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.