掛毯 (TPR) 2018 Q1 法說會逐字稿

Good day, and welcome to the Tapestry Conference Call. (Operator Instructions) Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Andrea Resnick, Global Head of Investor Relations and Corporate Communications.

Good morning, and thank you for joining us. With me today to discuss our quarterly results and annual forecast are Victor Luis, Tapestry, Inc.'s Chief Executive Officer; and Kevin Wills, Tapestry's CFO.

Before we begin, we must point out that this conference call will involve certain forward-looking statements, including projections for our business in the current or future quarters or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon a number of important factors, including risks and uncertainties, such as our ability to achieve intended benefits, cost savings and synergies from acquisitions, expected economic trends or our ability to anticipate consumer preferences, control costs, successfully execute our operational efficiency initiatives and growth strategies.

Please refer to our latest annual report on Form 10-K and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors. Please note that historical trends may not be indicative of future performance.

Also, certain financial information and metrics that will be discussed today will be presented on a non-GAAP basis. These non-GAAP measures exclude certain items related to our operational efficiency plan and integration and acquisition-related charges as well as the impact of foreign currency fluctuations where noted. You may identify these non-GAAP measures by the terms non-GAAP or constant currency. The company believes that presenting these non-GAAP measures is a useful way for investors and others to evaluate the company's ongoing operations and financial results against historical performance and in a manner that is consistent with management's evaluation of the business. You may find the corresponding GAAP financial information or metric as well as the related reconciliation on our website, www.tapestry.com/investors and then viewing the earnings release posted today.

Now let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our first fiscal quarter 2018 results for our 3 brands. Kevin Wills will continue with details on financial and operational results and our outlook for the balance of FY '18. Following that, we will hold a question-and-answer session, where we will be joined by Todd Kahn, President, Chief Administrative Officer and Secretary; and Josh Schulman, Chief Executive Officer and Brand President of Coach. This Q&A session will end shortly before 9:30 a.m. We will then conclude with some brief summary remarks.

I'd now like to introduce Victor Luis, Tapestry's CEO.

Good morning. Thank you, Andrea, and welcome, everyone, to our first call as Tapestry. In changing our name, we are establishing a strong and distinct corporate identity, which enables our brands to express their individual personalities and unique language to consumers, therefore, eliminating confusion between Coach, Inc. and the Coach brand. We searched for a name to reflect the shared values of optimism, innovation and inclusion that all 3 of our brands share while also expressing the diversity of our people and our brands.

Our new corporate identity embodies our creative, brand-led and consumer-focused business while also representing the heritage of our group.

Now turning to our results. As noted in our press release this morning, our first quarter performance was in line with our overall expectations, which, as Kevin mentioned on our last call, would be impacted by calendar shifts and currency. Our results clearly reflected the benefits of our diversified multibrand model, notably, the contribution of Kate Spade to our consolidated results and double-digit growth at Stuart Weitzman. While we were not satisfied with Coach's global comp store sales performance, which was impacted by both the expected calendar shifts and inventory mix challenges as well as the effects of the unanticipated natural disasters, we have returned to global and North America comp growth in the second quarter and are well-positioned for holiday. Importantly, we remain on track to achieve the annual guidance we set out for Tapestry in August.

We have been especially pleased with the progress of the integration of Kate Spade onto our operating platform. During the quarter, we took significant actions to position the brand for long-term success. We began to implement our strategic initiatives, including the pullback on wholesale disposition and flash sales while taking substantial steps to unlock cost synergies. After only a few months post close of the Kate Spade acquisition, we're even more excited about the opportunities for the brand, both in terms of revenue growth, driven by distribution expansion and productivity, and profitability improvements, as we leverage our scale across our supply chain and corporate functions. We are also optimistic about growth opportunities as we leverage our global business development organization across all brands and geographies. Importantly, we now expect to achieve run rate synergies of approximately $100 million to $115 million in fiscal 2019 versus our previous guidance of $50 million.

Today, the 3 brands of the Tapestry family are united in a common philosophy: first, driven by brand-led strategies that focus on the consumer and on an inclusive approach to luxury; second, a focus on innovation across product, marketing and experiences, both in our stores and in our digital channels; and lastly, the objective to drive sustainable revenue and earnings growth through strategies that are focused on long-term brand health. Our strategic priority is to achieve this balance by making the appropriate investments while carefully managing our distribution channels to optimize growth.

As we look forward to the balance of FY '18, our strategies for Tapestry are focused on creating an operating platform that powers our multibrand company, writing the next chapter in the Coach story, building upon our history and heritage of craftsmanship and fashion relevance across product categories, channels and geographies; establishing a healthy foundation to support Kate Spade's global growth; launching the new creative direction for Stuart Weitzman while maintaining the brand's leadership position in the fusion of fashion and fit; and driving innovation in e-commerce and digital marketing as well as materials and supply chain while leveraging Tapestry's scale across brands.

Overall, we've remained focused on creating desire for our brands and reinforcing the emotional bonds with our customers across geographies. We are confident in the opportunities for Tapestry as a whole and for each of our brands individually within the attractive and growing $80 billion global market for premium handbags and accessories, footwear and outerwear.

Moving to category trends and giving our new reporting structure. We are moving to a global category update. During the first quarter, we estimate that the men's and women's premium handbag and accessories market, which is over $40 billion, grew at high single-digit rate globally, accelerating from the June quarter, driven by the strength of luxury logo product, proving that brands absolutely still matter. For perspective, we did still want to provide North America trends this quarter, and we estimate that the men's and women's premium handbag and accessories market grew at a low single-digit rate, also led by the outperformance of luxury brands, partially offset by continued negative trends in the U.S. department store space as some brands have pulled back from the channel.

Now turning to results by brand. I'd like to focus on first quarter performance and the holiday outlook for the Coach brand, where we've remained focused on elevating brand perception, driving fashion relevance and ensuring balance across our product offering in both price points and materials.

Overall, for the first quarter, Coach sales declined 3% as reported and 2% in constant currency. The brand's North America business declined modestly, while the international business was flat on a reported basis and up slightly in constant currency, given the impact of the stronger U.S. dollar. The brand's international constant currency sales growth was driven by increases in Europe, greater China and Japan.

During the quarter, our global Coach comp declined 2%, with our North America comp down similarly. Europe and Mainland China continued to generate positive comps, while our overall comp store sales in Greater China were down as expected, given both the holiday shift and continued weakness in Hong Kong and Macau. The balance of our direct Asia business continue to be negatively impacted by the ongoing issues in Korea, with both domestic macroeconomic malaise and weak tourist flows.

As I mentioned, there were a number of both anticipated and unexpected impacts on global results during the quarter. These included the movement of the Mid-Autumn festival, which reduced Chinese tourist flows and their spend during the quarter; and some inventor mix opportunities, stockouts and shortages of certain product, notably, logo in the North America outlet channel. There were also the negative effects of hurricanes and typhoons in North America and Asia, respectively. In addition to direct impact on sales from these disasters, we also experienced disruption to our Jacksonville, Florida distribution center, both receiving shipments into the facility as well as sending inventory out to stores. However, our rebound quarter-to-date underscores our confidence in Coach's continued transformation and brand momentum as well as our ability to deliver a strong holiday season.

Moving to wholesale. Our North America shipments grew during the quarter, driven by footwear. As expected, our sales at POS declined due to the rapid impact of spring 2017 door closures. However, we were pleased to have positive year-over-year performance in comp doors within our largest accounts. Our results are especially strong in those doors, which have been renovated into the modern luxury concept. Our international wholesale business declined as expected due, in part, to shipment timing, with shifts in both the fourth quarter of 2017 and the second quarter of fiscal 2018, while sales at POS rose, driven by door growth.

Turning to Coach product performance and starting with retail. We continued to see strong consumer response to fashion innovation. Most exciting in the quarter was the launch of the Coach and Selena Gomez collaboration, a new collection designed in partnership with the multitalented actress and singer. This launch was supported by our fall advertising campaign, featuring Selena wearing the Selena Grace Bag in red, which has virtually sold out across our network. What was especially exciting was the increase in our North America retail customer database, in part reflecting our strategy to leverage the Selena collaboration to cut through to a broader audience. This was also evidenced in our brand tracking, where among the broad premium market, women, who believed wearing Coach handbags make them feel fashionable and put together, rose versus a year ago, while Coach also leads in being viewed as high quality. Importantly, among category drivers, perception of the brand's ubiquity fell year-over-year. As we entered Q2, we launched Coach create globally a platform for customers to customize her bags either online or in store. In 35 stores worldwide as well as online, we have the most complete expression of Coach Create, which allows customers to customize bags with signature details, such as embossed leather tea roses or prairie rivets. This customization is done in store while the customer shops. And in over 25% of our direct fleet worldwide, we now have stand-alone monogramming stations. We consider Coach Create to be the cornerstone of our co-creation strategy, and based on very strong early results, we will be expanding the most complete expression of the concepts to more stores in the second half of the year.

We continued to build our fashion authority at Coach. After winning the CFDA Accessory Designer of the Year award earlier this year, Stuart Vevers' recent spring fashion show in September was named one of the top 10 global fashion shows among all designers, showing in New York, London, Milan or Paris by the industry publication, Business of Fashion. The runway show featured a fresh take on Coach signature as we begin to capitalize on the logo trend sweeping the market in the months ahead. And just recently, Stuart has been nominated for the British Fashion Council's Accessory Designer of the Year.

For Q2, we have focused on cascading the level of innovation and fashion leadership, which Stuart Vevers brings to our most elevated runway collections across a pyramid of price, occasion and function in both 1941 and broader Coach assortments. The Selena Grace Bag is a great example of innovation under $400.

During Q1, we launched the new Coach women's footwear assortment, both in our stores and in the wholesale channel, following the take-back of our license at the end of FY '17. We started with a focused and curated offering of about 100 SKUs for pre-fall, with limited wholesale distribution of about 120 doors. We'll build pre-spring and spring from 100 to about 175 SKUs and look to grow distribution. Though early days, we look forward to the expansion of Coach footwear as Tapestry looks to play a leading role in the $28-billion-and-growing premium footwear market.

Looking ahead to holiday. Coach takes an overtly festive approach with product and marketing. Specifically in retail, we will, first, offer a compelling holiday gift assortment with options across categories and price points in a wide selection of colors. Touches of playful prints and metallic are aimed at surprising and delighting customers. And second, continue to innovate leather craft, launching quilting as a new technique. This novelty platform will be offered across collections and silhouettes from Rogue to Dinky as well as in a full range of smaller leather goods crafted in luxurious, lightweight Nappa leather.

Beyond women's leather goods, we expect growth in lifestyle categories during holiday, driven by innovation in shearling, varsity, trenches and apparel as well as footwear, notably sneakers and booties.

In men's, we're excited about growth in travel, outerwear and belts. Supporting our retail product initiatives, our holiday marketing will focus on compelling product-driven content and storytelling. We will also significantly increase our focus into digital, maximizing investments, with 4 billion impressions targeted globally. And we will, of course, be using Selena to amplify our gifting message in our holiday campaign and including a personal appearance at our Regent Street store in London.

Moving to Coach brand outlet and starting with Q1. This fall, we delivered Coach Varsity, inspired from our fall runway collection and just in time for back-to-school shopping. This collection included on-trend varsity jackets, patches and our first full personalization assortment in outlet. In addition, we continued to drive growth in the lifestyle and men's categories.

As discussed earlier, due to strong performance in Q4 and heightened demand for logo, we entered FY '18, chasing some of our top women's bags and core leather styles and colors and especially in logo platforms. As we exited our first quarter, we were able to rebuild our inventory position in these key items and are seeing a positive impact to handbag performance quarter-to-date.

Now looking to our second quarter in outlet. As we move into our biggest season of the year, we are excited to launch our full holiday expression 2 weeks earlier than last year, with a clear 360-degree message across product, stores and marketing. This year's holiday collection is all about metallic, sparkle and great gifting options across all price points from glitter wristlets to shearling outerwear.

Starting in November, we launch a dual-toned metallic palette and leather goods with elevated hardware details. As we move further into the season, we launch our Black Friday and Cyber Monday exclusive product and deals across all categories. For December, we will drive excitement through an enhanced flow of newness, offering a full assortment of product for both gift-giving and self-purchase.

So in summary, on the Coach brand, as we look forward to holiday and beyond, we are well positioned to drive positive comparable store sales, driven by compelling product, our differentiated modern luxury store experience and bold marketing campaigns across all of our channels and geographies. We are especially excited about our development in logo platforms across channels and the leverage that we expect to get from the Selena Gomez campaign in bringing these ideas to our core customers globally, given the current trend for highly differentiated logo product in the broader market.

Moving to Kate Spade. Sales totaled $269 million for the post-acquisition period. Underlying comparable store sales improved from previous quarters, with bricks-and-mortar comps down 3% globally compared to 8% in the previous quarter and total comp down about 9%, impacted by reduced promotional sales online. When looking at Kate Spade versus prior year for the full quarter, including the stub period, sales declined about 4%, reflecting our strategic reduction of both wholesale disposition and flash or surprise sales.

Highlights of the quarter were the strength of innovation in retail, the customer response to the make-it-mine customization program and the success of small wallets. We are especially excited about our trend in ready-to-wear and our testing a different visual merchandising approach. This test is focused on zoning retail stores by department rather than monthly introduction, allowing for an easier category shopping experience. These tests, which require minimal capital investment, are proving very productive and will be rolled out further in retail throughout the third quarter. In outlet, we saw improved results from higher inventory levels, notably in handbag sales, with small leather goods and jewelry also performing well.

In our U.S. brand tracking survey fielded in September, we saw Kate Spade momentum rise from the prior year among millennials, which represent about 60% of the brand's customer base. In addition, among the broad premium market, we continued to see the brand resonance on the attributes of fashionable, feminine and fun. In fact, nearly 90% of women believe Kate Spade handbags are fashionable and on trend, setting us up very well for the increased focus we shall be placing on core handbag innovation in the quarters ahead.

Looking to holiday and beyond. Our focus remains on delighting customers in a distinctly Kate Spade way, full of color and playful sophistication. For Q2, in retail stores, we will expand our customization program and support the expansion of the ready-to-wear visual merchandising test. Most important, we are focused on a gifting assortment with a more democratic offer and balanced color palette.

In outlet, we believe we have a real opportunity around our gifting capsule, where we actually ran out of inventory by Black Friday last holiday as well as in backpacks and cross-body silhouettes.

As we've said before, we know that Kate Spade is a strong unique brand, bringing important brand attribute and customer diversification to the Tapestry portfolio. It is a brand with highly productive retail and outlet stores and a strong top-tier department store presence in North America. Outside of the U.S., there is significant opportunity in Japan, the second largest handbag and accessory market in the world and where the brand already has a strong presence but is still under penetrated.

We're also really pleased with the initial response to Kate Spade in the U.K. market and extremely excited about the long-term growth opportunities in China, where our initial brand tracker shows promising consumer traction for the brand. Of course, we know that as we grow awareness for the brand in China, this will have a positive impact on important travel markets for the Chinese tourists, including Europe, Japan and North America.

As we look ahead for Kate Spade for the balance of fiscal year '18, we have already begun to take steps to position the brand, building a foundation for solid and sustainable growth. We will continue to significantly curtail promotional impressions by reducing surprise sales and pulling back on wholesale disposition. It's important to note that in the case of flash, we're not only pulling back on the number of events, but also significantly reducing the circulation, no longer using flash sale events as a broad, widely advertised recruitment vehicle.

We will also accelerate innovation in the core handbag and accessories category, along with ready-to-wear and tech, leveraging the Tapestry platform, notably, our supply chain and product development capabilities. Indeed, we have already made key decisions to reinforce Kate Spade's leather goods design talent.

We have begun to review the store fleet and leverage opportunities to maximize the brand's global footprint. To this point, we opened 5 new stores in the first quarter and closed 4. In addition to the winding down of Jack Spade, we continued to look for focus in our licensed portfolio, while we put our energy and team's efforts on the most significant women's opportunities: handbags; ready-to-wear; tech; and footwear, both domestically and internationally.

And we will tailor the brand's whimsical and fun marketing messages, ensuring that it resonates in all key global markets while remaining true to the brand's unique personality.

I have enjoyed immensely partnering with the terrific Kate Spade team as interim CEO as we continued to look to both capture synergies and, more importantly, drive global resonance and growth.

And finally, at Stuart Weitzman, we drove double-digit growth in the first quarter. Sales rose 10%, driven by international wholesale shipment timing, with more modest increases in the global direct business, driven in turn by distribution growth and global e-commerce. New seasonal product and booties did very well in the quarter, as did sneakers and our developing handbag offering.

In October, we launched a dedicated customer analytics program for the Stuart Weitzman brand, which will enable greater business insights moving forward. One initial learning is that our U.S. direct millennial penetration, though small, is growing nicely while seeing very exciting penetration of Asian, especially Mainland Chinese millennials across our business.

We are just beginning to leverage insights to help us recruit, retain and reactivate lapsed customers into the brand. We are very much on track to drive double-digit growth for the year at Stuart Weitzman as we continue to evolve the brand identity across global markets, but would expect second quarter results to be essentially even on a year-over-year basis, given the extremely difficult compare with last year's second quarter, which benefited from shipment timing shifts.

We are very excited to present Giovanni Morelli's first footwear and handbag collections to the trade in the upcoming weeks.

The Stuart Weitzman team is focused on innovation and capturing new occasions and wardrobing opportunities in footwear while building credibility in the leather goods category. We are also looking at distribution opportunities globally, notably in the key Asian markets, where we want to capitalize on the rapidly growing demand for the brand. You can also expect to see an evolved and exciting new store concept for Stuart Weitzman later this fiscal year with the renovation of our Rodeo Drive store in January. And of course, all of these programs will be supported by seasonal marketing campaigns, featuring a supermodel strategy, providing a platform to amplify the brand message in social media and attract an incremental millennial client.

Now I'll turn it over to our CFO, Kevin Wills, for details on our first quarter financial results and guidance for fiscal 2018. Kevin?

Thanks, Victor, and good morning, everyone. Victor has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our first quarter results as well as our outlook for fiscal year 2018.

Before I begin, please note. The comments I'm about to make are based on non-GAAP results. Corresponding GAAP results as well as the related reconciliation can be found in the earnings release posted on our website today. In addition, and as previously announced, beginning in fiscal 2018, we established reportable segments per brand. Information under these new reportable segments, including restated prior year results, can be found in our earnings release as well as in the 8-K filed with the SEC today.

Finally, fiscal 2018 first quarter performance includes the contribution of Kate Spade for the post-acquisition period of July 11, 2017, through the end of the fiscal quarter on September 30, 2017.

Now turning to the financial results for Tapestry. Net sales totaled $1.29 billion as compared to $1.04 billion in the prior year, an increase of 24%, driven by the acquisition of Kate Spade and double-digit growth at Stuart Weitzman, partially offset by declining Coach brand sales. On a constant currency basis, total sales increased 25%.

Coach net sales totaled $924 million as compared to $950 million in the prior year, a decrease of 3%. On a constant currency basis, sales declined 2%. As Victor previously noted, sales during Q1 were negatively impacted by inventory challenges, calendar shifts and the impacts of the stronger U.S. dollar as well as the impact of natural disasters.

Kate Spade net sales totaled $269 million for the post-acquisition period, reflecting in part the strategic pullback in wholesale disposition and online flash.

Stuart Weitzman net sales totaled $96 million compared to $88 million reported in the same period of the prior year, an increase of 10%, driven by growth in wholesale and an increase in total direct sales.

Gross profit totaled $853 million, while gross margin was 66.2% as compared to 68.9% in the prior year. The addition of Kate Spade pressured our overall gross margin by approximately 130 basis points, as expected, given the lower margin profile of the Kate Spade brand.

Gross margin for the Coach brand was 68.4% compared to gross margin of 69.8% in the prior year. The year-over-year decline in gross margin was larger than expected, driven by inventory mix challenges, notably in the North American outlet channel, where there was pent-up demand for higher-margin logo product, which we were unable to satisfy.

This decline was not fully offset by the benefit of lower product cost. We also experienced a negative 30 basis point impact due to bringing the women's footwear business in-house. In addition, currency pressure to brand's gross margin rate was 70 basis points in the quarter.

Kate Spade gross margin was 61.3%. This performance was above our expectations and the prior year, benefiting in part from lower discount rates in the North American outlet channel.

Gross margin for Stuart Weitzman was 58.1% as compared to 58.9% last year, with a year-over-year decline being driven by negative currency impact and channel mix, given a higher penetration of the wholesale sales versus prior year.

SG&A expenses totaled $684 million and represented 53% of sales as compared to 51.9% in the year-ago period. The deleverage in SG&A was driven by the Coach brand, where expenses increased slightly versus prior year on the lower level of sales as well as the addition of Kate Spade, which had a higher SG&A rate in the quarter as expected. Coach brand SG&A expenses totaled $434 million and represented 47% of sales compared to 45.4% in the year-ago quarter. The year-over-year increase in expenses was due, in part, to higher occupancy costs as well as increased depreciation.

Kate Spade SG&A expenses were $143 million and represented 53.3% of sales. As previously noted, when looking at Kate Spade results on a pro forma basis, we did not anniversary certain compensation benefits as expected.

Stuart Weitzman SG&A expenses were $47 million, an increase of 1% and represented 48.5% of sales as compared to 52.8% of sales in the prior year. In addition, please note that Tapestry's total SG&A includes corporate costs as outlined in our press release.

Operating income for the quarter was $169 million, a decrease of 4% versus prior year, consistent with guidance, while operating margin is 13.1% versus 17% in last year's first quarter. The addition of Kate Spade pressured our overall margin by 140 basis points as expected.

Operating income for Coach was $198 million, while operating margin was 21.5% versus 24.4% in the prior year. Operating income for Kate Spade totaled $22 million, while operating margin was 8%. And operating income for Stuart Weitzman was $9 million, or 9.6% of sales versus 6% in the prior year. Net interest expense was $21 million in the quarter as compared to $6 million in the year-ago period. The year-over-year increase was driven by higher debt levels associated with the Kate Spade acquisition. Our effective tax rate for the quarter was 19.3% as compared to 26.3% in the prior year. The adoption of Accounting Standards Update, ASU 2016-09 for the accounting of employee share-based payments favorably influenced our effective tax rate, as certain tax impacts that were previously recorded to equity have now been included in the income tax expense. This accounting change lowered the effective tax rate by approximately 5% in the first quarter. Our Q1 tax rate also benefited from the geographic mix of earnings.

Net income for the quarter totaled $120 million as compared to $126 million in the prior year, with earnings per diluted share of $0.42 versus $0.45. Importantly, we are pleased that Kate Spade was immediately accretive to our non-GAAP EPS.

Now moving to global distribution by brand. For the Coach brand, we've closed 2 net locations globally, finishing the quarter with 960 directly operated locations worldwide. For Kate Spade, there were 276 directly operated stores at quarter-end, which represented 1 net opening since the close of the acquisition.

And for Stuart Weitzman, we finished the quarter with 81 directly operated stores, no net change from year-end.

Turning to our balance sheet and cash flows. As you know, during the quarter, we completed the acquisition of Kate Spade for a purchase price of approximately $2.4 billion, which was funded through a combination of senior notes, bank term loans and cash on hand. At the end of fiscal first quarter, our cash and short-term investments were approximately $1.7 billion as compared to $1.5 billion in the prior year. Our total borrowings outstanding were $2.7 billion, which consisted of $1.6 billion in senior notes and $1.1 billion in term loans versus $600 million in senior notes a year ago. Inventory levels at quarter-end were $853 million, including approximately $283 million associated with Kate Spade compared to ending inventory of $547 million a year ago.

As previously communicated, we expected a higher inventory-to-sales ratio than has been our recent history due to elevated inventory levels at Kate Spade. We will protect the Kate Spade brand but not move an excess inventory into the disposition market but rather primarily flowing it into our own network into the second half of the year. Therefore, we expect our inventory-to-sales ratio to improve as we move to fiscal 2018.

Net cash from operating activities in the first quarter was an outflow of $104 million compared to an outflow of $38 million last year.

During the quarter, we incurred cash outflows of approximately $95 million related to integration and acquisition activities. Our CapEx spending was $49 million in Q1 versus $68 million last year. Free cash flow in the quarter was an outflow of $153 million versus an outflow of $106 million in the same period last year, impacted, as expected, by the integration and acquisition-related charges.

Now turning to our capital allocation policy. Our long-term priorities remain unchanged: first, we will continue to invest in our brands in order to drive sustainable growth and value creation; secondly, we will seek strategic acquisitions, looking for great brands with opportunities for expansion; and finally, returning capital to shareholders with a focus on dividends.

Since outlining these priorities some years ago, our strong balance sheet has provided the flexibility to invest in the Coach brand transformation; successfully acquire 2 great brands, Stuart Weitzman and Kate Spade, with only modest leverage while continuing to return capital to shareholders.

Moving forward, we remain committed to a conservative balance sheet management. To that end, we expect to reduce our outstanding borrowings to $1.9 billion by the end of fiscal 2018, with the repayment of an $800 million 6-month term loan with excess cash. In addition, based on free cash flow and cash on hand, we may elect to further reduce indebtedness by prepaying long-term bank debt. At the same time, we're maintaining our dividend at an annual rate of $1.35 per share.

Now moving to our 2018 outlook. Throughout the fiscal year, we will naturally incur a number of integration and onetime charges associated with the Kate Spade acquisition. I will provide more details on the expected charges in a few moments, but note that they'll be excluded from our non-GAAP results. Additionally, the Kate Spade guidance has provided subsequent to the deal close on July 11, 2017.

Turning to our guidance on a non-GAAP basis. We expect total revenues for Tapestry in fiscal 2018 to increase about 30% versus fiscal 2017 to $5.8 billion to $5.9 billion, with low single-digit organic growth. This includes the expectation for low single-digit Coach brand global comps and low double-digit increase in Stuart Weitzman brand sales. In addition, we expect the acquisition of Kate Spade to add over $1.2 billion in revenue. The Kate Spade revenue projection includes the impact of a planned strategic pullback in the wholesale disposition and online flash channels and assumes a high single-digit decrease in comps for the fiscal year.

In addition, we are projecting operating income growth of 22% to 25% versus fiscal 2017, driven by mid-single-digit organic growth, the acquisition of Kate Spade and estimated synergies of $30 million to $35 million. These synergies are expected to offset in part the reduction in profitability from the strategic and deliberate pullback of Kate Spade wholesale disposition and online flash sales. Taken together, the Kate Spade business and resultant synergies are expected to add approximately $130 million to $140 million to operating income.

As Victor mentioned, after only a few months of owning Kate Spade, we're even more excited about the opportunities to drive synergies across the Tapestry platform. To that end, we now expect to achieve run rate synergies of $100 million to $115 million in fiscal 2019 versus our previous guidance of $50 million. Net interest expense is expected to be $80 million to $85 million for the year. The full year tax rate is projected to be about 25% to 26%, and we expect our weighted average diluted shares outstanding for the year to be approximately 289 million.

Overall, we are projecting earnings per diluted share for the year in the range of $2.35 to $2.40, an increase of about 10% to 12%, including low to mid-single-digit accretion from the acquisition of Kate Spade.

We also expect our CapEx to be approximately $325 million in fiscal year '18. As previously noted, we naturally will be incurring a number of integration and onetime charges associated with the Kate Spade acquisition and integration. These charges include such items as transaction fees and integration costs, which include severance, store closure costs and inventory valuation adjustments. During the quarter, we incurred $188 million of integration and acquisition-related charges as follows. First, $40 million of acquisition transaction fees. Second, $19 million of inventory adjustment charges relating to increased cost of goods sold due to the step-up in inventory values as part of purchase accounting and, separately, the establishment of a reserve for obsolete inventory. The increase in cost of goods sold related to purchase accounting is a limited-life expense, and we expect such to be complete by the end of our second quarter. Third, $49 million of severance and equity vesting, the majority of which was pursuant to contractual commitments. And finally, $9 million of other integrated-related charges.

For the full year, we currently anticipate pretax integration charges to be in the $230 million range. Importantly, we estimate that out of the $230 million of charges, approximately $130 million will be noncash. Finally, we expect to incur approximately $10 million of operational efficiency charges.

Finally, our fiscal year '18 directly operated distribution plan by brand is unchanged. We continue to expect approximately 15 net closures globally for the Coach brand, with net closures in North America and Japan partially offset by net openings in Europe and Mainland China.

For Kate Spade, we continue to expect 20 to 25 net openings globally. As you know, these net openings will be partially offset by reduction in online promotional flash sales and wholesale disposition sales as we build the foundation for long-term brand health. And for Stuart Weitzman, we expect approximately 5 net openings in fiscal '18. It's important to note that due to the Kate Spade acquisition, we continue to expect significant variability between quarters throughout the year and across all financial metrics based on the implementation of strategic initiatives, the realization of synergies, the variability in brand and channel mix as well as currency. That said, we continue to expect to deliver double-digit operating income growth in quarters 2, 3 and 4. And while we continue to anticipate our earnings pattern to be uneven in fiscal 2018, we still expect to realize our annual EPS guidance as briefly mentioned.

In closing, we will grow both our Coach and Stuart Weitzman brands in the year ahead while successfully integrating Kate Spade, which we continue to expect to be accretive to our fiscal 2018 results. Overall, we remain very optimistic about global opportunities, and we are committed to driving long-term sustainable growth across the Tapestry portfolio of brands.

I'd now like to open it up to Q&A. Operator?

(Operator Instructions) Our first question comes from Bob Drbul with Guggenheim Securities.

You there, Bob?

Can you hear me?

Yes, we can.

Okay. I was wondering if you could talk a little more about the comp trends at Coach and Kate Spade in the first quarter. Specifically, what drove the negative comp at Coach? And for Kate, what drove the sequential improvement in store comp trends?

Sure. I'll take the Kate's side of it and then hand off to Josh for some texture on Coach. During the period that we owned Kate, as we expressed in our notes, we saw a decline of 9%, which was also including a 600 bps negative impact from global e-commerce. And that was driven, of course, in part by our strategic decisions to pull back on the online promotional sales as we have discussed. Store comp, also as we expressed, went from a negative 8% the previous quarter to a negative 3%. And that improvement was really driven by outlet, and we were really pleased with what we saw there as a sequential improvement at both reduced promotional levels and at higher gross margins and really thanks to just the right mix and better inventory all around, handbags performing well, SLGs performing well as well as jewelry. And I'll pass on to Josh for Coach texture.

If you remember on our Q4 call, we had mentioned that Q1 would be pressured by a continued inventory mix issues, specifically at North America outlet, where we had a lack of our higher-margin logo product to satisfy demand. In addition to that, we also expected the calendar shift of the Mid-Autumn festival, which moved from September last year to October this year. So both of those were anticipated impacts to the quarter. However, what we did not anticipate were the additional impacts of the hurricanes in North America and the typhoons in Asia. And it's important to note that in addition to the direct impact to sales to stores in the hurricane's path, we also experienced disruption to our Jacksonville, Florida distribution center, which services all of our North America business. And so that distribution center had trouble both receiving merchandise from the port and then getting it out to the network of Coach stores across the country. We believe that if you -- those factors weren't in play, we estimate that our global comp would have been positive in the quarter. And as we turned the corner into Q2, we're actually very pleased that we've had a rebound in our comps in Q2. And so that gives us continued confidence in our ability to deliver a strong holiday season.

Our next question comes from Ike Boruchow with Wells Fargo.

Just a quick one on Coach and a quick follow-up on Kate, if I may. So the Coach brand inventory issue that you guys called out for Q1, is that now totally behind us as we move into holiday? And just to kind of finish that question up, how should we be thinking about the Coach brand gross margin in Q2? And then as a follow-up, in terms of the Kate Spade trajectory, is there a reason we should assume that the Kate Spade top line run rate should sequentially slow down before stabilizing later? Or is this kind of the run rate we should be thinking about?

Sure. I will let Josh touch on the Coach inventory, Kevin on gross margin, and then I'll take the Kate question.

Yes. As we look at what happened in Q1, we really had an inefficient product mix and outlook in the quarter, with the lack of this higher-margin logo product to satisfy customer demand. And at the same time, some of the best we took in outlet fashion, particularly nylon, underperformed our expectation. And taken together, that resulted in an unfavorable promotional stance versus expectations. It's important to note that as we turned the corner into Q2, our inventory is more balanced, and we saw a rebound in our handbag sales.

Ike, it's Kevin. As it relates to the gross margin rate, we do expect that Q1 will be our most challenging year-over-year comparison due to the inventory issues that we've just did discussed. As we move into Q2, as Josh outlined, we feel we're in a much better inventory position, and we should expect to see improved year-over-year sequential performance.

And as it relates to Kate, Ike, we wouldn't change the guidance that we've given there. I think what you're going to see is some variability, specifically as we continue the strategic pullback in the first quarter. Of course, we have the pullback much more present in the online channel than we did in the wholesale channel, given some of the commitments that we had there. So as we go through quarters 2, 3 and 4, you'll continue us to -- you'll continue to see us increase the pullback from those promotional channels and, of course, the resulting impact that we have. What is exciting is the underlying trends that we're seeing in our brick-and-mortar channel. And again, as I mentioned, that's both driven by the good inventory mix that we had. And I have to say, the one thing that for us as a team is really exciting as well is the ready-to-wear trends that we're seeing in Kate Spade across both channels and, of course, nothing more exciting than the synergies that we're beginning to see in the increased amount that we've just communicated in the $100 million to $115 million range.

Our next question comes from Erinn Murphy with Piper Jaffray.

I wanted to focus a little bit about the logo trend you guys are kind of building into. Can you just talk about how you're planning to look at both full price versus the outlet interpretation of that trend? Any gross margin implications of this mix? And then just a clarification on the North American quarter-to-date comp for the Coach brand being positive. Can you just talk about how the promotional calendar compared year-over-year?

Sure, Erinn. I'll let Josh chime in on that.

Okay. In terms of the logo trend, it's really interesting because this is a trend that's happening throughout the industry right now in the most elevated brands. And it took us somewhat by surprise over the summer that the demand for the logo product exceeded our expectations in our outlet channel. Historically, as you know, this has been a very important part of the Coach brand's identity and the Coach business over time. At one point, logo reached 70% penetration of our retail sales globally and about 60% in our North America outlet stores. Over the past few years, our transformation plans were very focused on reducing some of the ubiquity around logo, with the strategic decision not to feature logo in advertising campaigns. And therefore, we've had this pullback, which has created pent-up demand as this logo trend comes back into fashion. So what's really interesting for us is, we're seeing demand in our outlet channel, but we're also having requests for more logo product coming from our most elevated wholesale partners around the world, like the Bon Marché in Paris, the Saks Fifth Avenue in New York. And so when Stuart Vevers put it on the runway, it was a great moment for the brand because editors and customers around the world were very excited with his fresh take and new approach to this iconic part of our brand. So we're feeling pretty excited about the reintroduction of signature into our most elevated channels this spring.

And Erinn, just on the gross margin, it is our highest IMU product. So obviously, we look to opportunity there. I think that's -- what I would also just add to Josh's comments, of course, is just how exciting it is for us given the fact that this is our most branded -- most highly differentiated platform. It's exciting because it obviously reflects the importance that consumers are placing on brand.

Got it. And then just the North American comp quarter-to-date, just the promotional calendar year-over-year.

Yes. Our promotional calendar is largely similar year-over-year quarter-to-date.

Our next question comes from Anna Andreeva with Oppenheimer.

A couple of questions from us. Following up on the North America negative 2 comp, I guess, was comp negative in both full price and in outlet? And then secondly, gross margins for the Coach brand. Are you guys still expecting flattish levels for the year? And if so, what would drive that improvement? And should we expect gross margins up in each quarter for the remainder of the year?

Sure. I'll let Kevin jump in on the gross margin question. And then I believe, your first question was -- if you could just repeat it one more time, Anna?

I guess was North America comp negative in both full price and in outlet?

Comp by channel. Got it. And I'll let Josh chime in on that.

Anna, on the Coach gross margin, we're still expecting it to be flat to up modestly for the year. And as it relates to the quarterly flows, we would expect relatively similar to up maybe a little in Q2 and 3, with a bigger improvement occurring in Q4 due to the last year's comp.

And in terms of the -- in terms of the comp by channel, we don't disaggregate the comp by channel.

(Operator Instructions) Our next question comes from Oliver Chen with Cowen and Company.

Victor, in the context of Tapestry at large, what are your thoughts regarding the 15- to 25-year-olds and how to cater to that customer and balance different needs? And also, as you think about data science and analytics and customer relationship management, what do you see is the opportunities to balance both art and science and also achieve digital personalization and creativity kind of in the new world of retail?

Sure. Great questions, and I'll also ask Josh to chime in because, obviously, we're leading on those areas with the Coach brand. What I can share with you, Oliver, is that our strategy in data analytics team is chomping at the bit right now as we take the data from all 3 brands and bring it together. We have approximately 80 million U.S. households now in our database, over 120 million globally in our database. And we're beginning, obviously, to look at opportunities on how to take that information and leverage it effectively. Of course, look, in terms of the first side, first one of your questions as it relates to the 15- to 25-year-olds, specifically, the younger consumer, and we've talked, I think, quite extensively about the opportunity that we have, especially with Kate Spade as we see through all of our analytics with their customers still in approximately 60% millennial offering us a huge opportunity from learnings. What we see there, of course, is how well Kate Spade does in the few very specific categories with smaller bags, gifts and, especially, tech, playing a significant role, both in their direct channels and, I would also add, even through some of the wholesale channels. We are gearing up, as far as the third part of your question, Oliver. We're spending a lot of time internally discussing about how we gear ourselves up from both the technical platform as well as from an innovation perspective through partnerships with other and collaborations with third parties to be much more active not just here in the U.S., but globally. I think that we're incredibly pleased with the performance that our China team has been especially led us with in the Coach brand. We have a leadership position both in as well as in WeChat. I think the opportunity for us here is really still here in the U.S. and in Europe for us to truly turn our flagship dotcom platform into a real force for the brand as well as through what we do through social media. But I'll let Josh chime in because he's been really focused with the team on what that next phase for the Coach brand will be, which will lead for the entire group.

Yes. There are 2 elements of your question that I'll touch on. First, our team in China, as Victor mentioned, has really been a pioneer on WeChat, developing a (inaudible) platform, which really allows a one-to-one dialogue between the store associates, the brand and the customer. And we're just seeing terrific consumer engagement out of that. And -- well, WeChat isn't the platform of choice outside of China, we're seeing great learnings from that, that can be exported to our other business units in North America and Europe. So that's something on all of our minds. In terms of the millennial customer, who you talk about, with our engagement with Selena, one of the things that we have seen is the breadth of the age range of the customers that she's attracting. She's definitely bringing some of her core fans into our store that tend to be a bit younger than our target customers. But on the other hand, we're also finding our core customers simply think that she looks beautiful and terrific in the Coach ads, and they aspire to be a part of her world. So we're seeing traction across age groups.

Our next question comes from Lindsay Drucker Mann with Goldman Sachs.

Kevin, I'm hoping -- I was hoping to start with you. If you could -- it's great to hear the upgraded synergy target. Could you give us a little more detail on the buckets of where you expect those synergies to come from? And in what sort of inning you feel like you are in identifying synergies? So do you feel like this is what we're going to get or is there opportunity for more? And then just a quick maybe housekeeping question. As you talked about some of the factors that impacted the Coach comp and excluding the lack of inventory, could you quantify how much the disruption -- the natural disaster disruption and the holiday shift hurt the comp, so we can maybe get to an underlying number?

Sure. On the synergy detail, obviously, we have spent a significant amount of time over the last quarter building our detailed synergy plans, and we're pleased we were able to up our fiscal year '19 run rate synergies to $100 million to $115 million. I would tell you that the synergy work is ongoing. But as you think about the $100 million to $115 million, that's probably going to be split fairly evenly between cost of goods sold and SG&A, with the vast majority of that residing in the Kate brand. And as it relates to what inning we're in, it's hard to tell. We're continuing to do work on that. Something's going to be an ongoing process for us as we move throughout the year. But we are pleased with the efforts and, hopefully, there will be more to come. But at this point in time, based on where we're at, we're not in a position to take the numbers up above the $100 million to $115 million.

Kevin, any more sort of detail beyond just COGS and SG&A on where the costs are coming from?

On the COGS side, obviously, it's the product, the raw material costs from sourcing and manufacturing. So it's really across the board. There's also some shifting in production between countries. So we've really tried to take a holistic look at the entire supply chain and drive synergies throughout the process. And on the SG&A side, again, really kind of across the board there from just elimination of duplicative corporate costs to negotiating better things relative to insurance rates or things of that nature, so again, trying to take a holistic look to leverage our corporate infrastructure.

Yes. I would just add, Lindsay. I think that there's a lot of negotiations going on across the company with a lot of our vendors and suppliers on the COGS side. Obviously, 3 things, you've got labor, you've got materials and then you've got the country shifts that are taking place as we leverage the Coach platform, where we have well-established partnerships in lower-cost areas.

Great. And then just quantifying the comp impact.

And then on the comp impact, in terms of the inventory and national disaster shifts, we've communicated it taking it together. We haven't really broken it down.

And taking it together, we would be modestly positive.

Our next question comes from Simeon Siegel with Nomura.

Victor, any color you could share on the distribution opportunities for Kate that you mentioned and then just nice adjusted gross margins for Kate. Any way to, given (inaudible) which had been a source of pressure for them, can you talk of the opportunity you might see there?

Sure. First on the distribution side, I think, look, overwhelmingly, the #1 opportunity is international. We see that in markets across Asia. Obviously, a very strong focus on Mainland China. We have a partner there. We've been in discussions with them now for a few months on what the future may look like there and why we don't have anything to announce today. We hope in the not-too-distant future to be able to share more, but very, very excited about Kate Spade in that market, both due to what we're seeing in our tracker in that market in terms of how it's resonating with the urban millennial consumer as well, of course, just given what we know about it and the tremendous opportunity that exists from a distribution perspective in a market where stores and malls, whether it be department stores or shopping malls are ready and waiting for a differentiated proposition like Kate. In terms of other opportunities from a distribution perspective, of course, there is Europe, and there, we're pleased with initial signs in the U.K., and that's our focus. Here in the U.S., as it relates to distribution, I think the opportunity is out. As we know, Kate's in less than approximately 70 doors today in the North American outlet channel. What we are seeing there, of course, is that, as a brick-and-mortar channel, it's holding up better from a traffic perspective than the full price channels. And as we've shown this first quarter with the right inventory mix, and we give the team there a lot of credit, because they've been working on that for a few months prior to the acquisition of the brand, getting themselves aligned with the right inventory mix to take care of that opportunity. And what we're excited about is providing them with more support in the core and bag development as we look to capture that. And of course, look, we're pulling back on the surprise as well as the disposition sales. And as we remove the more urban, I think, much more transparent promotional part of the business, we know that we'll continue to see opportunity in our brick-and-mortar channel.

Ladies and gentlemen, we have reached our allotted time for questions this morning. Our final question this morning will come from the line of Omar Saad with Evercore ISI.

I wanted to ask a follow-up on the logo discussion you guys were having earlier. I really want to kind of dive in there. How are you thinking about this logo trend as you work into it? Are you approaching it differently than the last time around? Victor, I think in the past, you had mentioned that sometimes when logo becomes a big percentage of the business, it's harder to differentiate the product between channels and, obviously, there might be a little bit of the ubiquity effect. But I noticed you're also saying fashion-forward designs are really working well. So maybe explain how you combine those 2 dynamics in the product line.

Sure. I'm going to add just -- add a couple of things and then let Josh jump in because he's really working very closely with Stuart and the design team at Coach on that, which I lead, and, of course, eventually, we do see even some opportunity for the Kate Spade brand to benefit from that. They do have a couple of logo platforms in their archives, and we're now exploring opportunities for that brand as well. I would just reiterate a little bit before handing over to Josh what he stated earlier, which is that, at peak, this was as high as 70% of our business. Logo is, on the one hand, the most differentiated platform that we have. It's difficult to copy the signature platform any other brand (inaudible) is there. So it's uniquely ours. The key is, as you suggested, Omar, how we manage it carefully, how we differentiate across channels, how we obviously leverage fashion execution with a design team on the logo platform to make it relevant today and not just bring it back like it was in the past. And on that, I'm going to let Josh jump in because he's been working very closely with Stuart on all of those areas.

This trend is an industry trend, and it's a very cyclical part of the business. So every few years, there's a big cycle around logo. And for us, this is very powerful because we have the opportunity to harness this as such an important part of our heritage. And Stuart debuted on the runway this season, and he took a very fresh take on it. He recolored the logo, did it in a new version of a coated canvas, trimmed with a burnished leather and that really sets the tone for our most elevated assortment that is going to be embellished with different icons of the brand in the most elevated way. And so we're really looking in the merchandising mix of how to build a pyramid of product: good, better, best. And really at the top of the pyramid, having a limited edition product that would be highly desirable. And what we've seen already is that some of the most influential fashion editors in the world, including, for instance, the legendary Carine Roitfeld, have already been going into the Coach archives to find Logo product and show it alongside other world-class brands. So we are very encouraged by the start, but we know this has to be carefully managed in the seasons ahead.

Thank you, everybody. That will conclude our Q&A. I will now turn it over to Victor Luis for some concluding remarks.

Thank you, Andrea. As is our custom, I just want to close by thanking all of you for joining us and, just as importantly, thanking our 20,000 strong team across the world in 25 markets for all of their hard work and dedication. Obviously, we couldn't be more excited about the evolution of Coach, Inc. to Tapestry as we become a true house of brands and support division of all of our leaders and creative teams across the brands as they bring those narratives to consumers. A lot of exciting activity and tremendous innovation taking place, and we look forward to sharing that with all of you in the quarters ahead. So please stay tuned. Thank you.

Thank you.

Ladies and gentlemen, that will conclude the Tapestry Third Quarter -- First Quarter 2018 Conference Call. You may now disconnect your lines.