Tapestry’s Coach-Led Quarter Powers Raised Guidance

Tapestry ((TPR)) has held its Q2 earnings call. Read on for the main highlights of the call.

Tapestry Earnings Call Signals Confidence Amid Record Results and Targeted Brand Reset

Tapestry’s latest earnings call carried an unmistakably upbeat tone, as management highlighted a record quarter marked by strong revenue and earnings growth, meaningful margin expansion, and powerful cash generation. Executives struck a confident balance: Coach is outperforming across regions and demographics, especially with younger consumers, while the company acknowledged near-term challenges at Kate Spade, tariff headwinds, and softness in Japan. Even so, raised full-year guidance and an aggressive capital return plan underscored management’s conviction in the business trajectory.

Record Quarter With Double-Digit Growth and Margin Expansion

Tapestry delivered a standout Q2, with pro forma revenue up 18% year-over-year and adjusted EPS climbing 34% to $2.69. The company expanded its adjusted operating margin by a hefty 390 basis points, an unusual combination of strong growth and improved profitability in a volatile retail environment. Management characterized the period as a “record quarter” and used the outperformance as a springboard to raise full-year guidance, signaling confidence that recent momentum is sustainable rather than a one-off.

Coach Outperformance Anchors the Growth Story

Coach remains the engine of Tapestry’s top-line performance. Revenue at the brand surged 25% in the quarter, and management now expects high-teens percentage growth for Coach in fiscal 2026. The strength was broad-based: North America grew 27%, Greater China rose 37%, and Europe climbed 26%. This balanced geographic performance reduces reliance on any single market and reinforces Coach’s position as a global lifestyle brand, giving Tapestry a solid foundation as it navigates issues in other parts of the portfolio.

Gross Margin Strength Despite Tariff Drag

Gross margin improved to 75.5% in Q2, an impressive 110 basis points above last year, even as tariffs and duties created roughly 190 basis points of headwinds. Management attributed the margin strength to about 250 basis points of operational expansion and an additional 50 basis point boost from the divestiture of Stuart Weitzman. Tapestry raised its full-year gross margin outlook, noting that operational actions and higher average unit retail (AUR) are expected to fully offset tariff pressures over the year, a key positive for investors focused on profitability resilience.

Customer Acquisition Surges, Led by Gen Z

The company is adding new customers at scale, a critical ingredient for future growth. Tapestry brought in over 3.7 million new customers in the quarter, including 2.9 million at Coach alone. Management spotlighted strong traction with Gen Z consumers, positioning this as a long-term driver of repeat purchases and lifetime value. The data suggests that recent investments in product, marketing, and digital experiences are resonating with younger demographics that can fuel the brand for years to come.

Direct-to-Consumer Channels Power Top-Line and Profitability

Direct-to-consumer (DTC) remains a key strategic focus and growth driver. DTC sales rose 17% year-over-year, with digital revenue up around 20% and global brick-and-mortar stores growing in the mid-teens. Importantly, management emphasized improving profitability across all channels, suggesting that Tapestry is not merely buying growth through discounting. The mix shift toward DTC, with better control over pricing and customer relationships, is helping underpin both revenue and margin expansion.

Enhanced Guidance and Aggressive Cash Returns to Shareholders

Reflecting strong execution, Tapestry raised its fiscal 2026 outlook to more than $7.75 billion in pro forma revenue, implying roughly 15% nominal growth, and lifted EPS expectations to $6.40–$6.45, representing over 25% growth. The company plans to return essentially all of its roughly $1.5 billion in adjusted free cash flow to shareholders through dividends and an enlarged $1.2 billion share buyback program. This combination of upgraded earnings guidance and robust capital returns underscores management’s confidence in both the durability of current trends and the strength of the balance sheet.

Healthy Cash Generation and Delevered Balance Sheet

The quarter showcased Tapestry’s cash-generating power. Adjusted free cash flow was a sizable $1.0 billion inflow, helping support a cash and investments position of about $1.1 billion. Total borrowings stood at $2.4 billion, leaving net debt at roughly $1.3 billion and gross debt to adjusted EBITDA at around 1.2x—well below the company’s long-term leverage target. This financial flexibility gives Tapestry room to continue investing in growth while still comfortably funding dividends and buybacks.

Stepped-Up Marketing and Brand Building Fuel Demand

Tapestry significantly increased its marketing investment, up roughly 40% year-over-year, with a deliberate shift toward top-of-funnel brand-building rather than purely promotional activity. Marketing spend now represents about 11% of sales and is expected to move toward 12%. New product innovation—such as the Tabby line, the New York family, and Terry—along with regional collaborations like Coach x Clot and more immersive retail concepts, are helping drive brand heat and differentiation. Management framed this spend as a strategic lever to sustain demand, not just a short-term volume driver.

Kate Spade Revenue Decline Reflects Strategic Reset

Kate Spade remains a weak spot, with revenue down 14% in the quarter and full-year guidance calling for a high single-digit decline, albeit with sequential improvement in the second half. Management emphasized that the brand is undergoing a reset, including reduced promotional activity, which is intentionally pressuring near-term sales in favor of long-term health. While the numbers look soft today, the company appears willing to sacrifice some immediate revenue to reposition Kate Spade for more sustainable, full-price growth.

Tariff and Duty Headwinds Hit Margins, Especially at Kate Spade

Tariffs and duties weighed heavily on results, shaving about 190 basis points off gross margin this quarter. The impact was uneven: roughly 140 basis points at Coach and a much steeper 520 basis points at Kate Spade over specific periods. These pressures are forcing Tapestry to push harder on operational efficiencies and selective pricing actions to maintain profitability. Management maintains that these steps will fully mitigate tariff impacts over the full year, but investors should expect some noise in quarterly margin trends until mitigation is complete.

Japan Softness and Intentional Promotional Pullbacks

Japan was a notable regional drag, with sales down 6% in the quarter and a high single-digit revenue decline expected for fiscal 2026. Management attributed part of the weakness to an intentional reduction in promotional activity, a move consistent with Tapestry’s broader strategy of elevating brand positioning and protecting AUR. While this creates near-term pressure on reported sales, the company appears focused on quality of revenue and long-term brand equity rather than chasing volume at any cost.

Short-Term Profit Headwinds at Kate Spade

Beyond sales softness, Kate Spade is also facing earnings pressure. Management expects the brand to post a modest profit loss for the year, due to outsized tariff costs and continued brand investment. However, underlying brand metrics such as consideration and Gen Z acquisition are reportedly improving. This suggests that, while financial results are under strain today, the groundwork is being laid for a more profitable and relevant Kate Spade over time—if the strategy executes as planned.

Inventory and Style Rationalization as a Long-Term Fix

A key component of the Kate Spade reset is a significant simplification of its product range. The brand cut handbag styles by about 40% during the holiday period to prioritize full-price selling and strengthen AUR. This sharper assortment strategy has contributed to the near-term revenue decline but is designed to reduce complexity, improve merchandising, and bolster pricing power. The move aligns with Tapestry’s broader focus on brand elevation and could be a meaningful driver of future margin improvement at Kate Spade.

Tariff Timing Adds Short-Term Volatility

Management cautioned that the timing of tariff-related charges—affected by inventory on hand and sell-through patterns—may cause quarter-to-quarter fluctuations in reported gross margin. This “timing noise” is expected to persist until mitigation actions fully flow through, particularly into next fiscal year. For investors, this means underlying margin health may be stronger than individual quarterly prints suggest, reinforcing the importance of looking at trends over several quarters rather than reacting to single-period swings.

Upgraded Outlook Points to Stronger Back Half and Robust EPS Growth

Looking ahead, Tapestry raised its fiscal 2026 guidance across key metrics. The company now sees revenue topping $7.75 billion, driven by high-teens growth at Coach, a high single-digit decline at Kate Spade, and balanced geographic gains: low double-digit growth in North America, roughly 20% in Europe, more than 25% in Greater China, and low double-digit growth in other Asia, offset by high single-digit declines in Japan. Operating margin is expected to expand about 180 basis points, fueled by roughly 180 basis points of operational gross margin improvement and a 60 basis point boost from the Stuart Weitzman exit, offsetting nearly 200 basis points of tariff headwinds and a modest FX drag. SG&A leverage of about 160 basis points is anticipated even as marketing rises roughly 130 basis points to near 12% of sales. EPS is guided to $6.40–$6.45, implying more than 25% year-on-year growth, alongside approximately $1.5 billion of adjusted free cash flow—all earmarked for dividends and $1.2 billion in buybacks. Management also flagged a stronger back half, with low double-digit revenue growth, mid-teens growth at Coach in the second half, and improving trends at Kate Spade, and expects Q3 EPS around $1.25.

Tapestry’s earnings call painted the picture of a company firing on most cylinders, with Coach driving record results and strong cash flow enabling substantial shareholder returns, even as tariffs and Kate Spade weigh on parts of the portfolio. The strategic choice to invest in brand building, simplify assortments, and pull back on promotions is dampening some near-term metrics but aims to underpin healthier, more profitable growth ahead. For investors, the raised guidance, robust balance sheet, and clear commitment to returning capital provide a compelling counterweight to the acknowledged risks in Japan and the ongoing reset at Kate Spade.