamic landscape. So to your point, what we're seeing in the in the background or in the market more generally is that the category, the handbag category inflected to growth in the last quarter.

And so there is a more constructive backdrop developing, particularly in places like China, where we saw it also inflect to growth with 1% growth in the market we estimate. And we welcome a more constructive environment, but that doesn't define our actions. We laid out a very compelling plan going forward and how we're building our business with this strong building on the emotional connection consumers have in the category, but building those emotional connections to our brands.

And that's what's driving and powering our growth. You saw us grow through really difficult when the market was down, we were putting up substantial growth, and we're continuing to outperform the market very consistently. So we're seeing a customer who is resilient. They are being choiceful and cautious, as we've talked about before, but they're active around the world and where we're delivering innovation and emotion we are winning.

And again, that's success attracting more young consumers to the brand. They're coming in, in a healthy way. And we're actually seeing them come back with more frequency. Our retention rates are higher among Gen Z, but they're also higher and growing in non-Gen Z cohorts. And Coach is really firing on all cylinders. Maybe I'll toss it to Todd to give you some color on how he's thinking about the market and our growth going forward.

Thanks, Joanne. I'd like to say we play our own game. We're happy to see the category grow. That's why we love this category. It's the durability of it, it's fantastic. 1% globally, but we grew 21%. North America, we grew 26%. We think the category grew 4%. And it's exactly what Joanne said, it's about bringing new customers into the category. .

And we're achieving this incredible top line growth at some of our best margins in history. I had to go back 20 years, and I still couldn't find a better first quarter overall than what we delivered. So the good news is we're playing our own game. We love our brand positioning. We're bringing in new customers into the brand. That's how we're going to keep winning.

Our next question is from Adrienne Yih of Barclays.

Let me add my hearty congratulations to the entire team throughout Joanne and Todd, kind of a more of a kind of synmatic question on the European market. Europe has historically been kind of extremely discerning, hard to penetrate you really seem like you're at kind of a tipping point in the positive direction.

Todd, what is going on in terms of kind of the brand positioning, the younger audience? And how much of the marketing are you spending in Europe? What's the kind of potential kind of penetration there? And then, Scott, can you just kind of talk about Kate's merchandise margin progress, excluding the tariff impact? We seem to have seen some stabilization in promotional activity, at least that's a markdown side of things. I'm wondering if that's an accurate reflection of the merch margin there.

Great. You're right. We seem to materially inflect in Europe, and I love seeing that 39% growth in the quarter. And what's really working is what's working globally. Our value proposition and our purpose campaigns are cutting through. And again, what I said earlier, we're playing our own game. We're not just chasing a traditional European model.

We are building this through customer acquisition, out incredible value. We're opening stores, not just on high streets where we look for adjacencies. We're building it digitally. We're building it where the customer is. So we feel very good. We have a lot of potential in Europe. And again, we're doing it at fantastic margins. So I feel -- I don't want to give you how big is big yet, but we feel very good about where we're going and the opportunities. And what I often say is a great bag, it's a great bag, and it's a great bag in London, Shanghai or New York.

Yes, Adrienne, I'll address I'll address your question on Kate Spade. I'm glad that you asked it that way because, yes, we're taking care to reduce discounting in the Kate Spade brand. We know that has an impact on the top line. But we also know that's the formula for long-term sustainable growth. So we are making progress. We're early days. And when you look at the margin pressure, it's really 2 things, right?

It's the tariffs which were even more disproportionately an impact at Kate. And it's, frankly, the investments we're making in customer engagement and all of these factors together are focused toward long-term growth at Kate.

Our next question is from Michael Binetti of Evercore. .

I want to ask you on the AUR versus units. You touched on this a little bit. It was notable that this was the first quarter where the units really seemed to have inflected relative to the total growth at Coach, 21% of Coach mid-teens AUR. As you build to the rest of the year, should -- and the comments that you gave us for the rest of the year, Scott, should we think about continuing that wider spread of Coach total growth to AUR, so similar big unit spread like that? Is that truly incremental upside to the revenue that you were planning earlier in the year?

And then I'd love to just ask on Kate Spade. What's driving the sequential improvement in North America? I thought it was notable that you just said you are accelerating revenues there while reducing promos a little bit. How long is that promotional hold back continue? Is there a scenario where Kate North America could return to positive one quarter this year?

Yes. I would say, tactically on the first question. We've said as part of our guidance that we expect to balance between AUR and units. I would say that the magnitude of the inflection in Q1 is significant and is a good indicator of the potential for improved outlook on the second half. So it's a very encouraging sign that points in the right direction. We haven't fully baked in that level of inflection for our guide, but should that continue, then that would be a good thing for us.

Okay. And -- and on Kate, Michael, the actions to reset the brands are underway. Our focus is on resetting our foundation for durable and profitable growth going forward. As you noted, reducing our discounting footprint is an important part of that. And where we focused our strategy and investments this quarter, we did drive progress.

We saw a lift in consideration from our fall campaign. We saw improvement in Gen Z acquisition trends driven by handbags, and our handbag blockbusters are outperforming at higher AUR. And importantly, we are seeing an improvement in full price sell-through as well, and that's helping with the improvement. But we know turnarounds take time. And so we are confident in our path forward.

We expect to deliver sequential improvement in the back half of this fiscal year, while holiday will be impacted by our reduction of discounting and then a return -- we expect to return to profitable growth in fiscal year '27.

Our next question is from Bob Derbal of BTIG.

Just a couple of questions on the product side. Just the footwear business in Coach and then the Charms business, are those consistent globally as well? Just curious on the penetration with both of those categories.

Bob, thank you. Yes, is the short answer. We -- our more mature markets, China and North America, we have more space for footwear. And -- but we're seeing -- particularly our focus on sneakers is winning globally. And it's winning across both genders. So we feel very good about that and the long-term value of that customer acquisition, we know if they come to the brand through footwear, we tend to get them as a multiple purchase across multiple categories. So we love that.

We love the back churn. You'll see us have a fulsome presentation for the holiday, everything from beloved cherries to our [indiscernible] back charms, whether it's mini Rexy, a carat or other things that I don't fully understand, but the young consumer does, which is much more important.

So we feel very good about those add-ons and they're meaningful. And what we love about it is, while it may not always be a UPT driver at the point of sale when they buy the bag, they're often coming back a week or 2 later to buy the charm, to buy something else. So that gives us another bite at the apple. And what I love is our salespeople know how to convert if we get them back a second time.

Our next question is from Aneesha Sherman of Bernstein.

I want to dig into the topic of AURs a little bit more and more focused on the short term. So you did -- you've talked about the long-term opportunity to keep raising AURs at your Investor Day and that makes sense. But more short term, you did a mid-teens AUR raise led by North America specifically.

And now North America is coming up against those tougher compares with mid-teens for Q2 to 4. I know you don't specifically target AUR, but how are you thinking about the risk of that AUR growth in North America starting to moderate into these tougher compares and more difficult consumer sentiment environment.

And then perhaps the second part of this, perhaps for Scott, AUR is the single biggest driver of your gross margin guidance. So if you were to see that AUR growth come in a little bit lower than expected, are there other levers on margin that you can lean on to maintain your margin guidance? Or could it be a risk to gross margins as well?

Maybe I'll kick it off, Aneesha, and start with just the big picture here. Our AUR growth is driven from our understanding of the consumer the balance of magic and logic. There are a lot of factors that go into our ability to drive this AUR growth. The creativity that our teams are bringing, it's not just knowing the consumer, but it's what you do with that information and bringing the creativity together, understanding the consumer and delivering incredible innovation into the marketplace is driving our AUR growth.

Also what's driving it is our ability to step away from discounting and the way we use data to make better, higher quality decisions contributes to our better management of inventory, which contributes to a cleaner presentation for the consumer, and they start to build on each other. So that is the more functional, I guess, description of our AUR growth and the disciplines that underpin our AUR.

Maybe I'll send it over to Todd to talk about the more emotional the magic side of the business and how we're thinking about driving AUR growth, both from the innovation we're delivering but also how we're managing the brand across channels. Todd?

Thanks, Joanne. And Joanne, really focus on the big drivers. The only -- and it is an emotional business, and we have that opportunity to continue to engage emotionally with our customer. One of the structural changes here, which we talked about at our Investor Day that is going to be a driver for AUR even when we comp the comp in a meaningful way is our One Coach strategy.

Remember what we introduced, we talked about bringing collection product into some of our largest stores globally. So if we can get them, and we're seeing it win, we're seeing the consumer trade up because the consumer comes in, whether it's a Woodbury Common, a saw graph, Bisto Village, they want to come and when they're in those magnificent outlet stores that have the service levels of any coach store globally, they want to buy the Tabby bag. They want to buy Brooklyn and they're buying them.

So that has a wonderful effect of lifting our overall AUR globally. Additionally, as something Joanne highlighted, we are far less promotional than ever before. And that raises the floor. So we don't have to give up the sweet spot of that $200 to $500 to still have massive AUR growth in the quarters and years to come. What we have to do is just do what we're delivering now, One Coach, lower discounting continue to innovate.

Yes. And I think, Aneesha, you had a question for me about margin sustainability of AUR, et cetera. So first of all, just an observation, this is a team that really is focused on gross margin in case you haven't noticed. We -- this is the vernacular of our organization. We talk about it a lot, and growth is number one, but gross margin is right behind it, and I think you see that in the results. And we're looking at it very carefully.

And a question we frequently get asked is kind of the opposite side of this is given the size of the AUR, should we even take more, I'd say we're getting it pretty right. When you look at the inflection of units, and 15% or mid-teens AUR growth. We're looking very carefully and listening to our consumers, they ultimately decide what they're going to pay.

And I think we're going to fairly right, right? When you look at the inflection of the business, we're finding ways to grow AUR, but we're also growing units. This is our moment, right? We're grabbing significant share and we're looking at this very carefully. So do we have other levers, Yes, we do. We didn't even talk about AUC. We've got the best supply chain in the business. We're always fighting for cost opportunities very closely with the merchants and the brand teams.

And we are finding those opportunities, right? we're driving efficiency throughout the business. So we have a lot of levers to protect our gross margin over time. But the most important thing is making sure that what Todd mentioned, that value equation that the consumer sees and is relating to is in balance and that we're delivering innovation and superior product, which they're willing to pay for it. That's number one, and that's the thing that we're maniacally focused on right now.

Our next question is from Brook Roach of Goldman Sachs.

Joanne, Scott, Todd, I was hoping you could speak to customer acquisition and retention that you're seeing across various income cohorts. Are you seeing the same strength with the value-sensitive customer across the portfolio, particularly in outlet beyond the success that you're seeing in the collection strategy.

Yes. Great question, Brook. I know on everybody's mind. And what's been powerful about our model is we are seeing strong customer acquisition, strong retention across not only Gen Z, but all age groups, and we're not seeing any meaningful difference between income cohorts and the performance of our business and our brands. .

So the platform that we have, we reach a broad cross-section of consumers with our brands, and we're winning with all consumers right now.

Our next question is from Mark Altschwager of Baird.

I wanted to follow up on the One Coach topic. Any more color that you can share on the performance of the collection product in outlet? Where is that mix? Where do you think it can go? And just relatedly on the real estate pipeline, given the One Coach initiatives here, maybe speak to where you see the opportunity regionally and how you're thinking about different store formats.

Great. We're really pleased. I mean we're only about a year into introducing for the first time last -- a year ago summer. We introduced Tabby some outlets. Today, it's more than just have. It's really talking about the full lifestyle of Coach. So you see us then followed up with One Coach strategy in sneakers. You're going to see us do similar things with some of the tertiary categories, jewelry in the spring will become more and more One Coach price point.

So you're going to see us penetrate quite substantially. I don't want to put a number out there yet. Let's deliver it. But we feel very good that this is going to be a meaningful contributor to growth. On real estate, what we said to you in September at our Investor Day is we see a lot of growth coming from international. 70% of our future growth is going to come from international. We have inorganic growth, particularly in China, we're going to launch probably close to 100 stores in the next 3 years. Remember, Scott for one, If you model it, these to be some smaller format stores, but what I love about our strategy, which is very different from our historic norms, is this idea, we have the right to win in places in neighborhoods and locations we had never played before. And that's a global phenomenon.

So you're going to see us introduced stores and new store formats and food and beverage, particularly coach coffee shops and outlets, those are all going to be incremental to our growth, and we're going to do a lot of experimenting. But one thing you can bang on from this team, we fundamentally -- and I think Joanne and I both said this 4 or 5 years ago. We believe that stores are profit centers, not marketing activities. So our stores are going to open, they're going to be profitable. They're going to be engaging and they're going to attract a new consumer.

Thank you. That concludes our Q&A. I will now turn it over to Joanne Crevoiserat for some concluding remarks.

Thank you, Leo. As we shared this morning, this quarter's outperformance reinforces that our Amplify strategies are not only working, they're winning. And I want to, again, thank our talented global teams for their creativity, discipline and relentless drive. These standout results are yours.

Looking forward with strong fundamentals and momentum, we are focused and committed to delivering sustainable growth and lasting shareholder value. Thank you for your continued interest in Tapestry and for joining us today.

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

Good morning, everyone, and thank you for joining Tapestry's 2025 Investor Day. [Operator Instructions] The following presentation includes forward-looking statements that are based on information currently available to Tapestry and is subject to risks and uncertainties that could cause actual results to differ materially from the information presented today. In addition, the presentation will reference certain non-GAAP financial measures. Please see Tapestry's investor website for a full reconciliation of GAAP to non-GAAP financial measures. And now the program will begin with a short video. Now please welcome to the stage, Joanne Crevoiserat, CEO of Tapestry, Inc.

Good morning. Welcome, everyone. I'm Joanne Crevoiserat, and I'm excited to be here with our leadership team and on behalf of our 18,000 associates worldwide to welcome you to Tapestry's 2025 Investor Day. We are excited by the momentum in our business, and we're ready. We are ready to amplify, building on our strong foundation to reach more consumers, drive sustained growth and create more value for our stakeholders. Today, I'm going to cover who we are and our competitive advantages, our ongoing transformation, which has created more fuel for our brands and delivered superior financial results.

And I want to spend most of our time today on what's next, our Amplify growth agenda that will drive sustained profitable growth for many years to come. I believe Tapestry is a differentiated and special company. So let's start with our advantages. We are anchored in our purpose to stretch what's possible. Our purpose pushes us to break boundaries going beyond conventional paradigms, constantly seeking growth, innovation and creativity in a way that is authentic to us. And this spirit lives in our 2 iconic brands, Coach and Kate Spade, each with a distinctive identity and strong emotional connections with their consumers. Coach is blazing a new trail with a new generation of consumers.

Today, we will cover Coach's bold ambition, building on the success of the last 5 years. In Kate Spade, Kate has something rare. Kate Spade is an iconic brand that lives in the hearts of consumers. Today, you'll hear more about the deliberate steps we're taking to unlock that spirit and reignite growth at Kate Spade. Together, they represent compelling organic growth potential for our business. And our brands are supported by a direct-to-consumer model where we operate at global scale with $7 billion in revenue across 60 countries and nearly 1,300 directly operated stores worldwide.

And importantly, our brands and our business are supported by our incredible associates across the globe. I say this all the time. You'll hear it more than once today maybe. We have the best team in the business. You see it in our stores. Hopefully, you'll take the time today and see it in our workshop or in our showrooms. Hopefully, you can feel it in our office. Our teams are bringing their passion and energy to our brands every day. And woven into our culture is our fabric of change, which reflects our ongoing commitment to building sustainable business for the long term to allow our business, our people, our communities and our planet to thrive. And leading our work is our world-class team. They've joined me today. You will hear from several of our leaders today, including myself, Todd and Scott, who speak to you every quarter.

But I'm excited that you'll also hear from Sandeep Seth, our Chief Growth Officer and President of International, who is an expert in brand building; and Eva Erdmann, our CEO of Kate Spade, who comes to us with decades of proven success building luxury brands in the beauty space. And Peter Charles, our battle-tested Chief Supply Chain Officer, who leads the team that brings unmatched quality and innovation to our consumers with efficiency and always as required today with the agility that we need in a complex world.

So what have we been up to over the last 5 years? We have structurally changed our business, setting an important foundation for our future growth. Through our acceleration program, which began in 2020, we put the consumer at the center of our business. And with Future Speed in 2022, we took the next step and began to operate at the speed of the consumer. Today, we know that consumer behaviors are shifting quickly. Data and digital innovation is changing how consumers and brands engage and what is true today may not be true tomorrow. These truths have profound implications, not only for our business, but for our industry. This requires staying close to our consumers, constantly delivering innovation and staying agile in responding to that change.

At the end of the day, in a world where consumers have more choices than ever, brands matter. And that's why today, we have a culture of consumer-obsessed brand builders, supported by an agile and data-driven operating model. I want to emphasize, this is what differentiates us. This is in our culture. Brand building at Tapestry means building deep emotional connections with consumers at every touch point in our product, in our stores, on our website, in our marketing and in our communication. Brand building is embedded in everything we do.

Today, you'll hear about how this strong culture is driving our growth and delivering for our shareholders. So you may be asking, how have we changed? As part of our transformation, as I mentioned, we've built robust brand-building capabilities across the organization from establishing a consumer listening function to our focus on customer acquisition to the way we invest in our brands. These capabilities are driving our success, and you're going to hear from Sandeep about where we're going to take them next. We'll also -- we've also further strengthened our operations, building robust data and analytics capabilities, establishing a truly global digital platform.

And importantly, in today's world, building an even more diversified supply chain that maintains best-in-class quality and efficiency, and you'll hear more about that from Peter. Underpinning all of our work is a culture that allows us to move faster than ever, bringing innovative thinking to both challenges and opportunities. And before moving on, I want to touch on what it truly means to be data-driven at Tapestry. One of the ways we're innovating is how we bring -- we move from insights to action, where we see the payoff in our business by placing data and insights tools in the hands of decision-makers across our organization. This is an important differentiator that we've been building over the last 5 years.

We are constantly listening and testing and leveraging data to inform the choices we make across the value chain from design and assortment planning through store operations, pricing and marketing at every touch point, we are improving the customer experience. That's what allows us to make stronger emotional connections with our consumers, and it brings together the magic and the logic in our business. And these competitive advantages are powering our execution behind our Future Speed agenda. And as a reminder, our Future Speed agenda focused on 4 key priorities: building lasting customer relationships, fueling fashion innovation, delivering compelling experiences and driving and powering global growth. And our strategies are working. You can see it in our results.

Over the last 3 years, we have recruited more than 20 million new customers to our brands in North America alone. We have grown our top line by 10%, while generating 180 basis points of operating margin expansion. Notably, we have delivered on our commitment to generate over $5 in earnings, driving nearly 50% growth in earnings per share. Our foundation is strong, and this presents a compelling opportunity to amplify from a place of strength.

So let's talk about our growth agenda. With the capabilities we built, we are now positioned to amplify. We are ready. It means scaling what's working and building on our strengths to power our growth. And as we look to the future, we know that trends are only accelerating in the marketplace. And because of that, the future will be written by those closest to the consumer. We are uniquely positioned against this truth.

With the culture that we've built and the agility that we've embedded across our organization and a business that is 85% direct-to-consumer, we are wired to keep the consumer at the center of our focus and move with speed to maintain engagement and relevance. And guiding us forward is a clear vision to give more people the power to bring their own style and story into the world. And as we deliver on this vision, we're going to take our iconic brands to new heights. Let's take a look at what that looks like.

[Presentation]

So have you agree, this is an exciting place to be. We are building off our strong foundation toward this bold vision with our Amplify Growth agenda. The strategies that guide us should look familiar to you. These are consistent strategies and they're proven, which we will execute through our Amplify agenda with even more focus. We will continue to deliver the financial outcomes you've come to expect from us.

First, we will continue to create emotional connections with our consumers with a focus on driving new customer acquisition, particularly with younger consumers. Second, we will fuel fashion innovation and product excellence with a focus on our core leather goods category where we're positioned to lead with quality and creativity. Third, we'll deliver compelling experiences to drive global growth with a focus on our key markets of North America, Greater China and Europe.

And finally, we'll ignite the power of our people, strengthening our culture and our capabilities to future-proof our growth. Let me unpack these in detail. New customers are like oxygen for our brands, necessary to drive our growth. This is why we are focused on new customer acquisition. To do this, it starts with knowing the customer, understanding them deeply to ensure that our brands are relevant and fit into their evolving lives. And we're focused on winning with young consumers as they're entering the market, expanding the market, fostering deeper brand love and providing higher lifetime value through lasting relationships.

And we will invest in marketing to spark their brand desire and achieve our growth ambition. And as we fuel fashion innovation, we will focus on leather goods, continuing to create icons our customers will treasure. We will also prioritize innovation throughout our assortment while staying true to the craftsmanship and quality that define our products. And we will extend into lifestyle categories where we have a right to win, specifically in footwear.

And as we look at the path ahead of us, it's exciting to see the opportunity to amplify growth across our key regions with continued growth in North America and accelerating growth in international markets, particularly in Greater China and in Europe, where we have lower penetration, and we see an opportunity to expand the market and our share. To achieve this growth, we will scale our proven brand-building capabilities globally while always mining and adapting to local consumer insights.

Again, we will support our growth ambition with investment and targeted store expansion across these markets. And we know that our people and our culture are a differentiator for our company. It's our secret sauce. Our continued investment in talent and culture will future-proof our growth for years to come. Our ambition is to have brand builders in every seat with every person across our organization obsessed with knowing our consumers and building our brands. To do this, we'll be supporting our people in new ways, giving them the tools and training to continue to translate data and insights into action. Again, that's where we see the payoff in our business. We'll be fostering curiosity and empowering them to make decisions, enabling them to become the next generation of transformative leaders for our business and for our industry.

And we're confident that these strategies will create durable growth with a compounding financial model that will drive significant returns to shareholders for many years to come. This is what amplifying looks like. We are confident in our existing fiscal '26 outlook, and we're excited about fiscal '27 and fiscal '28, where we expect to deliver mid-single-digit revenue growth, operating margin expansion to over 22% and low double-digit growth in earnings per share annually.

And we plan to return $4 billion to shareholders over the next 3 years. This demonstrates our commitment to creating value for our shareholders, and it recognizes the underlying intrinsic value that we see in Tapestry because we're building a business to deliver solid growth not only over this 3-year time horizon, but well into the future. And before I hand it over to Sandeep, here are the things I hope you take away from today's Investor Day. Our strengths are structural.

We have transformed our company to become consumer-obsessed brand builders, and we are winning with a new generation of consumers. This is driving our global momentum, and our growth is durable well into the future as we deliver our Amplify plan. Our vision is clear. We are giving more people the power to bring their own style and story into the world. This will deliver compounding financial returns and significant value for our people, our consumers, our brands and our shareholders. Thank you. And it's now my pleasure to turn the stage over to Sandeep.

Thank you, Joanne, and good morning, everyone. I've met many of you, but maybe it's the first time seeing a lot of you. So I'm going to start with a brief introduction. Hi, I'm Sandeep Seth, Tapestry's Chief Growth Officer and President, International. I've joined the company 4 years back as Coach's CMO and North America President. And prior to that, I've spent 23 years at Procter & Gamble, learning the art and science of brand building. I know many of you are here today to understand what have we done to unlock the growth that we are seeing and ask the question, what gives us confidence that this can be sustained.

So what I'm going to share with you today is what we have unlocked and how we're going to bring this forward to drive long-term durable growth. And here are the 3 things that I'm sharing today. The tremendous headroom we see for growth. Two, how we unlocking the strategies, Joanne just shared to drive robust long-term growth. And three, what's our international agenda. So let's start with the headroom. Historically, this is the view of the market we've taken where we look at the market from a dollar value and the existing buyers in the market.

Now this is an attractive market and Tapestry has 7% share in this $100 billion handbags, small leather goods and footwear market. And we see significant headroom for growth within this market. Now this historic view of the market limits our focus on current buyers of the market. And this overlooks the full potential and the focus really becomes gaining share from other existing players. So we are redefining this market. We are redefining this market to include qualified consumers who have the potential to purchase our handbags. Now this opens up the aperture and gives us a significantly higher global reach and grow by expanding the market.

Now if I look back historically, Coach had achieved these back in the late '90s and early 2000 when the luxury market in America grew as we increase the consumer participation in the market. So we see exponential opportunity as we open up the aperture. So let's look at this market from a consumer lens point of view. Expanding this focus gives us a global reach to 1.9 billion potential consumers of this category. And if I look at the current penetration for Tapestry, it's only 0.6% within this market. In fact, what I want to focus on is the point of market entry, and we are honing into this point of market entry consumer, which comprises 275 million consumers out here.

Point of market entry is the 18- to 27-year old. And this provides us with a really robust and sustainable cohort of consumers to drive long-term growth. And our brands are really well positioned to win with this point of market entry consumers. So let's look at why point of market entry and what does it give us? First and foremost, this is a sizable and sustainable TAM for us because every year over the next 10 years, 25 million women are going to turn 18, and they are all going to make their first major handbag purchase. Why 18 is significant? This is the age where they transition from carrying backpacks to handbags as most of them move from high school to college or university. And this provides a huge opportunity to grow by expanding that market.

Second, our brands have it in their DNA to be considered for the first major handbag purchase. We've heard countless stories of consumers recounting their first coach handbag purchase. And this nostalgia stays with them forever. Now if I were to do a quick poll in this room by way of raising your hands, how many of you remember your first coach handbag, which you bought for yourself or significant others, there will be many hands up here. And I wanted to recount one of my own personal stories. 5 years back when I was interviewing with Tapestry, it was still COVID. I was doing the interviews from home and my wife overheard the name Coach, and she pulled out the first Coach handbag I bought her back in 1999, just a couple of months after we got married, which I bought on my way back from Hong Kong.

And so these memories last forever. And we hear the same stories from Kate Spade consumers. And again, they continue to recount these beautiful memories of their first pack. Thirdly, point of market entry is critical because behavior is shaped at this age and it stays forever. Now we've seen for Coach, the boomers and the Gen X who bought Coach in their teens continue to stay loyal with the brand forever. Now this is not just happening because of the price points we offer. It is because of the brand heat that drives desirability and brand love that stays forever.

Fourth, we've seen data to show that this generation has the highest reverse influence amongst all other generation. Again, our data at Coach shows that we are seeing growth across all generations once we unlock the growth with the Gen Zs and the point of market entry consumers. And lastly, capturing them at this point gives us the highest lifetime value that we can unlock. So with that tremendous TAM, how are we going to use the proven strategies to unlock the durable growth? Joanne just shared this. What's so significant about these strategies is they've been unchanged for the last couple of years.

And what we've done over this period has gotten really focused on our where to play choices under each of them. And what I'm going to talk about is how we are leveraging these strategies with clear consumer building blocks, the capabilities that we are building from a brand building point of view and the investments that we're going to fuel behind these strategies. So let's start with the consumer building blocks. As you see here, we start with a robust planning of how many consumers we need to acquire over the next 3 years to hit our goals. We then break that up into who these consumers are, what are they going to buy and where are we going to capture them.

As you see in this chart, 85% of these consumers are point of market entry consumers that we're going to acquire. And this really informs our teams on how do we emotionally connect with these consumers, what stories we need to engage them with. Two, 80% of them are going to come through our core handbag and leather goods products. Again, very important information for our design teams, our product teams, and our supply chain teams for their planning. And lastly, over 75% of them are going to be acquired across international markets, which informs our global agenda.

With these clear building blocks, the next step is the brand growth capabilities that we are building. These brand growth capabilities is the part of what sets Tapestry apart. Our current growth is fueled behind the brand building we are doing. This is structural, and this is repeatable. It starts with knowing the consumer, building a deep understanding of who these consumers are, translating that understanding into the magic that our teams create across everything we do and eventually leveraging that to reach many consumers and drive acquisition at point of market entry.

So let's start with knowing the consumer. We have defined a very clear and distinctive target segments for both our brands, Timeless Gen Z for Coach and Gen Z connectors for Kate Spade that Eva is going to talk about. This is based on demand spaces, and we've done quantitative segmentation work across all our global markets to define what these segments are. They are sizable, they are distinctive. We get clear data on their emotional and functional needs. We understand their category behaviors and all of this informs our teams.

But we don't stop there. We go a step deeper to understand them beyond their category behavior to know their life and understand how and where our brands fit in this. For this, we are doing ethnographic studies. Personally, I have visited over 200 in-homes, meeting consumers myself here in the U.S., across Europe, across the different countries in Asia. We spend 2 to 3 hours in their homes. We talk to them, understand their aspiration, understand their future plans, understand what gives them confidence, what are their fears and what are the tensions they're facing.

All of these are deep insights that then are translated into the storytelling. Coach recently launched a campaign last week that you may have seen, which brings these emotional stories to life and Kate Spade is doing the same. Equipped with this understanding, we have a clear picture of what this consumer is looking for. But the important thing I want to introduce is deselection barriers because it's equally important to know what they don't like. And that's where deselection barriers come in. Our consumers are presented with over 200 brands to choose from.

And the way the brain works is not through a process of selection, it works through a subconscious process of deselection. And this is very important to understand what causes that deselection. Anything we don't like, anything that doesn't fit with our value system, our brain automatically deselects. And brands miss this quite often. So let me give you a couple of quick examples on what that looks like. Overexposure to discounting is a deselection barrier because it subconsciously sends a signal the brand is not hot and trying to push sales. Too many messages, e-mails, SMSs, let's say, 10, 15 messages a week is an annoyance and causes deselection.

So our teams are constantly working whether in our communication, whether in our product stories, whether in our stores and experiences, what are those deselection barriers we need to eliminate so we can have people subconsciously put us in their top choice and remember us as the brand of choice. Now before I proceed, I would like to play a quick video to give you a snapshot of the consumer in homes and the work we're doing with these consumers. Can we play the video, please?

[Presentation]

Hope that gives you a snippet of these consumers and what they have to say and how they are distinctive from each other. Now the key is to ensure everyone in the organization has this consumer understanding. We always try and bring as many people out for the consumer in homes, but we want to make sure that everyone has these insights and have this data, which then leads to the magic they all create. This information, these insights inform the product icons our teams are developing, the product and pricing strategy.

It informs the storytelling that our teams are working on and the experiences, be it in our stores, our pop-ups, our digital presence, all come out of the data and insights from the consumers that we gather. -- which, in turn, enables us to reach a lot of consumers and drive acquisition at scale. Our strategy of focusing on point of market entry really gives us sustainable growth as new consumers are entering the category every day, and we want to be present with our brands first with them.

Now it's equally important to retain these consumers and drive lifetime value. But here's the interesting insight. The strategies that drive acquisition are also the strategies that drive retention. Creating that best first experience is the best way to have the consumer come back. And on a lighter note, I would say something that we can all relate to, you only get a second date if you have a great experience in the first date. No amount of calling back will bring the person back on that. And that holds true for our consumers.

We want to make sure we are creating the best experiences for our consumer at every touch point so that they want to come back repeatedly to our brand and drive the maximum lifetime value. And we're seeing it in our data. We're seeing it with our new consumers we're acquiring that our retention rates are going up. So with clear and tangible building blocks that our teams have and the foundational brand building capability, it's important we are investing behind these capabilities. And over the last 5 to 6 years, we have significantly increased our marketing investment.

Back in fiscal year 2019, we were investing 4% in marketing, and it's up to 11% last fiscal year. If you look at the last 3 years, we've spent $1.8 billion in marketing investment, building these connections with our consumers and reaching many million consumers across the world. We're also investing in driving our footprint, both physically as well as online to reach the consumer. Shifting to brand-building capabilities. We want to make sure that every employee in the company has the foundational understanding of the brand growth capabilities we've just demonstrated.

And to do that, we are establishing a brand university, and we'll make sure every employee has this understanding and is using the consumer knowledge to build the magic that they're doing. So how are we going to scale all of these strategies, all of these capabilities, internationally. Firstly, as I've mentioned, 75% of our growth over the next 3 years is going to come from international markets. As you look at this chart, you can see the significant size of the addressable market that we have across all our key geographies and the headroom that we have given our low penetration in all of them.

As we focus on the top markets internationally, first and foremost, we are committed to driving growth and investment in North America. As we look internationally, Greater China and Europe provide us the largest opportunity in terms of the TAM and the low penetration that we have to grow. The way we're going to bring this global plan together is really mixing a global and local approach. There are some things that are going to stay globally consistent for us. Brand purpose is defined by the brands globally based on consumer understanding across all markets, and this stays consistent for us.

Two, the icons, the product icons we are building will stay consistent globally. We've seen now data, compelling data on this that the products that work resonate globally for us. Three, our target segments. Our target segments are not going to change. The timeless Gen Z that Coach is focusing on and the Gen Z connector that Kate Spade is focusing on stay the same because this is based on segmentation work that we've done across all the key markets, and we know we have sizable segments that desire our brands.

What our local markets then focus on is really deep understanding of the consumer and the culture in the market. They bring out the insights, which are then shared back with the design teams, but also used locally to create content and experiences that are relevant for that market. We then tailor our distribution strategies by market. As we look at China, we have a lot of physical footprint opportunity for expansion, while in Europe, a lot of this opportunity is going to come through wholesale or digital.

Let me share a quick example of how the teams are planning against this. This is an example from China. We recently visited a city called Wuhan in China, and our teams penetrated here. Wuhan is somewhere between a Tier 1, Tier 2 city in China, but it presents a huge opportunity from a TAM point of view as you look at it. But what's significant here is Wuhan has 1.2 million university students, making it one of the largest university populations in the world. And as we look at our brands, Coach has 3 stores in Wuhan. It has single -- low single-digit unaided brand awareness, and it has only 0.5% penetration on that.

So presenting a huge growth opportunity. So our teams leverage this data and do detailed planning, what's our media and marketing investment and content needed to drive unaided brand awareness. What's the footprint expansion we need to build there? What's the product and pricing strategy that we need to build behind this. And we are doing this meticulous planning for nearly 200 cities in China, building very, very specific plans to drive this growth.

And as I mentioned, we do see significant opportunity to drive our footprint. We are looking at about 125 new doors opening for us globally and also in digital expansion from 9 to 26. But we are taking a very disciplined approach on this. Every store opening goes through our very strict productivity criteria, and every store has to make money and meet our productivity requirements. And that's the foundational way in which we are looking at every investment we make. So adding it all up, first and foremost, we are committed to consistently grow in North America.

Internationally, we expect to deliver low double-digit growth in Greater China and Europe, and the rest of the world is going to deliver mid-single-digit growth for us. So to end up, here are the few key takeaways I want to leave with you on why we have confidence to deliver durable growth for the long term. First, as I mentioned, we play in a very attractive and large market with a huge opportunity to grow. And we are expanding the view of that market to include potential qualified consumers.

Our focus on point of market entry makes our growth durable because this is a sizable growing segment, and our brands are well positioned to win with them. Three, our brand-building capabilities are foundational to what we do. They are a part of what's driving our growth today. They're structural and they're repeatable. Four, we are investing behind these strategies and these capabilities. And lastly, we see immense headroom in international markets for further growth, and we're investing behind that.

Thank you very much for your time and attention. I'd now like to invite Todd Kahn, CEO of Coach.

Thank you so much. Thank you, Sandeep. Good morning, everyone. It's great to be here. I get to talk about my favorite subject, Coach. Many of you have been with us for a very long time. I know see faces around this room who have been covering us since Coach went public. Thank you for that. Some of you are new to our story, so I welcome you. I'm going to cover 3 things today. I'm going to talk a little bit about how we got here, where we are today. I'm going to talk about our bold ambition for the future. And then I'm going to talk about and give you concrete reasons why I have such conviction around the future.

So at Coach, you know we love talking about blending magic and logic. I'm going to give you a little insight into the magic and a lot of insight into the logic. So let's get started. It starts with our vision. And our vision was audacious to be a brand that's loved. Loved is something you really have to work for. And this was designed to be a rallying cry for everyone. Equally important was our purpose. Our purpose, again, was designed initially for an internal audience to motivate our people. Today, our purpose is resonating with our clients worldwide.

So how do you become loved? Well, it doesn't happen overnight. And in our case, we have been on an 80-year journey, and it started with an incredible origin story, a story that took place actually just a few blocks from here with a husband and wife entrepreneurs, with a group of artisans who took the most American icon a baseball glove and developed beautiful leather product. And that was our first beginning stages.

And then we moved into the '60s with Bonnie Cashin, our first design director. Bonnie took everyday items. She literally was inspired by a paper grocery bag and turned that into a beautiful handbag. She was inspired by her convertible, which had the old turn-locks to turn down the top, and she created our most iconic closure. And then when some of you started to get interested in our story and we went public in the 2000s, and we launched accessible luxury, the concept that you didn't have to be an exclusive world to engage in luxury that when we talked about our product or handed you our product, we didn't put on white gloves. We engaged with you. You touched and felt the product, and that was incredible.

And then in 2013, Stuart Vevers, my partner, came to Coach and elevated us. He brought us into the fashion conversation. And then the next phase in 2020, after 12 years of sitting in almost every seat in this company, I was given the opportunity and the privilege to become the CEO, coupled with our acceleration program. And then 3 years ago, here in this room with you, we launched expressive luxury, the next phase of growth for Coach.

And now today, we're starting a new chapter, a new growth chapter for Coach, and we're going to talk about that. So how do we do? What's our 3-year report card? Well, first, on revenue, we said we would give you mid-single-digit growth. You know what we did? We gave you mid-single-digit growth. We said we would give you 73% gross margin. Well, we did a little better. We delivered 78% gross margin. We said our operating margin would be around 30%, we delivered 33% -- we say what we're going to do and we do what we're going -- what we say, and that's powerful. Well, that was about 30 seconds of celebration. Now we get to talk about the future and our ambition. And our ambition is bold. Our ambition is to take Coach to $10 billion annually in best-in-class margins. This many years ago, a couple of years ago, I gave this as a challenge for our internal teams. This was our moonshot. This was the rallying cry for all of our people.

Today, I have more conviction that this is an attainable outcome than any time in our history. And I'm going to share with you how we're going to do it. Okay. It starts with understanding the game we're playing and having a winning playbook. And Sandeep talked about this. The first understanding of the game we're playing is focusing on the consumer. And this view that Sandeep shared with you of unlocking the potential of the consumer and not just sitting here and taking share from one player or the other player, this is the unlock for future growth. This is powerful. So the world is a big place, and we're winning and playing in 50 countries. But to achieve our goals over the next 3 years, we need to focus and win in 3 areas.

First, in North America. North America, now I think everybody knows Coach in North America, and everybody should have a handbag in North America. But the truth of the matter is when we look at our focus market, Gen Z, we have only 4% penetration. That's massive headroom here. Second, China. China, as Sandeep talked about, is an incredible opportunity for us. Coach has been in China for over 25 years. And I almost feel like we have so much new territory to cover. Sandeep and I like talking about Wuhan. We visited Wuhan.

But to give you perspective, when he talked about the college and university students, that's 5x Boston, 5x Boston, 3 stores, okay? Think about that opportunity. So we're going to win in Boston. We're also going to win in Wuhan. And then Europe and the Middle East. Europe and the Middle East is such an unlock for us. And the reason we're winning there is because our value and values resonate with that consumer. They like what they see. They like the value proposition of our product.

And in fact, Europe and the Middle East has outgrown every other market over the last 2 years. That's incredible.

Okay. We know where we're going to play, and we know the game. Let's talk about the how, and the how starts with expressive luxury. Expressive luxury came about from an insight we learn from the consumer that, in fact, the consumer wants to help them give them a sense of belonging and self-expression. They want to build their confidence. They see luxury not just about impressing. That's just a low-level need. They want their confidence. We launched this 3 years ago. Let's see what that looks like today.

[Presentation]

What I love about that video is you see our clients' customers emote their love for the brand. That's powerful. And that comes about because we have a clear and consistent strategy. Now Joanne said it, Sandeep said it, our strategy has been very consistent and stable the last 3 years. We have not needed to change every quarter or year our strategy because it's working. We hone our strategy. There's 3 key pillars to our strategy. First, there's building a connection emotionally.

An emotional connection starts with understanding the consumer, and we do that quite well. This is where the logic comes in. The logic, and we have big data. We have millions of consumers, and we see that data and unlock that data, and it's rich. But we do something else. We use small data. We do ethnographic work. Sandeep mentioned it, you see pictures here of Joanne, Sandeep, myself and every leader at Coach interacting with our customers, almost always on a no-name basis. So there's not a bias in reporting. We interact with them. We hear what they say.

And what's powerful about this interaction is what people say they are going to do and what they do are not always the same. If you give out surveys, people will say a lot of things in a survey, but that's not always the truth. And let me give you one great example. We were in Japan. We met with a wonderful woman, young, targeted Gen Z client. She love pink. pink was her favorite color. In fact, she had pink appliances, okay? That's how powerful pink was in her life. But she never wore pink out. She only wore black out. She didn't have the confidence to wear pink. So what do you learn from that story? Well, you learned 2 things. You understand that confidence plays such a key role in their decision-making.

And we learned that if we can actually help build her confidence through our storytelling, maybe we'll sell her a pink bag that she'll actually wear out. Nevertheless, we'll certainly sell her a black bag. That's powerful insight that we learned from these interactions. So I'm going to give you 2 significant takeaways about Gen Z universally. First, they're the most connected generation ever. They are seeing, interacting, responding to the same things globally. We see that from look at the #1 hit in Netflix today, a Korean animation that is popular across everyone. And I recently watched it on a plane and I think got some looks, why is this older guy watching this Korean animation, but it really was for work. But it was fabulous, okay? That's one.

Second, because they're so connected, because they see and respond and interact to the same things, their fears, their likes, their dislikes are very similar. And we can tap into those emotions, and we hear it from the consumer. I was tired of not feeling confident, having the courage to be you and to stand up for who you are is so important. I could take those words and that attitude and put it in Chinese and put it in Korean and put it in French because the consumer is saying very similar things universally. So what do we do with this insight? Well, we turn it into action. We take the insight and the data and it inspires us. And it inspires us fundamentally in 2 key ways.

First, we don't just chase trends. We develop new ideas, new concepts, and we make sure that everything we do is designed to inspire our values, purpose and our brand positioning of self-expression. And then we don't just lead with product. For a long time, like many fashion houses, we put out an ad, there is a beautiful model, here's a bag. Usually, they're alone, sometimes they have a friend, okay? You go through pages and pages of fashion magazines and you see the same thing, okay? We don't just do that. We take our beautiful product, and it anchors our storytelling of something much more profound as we -- as Sandeep referenced in our most recent campaign. So -- all of that insight, all of our storytelling. What does it do? Well, it creates desire.

Now this is a year-over-year Google search representation. The size of the bubbles show the level of interest. Now our lawyers would not let me list all the competitors here. But I can assure you, they're everyone you think of. They're every brand in our space. They're every pinnacle luxury brand, and there are brands with apparel adjacencies. So what does desire create? Desire creates customers. You create desire, you bring them into the fold. And we have done that with our targeted consumers and everyone else. So when you're winning with our core audience, we win with everyone.

Okay. How are we winning? It's great to tell a compelling story. It's great to have a purpose. You got to have wonderful product, and we have amazing product. And our product has been driven by fewer and richer stories, and it starts with a goal to take key products and turn them into icons. Now our teams can design beautiful products. It's the consumer who will determine if it becomes an icon, and the consumer has voted. First, we start with Tabby. Tabby was a bag that we launched in 2019. Tabby has grown every year since. Tabby is iconic to us because of the value, the structure and, of course, the unmistakable sea that grounds the entire proposition.

And hopefully, you got -- when you walked in here, you spent a little time in the Tabby shop to see all of the various ways we can amplify the Tabby collection. Second, Brooklyn. Brooklyn was the premier anchor of the New York collection. Brooklyn was a bag that Stuart walked the runway with. Now interestingly, and we had a lot of conversations about Brooklyn, and this is where magic comes in. Brooklyn on its surface is not a fantastic coach bag. It doesn't have an adjustable strap. It has very -- no closure God forbid. It has very little branding, okay? It's a demure bag, yet it captured the feelings, the Zeitgeist, the authenticity that was always coached. Beautiful leather, beautiful product, and it feels so right for the era. And what's amazing, it's a year old.

And I think what you saw in the showroom this morning is the amplification of the entire New York family and what a wonderful platform Brooklyn is to take it into other materials beyond just glovetanned leather. And I would not do this -- just this if I did not talk about Teri. Teri is an outlet bag that is one of our #1 recruiters of Gen Z at $200. Think about it. It's a small bag at $200, recruiting new customers. We've taken this learnings of developing fewer and richer stories, and we've expanded it into footwear. And we've done this with our Soho sneaker.

And again, it starts with insight. The insight was if we want to win with Gen Z, 50% of the Gen Z closet is sneakers. We have to win with sneakers. Soho sneaker, which we launched last February, is at one price across all channels. That's going to be an important point that I'm going to make in a few minutes that we're winning with. And then I have to talk a little bit about fashion. We walked this Kiss Lock Bag down the runway. It is an oversized frame purse basically, okay? If somebody were to tell me an oversized frame purse is going to be impact, which Stuart told me, I had some doubts. But this is where we create a world where creatives can thrive, where we engage, we test and learn.

And right now, in North America, there are over 92,000 customers who are on a waitlist to get this back. So the 2 out there, I think we have security watching the 2 out there because I know this group, okay? Some of you are coveting that bag. So what has this model changed? This has been a profound change in our business. We've gone from a highly seasonal to a core business. A core business reduces markdown. It takes away churn. It allows us to go and invest in deeper stories on fewer ideas to cut through those 200 other choices that people can make. We can put massive amounts of marketing behind these ideas.

And here's the best part because I know what some of you are thinking. No single icon accounts for more than 10% of our sales. So there is not over concentration. It gives us a rich platform to continue to grow. Okay. We have a compelling story. We tell great marketing. We have amazing product. We have to bring it all together, and it has to come together in the environments that the consumer sees, both on digital and in the real world.

And again, everything starts with an insight. Our insight that Gen Z, you know what Gen Z loves to do. They love to shop in the real world again. They love to be part of a community. They love to engage with their friends. Maybe part of it could be because so many formative years were spent in COVID, in lockdowns and being remote. So we want to engage them. Now the journey may start on their smartphone. but they love being in the real world. And when they're in the real world, we engage with them.

And we get to engage with them in so many different ways. It could be our future coming at the end of this calendar year, flagship in Ginza, which is going to be incredible because as you can see, you're going to see that sea from a mile away, okay? Building and leaning in on that brand intellectual property is incredibly powerful. But then beyond these big flagships, we win when we go small, when we engage with them in what we call the Coach play environments, where there's tactical experiences that they get to experience and interact with the product, and it's not off putting.

Sandeep talked about deselection barriers. One of the key deselection barriers is something off putting. This consumer, they spend most of their time looking down. Even the selling habits that we engaged with in the past, which interacting, welcome to Coach, look them in the eye. Actually, that doesn't always work. We have to make sure we meet our client -- customers where they are and how they want to interact. And this has expanded into gaining on all 5 senses. You experience and hopefully, you've enjoyed the Coach Coffee, the Tabby cake, the product that this engages. We love building experiential retail, particularly in coffee shops.

And to be clear, this isn't just a marketing idea. This is a commercial idea. We like commercial ideas here. We like the fact that when there is a coffee shop, the linger time of the customer increases in our main store. That's powerful. So what does this look like? We are going to grow our store base across the world, primarily internationally, but for the first time in a dozen years, you will see store growth in North America. And what's powerful about this is we're not limited to the 2 models historically we were limited by, traditional mall or outlet center. We're going where the Gen Zs are. That can be lifestyle centers, that can be street locations. That can be all over China.

But before you get too carried away because I know some of you are starting to say, okay, 100 and 200 stores, model, this is the outcome. Many of these stores are going to be smaller footprint stores, okay? We want to engage the consumer in different formats. But our commitment to you, something Joanne and I made 5 years ago, stores are commercial ideas. We will make money with our store openings. What is that? I guess we missed the video. Anyways, it's all good. Let me get to the next big idea and something we've hinted to over the last year, one brand, one coach.

This is a profound change in the way we think about our business. We've talked to you a little bit about putting Tabby in outlet stores and the benefits of that. And we've experienced that. But it's profoundly different and more important than that. Because over the last 5 years, we so substantially reduced the discounting in outlets. Because over the last 5 years, the consumer is coming in at higher AURs. Because of the insight we're seeing from the data, the consumer today sees brands, not channels.

When they go into Woodbury Common, when they go into Sawgrass, when they go into stores around the world, you know what they want, they want our best product. They want the product that they've seen us market. And you know what they're willing to do, pay full price for it. So we have added this complexity and quite unlocked growth vehicle from our outlet stores. And today, in the last quarter, our collection product, and that's going to be the nomenclature you're going to hear us talk about. It's not going to be retail and outlet product. Our collection product is penetrating at 10% in our outlets. And we're expanding that to digital as well.

And this is really key because what we're able to do digitally is now direct traffic to one site and enhance the productivity of our marketing. So when you go to coachoutlet.com, you don't just lead with a discount message. You lead with our purpose and our storytelling. And that's why today, the tab sites look very similar. And come springtime, we'll have a fully integrated cart in North America. This is really powerful. And all of the data that we have seen, the customer, wherever they land and given the full assortment tend to shop up for Coach because they may come there with an idea bag and they may see something even more compelling for them. That's very powerful.

So -- where does it start? It starts with our culture and teams. And many of you are familiar with the old paradigm. The old paradigm had 2 spheres of influence. You had a very strong CEO with commercial acumen and you have a very strong creative director with real insight, brilliance, creativity. We have that approach. I think we've demonstrated that. But today, we've shifted the spheres of influence from just 2 to the most important sphere of influence, putting the customer at the center of everything we do. Everyone is focused on this customer.

The muse for HR, the muse for procurement, the muse not just for Stuart is the Timeless Gen Z. We all engage in that. That's what brand builders in every seat means. This is what it looks like. We still have the logic and magic. I still drive commercial results. Stuart still drives amazing product creation, but it's not limited to just that. We create an environment where great ideas can thrive, where we look at data. We love the gut of our merchants and our designers. It's important, but it's an informed gut because we look to this model.

So what does that lead us to? Well, over the last 5 years, I've worked on some myths that we have heard over the 20 years prior to that. And I want to bring a few of them to light and give you the myth and the reality. Okay. First, myth. If we focus on Gen Z, we risk alienating our core consumers. Truth, in FY '25, we grew across all generations and particularly our Gen Z targeted generation. Myth, this one we hear a lot. So I'm coming -- I'm supporting you Gen Z. Gen Z is fickle and hard to retain. Truth, Gen Z year 1 retention in North America was more than 150 basis points above balance of cohorts.

North America has hit its growth ceiling. We're overpenetrated. Well, you already know the answer to this. You saw the TAM, okay, 6% is overpenetrated. The truth is we've been growing in North America over the last 3 years, and we have a lot more growth ahead of us. And then my favorite myth of all, outlets dilute brand equity. Well, with our One Coach strategy, outlets are a channel of distribution, and they don't see it that way. They see the brand. The consumer wants our best product in outlet and 10% penetration of collection product is the beginning. It's not the end point.

So what does this look like? We take all of this. We give you an algorithm. And the algorithm is powerful. We are committing to mid-single-digit revenue growth, top line and operating margin expansion over the next 3 years on our way and our path to $10 billion. Now I want to be extremely clear on this point. For me, this is our floor. This is our floor. This is what we are committing to you today given all the uncertainties in the world, and we're going to do -- I plan on looking at even greater opportunities for our future.

So what are our building blocks to get there? Well, we have a lot of drivers. First, and it starts with customer acquisitions. Spending 11% on marketing is not just about storytelling. It's about acquiring new customers. That's why we're doing it. That's what's driving. That's the fuel. And then you can't have lifetime value of a customer if they don't repeat. Our customers are repeating. And they're repeating because we keep innovating in our core category of handbags, but then we're giving them so much more. We're giving them bag charms. We're giving them jewelry. We're giving them sneakers. And this is powerful. You know what's fascinating is we have a fantastic bag charm business, really great.

And I didn't see the [indiscernible] moving materially even though wait a minute, we're selling a bag and we're selling a charm. And here's the insight we got. The consumer is coming back. They may come day 1 buy the bag. They may come back a week or 2 weeks later to buy the charm. How great is that? We get to interact with them twice in a shorter period and keeping that desire. And then, of course, our wonderful sales associates show them the next bag that they need to wish for.

AUR growth. We have AUR growth ahead of us. And we have AUR growth ahead of us with some very simple ways of getting there, less discounting, more collection product and outlet, leaving aside the inherent white space that exists between us and some of the traditional European luxury players. We are going to stay focused on our $200 to $500 price points to make sure we capture this younger consumer. That's the win. That's the opportunity. But even in those price points, we will see AUR grow. And then new store opportunities. Again, probably a smaller number here compared to everything else, but yet powerful because we want to engage with them in multiple places, multiple locations, geographies and the new city growth that we can see in Asia is remarkable. That all leads to a beautiful, sustainable long-term outcome.

So -- what do I hope to leave you with? If you have to remember one number from my presentation, remember $10 billion, okay? That is our goal. That is our opportunity. That is something we will achieve, and we will achieve it the right way. We will achieve it from profitable margin and sustainable growth, not just get there to get there. Second, we will continue to build our icons through brand -- through our brand and through new customers. That's the engine that fuels everything. Third, we will win in our 3 largest markets: North America, China and Europe and Middle East. And finally, we have clarity that this floor that we have set for you is very achievable. Thank you very much. And now I let you have a wonderful deserve break, and we'll reengage shortly. Thank you.

[Break]

And now please welcome Eva Erdmann, CEO and Brand President, Kate Spade to the stage to begin the second half of our program.

Good morning. I'm Eva Erdmann, CEO and Brand President of Kate Spade. Well, it's been 10 months since I stepped into this brand after more than 2 decades of building brands in the beauty industry for LVMH and L'Oréal. And why? Because I saw something rare. I saw a brand with a massive potential. I saw a brand with a very unique emotional connection with the consumer. But also I saw a market that still hasn't seen the best of it, and I knew we could do better. So here's the truth for you today. We are not talking about fixing a broken brand.

Today, we are talking about unlocking an underused asset that millions of consumers already know and like, but don't always choose first today. And you know to say that, I'm not guessing, I'm looking at the data. In the U.S. today, Kate Spade ranks top 5 in unaided brand awareness. So without any doubt, she knows our name. But when you ask her to name the first brand that comes to mind, we are not there. And if you're not there, when she's deciding between 2 or 3 handbag brands, you are invisible at the cash register.

Second fact, she considers. Here again, we are ranked top 5 in consideration in the U.S. today, which means that she sees us in her universe. That's phenomenal. But again, at the point of sale, we lose her. She tells us that the offer that she sees is confusing, overwhelming and most importantly, not relevant enough. So that gap between knowing us and buying us is our single biggest growth lever. And that's why becoming top of mind and truly relevant is the unlock. Not with scattershot campaigns, but with disciplined cohesive brand expression with a strong product storytelling and a flawless execution. I'm sure it sounds familiar. Yes, these are exactly the same principles that have fueled the growth at our sister brand Coach. So our focus is crystal clear: build brand heat and relevance to drive acquisition and invest in brand media to put Kate Spade in her first thought.

Focus on fueling relevant handbag blockbusters and invest in them over the long term deliver a consumer experience so compelling that all the selection barriers disappear. And we will get there by being consumer-led in every decision we make across the consumer journey, ensuring excellence in execution and of course, practicing financial discipline. And this is how I'm confident that we will see sequential improvement in fiscal '26, especially in the back half and return to profitable growth by '27. Kate Spade has massive potential, and we are going to fully leverage it. So now let's unpack how we're going to make that happen.

I've always believed that the transformative journey of a brand starts with the consumer. And today, the younger generation is telling us they're going through a cultural shift. They are earning for connection and enjoyment. But also they are redefining the cause of luxury, looking for innovation and quality at the right pricing. Good news, Kate Spade is perfectly poised for all of that.

Remember, 30 years ago, Kate Spade was founded on a pioneering vision and became a cultural phenomenon. Why? Because Kate Spade was talking to a younger generation and offering something that didn't exist in the market, a unique vision of the American [Foreign Language], where with the desire to spark something beautiful in every life moment and offering timeless handbag with function, feminity and a touch of it.

So today, we are reigniting that original emotional connection that made Kate Spade distinctive and modernizing it for a new generation of consumers.

[Presentation]

So we are leading into our very rich heritage while building relevance for a peer target, the Gen Z connector. And from all the consumer work we have done, we know she has high affinity with Kate. She's genuine. She's caring. She's an expert at bringing people together. Her style is feminine and she puts a lot of effort into looking effortlessly put together. She uses touches of colors to share her approachable personality. And when it comes to handbag, she's looking for something versatile, functional with something a little special.

But most importantly, the connector is a sizable segment of the market, 15% of the market, the third biggest segment, a sizable segment of the market with high affinity with Kate. A sizable segment of the market with high affinity with Kate, high awareness and high consideration. That's a huge potential to unlock. And we aim to increase our Gen Z penetration by 60%. And for that, we are concretely embedding her at the center of all we do from products to campaigns, to pricing, to experiences. And we have reset our cultures and ways of working, embracing always on consumer testing. Internally, we call it we test before we invest.

To match perfectly her very optimistic personality, our brand territory is an uplifting vision of luxury, where every day becomes a bit more radiant. And we design feminine, functional and versatile handbag with, of course, a touch of it. To become top of mind, we have also revamped our media strategy. And I'm sure you're going to remember that slide in those 3 words, more, longer and better. More because we're going to be increasing brand marketing investment by over 60%. Longer because we're going to move from intermittent spikes to spikes and sustain all year long to increase always on top-of-mind awareness and better with always-on consumer testing and insight optimization.

On to our second pillar. We have sharpened our product strategy around 3 principles: driving relevance, focus and importantly, create desire. And for that, we have reinvented our design process. It starts with the consumer and testing at every stage with our Gen Z connector. Then every idea is filtered through the lens of our uplifting luxury territory. We bring the Kate Spade kit. We are uncompromising on design relevance with focus on what brings value to our Gen Z connector.

And finally, we test again before we invest with our Gen Z connector. So this closed loop of innovation doesn't just deliver handbags that are desirable and distinctive. It ensures they are the right product, relevant validated and commercially scalable. We are doubling down on those blockbusters over time with amplified resources and investment marketing and also to make sure that they're going to cut through and be seen, we are streamlining our assortment, reducing size by 40%.

We are also simplifying our lifestyle categories, consolidating them into one Kate across channels. This discipline ensures that every product we put forward has the scale, the visibility and the longevity to become a true icon. And building that relevance in our product is one of the steps to become desire-driven versus discount driven along a compelling pricing structure, making sure we get the right price upfront to increase full price selling and recruitment, a higher percent value, offering the functionality, the versatility she cares about and of course, a promotional pullback. All of this will help us grow AUR and gross margin over time.

And here is a preview of how product is coming together.

[Presentation]

On to our third pillar. Excellence in execution is a nonnegotiable. This is how we eliminate all barriers of this election. And it starts with one cohesive voice from paid media to organic social, from site to stores across mainline and outlet, we now deliver one consistent and relevant brand message. And we have 1 journey to our processes to make sure we can deliver an uncompromising 360 consistent consumer journey. It also requires excellence in the experience we are building for the consumer because cohesion only matters if the experience matches. So that's why we are revamping our website, optimizing our stores, with a clear target to lift NPS and increasing productivity.

And finally, of course, meeting the consumer where they are. We are evolving our fleet, closing nonprofitable doors opening new Gen Z relevance locations by '28 to make sure we are where our consumer lives, shops and plays. Finally, of course. Our financial discipline is the backbone of this transformative journey to become durable profitable growth. Our investment areas are precise reflection of our strategic focus, increase brand investment to accelerate relevancy and acquisition, distorting investment in North America first, to improve trends by '26 and driving blockbuster styles with higher AUR and gross margin, investing in their inventory while cutting the long tail.

So over the next 3 years, our objective and commitment are to deliver profitable growth starting from fiscal '27. We are informed by the journey of Coach. And that's why we know that our turnaround path will have 3 phases. We will streamline in '26, invest in the brand for the long term while maintaining financial discipline. In this phase, we are expecting modest operating loss with sequential improvement of the top line in the back half. We will be solidifying in fiscal '27, strengthening our healthy and streamlined foundation and returning to profitability and low single-digit growth. And in '28, we will shift to scale, accelerating growth and operating margin.

But we won't wait for those lagging indicators to tell us how we are doing. We are managing ahead of the curve, adjusting in real time as we learn. The brand turnaround, we shop first in these leading indicators, improving step by step alongside the consumer journey. So step one. First, we both get on the consumers' mind and state up of mind. So here, we're going to be tracking consideration lift from campaigns and unaided brand awareness. Step two, we focus on moving from interest to intent. Here, we measure such intensity and traffic growth. And step three, success in awareness and consideration naturally converts to acquisition and sales growth. So this disciplined focus on leading indicators, gives us the ability to course correct early, accelerate what works and build momentum towards sustainable sales growth.

We all know that turnarounds take time. But we also know how to make that happen. We have learned a lot from Coach playbook. And we have the Tapestry brand building growth capabilities. So I'm confident. I'm very confident in the path forward because we are consumer-led. She is embedded in every decision we make. We are focused, winning in North America with handbag blockbusters is our top priority. Because we are investing more than ever in brand building to build for the long term because we are agile. The tracking leading KPIs allow us to act quickly. And also, we are reinforced with new talents and resources to build for growth.

So in short, we are not just turning Kate Spade around. We are reigniting it for the long term with consumers at the center, investment behind the brand and a strategy to build icons, setting the stage for long-term profitable growth. So yes, we know where we are today. And we know the work we have to do and the time it takes. But as the CEO of this brand, let me tell you this with conviction, we know exactly where we are going and how to get there.

Thank you for your attention. And now it's my pleasure to welcome on stage Peter Charles, Chief Supply Chain Officer. Thank you very much.

Good morning, everybody, and it's such a pleasure to be with you today. And for those that haven't had the opportunity to meet me, my name is Peter Charles. I'm Chief Supply Chain Officer here at Tapestry, I've worked for the company for the last 9 years. I've been practitioning supply chain for more than 9 years. And it's an absolute pleasure and privilege to be here today to talk to you.

Three things I'm going to share with you today. First of all, I'm going to talk a little bit about something that I'm passionate about, which is Tapestry supply chain. First of all, what we've built. Secondly, how we've navigated through what have been absolutely unprecedented challenges over the last few years. And thirdly, most importantly, I'm going to talk a little bit about where we're going in the future and what we're focused on.

So let's talk a little bit about craftsmanship. You've heard from Joanne and you heard from Todd in their presentations, and they referenced the word craftsmanship. Tapestry supply chain, we talk a lot about craftsmanship at scale because in essence, that's really what we deliver to our consumers. And that craftsmanship at scale is built on the foundation of 3 fundamental pillars. First of all, it's built on the pillars of our internal talent. The internal talent and institutional knowledge that we have built up over many, many years here at Tapestry.

Secondly, it's built on our manufacturing DNA. Coach started life in 1941 as a domestic manufacturing company. And those threads run all the way through our business and through our teams today over 80 years later. And thirdly, it is built on the foundation of the relationships that we have built with our strategic partners around the world that have been developed and built over 30 years. So consistently delivering craftsmanship at scale. Every single one of our leather goods are made by hand, handcrafted.

On average, each of our bags takes over 3 hours of work content to produce. Think about that, 3 hours of individual work content that goes into each of our leather goods. Each of our bags have on average over 35 cut pieces that go into the construction and the engineering of that product. But it's not just the craftsmanship that separates Tapestry. It's the ability to deliver that at scale that is really the competitive advantage that we have. And here's 4 data points that illustrate that.

First of all, 50 million units of leather goods production a year, produced by over 60,000 artisans working in our service providers and in our factories around the world that are touching that product every single day. They're made in 45 individual manufacturing facilities in 11 different countries. And then finally, distributed to our customers and our consumers within 20 fulfillment points of distribution around the world, 2 of which we own here in the United States, in Jacksonville, Florida and in North Las Vegas.

So what are the results of craftsmanship at scale? If you take nothing from my presentation today, these 2 facts are things that I would like you to leave with you today. First of all, we deliver and execute product excellence and an outstanding value for money proposition that's unparalleled in the industry. It has led Coach to be ranked in a recent survey #1 in terms of value proposition for the consumer.

And in tandem with that, we've also delivered AUC reductions that has delivered over 200 basis points of gross margin expansion over the last 3 years. Doing one of those things is really impressive. Doing both of those things together is really impressive. And we've delivered that by not cheating on the product, by not cheapening the product, we've done it by maintaining an outstanding quality and execution across our supply chain.

So how have we done this? This is the product creation process, 5 simple steps. It looks really easy, right? Behind this are hundreds of processes that our supply chain organization manages, drives and controls at every single stage of the product creation life cycle, from an ideation all the way through to the production phase. Long ago, Tapestry gave up being a domestic manufacturing company. But the manufacturing DNA and philosophy that we learn through that functional capability drives this entire process. With our teams around the world, we touch every single stage of this process, and we add value.

We have our own internal sample facilities. You'll see after the Q&A today, on the ninth floor here our Craftsman shop here in Hudson Yards. We cut our own patents. We make our own samples. We have teams of people that understand not how to talk about leather, but actually understand how to make leather. We test our own product in our own laboratories. We have our own engineering standards in which why we create our product, and those engineering standards are the standards that our manufacturers produce the product to in 41 facilities in 11 different countries.

And it is this product life cycle. And it is this craftsmanship at scale model that delivers outstanding quality delivered to consumers on time, at a value-for-money proposition that's unparalleled in the industry.

You've heard a lot on many earnings calls from Joanne and Scott about our diversified supply chain. This has been decades in the making. And this strategy has been intentional and it's been strategic. It has not been in response to the recent challenges we've seen in the market. This has been an intentional drive to create resiliency and agility over a long period of time. 20 years ago, 95% of our product was made in Mainland China. 10 years ago, 35% of our product was made in Mainland China. Today, less than 6% of our product is made in China, and we've built out this supply chain into multiple countries.

And that has been done in the partnership and with the partnership of our suppliers, not just Tier 1 suppliers in the finished goods space, but we have built an ecosystem of a supply base from raw material suppliers to finished goods suppliers that is the envy of the industry. This has created a resiliency and agility that has allowed us to navigate through the last several years of unprecedented challenges. It has also been done around product capability.

When we think about building this, we think about 4 Cs. We think about capability, we think about capacity, we think about cost, and we think about compliance. And of those 4 Cs, the first C that we think about is capability. We don't just chase lowest-cost denominator product. We drive value to consumers, and we always think through the lens of security of supply, and delivering outstanding quality to our consumers.

Several years ago, most people didn't really understand what supply chain actually did. That has changed, and it's changed forever. The reality is we are living in a complicated macro geopolitical environment, and we don't think that's going to slow down. And what we have been able to do is not just survive during this period, but actually thrive. And as Joanne said in her opening remarks, we have used these challenges to transform our capabilities across our business and supply chain is no exception to that. We have built intentional competitive advantages and capabilities that have been built over many, many years.

I've talked to you about a couple of those already. One is our scale. And the other one is around our diversified footprint. But I want to draw attention to 2 others. What is our internal talent. We have the best-in-class supply chain in the industry. Joanne talks about the best teams in retail, I believe, and we believe we have the best team in supply chain. It is a point of real differentiation for our business.

And secondly, the suppliers and the relationships that we have built over decades through good business conditions and bad business conditions. These are partnerships that have survived over time, we communicate constantly with those suppliers, and we've built true inextricably linked strategic partnerships that have helped us and continue to help us.

And then the other capability that I'd like to also talk about is technology and data. You've heard a lot this morning about the way in which we've used data and technology and analytics to mine data with our D2C business model. We are continuing to lean in on supply chain, around data and technology. No human being today can optimize supply chain. They're too complicated. We have to lean into this, and we are, and you'll see some of that capability in the Craftsman workshop later after the Q&A.

But as Joanne likes to say, we're just getting started. And what are we focusing on? We're not just looking around corners in supply chain. We're looking at over the horizon. I say to my team all the time. In supply chain, you have to manage forward 6 months, you have to plan 3 years out. And you have to pull the concrete to build the foundations on which you can build your business and grow our brands. and that is what we are doing. Three key areas around that today. First of all, product innovation. Product has always and will always be at the absolute center of our business. We do not sell supply chain to consumers. We sell great product to consumers and outstanding value. And we are continuing to collaborate and work with our design and merchandising partners to develop techniques, product capability, and particularly thinking about next-generation to supply sustainable materials that will delight consumers and drive towards our decarbonization goals.

Secondly, as I've mentioned, AI and analytics. It's not a shiny object for us. It's something we believe in, and we're going to double down on it. From digital product creation, which you'll see later after the Q&A today and the technology we're implying to help us create product to the ways we're looking at streamlining our planning and operational processes and the use of data and technology is going to be a central plank of a 3-year ambition. And then finally, leveraging automation and robotics in the 4 walls of our own distribution centers in North America, not only to streamline processes, reduce costs, but also deliver on the evolving needs of our consumers.

So in conclusion, 4 key takeaways I'd like to leave you with today. Number one, craftsmanship at scale. It's a proven model. It works and our teams around the world are adding value at every single touch point in that process. Secondly, resilience. We have a proven track record with a diversified footprint of security of supply and delivering outstanding product quality. Thirdly, we add value. Gross margin expansion in an inflationary environment, really difficult to do, we have done it. And then finally, we believe that we're uniquely positioned to take advantage of technology as we think about the future and we think about supporting the growth ambitions that you've heard here today for our brands and for our business.

And with that, I'm going to turn it over to Scott Roe, my friend and partner, our COO and CFO and somebody who I don't think he needs any introduction to this group. And with that, thank you for your attention and your time, and I'll hand it over to Scott. Thank you so much.

Love that music. My goodness, my goodness. If I were an influencer, that's what you'd listen to. But I'm not. So thank you, Peter. You know what, it's great to get a peek for you, all to get a peek behind the curtain. And I'm so happy. You got to see what Peter is up to, and please do come over around the corner of those of you in the room into the workshop and see what craftsmanship at scale really looks like. I think it will blow your mind. It's pretty cool stuff.

So I am so glad to be here, and thank you for your attention in our story. I think it's a pretty compelling story. I guess you'll be the judge. You've seen a lot about our strategies. You've seen the building blocks of growth from our great brand leaders. You've seen craftsmanship at scale. And now we're going to bring it all home, right?

We're going to talk about the so what does all this mean financially? So let's dive in. I'm going to talk about 4 things. First of all, we're going to take a little bit of a tour backwards. We're going to talk about -- it's almost 3 years almost to the day that we were here talking to you about future speeds. So we'll do a little tail of the tape. We'll talk about what's happened over the last 3 years financially at the Tapestry level. Then we're going to talk about the categories in which we play, and I think this is what I would call structural advantages of our business. These are things that I think are differentiators. And we'll dive into a little bit about what that means.

Next, we'll talk about a compounding financial model. You expect me to talk about that, right? This is, I think, a competitive advantage of ours because we prepared for this moment, and we're ready to take advantage of the great opportunities that we have in these great brands. And finally, we generate a lot of cash, a whole lot of cash. Now we're going to talk about what we're going to do with that cash and how do we make those decisions and what are the priorities from a capital allocation standpoint.

So let's go, right? Track record, how we've done over the last 3 years? Well, you saw this earlier from Joanne's presentation, we have found a new gear of growth and the acceleration most recently in the last year, really led by Coach has led us over this 3-year period to a 10% top line compounded annual growth rate, right, 10%. So this is a business that grew in the low single digits for a long period of time. And over the last 3 years, we found that new geared growth. And we've invested heavily into our business, right? We've essentially tripled our marketing investment. We've invested in foundational capabilities around data, AI and technology. We've invested in our stores.

Even with that, we've got almost 2 full turns in the operating margin, 180 basis points expansion in operating margin and EPS of almost 50%. Remember, we returned a lot of cash. In future speed, we talked about $3 billion return of cash to shareholders and that's through dividends and significant repurchases. So what do you all think? I guess you liked it, right? So we're up 47%. Compounded annual return over this period. That's double the S&P 500 and almost 15x the retail index of our peer companies.

So here's the best part of the slide from my perspective. I appreciate the recognition of what I think is a unique and differentiated model, but we're just getting started, right? And for the rest of this presentation, let's talk about what amplifying upon the strong base of future speed looks like. I mentioned attractive categories where we play. One of the things I like to remind ourselves and our management team is what are the most important decisions that you can make as a business leader is where to play. Because the difference between tailwinds and headwinds is significant. And we are really fortunate because we play in some very attractive categories.

Let's break that down. I'll start with where Sandeep left off, which is we have opened the aperture. And we're talking to a much larger audience than maybe has traditionally been done here or I would argue with some of our peer set. So while many are talking to millions of consumers, we're talking to billions of consumers, right, almost $2 billion that's an order of magnitude, I think, 11x the size of the potential customer base. So why is that important? We're not going to grow through just trading share. In fact, some have said, well, you're just benefiting from a trade down. That math doesn't work. There's not enough units, right? There's not enough consumers. But we've opened this aperture and we're looking at a much broader audience. And that gives us -- that's one of the reasons we have great confidence in our ability to grow.

So let's talk about our core categories. Right this chart works, the bottom, the yellow is leather goods, handbags and small leather goods and the top is footwear, that's over an extended period of time. You can see that these categories are resilient. They've grown at a mid-single-digit rate since the millennial, right, since the turn of the century. And think about what's happened during that period of time, right? We had a recession. We've had COVID, we've had so many disruptions at a macro level. And yet these categories continue to be durable.

Let's talk about the biggest category, about 80% of our business, handbags and leather goods. This is also a unique category for another reason. It's both utilitarian, people need to carry their stuff, right? You want to have something that will functionally work, but it's also emotional, sometimes kind of irrationally so at a time like COVID, when there -- people weren't even leaving their house, they were buying handbags, right? Because there is something that buying that handbag says about them as a person you heard our brand leaders, you heard Sandeep talk about that. That's one of the reasons we love this category. Oh, by the way, it's high margin, too.

And let's talk about footwear, also resilient, right? You've seen that this has been a large and growing category. And for us, that's mostly sneakers is the sweet spot of that. We like this also for a couple of other reasons. Not only is it a great growing category, but the frequency of purchase is significantly higher. So these are more opportunities or touch points for us to talk to our consumers and interact with them. Also that target, remember Gen Z, the younger consumer, they love this category, and they're very attached to it. So when you look at how do we access and find more ways to acquire consumers, this is one of the vehicles with which we can acquire those new consumers.

So this is a chart that depicts what we've said in words many times, I've said it, Joanne said it, Todd said it. We like our position from a value standpoint. We deliver superior products that are innovative at a price point that is accessible for many. So remember, if we're going to talk to billions of people, that served market has to have a price point, which is accessible to them. And the great news is we have that. We're bringing superior product at a compelling price. Now remember, emotion innovation are the primary drivers, not price, but a deselection barrier can be, if something is out of people's ability to purchase it, they're not going to be able to buy it. So we love this positioning, right? We love this positioning.

So let's talk about the way this chart works. Over the last 5 years, through the acceleration program, you've heard us, it's been off-quoted that we've increased our AURs for some categories and brands more than 50%. That can sound like you're out of room, right? How much more is there? That's a frequent question from all of you. But if you zoom out a couple of clicks and you look at this over a broader perspective over a longer horizon, this one goes back to 2009, you'll see that we're just now getting back. Even with those big AUR, increases. We're just getting back roughly to where we were 15 years ago or so, right? And that's during a time when the top, say, traditional European luxury has consistently taking price up every year. So whereas we had a gap between a similar bag from Coach and European luxury in 15 years ago, that was 2 to 3x in terms of the gap. Today, that's more like 5 to 10. So 2 to 10. It's never been wider.

So let me tell you what that means and what that doesn't mean. What that means is when Eva and Todd talked about the sustainability of our AUR growth, you can believe it, right? That price value has never been more compelling. On the other hand, what it doesn't mean it's that we're going to close the gap, right? We're not telling you that we can get all the way there, but we are telling you that we like our positioning, and we think that's something that we're going to guard very carefully.

Okay. So we've prepared for this moment, right? We've done a lot of hard work to establish a financial model that is a flywheel. It's reinforcing. So let's go back 3 years ago, and we talked about the fact that we weren't chasing sales. We were focused on growing high-quality sales. And for a while, you didn't see the top line move. I remember these conversations for many of you people out here in the audience. But what we did was we increased our gross margins. We saw new customer acquisitions that were increasing, and it took a while for us to see the acceleration in the top line. But we set the foundation based on strong fundamentals. Now as we're seeing this new year of growth as we're seeing this acceleration in the top line, you marry that acceleration in the top line with strong operational discipline and the ability to grow our margins and drive efficiency through the model. That allows us to do 2 things.

Number one, to reinvest back in that growth for the future. We're continuing to invest in this long-range plan that we've just laid out and things like marketing and things like capabilities, technology, AI, et cetera. But it also means we can deliver superior earnings and cash returns at the same time. So that's the flywheel, right? Focus on quality sales, invest back into those sales while delivering superior returns and that flywheel keeps coming. That's one of the things that gives us confidence in the durability of this growth is all the levers that we have and the ability to continue to invest in our business while still giving you the returns that we laid out.

So here it is. You've seen it in pieces. Maybe you've seen it all, I guess, by now, but here's the famous model. Hopefully, at the break, you got your muffin. Here's the model, right? It was an organic muffin by the way, did you notice that?

Here's the model, right? It was an organic muffin, by the way. Did you notice that? Did you notice that? Actually, the lawyers told me I can't say that because that actually is not organic. So don't hold me to that. But you know our '26 guidance. So I'm really focused on the ongoing and durable algorithm, '27, '28 and beyond, right? So we found that new gear of growth, as I said, mid-single digits on a sustainable basis -- that's with reinvesting -- remember the flywheel, reinvesting back in the business and continuing to expand what we would say are superior margins. So over twofold turns, plus 22% plus from an operating margin standpoint and EPS at low double digits. That's the algorithm going forward.

So as it relates to the growth portion of this, let's break that down in a little more detail. So here it is by brand. You saw all these pieces already. So mid-single digits at the Tapestry level led by Coach, which Todd unpacked, and then we're inflecting the growth at Kate Spade. This is a breakdown by category. Remember, we talked about the durability of our primary categories. 80% -- more than 80% of our growth is coming from our core handbags and leather goods. That's great news, right? Our core is strong. We're focused on maintaining the core.

And again, oh, by the way, really good margin structure, and we're pretty good at it from a supply chain standpoint. The other biggest category, the second, as I said earlier, is footwear, and that's with a particular focus on the sneakers within footwear. And by channel, we are and will continue to be a D2C business. We are pretty good operators in retail. In fact, as I came into this organization, one thing that really impressed me and frankly, blew me away was the quality of our retail associates and the experience that we deliver for our consumers in store. It is truly exceptional. Hopefully, you'll go downstairs and experience that to some degree if you haven't recently. That's always been a core and a differentiator of us -- of our business.

And that, coupled with our digital business, which is sizable, about 1/3 of the business online is the majority of our go-to-market breakdown. So why else do we love that? Because we own the experience. We know that our consumers -- you heard this from the brand presentations. We know that our consumers want to be in physical stores -- they want to be online. They want to interact with us, and we love to have them there. We're going to follow them wherever they want to go. The other thing we like about it is we own the data. So we get real-time first-party data based on those interactions.

And that goes -- the consumer is at the center of everything we do. So these feedback loops are really critical for us to understand where we get it right, where we get it wrong, and we do get it wrong. But if we get it wrong, we can react more quickly and mitigate it. And where we get it right and we see those signals, we can lean in and chase those opportunities. This is a differentiator for us. Sandeep outlined and Todd and Eva underscored some of the international opportunities. So I won't unpack that in detail, but I will say this.

So North America is and will continue to be the bedrock of our business. We're growing in North America. We're very optimistic about our North American business, but it's also the one we've been in the longest, right? We have the most penetration. And when we look at Europe, goodness, we're getting -- just getting started. It's only 6% of our business with a strong U.K. footprint and an extension into France and the rest of the continent is ours to expand. And then when we look at Asia, we have broad-based growth opportunities across Asia. They're anchored by China.

And again, when you think about our positioning, the brand momentum that we have and the rising middle class in China, we are perfectly positioned to continue to grow significantly in that region. So you can't have a presentation with me without talking about margins. It's a particular I think, strength of this business model. So let me just unpack in this waterfall a little bit how we intend to have 2 full turns plus of margin from an operating margin standpoint.

First of all, it's underpinned by continued expansion in gross margin. So what gives us that confidence? Well, a couple of things. We talked about AUR. Hopefully, you now see that we have the emotional connection, the investment and the price value relationship that will allow us to continue to take AUR gains or increases over time. We also have a structural advantage. 75% of our business or of our growth is going to come outside of the U.S. That's good for us from both a gross margin and an operating margin standpoint. That's a mix benefit, right? That's structural. And that's going to continue based on the growth profile that we see.

And lastly, Peter just talked about AUC, our ability to effectively manage the supply chain. And this is not taking money out of somebody's pocket and putting into ours. That's not sustainable. This is working smarter and disintermediating the supply chain because we grew up as makers, right? We understand it end-to-end. And by us taking active roles and working smarter across that supply chain, we continue to find opportunities to bring efficiency and reduce cost, never compromising quality, never compromising our innovation. So we believe that our gross margin expansion is durable and sustainable.

And that underpins a lot of the model, if you will. We've also worked hard to find efficiency across our expense base and make sure that we're focused on the things that are difference making, those platform capabilities that give us alpha value, right, that will help us be a little bit better than our competition. And those things we've talked quite a bit about, right, in terms of insights, understanding the consumer and marketing. And we're going to continue to invest in marketing, over 200 basis points in marketing. So leverage in the rest of SG&A, increased marketing expense allows that gross margin to fall through and expand our operating margin.

The other thing I would say is we've created a more variable cost basis. So by putting so much money in marketing, by putting diligence around our store fleet, our average lease term is 4 years. We have a lot. 2/3 of our fleet is variable rent. All these things also give us protection in the event of a downturn, but mostly give us confidence in our ability to keep that durable growth on the top side -- on the top line.

So tariffs, anybody want to talk about tariffs? It seems like the topic du jour. So as you know, from our last earnings call, we had a significant impact from the tariffs. And I want to unpack this just a little bit. So first of all, even with the significant increase in cost due to tariffs, we're growing our operating margin this year, and that's based on the outlook that we've already given that we just affirmed this morning. And we have great confidence in our ability to grow both gross margins and operating margins in '27 and beyond. Now some of you have said, well, gosh, why not earlier? And of course, we could take more price early, right? We have brand heat. We have momentum. There are options available, but just because we can do that doesn't mean that we should.

And when Todd and Eva are looking so intently at their consumer and understanding that we apply elasticity models using AI to really understand that price value relationship, we've taken a fairly nontraditional or maybe even you can say, controversial point of view as it relates to pricing. We don't think about it as cost plus. We didn't work backwards to say how much price do we need? Well, of course, we know what that number is, but we didn't say, well, that's the price. We're looking at the value that the consumer sees and we're very protective of that because we believe that positioning and that trust that our consumer has is one of the reasons we can speak to billions of people, not just millions of people.

So can we do more? Let's see, right? The consumer will lead us. They decide, by the way, not us. They decide what they're willing to pay, but we're going to be very protective of that. But what you should take away from this is we have great confidence that we will return to both gross and operating margin growth as we look at '27 and beyond. And we'll be opportunistic in the meantime based on what we can see the consumer is willing to go with us and where they perceive their value. So we're going to grow the top line. We've got operational discipline and the ability to transfer that into earnings. That also means we can translate that into cash flow.

I'm just going to leave this number up here for a minute, $4 billion. So we talked 3 years ago about $3 billion, right? And we delivered, right? We delivered upon that. And now based on the higher level of growth, the maturity of the model, increasing margins, we see $4 billion of cash generation over the next 3 years based on the algorithm we just laid out. That's a big number. So what are we going to do with it? What are our allocation priorities? How do we deploy that $4 billion? Here's the great news. Our priorities are completely unchanged. These are the same priorities that we've been talking about now for a number of quarters, right, since our pivot to an organic model.

And let me just unpack them here. So first of all, we're always going to make the first bite of the apple a reinvestment in our brands. We have momentum. We want to continue that momentum and feed it. That starts with Coach. That includes the Kate opportunities that we see, and that's our #1 priority. We also believe in the dividend, and I'll give you a little more about that, but we believe that the dividend is an important part of the equation, and we will continue to grow the dividend at least with earnings.

And lastly, we have a lot -- even exhausting those first 2 priorities, we still have a lot of cash. So you saw in our press release, $3 billion authorization from our Board of Directors for share repurchases over this -- well, I guess it's not time bound, but we have a $3 billion authorization from our Board of Directors. Now let me talk about the fourth priority, right, strategic portfolio management, code for M&A. Once again, our priorities are unchanged. We established bright lines with which we won't cross.

One of those is return to profitable and sustainable growth in Kate Spade. And the second bright line is the continued profitable growth at Coach. -- that's a hard red line, right? So while we believe in the future, there is an opportunity to grow this platform because of the capabilities that this plan is really focused on our organic business, right? And the way I would characterize that is as it relates to M&A, not no, but not now, right? This is an organic plan.

Okay. So CapEx, the reinvestment back in the business, where is that going to go? Well, remember, our consumers love our stores. So 70% of our CapEx, which we're planning 2.5% to 3.5% of sales for CapEx 70% of that is going to go into stores. Now that's some store openings. That's obviously the normal refurbishment of the stores that takes place. The store openings will be predominantly Coach. We are opening stores in North America. By numbers, there will be more outside of the U.S. than inside. And just to double down on one thing that Todd said, not all stores are created equal. So I know many of you are trying to model this. These will generally be different formats, smaller formats.

And if you want to do the math, this should account for a little less than 1% of sales over this 3-year period based on our estimates of the new store growth. The other 30% is mostly in the technology area. Now one of the things I love to point out when we talk about technology is a lot of the unsexy money, a lot of the tech debt is behind us, right? We're on one instance of ERP on the cloud. We have a patented data management system, a data platform, which is patented and allows us to take advantage of more sophisticated technologies like machine learning and AI.

I hear a lot of people say, gosh, companies are making huge investments in AI, and there's no payback. Here's the good news. Actually, AI for us is more of a cultural issue than a money issue. The hard work has been done. We are investing in AI, and we have ample opportunity to continue to invest in AI. But we don't look at AI as a destination. We are focused on business outcomes. And the question always from Yang, who's in the audience here, who runs this for us is not how do we use AI, it's how do we achieve this outcome? And oh, is AI an enabler, right?

And the interesting thing or the great news from my perspective is there are multiple use cases where we are getting better, smarter, faster by using technology, and that's only possible because of the hard work that's been done in the preparation for this moment. So let's talk about cash returns, right, something near and dear to your heart. So the dividend, I mentioned that we believe in the dividend. We intend to grow it at least with earnings.

And we have a targeted payout ratio of about 30%, right? So the dividend is one key part. But when you do that math and think about it, we still have a significant amount available for share repurchases. So again, to reiterate, the Board has authorized a $3 billion share repurchase authorization. That means that 100% of that $4 billion that we talked about is coming to you, the shareholder through dividends and through share repurchases.

Again, as an organic plan, we have the cash, we're going to return it back to you. So how do we make these decisions? Well, you saw the 4 lenses before. It's this -- it hasn't changed, right? We have the same criteria. As I said before, strategically, how to play -- where to play and how to win, really important decisions, great news. We like -- we really like where we play from a category and a brand standpoint. We're investing in those capabilities, which we think are leverageable and give us a discernible and meaningful point of difference over time. This is where we hope to create that alpha value based on those capabilities that Tapestry uniquely employs.

We have a financial lens on all big decisions around capital, right? What's accretive from a TSR standpoint, and we have the rigor to do that. On the other hand, we're going to risk adjust that, right? We're going to take the execution risk and adjust all of those options as we think about how to deploy capital. So we have some rating agencies in the room. And I want you to know that we have -- we believe and strongly defend our investment-grade rating.

Our balance sheet is in great shape. You'll notice that we define investment grade as less than 2.5x gross debt to EBITDA over a long period of time. We're about a full turn below that. You know what, that's okay. In this uncertain environment, in the macro conditions that we're at, we're okay with a little less leverage in this environment. We like where we are. It's not a presentation without a TSR waterfall from me, right? I've had a number of you pick me off in the hallway and ask, are we going to see the waterfall? Yes, you are going to see the waterfall. Here is the waterfall. So it's pretty intuitive, I think.

We got mid-single-digit growth from a revenue standpoint. Again, remember, we're going to invest heavily back in the business and invest in our future growth, but still deliver 200 basis points of margin expansion. And then that $3 billion of cash returned to you via share repurchases is another 5%. Dividend yield, I'm making the assumption it's around 2%. And all that gets you to a low teens TSR delivery, roughly tough twice the expectation of the market according to BCG.

So what's notable that's not here is any change in the PE. That's obviously your decision, right? You guys will determine what happens to our multiple. But I'd tell you what we believe and what I believe personally, I believe the intrinsic value, and we've done the math, the intrinsic value of this plan is significantly above where we trade today. And as a result, we're putting our money where our mouth is. We're investing -- we have an authorization for $3 billion worth of share repurchases, investing in ourselves. We're investing in Tapestry.

And we think that's -- as we look at the cascade of choices against that 4-lens framework, we believe that's one of the best investments that we can make. I hope you agree. So in summary, we stood here 3 years ago. And I would say we gave you a plan, which was based on a lot of understanding of the consumer. It was based on the strategies that we had laid out, but it was a hypothesis. It was an educated guess, right? There was a lot of work that needed to be done.

As we stand here today, we now know and have more conviction that these brand-building principles work when we apply them correctly. And the evidence is out there empirically, right? You look at what's happened at Coach. You look at what we're deploying at Kate Spade. We know that these are proven brand-building principles. And that gives us even more conviction on the durability of our growth on a long-term basis. So I'd ask you to remember 3 things. as we conclude here. Number one, we found a new year of growth. This business has moved from low single-digits to mid-single-digits on a sustainable, durable basis in the long term, and we have aspirations for even more.

Second, I would say the operational discipline that you've come to know in this organization is still intact. So think what happens when you put a little bit more growth against that discipline and the strong margin profile that we have. You get earnings and you get cash flow. And the last thing is $4 billion, right? $4 billion, 100% of which is returned to you, the investor, via dividends and share repurchases. I think it's a compelling story. I hope you agree. I thank you for your attention and your time. We're going to Q&A.

Good morning. I'm Christina Colone, and I have the privilege of leading Investor Relations here at Tapestry. I'm pleased to be here with you to lead the Q&A. If you have a question, please indicate with your hand. I will call on you and someone will bring around a mic. Please introduce yourself and your firm. I also have the ability to take questions from the webcast. So let's dive in. Ike, why don't we start with you here in the back?

Ike Boruchow, Wells Fargo. I think I'm going to focus on a multipart question for Todd. We all kind of understand the Coach momentum today. I think it might be helpful given some context. Just historically, maybe just what wasn't working in the 10 years prior to the inflection, just -- and kind of to that point, what are the largest changes you've noticed behind Coach brand from then to today? And really, when did you see the inflection coming?

Right. It's a powerful question, and we could probably use up most of the Q&A on that. So I'll try to be a little more precise. I joke a little bit, we're an overnight success story 5 years in the making. And it really has been this 5 years. And something I think I said in the video, it was incremental. It's progress and progress a little bit. And you do something when -- I remember when we first launched our first purpose campaign, and you know what happened for the first 3 months, nothing.

And it took a while to kick in. But when I look -- and I think about this a lot because I was here during the -- maybe the tail end of one of the great chapters of Coach and then maybe a low period. And I think it comes down to just a couple of key things. First, humility. I think we absolutely lack humility. We were winning. We had won for a very long time. And when you don't have humility, you immediately think you have all the right answers. You don't -- you're not curious, something that Joanne and I talk about a lot, staying curious is powerful. We had a comp mentality, comp the comp, comp the comp. When you get into that vicious cycle, you do dumb things.

And we did a lot of dumb things. We also were such a closed-loop system, whether it was our sales vehicles, we didn't think about acquiring a new customer. That was really one of the most powerful things that we did not do. We talked about market share. We talked about TAM, but we didn't open the aperture that you're seeing us do today, which then led to -- we had a very efficient P&L, but efficiency at what cost. We spent 3% on marketing. We didn't acquire a new customer. And so with that efficiency, with that comp mentality, with that protectionism, it led to bad results. I think with starting with the acceleration program that we launched 5 years ago, starting with a different mindset, curiosity, humility, we unlocked where we are today. And I think those ways of working are now amplified and there -- not only will we do it, but you heard from Eva, you'll see it at Kate as well.

Thank you, Michael.

Michael Binetti with Evercore. Maybe just Joanne, what are some of the key inputs to drive retention and AUR progression over the 3 years in the plan with the new consumer, the Gen Z that you focused on so much today. When you think about evolving the loyalty programs, the CRM, some of the experiential retail and refining the marketing to deepen the lifetime value that you guys -- I know are focused on more behind the scenes.

And then maybe a second one for Scott. At a high level, if we exclude tariffs, I think the guidance is for about 260 basis points of EBIT margin expansion this year. So really good if we exclude tariffs, which -- and that's on low single-digit revenue growth after this year, it looks like we get 80, 85 basis points on mid-single-digit revenue growth. Is that some harvesting of cost opportunity this year to help get through tariff? Or is there something different in the interchange as we get out to fiscal '27 and '28 that we should think about?

Joanne, why don't you start?

Sure. I'll kick it off. On your question about customer acquisition and driving our growth, I think it is important to talk about the fundamental capability that we're building is this curiosity and listening to our customer and understanding them, really understanding them deeply. And that is what we translate that we take those insights and translate them into action. And I said a couple of times in the presentation earlier that that's where we see the payoff.

So we've worked over the last 5 years to embed the capability to take an insight and have it lead to an action in our business, whether that be a different place where we're marketing and putting our brand content -- if we're going to put it on YouTube, what is the content that the customer is expecting to see on that channel versus Instagram or TikTok or Dalion or any of the other myriad of platforms that the customer is moving to.

So first, we have to stay close to our customer because they're not staying in one place for long. So it's the embedded disciplines of listening to the customer and taking an action. And it's interesting you mentioned loyalty programs. Our focus is on capturing a new consumer at point of market entry. And as Sandeep said in his presentation, we talk about it all the time in our business. We have to make sure they have a great first date, where we're not going to get a second date. It doesn't matter if we have somebody signed up for a loyalty program and we hit them over the head with 16 e-mails to say you've got 10 points, please come back.

We need to make that experience terrific. And we do that at every touch point. It's really in our marketing. It's our brand building and storytelling. It's the incredible innovation and creativity. We're bringing behind those insights. Todd talked about this gut and merchant instinct is important, but it's informed, right? The creativity here is, I think, unparalleled, but it's informed creativity. So we're bringing really relevant product and experiences forward. So that's how we're maintaining. And we've seen as we invest in marketing, so that's the other real trigger for driving our growth.

We're investing in the opportunity to reach these customers where they are with a new level of investment that allows us to sustain our campaign messages, our purpose messages so that we stay top of mind. And that, as you heard from Todd, we launched our first campaign, nothing happened. But we -- the important thing was that we didn't stop there. We continue to invest to sustain the message so that we cut through to our target consumer and remain top of mind. And then pretty soon, the customer starts telling our story for us. I can toss it to Sandeep. We could go on and on and build on this.

If you don't mind, I'll just add one thing. I mean, I did talk about the strategies that drive acquisition, also other strategies that drive retention. I'm going to make 3 key points on this. First, the reason people come back to buy us is brand heat, right, which is also the reason they buy us for the first time. So maintaining that brand heat is important. Second reason they come back is because they had a great experience first time they did. And third reason they come back is they love the product when they wear it on that. So I think those 3 strategies hold true when you're acquiring a new customer or bringing them back.

And they are more important than any form of loyalty programs. Now that doesn't mean we don't reach out to our consumers. We have a really strong clienteling program. We do reach out, but we reach out to them on messages that are relevant to them versus just pushing discount messages or points, as Joanne said. So that's how we're looking at it. And we've seen amazing success in this, and people don't feel fatigued and annoyed with us just e-mailing them 10 times a week or sometimes even 10 times a day, which you may get from some brands.

And Scott?

Yes. And Michael, on the EBIT margin. So a couple of things I would say is, number one, we're talking about a long-term sustainable algorithm, which has investment back into the business. We talked about marketing. We have investment in growth. And -- but we're also disciplined. This is the only marketing guy I've ever seen. And when I say, Sandeep, I got more money, and he's like...

I don't want it now.

I don't want it now. We joke that we switch places sometimes. And I guess the point in that is these investments in growth are based on facts. They're based on KPIs, and we're going to be disciplined around those. We have ample investment to drive sustainable growth over a long period of time, but we're not going to spend it just to spend it. So that's one thing that I want to say to you. As it relates also to the pace of AUR growth, I mentioned this in the comment around tariffs and also maybe a little bit on where we're positioned.

We're -- we have demonstrated our ability to take AUR, but we're very cautious, right, about the way we do that to make sure that it is perceived well by the consumer. There are times when we will see AURs grow even faster than we expect, and that's good for margins, EBIT margins all the way through. But we're going to let the natural growth rate develop based on what we're bringing in terms of innovation, product and brand engagement.

So I think what you should take away from this is we are solid on our ability to deliver this algorithm, and we have multiple factors in our more variable expense base to drive that growth, but we're also going to remain disciplined to make sure the investments that we make pay off. And you asked me about EBIT margin, but maybe I'll just throw in one more thing as you think about earnings, right? We have assumed some modest increase in the tax rate in our earnings algorithm due to Pillar 2. Let's see if that happens. That would be in the out years, '27 and '28, not in '26. So that's another factor just to keep in mind as you think about this algorithm going forward.

Just to continue on that conversation about AUR, I was wondering when you think about the mid-single-digit growth at the Coach brand, will that continue to be driven by AUR in your model? And how big of a factor is that, Scott, in your 180 basis point gross margin expansion target?

Yes. Maybe I'll start, Todd, and go just to give you the numbers on it. So AUR has been one of the primary drivers looking back. It's notable that over the last couple of quarters, we've inflected the positive unit growth. That's a really important milestone. And as we look forward, we will have both unit growth and AUR, but most of -- the majority of that growth will still come from AUR.

But margin growth is AUC and AUR.

Yes, that's right. Oh, you were talking specifically -- I was thinking of top line growth, yes, but, yes, yes. I don't know if you heard what Joanne said, don't forget AUC. The most underappreciated part of our story, Peter.

Not anymore.

As I'd like to say. Did we answer your question? Okay.

Matt?

Great. Matt Boss, JPMorgan. So Joanne, could you speak to segmentation strategies in place and the foundation today that gives you confidence to expand the lens to the larger consumer total addressable market that you cited, I think, was just less than 1% today for the Coach brand?

Yes. For our business, we've really opened the aperture to look at all potential consumers of our products. And the reason we're doing that is because we're having such success in acquiring new customers, particularly at point of market entry when young consumers are entering the market, and we believe we can expand the category. When Coach was at its best, that's what we did. We expanded the category and brought new users into the category. And that's what we're seeing happen with Coach today around the world. We're seeing tremendous success.

And you asked about segmentation, you're talking about market segmentation and where our brands play. We have very distinct brand identities. And we did all the math and we did all the homework on understanding the full market and where each of our brands play. But these are brands that are distinctive. -- each and unto themselves. We didn't create this positioning because we wanted them to be different. They are different.

And so when we look at the overall market and who our brands -- who their target customer is for these brands, it is very clear. And it was very clear in the work that we did that these are very differentiated brands in the market. And as we talked about, it's a huge market. We have tons of headroom in the market to grow our brands where they are in our current positioning -- and of course, the market segmentation and market positioning also has a halo effect on the full market. Maybe, Sandeep, if you want to comment?

Yes. Again, look, we've used demand spaces to kind of look at what are the segments each brand goes against. And again, to the point Joanne said, it's the mapping of the brand positioning with those segments. Now they are pretty sizable. I mean, Eva talked about 16% for Coach, Timeless and the timeless segment is about 19%, but the halo spaces are massive, right, on that. So on one side, they are sizable and distinctive, but also the halo on a large space. And again, our point of market entry strategy is what differentiates the because they have the highest halo or reverse influence as we're seeing across large parts of that. So that's why we are able to design against those target audiences. That's why it's important to define who are you designing against. But that design has a large aspiration over much big spaces in that.

And one thing just to add, and I think this is clear, but just in case there's any doubt, that 275 million consumers we're talking about are in markets we play now. So this is not some hypothetical we're going to grow 100 million people in Africa or we're -- India is going to be the next big growth driver. That will come at some point, but that's -- we don't have to get there now to get to our ambition.

The 200 basis points margin expansion that you outlined, what have you embedded for recapture of the tariff headwind? I think this year, it was a little more than 150 basis points.

Yes. So you remember my little chart, we said we would continue to make progress and in fact, grow gross and operating margins in '27 and beyond. And we will fully mitigate the impacts of tariffs through this 3-year period. In fact, I would argue we already have, but we can debate that.

Paul?

Paul Lejuez, Citigroup. You put out some numbers in terms of top line growth algo's by region. You also talked about store growth a little bit. Can you maybe just break that down a little bit? How much of those top line numbers that you put out there are being driven by square footage growth versus what do you assume for comp growth by region? And then also in that store growth, how much of that is full price stores being opened versus factory in some of these international regions.

Paul, have you not listened -- First of all, there's no such thing as a factory store anymore. Okay. Let's start with that.

Well, I was just going to just -- to clarify the number, we didn't give it exactly in the detail that you just asked, but we said less than 1%, slightly less than 1% is the impact of the new stores, which you can infer from that, they're going to be generally smaller in format. And remember, while we are opening stores in the U.S., the majority of these are going to be outside of the U.S. with China as kind of the center of the bull's eye. Todd, if you want to add.

Yes. Again, you are going to hear us talk far less about channels of distribution. If, in theory, I have an outlet store that is penetrating 25% in collection product, if my discount rate is half what it historically was, okay? If we're attracting new consumers who the best mall in their location happens to be in historic outlet store.

If the mall is something like a hybrid mall like in outside of Boston, Assembly Row, is that an outlet store? Or is that just a great place to interact with our customer? That's the mind shift. That's the difference. And that starts from product creation to the merchants to the way we're running our stores. So again, it is going to be materially different. We've done all this work now to get there. And that's why, particularly when you look at our digital footprint, that will change as well.

Adrienne?

Adrienne Yih from Barclays. I guess, Todd and Eva, my question for you is you're both targeting the same kind of point of market entry, the 18- to 27-year-old. How do you ensure that between the 2 brands that you keep a distinct kind of target and positioning? And then along those same lines, what have you found in your price elasticity work at each of the brands? How do you know when you can take more price? Do you just look at kind of the turns on full price selling? And if they're going really fast, you have -- you probably underpriced it for the market. So just some characteristics on the elasticity side of that.

Yes, I can kick it off. Honestly, we have 2 very distinct targets, and this is what allow us also to build very different brands. First of all, we have a very different heritage, and I'm sure you're going to say more about that, but also the consumer we're going after is very different. And I think you saw it in the video of Sandeep. They are Gen Z, they are young, but they are interestingly like a very different person and they are not looking for the same kind of products. They are not considering fashion for the same reason. They are not buying a handbag for the same reason.

The Gen Z connector is -- she cares about connecting with people. She cares about fitting in. This is what does matter for her. So today, when she buys a handbag, in her mind, she wants to use this to show that she's approachable. She wants to use this as a pretext to connect with people, to trigger a discussion. So it's a very different motivation than the Gen Z, the timeless Gen Z of Coach.

So she is looking for something different. She's looking for something very feminine. She's looking for something with more thoughtful details that shows that she is nice and kind and friendly. So it's a very different target. And we see that. Of course, you will always have consumer that will buy both brands or more brands, but they are looking for something very different. And when you focus on that consumer, when everything you do is at the length of this consumer, you're developing for them and with them, then you build something that's very distinctive.

Yes. Eva said it really well. I mean the brands sit in different places, different reasons to buy them. But listen, if somebody has 200 brands, if they don't buy us, I'm happy for them to buy Kate. So -- and it's a big, big audience that we're attracted. On the pricing side, sometimes historically, I'd say we were 2Q by half because sometimes we prided ourselves on incredibly dynamic pricing.

I mean, so every day, we can switch prices and we can play with the discounting and you walk into a store and it's one thing and then the next day, it's another thing. First of all, we changed the conversation. We don't even lead with discounting. The first interaction is not welcome to Coach, here's a 20% off coupon, okay? That fundamentally changes things. Our shift from seasonality to core has also changed things.

Do we always get pricing 100% right? No. Have we taken up pricing in a thoughtful, systemic way? Absolutely. We put new collections together. Sometimes we don't know. Predictive pricing for a future collection even with all of our technology is the hardest thing to unlock. But actually, we are using AI to help us with that quite a bit. And over time, our learning models have gotten better. So it's not just our great merchants and our great people who are involved in pricing, but it is technology.

And we -- but the guardrail here is not to absolutely get the final best price. The guardrail is to ensure we show value for this consumer. Somebody asked me last night, why aren't you going after more $1,500, $2,000 bags? We have some, and we'll have a sprinkling of that for the halo impact. but that's not where we're going to win. We are going to win with bringing these new customers into the category between $200 and $500. Now 3 years from now, that might be $300 to $600, but we're going to be very thoughtful in our approach.

I may just add one thing. I mean these are very clear and distinct audiences, but the thing we need to remember is there are 275 million consumers and both brands put together, our penetration is only 0.6% on that. So there is enough space for these 2 brands to kind of grow.

Brooke?

Brooke, Goldman Sachs. I wanted to dive a little bit deeper into the Coach China strategy and what you're doing to capture that new customer there, specifically the inflection to new store growth in a market that is a little bit uncertain. What gives you confidence in delivering that targeted sales growth over the 3-year period when others have been struggling a little bit more?

Sandeep, do you want to start and then turn to Todd?

Yes. I'll start. Firstly, look, I'll start with something that we've already shared. We are already delivering 18% growth in China when the overall market is in the negative double digits on that. And this really starts with the brand heat that we are creating there and the desire we are building for the Coach brand, and we have the right value equation for that market to win in. Now I talked about 25 million women turning 18 every year over the next 10 years, 5 million of them are going to be in China. So there is a huge TAM out there, especially when we're talking point of market entry.

And the way we're working is with precision on how do we target these consumers in the market. These consumers are coming into the market. They are going to make their handbag purchases. They're looking for a brand that fits their expression, right? And both for Coach and Kate Spade, I mean, that's a massive opportunity. Again, yes, we're going to expand our footprint. I gave the example of Wuhan and we're building that across other cities.

But the key point is keeping a couple of things in mind. One, we got to be very disciplined on those store openings, right? Two is those stores open where these consumers are and shopping. So sometimes it doesn't have to be one of those traditional high-end malls like if you look at malls like in [indiscernible] which is more high-end luxury, the traffic is very low. On the other hand, you look at malls like MixC in China, where there's so much traffic and so many young college students out there. So all of those decisions are going into that. Again, I'll just end by saying before I pass over to Todd that there's a massive TAM there. There's a lot of point of market entry consumers. Our brand has the right heat at this point and momentum in terms of building, and we have the right value equation.

And that $5 million, just to clarify, is qualified.

Qualified.

Consumers who have the purchasing power, right?

And just building on something Sandeep just broke, but it's our brand position that is going to allow us to win. So this idea of expressive luxury, this idea, it's not just about impressing. For a long period of time, China, almost like a developing market was all about impressing. I'm going to save 6 months of salary to buy the impressive bag. There's a cultural shift that's happened in China that we will capitalize on because the idea that you have to save 3, 4, 5 months of salary to buy a handbag, even if you're living at home with your parents and don't have all the expenses has fallen out of fashion.

So there is really something in the air where some of those very traditional European luxury that price themselves so high, they've lost some of that opportunity because it's not resonating with the customer in the correct way. And because we've changed our approach, that allows us now to do exactly what Sandeep said. We don't have to just go to the mall in the city that was us adjacent to very traditional European luxury players. We can go to wonderful places. We're in cities and in locations that are very different because I don't even have to look at the adjacencies. And by the way, that also helps in negotiating because when they want us in a location, and we may be the absolute pinnacle of luxury in a location, negotiating looks a little different there. We like that.

Oliver?

Oliver Chen, TD Cowen. The Coach brand has done so well. Is it at peak margins in terms of wanting to make sure you offer value to the consumer? And shouldn't you reinvest the AUC to give product back to the consumer? Also, the international opportunity is huge. So what are the toughest decisions you're making or the tougher problems, opportunities as you pursue international? How would you rank a couple? And as we think about Kate Spade, just would love your take on establishing icons. It's very important, and you're revisiting a lot of the whims and wit, but icons and cutting the SKUs sounds like a really great idea?

Todd, why don't you start and then we'll go to Eva.

Okay. So no, we have more room, be definitive there to take margin. And on the make, I want to be very clear. Peter's partnership and his team's partnership, we're not taking value out of the brand, okay? Everything we look at, okay, on an AUC basis has to meet a couple of criteria. And by the way, it's not just Peter, it's our -- the Coach CFO, who works with Scott, who does this, and it's Stuart as well. Stuart and our CFO at the Coach brand have led an AUC drive.

And what's important is we will not cheapen the product, okay? We will do things that look to -- that are -- you can't even see -- and I'll give you one quick example. I think I've given this example in the past, but just for clarification. It's not a Coach bag unless it has a story patch. We all know that. You see it, open up your Coach bag. There was an extra stitch that we put in the story patch making that took an extra step.

Remember, this is a story patch inside a bag. That -- and again, when you think about our scale of tens of millions of units, there was $1 million savings not doing that extra stitch. No consumer we'll ever know or see the durability. We tested it, we pulled it. We'll ever see that change. But that's an intellectual interesting, aggressive approach to looking at this. And remember what we're trying to do.

We're not -- yes, can we keep growing gross margins? We will. But we're also taking the Tapestry Coach flywheel to put that money into our marketing, be very stingy on non-marketing SG&A and put that in to keep fueling this consumer. Any of us have ever made a camp fire. You know to keep the camp fire going, you got to keep throwing more wood in it, okay? That's what we're doing.

Eva?

Yes, answering your question on Kate, yes, building icons is crucial. If you want to make the brand a destination, if you want to build for the long term. So our strategy is made to build those icons over time. And how we do this, to your point, of course, is making space for them, but also making sure we develop relevant products. And that's what's our strategy? We have different steps. First of all, like making sure we're developing something that's relevant.

And for this, we're going to test everything along the way and select the winning designs for the consumer. Then we're going to invest in them in inventory. We're going to invest in them in marketing. And I'm not talking one campaign, I'm talking over time to make sure we can build them at an icon. And then we're going to continue animating to your point, with new colors, new design, new idea around that icon. So this is the cycle we can create to build icons over time. I'm going to give you an example. Maybe you saw in the video, you saw in the showroom or even in stores, the geo bag that we have today.

This is exactly how it has been developed -- has been developed with the consumer, has been tested. Everything has been tested in this value down to the name, down to the pricing, everything. Then we've been investing. Then now it's one very cohesive experience for the consumer. If you go to the website, if you go to our stores, in the windows, the sales associate, the training, everything is focused on building this as an icon, and we're going to continue animating it over time.

Alex?

Alex Straton, Morgan Stanley. Maybe for Todd, just on that $10 billion target for Coach, can you just help us bridge from the end of this plan to there? I see you're smiling. You're probably prepared for this?

Why it takes so long...

How we get there and maybe Scott can chime in just from the end of this plan to there.

Well, again, as I said, this plan is our floor. So I don't want to leave you with this is our highest aspiration. A long-term plan is a long-term plan. We see clarity that we have a $10 billion opportunity at the margins we want. Can I always add $1 billion? Of course, we can. We've seen what that looks like if we don't do it thoughtfully. So we are going to do this quarter after quarter in a sustainable way.

The consumer is going to vote. We have a lot of opportunity. And there may be times where all of a sudden, the quarter or period does much better. It's not going to be artificially driven. It's going to be driven by a steady march forward. So what that looks like, we'll see. But what I hope you appreciate and take away is I have a great deal of confidence that we will achieve that number.

The only thing I would add to that, Alex, is what I think the main message is this brand is just getting started, right? And as you look at the runway and the potential to grow, it's not limited by this short somewhat arbitrary 3-year plan that we have laid out. It's important to do that for all the reasons that we know. And we establish what we think is a very durable base that you can build from but the potential here is massive. And we know it based on the way these guys have reframed the market and the aperture that we're looking at, it's changing everything on how you think about what the potential of this brand can be over time. So...

We'll take our final question from Dana.

As you think about -- and it's Dana Telsey from Telsey. As you think about the marketing spend on each brand, what's appropriate in the long-term targets of what you see as you're developing? And lastly, other categories, you talked about footwear. Is footwear and men's an opportunity? I think years ago, we talked about men's at one point.

Yes. And I'd love to start. Marketing is definitely an unlock. And I hope what you heard from us today is not just this 3-year plan, but the durability of this model over time. The building blocks of growth, we talked about opening the aperture, but we know where we're going to source our growth from, how many new customers we need to acquire to drive that growth. And how many of those customers will buy leather goods, our core category to drive that growth, 80%, over 80% will be in leather goods.

And where around the world, we're going to drive that growth, which informs our investment. So if you think about new customer acquisition, we are winning with new customers, and it is really driving our growth right now, and we see the opportunity to continue that momentum as we move forward. And as we drive that momentum, we will feed marketing. We're not spending marketing with a hope. We have a lot of KPIs that we manage, and we manage our marketing spend in a very disciplined way.

But some of the capabilities that we've built, I think, are a differentiator of our company. We understand what content to put on what platform to reach which customers. And we're really clear about what those are. So when we talk about the target customer, timeless Gen Z for Coach and the Gen Z connector for Kate, we're laser-focused on how to hit the radar and be relevant to them with the storytelling, with the marketing, the spike and sustain, and that requires investment, but it's not investment without discipline. It's disciplined investment.

And we'll continue to feed that engine. That's the flywheel that Scott talked about. That is the Tapestry flywheel that drives our brand heat, allows us to expand margins. It allows us to drive that disciplined growth that we talked about with high margin that allows us then to reinvest back into our business. So can marketing spend go higher? I think absolutely, it can. And actually, in the presentation, we showed you we expect it to go higher, but it will go higher with the return that we expect as well. And that will drive the discipline. We're talking mid-single-digit growth for this 3-year time horizon, but well into the future. And we think that is a very compelling value creation model for us.

And just quickly on men's. Let's -- we -- this morning, we are very, very focused on our female customer, we have a big men's business. And there's huge opportunity. Footwear is an area where we're leading with that. Our sneaker, the Soho and the Highline, the 2 major sneakers are all gender. And if you hadn't noticed the clip, Charles Melton without a shirt on, selling the men's sneaker has very massive appeal. So you'll hear us keep talking in the future more about our men's, but we like our brand positioning here. And interestingly, who buys men, if you're winning with women's, you're winning in all gender.

Great. Joanne, now I'll turn it to you for some closing remarks.

Well, I can't believe we're done already. This has been really fun. I hope that you take away a lot from our presentations today. But the one thing I hope you take away is the durability of our growth. I just talked about it. Our -- we have momentum in our business, and our growth is durable, not just for these 3 years, but in the long term. And that's going to create a lot of value for all of our stakeholders.

So thank you for coming today. I do want to -- a couple of housekeeping announcements. If you haven't taken the time to browse the Coach assortment out here, have a Coach coffee, please do that. The showroom upstairs for Kate Spade. I encourage you to go see what's brewing up at Kate Spade. And we are delighted to be able to share with you our workshop here on the ninth floor. It is unique to our business. Peter talked about craftsmanship at scale. You'll be able to see that in real life, touch it and feel it. So thank you for coming today, and enjoy the rest of your day.