Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Fourth Quarter and Full Year Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions on how to ask a question will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Cori. Good morning, everyone, and thank you for joining today's call. As we close out year two of our next great chapter Accelerate Plan, we are proud to have delivered strong progress once again on our core strategic and financial commitments. Supported by the incredible dedication and agility of our teams, this year's performance underscores, both the strength and resilience of our multi-levered plan. In particular, we drove progress on, first, clearly increasing the desirability of our timeless brand, which is resonating with consumers of all ages and enabling continued pricing power in the market. Second, leveraging the breadth and authenticity of our lifestyle portfolio of products. And third, continuing on our long-term strategic pivot toward direct-to-consumer channels, which now represent about two-thirds of our total business compared to 55% when I joined the Company. This is where we can drive the best expression of our brand and own customer engagement while reducing our exposure to wholesale. All of this is underpinned by our key enablers and culture of operating discipline. These are key differentiators behind our consistent execution, which enable us to fuel our strategic growth initiatives for the long term. We closed out fiscal year '24 with solid fourth-quarter performance, including top line growth and operating margin expansion that exceeded our expectations. For the full year, we delivered 3% top line growth with 40 basis points of operating margin expansion, driving more than 20% adjusted EPS growth. Results were at the high end of the targets we laid out last May, even with unexpected macro headwinds across several of our key markets throughout the year. This year's performance also puts us firmly on track with our long-term financial commitments and demonstrates continued progress across our three strategic pillars. As a reminder, these include, first, elevate and energize our lifestyle brand, second, drive the core and expand for more, and third, win in key cities with our consumer ecosystem. Let me take you through a few highlights from the fourth quarter and year. First, on our efforts to elevate and energize our lifestyle brand. Ralph Lauren is at the intersection of culture, spanning fashion, celebrity, sports, gaming, and music moments as we expand across geographies and demographics. And our team put our brand at the forefront of the conversation this year. From our iconic runway shows in New York City and Milan, the Singles Day activations in China, Fortnite gaming partnerships, and Taylor Swift on the cover of Time. This strong momentum continued through the fourth quarter. Key campaigns included, first, our sponsorship of the Australian Open Tennis Championship in January, which was officially the world's most-attended Grand Slam of all times. Now in our fourth year, the tournament is quickly becoming one of the most iconic events of our sports calendar across social media, our on-court uniforms and off-court spectator style. Our brand was featured on more than 700 celebrities and friends of the brand, including Korean pop sensation Crystal Young, Elle Macpherson, and comedian Celeste Barber. This enabled us to significantly extend our brand reach with over 400 million social media impressions globally. In March, we released the second capsule of our groundbreaking Polo Ralph Lauren Artist and Residence campaign, focused on empowering and celebrating artisans within the communities that have historically inspired our designs. Together, the first two capsules featuring Navajo designer Naiomi Glasses generated more than 6 billion PR impressions, and the collaboration represented our second-highest online search trend of the year. Our Lunar New Year activations across social platforms like Douyin and WeChat also generated another successful holiday event with high single-digit sales growth significantly outpacing peers and double-digit growth in new customers in China. In the world of gaming, we want to congratulate Ralph Lauren-sponsored e-sports team T1 for winning the League of Legends World Championship this year. T1 became the most winning team in gaming history and drove important visibility for our brand as we continue to recruit new younger consumers through exciting digital platforms. We also outfitted iconic celebrities, including Beyonce on her new Cowboy Carter album tour, and Reba McEntire at the Super Bowl. Both were radiant in Western-inspired ensembles, one of Ralph Lauren's signature design coats. And beyond the quarter, we continue to drive excitement across the worlds of fashion and sports, including our Intimate Fall 24 Women's Collection fashion show here in New York City a few weeks ago, and the upcoming Olympic Games in Paris, where we are once again the official outfitter of Team USA, a cherished partnership since 2008. These activations are driving strong sustainable growth in new customer acquisition and engagement. In fiscal '24, we added over 5 million new consumers to our DTC businesses, consistent with our long-term expectations. Our brand consideration, purchase intent, and especially our net promoter scores all increased to last year, led by next-generation under 35 consumers and women. And we grew our followers on social media by low-double digits to last year to over 58 million, led by Instagram, Line, Douyin and TikTok. Ralph pioneered a company of firsts from our earliest forays into fashion-sponsored sports partnerships to our popular coffee shops and restaurants that drive viral social media engagement. And our teams will continue to drive brand heat and elevation by leading on next-gen platforms and leveraging our powerful new data science models to drive lifetime consumer value. Moving next to our second key initiative, Drive the Core and Expand for More. As the market continues to demonstrate, consumers are turning to brands they know and trust and styles that live beyond one season. In addition to our powerful brand, Ralph Lauren has one of the most authentic, recognizable and broad-based portfolios of lifestyle offerings in the world, one that resonates across our diverse customer base and sets us apart from other brands. And Ralph and our design teams continue to create and reimagine beautiful styles that capture the modern consumer's changing lifestyle through our unique lens while also embodying the quality, craftsmanship, and sophistication that have come to define our brand. Our core products, which now represent more than 70% of our business, grew low-single digits in the fourth quarter and high-single digits for the full year ahead of total Company growth. Performance in core was led by our cable knit, cool neck and polo bear sweaters, transitional outerwear, iconic mesh polos, linen shirts and shirt jackets, and sophisticated casual sports coats. Our Polo player chino caps as seen on Kendall Jenner and Jennifer Lawrence are also resonating strongly with existing customers while attracting new next-gen customers as a trend-right entry point to the brand. As we continue to build on the long-term foundation of our core, we also delivered strong growth in our high-potential categories, including women's, outerwear and home. Together, these categories increased mid-single digits in the fourth quarter and high-single digits for the full year. This strong performance was driven by both outerwear and women's. Women's now comprises about 29% of total Company sales, up 100 basis points to last year and still represents our most significant long-term growth opportunity. Top sellers in women's this quarter included our iconic cable knit and polar bear sweaters, linen and seasonless chambray shirts, cable knit polos, lightweight outerwear, and short dresses. In addition, this fiscal year, we moved our directly-operated furniture business to a highly experienced licensed partner with proven success in luxury furniture design, production and distribution. While we still see significant long-term growth opportunities for the category, this move will enable us to better serve our home customers and expand the category with elevated products and white glove service consistent with our brand. With the transition now complete, this will enable us to put even more emphasis on handbags, a directly operated business as our third high-potential category. Other exciting releases this quarter included the successful launch of our newest fragrance, Polo 67, with a global campaign featuring New York Yankees captain Aaron Judge, and our Lunar New Year, Year of the Dragon capsule, celebrating prosperity and opportunity with both strong AUR and sell-through rates. Looking ahead, we will continue to drive our core icons, while leveraging the breadth of our brand and assortments to fuel excitement and desirability. Turning to our third key initiative, win in key cities with our consumer ecosystem. Our key city ecosystems around the world are driving elevation and consistency across all of our consumer channels and touchpoints. Each of these ecosystems is anchored by direct-to-consumer channels, including our stores and digital commerce sites, where we offer our most elevated consumer experiences and engagement. During the year, we drove strong DTC comp growth while also expanding our connected ecosystems across key markets. Comps were up mid-single digits in both our brick-and-mortar stores and digital channels. Globally, we opened a total of 78 new stores and concessions focused on our top cities with the majority in Asia. This includes several iconic Ralph Lauren stores over the past year, notably new stores in Amsterdam, Singapore, Prague, and Charlotte; our first TCD ecosystem in Canada, including our first Toronto store and the launch of our Canadian digital flagship, and our first Ralph's Coffee shops in Paris and Dubai. And we continue to develop and test new concepts, including our latest opening, a new women's polo store on Cat Street in Tokyo, which sits at the epicenter of Tokyo's street fashion culture with more to come. By region, growth was led by Asia, consistent with our long-term plan, followed by a better-than-expected performance in Europe and North America. China was once again a standout with sales up low-double-digits this quarter over a more normalized post-COVID compare, and up 30% for the full year. Our China business has more than doubled versus pre-pandemic levels, now representing 7% of total Company sales with significant growth opportunities still to come. Our expansion remains disciplined as we largely focused on our key city clusters, supported by highly dynamic local marketing and digitally led ecosystem expansion to recruit new customers to the brand and elevated assortment of high-quality icons that align particularly well with the old money or quiet luxury aesthetic and the strong continued execution of our local teams. And finally, touching on our enablers. Our business continued to be supported by our five key enablers. I'll share a few highlights from the quarter and year. First, as part of our focus on delivering best-in-class digital technology and analytics. Over the past several years, we have embedded a culture of operating discipline, including more rigorous inventory management. To further support this, we started testing our sophisticated predictive buying model in Asia and Europe stores this year. This AI-driven model enables better in-stock availability on sizing and best-selling products to drive incremental sales and improve conversion. Based on the pilot's early success, we plan to continue scaling its use to around 25% of our international DTC businesses in fiscal '25. And as we continue to embed citizenship and sustainability in everything we do, we were proud of the recognitions we received this year, in particular, being named one of Forbes World's Best Employers in 2023, a top-rated ESG performer by Sustainalytics, and the Best Company for Women to Advance by parity.org for the fourth consecutive year. In closing, Ralph's unwavering vision of authenticity and timeless style is resonating around the world, transcending fashion trends and generations. From the easy elegance of our runways to the incredible energy and thrill of sports partnerships, Ralph Lauren continues to define a luxury lifestyle that is uniquely our own. This year's performance keeps us firmly on the offense, delivering across our multiple drivers of growth with a plan that is not dependent on any single channel, geography, or category. All of this is supported by the dedication, passion, and agility of our teams who are executing with excellence to bring our brand to life through our dynamic campaigns and consumer experiences in stores and online. And as we look to fiscal '25, we will continue to drive this brand momentum and consistently execute on our plan, all while investing in our key strategic priorities to deliver long-term sustainable growth and value-creation. And before I hand it off to Jane to discuss our financial results, you will have seen from this morning's press release that we named Justin Picicci, our new Chief Financial Officer. Jane will continue in the role of Chief Operating Officer through fiscal '25, while ensuring a seamless CFO transition. Ralph and I are incredibly grateful for her leadership and impact in the CFO position, helping to guide our Company through significant transformation over the past seven years. And we look forward to continue partnering with Jane as COO. And we're excited to welcome Justin, who steps into the CFO role effective today, and will join us on our next earnings call. With nearly 20 years at the Company, Justin is an experienced leader who has worked closely with Jane and me, and successfully served in a range of senior finance roles at Ralph Lauren around the world. Ralph, the Board, Jane, and I have the utmost confidence in our ability to deliver together continued strong growth and value creation, building on the foundations we've established. With that, I'll hand it over to Jane, and I'll join her at the end to answer your questions.

Operator:

[Operator Instructions] The first question comes from Jay Sole with UBS.

Jane Nielsen:

Thank you, Jay.

Jane Nielsen:

Jay?

Jane Nielsen:

Sorry. Can you repeat the follow-up question?

Patrice Louvet:

Sure. Well, good morning. So just on your first question and then Jane will cover your second question. Fiscal '24 was a strong proof point that our strategy continues to deliver, even with the continued macro and channel headwinds out there. And we were really encouraged that we were able to deliver at the high end of what we guided at the start of the fiscal year. And that we reinforced that we're on track with our three-year targets, both on the top and the bottom line, including our 15% operating margin constant-currency goal. Overall, I would say that the key areas of strength that we saw over the past fiscal year are what we expect to meet again in fiscal '25. Our strategy is working and we're going to continue to execute on the key tenants of it. So first, I'd say we're driving continued momentum in our brand elevation and brand heat. And you saw -- you heard in the script some of the key data that supports that with a lifestyle product offering that is really connecting with consumers around the world, whether that's in Shanghai, LA, or Paris. The Australian Open is actually, a really good example of a franchise that we've built in just a few short years, and our outsized growth in net promoter scores is an important indicator of our brand desirability and the strength of our business. And next up, we have Wimbledon, gaming championships, the Olympics, the US Open still to come this summer. So a lot of brand events that will help us continue to drive this brand [deep] (ph) and desirability around the world. Second is our pivot to DTC, and our pivot to DTC continues, right? You saw the strong performance this past quarter on comps for DTC, and in fiscal year '25, we expect DTC to lead growth again with healthy increases across both brick-and-mortar and digital channels following the in-store interventions we made over the last year and our online storytelling. And third, we're leaning into our multiple drivers of growth also from a regional standpoint. So Asia continues to scale up nicely with company-leading revenue growth and margins that are now strongly accretive to the total company. So like in fiscal '24, we expect positive growth across every market in Asia this coming year, led by China. And Europe has also outperformed our expectations despite all the macro headlines ranging from challenging consumer sentiment to high inflation. This speaks to our brand's strong and elevated positioning across the region and momentum across channels in the market, where we delivered the highest AUR growth last year. So we're obviously, not immune to market challenges. However, we talk a lot about agility in this Company, as well as our diversified drivers of growth. And this is serving us well as we focus on consistency of strong execution on top of all the moving parts. And then on guidance, I'll turn it over to you, Jane.

Corinna Van der Ghinst:

Great. Next question please, Angela.

Dana Telsey:

Hi. Good morning, everyone. And, Jane, congratulations and continued best wishes at Ralph Lauren and after. And can we dig a little deeper into your outlook for North America this year? Outside of wholesale, which was still guided down, but moderating from the declines of the past year, how do you think about the rest of the business and margin opportunities? And can you reach your total operating margin target of 15% if the wholesale channel remains weaker? Then I have a quick follow-up.

Corinna Van der Ghinst:

And your quick follow-up, Dana?

Dana Telsey:

Yeah. The follow-up on AUR, which has been so strong in the past few years, how are you thinking of the progression this year? And I think the target has been around mid-single digits that you stated. How should we be thinking about AUR growth going forward?

Corinna Van der Ghinst:

Great. Next question, please.

Matthew Boss:

Great. Thanks, and congrats on your next chapter, Jane.

Matthew Boss:

So, Patrice, given your multi-year elevation effort, where do you see the brand positioned today, maybe versus your ultimate goal in both the US and Europe? And coming off the mid-single-digit global DTC comps, could you just elaborate on new customer acquisition trends that you're seeing? And then, Jane, just on SG&A, help us to think about SG&A relative to revenue growth moving forward.

Jane Nielsen:

And then, Matt, just on the second part of your question on SG&A leverage. Our fiscal '25 guidance implies about 30 basis points of SG&A leverage on our about 3% constant-currency top line. That we expect will be pretty consistent as we look at the second, third and fourth quarters in the first quarter, driven by the fashion show. We do expect a little deleverage, but entirely driven by marketing. And so you'll start to see our SG&A growth be behind our revenue growth in -- following Q1.

Operator:

Thank you. The next question comes from Michael Binetti with Evercore ISI.

Jane Nielsen:

Sure. Thanks, Michael. One of the things as I step back from your question, we believe our brand elevation, our pivot to ecosystems and our pivot to DTC is going to continue to drive AUR growth into the future. So stepping back from that, in wholesale, we've always said that wholesale, especially in North America, is a few clicks behind what we've seen in DTC. I mean, we started this journey even pre-COVID saying we're going to lead with our DTC channels followed by wholesale. And we're very encouraged by what we've seen. In FY '23, we saw AUR -- strong AUR across wholesale in North America and in Europe. And that continued into FY '24, although as we closed out the year at a more moderate pace. We saw wholesale AUR growth in the third quarter and in the fourth quarter. And so we expect that to continue through FY '25. That will have some pressure on units, but we feel good about where the product mix is going in wholesale, our focus on those top 100 doors, and our ability to elevate that experience and elevate our product offerings in wholesale. We feel it's a strategy that's working. And you can see that in our guide coming into '25 where we expect a meaningful uptick, although not too positive in North America wholesale. And then just on DTC, what we've seen over the past two years is that our full-price stores have led our growth. What's encouraging to us with some of the investments that we've made in our outlet stores is that gap is narrowing. That's a positive thing because it means our outlet growth has accelerated. That's a dynamic that we're happy with and the dynamics that we expect to continue into FY '25. We expect that gap to be narrowed, but not based on a slowing, but based on better trends in outlet.

Corinna Van der Ghinst:

Next question, please.

Operator:

Thank you. Next question comes from Ashley Helgans with Jefferies.

Jane Nielsen:

I'm sorry. Ashley, could you just repeat the last part of your question? I got the gross margin puts and takes.

Jane Nielsen:

Just in terms of gross margin drivers, we were very pleased with our gross margin expansion in Q4 up 510 basis points in constant currency. That was really driven by a few things. One, strong AUR growth. And what drove that AUR growth was a favorable channel mix, favorable geographic mix, product mix, and a significant pullback in discount. As we came into the fourth quarter, we were super tight on inventory and had much less going into clearance or in off-price channels. We also saw from a gross margin standpoint after AUR growth that freight continued to be a tailwind for us of about 100 basis points. And of course, this was the quarter where cotton turned from a headwind, which we've seen for the first three quarters into being about neutral into the fourth quarter. Then we had some pressure from FX of about 30 basis points. And then as we look forward, Ashley, we are seeing in FY '25, our continued gross margin expansion of 50 bps to 100 basis points, largely premised on lower cotton costs and some significant cotton recapture. About half of the cotton that we expect to recapture about 90 basis points will come into this fiscal year, you know, being a little heavier weighted to the back half and continued channel and geographic mix. We, of course, expect AUR growth to continue with a few headwinds in terms of some small incremental Red Sea pressures that we see now, obviously, FX and the weaker yen and some other product costs, higher labor costs in some of our markets and some inflation in non-cotton materials. But overall, pleased with where we landed the year and encouraged by our continued gross margin expansion journey into fiscal '25.

Corinna Van der Ghinst:

Next question, please.

Operator:

Thank you. Next question comes from John Kernan with TD Cowen.

Jane Nielsen:

Thank you.

Patrice Louvet:

We've been -- so yes, good reminder, John, that the context is challenging in Europe. But our teams are doing a terrific job, I think connecting with consumers and leveraging the different channels. You saw the DTC performance this past quarter up double-digits, both brick-and-mortar and digital. So really nice momentum. Our flagship stores are hitting record highs this year across different key cities in Europe. And -- so we expect to continue to drive that. We have really nice plans in terms of footprint expansion for stores across Europe. You remember at the beginning of this journey, we were at 19 stores across all of Europe, right? I don't have the exact number here, but I think we're closer to north of 50 stores at this point with actually more to come. So opportunities to continue to expand our footprint. The team is doing a great job driving comps in our full-price stores. On digital, there's really good momentum on our own digital, which we have a number of levers that we have now a good handle on that we're going to continue to push. And then on the -- so expect, I think the share of DTC to continue to expand, John. On the wholesale side, it has been -- it's a mix of both pure-play and obviously brick-and-mortar and then bricks and clicks. We've seen recent strength in -- with our pure players as we align strategies with what they're focused on, including our biggest pure-play partner in Europe, Zalando, where we're now both on an elevation strategy, which is serving us really, really nicely. We've done some reset this past year in Spain and in the UK for wholesale, consistent with our philosophy and approach in the US, both with the ECI and the Frasers Group. So working off a healthier foundation and feeling like the work that the teams are doing on the ground in terms of getting the brand connected to the consumer, to Ashley's earlier question, getting connected to that younger consumer is working well. So we remain cautiously optimistic about that region. We are not oblivious to your point, John, on all the headwinds out there, whether that's inflation, consumer sentiment, obviously, the two wars that are going on, which is why I think our guide -- we feel our guide is right based on the current conditions, but are excited about the momentum that the team is driving there.

Corinna Van der Ghinst:

Great. Well, go ahead with our last question, Angela.

Laurent Vasilescu:

Thank you very much for taking me -- taking me as a last question. Patrice, I think you mentioned Asia will grow high-single digits, but will be led by China. I know you don't mention or don't talk about quarter-to-date trends, but just love to get your perspective on what you're seeing in China. And then Jane, I have to ask a modeling question for your last earnings call. How do we think about marketing as a percentage of sales for the year? And then I think you mentioned because of the activation in the first quarter around marketing, how do we think about it for the first quarter as well? Thank you very much.

Jane Nielsen:

Okay, Laurent, for my last question. Remember, Q1 is going to be -- we expect growth on a revenue basis to strengthen as we move into Q2, Q3 and Q4. But Q1 will represent a meaningful growth in marketing expense, up double-digits. And then as you look through the balance of the year as a percentage of sales, I think that what we spent in Q and in fiscal '24 is a pretty good proxy with a little more marketing expense growth in the second quarter given that that's the Olympic's quarter.

Operator:

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third Quarter Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Cory. Good morning, everyone, and thank you for joining today's call. This holiday quarter, our campaigns around the world celebrated a season of giving, marked by warm, reflection and comfort that inspires people to dream of the best things in life and share them with those they love. Immersing people in our world of easy elegance and sophistication has epitomized Ralph Lauren over 57 years. And we continue to deliver this quarter-after-quarter to an ever-expanding audience to our next great chapter accelerate plan. This combination of magic and logic translated to strong financial performance in the third quarter, our biggest quarter of the year. With top and bottom line results that exceeded our expectations, along with significant EPS growth. As we continue to navigate a dynamic global operating environment, our teams remain keenly focused on what we can control. This starts with our timeless and highly desirable brand which is resonating with consumers all around the world and enabling continued pricing power in the market. Our ability to leverage a broad powerful portfolio of core products that we can flex with evolving consumer needs. Our continued deliberate shift toward our direct-to-consumer channels where we can best deliver our elevated and connected consumer experiences and which once again led growth in the quarter. And all of this is underpinned by the agility and operational discipline we have built into our business so that we can continue fueling our strategic growth initiatives for the long-term. As we outlined at our last Investor Day, we are strongly encouraged that we have built a sustainable and resilient model with multiple diversified drivers for long-term growth and value creation. Our third quarter performance was a clear example of how we're driving progress across our three strategic pillars. As a reminder, these include, first, elevate and energize our lifestyle brand, second, drive the core and expand for more; and third, win in key cities with our consumer ecosystem. Let me take you through a few highlights across each of these areas. First, on our efforts to elevate and energize our lifestyle brand. We continue to harness the power of our iconic brand as we expand across geographies and demographics, cutting through culture across fashion, celebrity, sports, gaming and music moments. During the third quarter, key campaigns included, first, our holiday season for dreaming activations in every region generating nearly 8 billion global impressions. These included immersive holiday gifting content, unique key city takeovers across New York, Shanghai, London and Berlin and our Singles Day stream in China. Second, our Polo Ralph Lauren Artist and Residence campaign featuring Navajo Designer, Naiomi Glasses, which is the first in a series of groundbreaking partnerships focused on empowering and celebrating artisans within the communities that have historically inspired our designs. This campaign was not just a galvanizing cultural moment for our organization, but also resonated strongly with consumers, driving more than 3 billion impressions and our highest engagements ever on TikTok. We also outfitted an incredible roster of inspiring women including America Ferreira, Jody Foster, Greta Lee and JLo at the L Women in Hollywood event. Janelle Monae and Kate Bock at Art Basel in Miami. And Gauravi Kumari, Princess of Jaipur for a high-profile fundraiser at the dazzling City Palace in Jaipur, India. And who could forget Taylor Swift, who chose an all-American Ralph Lauren look for the cover of Time Magazine as their 2023 Person of the Year. These activations helped to fuel our strongest quarter of new consumer acquisition and brand affinity since the pandemic. We added 1.7 million new consumers to our DTC businesses, up high single digits to last year, driven by all regions. Our Net Promoter Scores accelerated along with positive momentum in brand consideration and purchase intent. And we grew our followers on social media by low double digits to last year, led by TikTok, Instagram, WeChat and Douyin. Moving next to our second key initiative, drive the core and expand for more. Consumers continue to turn to brands they know and trust and styles that live on beyond one season. And this holiday was no exception. As Ralph and our design teams seamlessly married sophisticated casual with styles exuding the luxury and glamor of the season. Our iconic core products, representing about 70% of our business, grew low double digits in the quarter, ahead of total company growth. From our Mesh Polos and Oxford Shirts, to our luxuriously soft Cashmere Sweaters and versatile Blazers, we have established a broad and highly recognizable portfolio of icons that drive our business through both choppy and more stable times alike. And we are incredibly proud of the work Ralph and our creative teams are doing to drive newness and excitement behind these styles, so they appeal to our most loyal and new consumers alike. Performance in core was led by our cable knit sweaters in cotton woolen cashmere, quilted and down jackets and sports coats in the range of tweed, tartan plaid, stretch corduroy and party ready velvets. As we continue to build on the long-term foundation of our core, we also delivered strong growth in our high potential categories, including women's, outerwear and home. Together, these high potential categories increased low double digits to last year. This was led again by women's, our most significant long-term growth opportunity. Driven by an elevated assortment with AUR up mid-teens. Performance was supported by our cashmere, flag and polo bear sweaters, sophisticated wool and cashmere coats, blazers and heritage tweed and modern knit tools and cocktail and evening dresses. Other special releases this quarter included our Polo Country and Element Skateboards Capsule, a limited-edition collection of unisex Polo Country styles and Element Skateboards celebrating the great outdoors. We sold over 2,000 skateboards, highlighting the lifestyle reach of our brand, and appeal to younger consumers. Our limited edition Polo ID handbag collaboration with Mr. Bags in China, which sold out within one minute on WeChat. Our innovative love of the land collaboration with Navajo Designer, Naomi Glasses; Ralph Lauren's first artist in residents. And the annual and much-loved Ralph Lauren Pink Pony collection supporting Ralph's 30-year commitment to cancer care and research. Looking ahead, we will continue to drive our core icons while leveraging the breadth of our brand and assortments to fuel excitement, and desirability. Turning to our third key initiative, win in key cities with our consumer ecosystem. Our key city ecosystems around the world drive elevation and deliver consistency through all of our consumer channels and touch points. Each of these ecosystems is anchored by direct-to-consumer channels, including our stores and digital commerce sites, which combined already represent about 2/3 of company sales. During the quarter, we drove accelerated comp growth while also expanding our connected ecosystems across key markets. Globally, we opened a total of 17 new stores and concessions focused on our top cities with the majority again in Asia. While comps in our Ralph Lauren stores and own digital sites were strong around the world, we were particularly encouraged by the continued improvement in our outlet trends. The key outlet actions we implemented in the first half of the year from our optimized staffing to assortment enhancements and emphasis on quality and value, served us well through holiday and will continue to be drivers as we look ahead. In addition to our existing fleet, we opened a select number of iconic Ralph Lauren stores in the quarter, including our new emblematic store at Singapore's Marina Bay Sands, the first door to offer our luxury collections in Southeast Asia. Our first Ralph Lauren store in the Czech Republic, in Prague's historic old town as well as in Charlotte, North Carolina. And our first Ralph's coffee shops in Paris and the UAE. We also launched our Ralph Lauren digital flagship site in Canada, following our Toronto store opening last quarter. Combined with our elevated wholesale presence, these are helping us introduce a cohesive connected retail experience to our consumers across the Canadian market. By region, growth was again led by Asia with particularly strong performance in China, where sales increased more than 30% this quarter on both comp and new store growth. This was ahead of our expectations, even with last year's easier compares due to the surge in COVID cases. We are still in the earlier stages of brand building in China with meaningful outperformance versus peers in the quarter on consumer KPIs, including brand awareness, consideration and Net Promoter Scores. Our team delivered another successful Singles Day focused on brand building with ralphlauren.cn sales up 25% on lower discounting and higher AURs to last year. Our early performance to date on Douyin has also been very encouraging following our limited launch last fall with an expanded rollout this spring. And finally, touching on our enablers. In addition to our strategic priorities, our business continued to be supported by our five key enablers. I'll share a few highlights from the quarter. As we drive towards best-in-class digital technology and analytics, we tested our sophisticated predictive buying model in our European and Asian stores this quarter. With our initial rollout limited to select sweaters, knit tops and caps, this artificial intelligence-driven model enables better in-stock availability on sizing and best-selling products to drive incremental sales and improved conversion. Based on this early success, we plan to continue scaling its use to an expanded range of categories and markets over time. As we continue to integrate citizenship and sustainability to future-proof our business, we are also proud to be named once again one of Forbes World's Best Employers in 2023. In closing, Ralph and I are energized by our team's excellent execution through this important holiday season. This quarter's performance reinforces how the power of our iconic brand, together with our multi-lever strategy delivers. We are firing on multiple cylinders while not dependent on a single geography channel or category for growth. And this model, combined with our unique agility and the remarkable dedication of our teams is what will continue to differentiate Ralph Lauren through these dynamic times. With that, I'll hand it over to Jane to discuss our financial results, and I'll join her at the end to answer your questions.

Operator:

[Operator Instructions] First question comes from Matt Boss with JPMorgan.

Patrice Louvet:

Thank you, Matt.

Matt Boss:

So Patrice, relative to mixed results across retail, Ralph Lauren clearly stands out as a winner over the holiday period here. What gives you confidence that you can maintain this momentum in a volatile backdrop? And then, Jane, any constraints to achieving the mid-teens constant currency operating margin target as we think about next year? And maybe as we think multiyear, do you see this as a ceiling for the business, or how best to think about longer-term operating margin opportunity?

Jane Nielsen:

Yes, Matt. So we are still firmly committed to our 15% constant currency operating margin. We think it's the right goal for our businesses. And specifically to your question, do I see any constraints? Obviously, we're operating in a volatile and dynamic operating environment. We're not immune to that. But what gives me confidence is our organization's agility to address those changes, navigate them effectively and lean into our multiple engines of growth, be it different geographies, be it different products, be it different channels that we drive as you saw us drive DTC this quarter so effectively. And I don't view 15% as a ceiling at all. That's why we've identified these high potential categories in women's handbags and planting seeds in homes that those businesses can scale over the longer term and provide new engines for growth and profitability.

Michael Binetti:

HI, guys. Great quarter. Thanks for taking our questions here. I guess a couple tactical ones. North America, 15% wholesale decline in the quarter. Nice to see you guys controlling it where you can in the D2C business. On that number, though, I think you said POS in wholesale was well ahead of sell-in on wholesale. But it sounds like AURs are increasing in the channel and you're maintaining a cautious posture there still. Is there a point on the horizon where you see those two numbers can start to converge, Jane a little bit. And also, I guess, Europe as a stand out here. I want to make sure I understood the 11% growth rate would have been 5 points higher in the quarter that comes out of the fourth quarter. But even with that, it looks like you're planning for a deceleration in Europe in the fourth quarter. I know you've been planning that market very cautiously for a long time. It's nice to see you coming in above your above your guidance. But is maybe a little bit more context on what you think the underlying growth rate is in Europe in the fourth quarter and how we should think about that market for '24? Are you seeing any less pressure on the wholesale side there? Maybe just a little bit of color, please?

Patrice Louvet:

And maybe I'll just add one data point on your first perspective, which is on North America wholesale where indeed need to be cautious moving forward. We are encouraged by our digital wholesale performance this past quarter, which was up mid-single digits. So the challenge really is stores, driving traffic in the stores, running conversion in the stores working closely with our wholesale partners to activate this.

Jay Sole:

Great. Thank you so much. So maybe, Patrice, just to follow up on those last comments. Can you just talk about your enthusiasm for your direct consumer business, particularly opening stores, given the comments you made in the opening remarks. Can you maybe just compare how you feel about it now versus, say, 90 days ago?

Jane Nielsen:

And we're still on track for about 250 new doors over the 3-year time horizon.

Brooke Roach:

Good morning and thank you for taking our question. Healthy improvement in the outlet channel again this quarter. And I know a lot of ground has been covered on DTC, but I was hoping you could elaborate on the changes that are working best there and your plans for further actions to drive continued accelerated improvement from here in outlet in both North America and Europe. Thank you.

Operator:

Next question comes from Laurent Vasilescu with BNP Paribas.

Jane Nielsen:

Good morning, Laurent, and thank you for the question. So you're right. We've guided 350 to 400 basis points largely driven by that's the equal guidance that we gave in gross margin. So it's driven by gross margin. And so SG&A becomes a neutral factor. And we still will have over 100 points of tailwind from freight, even with consideration of the resi as we come into the fourth quarter. So that's a durable factor for us as we exit this year. We're going to have favorable benefits from channel and geographic mix about similar, I think, to what you saw this quarter. There are two big changes. The big change is that cotton becomes a tailwind at the very end of the quarter. It's been a meaningful headwind over the course of the year of about 110 basis points. So as it becomes a tailwind, the pressure that we felt from cotton has reduced significantly. Also AUR growth becomes a more powerful driver in gross margin. as we expect our AUR trajectory to be about similar, we expect to get more efficiency, especially in our promotion lever. You saw us be quite focused in the holiday quarter as we come into the fourth quarter, we'll be less focused and we have less inventory that have to go out at end-of-season sale. So that's a gross margin benefit. I just want to be clear that cotton still a slight headwind in the quarter, but again, vastly reduced. And that's the key drivers that we see as I look at cotton over the last several years. It's important to note that even today, cotton still about 25% above pre-COVID levels. So it hasn't gone down to pre-COVID levels. And I expect that, that with the best visibility that we have, that's about a stable point for cotton. But it's actually been a little less than the 300 basis points, Laurent. I would say it's been about 110 basis points this last year and a little over 100 basis points to 150 basis points in the previous year.

Chris Nardone:

Great. Thanks guys. Good morning. Just wanted to know how to think about the impact your operating margin next year in a scenario where wholesale sell-in starts to improve globally. And then I heard you loud and clear on reiterating the 15% constant currency target for operating margins next year. But can you provide an update on where we are in your cost savings program that you outlined at your Investor Day and your ability to pull that lever if sales and macro volatility continues this year? Thank you very much.

Operator:

Next question comes from John Kernan with TD Cowen.

Patrice Louvet:

John, we haven't guided specifically in terms of the relative percentages. We did say that the women's opportunity was quite meaningful. 56% of our customers walking into our stores or shopping on our website are women and yet women's has represented less than 25% of the company's business. So you can expect that percentage to go up, but we haven't guided specific breakouts. We do have a lot of confidence in the potential of these categories. We're really pleased with the customer response across our women's portfolio. Women's really led the dance this quarter again and really resonating nicely. Outerwear is also a category that we're leaning in. You've heard others say, the season was challenging and certainly, the temperatures were maybe a little milder than anyone would have liked. But outerwear outperformed for us again this quarter, teams doing a great job developing a line of products across different outerwear categories that's really resonating. And as we look ahead, we still see a lot of runway, particularly on women's outerwear. Moving forward, strong performance with our handbag business. We launched the RL888, which was hard to miss in a number of our key cities around the world, very nice response to that. with continued momentum on the Polo ID bag and the little partnership or not little, but the partnership we had with Mr. Bag in China. And also good progress on home with new capability building as we bring in our new licensing partner on furnishing. All in all, all these categories are AUR accretive. So if you think about the different categories I laid out, when you look ahead in terms of what's going to be accelerators for the company, both in absolute top line and from an AUR and margin standpoint. We look forward to continuing to build on the momentum that we have in these spaces.

Dana Telsey:

Hi. Good morning, everyone, and nice to see the nice results. Just as you think about your channels of growth and obviously, DTC being so much more important than wholesale, or the interesting things on wholesales, the stronger results that you saw in Europe this quarter with the reorder trends. Anything we should be thinking about the wholesale business and reorder trends in Europe and what it could mean for North America? Is there anything to parse apart on North America? And then just lastly on the whole digital side of the business, what are you seeing in terms of the mix, whether is it AUR growth? Is it new customer activation? Is it more from existing customers and how you see that growing as a percent of sales? Thank you.

Patrice Louvet:

And then, Dana, on the digital front, let's start with North America. So North America comps were up 4% digital. It was really driven by traffic, all right? That was the key traffic. We saw improvements on conversion basket size. What's really exciting in the new consumers that we are recruiting. And I mentioned in my prepared remarks, we're up 1.7 million new consumers this last quarter is the momentum we have on brand is attracting higher value younger consumers, and we're seeing that play out very clearly in digital. If I look at the other regions, we were super pleased with the performance in Europe with digital at 12%. This was also driven by very strong traffic during the holiday events and new capabilities that the teams have put in place there. And then, finally, Asia, which is a smaller base and newer flagships also a very strong momentum, up 25% versus plus 21% last compare. And I think same thing new consumers, higher-value consumers, younger consumers, progress on conversion. And listen, as we look at this channel for the future, we still see significant runway. This business is a little less than 30% of our total company. We had guided to continued acceleration within this channel. As we build new capabilities, we just launched a new search engine in the U.S. also we mapped our product presentations, we expect to see continued progress in this space. So we feel good about the results that the teams are achieving across all three regions with more to come.

Rick Patel:

Good morning, Jane. I will add my congrats as well. How should we think about the flow-through of outperformance as we go forward? Because for the year, it looks like you raised guidance for gross margins, but less so on operating margins. So curious which areas might be getting incremental spend here? And then, secondly, just zooming out which areas of the business will you look to distort investments to as we think about continuing the strong momentum?

Patrice Louvet:

All right. Well, this is the end of our call. So thank you, everyone, for joining us today. We look forward to sharing our fourth quarter and year-end results with you in May. And until then, take care, and have a great day.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter Fiscal Year 2024 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Patrice Louvet :

Thank you, Corey. Good morning, everyone, and thank you for joining today's call. We continue to deliver solid progress on our Next Great Chapter Accelerate plan in the second quarter. Through an uncertain global macro environment, our iconic brand and timeless products continue to resonate with consumers all around the world. And our multiple engines of growth across categories and regions, enable our teams to deliver against our strategic and financial commitments even in a choppier backdrop. Second quarter results exceeded our expectations on the top and bottom line. We were particularly encouraged by an acceleration in our retail performance with positive comps across every region and channel in the period. The strength and growing desirability of our brand is underpinned by our continued pricing power, with AUR up another 10% on top of 18% growth last year. In addition, consistent with our plan, we continue to focus on balance sheet and expense discipline. This is fueling our investments in high-impact brand moments spanning geographies and demographics, all while delivering profitability ahead of our expectations. Looking ahead, as the important holiday season gets underway, we are executing on our long-term game plan and keenly focused on what we can control. We are elevating our brands and positioning in the marketplace while staying grounded in the realities of the macro environment. With more than six consecutive years of AUR growth, a cumulative increase of over 70%, we are confident in our pricing power in the market. Now it's important to remember that AUR growth is an output of our overall elevation work that has included evolving our product categories, product mix, and shopping experiences in addition to promotional pullback. This fundamental reset in our pricing architecture gives us the flexibility to continue driving our long-term brand elevation while also reacting with agility to near-term inflationary pressures. Turning to the second quarter. Our performance was guided by our three strategic pillars to drive long-term growth and value creation. These are

Operator:

[Operator Instructions]. The first question comes from Michael Binetti with Evercore ISI.

Patrice Louvet:

All right. Well, Michael, welcome back. Thanks for your question. Our teams continue to execute really well in a tough environment. And while we're planning for things to remain choppy for the foreseeable future, I think this quarter showed once again that we can deliver on our commitments. There are a few reasons for that, and I just want to call out the top three. First one is our brand is our most powerful asset, and we're driving momentum and desirability. As we cut through culture and appeal across generations through a variety of platforms, I actually think we have probably one of the most diversified broadest marketing programs in our space, ranging from the fashion show we did recently at New York Fashion Week, to two sports partnerships, Wimbledon and Ryder Cup U.S. Open just this last quarter through dressing celebrities like Beyoncé, you heard that in the prepared remarks to actually influencers wearing us spontaneously to gaming with Fortnite. So, a broad range of activities. We continue to invest in our brands for the long term, and we're seeing consumers respond to that. The second point, which is actually quite important during challenging periods like this for consumers is our iconic core products anchor us think beautifully made casual wear sweaters, maybe blazers, tweet jackets, Oxford shirts, really the foundations of a wardrobe. And these timeless products deliver through cycles and when things get more challenging, we know consumers tend to gravitate back to core products, products, and brands they know and trust. And in addition to that, we continue to have significant growth opportunities in women's and in outerwear. And then the third point, and you heard this in our prepared remarks, is our DTC channels are really where we can best control the consumer experience -- these channels today represent two-thirds of our business. So, DTC is two-thirds of our flooring business, different picture than a few years ago. And as you saw, actually, our performance in that channel is accelerating with positive comps across every channel, brick-and-mortar and digital across every region. So, in addition to this, I think we've also built over the past few years an agility muscle that's integrated into our operating model. And I think you saw this in this past quarter. For example, we made fast product assortment changes, leaning even further into our core products in order to improve traffic and conversion in DTC, and you saw that play out in the numbers. We delivered enhanced staffing in our retail stores to improve the customer experience. And online, we also made a number of changes relative to surge and more personalized pages, which also drove to an acceleration, both from a traffic conversion and AVT standpoint in those important channels. And while we continue to elevate our brand, this wouldn't be a Ralph Lauren call if I didn't talk about AUR. You see this play out in increased AUR again this quarter, up 10% in an environment that's relatively intense from a promotional standpoint. And we are able to grow AUR double digits while having limited targeted promotional actions for our more value-oriented consumers to close the deal and drive conversion. So, listen, we're operating in a very uncertain world, but I think that's become the norm. We know how to navigate this, and our iconic brand, our multiple growth drivers, and our agility muscle really help us to stay on offense. And importantly, we have the operational discipline and the balance sheet to enable continued investment in growth. So, I think when you look across the marketplace, these are all very important differentiators and we're going to continue to focus on what we can control to win and create value in the marketplace. When it comes to wholesale since it's a jump bulging at the ball. Over to you.

Operator:

The next question comes from Bob Drbul with Guggenheim.

Jane Nielsen :

Sure. Thanks for the question. The current operating environment is volatile. But our performance through it makes us even more committed to our strong balance sheet and culture of operating discipline, all of the things that are really critical to our Fortress Foundation with the agility of our team, it's what really enables us to continue to drive the plans through tougher times. And we think that our focused foundation and the way we manage our balance and our commitment to capital allocation is increasingly a strong differentiator for us -- and we're always interesting and interested in doubling down on just differentiation. So, I think the short answer is we're going to continue on passionate about discipline in managing our balance sheet and sticking with our capital allocation principles, which drives growth and investments and return capital to shareholders. And it's not just words and principles, it's producing results for our shareholders. We're on track with our capital allocation and shareholder return commitments that you heard us talk about at Investor Day. At the halfway mark, we returned about $1 billion to shareholders in the form of share repurchases and dividends. Our cash position remains extremely strong. We're in a net cash position, and our leverage is nearing our historical levels and those levels are usually low with our targeted one-time to two times EBITDA leverage. And our inventories are clean. Our inventories are down 5% this quarter with units down double digit. And importantly, North America inventory was down double digits and Europe in constant currency was down mid-single digits. Again, we expect to end the year tight inventory discipline that inventory will be down as we exit the year, improving our overall terms. So, we're more committed than ever Just on the country trends that we're seeing across Europe.

Operator:

The next question comes from Matthew Boss with JPMorgan.

Patrice Louvet:

Good morning, Matt. So, our game plan continues to be driven by our overall goal, which is and strategy, which is brand elevation across our three pillars

Operator:

The next question comes from Rick Patel with Raymond James.

Patrice Louvet:

Sure. It's really the execution of the different strategic pillars that we have in place. So first, I think as we talked earlier, be leaning into our core products and we see consumer -- strong consumer response, both on our men's business, very strong response on our women's business, strong improvement on our kids’ business. So, leading into core products, it's been intervention one, Rick, that's going to keep going, right? Intervention number two has been customer experience and making sure that we're servicing the customer in the right way, consistently throughout the week. And we know we have some opportunities to rebalance staffing and strengthen staffing in some areas to make sure that the customer walking through the door was getting the type of experience that they deserve from Ralph Lauren. Point number three is marketing activities and targeted marketing activities for that shopper for that consumer, leveraging both the centers, capabilities, and platforms and our own database. And then point number four, relates specifically to connected retail and how we leverage our connected retail capabilities. Now I don't know if you've been in some of our outlets recently, but we've implemented endless aisle screens, for example, where now you can shop the entire catalog from that store, full price outlet, anything that's available within the Ralph Lauren catalog, we also have digital clienteling for outlet customers, which has also been useful and driven the performance this past quarter and are structural. So, will continue to pay benefits moving forward. And then finally, as I highlighted earlier, for those more value-oriented consumers who need that little support to close the deal we have been able to implement limited targeted promotional activity further more value-oriented consumers while still being able to expand the AUR in that channel. So, five core interventions. I'm really proud of how nimble the organization has been as we've read consumer behavior, competitive environment. And we feel good that these interventions will serve as well through holiday and beyond.

Dana Telsey:

Hi, good morning, everyone. Congratulations on the nice improvement. One of the things I noticed is when you talked about your core product and the improvement that you saw just in the core product, I think it was up high single digits compared to the first quarter up mid-single digits. In addition to the continuing strength of the women's outerwear and home business is up low double digits. In the core business, anything new on pricing, newness and product that you're seeing there that could continue as we move forward. And then on the AUR growth of 10%, how are you thinking of the magnitude of AUR growth for the balance of the year? And with new introductions like the RL 888, is that helping to drive AUR growth? And are you seeing anything different by region? Thank you.

Jane Nielsen :

Just on the near-term trajectory of AUR, as you mentioned, up 10% this quarter, we do expect there to be -- that we are past the peak of product cost pressures. So, the pressure to price with inflation a bit slightly in the balance of the year. But I think we're planning on AUR being in the high single-digit range as we close out the year. So again, strong AUR growth, what we're seeing is that consumers are penetrating into our higher-priced products. So, we're seeing a penetration increase into products over $100. We're also seeing our new consumers penetrate the new consumers that we're recruiting penetrate into higher AUR products, so higher individual products and higher basket. That's really given us the flexibility to do what Patrice talked about, which is reach a more value-oriented consumer with some highly targeted discounts, leveraging our one-to-one marketing personalization so that we can reach them directly. I don't expect to change in our AUR journey in the near term. And as you'll recall, AUR is really for us is about many levers. It's founded in the brand elevation journey that we're continuing -- and you'll see us continue our product mix elevation, which is going to where the consumers -- where consumer demand is going, but also building that agility and flexibility for us to continue to expand gross margins we took up our guidance and continue to drive strong DTC growth.

Operator:

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Corey. Good morning, everyone, and thank you for joining today's call. We started year two of our next great Chapter Accelerate plan with continued progress on our long-term strategic commitments. Our solid first quarter performance highlights both the power of our iconic brand around the world and our diversified engines of growth. First quarter results exceeded our expectations on both the top and bottom line in what continues to be a highly dynamic global operating environment. We delivered positive comps, stronger value perception and luxury credentials and targeted ecosystem expansion across our top cities in the period. Our growing brand desirability also drove double-digit AUR growth on top of last year's strong gains. And we will continue to invest in our product quality and sustainability, selling environments and authentic brand messaging to sustain our growth and long-term pricing power in the marketplace. At the same time, we continue to balance this growth with a relentless focus on agility and operational discipline to respond to evolving market dynamics. This enables our operating profit and margin expansion even as we invest for the long-term. We continue to be mindful of macro inflationary challenges facing our more value-oriented consumers, particularly in North America. That said, we are more than offsetting softness from this cohort with growth in our full price businesses. Turning to the first quarter. Our solid performance was guided by our 3 strategic pillars to drive long-term growth and value creation. These are, first, elevate and energize our lifestyle brand, second, drive the core and expand for more, and third, win in key cities with our consumer ecosystem. Let me take you through a few highlights across each of these strategic pillars. First, on our efforts to elevate and energize our lifestyle brand. We are investing in our most powerful asset, our timeless iconic brand to inspire and engage our consumers, drive brand desirability in the market and ultimately grow lifetime value. We continue to diversify and optimize our marketing across a variety of media and platforms as we deliver a clear, differentiated story to our target consumers in order to trade them in, across and up our lifestyle portfolio. During the quarter, first, we drove some of our highest engagements globally through iconic celebrity dressing moments. This was led by Jennifer Lopez at the Met Gala in May, delivering over 8 billion global media impressions and her look landed on multiple best dress lists across TV, digital, social and print outlets. Other celebrity highlights included Taylor Swift, spotted on the streets of New York in our Wellington bag and all white Polo Ensemble; Singer and Actress, Crystal Young in Cannes. First Lady, Jill Biden at the Coronation of King Charles. And you may have caught a recent episode of, And Just Like That, which features characters Charlotte and Rock, outfitted in Ralph Lauren at a fun fictional polo photo shoot, highlighting the multigenerational appeal of our brand. Second, we have worked to reinforce our luxury lifestyle positioning through iconic lifestyle partnerships and activations in key global cities. We paired our recent Milan flagship openings with key campaigns to fuel excitement in this influential fashion capital this spring. This included the return of men's Purple Label to Milan Fashion Week in June and our second annual participation at Salone del Mobile, part of Milan Design Week, where we showcased our emerging home business. Similarly, across Europe and Asia, we drove brand heat through experiential events like our California Dreaming key city takeovers, exclusive private client events and influencer campaigns to build our presence in both new and existing ecosystems from Paris to Shanghai, Tokyo and Seoul. And most recently, we reinforced our leadership in the world of sports with another successful Wimbledon sponsorship, where we delivered our highest ever results on social conversations on-site merchandise sales and global PR impressions. Ralph Lauren truly embodies the heritage and tradition of this iconic tournament. In addition to our beautiful Encore presence, we also captured our iconic spectator style on celebrities and influencers like Ariana Grande and David Beckham, which we amplified globally. Together, these activations are both reengaging existing customers, while also attracting new high-value consumers to our business. In our DTC businesses, we added 1.2 million new consumers in the first quarter consistent with recent trends. This continues to skew increasingly toward next-generation under 35 consumers. And we reached 53.5 million social media followers globally, a high single-digit increase to last year driven by Instagram, Line, TikTok, WeChat and other key platforms. And our online search trends continue to outpace our peers globally, driven by spring icons and accessories. Moving to our second key initiative, Drive the Core and Expand for More. Ralph and our design teams continue to create sophisticated timeless products that meet our customers' modern lifestyle, underpinned by the quiet luxury that is a hallmark of our brand. Starting with our iconic core products, which typically represent about 70% of sales and are a consistent driver of our business, season after season. Our core grew mid-single digits in the first quarter, ahead of total company growth and penetration to total sales increased by 350 basis points, underscoring the importance and resilience of our icons through choppier times. This was led by our iconic cable knit sweaters and cardigans, linen shirts and chinos, double net sweatshirts, rugby shirts and tailored suit separates. We continue to see evidence that consumers are turning to brands they know and trust and styles that have longevity beyond one season. Our roots in quality and timeless style remain a competitive advantage in this context, supporting our strengthening value proposition. Our core also establishes the foundation and credibility to grow our high-potential categories. These include women's, outerwear and our emerging home business. Together, these high potential categories increased low double digits in the quarter. Women's, our largest long-term opportunity, continues to outpace total company performance, supported by our Spring '23 California Dreaming collection inspired by the natural beauty, optimism and glamor of the West Coast, Polos, day dresses and lightweight skirts in seasonal florals and silks, newer wide-like bottoms and encouraging growth in our Polo ID handbags. Other special releases this quarter included the launch of our Polo Mirum sneaker, our first luxury sneaker that is 100% plastic-free. Leveraging our investment in natural fiber welding, Mirum is made with an innovative combination of natural rubber, cotton, cork and plant oil. Looking ahead, we will continue to leverage the breadth of our brand and assortments to meet consumers' evolving lifestyles. Switching to our third key initiatives, winning key cities with our consumer ecosystem. We remain committed to developing our key city ecosystems around the world, with a focus on elevating and connecting all of our consumer touch points across every channel. At the same time, we are clearly pivoting our business toward direct-to-consumer, which already represents about 2/3rds of our sales. Our investments in high-quality new customer recruitment and increasingly elevated distribution are working. Our full-price retail channels led the growth in the quarter, consistent with recent trends. This is helping to mitigate near-term inflationary headwinds facing a subsegment of more value-sensitive consumers. Our positive retail comps were supported by continued momentum in our core Polo products and luxury collections, along with improving foreign tourist sales and successful clienteling by our dedicated sales teams. This performance more than offset continued pressure in our outlet comps, which were challenged by a more promotional North American market. We opened a select number of iconic World of Ralph Lauren stores in the quarter, notably in Amsterdam, Tainan and Kuala Lumpur, featuring an elevated assortment and prime luxury adjacencies. These stores are designed to anchor our city presence and drive desirability and engagement with consumers. We opened a total of 28 new stores and concessions, focused on our top cities globally this quarter, with the majority again in Asia, particularly in China. China sales accelerated to more than 50% growth with easier compares following last year's Shanghai lockdowns. We were particularly encouraged by our strong 6/18 performance, which outpaced peers and reinforced our new customer acquisition in the market. And over 40% of our transactions were generated from new consumers. Looking ahead, we still expect China to remain one of our fastest-growing markets. Within our digital businesses, sales for our total Ralph Lauren digital ecosystem, including our directly-operated sites, departmentstore.com, pure players and social commerce were flat this quarter. Strong growth in our international markets more than offset declines in North America, where the digital channel has also become more promotional. This quarter's digital performance was clearly below our long-term targets, and we implemented key interventions during the quarter, which will continue into the fall season. Encouragingly, we started to see improvement in our North America digital trends from June onward, as Jane will discuss in a moment. And finally, touching on our enablers. In addition to our strategic priorities, our business continued to be supported by our 5 key enablers. I'll share a few highlights from the quarter. As part of our ongoing work to deliver superior operational capabilities, we are implementing process improvements and new tools to streamline our value chain and drive long-term margin opportunities. Our recent work has resulted in a 25% reduction in our overall Spring '24 SKU count, even as we continue to develop our high-potential categories. Within citizenship and sustainability, we were proud to be recognized as a top-rated ESG performer by Sustainalytics as we work to embed sustainability in all we do. And within our people and culture, we were recently named a best company for women to advance by parity.org for the fourth consecutive year. In closing, Ralph and I are energized by our team's solid start to this fiscal year. We continue to focus on offense, agility and pragmatism in these dynamic times. And we believe Ralph Lauren is firmly in a position of strength to deliver on our strategic commitments. Underpinned by Ralph's timeless vision and the strength of our iconic brand, we have diversified levers of growth across geography, channel and category, a broad lifestyle portfolio of products that consumers know and trust and that we are actively flexing with consumer needs, and strong foundational enablers to support long-term growth and value creation from our talented people, innovative technology and supply chain to our balance sheet and muscle of operational discipline. With that, I'll hand it over to Jane to discuss our financial results, and I'll join her at the end to answer your questions.

Operator:

[Operator Instructions]. The first question comes from Matt Boss with JPMorgan.

Patrice Louvet:

Mike, thank you for your question. Yes, first of all, overall, our teams did a very good job delivering on our top and bottom-line commitments. For this quarter, even with ongoing challenging backdrops across the different regions. As you know, our strategy has multiple growth engines, meaning resilience is embedded in our strategy and in our plan. If you look at it across regions and then we'll zoom into North America. Our second largest business, Europe continues to hold up well despite macro headwinds. We're also feeling very good about the way our performance came in on China and broader Asia. You saw China up 50% this quarter. And while North America is facing some pressure in the near term, our core consumer, which is a more elevated consumer continues to be resilient, and we have the right strategies in place to drive growth well beyond these headwinds. In fact, a couple of data points to illustrate that. First of all, our value and also our luxury brand perception scores are growing faster in North America than any other region in the world. And if I provide additional perspective, if you look at it from a channel perspective, our emphasis and investments are in DTC and which is now about 2/3rds of our North America business and where we have the biggest growth opportunity. From a product perspective, we have multiple opportunities across high potential categories from outerwear to home and to women's more broadly. On brand, we continue to invest in new customer acquisition. You saw that this quarter again, $1.2 million overall, a good chunk of that coming from North America, as well as key brand moments like our upcoming U.S. Open partnership and our upcoming fashion show early September. And then finally, our key enablers here are also quite important. Our inventory levels are healthy. We go into back-to-school. We're going to go into holiday in a really good place. And our operating discipline and balance sheet give us the flexibility to continue investing in our growth to continue investing in our [indiscernible]. So we're also well positioned as conditions improve in North America and beyond. So I would say even with the near-term pressures, Matt, we're confident that we're in a strong position to perform and deliver over the long term, and that's really where all our focus is.

Operator:

The next question comes from Jay Sole with UBS.

Jane Nielsen:

Sure. Thanks for the question, Jay. Stepping back a bit, we are really confident in our long-term brand elevation journey. As we said at Investor Day, we have three key drivers of long-term revenue growth, new customer recruiting, select unit growth and AUR growth. So with regards to your question and AUR specifically, we're confident in our AUR strategy and expect our multipronged approach to drive continued, albeit a more moderate level of AUR growth as we look ahead. You've seen us elevate across products, the consumer experience, stores and our brand positioning. And AUR is an output of this journey. Importantly, as we've elevated our consumer value perception metrics have continued to increase, even again this quarter. These factors taken together are really what give us confidence in our long-term AUR trajectory. That said, we're keenly aware of the current environment, and we continue to keep a really sharp focus on the value we are driving and delivering. With some of these pressures, we're seeing some of our more value-oriented consumers needless to lean in a bit more during select key consumer value-seeking moments like back-to-school and holiday and our guidance contemplates this as we move forward. As cost inflation starts to moderate ahead, we'll adjust our like-for-like pricing elements of our [AURs] [ph] strategy accordingly. And we're not expecting double-digit AUR growth every quarter from here. But overall, the elevation strategy hasn't changed, and we plan to continue AUR growth this year and beyond.

Operator:

The next question comes from Laurent Vasilescu with BNP Paribas.

Jane Nielsen:

All right. Laurent. Could you just repeat your question on marketing, you broke up a bit.

Jane Nielsen:

Sure. So Laurent, as we look at the second quarter, what we're seeing is we continue to be cautious about the overall consumer environment. You'll see, as we called out in the first quarter that the wholesale timing shift in Europe will impact us in the second quarter. You will start to see sequentially from here some improvement in what you saw in North America wholesale. And in fact, as we look at North America more broadly, I think you'll see a sequential improvement while we're still cautious, sequential improvement on the top line as we move through. And just to keep in mind in our second quarter guidance, APAC is overlapping its strongest growth of the year last year as we came out of some of the COVID-related shutdowns. On the marketing side, what you'll see in terms of our spend, this first quarter, we were about 5.7% of sales. You'll see us go to 8% of sales in marketing in the second quarter. On a dollar growth basis, that will be our peak marketing dollar growth that is as our tradition, our highest dollar spend in marketing will be in Q3, aligned with the holiday quarter. And then, as we look at your question on our second quarter OI margin, what you're really seeing is in that second quarter, you'll see the impact to OI margin of the shipments in Europe into the first quarter coming out of the second quarter. Also, as we've seen some softness in North America wholesale, we've been able to lean into our DTC channel, specifically in North America, which has a gross margin benefit, which we're calling out in our full year guidance. But carries heavier SG&A expense but is OI margin neutral. And that's playing through what you're seeing in terms of expense to leverage. And that said, on SG&A expenses overall, as Patrice mentioned, we are playing offense. So we are not pulling back on our investments in our digital platforms in Q2, we are investing to make sure that we can go live on a new website in Canada and that we will implement later in the second half, a new search engine, as well as our continued advancement of store opening. So we're not backing off building growth into the future. I do understand the investments are in Q2, but these are both long-term benefits and some benefits that will play out in the second half of the year. And then just in terms of gross margin, we're confident in our gross margin guidance. Mix shift plays a small role, but we are realizing the benefits of freight, which we called out in May, will give us about 100 basis points benefit as we move through fiscal '24. That's about offset by cotton. But as we look forward to FY '25, we expect cotton to turn into a tailwind at the very end of the quarter. We're also seeing with our AUR up 15%. We're really confident in our ability to continue to elevate with AUR as an outcome of that. And we're confident in that as we move forward, although I said it will moderate as like the need for like-for-like pricing due to inflation also moderate.

Dana Telsey:

As you talk about the pressures of the value consumer and the AUR increases, what are you seeing globally that value consumer, whether in North America, Europe or in Asia versus the more higher-end consumer and helping to drive the AUR growth. Is there a difference?

Dana Telsey:

Okay. And then just kind of get your perspective on the wholesale channel and when you see it return to stabilization even growth go forward given the timing shifts that have occurred. Thank you.

Operator:

The next question comes from Chris Nardone with Bank of America.

Jane Nielsen:

Thanks for your question, Chris. I think what we're calling out both in our guidance and in our intent is that as Patrice mentioned, we are seeing value-oriented consumers really responding during the sort of what I would say, consumer moments. And so what we've left in our algorithm is contemplated in our guidance is some select targeted promotional activity, specifically for that value consumer. So you'll see us go sharp back to school. You'll see us be sharp in key holiday moments. Black Friday, specifically. A few days leading up to Christmas, especially Cyber Monday. But what we're calling out is that we'll continue AUR growth, albeit at a more moderate rate and AUR growth that leads to gross margin expansion. So this is not at all moving away from our brand elevation strategy. It's about being agile, responding to key consumer moments in a targeted basis. And you've seen us go to the top-end of our gross margin range. So we've got a good handle on where we need to be. And I would say that if you look at our inventories up 1% this quarter, you don't have pressure to be promotional. We want to go where the consumer is going, respond to the consumer need for value at select times, but not at all be pressured in terms of moving backwards. We're about brand elevation and AUR growth, while being smart and pragmatic in this current environment. So from North America, top-line standpoint. As we've called out and we've looked at revenue, we expect North America as we put in place some key interventions like outlet interventions that we just talked about, like the digital ecosystem investments with Canda going live in Q3. Like key brand moments like the fashion show, we expect North America revenues to increase, especially in the second half where we would expect them to be in positive territory.

Bob Drbul:

Jane, I was wondering if you could spend a little more time on new customer acquisition sort of success that you're seeing both domestically and internationally and sort of how you expect that to unfold over the next few quarters?

Patrice Louvet:

Yes, Bob, I would add probably three things. First of all, we're seeing this growth of new consumers consistently over time, right, because every quarter, we are talking about 1 million to 1.5 million new consumers. So we've got an engine that's delivering consistently. And it's delivering consistently around the world. This is not just dependent on more emerging market growth. So we're excited about that, both in our core markets like North America, Europe and also Asia. The second point is this is really the outcome of how we've expanded our marketing activity portfolio, which now ranges from powerful experiential fashion moments like the one we're about to do early September, what we just did in along with men's. Two, high-impact celebrity dressing. You saw some of the highlights for the past quarter and we're doing this consistently. Through partnerships with key sports platforms they're really resonating particularly with that younger consumer. Two, now presence in gaming and metaverse related activity that's also helping us engage in a different environment. Two fantastic work by our teams in the markets on social media platforms, right? You heard the numbers earlier today, 53.5 million, new followers on social media across all the different platforms around the world. So this engine that's been put in place that has a diversity of activities that's targeted to different generations, different genders. That's enhancing brand equity is the engine that will consistently drive new customer acquisition. We talk a lot about AUR when it comes to Ralph Lauren, but it's important to remember that our growth algorithm is dependent on three elements. New consumer recruiting, select unit growth and AUR and we feel really good about all three.

Tracy Kogan:

Two questions. I was hoping you could just detail some of the drivers in the women's business. And what's the growth in the Lauren brand versus the Polo product? And then, secondly, I was hoping you could talk about, I think you said your U.S. wholesale AUR was up 11%. And I was wondering what you expect for wholesale AUR for the year and whether you're getting any pushback from your wholesale partners on price increases you may have taken in the U.S.

Jane Nielsen:

Yes. I would just add, Tracy, that Polo Women's significantly outpaced both our total growth and led our women's growth with up high single digit with Lauren pacing about at company level of growth, a little bit ahead. So we're very encouraged by that. The second part of your question, which is wholesale AUR up 11% this quarter, we still see a strong trajectory for AUR at wholesale. But like in our DTC business, we expect that AUR growth to moderate as the like-for-like pricing moderates as inflation pressures abate. We called out the fall with our peak pressure in terms of cotton costs, we'll start to see those moderate into spring, and you'll see some moderation in our wholesale AUR. I would say the support from our retail partners has been tremendous. This has been a multiyear journey that we've partnered together on. They see the power of elevating the brand. They see the power of the brand, and we're both benefiting from improved consumer desirability that's pulling through into migration of the consumer into higher-end products. So product mix has been a factor in that. And so continued AUR elevation but similar to BGC's moderation.

John Kernan:

Jane, how should we think about inventory dollars? It looks like they're sitting around $1.2 billion as of the first quarter. Still you've got some easier compares, I guess, as we go through the rest of the year. Where do you think inventory dollars should land as we head towards the back half of the year? And when do you think we'll start to see some meaningful declines off of what was fairly elevated levels last year.

Patrice Louvet:

Okay. Well, listen, thank you, everyone, for joining us today. We look forward to sharing our second quarter results with you in November. And until then, take care. Have a great day.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Fourth Quarter and Full Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question and answer session. As a reminder, this conference is being recorded. I would now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Cory. Good morning, everyone, and thank you for joining today's call. When we met last September here in New York, we outlined our ambition to become the world's leading luxury lifestyle company and build a business that lives up to the potential of our powerful brand. As we close out the first year of our Next Great Chapter

Operator:

The first question comes from Matt Boss with JPMorgan.

Patrice Louvet:

Thank you, Matt, and good morning. Well, let me first reground us in the fact that we just finished an above algorithm year on revenue and on track on profit. So we continue to build our business for the long term. And this past year's progress puts us on the path to deliver on our long-term plan. So to answer your question very simply, our long-term ambitions have not changed. And this confidence is really grounded in a number of unique strengths which are particularly relevant in choppier environments. First of all, a brand that people love and desire that we are continuing to invest in. Second, core products that consumers know and trust that aren't based on seasonal fashion or trends. And we know that during choppier times, consumers tend to gravitate back to these more iconic categories and iconic products. And so for us here, think about Polo shirts, Oxford shirts, blazers, dresses and even ties are back. Third is strong operational fundamentals, which I think have been demonstrated throughout the past few years. Fourth is multiple growth levers, and you saw that play out in this quarter again. And then finally, a proven ability to flex to consumer demand. So these factors give us broad confidence that we continue to be on track with the goals that we laid out about 9 months ago. Now let me offer some perspective on how we're thinking about the consumer overall to the second part of your question, and I know this is a top of mind question for many of you on this call. First of all, I would say our core consumer is resilient. And we are seeing that around the world in Asia, in Europe and here in North America as well. And that segment is growing as we're bringing in new consumers into the Ralph Lauren family. The second point is that our consumers across every region are also responding well to our continued brand elevation strategy. This is evidenced by the fact that our brand desirability continues to strengthen, our value perception is growing, and we track this on a quarterly basis in our key markets. We're recruiting millions of new consumers, 5.2 million this past fiscal year, including growing our highest value consumers double digits, which we're particularly excited about. And all of this while expanding AUR plus 12% this quarter, plus 77% over the past 5 years. The third point I would call out is that we saw a lot of work to grow our consumer base outside of North America. And today, nearly half of our business is international and actually more than half of our profit is international. And as you saw in the last fiscal year, and particularly this last quarter, our Asia performance has been a real highlight. I'm very proud of the work that our teams have done across Asia and in particular, in China and we anticipate another year of above algorithm growth there, broader Asia. And then finally, in North America specifically, there is continued divergence between our core high-value consumers and that subset us more value-oriented consumers that we called out in prior quarter. Clearly, those more value-oriented consumers for a smaller part of our customer base and getting smaller and smaller as we bring in higher -- more higher value consumers into the Ralph Lauren family are feeling increased pressure because of inflation, because of increased interest rates. And I think you've heard this from others as well. But we believe we've appropriately embedded this caution into our guide. So Matt, we know where we're headed. We feel good about the multiple drivers in place to get there. I think we have a strong track record as a team in the business, and we'll manage this year with agility again. Jane, over to you on pricing power.

Operator:

The next question comes from Jay Sole with UBS.

Patrice Louvet:

So I think it is fair to say that the environment has been more pressured. And listen, we expect it to stay volatile as we come into this new fiscal year. We are still -- you just heard that from Jane, we're still firmly committed to our elevation strategy, which we started well before COVID over 5 years ago. And why? Because it's working. The strategy has served us well through stronger and weaker macro backdrops. We're seeing strong consumer response to what we are doing. And I think it's pretty clear also to Matt's earlier question that our brands continue to have strong pricing power in the marketplace across every region, right? You saw AUR grew across every single region this past fiscal year, in this past quarter. And we believe this is becoming an even bigger differentiator for Ralph Lauren relative to peers in this environment. And we are guided by the consumer here, right? And as Jane mentioned, the consumer response to our brand elevation on product, on storytelling, on selling environment continues to be strong. And the AUR is an outcome of all of that, and we feel quite good about our ability to continue on this journey, and then Jane, I'll turn it over to you for some more color on the second part of Jay's question.

Operator:

The next question comes from John Kernan with TD Cowen.

Jane Nielsen:

So what we see in wholesale is that, as we called out in the guidance, we do see a normalization of wholesale sales that were disrupted during the supply chain. And we expect that to be a heavy headwind in the first quarter. Now that's anomalous. We want to call it out. But underlying in terms of wholesale, we have seen some challenges in terms of replenishment orders and some caution in their more value-oriented consumers. So we've taken that into consideration as we've planned our inventories and know that they're taking a more cautious stance in both North America and in Europe, as they give us order -- as they place orders for receipts into spring. We've incorporated that into our guidance. We're more optimistic about certainly, what we've seen in our full-price store environment in North America, it's remained strong through this period, and we're encouraged by that. We are more cautious as we came into the fourth quarter in terms of the outlet consumer. We've been calling that out for several quarters, and we've incorporated that into our guidance as well. We are encouraged that we do see that all our consumers migrating up in terms of the categories that they're buying into. They're buying higher ticket items. Those value consumers are looking for a good deal, but we do see that migration up in terms of the product assortment, and we're adjusting our assortments accordingly. We did see basket growth and AUR growth across all our channels and are encouraged by that. We will follow that while being flexible for the consumers. But encouraged by the overall store environment, and we feel we have the tools to flexibly move through this environment.

Operator:

The next question comes from Chris Nardone with Bank of America.

Jane Nielsen:

So broadly across Europe, we've been very pleased with our digital progress. We're up substantially in terms of where we were pre-COVID, it's been a source of strength for us. In terms of what we're seeing on our digital growth, we expect continued growth in digital at a more moderate pace for Europe, but continuing our AUR journey in that channel and strong performance. As we look at the wholesale channel in Europe, it is more elevated and healthier than what we've seen in North America but we have seen pressure from pure players. Now that's playing out in our digital ecosystem in Europe, and it's playing out in our wholesale business in Europe. We have adjusted our inventories accordingly and expect to continue to grow with them in the long term, but do see pressure in the near term from the pure players that will play both into our digital ecosystem growth and will -- and plays out in terms of our total wholesale growth in Europe. But overall, it's an elevated offer. We continue to like our market share gains in that channel and are continuing the journey, but the pure plays are the pressure point.

Operator:

The next question comes from Dana Telsey with Telsey Advisory Group.

Patrice Louvet:

Maybe tack team on this. On marketing spend, as Jane mentioned in her prepared remarks, our strategy is to spend about 7% of revenue on marketing. That's roughly where we were this past fiscal year. That's where we will be this coming fiscal year. It won't necessarily play out exactly per quarter at 7% because obviously, we have fashion shows and those types of events that will skew the numbers in a particular quarter. But directionally, 7% of revenue, we expect modest revenue growth, so you can expect the absolute dollars of marketing spend to increase on the total brand. Jane, I'll let you do the raw materials.

Patrice Louvet:

And then your question on wholesale. So just stepping back a little bit, our direction of travel from a strategic standpoint is to pivot the company further into DTC. Our DTC today is about 63%, 64% of -- for the total company. And as we guided during Investor Day, we expect the numbers to be north of that in the coming years. Now we believe wholesale -- quality wholesale has an important role to play in our go-to-market model as well. If you do the world tour, in Asia, most of our business, if not all of it, is concession. So to a large sense, actually a DTC business. It's nicely elevated. We had really nice momentum there, as you saw in the results that we just announced. And so we're focused on running the play and continuing to drive elevation there. In Europe, it is a mix of concessions and wholesale. And in Europe, what we're working on is continued elevation. There's been some really nice work done in Germany, in France, we're looking very good in France and had really nice performance this past year in France wholesale in the U.K. In Southern Europe, there's opportunity to elevate. So we're putting emphasis on customers like El Corte Ingles, right, to make sure that we show up the way we want to show up in the appropriate doors. And then as we were just talking earlier and Jane mentioned some of this on pure players, pure players are an important part of our wholesale business today. It will be even more important in the future. And I'm actually quite excited about some of the strategic pivots that some of the European pure players are doing because it really lines up nicely with our strategic approach. And I refer to an example earlier on that. And then as far as North America is concerned, kind of 2 tiers of wholesale last, right? Remember, we closed 66% of our wholesale doors over the past 3 or 4 years. The upper tier is performing quite strongly, and we feel good about the way we're positioned there. So think of the Saks in the Blooming deals of this world and consistent with what we talked about our core luxury consumer being quite resilient. As far as the premium tier is concerned, our focus is on share gain. These are players, I think that I would say if they were on this call that they're picking between the winners and the losers and they're putting investment behind the winners and pulling back on the losers. We are fortunate to be part of that winner's column based on our performance over the past few years, share growth, value creation, joint value creation with them. So we are benefiting from staffing investments from these partners. We're benefiting from capital investments from these partners as we continue to elevate our brand presence in these more limited doors given the number of doors that we've closed. And our focus is on share gain, right? And as I mentioned earlier, over the longer term, we are growing share across all 3 of our segments, and we have a number of initiatives in place to continue to drive that while driving brand elevation. And I'm pleased to see that our AUR was up 8%, high single digits, up 8% this past quarter, in an environment that's still relatively promotional. So hopefully, that gives you a bit of a sense of how we're thinking about the broader go-to-market strategy moving forward.

Laurent Vasilescu:

Congrats on a great quarter and a full year. Jane, I would love to get a little bit more color. Thanks for Dana's question on the bridge on the gross margin. But on the first quarter, can you maybe just kind of give us a little bit of a bracket on how we should think about gross margins? And then second, just following up on the Investor Day, I think you talked about $400 million plus of gross productivity gains. I think 2/3 of that coming from SG&A. Can you maybe just tell us or share with us any further insights or any further confidence you have to achieve those productivity gains.

Patrice Louvet:

All right. Well, thank you, everyone, for joining us today and we look forward to engaging with you at our Annual Shareholder Meeting and first quarter fiscal '241 earnings call in early August. Until then, take good care.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third Quarter Fiscal Year 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Patrice Louvet :

Thank you, Corinna. Good morning, everyone, and thank you for joining today's call. We were pleased to deliver another quarter of better-than-expected performance, including through the important holiday season. All three regions contributed positively to revenue growth. And at the same time, we made strong progress on the strategic priorities we outlined last September in our Next Great Chapter

Operator:

[Operator Instructions] The first question comes from Dana Telsey with Telsey Advisory Group.

Patrice Louvet :

Good morning, Dana. Thanks for your question. Listen, Ralph, Jane and I are really proud of our company's outperformance this year to date. As you mentioned, the macro environment certainly continues to be quite choppy, but I think we're used to that by now. Our teams have built this incredible agility muscle over the past few years, if you kind of reflect on what we've worked through COVID, inflation and now a relatively promotional environment. So this agility gives us confidence looking ahead, but it's that agility plus other three things that I would really call out. The first one, and it touches on your second question is, our core consumer remains quite resilient. And that's true around the world, and that's true across channels. And as you know, we've done a lot of work over the past few years to evolve our customer base to bring in a higher value, younger customer that played out again this past quarter, 1.6 million new consumers, higher value, less price-sensitive, younger consumer. The second point is our diverse growth strategy that has multiple growth levers, and we constantly challenge ourselves to make sure they're still relevant in the environment that we are operating in and looking ahead, and we believe they are as relevant as ever, even in a tougher environment. What do I mean by that? Well, you can look at our opportunities to grow across regions, right? We have significant growth opportunities, of course, across Asia, including in China, in particular, but also in key cities across North America and in Europe. On the product front, we have a very wide lifestyle portfolio, and so that enables us to drive our core. You saw our core did quite well this past quarter, up high single digits, but also go after high potential categories like women's up mid-teens this quarter and outerwear up high single digits. And then the third point is really around flexibility, right? And two things I would call out here. One is because of this breadth of product portfolio, we can really flex up and down. You've seen us do that over the past few years based on where the consumer desires, wants, needs are. And I'm sure we'll have the opportunity today to talk a little bit more about products and what we're seeing. But this ability to flex, I think, is quite unique, and it's a real strength for our company. The other thing is our elevation journey, means our pricing structure has built in flexibility, right? If you look back since the start of this elevation phase, our AUR is up close to 70%, which means we can still react to the competitive environment, including when it gets more promotional without walking back our overall brand elevation strategy. I was really encouraged to see our AUR performance again this quarter, up 10%, bringing in more consumers, driving strong topline growth in what is pretty clearly a more aggressive promotional environment. And then underlying our diverse and flexible growth drivers are two critical things

Operator:

The next question comes from Matthew Boss with JPMorgan.

Patrice Louvet :

Sure. So sorry, on demand on the Polo brands, particularly in the Polo brand, as you know, is the heart of this company. We are seeing progress on men's consistently. And what I'm excited about, we touched on it in our prepared remarks, is the introduction of the Polo Originals line that kind of pays homage to the Polo roots, which is just a view the full line of products that our teams have being around to allow us with really a communication that's really resonating with the customers. So continuing to drive that elevation and tapping into the breadth of the portfolio so that if you want athleisure, we have that available with exciting products. But we also have investments in the more tailored proposition, which is where we're seeing the consumer gravitate more and more to this more elevated casual proposition. So Polo Men is really nice momentum with a number of engines of growth that were very promising for the future. Outerwear is obviously an area of strength on the Polo Men. On the women's side, across all the key categories actually, we're seeing Polo Women's get significant traction. And as we're seeing the consumer gravitate to this more elevated casual dimension, then we're able to leverage the breadth of the portfolio and that ranges from sweaters to dresses to acceleration in outerwear, and we expect that to continue. Obviously, we see significant growth opportunities ahead on Polo Women. And then on Polo Kids, we're also continuing to see nice traction and share growth, we’ve seen share growth for quite a while on that business as well and expect that to continue as we throw a relatively wide net when it comes to attracting new consumers and leveraging the presence we have across multiple categories. So the range of product offerings we have on the Polo brand and the skew to our sweet spot, which is this elevated casual, I think, sets up to run nicely, not just for outperformance now, but for the future. Jane, I'll turn it over to you for the second.

Operator:

The next question comes from Michael Binetti with Credit Suisse.

Jane Nielsen :

Yes, sure. Let me take the first part of your question, which is AUR base. So as we move forward in this pricing journey, you've seen us continuously put up AUR increases across all three regions. Again, this quarter, we saw Asia, which is furthest along in the journey put a very strong AUR delivery, but more modest than the rest of the regions because they're further along in their journey. So fully offsetting inflation and expanding gross margin. Europe, which is in the middle of the journey also put up nice AUR expansion as did North America. I do believe that because North America is earlier on in his earnings that they will be slightly outpaced in progression through this long term -- through the length of our plan, and they're certainly positioned to offset inflation through the length of this plan. So it's not a disproportionate amount, but I do think there's more opportunities. We've just started this journey in wholesale. We're early on there. And we've continued to make progress across full price our outlets and our digital. So we're encouraged by the breadth of AUR progression that we see in North America. And again, we have a multi-pronged strategy. Because of inflation, like-for-like pricing is a part of that, but we're getting continued benefits from geographic, and because we're shifting to DTC, we'll see DTC also be a positive tailwind for us and also including the elevation of our assortments, which will continue as we elevate the brand. As I look at North America operating margin, overall, we're very pleased with the reset of North America and putting North America on a more profitable base. Year-to-date, our margins have been pressured really by two primary things. One is, rate impacts were disproportionate in North America, and we do expect that to start to abate a bit in the latter fourth quarter, but certainly into FY '24. The other factor was wage actions that we took last year that were overlapping this year. Those were primarily in our distribution centers and in our retail staff. We think it was the right thing to do, and as we elevate the brand, that continuity is important in our retail. So clearly, as we come out of that and start to get a free benefit into '24 and we'll be out of the overlap of wages, it will be a positive benefit as we move it into North America. And as I said before, we have made some meaningful investments in digital. We have a home app. We now have a full content RL app. Those have been good investments that are now made, and we can start to leverage in the future.

Paul Kearney :

Jane, I was wondering, can you help unpack the foreign currency into next year based on current rates? How much of the transaction impact has already hedged or locked in for the year? And what are some of the ways to recapture the 180 basis points of margin impact that you now expect from this year?

Operator:

The next question comes from Laurent Vasilescu with BNP Paribas.

Patrice Louvet :

Laurent, we'll tag team on this one. A few things on China. First of all, I have to say, I am really proud of our team's execution, actually not just in China, but across the entire APAC region. And as we talked in prior forums, we see significant near and long-term growth opportunities in China on strong brand building, on relevant product offering and a connected ecosystem expansion in key markets. In Q3, we were up 7% constant currency in China, despite 94% of our stores impacted either by closures or reduced hours or staffing shortages. So it gives you a sense of the team's agility that I referred to earlier and the ability to kind of navigate that still connect with the consumer while the access is a little constrained. You are right that we don't generally comment on in-quarter performance, and it's only been 3 weeks, but we've been very encouraged by the reopening. We are now up and running everywhere, and we're seeing consumers reengage strongly. So far, I think, double-digit rebound across Mainland China. And we're seeing a combination of, of course, the return of traffic both on -- in our brick-and-mortar and also online and then strong conversion. And why strong conversion? Because the work that the teams are doing on brand desirability in China is really resonating with the consumer, and they're leaving the brand into the local fabric of the Chinese culture in a way that really sets us apart. If you think about what the Ralph Lauren brand is about, right, it's understated luxury grounded in heritage and icons. And that's a pretty unique proposition. And based on where the Chinese consumers' mindset is right now, which is maybe a little less focused on short-term fashion and more focused on brands that have a history to have a heritage and have a set of clear values, that positions us very well. Team is doing a really nice job creating our product line up there, and as we've mentioned in prior calls, we're continuing to see consumers there gravitate towards our highest price items actually around the world. And then we're super excited about the way the ecosystems are playing out in the top six cities that we've called out. Those of you who plan to visit Mainland China in the near term, you can visit our new store in Shenzhen, which we opened a few days ago and is off to a wonderful start. In a store we opened recently flagship in Chengdu, which is also doing quite well. And then this is only about domestic consumption, right? So the other thing that's going to happen is, we're going to see Chinese travelers wanting to shop our brand around the world, and we're in a much better position in terms of brand perception than we were 3 years ago. So I think we'll be able to benefit from that, and we're starting to see some of that in Southeast Asia and parts of Northeast Asia for our business. So promising start, excited about the long-term perspective, and we have a very intentional game plan to win with the Chinese consumer.

Operator:

Our final question comes from Ike Boruchow with Wells Fargo.

Jane Nielsen :

So I think that when we guided in May, we gave guidance based on our best estimate of consumer response and pressures. I think the consumer -- the value consumer that we've called out is more pressured than when we gave our original guidance. And we've also looked at the fourth quarter and want to ensure that we are in good shape as we start fiscal year '24 from an inventory perspective. As we've committed, we're going to have inventories more closely aligned to sales, and that's been responding to the desires of our value consumers to have a really compelling value. Total value for us has made us a little more responsive to that and as well that we want to make sure that we're healthy on inventories as we move out of the fourth quarter.

Operator:

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions on how to ask a question will be given at that time. [Operator instructions] As a reminder, this conference is being recorded. I'll now like to turn the conference over to our host, Ms. Corinna Van Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Corinna. Good morning, everyone and thank you for joining today's call. It was great to see so many of you at our Investor Day in September where we laid out our ambition to be the world's leading luxury lifestyle company. We also outlined our company's next phase of growth powered by multiple engines, which we are calling our Next Great Chapter Accelerate plan. We are off to a strong early start with our second quarter performance, which exceeded our expectations on both the top and bottom line, demonstrating the consistency and momentum of our business around the world. At the same time, we continue to drive a culture of operating excellence as ongoing productivity is an important driver to fuel our near and long term growth. This resulted in another quarter of double digit AUR growth and sales exceeding our plan, even as the broader marketplace became more promotional into the fall as anticipated. Also, as we had expected from the start of this fiscal year, the global operating environment has remained choppy across many of our key markets. Our solid performance amidst this backdrop is a credit to our team's agility and execution as we focus on delivering what we can control. And while we expect this choppiness to continue in the near term, we're encouraged that our core consumer remains generally resilient despite the macro headlines, reflecting increasing desirability for our brand and the attractive value proposition of our products. As we navigate the broader macro headwinds, we're focused on driving our three strategic pillars of long-term growth. These include first, elevate and energize our lifestyle brand. Second, drive the core and expand for more, and third, win in key cities. With our consumer ecosystem and spanning everything we do is our commitment to deliver positive impact in the world across citizenship and sustainability. Let me take you through a few of our second quarter highlights across our plan. First on our efforts to elevate and energize our Lifestyle brand. As we continue to build our business for the long term, we remain focused on investing in our brand to deliver a differentiated elevated message to our target consumers. Consumers perception of Ralph Lauren as a luxury brand remained high at 78% and their perception of our brand's value for money continued to expand both sequentially and versus last year in the second quarter. This is enabling us to both strengthen our existing relationships and recruit new, younger high value consumers around the world. With the growth in our highest value, consumers significantly outpacing our total business. We are leveraging our core brand values and ROI driven marketing strategy in order to connect authentically with consumers and continue to gain market share. This was evident in the second quarter where we continue to focus our investments on driving brand desirability across a diverse range of activities. First, we celebrated the energy and optimism of sport to our annual sponsorship of the US Open Tennis Championships, which were particularly thrilling this year with record attendance levels and a 50% increase in viewership. It was hard to miss Polo on the court and in the audience from our official ball person uniforms made with recycled plastic to our timeless spectator style showcased by celebrities like Anne Hathaway, Diplo, Angus Cloud, and Jamie Foxx. We were also proud to outfit Serena Williams in Vogue, September issue where the tennis legend announced her retirement from the sport. Our 360 degree campaign for back to school drove strong conversion in our Polo Kids business this fall. Our class of RL video in August followed by our women's Polo ID handbag video in September were our top viewed Instagram reels on our Polo handle of all time. We continue to capture key brand moments that resonate with fashion lovers around the world. 2022 was the year of weddings and we were front and center dressing Hollywood royalty like Jennifer Lopez and Ben Affleck along with NBA superstar, Kevin Love’s wedding to Kate Bock. A few weeks ago we hosted our first ever fashion show on the West Coast at the Huntington Library in L.A., celebrities and friends of the brand like Lily Collins, John Legend, Ashton Kutcher and Mila Kunis, Jessica Chastain, Diane Keaton and newlyweds JLo and Ben Affleck joined us in celebrating the optimism and joy of California Dreaming, featuring our full luxury lifestyle brand ranging from RRL to Polo Men's, Women's Kids and Home. And as we continue driving our brand leadership deeper into the metaverse, we launched our first collaboration with Fortnite last week in time for holiday. The popular online game has more than 400 million registered accounts with a strong following among 18 year to 24 year olds. The partnership includes a special collection of digital outfits and two special drops of physical product available in our DTC channels and select specialty retailers around the world. Together these activations are attracting younger full price consumers to our business. We exceeded 50 million social media followers globally this quarter. A high single digit increase to last year led by Instagram. In our DTC businesses, we added 1.3 million new consumers similar to recent trends and our online search trends grew low double digits to last year in Q2, significantly outpacing our peers across our top markets globally led by Polo shirts and fall apparel such as sweaters and fleece. Moving to our second key initiative, drive the core and expand for more. As we work toward becoming the leading luxury lifestyle company, our products all come back to the idea of inviting consumers to step into the world of Ralph Lauren. Ralph and our design teams are capturing the breadth of styles and end users consumers are looking for today from a more sophisticated take on casual comfort to their modern hybrid approach to where to work and social gatherings. Starting with our core product, which grew mid-teens in the second quarter, supported by all key categories led by sweaters, seasonal core knits, sweatshirts and chinos as we discussed our Investor Day. Our core product comprises about 70% of our assortment and is a key competitive advantage in the marketplace. In times of uncertainty, consumers continue to invest in brands and products they know and trust. Our core also establishes the credentials for driving our high potential categories, which include Women's Outerwear and our emerging Home business. Together, these high potential categories grew high teens in the quarter. Women's represents our single largest long-term opportunity for market share gains and category growth. As a company, we are trading her into the brand, including the successful launch of our Polo ID handbag collection. This year we are trading here across by building an offering of essentials like sweaters, sophisticated coats, dresses, and denim that will form the foundation of her wardrobe and expand her lifetime value and we are trading her up to more elevated product through our hybrid styling as only Ralph can with Women's AUR up 20% in the second quarter. Within Outerwear, another high potential category, which now represents about 10% of sales, we are establishing our brand as a go-to player for the category. Second quarter highlights included our quilted Beaton and Harper jackets, cotton twill, city windbreaker, and Terra Packable vest. Our Kids Outwear business was led by the launch of our P Layer outerwear system, a versatile collection of functional outer shells and liners constructed of all recycled materials, other product highlights and special releases. This quarter included our US open collection, which drove our highest sales ever for the event. We also introduced our first US Open Sneaker, which sold out in our stores our NOLA Collection for women inspired by the culture, climate and beauty of New Orleans and our Polo Active Club collection tailored to next generation consumers. The digital campaign was brought to life with skateboarder filmmaker Mikey Alfred and his skate group. From our Polo bear sweaters to a return of tailored dressing. Our teams are consistently delivering the styles consumers are craving in this new normal. Switching to our third key initiative win in key cities with consumer ecosystem, we continue to drive our long-term strategy of investing in our key city ecosystems around the world in the second quarter with a focus on elevating and connecting all our consumer touchpoints across every channel. Each of our ecosystems is led by a digital first mindset representing the best expression of our brand through innovative storytelling, dedicated shop-in-shops and virtual selling experiences. Second quarter sales for our total Ralph Lauren and digital ecosystem, including our directly operated sites, department store.com, pure players and social commerce accelerated to mid-teens growth in constant currency. Our Asia digital ecosystem once again drove the fastest growth globally over a smaller base, up more than 60% in constant currency to last year. Within our own digital sites, sales grew mid-single digits in the second quarter and more than 40% on a two year stack. We continue to drive an increased penetration of full price selling through elevated products and investments in AI powered targeting and high quality new consumer acquisition growth was also supported by the continued launch of new sites, including the recent additions of Korea and Australia. Our digital capabilities also provide true endless aisle connectivity to our physical channels. Indeed, our stores remain a critical component of our ecosystems to build our brand and consumer engagement around the world. We opened 29 new stores and concessions in top cities globally this quarter with the vast majority in Asia, particularly the Chinese mainland. Our brand momentum and opportunities in China remains strong with sales up more than 30% performance was balanced across Hong Kong, Taiwan, and the Mainland despite mandatory closures in the period. As you heard at Investor Day, China provides not only the successful blueprint for our elevated ecosystem strategy globally, it also represents one of several geographic long-term opportunities for our brand. With strong brand momentum, our highest AUR in the world and significant runway for strategic store openings to strengthen our relationship with the Chinese consumer. Looking ahead, the strength we are also seeing across markets like Korea and Australia are just two examples of the diversity of growth drivers that we have around the world. As you heard in September, we remain bullish on our long-term growth opportunities and ability to strategically drive lifetime value across all of our regions. And finally, touching briefly on our enablers. In addition to our strategic priorities, our business continued to be supported by our five business enablers, which we highlighted in September. These include our people and culture, one of our key competitive advantages, best in class digital technology and analytics, superior operational capabilities, the powerful balance sheet and leadership in citizenship and sustainability. I won't go through all of these in detail again, but in the second quarter we were particularly proud to be named one of the world's best employers by Forbes. Our people are at the heart of everything we do. They inspire us to be better and to do better. Just a few weeks ago, our teams around the world came together for our first in-person Pink Pony Walk since COVID. We celebrated the Ralph Lauren Foundation's $25 million grant to fund five cancer centers in the US this year, but it was also a moment for us to reflect on our purpose and what we've been through over the past few years as humans as an organization and the important role we play in our communities. In closing, we are highly aware of the macro challenges across each of our geographies. Ralph and I are exceptionally proud of the creativity, agility, and execution. Our teams continue to demonstrate as we effectively navigate these dynamic times and while we expect the environment to remain choppy in the near term, what gives us confidence to deliver on our commitments are our powerful authentic brand. Ralph built a brand that stands not just for one product but a lifestyle, a dream to aspire to our multi-pronged strategy with diversified growth across regions, consumer groups, categories and channels, and our fortress foundation. With that, I'll hand it over to Jane to discuss our financial results and I'll join her at the end to answer your questions.

Operator:

[Operator instructions] The first question comes from Michael Binetti with Crédit Suisse Securities.

Patrice Louvet:

Thank you and good morning, Michael. So clearly the macro pressures are out there, right? Inflation currency, geopolitical concerns and so on, and you all know them as well as I do, and they're of course top of mind for us. That said, we have a clear game plan and as you mentioned, multiple diversified engines of growth. What I think is really unique for us is the breadth and depth of these growth drivers. It enables agility, so in other words, we have this unique ability to lean harder on some areas of the strategy if others are more challenged, and Q2 is actually a good illustration of that, taking it across the different growth drivers. If you could look at it from the regional side, we were proud that all of our regions grew top line in constant currency and we delivered disproportionate growth, as you heard in Asia where we're seeing the strength of the brand across just about every single individual country, whether that's, out size growth in Korea, Japan, Australia, Southeast Asia, and we're particularly proud of the continued growth in China. Even with a number of our stores closed with China up 30% this last quarter. If you look at this through the channel lens, we're encouraged that the strength in our full price businesses is more than offsetting the softness that we're seeing from our value oriented consumer subsegment, which is more prevalent in our outlet business. And on the product side, we can flex the breadth of our portfolio and I think we've demonstrated our ability to dial categories up or down for the consumers as their needs desires change. For instance, in this quarter think more sports coats and dresses and less hoodies. So our ability to be agile in this way is a real competitive advantage in a volatile environment, which already served us quite well during COVID. And to this end we really believe that this is the time to continue to be on offense, recruit new consumers and continue to take market share. Jane, over to you on North America.

Operator:

Thank you. The next question comes from Matthew Boss with JP Morgan.

Patrice Louvet:

So Matt, what's exciting about this business candidly is how fragmented the market is, right? So our market share is while we have a sizable business in Polo, Men's, Women's and Kids. In relative terms, it’s still very small. So we have incredibly long runway when it comes to market share growth across all three businesses. You will have seen in the more recent share reads that we're continuing to grow share on Men's, were continuing to grow share on Women's Continuing to grow share on Kids, particularly strong performance last quarter on kids' share growth. And I think as we look around the world at what Polo stands for, that the type of products that we have within our lifestyle portfolio and what the consumer is looking for right now, we actually feel that we're really in the sweet spot of consumer demand with the breadth of our range and with the overall positioning across Men's, Women's, and Children's. And I think this is as true in North America as it is across Asia, as you heard me, referred to performance earlier as well as in Europe. So I think we're very nicely positioned on Polo and we're going to continue to invest to bring in more consumers, continue to elevate the positioning across that portfolio. When it comes to your question on wholesale orders and Jane and I will tag team on that in the second part listen, there are a few things I would say about our wholesale partnerships right now. First of all, I am really pleased to see how aligned we are strategically with our key wholesale partners, both in North America and around the world. And that's really enabling us to look at things through a similar lens when it comes to, to growth and value creation. We have seen strong progress this past quarter. You saw North America of 8% strong results in Europe and Asia as well. We are not seeing any pullback on orders or any cancellation of orders around the world with our key wholesale partners. So I would say, Matt, as we, as we said in the guidance, we are not seeing cancellations at this point, but we are more cautious and we took a more cautious stance on our spring buys, given the macro pressures that we're seeing. So while we're very happy with our position in sales, especially in the second quarter, we wanted to be well positioned for the holiday season, overlapping a challenging previous quarter. We are embedded in the guidance, a softer outlook for spring based on those macro pressures. And as we look at in the second part of your question, the visibility that we have in outlet in in Europe, we have seen softer trends and we've incorporated those softer trends into our guidance for EMEA. It's not a one country, one region story. I do think that there is variability in the marketplace. This quarter, Germany performed quite well. We saw some more pressures in in the UK, as you might expect, given some of the inflation pressures, coupled with some political uncertainties. Given the fuel pressures and the outlook we have, we've taken a more moderate view across Europe, but especially in some of the countries like Germany, where we expect gas rationing and fuel prices to be an explicit pressure.

Operator:

Thank you. The next question comes from Gabby Carbone with Deutsche Bank.

Patrice Louvet:

Of course. Thanks, Gaby. So what we're seeing across the competitive environment, we are seeing an increasingly promotional environment, as was expected, there you can see the results as well as we do. There's excess inventory out there and many are looking to liquidate. But our long term strategy, despite the cure the promotional environment has not changed. We're trying to stay agile and mindful of the competitive environment, but we really have multiple vectors of growth across AUR. And I think that that is really serving us well. Saw that show up in our AUR at plus 18% this quarter. And we're really encouraged underneath the covers that despite our higher AUR, within a more promotional context that we've seen, our value ratings from our consumers continue to increase, increase both versus pre pandemic levels and sequentially again this quarter. So for us, that's a key IOR indicator and gives us a lot of confidence. Now that being said, as we have in the past, we build a strategy that has, that is fully aligned with our long term strategy, but has some flexibility in it. We don't, we are not going to overly react to the promotional environment, but we are going to be strategic about it and know that we need to stay competitive. We feel good about that. We feel good about into the second quarter. We've embedded in our guidance, the confidence that we'll be able to offset inflation with pricing. And you can see that in our implicit gross margin guide. So feeling good and feeling good about the consumer, and especially because it's really based on our multi-year elevation work that we've done as well as the reset work we've done. That's really put us on a healthier base. Yeah, increasing desirability, increasing value equation. Those are things that we're driving and we're really pleased to see because that will drive sustained performance. On the product front, Gaby, probably three things I would call out. One is our core is actually doing quite well. It was mid-teens this past quarter, and as we talked that investor, our core is 70% of the company, It's actually not surprising that it's doing well because I think at times where consumers are more discerning on where they spend their money, obviously they're going to gravitate towards brand they know and trust and learn to gravitate towards products they know and trust. So strengthen the core. We've seen really nice performance in our high potential categories, which were up high teens this past quarter in constant currency. The probably the best performer was again, Outerwear where we saw a very strong performance, where we're also very excited to see the progress we're making on Women's across collection Polo Women's and Lauren. And then the last thing I would highlight is the tailored business continues to, to strengthen and improve. So to my prepared or earlier response to Michael's question, we're seeing more sports coats and less hoodies.

Omar Saad:

Thanks for taking my question. Great execution this quarter. I wanted to ask you about some of the new consumers the many new consumers you who joined the Ralph Lauren franchise during COVID I think many of them younger. How, are those consumers performing in this kind of post-COVID era? Are they still kind of behaving with not much price resistance to the brand? I'd also love a quick update on the wholesale channel. Just give us a quick reminder on how you and the wholesale, your wholesale partners are managing inventory planning differently today versus in the past as we're seeing some other retailers and brands out there going to get seeing some pockets of blow-ups and inventory that you're seeing seeming to be able to avoid. Thanks.

Operator:

Thank you. The next question comes from Jay Sole with UBS.

Patrice Louvet:

Very good morning, Jay. Listen, we're really proud of the team's execution in China, actually across the entire APAC region, and we continue to see near and long term brand opportunities in China. What's really working well right now, but has been for a while, right? This is not just a one quarter story, is the fact that the teams are weaving the brand into the fabric of the local culture and translating our core values, our core propositions in a way that's resonating with that younger Chinese consumer, both men and women. And they're taking both global programs that they're translating in the market, and then also complementing that with, with local activities, partnerships with influencers and others. The second piece is the product offering and, and the curating that the team is doing there to really make sure that within the broad range of products that we have, we have items that really resonate with that specific consumer. And I think this Jay, but our highest AUR is actually in China, right? So that's where we're focusing some of our most elevated products and we're seeing very good response from the consumer. The last point is around connected retail, and I think China to some extent is our poster child on connected retail and bringing all of that together digital brick and mortar in a way that is seamless in a way that really meets consumers’ expectations. So those have been the drivers this past quarter have been the prior quarter -- will continue to be moving forward with really a team that's in touch with that, that local consumer understands that local consumers and ensures that we're showing up in a way that's, that's incredibly relevant there. So our Singles’ Day is concerned. So Singles’ Day for us is really more of a brand building opportunity than it is an opportunity to sell a whole bunch of volume. So our game is not high promotional activity. We're not interested in doing that. And over time I think that strategy has worked for us. It's really about brand exposure, brand awareness, brand desirability, and we're in the middle of it. So we will see how ultimately all this has played out, but what we've seen in key events leading up to Singles’ Day is we've actually seen out outperformance consistently. So our encouraged with how China is going, but I, I put in, in the context of the broader growth drivers for the company of course momentum in China, but we have many geographical opportunities in addition to, to what's happening in China. On the repurchase side, Jay, you have seen us be more, more aggressive are guidance supplies about 450 million to 500 million in buybacks a year. In the first half we've repurchased about 390 million in shares. We tend to be fairly ratable, but opportunistic as well. And given the price where it was, often below $90, we felt that was an outstanding time to buy back our shares and so you saw us lean into that. Again, I think we're comfortable with our annual guidance. We might be on the high side of that and remain opportunistic, but it's about the right range for us from a buy back standpoint. Thank you. Next question, please.

Chris Nardone:

Good morning, Thanks for taking my question. Can you elaborate a little bit on your guidance for gross margin expansion in 3Q? Is there any way to provide guardrails around the magnitude on a reported basis? And then also tied to that, can you just discuss how your expectations for markdown activity in your DTC channel has changed compared to when we last spoke at your investor day? Thanks.

Chris Nardone:

Markdowns?

Corinna Van Ghinst:

Last question, please.

John Kernan:

Excellent. Thanks for squeezing me in. Congrats on all the momentum. Jane, how do we think about the implied operating margin expansion for the fourth quarter and then the timing and sequencing of operating margin expansion as we get out of fiscal '23, as some of the, the onetime headwinds roll off and freight maybe FX get a little easier? Thank you.

Corinna Van Ghinst:

Jane. All right. Well listen, thank you everyone for joining us today, and we look forward to reconnecting in February to share our third quarter fiscal '23 results and until then, take care and have a great day.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal Year 2023 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn over the conference to our host, Ms. Corinna Van Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Cory. Good morning, everyone, and thank you for joining today's call. Our strong first quarter performance underscores the resilience and momentum of our business around the world. This follows our significant multiyear reset to transform our consumer base, product portfolio and distribution. These results also validate the strong confidence that Ralph and I have in our teams who are consistently executing with incredible dedication and agility through what continues to be uncertain times. We exceeded our expectations again on both the top and bottom line with broad-based strength across all 3 regions despite macro headwinds from COVID and inflationary pressures in the quarter. Our teams are driving increasing desirability for our brands and products enabling high-quality consumer recruitment as well as retention. Our proven ability to drive a strong value proposition for our consumer, which has strengthened over the last 4 years of our strategic plan is an important advantage for Ralph Lauren, especially through times of macro uncertainty. We are obviously highly attentive to the volatility highlighted recently by our retail peers across the price spectrum. And while we are not immune to broader macro headwinds, we remain focused on what we can control. We have many areas of strength that include a powerful, differentiated brand that we continue to invest in, a strong core business that is resilient through challenging cycles, a more flexible expense structure, a diversified global supply chain with proven agility and discipline in our inventory management and a robust balance sheet, which enables us to make the right decisions for the long-term health of our business. And while we continue to adapt to shifting macro developments, this strong foundation gives us confidence as we drive our business across multiple engines of long-term growth. These include

Operator:

[Operator Instructions]. The first question comes from Jay Sole with UBS Securities.

Patrice Louvet:

Well, thank you for your question. Yes, it has been a more challenging operating environment. And as you heard us talk about in the prepared remarks, we do expect more choppiness ahead given the various macro signals. But we still have strong confidence in our game plan and our ability to navigate and execute successfully through this choppiness. As you know well, we've been repositioning this company for the past 4 years to establish a very strong, broad foundation with multiple engines of growth ahead. And I will highlight 4 clear sustainable advantages. The first one is an iconic lifestyle brand. With consumer metrics like desirability that are improving in every market, as you know, we track our brand perception in our top 7 markets monthly and we continue to see strengthening across the board. And we have millions of consumers joining our brand every year. This past quarter, we had 1.3 million consumers join us on top of over 5 million last year. The second element is the unique breadth of our product offering. We're really the only brand that can credibly offer categories from sneakers to tuxedos, which means we have the ability to dial up and dial down specific elements based on consumer demand and desire. The third is a clear and regionally balanced go-to-market strategy so that even if one region is adversely affected, we're diversified across market and can offset in other parts of the world. And I think we've also proven our ability to rebound quickly as recently demonstrated again in China where you saw that we were able to deliver strong performance given half of our stores were closed for the majority of the quarter. And the fourth area I would call out is a diversified and agile supply chain. There's been work that's been going on for the 5-plus years to really establish that. And that has proven to be both a huge asset and a major competitive advantage for us as we navigate this [indiscernible] world. And supporting all of this work, we have an organization that is engaged, that has fully embraced operational discipline, as you've seen with our continued margin expansion versus pre-pandemic levels. So net-net, I would say we're staying in touch, of course, with what's happening. And while we're not immune to macro pressures, we are staying focused on the medium and long-term direction for the company. If I had to sum up where our current position is in 3 words, I would say offense, agility and pragmatic. Offense, to maintain and fuel our momentum. Agility, as we face a continually volatile operating environment and pragmatic and choiceful about where we use our resources to ensure we continue to build our brand and our market position for the long term.

Operator:

The next question comes from Michael Binetti with Credit Suisse.

Jane Nielsen:

Sure. Thanks, Michael. We were pleased with the performance this quarter, and it really helped us to maintain our full year constant currency guidance in the context of a lot of macro choppiness out there. And as you would expect, we're actively scenario planning around the consumer. And I'll get to your value consumer at the end. But I did want to just walk you through some of the puts and takes on the guide for fiscal '23. First, on the top line, really, our positive performance trends in international gave us some flexibility on the full year as both Europe and Asia came in stronger than we initially expected back in May. China was largely locked down, as Patrice mentioned, in Q1, but was offset by the strength in other countries, Korea, Japan and Australia, all performed extremely strongly through the quarter. So we were very pleased with that. And Europe also trended well despite the known political and consumer macro headwinds there. So we're pleased with Europe through the quarter and have been cautious entering the year. And while we see North America on a nice, healthy mid-single-digit growth trajectory, we are adding some additional caution around the value-oriented consumer. This really speaks to the inflationary headwinds and weaker consumer sentiment that's out there. We're not naive about what's happening to that consumer from a macro standpoint and wanted to make sure that we were building that in overall. And I say that for the guidance, this all speaks to our diversified engines of growth and gives us confidence in continuing our strategy despite a more uncertain environment. And our margins, clearly, we're managing through cost inflation that we've communicated over the last several quarters. But there are some signs of relief on the horizon. I don't think they'll impact fiscal '23. But given we've got proven pricing strategies, we've reengineered many aspects of our cost structure, and we are laser focused on ROI. We feel pretty balanced on our margin guidance at this point. So in terms of the second part of your question around the value-oriented consumer, we think that we're watching the macro developments carefully. And Q1 was solid. As you saw, we had positive comps in factory. But we saw outperformance in our full-price stores as that consumer remained healthy and robust. And so with that disparity -- which has been happening over the past 5 quarters. So this is not anything new. But given that disparity, we thought it was prudent, given what's happening with that consumer externally to take a more cautious approach in the back half, notably on that consumer. So we feel good about where we're at. We feel about good maintaining our full year guidance. And I do think we've derisked the back half of it with that -- with some caution around that value consumer.

Matthew Boss:

So Patrice, on the multiyear foundational initiatives that you walked through and that you've put in place, when do you believe you saw the inflection in the organization that for this year supports your reiterated 8% constant currency top line forecast, and that's despite the dynamic macro backdrop? But then also, how do you see these initiatives as accretive multiyear if we're thinking about your sustainable top line plan, which I think in the past was cemented in the low to mid-single digits?

Jane Nielsen:

Yes. I think there are a few pivotal moments that we've seen as we really started to develop multiple engines of growth through the post-pandemic period. One was, as China came back after -- and we had pivoted to extensive digital growth, we continued digital growth and saw a big acceleration in comps. So that was, I think, a pivotal moment for us in APAC. In Europe, as we went into the pandemic, you saw very strong e-commerce growth that was based on new consumer acquisition at higher operating margins. I think that was a pivotal moment in Europe. And then in North America, starting in Q4 of '21, our sellout went positive in wholesale has maintained positive along with share gains and pricing increases. And at the same time, we started to really move having reset our business in RLE and you saw nice growth and big margin movements in RLE in North America. I think that Q4 '21 was also a pivotal moment, and those all give us confidence in the pivot to strong positive growth that we're guiding to this year.

Dana Telsey:

Nice to see the progress. Jane, you just mentioned what I was thinking about is wholesale and the pickup in strength in wholesale that you've been seeing across the board. How do you think about that as different drivers in each region? Is there different reasons for each? Is it the refurbishment of the in-store shops in terms of what you've been seeing? And then to pick up on that, on your 30 key cities retail store network, where are you in that redevelopment?

Patrice Louvet:

And Dana, I would add to Jane's perspective on the top 30 cities. What's interesting, particularly when you look at the luxury landscape right now and I was in the conversation earlier this morning on this topic where you see a number of luxury players pivot from China to the U.S. in terms of investments. For us, as we look at our top 30 cities, they're pretty balanced across the 3 key regions that we operate in. And the U.S. still represents significant white space opportunity for us. So we're going to double down on that opportunity but continue to invest in APAC, continue to invest in Europe. We recently opened a couple of stores in the Berlin area, which is a key iconic cultural city for our brand. So I think you can expect that to be pretty -- it continue to be a broad-based effort across all 3 key regions for us.

Omar Saad:

Congrats on your continued success. I wanted to do a quick clarification, Jane. Did you say the spread between full price and outlets was widening? Or that was just maintaining the same level? And then I wanted to ask for a little bit more detailed response around China. It seems like you guys are putting up really strong numbers there at a time when others are struggling, given the lockdowns. Is it fair to say that the brand is at an inflection point in China? And if so, why now?

Patrice Louvet:

And when it comes to -- Is there anything else you want to add? No? When it comes to China, yes, we are very pleased with the work that our teams are doing in that market and the performance we are delivering. I don't know, Omar, that I would talk about an inflection point. We are seeing a general pace of growth that is quite healthy and strong, right? Digital was up 40% this past quarter in China, despite all the delivery challenges because of the lockdowns. I think if you boil it down to the 3 key drivers for us, the team is doing a very nice job on the brand front, balancing global storytelling like our recent publisher's initiative, along with working with local influencers and local content and messaging. And I think that's really weaving the brand into the local culture in a way that is bringing in more consumers, younger consumers, more elevated consumers. On the product front, I think the gang is doing a great job curating our global lineup to really make sure that we're delivering along the more elevated expectations of that customer. And we're seeing a really nice balance between our men's and women's business. It's actually the more balanced split that we have across the world. And actually, the Chinese market is a great source of inspiration for us as we continue to elevate our product. And then we touched on it a couple of times earlier in this call, but the power of the ecosystem, right? And I actually think there's a virtual cycle there, as we build capabilities on the digital front as we establish iconic store presence that just consistently builds on itself and get stronger and stronger as time goes by. So listen, we're not out of touch with the realities of lockdowns and things like that. But we feel like the brand is really nicely positioned in China at this point. It's something we're going to continue to invest in. And the key for us is to really stay in touch with that local consumer.

Operator:

Our final question comes from Chris Nardone with Bank of America.

Patrice Louvet:

Sure, Chris. So it's actually really interesting to see what's happening with the consumer right now. And we're actually really uniquely positioned to capture the consumers evolving wardrobe choice. Because what we're seeing is a combination of reinvesting in core wardrobes. So specifically, that's products like sweaters or denim and then a pivot towards newness and elevation and sophistication, right? So the pivot towards newness for us will translate into more elevated cashmere sweaters, for example, or a novelty and matching . And then you have consumers not going out during the day, right? And it's still early days on that journey, and therefore, a need for greater outerwear and need for greater dresses and need for greater sports coats. And then we're also seeing more evening activities more going out. So obviously, that's supporting and impacting our overall evening where more dressier parts of the portfolio. So general direction of travel is elevation for your sophistication. Chris, when I look at categories, there are no categories where we feel we are heavy, if I could use that terminology. I think the team has done a nice job managing inventory across all of these, and that's the result of shorter lead times, greater agility, greater diversification in our supply chain. But very clearly, we are seeing the consumer pivot towards more sophisticated, more elevated products versus what we saw during COVID, that was much more athleisure reliant. All right. Thank you for that question, Chris. Well, thank you for joining us today, and we look forward to sharing our updated strategic plan with all of you mid-September, September 19. Until then, stay safe, and have a great day.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Fourth Quarter and Full-Year Fiscal 2022 Earnings Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Cory. Good morning, everyone, and thank you for joining today's call. We are pleased to report strong fourth quarter and full-year results that exceeded our expectations on both the top and bottom line. This year's performance underscores the strength of our business and desirability of our brand around the world, with both strong loyalty among our existing consumer base and enabling new high-value consumer recruitment. Ralph and I are inspired everyday by our team's engagement, agility, and execution, which is driving this progress. As we enter fiscal '23, our consumer remains healthy and motivated to invest in the timeless quality products we have always stood for. While we consistently adapt to ever-changing macro developments, our strong brand momentum will continue to be supported by multiple engines of growth. These include, first, continuing to drive brand heat and desirability with increased marketing investment and a combination of iconic lifestyle campaigns and precision marketing. Second, leveraging our unique, multi-category lifestyle proposition to drive the mix of sophisticated and casual dressing consumers crave. As we look ahead, there remain significant opportunities for category expansion and continued product elevation. And third, rolling out key city ecosystem strategy, which integrates a brand-elevating, cohesive consumer experience across our touch points. Originally developed in Asia, we're still in the early innings of scaling this model across each of our regions, including North America. Within this ecosystem, we lead with digital commerce, which continues to represent a significant growth opportunity while already solidly accretive to every region's profitability. Woven into all of these engines of growth is our focus on delivering positive impact in the world, across citizenship, and sustainability. Our fourth quarter performance was a great example of the continued progress we're making across these priorities as we pivot to growth while maintaining our culture of productivity. Despite macro headwinds from COVID, the devastating war in Ukraine and significant inflationary pressures, we expanded operating margin and each of our regions reported strong double-digit top line growth fueled by digital. Let me take you through a few of our fourth quarter and fiscal '22 highlights across the strategic pillars of our Next Great Chapter plan. First, on our efforts to win over a new generation, from our iconic brand moments at the summer and Winter Olympics to our launches in gaming and the metaverse, consumers around the world are connecting more than ever to our brand positioning and product portfolio. We're also strengthening our relationships with higher-income consumers across both our new and existing consumer base. This was particularly evident in the fourth quarter where we shifted a significant portion of this year's investments to drive brand desirability across a diverse range of activities. First, this March marked our celebratory return to the runway at New York's Museum of Modern Art, where our men's and women's fashion show immersed viewers in the world of Ralph Lauren, as only Ralph can. On stage and in the audience were faces familiar to the brand, including Janelle Monáe; Gigi and Bella Hadid; Emily in Paris' Lily Collins; New York City Mayor, Eric Adams; and our newest fragrance ambassador, Angus Cloud; from the hit show Euphoria. As we continue to amplify our events globally, we delivered our most successful TikTok campaign ever around the show, with our largest growth in new followers on the platform this year. You may have seen our exciting partnership with Morehouse and Spelman Colleges this quarter, honoring the legacy of HBCUs and their contribution to the culture of American fashion. Inspired by the rich heritage and esteemed traditions of these two schools, this creative collaboration is just one example of our commitment to evolve how we portray the American dream in the stories we tell and the faces and creators we champion. The collection, conversation, and press surrounding this collection sparked strong consumer engagement and traffic to our North American digital flagship in the quarter. And we continued to strengthen our leadership in the world of sports through our high-visibility sponsorships of the Australian Open and Team USA at the Winter Olympics. This year's events were particularly thrilling as we celebrated the spirit of optimism and aspiration that these sports represent consistent with our brand values. These activations not only drove another quarter of strong top line growth, but also helped recruit younger, full-price consumers to the brand, particularly on our digital channels. New consumers on our digital sites grew more than 70% to LLY, including an increased penetration of under 35 higher-value consumers. Our online search trends also grew double digits to last year in Q4, significantly outperforming peers globally. Looking to fiscal '23, we will continue to drive this momentum and desirability with iconic brand moments in sports and culture across our portfolio, all of which you will see amplified across our global campaigns. Touching on our second key initiatives, energize core products and accelerate high potential underdeveloped categories. Ralph Lauren is one of the few brands in the marketplace with the authenticity, [Technical Difficulty], and credibility to deliver products across a range of lifestyle categories. As Ralph likes to say, the brand is not about chasing fast trends, but rather about living. And I can't think of a moment where this has been more relevant as consumers come together again with a return to pre-pandemic activities. Our design team is leveraging the breadth of our portfolio to create products that our consumers can live in and feel confident in regardless of what the new normal looks like for them. In the fourth quarter, consumers gravitated back to more sophisticated, luxury, and formalwear looks, while we also continued to drive a mix of elevated, but comfortable casual styles. As we continue to drive brand heat and new consumer acquisition, special collections this quarter included the Polo Color Shop, our pre-Spring ode to the easy luxurious style of the Côte d'Azur; our Morehouse and Spelman Colleges Collection, which sold out almost immediately; our Team USA Olympic styles featuring Intelligent Insulation technology and inspiring our next generation of outerwear; and our Lunar New Year gifting celebrating the Year of the Tiger. We were also proud to open our first iconic World of Ralph Lauren home shop at Harrods this quarter, with more to come as we build on this high-potential category. And in April, we launched our first unisex fragrance, Polo Earth, with consciously designed vegan fragrance featuring sustainably sourced ingredients and recycled packaging. Shifting gears to our third key initiative; drive targeted expansion in our regions and channels. We continued our long-term strategy of investing in our key city ecosystems around the world in fiscal '22, with a focus on elevating our touch points with the consumer across every channel. During the year, we opened 122 new stores and concessions in top cities globally. This fiscal year marked our first emblematic concept stores in China, in Beijing and Shanghai, our first European flagship opening, since 2010, in Milan, and our first slate of full-priced North America store openings since 2016. The vast majority of our store openings continue to be in Asia, and particularly the Chinese Mainland, where our brand momentum remained strong despite recurring COVID lockdowns. Our fourth quarter Mainland sales were still up more than 25% to last year in constant currency. And our Lunar New Year performance across the market significantly outpaced the competition as we continue to build our brand for a local audience. We further expanded our successful key city ecosystem model to other markets around the world this quarter. In North America, we just opened one new full-price store in Century City, Los Angeles, and relocated one store in Bal Harbour, Miami, for a total of eight new full-price openings this fiscal year. Overall, coming out of fiscal '22, we are strongly encouraged that North America's turnaround is well underway as we fire on all cylinders following our final phase of major distribution resets over the past year. Moving to our priority of leading with digital, sales for our total Ralph Lauren digital ecosystem, including our directly operated sites, departmentstore.com, pure players, and social commerce grew low double digits in the fourth quarter, a more than 80% to LLY in constant currency. For the full-year, digital grew more than 40% to last year, and 65% to LLY, reaching 26% of total revenue. This is consistent with our penetration levels during the heights of COVID, when store were closed. Within our own Ralph Lauren digital sites, sales grew 18% in the fourth quarter, and more than 70% to LLY. We continue to drive strong full-price selling as we deliver the right mix of product and invest in AI-powered targeting and new full price consumer acquisition. We also launched new localized digital commerce sites to support our ecosystem expansion globally. This includes our first digital flagship in Australia and the Middle East as well as 15 new ship-to destination largely across broader Europe. During the year, we expanded on the connected retail capabilities we launched during the pandemic, from virtual selling appointments to endless aisle product availability. Looking ahead, we will focus on scaling these capabilities along with our full catalog mobile app launched this past holiday to provide our consumers with a seamless elevated brand experience across every touch point and our entire portfolio. Moving to our work to operate with discipline to fuel growth, our teams have operated with incredible agility to mitigate emerging macro challenges, delivering both growth and operating margin expansion again in the fourth quarter despite increased cost headwind. In addition to implementing a culture of operating discipline across our company, over the last 24 months we have driven further efficiencies in how we operate. From the launch of digital product design and virtual showrooms to digitizing our supply chain in order to enable real-time visibility and planning, we also continue to make significant strides across our global citizenship and sustainability commitment over the past quarter and fiscal year. Let me highlight a few high impact initiatives, meaningfully progressing towards our target of at least 20% under represented race and ethnic groups on our global leadership team by 2023. Delivering $2 million donation in scholarship for students at historically black colleges and universities through their Ralph Lauren Foundation, launching the U.S. Regenerative Cotton Fund to support long-term sustainable cotton production in the U.S., unveiling color on demand, the world's first scalable zero waste water cotton dyeing system, and bringing to market CLARUS, a first-to-market patented technology and critical step in scaling our use of recycled cotton. And recall that in fiscal '22, we incorporated key ESG metric into our executive compensation plan for the first time. In closing, this year has been an exciting chapter on our journey to elevate our brands and pivot to offense. Ralph and I are proud of and encouraged by the passion, collaboration, and execution of our team. Together we have fundamentally repositioned our business and are already starting to yield positive results across our multiple engines of growth. Looking ahead, we have strong confidence in this growth model. And we'll continue to invest behind this year's momentum to deliver long-term value creation. We remain keenly focused on what we can control while continuing to navigate in uncertain global environment. We look forward to sharing more with you at our Investor Day on September 19. And with that, I'll turn it over to Jane to discuss our financial results. And, I will join her at the end to answer your questions.

Operator:

[Operator Instructions] The first question comes from Matthew Boss with JPMorgan.

Patrice Louvet:

Thanks, Matt.

Patrice Louvet:

Sure. Well, good morning, Matt. Few things I would call out here, first of all, I think as all of you know, we significantly repositioned our company over the past couple of years, right? And we're coming into this new fiscal year with strong momentum. We now have multiple engines of growth, and we're delivering growth across every brand, every channel, every region, with opportunities for continued acceleration across each of them. So, our game plan is working. And I believe our deep brand strength, our demonstrated pricing power, and more diversified growth strategy becomes even more important during these turbulent times. There are few things I would call out. One, our consumer remains strong around the world, all right? And as we recruit new consumers, you saw this past quarter, we recruited 1 million new consumers, 5 million over the past fiscal year. We've been fundamentally pivoting our base towards higher-value full-price consumers who are less promotion/price sensitive. Second, as we've talked in prior calls, our designers and our merchants have been spot-on with this post-pandemic style of dressing and our products are driving desirability as they leverage the full breadth of our lifestyle portfolio. Third, our supply chain is built to be flexible and resilient. There's been a lot of work that's gone on over the past two, three years to get us there. And we now have proven our agility over the past couple of years, and I think I have a lot of confidence going into the continued turbulent environment. And then lastly, we've built a culture of cost discipline in the company, and we continue to drive value through productivity as well. So, listen, of course, we're grounded in reality and we're tracking closely consumer sentiment, bigger cost headwinds, including FX as well as COVID trends, particularly what we're seeing in Asia right now. We're not immune to any of these, but in this context, we are in the strongest position we could be in terms of what we can control moving forward. Now, specifically on the space that we play in, and you know, we've been on the brand elevation journey now for multiple years, right, working to get closer to the luxury groups. And so as we look at the consumer in that space right now, and this is both a reflection of what we're seeing in North America, but also in Europe and in Asia; that consumer is strong, that consumer is engaged in our category. And we're actually seeing some really interesting things in terms of purchasing pattern. We're seeing a combination of reinvesting in the core -- core wardrobe, so think of sweaters, think of denim. And then we're also seeing the consumer pivot towards newness and sophistication, examples for us would be cashmere hoodie or a novelty fleece. And then, and I think this characterizes the broader population, consumers starting to go out during the day, so there's a need for a sports coat, there is a need for auto wear, there's a need for dresses, and then the return to social activities in the evening or on the weekends. So, that that whole space for us continues to be healthy, continues to grow. And if anything, we're actually very energized by the diversity of the opportunities that we have as consumers pivot their apparel needs in this kind of new normal. Polo, within that, which is at the heart of our company, is actually really in a sweet spot when it comes to serving these needs nicely and competitively. And that's both the combination of our very strong core products, right, that's really a foundation for this company is our core propositions. And obviously, as I mentioned earlier, that taps into consumers reinvesting in their core. And then also, we're seeing some really nice elevation and innovation across a number of different categories within the Polo brand, whether that's Polo women's, with all the wonderful work that the team is doing on dresses, for example, or broader propositions, and all the work that our Polo men's and our Polo kids teams are also doing to serve this more elevated, more sophisticated consumer need right now. So, we actually think, well, the Polo brand is really well-positioned within this total addressable market and from everything we're seeing so far in market, consumer healthy and strong in that space.

Operator:

Thank you. The next question comes from Michael Binetti with Credit Suisse.

Jane Nielsen:

Sure. Thanks for the question, Michael. Let me start with the first, about our guidance. We are comfortable with our fiscal '23 guidance at this point. Our momentum and our track record of expanding both our gross margins and our operating margins through our Next Great Chapter plan are really a strong foundation for our fiscal '23 guidance. And as you saw, our business trends are good. Now, clearly, we're watching the macro headwinds very carefully. So, as we thought about our guidance, particularly in gross margins and in operating margins, we really tried to take a balanced approach, balancing both risks and opportunities that we saw and we tried to do this across our guidance. We are encouraged as we look ahead. And let me give you a few reasons why. First, our consumers are resilient. They're at the higher end of income demographics, and they've proven, through COVID that their desire for the brand has increased and that they've come back repeatedly. Second, our value perception, our quality score, and our purchase intent have strengthened through the pandemic, even with the backdrop of us taking pricing up 50% over the last two years. So, quality, value, and purchase intent all up in the face of that kind of pricing; that gives us tremendous confidence. And third, we are maintaining new consumer acquisition momentum of younger and higher-quality consumers through this journey, and we intend to continue that and investing in that. And that's a very important part of our gross margin journey. And then finally, our team, obviously, they've managed through disruptions and headwinds, and have done so with great agility. And we have confidence in our ability to navigate the macro headwinds doing that. We're confident in these drivers to expand our gross margins this year and beyond, and feel that we're on a very solid ground to achieve our mid-teens operating margin, that's our longer-term goal. And feel that this year will put us a step closer to getting to that goal. Now, on North America wholesale, what you've seen, in up 1% in terms of overall, there is about 20 points of headwind from Chaps in that number. So you will recall, Michael, that we took Chaps out of our owned and operating model and we moved it to a license model, that impact is sitting on North American wholesale growth. Without that impact, we would have been up mid-20%. Now, that is going to continue. We lap out of that transition in August, and there is about $17 million of revenue in the first-half of fiscal '23. So, you will see that continue, but we expect the underlying growth in wholesale to be quite healthy, and we're very encouraged by the progress that we're making there, but you will see that in the first-half of fiscal '23.

Corinna Van der Ghinst:

Thank you. Next question, please.

Omar Saad:

Thanks for taking my question. Good morning.

Omar Saad:

Great numbers on the digital side, you have a lot of momentum in that channel. Maybe you could elaborate on that integrated market digital strategy that you talked about earlier on, developed with China, rolling it out to other markets. Maybe you could talk about how it operates? Why it's so effective? And where you think the biggest opportunities are in that owned digital channel? Thanks.

Jane Nielsen:

And Omar, on your question about local sites, we opened up 20 local sites this quarter. They tend to be smaller markets. We opened North Africa, the Middle East, some larger markets; Australia, and Korea were also local sites that we opened this quarter. It was one of our key investments as we exited the second-half of this year and will continue as we move into next year. So, we're very pleased with our ability to reach digitally new markets in local language and local shift to addresses and we think that's going to be a very positive driver as we move forward.

Operator:

Thank you. The next question comes from Laurent Vasilescu with BNP Paribas.

Jane Nielsen:

So, we don't guide our regions exclusively, but we think that North America is positioned for strong growth as we move forward. We are very pleased about North America becoming an engine of growth. We expect Asia to be driven by the reopening of Japan, which would have significant market shutdowns through this year. And also China, while we contemplated the shutdowns in Shanghai and some of the key cities for Q1, which are material, Shanghai alone is 40% of our China business. We still expect strong double-digit growth as we exit the year, this year for China. We've seen China being very resilient through COVID. Our consumer scores there are some of the highest we have around the world, and we have seen very strong continued digital momentum even store comps have come back. So, we are very bullish about our China business. You saw it very sequentially strengthened this quarter. We are realistic about the impact of the shutdowns, but we have contemplated that for Q1, and still expect strong double-digit growth in China.

Operator:

Thank you. The next question comes from Bob Drbul with Guggenheim.

Jane Nielsen:

Sure. Thanks for the question, Bob. You saw our inventory increase in the fourth quarter. That was two factors. One, over the past three quarters, our sales numbers has significantly exceeded our inventory growth numbers. And so, this quarter we move to reset some of our inventory level. In addition and as I think as we've talked about, we made a move to take inventory earlier, especially for our wholesale account. And so, to address the challenge that you said, we want to maximize full price selling in our wholesalers. And so, you've seen us take inventories earlier. And hold it longer due to some of the supply chain delays that we are still experiencing and expect to experience through the first few quarters of this year. We have seen great partnership with our retailers. They are appreciative of our moves to secure their inventory and supply. And we feel great about our wholesale inventories. While they were up 16% this quarter, our sell out was up almost mid 20%, so, very healthy inventory, and no resistance at all in terms of taking our assortments and truly great partners in terms of our move to secure inventory for them.

Operator:

Thank you. The next question comes from Jay Sole with UBS.

Jane Nielsen:

Sure. Thanks for the question, Jay. As we look at our capital allocation priority, it really hasn't change. So, number one is to invest in our business. And you saw -- take our CapEx up largely for growth-oriented initiatives, new stores. We are planning to open 200 new stores this year, which is a big step up from this year. We opened about 122. Digital infrastructure is an area of investment. And we feel great about digitizing our supply chain which is an important productive initiative. So, we are investing in our business and that's our first priority. From a balance sheet capital allocation perspective, first take up our dividend 9%, and we are committed to returning excess free cash flow to shareholders. We repurchased about $450 million of shares last year. We still have 1.6 remaining on our authorization. And expect to be able to continue -- returning excess cash to shareholders through this year about the same level you saw us do last year. So, we are encouraged by the health of our balance sheet. And we are encourage by our opportunity to invest in our business.

Operator:

Thank you. Our final question comes from Chris Nardone with Bank of America.

Jane Nielsen:

Yes. So, we are encouraged by the underlying growth of our Europe business as we moved forward. The biggest impact that we see is FX. While we did see some pullback in Q4 with the war in the Ukraine, we are seeing consumers subsequently respond well and see nice traffic into our stores. So, we are encouraged by the European consumer. The underlying growth we expect to be consistent with our long-term guidance which was in the mid single digit range. And we expect Europe to be in that range this year -- mid to high single digit range this year. And we've fully contemplated some of the impact of the Ukraine war and impact to European sentiment in their guidance. It was about 1% of sale when we stopped shipment to Russia and Ukraine, and probably another percent in terms of overall overhang of the war to consumer sentiment.

Patrice Louvet:

Well, listen, thank you everyone for joining us today. We look forward to sharing our first quarter fiscal '22 results with you in August. In the meantime, stay safe and have a great day.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third Quarter Fiscal Year 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Cory. Good morning, everyone, and thank you for joining today's call. We were pleased to report strong third quarter performance during the important holiday season. Our better-than-expected results across all 3 regions are a testament to the outstanding work our teams have done to fundamentally reposition our business, elevate our brand and pivot to offense, including in North America, where our turnaround is well underway. Our significant reset work is behind us. Our brand is strong, and our growth is supported by multiple levers, from geographic and channel expansion to recruiting new higher-value consumers and developing high potential product categories. While we expect these growth levers to be sustainable and deliver in the future, they are already driving profitable growth, with all of our regions reporting positive increases to last year and pre-pandemic levels. And we delivered this broad-based performance while many of our markets around the world are still managing through the impacts of COVID. Let me share a few highlights from the third quarter across the 5 strategic pillars that we outlined at the start of our Next Great Chapter plan. First, on our efforts to win over a new generation, consumers around the world are connecting more than ever to our brand positioning and product portfolio. Together with our multifaceted strategy for demand creation honed through the pandemic, we are engaging both new and existing consumers in exciting ways. This is particularly evident in our fiscal third quarter, where we shifted a significant portion of this year's investments to drive brand momentum across a diverse range of activities. From celebrity activations to the metaverse, we drove a significant increase in digital share of voice globally. These activations not only drove our strong top line outperformance in the quarter, but also helped recruit younger full-price consumers to the brand, particularly on our digital channels. New consumers on our digital sites grew 58% to LLY, including an increased penetration of next-generation under 35 and higher-value consumers. For the critical holiday period, our brand tracking data showed that our high-impact campaigns further increased consumer perceptions of Ralph Lauren as a key destination for gifting in all regions. Online search trends across our family of brands also grew strong double digits the last year, significantly outperforming peers in our largest markets in Q3. Some of the innovative holiday campaigns that drove brand heat and enabled consumers to engage with and shop our brand in new ways included

Operator:

[Operator Instructions] The first question comes from Michael Binetti with Credit Suisse.

Patrice Louvet:

Sounds good, Michael. Listen, on the first part of your question, I would outline a few things. First, we have fundamentally repositioned our business over the past couple of years. And this is clearly visible through the performance, not just this quarter, as you highlighted, but also over the prior quarters. And clearly, as Jane closed in her opening remarks, the company is back on offense. And so based on that, I have a lot of confidence in our ability to comp this year's outsized recovery growth and deliver sustainable growth ahead. Here's why, our company is fundamentally healthier than it was 2 years ago. If you look at the different elements, the brand is elevated, it's strong, it's desirable around the world. We're bringing in a younger, higher value consumer, less price-sensitive consumer. And our growth is broad-based

Operator:

The next question comes from Beth Reed with Truist Securities.

Jane Nielsen:

Of course. As I said, we were very pleased with our Q3 performance, and we're pleased that we've been able to raise our gross margin outlook again this quarter all in the context of comping last year's outsized gross margin gains that were primarily channel mix-driven, offsetting this year's supply chain and logistics pressures, and we're able to raise gross margin while still gaining momentum across all of our regions even on a pre-pandemic basis. So very encouraged. This holiday specifically, what drove our outsized performance was really our consumers, which shopped early and shopped at full price. So we got ahead of the curve on the holiday, and we maintained that momentum through the holiday without pulling significant promotional levers. We were much less promotional this year than we were last year. I think that's based on the desirability of our brand. We're seeing that in the consumer scores that Patrice mentioned and very strong reaction to our products. So very encouraging there. As we think about the long term, we really have multiple tailwinds to leverage. And again, given our view of the upcoming inflationary cycle, we feel well positioned to leverage them. First of all, there's the increasing desirability of our brand. Second, there's the new full-price consumer acquisitions that we're doing

Operator:

The next question comes from Laurent Vasilescu with BNP Paribas Exane.

Jane Nielsen:

Yes. Laurent, let me take the first part of your question. Yes, it was 700 basis points to full company and obviously much more significant to North America, and about 15 basis points -- 15-point impact in North America. As we move forward, when you think about the resets, we'll anniversary the department store exits this year along with the daigou reset as we come out of the fourth quarter. There will still be some pressure, notably in wholesale, because of our Chaps conversion to a licensed model. And that pressure point will be notable in North America in the fourth quarter. So it's important to look at those resets. The fourth quarter is meaningful. And then, of course, we lap out as a total company of Club Monaco as of June. But you're right to keep a look out, especially in North America on that reset impact in the fourth quarter.

Operator:

The next question comes from Matthew Boss with JPMorgan.

Patrice Louvet:

Sure. So listen, on product, the first thing I would call out is that our lifestyle positioning, the breadth of our offering really puts us in a strong competitive position to flex with consumer needs and their wardrobe evolution. And I think that's a real differentiating point for our company relative to many peers in this industry. The second thing I would call out is the fact that we've seen a new product apparel cycle start in the spring -- and I think we talked about this together last time, and accelerate in the fall. And what's exciting about it, I think it's still very early innings with many tailwinds ahead because the consumer hasn't really fully returned to work and certainly hasn't fully returned to more regular external activities. So what we're seeing on the hybrid approach by consumers is, on the one hand, a replenishment of their core wardrobe, and on the other hand a gravitation towards newness and sophistication. Let me peel the onion a little bit on that to give you a specific product category examples. So replenishing core elements of the wardrobe, those are things like denim, sweaters, those types of products. On the pivoting towards newness and sophistication, there are 2 things I would call out. One is the elevation of casual looks, right? And this is clearly driving newness in our assortment. To give you a specific set of examples, cashmere hoodies, novelty and matching fleece, for example. And then the other element to call out here is items to wear outside of the house, right? Items to wear outside of the house during the day. So we're seeing a significant pickup in our sports coats, we're seeing significant pick up in our outerwear. And then elements to wear in the evening as people go out. Now that's a smaller part of our business, but it has an important halo effect overall. So those are evening gowns and tuxedos. We, based on where the consumer is and where the consumer is going, are uniquely positioned to serve this hybrid need and expectation. And as I mentioned a couple of minutes ago, we expect this to continue, and I think this will be actually a really nice tailwind based on how we are positioned.

Operator:

The next question comes from Erinn Murphy with Piper Sandler.

Jane Nielsen:

Yes, Erinn, thanks for the question. Taking a step back, we really expect our growth to come from AUR growth, as you noted, unit growth in targeted high-value areas. Over the past several years, we've been on a journey to restructure our business and really move away from low value, low AUR units and transition into higher value, higher AUR units. So our exiting of the lower wholesale doors, our licensing of Chaps, we really transitioned those units and are moving into units, like the elevated product assortments

Corinna Van der Ghinst:

Let’s go to the last question, please, Angela.

Paul Lejuez:

You guys have talked about bringing more new customers to the brand several occasions. I'm kind of curious what those customers are buying? How are you hooking them into the brand? And I'm also curious what that younger customer wants from the brand, how that might be different from your older customer and how that might differ by geography.

Operator:

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter Fiscal Year 2022 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a Question-and-Answer session. Instructions on how to ask a question will be given at that time. . As a reminder, this conference is being recorded. I would now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Corrie. Good morning, everyone. And thank you for joining today's call. We were delivering strong progress on our fiscal '22 plan with second quarter performance exceeding our expectations across all key financial and consumer engagement metrics. Our brand elevation strategy, which cuts across our product, marketing and distribution channels, is resonating with consumers in every region. We're driving these results despite greater-than-expected disruptions in the global supply chain and extended COVID restrictions in key markets like Japan. And while we continue to face a volatile environment, the work we have done to build a resilient supply chain over the last several years, as well as our significant AUR elevation, will continue to be competitive advantages as we navigate emerging challenges, and mitigate risks. To give you some context and color our supply chain is intentionally diversified across multiple markets. A key initiative we started over four years ago. This allows us to quickly shift production when certain markets are affected by COVID or other issues. We've created a strategic supplier program, whereby we prioritize our partners with a presence across multiple markets, and maintaining these shifts to happen even more seamlessly. And we have proven pricing power. Elevating our AUR across every channel and geography over the last 4.5 years. So that we have room to absorb near-term pressures we've seen in our business, such as tariffs or current inflationary headwinds. This built-in agility gives us confidence as we continue to navigate a volatile global operating environment ahead, but I want to be clear that this is not just about our ability to play defense. Even as macro challenges arise or subside, Ralph Lauren is firmly driving often to position the Company for long-term sustainable growth. We are leveraging our strong momentum to further accelerate investments across brand-building, personalization and new customer recruiting, digital, and key markets and categories in the months ahead. Reflecting on the last quarter, a few key highlights. First, our overall recovery is outpacing our expectations. This was led by out-performance in Europe and North America with Asia in line with our plan, and positive to fiscal 2020 or despite extended COVID measures as our product assortments resonated strongly with consumers globally. Second, our digital momentum continues following our reset work across product, pricing, and promotions last year. In our digital operating margins continued to be strongly accretive to our overall Company margin rate. And third, our elevation strategy is translating across all channels, including positive trends in wholesale across regions. On top of all of this, we made further progress toward our long-term target as mid-teens operating margins with second quarter margins of 17% representing the highest Q2 rate since Fiscal 13. And we achieve this even as we continue to reinvest for future growth and plan to increase returns to shareholders over the next several quarters. Our performance demonstrates our team's strong execution against the 5 strategic pillars that we outlined at the start of our Next Great Chapter plan. Let me share a few highlights from the quarter across each one. First on our efforts to win over a new-generation, we continued to invest in our brand-building initiatives to drive both new customer acquisition and retention in order to fuel long-term growth. In the second quarter, we further strengthened our brand consideration, purchase intent, and net promoter scores globally while Ralph Lauren brand sentiment also improved across every region. Some of our key campaigns underpinning these results included; the continuation of our summer sports program, with the U.S. Open Tennis Championships here in New York, as well as Team USA's victory at the 2021 Ryder Cup in golf. These came on the heels of our sponsorship of the U.S. Olympic team in Tokyo earlier in the quarter. Together, these campaigns generated over 71 billion media impressions in the second quarter as we continue to inspire new-generations of athletes and dreamers. In September, we celebrated the return of fashion's biggest night, the Met Gala. And what better opportunity to showcase this year's team of American fashion than with one of the most iconic American brands, Ralph Lauren. Celebrities and influencers from Jennifer Lopez and Ben Affleck to Chance the Rapper and Lily Aldridge, were featured in our designs, driving strong engagement and traffic to our channels. Ralph's design of Lily Collins wedding dress, some of you will know her as Emily in Paris, garnered worldwide media attention. And we were excited to announce a new collaboration this quarter with Zepeto, a metaverse or virtual world, where users Avatars, can socialize and create content. This partnership represents the latest frontier in digital engagement in which users can purchase exclusive digital Ralph Lauren apparel for their 3D avatars for the first time ever. Early engagement has outpaced our expectations with a 100,000 items already sold in just a few weeks. In all, we added 1.4 million new consumers to our direct-to-consumer channels alone this quarter, a 19% increase to last year. And our total social media followers continue to grow, reaching 46.9 million globally, led by Instagram. Moving to our second key initiative, energize core products and accelerate high potential, underdeveloped categories. Ralph and our design teams continue to inspire consumers around the world as they begin to incorporate sophisticated, casual styles back into their closets. While still seeking elevated comfort with categories like loungewear. We are uniquely positioned to capture this evolving hybrid way of dressing, given the breadth of our portfolio. And we're also making strong progress on our high potential categories like outerwear and denim. During the second quarter, we drove our core sportswear categories along with seasonal styles, such as transitional sweaters and fleece as we headed into early fall selling. On the men's side, we saw strength across bottoms, including denim, active styles, and shorts, as well as sweaters and performance suits. Though a small parts of our business prior to COVID, tailored clothing and dress shirts continued to show sequential improvement. In women's, we drove outsized performance in sweaters, sweatshirts, mid layer knits, and bottoms. Outerwear, including transitional quilter jackets, updated lasers and denim jackets, also grew double-digits to doubled LY. This should bode well for the key outerwear selling period the following holiday. We also launched our new Ralph's Club fragrance globally with a digital first campaign featuring Lucas Haba and Gigi Hadid. This marked our first major fragrance launch in China. And in its first month, it ranked among the top 3 men's fragrances in key markets around the globe, including in the U.S. And more than 75% of purchases on ralphlauren.com were made by consumers who are new to the brand. This takes me to our third key initiative; drive targeted expansion in our regions and channels. We continued the build-out of our brand, elevating key city ecosystems around the world in the second quarter. With 35 new stores in concessions opening in top cities globally and 13 locations closed. The majority of these store openings were in Asia, and particularly the Chinese Mainland, which continues to represent a significant long-term growth opportunity for our brand. Despite COVID-related shutdowns in July and August, our mainland sales were still up more than 25% to last year and more than 70% to double our OI in constant currency. And comp trends rebounded quickly in September, once restrictions were lifted, we opened our second emblematic store experience in China at Shanghai's Kerry Center this quarter. Following our first opening in Beijing this spring. The emblematic concept provides an example of how we are transforming the retail experience with digital integration throughout, exciting in-store activations, and hospitality features like Ralph's coffee that are fueling new consumer’s acquisition. Early performance is well ahead of our expectations, and these stores are also listing overall growth trends in their respective omni -channel ecosystems, moving to our priority of leading with digital. Our global digital ecosystem, including our directly operated sites, department store.com, pure players, and social commerce, grew approximately 45% in the quarter in constant currency, and 50% to double LY. Our digital momentum continues, even as traffic returns to physical stores, driving a benefit to our overall operating margin mix. This is the result of our continued digital investments focused on content creation, data analytics, and AI to serve our consumers through an elevated, connected retail experience. Now, touching on our work to operate with discipline to fuel growth. As I mentioned, our teams continue to operate with agility and focus to mitigate supply chain headwinds, delivering better-than-expected gross and operating margins. In the second quarter. At the same time, we continued to drive expense discipline as we accelerate both near term and multiyear investments in the back half of the year to fuel long-term growth. And lastly, on our brand portfolio, we successfully transitioned Chaps from our North America wholesale business to a licensed model in the second quarter, as previously announced. This completes our exit from moderate priced U.S. department stores, enabling our teams to focus on our core namesake brands and elevated positioning in the marketplace. I also want to take a moment to highlight our ongoing work to integrate citizenship and sustainability into everything we do. We recently announced the launch of the U.S. Regenerative Cotton Fund in partnership with the Soil Health Institute. Funded by the Ralph Lauren corporate foundation, this program works directly with farmers to transition 1 million acres of American constant crop plan to regenerate the production. In all, it is set to eliminate 1 million metric tons of carbon dioxide equivalent from the atmosphere by 2026. Both increasing sustainable constant supply and making important progress in the urgent call to action on climate. We are proud to share today that this program is being recognized at the COP26 International Meeting on climate as an innovation spread partner by the Agriculture Innovation Mission for Climate. In addition, this quarter, we joined a global fashion agenda, strategic partner group, to prioritize sustainability and fashion, as well as Ellen MacArthur foundation as a partner in its mission to create a circular economy for our apparel. And we were also honored to be recognized as one of the 2021 Best Places to Work for people with disabilities by the Disability Equality Index, and as one of the world's best employers of 2021 by Forbes. In closing, Ralph and I are strongly encouraged by the Company's progress through the first half of the fiscal year. All channels and geographies are showing strong momentum as we build on the healthier foundation, we set over the past 18 months. Our performance along with the resilience of our supply chain and pricing power in the market, gives us confidence as we accelerate our investments in the back half to support long-term growth. So, with that, I'll turn it over to Jane to discuss our financial results, and I'll join her at the end to answer your questions.

Operator:

One moment please for the first question. First question comes from Dana Telsey, Telsey Advisory Group.

Patrice Louvet:

Good morning. Thank you for your question. Listen, we're certainly encouraged by the strong first half we've had this fiscal year, and what's really important to note from a mindset standpoint is we still have massive runway ahead of us. To a large extent, our brand continues to be much bigger than our business. So our performance so far has given us proof point and the confidence to continue investing in the multiple that we had ahead of us. There are four that I would call out Dana, the first one, which is really our lifeblood, is customers. New customer acquisition. And you've seen the numbers this past quarter up 19% versus last year, we're bringing in a younger consumer. We're bringing in a higher value consumer, a more profitable consumer, a less promotion sensitive consumer. We're very excited about that momentum. And we're going to continue to invest in this space to expand our footprint and also of course, drive retention. And we've seen very good progress on retention for customers that we've brought over the past few quarters. Second area is around product and the breadth of our product portfolio and which we've talked in prior forms, really sets us apart from many other brands in this space. We have a lifestyle portfolio that ranges from tuxedos and evening gowns all the way to sweatshirts. And as you see consumers progressively reinvest into more elevated casual, we're incredibly well-positioned to meet that demand. And that's part of what's driven the success in Q2, is this ability to meet this hybrid customer expectation. Both more elevated products and also continued interest in athleisure. We've been able to balance both well, on top of that, we've talked a lot about our high potential underdeveloped categories. And we've seen really nice momentum in these categories, but again, relatively early days in sneakers, outerwear, and denim, for example. So much more runway there. The third area is digital, right? And as you know, we've done a lot of work to reset here. Reset on products, reset on pricing, reset on brand presentation. We're seeing really good momentum in this channel across both our own sites, up 35% across pure players and breaking clicks up 57% this past quarter, total digit up 45%. What's exciting here is the momentum on digital continues as the stores are reopening. So we're seeing consumers with an omni -channel mindset continue to engage both digitally and also in our stores. We are obviously going to continue to invest in capabilities in this space, functionality and connected retail experience. Notably, and you touched on it, our margin in digital continues to be accretive to our total Company margin. That is one -- of I think one of our most exciting achievements over the past year and the team has done a fantastic job to reset both product pricing, promotion, operations cost structure, in a way that this is accretive across all three regions. And our expectations is that we'll continue. We expect digital to be our fastest-growing channel for the years to come. And we're really pleased that the digital margin is accretive to the Company margin. And we have full confidence is that we'll continue and expand. And then the final thing I would call on in terms of drivers is our focus on key cities. You know, we don't look at markets as much by country anymore. We really look at them as key cities and building and partner for the jargon, but building a connected omni -channel ecosystem in each of the key cities that's playing out really nicely, the combination of brick-and-mortar, pure-play, wholesale, brick-and-click, and our general digital wrapper. We're seeing very strong response from the consumer in those cities where we've made these investments. You have a couple of examples in our prepared remarks of things that have happened recently in Shanghai, in Beijing. And we have more to come in the following quarters. When I look at the model we have there, the success we're seeing with it, and the opportunities we have ahead of us. Same thing, long runway in terms of our ability to go build these ecosystems around the world. So 4 key drivers that certainly drove the performance in Q2, and we will continue to play out for the long term. As far as risks are concerned, the biggest risks we're facing are clearly macro-related. Right from supply chain to cost inflation headwinds. I mean those are very real, we've touched on these in the script. And we believe we're actually very well-positioned to mitigate them because of our brand pricing power,18 quarters in a row of AUR growth with multiple levers to drive AUR, because of our newly diversified, agile, faster supply chain that is not dependent on one specific supplier or one specific country. So these headwinds are there, they are real, but we are very confident in our ability to mitigate them. And so I would say in this context, the biggest mistake we could make with these macro headwinds and these external pressures is actually a shift to defense. And as you've seen in our plans right now, we're on offense. We're executing our plans while mitigating the headwinds. We've got the resources to invest in the business. Our focus is on fueling our momentum next quarter, the quarter after that and for the long term. Thanks for your question, Dana.

Jay Sole:

Great. Thank you so much. I have a 2-part question. My first question is, can we talk a little more about the current cost inflation environment? How are you expecting increased cost impact your ability to drive long-term AUR and operating margin from here. And my second question is -- a smart question is just can you talk about the pace of share buybacks? Would you expect to use all of the authorization they have available in the current fiscal year? Thanks so much.

Operator:

Thank you. The next question comes from Michael Binetti with Credit Suisse.

Jane Nielsen:

Sure. Why don't I take the first part of your question in terms of the disaggregating North America growth? So if you think about North America growth, we have as we move into this second quarter, we are really encouraged by the strong -- overall strong performance in North America. We have a much stronger foundation for growth. Solid momentum in the business where we had to do most of the reset work in digital and in wholesale. And our Q2 guidance did assume a sequential LLY slowdown ex-resets, as we weren't expecting the same level of upside that we saw in Q1 based on some of the inventory restocking that we did in Q1. But overall, Q2 was still in line or better than our expectations. I think that the other aspect in North America was we did see some traffic softness in the outlet centers as the Delta variant started to rise, sort of mid to late summer, which impacted traffic overall, but we certainly saw that impact. Now, encouragingly, we do see our conversion and our comp outpace the traffic in our web, but that was also part of the -- a bit of slowdown that we saw through the summer. Do I think this supply chain is impacting -- impacted some of that? Yes. I know that we had less airfreight coming in during that mid-summer level, so we were a little slow to get fall on the floor and make that transition. So I do expect that that impacted North America. When we started to airfreight in and we became more aggressive in airfreight as we closed out September, we saw a rise in comps in our outlet doors and we're very encouraged by that. So I do think it had an impact. There's a lot of dynamics going on, but I do think it had an impact and we were encouraged by the acceleration that we saw in September.

Jane Nielsen:

And on your question regarding Q4 implied up margin, it is our smallest quarter and it's certainly our -- traditionally our smallest quarter from an -- on an OY basis. We are making substantial investments that Patrice noted, largely on new consumer acquisition and new digital sites, and digital investments, all of which will pay dividends into the future. It's not a one and done kind of return on investments. These will be a long-term investments and we're committed to making them. Where could be upside come? Really if we see revenues strengthen beyond our expectations into the fourth quarter, supply chain resolved, or especially the logistics aspect of supply chain resolves quicker than we expected. You could see some flows through there. The pressures are twofold other than the small quarter, we're moving into some of the higher costs that we're seeing on a product basis. And you saw that we've taken up some of our estimate on freight now moving to 130 to 150 basis points. Obviously given -- freight was 60 basis points in the first quarter, 150 in the second quarter, the back half to get to our range is more substantial than that. So you see that pressure in the back-half.

Operator:

Thank you. The next question comes from Matthew Boss with JP Morgan.

Patrice Louvet:

So Matt, I'm going to broaden your point, because the way we appeal to that younger consumer is also through how we present some of our core products, right? How to make our white polo shirt relevant for that younger consumer. And I think through the pivots we've made on marketing, going on the platforms that resonate the most with that younger consumer, whether that's TikTok or Snap, participating in those activities that are most relevant for them, like gaming, like engaging in the Metaverse, like what we've done recently with the Zepeto where we've seen very high level of engagement. So the shift in our marketing has really helped broaden the appeal to the younger consumer, we see it in our data. As I mentioned, upfront on Dana's question, we are seeing a younger consumer coming into the franchise. As a result of the marketing content and targeting on the product front, we have, of course, also leveraged categories that resonate the most with the younger consumer Polo sports, which we've re-energized. And I think there's a really clear positioning now, is resonating very nicely. Elevated athleisure and fleece is also connecting nicely with that consumer. And then, some of our core, products are sweaters, or chinos, our denim. Some of our more elevated outerwear is also resonated -- quite resonating quite nicely with that younger consumer. So as I look at the broad categories that have been successful in the past quarter, and as we look ahead in terms of where we've invested, we feel very nicely positioned broadly, and in particular, for that younger consumer, whether that's again denim, investments in sneakers, driving more elevated casual that is resonating with that group both on the men's side and on the women's side. And I'm actually very encouraged that the progression we're making in terms of attracting that younger and higher-value customer is not a one-quarter phenomenon. We've now seen this for a number of quarters and is the direct results of interventions -- targeted interventions we're making across product, across marketing, and across product brand distribution.

Operator:

Thank you. The next question comes from Brooke Roach with Goldman Sachs.

Patrice Louvet:

So maybe Jane will tag team on this one. In terms of Rob buckets broke into -- where we're focusing our investments moving forward that we expect to drive long-term growth, or one new customer acquisition, younger customer, higher-value customer. And we now have the tools with the consumer intelligence group that we have in place, with our ability to target and tailor the messaging to really be providing very high ROI on these types of investments. So we've seen the success behind them. We're going to dial that up across the region. The second is continued to fuel our digital momentum, right? And that's combination of functionality on our own sites, elements of connected retail, work that we're doing with our wholesale partners, and you will see we have a number of exciting things coming online over the next couple of quarters when it comes to our digital capabilities. In addition to localizing sites, so expanding our footprint into new markets with localized propositions from the RalphLauren.com standpoint. And then the third one is continuing to invest in building our store footprint in the context of our key city ecosystem. And we had two good examples recently with Shanghai and Beijing and there's more to come there. So these are investments that will not just generate an impact over the next one or two quarters, but there will have long-lasting effect. We really look at lifetime value of customers that we bring in to the franchise and we're actually really pleased with the profiles we're bringing in. We're really pleased with our retention performance. So these three areas will have a long runway in terms of contributions to growth and value creation.

Corinna Van Der Ghinst:

And the last question, please, Angela.

John Kernan:

Excellent. Thanks for squeezing me in.

John Kernan:

Good morning. Good thanks. Going back to North America, the $700 million in revenue that we're taken out of the business globally. I think a lot of that is from North America. Just curious, how should we -- we should think about wholesale and retail within North America? And what a sustainable growth rate in North America might look like as we exit the pandemic.

Patrice Louvet:

Yeah. I think if you in did you're going to step back and say, okay, where are the drivers of North America are going to be moving forward? And you heard me say last quarter -- I think it was last quarter and there have been this confidence in our ability to win in North America since I started and that comment and confidence completely holds true as we speak together today. As Jane mentioned, if you look at the key vectors of growth moving forward, digital, right? We now have, after a painful reset, dealing with Daigou, dealing with the site that was over promotional that didn't have the right product offering. We've now showed very good about our ralphlauren.com site in the U.S. both in terms of how the brand has presented, are engaging with consumers. The connected retail capabilities that come with it and of course, the profitability. So that's the first element. Second element, as you mentioned, is our retail footprints, right? Both productivity in our outlet and expanding our own full-price store footprint, so more to come in this space. But we know that there’s an opportunity for us to increase our presence -- physical presence from a DTC standpoint in a number of key cities in the U.S. and that work is well underway with a format that we're excited about, and a brand sensation that we're excited about. And then the final point is now Wholesale, which used to be a drag in a bit of an albatross candidly around our necks, is now reset, is now on a healthy base both the brick-and-mortar side, where week flows as reminder, 65% of all our locations over the past 3 - 4 years. And the digital front, you saw the digital numbers. This -- the digital growth numbers from wholesale this quarter are quite strong and we believe only the beginning of the long journey. So multiple vectors of growth, Jane, as you mentioned, we're not ready to guide North America longer-term, but I think both of our behalf, I could say we have a lot of confidence in our ability to not only grow, but win in this market, right? The last thing I would leave you with is recent -- latest share readings. We're growing share in men's, we're growing share in kids, we're growing share in home, we're growing share in women's ready-to-wear, and there's more to come. So we've got really nice momentum, a healthy foundation, and we're investing to win. All right, with that, we're going to close it here. Thank you for joining us today. We look forward to sharing our third quarter fiscal '22 results with you in February. In the meantime, we hope to welcome you at the Polo Bar, little advertising never hurts, which just reopened here in New York City a couple of weeks ago where you can experience the magic of the Ralph Lauren lifestyle. Thank you for joining and have a great day.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions on how to ask a question will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn over the conference to our host, Ms. Corinna Van Der Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Cory. Good morning, everyone, and thank you for joining today's call. As we close out this fiscal year, Ralph and I are proud and inspired by the way our teams have navigated through the pandemic. They have demonstrated their resilience, agility and ongoing passion for our brands and our consumers in a year unlike any other. Their commitment and execution shine through in our better-than-expected fourth quarter results. Against the volatile backdrop of the past year, we took action that has enabled us to emerge from this period a fundamentally stronger company than when we came into it. This includes; first, across all three regions, we accelerated our work to elevate our brands while also strengthening and simplifying our brand portfolio; we're also engaging more meaningfully with consumers and driving increased marketing to deliver higher brand awareness and purchase intent coupled with higher AURs; second, we repositioned each of our channels and reduced our exposure to secularly challenged areas of distribution, particularly in North America. Within wholesale, we focused our brick-and-mortar presence on our healthier stores and significantly reduced our off-price penetration. Within direct-to-consumer, we accelerated our shift to digital, step-changing profitability by over 1,000 basis points as we added new connected retail capabilities and drove quality of sales.

Operator:

Okay, you may begin.

Patrice Louvet:

Thank you, Cory. Hey, if there's one thing we've learned over the past 18 months, it's agility and the importance of agility. So apologies for the false start. And now we're ready to go into our prepared remarks. So good morning, everyone, and thank you for joining today's call. Our teams delivered exceptional first quarter performance on both our top and bottom line results and across every geography. Our brand is resonating with consumers around the world as we lean into the breadth of our offering to deliver the products they are craving in this new normal. And all of our regions are in a healthier, more profitable growth trajectory. Even as we continue to execute through COVID-related challenges, it is clear that Ralph Lauren is back on offense. A few highlights to note. First, building on our consistent brand elevation work in direct-to-consumer business. We are now seeing accelerated demand and increased AUR in our wholesale channel. Second, our digital growth is accelerating following our pricing and promotional reset work last year, and our digital margins continue to be accretive across every region. And third, we continue to make strong progress toward our long-term target of mid-teens operating margins. We delivered the highest Q1 company operating margin since fiscal 2014, even as we more than doubled our marketing investment and continue to reinvest in key areas of growth like digital, key city ecosystem expansion and our consumer targeting and personalization. Our performance demonstrates consistent execution against the five strategic pillars that we outlined at the start of our Next Great Chapter plan. Let me share a few highlights from the quarter. First, on our efforts to win over a new generation, as we continue to invest in marketing, we are focused on new consumer acquisition and retention and both global and localized campaigns that capture consumers' optimism and desire to come together as we progressively emerge from the challenges of the past year. Some of our key campaigns in the first quarter included our summer of sports, which we kicked off with our Olympics campaign in North America as the official outfitter of Team USA. In June, we amplified our Wimbledon campaign with a diverse group of athletes, celebrities and influencers such as South Korean Superstar and Tottenham Forward, Son Heung-min; British pro-surfer, Lucy Campbell; and G2 eSports League of Legend Superstar, Rekkles. In the world of Golf, we celebrated our brand ambassador, Yuka Sasou's first major win at the US Women's Open Championship, and we were excited to welcome LPGA professional golfer, Andrea Lee, as the newest face of our women's golf brand. Combined, these summer sports campaigns generated more than 8 billion total impressions globally in the quarter. And there's still more to come in August and September with the 2021 Ryder Cup and the US Open Tennis Championships right here in New York. We also announced our launch this quarter as the official outfitter of G2 eSports, 1 of the world's premier professional esports organizations. We are proud of this first-of-its-kind partnership in fashion and gaming as we continue to drive new ways of reaching next-generation consumers in key channels where they engage. In all, we added more than 1 million new consumers to our direct-to-consumer channels alone this quarter. And our total social media followers continue to grow, exceeding 46 million globally, led by Instagram. This takes me to our second key initiative, energize core products and accelerate high potential underdeveloped categories. As markets reopen around the world, consumers are shifting back to many of the key categories that drove our business prior to the pandemic, while we also continue to develop new and high-potential categories. While casual styles are still resonating, we're also seeing a progressive return to sophisticated casual. Given the breadth of our assortment, we have the unique ability to respond to consumer shifting appetite, reintegrating more elevated styles into our assortments as we scale back on stay-at-home categories. On the Men's side, we're seeing a resurgence in polo shirts, sports coats and trousers, denim, footwear and accessories for our core brands. In Women's, we're seeing improvements across dresses, elevated sweaters, novelty fleece, jackets and handbags. And we're also driving better performance in bottoms, including new fashion silhouettes like wide leg as well as new fabrications like Silk and Linen. We are rebuilding the penetration of these categories into Fall '21 and beyond as consumers make the transition back to the office and social activities. Our spring performance gives us increased confidence that we will have the right assortments to meet consumers' needs moving forward. Other product highlights from the quarter included our first of several special collections with Major League Baseball. These limited capsules celebrate the heritage of America's favorite past time and evoke Ralph's lifelong love of the sport. Launched in May across all of our channels, including social, digital, our stores and wholesale. The initial capsule generated over 5 billion media impressions, along with significantly higher spend compared to our average total consumer. Our Spring Polo shirt campaign included the launch of our Polo Color shop, fully made to order customized Polos and our updated Earth Polo in expanded colors. And we launched Polo Colonia Intense, an updated fragrance for a new generation and our new stir of eyewear collection, as we continue to elevate and innovate across our licensed categories as well. Moving on to our third key initiative, drive targeted expansion in our regions and channels. With most of our key markets now fully reopened, we are back on offense this year, with the build-out of our brand elevating key city ecosystems around the world. This ecosystem approach ensures a consistently elevated experience across our digital, social and physical channels, both in our direct-to-consumer and wholesale networks. As part of this, in the first quarter, we opened 18 new stores and concessions in priority locations globally, mostly in Asia, and closed 11 locations. China continues to be a significant long-term growth opportunity and our ecosystem approach delivered strong growth again this quarter, with Mainland sales up more than 50%. We are opening two new emblematic store experiences this year in Beijing and Shanghai. With a smaller footprint than our existing flagships around the world, this new format offers consumers an elevated immersive brand experience at a significantly lower investment than our traditional flagships. Our Beijing store opened at the end of April in Sanlitun Mall, one of the top shopping locations in the country. In addition to featuring a Ralph's coffee, Sunlitun integrates innovative, smart retail and digital activations throughout the store in partnership with Tencent. This includes endless aisle technology, the virtual try-ons and in-store treasure hunt, using QR codes and customization stations, where consumers use our WeChat Mini Program to order customized products from their mobile phones. Though still early, the store has significantly outperformed our initial expectations, and we're excited to build on our presence in China with the opening of our emblematic Shanghai location in just a few weeks. Both stores will immerse consumers in the world of Ralph Lauren and will help further develop our ecosystems in these key markets, which already include our smaller format Polo boutiques, in fashions and digital presence across our own site and key partners such as Tmall. And as foreign tourism continues to be a headwind compared to fiscal 2020 levels, we have shifted more of our marketing, clienteling and merchandising to capture local shoppers and regional tourists, along with driving digital commerce. This takes me to our priority of leading with digital. Our global digital ecosystem, including our directly operated sites, departmentstore.com, pure players and social commerce, accelerated to more than 80% growth in the first quarter in constant currency, up from about 60% in Q4. While traffic is returning -- is starting to return to physical stores, the strength in digital is exceeding our expectations, driving a benefit to our overall operating margin mix. North America drove the biggest improvement this quarter, increasing more than 50% across both owned and wholesale digital channels. Meanwhile, Europe and Asia momentum continued with growth of more than 100% in each region in Q1, led by our wholesale digital and pure-play channels. Our investments in digital continue to focus on content creation for all of our platforms, enhanced digital capabilities to improve the user experience, and continuing to leverage AI and data to serve our consumers even more effectively. Touching on our work to operate with discipline to fuel growth. We continue to drive expense discipline in the first quarter in order to fund our long-term strategic investments in global expansion, digital, and brand building, while also working toward our target of mid-teens operating margins. We also successfully completed the sale of Club Monaco at the end of the first quarter as planned. And as previously announced, Chaps will transition from our North America wholesale business to a license model in Q2. These actions will enable us to further focus our resources on our core namesake brands and elevated positioning in the marketplace. I also want to take a moment to highlight our ongoing work to integrate citizenship and sustainability into everything we do. In June, we published our annual Design the Change report, outlining our updated commitments and actions to drive our impact and champion the lives touched by our business. While I encourage all of you to download the full report from our corporate website, I'll highlight a few important additions this year. We committed to comprising our global leadership team of at least 20% underrepresented race and ethnic groups by 2023. As part of our comprehensive circularity strategy, we set a target to use 100% recycled cotton in our products by 2025 and to launch additional resale and recycle opportunities for our consumers by 2022. We also announced a goal to achieve net zero greenhouse gas emissions across our operations and supply chain by 2040, as we continue to work on reducing our carbon footprint throughout our value chain. And beginning this fiscal year, we will incorporate key ESG metrics into our executive compensation plans. In closing, Ralph and I are very encouraged by the strong start to the fiscal year. Our teams are executing with passion and continue to embrace the agility they demonstrated throughout the challenging and unpredictable last 18 months. While we will continue to monitor key macro challenges closely for the balance of the year, notably around inflation, supply chain disruptions, COVID resurgences, and the pace of traffic recovery. The actions we took to strengthen the foundations of our brand and our business last year are enabling us to deliver results even earlier than we expected. Looking beyond this period of unusual COVID compares, we are increasingly confident in our ability to drive sustainable growth. More than ever, led by Ralph's iconic vision, our teams are intensely focused on executing on our strategic plan, to continue to protect and elevate our brand, while realizing the significant growth opportunities that exist for our business in every market. With their passion, talent, and careful execution, Ralph and I are confident in our ability to deliver attractive long-term growth and value creation for all of our stakeholders. With that, I'll turn it over to Jane to discuss our financial results, and I'll join her at the end to answer your questions.

Operator:

[Operator Instructions] The first question comes from Brooke Roach at Goldman Sachs.

Patrice Louvet:

Hey good morning Brooke. Thanks for your question to kick us off. So, first off, I actually really want to take a moment to acknowledge the tremendous execution and agility of our teams in the first quarter as we got back on offense as a company. I'd say the key drivers of this quarter's outperformance were, first, the stronger-than-expected recovery in North America and Europe, especially in wholesale, which, as you know, is accretive to overall margins. Just a couple of data points to illustrate that, our North America wholesale AUR was up more than 20%. Our sell-out – full price sellout was up in the high teens and our wholesale.com business was up more than 75% to LLY. All 3 of these numbers are versus LLY, which we think is the more relevant benchmark period. The reset work that we did to create a healthier foundation in wholesale over the past few quarters is really starting to play out nicely and in a brand-enhancing way. The second point, I would call out is the fact that we drove the right elevated product and brand messaging with consumers. Ralph and our design team have done a great job of creating assortments that are resonating with consumers. We've been really pleased with our ability to win in casual, while at the same time, winning in more sophisticated casual as the consumer pivots back into that direction. And the third point I'd call out is our pivot to digital and connected retail, which is really driving accelerated growth and margin accretion across our digital channels. So therefore, I'd say we are feeling confident in the sustainability of our growth going forward, driven by a structurally healthier base, an important pivot in North America wholesale and digital and investments back into our business.

Corinna Van Der Ghinst:

Next question, please.

Mattew Boss:

Great. Thanks and congrats on a really nice quarter again, guys.

Patrice Louvet:

Thank you, Matt.

Patrice Louvet:

So you're right. It's 17% this quarter. And just to frame it for everyone on the call, this is our 17th quarter of AUR growth, okay? Now we know our AUR growth over the past 12 to 18 months has been outsized and our long-term guidance on that is more low to mid-single digits. But we're really pleased with the progress that the team has made on continuing to elevate the brand and drive AUR growth concurrently. Matt, the biggest areas of progression. The one thing I would really call out is actually the progress on North America wholesale. Because we haven't grown AUR in wholesale in North America in the long, long time, years. And I think through the great partnership that we have with our wholesale players here in the market, as well as the brand elevation work, the work on products, the work on marketing, the work on presenting the brand in a more engaging way, it's translating into meaningful AUR growth. You think we quoted a number up over 20% versus LLY North America wholesale. And listen, this is not a one quarter pop. We are confident in our trajectory moving forward, working closely with our partners to continue to drive AUR in wholesale. The other area I would call out is actually North America, our own website, where we saw, again, very meaningful progression on AUR this quarter, I think, up north of 40%. So quite healthy. Again, we're not pricing. We're not elevating AUR in a vacuum. This is the outcome of brand elevation work. Again, elevating the product, elevating our marketing, elevating our presentation. And as a result, we have the ability to drive AUR through the four vectors that we've been talking historically together. One is, being much more targeted and surgical in our promotional activity. Two is, strategic price increases where we believe we can offer competitive value relative to our peer set. Three is, continuing to invest in product mix, and you see us invest in outerwear, in home, now and those products obviously carry much greater AUR levels. And then finally, channel and country mix. So that's some specificity. But all-in-all, Matt, we've actually grown AUR really nicely across the board, and we're really pleased with our performance across regions, across channels, which indicates again that the brand elevation work that we are doing is sticking and that the consumers see the value in what we have to offer.

Corinna Van Der Ghinst:

Thank you. Next question, please.

Michael Binetti:

Hey, guys. Thanks for all the details. First, I'll offer my congrats. I know you guys did a lot of hard work to clean up the business last year. We can see the results of it here. A couple for me. Jane, similar to Matt's question on the AUR. How do you think about the sustainability of gross margins here? It's above – the run rate is above what you thought about at the Analyst Day, a couple of years back. It's been just such a source of upside to both our numbers and your plan for so many quarters. And it doesn't sound like the underlying drivers are slowing down at all. So I'd love your thoughts there. And then I guess in the quarter, as you started to refill the North America wholesale channel and Patrice, I heard in your voice, you're very happy with that. The growth rate improved by about 100 basis points sequentially compared to fourth quarter. So good numbers by any standards. And I don't mean to tempt or sound greedy, but as we've watched some of the peers report here lately, I wonder if Ralph Lauren would have seen wholesale up even more. And the only reason I ask that is because you've been very measured about the pace of restocking that channel. And I wonder if you could try to dimensionalize for us, how you think about the September quarter and North America wholesale channel trend, the gap between selling and sell-through. Do you feel like you've held it back and that can continue to normalize, or how should we think about the continuation of the refill the wholesale channel in North America?

Patrice Louvet:

Yes. I'm sorry, I would just double down on that. I think we've been really pleased with the partnership with our partners here. Just a data point to give you the context of the reset work that we've done on wholesale brick-and-mortar North America over the past few years. We're down 66% in terms of wholesale doors over the past 4 years, right? So, we're seeing the benefit of that healthier brick-and-mortar base. And then we're also seeing the benefit of amazing partnership we have on the digital front where you saw significant acceleration of our Wholesale.com performance, and we expect that momentum to continue. And I think we are on the very same page when it comes to looking at assortment and continuing to elevate our assortment.

Operator:

Thank you. The next question comes from Erinn Murphy with Piper Sandler

Patrice Louvet:

Good morning Erinn.

Patrice Louvet:

Sure. So, I'll take that one. I'm sure your follow-up is for Jane. So, on men's, it's indeed a pivot towards newness and a pivot towards more elevated products. And so sports jackets, sports coats, polo shirts, trousers, denim, and footwear are the areas where we have over-delivered over the past quarter. On women's, we're seeing the same shift towards newness and more sophisticated elevated casual, dresses, novelty sweaters, jackets, and bottoms are the key areas, Erinn, for women's. And as far as our, we like to call in high potential categories as opposed to non-core, but because over time, they will become core for us. So, these areas that we called out like outerwear, denim footwear accessories, and we're adding home to that, we still believe in the potential of those categories. If anything on outerwear, I think the opportunity is probably bigger than we initially estimated three or four years back. And we're going to continue to invest in that heavily. You will see that in our fall assortment as an illustration of that. And then across these different categories, I think we feel good about the capabilities we're building, the development of the product, how we're activating from a marketing standpoint and really rethinking the way the product needs to show up from a distribution point. The most recent addition to that group is home. It's very early days on that journey, but we're very bullish on the opportunity and encouraged by the initial momentum we have on those.

Jane Nielsen:

Sure. Well, we -- Aaron, while we saw tourist sales improved slightly in North America, they're still down 69% to LLY, but we did see some improvement on a sequential basis, but international travel remain limited to most regions. Our assumption in fiscal 2022 is that we've assumed continued headwinds from tourist sales as we expect foreign travel to be under pressure through the fiscal year. Foreign tourism intends to be lagging indicator. But fortunately, we are focused on capturing more domestic travel opportunities coming out of the pandemic. And know we've noted our Sanlitun store, which is outperforming in tourist market like Beijing and local domestic travel to some of our flagships is that we're also leaning into. And we have a limited presence in travel retail and have anticipated that that will be slower to recovery as we move forward. And we're very focused on building our business with the Chinese consumer within China. And you've seen our Mainland China growth, continued strong store build-outs and really increased marketing, which we doubled this quarter to engage with that consumer before they start on their travel as the markets start to recover. But our expectation is that will happen after fiscal 2022.

Operator:

Thank you. The next question comes from Omar Saad with Evercore ISI.

Patrice Louvet:

Certainly, as we look at our global wholesale footprint, we want to drive greater focus on more on just natural margin, right? And that's certainly where we're headed, and as we're seeing our improved AUR performance in North America, less reliance on promotional activity. I think that's the direction of travel. So that's certainly the intent and that's what we're working towards. With our partners in a win-win mindset so that we can expand our margins, and they can also expand theirs in a sustainable win. When it comes to recruiting new consumers on our e-commerce sites, if I understood your question correctly, Omar, I mean, actually, we're quite energized by the progress we're making in terms of new younger consumer recruiting on our site. It's the result of a combination of factors, right? One, our marketing investments are up significantly. Just as a reminder, marketing this year, 6% of revenue, two years ago, 4.5% of revenue, so a significant lift in marketing. And then we're playing a much broader palette of marketing activities, ranging from these above the line big brand campaigns around the polo shirt to our activities on sports, Olympics, Wimbledon, gaming, right? You saw that we signed a partnership with G2 and in particular, with the Rekkles, they're one of their superstars there because that's where the consumer is. And that we want to -- we're going to appeal to that younger consumer where he or she consumes media, where he or she engages and we're seeing gaming as an important component of that. And then we're continuing to inject product newness and surprise in our program. So Major League Baseball program, frankly, exceeded our expectations significantly what we've seen in Asia, and particularly in China, with the partnership that we did with Edison Chen and the Clot brand, also significant excitement and very strong reaction from consumers. So, we are going to continue to appeal to a new generation, right? That's 1 of our 5 core strategic pillars. We think through our increased marketing and our more targeted approach, we have the ability to do that, and I think the numbers would bear that out. To Jane's earlier point, what we like about the consumer beyond the fact that it's a new generation is higher basket size, more -- full price and therefore, a more profitable consumer for us. And then we also put a lot of attention and focus on retention, right? Because obviously, the name of the game is interested to bring them in is to make sure they stay in the family. And here, our ability to target them with much more personalized messaging through digital is proving to be a very effective tool for us. So a journey to be continued, but we're excited and encouraged by the momentum we have with that next-generation consumer.

Corinna Van Der Ghinst:

Next question?

Lauren Bales:

Good morning. Congrats on great results. I just wanted to ask about the operating margin, Jane and Patrice. You just delivered nearly a 17% operating margin in 1Q. You're guiding for a 13% to 14% operating margin, which would imply 2H operating margins would be single digits. Jane, any considerations on the gross margin SG&A front? And then secondly, I think, Jane, I think you mentioned North America was down 8%, but on a 2-year stack, but then there were 18 points of headwind due to the strategic actions which suggest that North America on a core basis really did grow. Is that the right way to think about it? And if so, how do we think about North America growth on a 2-year stack basis for FY '22?

Patrice Louvet:

Up 10%.

Patrice Louvet:

Yes, whole company up 3.5% without the resets, North Tercas specifically up 10%?

Corinna Van Der Ghinst:

Thank you. We’ll take the last question please.

Ike Boruchow:

Hey thanks for squeezing me in. Congrats Patrice, Jane. Great job. I guess maybe, Jane, a question on margins. The digital commentary you guys are giving, you're not only seeing pretty meaningful revenue acceleration in that channel, especially in North America, but the profitability metrics are pretty impressive. But I think you talked about 1,400 basis points of margin improvement on a two-year basis. And I think you said that it's now accretive to the total company operating margin, which is implying its mid-teens or better. How does that change the algorithm to get you to the mid-teens margin, maybe even quicker than what you would have thought prior at the Analyst Day when you think about how digital is mixing and the margin drivers within that channel?

Patrice Louvet:

All right. Thank you, everyone, for joining us today. We look forward to sharing our second quarter fiscal 2022 results with you in November and in the meantime, stay safe, and have a great day.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Fourth Quarter and Full Year Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, instructions on how to ask a question will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Cory. Good morning, everyone, and thank you for joining today's call. As we close out this fiscal year, Ralph and I are proud and inspired by the way our teams have navigated through the pandemic. They have demonstrated their resilience, agility, and ongoing passion for our brand and our consumers in a year unlike any other. Their commitment and execution shine through in our better-than-expected fourth quarter results. Against the volatile backdrop of the past year, we took action that has enabled us to emerge from this period a fundamentally stronger company, than when we came into it. This includes first, across all three regions, we accelerated our work to elevate our brands while also strengthening and simplifying our brand portfolio. We're also engaging more meaningfully with consumers and driving increased marketing to deliver higher brand awareness and purchase intent coupled with higher AURs. Second, we re-positioned each of our channels and reduced our exposure to secularly challenge areas of distribution, particularly in North America. Within wholesale, we focused our brick-and-mortar presence on our healthier stores and significantly reduced our off-price penetration. Within direct-to-consumer, we accelerated our shift to digital, step changing profitability by over 1,000 basis points, as we added new connected retail capabilities and drove quality of sales. Third, we established a stronger, digital infrastructure globally, while also ramping up our investments in consumer analytics, personalization, and high value new customer acquisition. Fourth, within our supply chain, we further diversified across geographies and meaningfully shortened lead times. With approximately two-thirds of our products now in lead times of six months or less, two years ahead of our goal to reach 50% and compared to just 20% five years ago. And lastly, we created a leaner, more agile cost structure. This operating discipline is enabling us to accelerate growth investments across areas like marketing, digital, and our key city ecosystems with further expansion in select underpenetrated markets this year. Overall, these actions position our business for healthier, more sustainable growth as we emerge from COVID. And beyond the foundational work we delivered this year, we strongly believe our brand is uniquely positioned to capture share both during this transitional post-pandemic period and longer term. Ralph has created a lifestyle brand that is inclusive and marked by spirit of togetherness, optimism, and love. And we believe this is the kind of luxury that people are creating in this moment. The breadth of our lifestyle portfolio means we have the ability to continue meeting consumers desires through comfort and timely [indiscernible], while also delivering on their increasing appetite to reintegrate elevated dress your styles back into their wardrobes. Over the coming quarters, you will see us progressively evolve our assortments accordingly. Before I speak to our growth drivers, I want to share a few of the highlights from our five strategic pillars this quarter and year. First, on our efforts to win over a new generation. Some of our key campaigns this year included our Ralph Lauren Bitmoji Collection on Snapchat with over 1 billion try-ons to date. Our first of its kind Virtual Store Experiences, which now includes five of our iconic flagships globally, our Spring '21 Collection featuring a live performance from Janelle Monae, with over 36 million video views and more than 8 billion total impressions. Our limited edition Polo collaboration with Edison Chen's CLOT brand, ahead of the Lunar New Year, which sold out in less than two minutes on our WeChat Mini-Program in China, and with over 6 billion total impressions. And our debut sponsorship of the Australian Open, which resonated particularly well across Asia. And more still to come with our summer sports program, including the Tokyo Olympics starting in just over two months. In all, we added approximately 4 million new consumers through our direct-to-consumer platforms alone this past fiscal year. And our total social media followers exceeded 45 million led by Instagram, TikTok, Kakao, and Snapchat. This takes me to our priority of leading with digital. Fiscal 2021 was a transformational year in digitizing our consumer platforms and experiences, as well as how we work as a company. And we were proud to deliver significant acceleration in digital performance across each of our regions with total digital ecosystem growth of more than 60% this quarter. We accelerated the roll-out of connected retail programs to enable our consumers to interact with our brands in new and more personal venues. Among the many new capabilities we added this year, highlights included digital catalogs, Buy Online-Pick Up in Store and curbside pickup, mobile checkout, contactless payments, and Klarna payment installments. Connected Retail options now represent a high-single-digit percentage of our retail revenues in North America, and a high-teens percentage in Europe, up from low-single digits in both regions prior to COVID. We also continued to roll out digital flagships in Japan and Hong Kong, while adding new partnerships with influential digital partners around the world like Farfetch. In the fourth quarter, we also rolled out digital ID tagging to 50% of our total products and are on track to reach a 100% by end of fiscal 2022. These not only enable product authentication and support future circularity, but also provide consumers access to detailed product information. In addition to our consumer-facing enhancements, we made significant stride this year in digitizing how we work as a company. This includes the adoption of virtual showrooms and continuing to expand our 3D digital product creation. Touching on our work to operate with discipline to fuel growth, we accelerated key actions this year to realign our cost structure, many of which I outlined at the outset of our call. The third and final stage of our fiscal 2021 strategic realignment plan was our announcement last week to sell Club Monaco, expected to close in Q1. This sale combined with our previously announced action on shifting Chaps to a licensed model will enable us to further focus our resources on our core namesake brands. Club Monaco has been an important parts of Ralph Lauren for over two decades now. We are proud of the brand's evolution over that time, thanks to the passion and dedication of its talented, experienced, and engaged global team. We believe that this is the right step forward for the brand, and we are confident in the brand's strong future under Regent’s stewardship. With this step and the actions we've taken as part of our strategic realignment plan, we continue to progress on our brand elevation journey as we deliver Ralph's vision in today's dynamic environment creating values for all of our stakeholders in fiscal 2022 and beyond. Importantly, I also want to take a moment to highlight our ongoing work to integrate citizenship and sustainability into everything we do. Navigating a highly dynamic global retail environment in the midst of COVID-19, our first priority was to ensure the safety and well-being of our employees, partners and communities. This year, we donated hundreds of thousands of PPE, the frontline workers, 3 million products to frontline workers and families indeed, doubling our initial commitment and $10 million in COVID-19 relief from the Ralph Lauren corporate foundation to support our employees. communities and charitable partners. We were also proud to be named once again one of Forbes 2021 America's Best Employers for Diversity, capping off an important and defining year of employee engagement, round tables and learning opportunities for our organization. Within sustainability, we launched our circularity strategy, as well as color on demand, the revolutionary platform aimed at delivering the world's first scalable zero waste water cotton dyeing system. We are open sourcing the first phase of the platform to the fashion industry. Our hope is that we will see broad industry adoption, so that together we can make progress in addressing one of our sectors biggest area of income. We look forward to sharing our comprehensive progress on our citizenship and sustainability journey in our 2021 Design the Change report this June. Looking to fiscal year 2002, though still volatile given ongoing COVID closures and global supply chain disruptions, we are optimistic on a more favorable operating environment ahead. Consistent with the five pillars of our Next Great Chapter plan, we expect top line growth over the next year to be driven by a combination of continuing to scale digital, which now represents more than 25% of our total sales; expanding our key city ecosystems, led by fast growing markets like China, in addition to our under-penetrated areas in North America and Europe; accelerating marketing investments, Including new consumer acquisition targeting and personalization; and continuing on our brand elevation journey more broadly across our distribution and product assortments, driving further AUR growth, coupled with unit growth. Furthermore, we have confidence in a new post-pandemic fashion cycle based on the strong full price performance of our Spring '21 Collections. Our consumers are starting to gravitate back to newness, color and the styles we are best known for, such as our Iconic mesh polos, blazers and denim. This trend comes on top of the continued momentum we are seeing in, fleece, tees, novelty sweaters and other casual styles that have resonated with the past year. With our brand's unique ability to a short compelling products across Sportswear, loungewear and dressier styles, we will be consumer's growing demand across these categories in the coming season. In closing, Ralph and I want to reiterate how proud we are of the dedication, resilience and agility, our teams have demonstrated as we worked through a challenging year on many levels. We enter fiscal year 2022 stronger than we came into the crisis. With a stronger go-to market model, in more streamlined cost structure, more resilient supply chain and then iconic brand, well positioned to capitalize on the relax with sophisticated style consumers are craving. As we look ahead, we have significant opportunity, and a world-class team focused on becoming and even more elevated more direct-to-consumer, more digital, more global and more diverse equitable and sustainable company. And before I pass it to Jane, a couple of updates regarding our Board. Hubert Joly, will step into the role of Lead Independent Director, previously held by Frank Bennack, while Frank will continue to serve our Board. In addition, Ralph and I would like to extend our thanks to Joel Fleishman, who plans to retire from our Board of Directors this July for his leadership, significant contributions to the company and unflagging support and kindness. With that, I'll turn it over to Jane, to discuss our financial results. And I'll join her at the end to answer your questions.

Operator:

[Operator Instructions] First question comes from Omar Saad at Evercore ISI.

Patrice Louvet:

Good morning, Omar. Thank you for your question. So, listen we're not only well positioned to benefit from new fashion cycle as we emerge from COVID and as consumers return to the category into the stores, but we've also really strengthened the foundations of our business and laid the groundwork over the past year for a sustainable multi-year growth trajectory of a healthier base. So to your point, yes, of course, the comps will look attractive for the coming 12 months, but because of the base period, but obviously our lens has been beyond that looking to the next three years to five years for the company. So, as part of the work, we've of course accelerated digital, you saw that in the numbers we just announced and established infrastructure for Connected Retail around the world, and that's going to have benefits on a long-term basis. But as I step back, I think there are really three key differentiators that I would highlight to underline how we see our competitive advantage and our long-term growth potential. The first one is the strength of our brand. And over the past year, we've actually seen our purchase intent increase across all of our key markets, which we track now on a monthly basis. And as you saw with our AUR numbers, we continue to progress on our elevation journey, up 30% this quarter, up 26% this fiscal year, 16 quarters in a row of AUR growth reflection of our brand elevation journey. The other point I would highlight is that we're seeing that our brand aesthetic that's anchored in luxury classics, right. So elevated flows that you can live in is resonating with consumers who are looking for a different kinds of luxury coming out of the pandemic. One important data point for us in this brand strength area is our ability to recruit new consumers. Over the past year, we've brought in more than 4 million new consumers into our franchise and these new consumers are generally younger, higher basket size, and higher profitability, and it's really only the beginning. I think we now have a consumer recruiting machine that's working very well across all of our key markets. So first area is really strength of our brand, Omar. Second area is the breadth of our lifestyle portfolio. And I think this enables us to flex across categories. The flex across different consumer interests and desires, whether that's athleisure, loungewear, or more sophisticated casual, and also expand into high potential underdeveloped categories like home or like outerwear. Third area is our resources and particularly our cash position. As you know and we've prided ourselves of that, we manage our balance sheet conservatively. And I think the past years indicated that, that was probably a good choice, and we are in a position now where one, we can restart dividends as you heard Jane mentioned earlier. And two, we have the fuel to invest in critical growth areas like digital, like marketing, and like store openings. So, we feel very good about where we are in terms of our ability to fund the investment opportunities for growth to your point. I think it's fair to say that our brand remains bigger than our business. And as we look at our opportunities around the world, both on the category, consumer segment and geographical standpoint, we have many vectors of growth, even more focus now on the Ralph Lauren namesake brands posts and moves that we've made on Chaps and recently announced on Club. So listen, on top of these three differentiators, which I think are evergreen and real point of difference for us, we have the benefit of an incredibly talented global organization, that's really proven its resilience and agility and scale during this crisis. We have a diversified and flexible supply chain. And I think the portfolio that's now well-defined and tight, so we can really focus on those key value drivers. So while we're not completely done with COVID, as you look at what's happening in Japan, what's happening in parts of Europe and other parts of Asia, I am incredibly encouraged by our positioning and by the foundations that we've laid for the short, the mid, and the long-term as we pivot back to offense not only this coming year, but for the years to come. To your question on quality of sales and general growth, listen we're in growth mode, right. We're in growth and value creation mode. We have a number of engines for growth. We will continue our brand elevation journey, which I think will be evergreen for this company. So, our expectation is to continue to drive AUR, obviously at a more modest pace than this past year. We continue to drive AUR. Our expectation is to continue to recruit new consumers, and we also expect to start to grow units, all right. And that's really the vectors of growth moving forward. So yes, Ralph Lauren is a growth company, value creation company, obviously, we will do it profitably as we've been doing, but we're excited about what's possible for us moving forward.

Corinna Van der Ghinst:

Next question, please.

Michael Binetti:

Hey, guys. Thanks for taking our questions here and all the detail today. Let me ask at a high level. North America has been a big focus for a while. How are you feeling about the North America business now? A lot of the initiatives that you mentioned that you were trying to clean up over the last year are focused in that market. So how are you feeling about the North America business now, your ability to grow sustainably in the core market? And maybe you could help us by touching on a few of the key elements driving the plan. And then my second question is on SG&A, as we look at the guidance for fiscal 2022. I'm trying to -- you've done a lot of work on that line, Jane. And if I'm trying to think if the revenues come in, in an upside scenario, where it is SG&A go, if revenues beat your plan to try -- we're trying to think about how the fixed versus floating in SG&A relative to what we know about this business pre-COVID? What's the flow through on upside revenues, if you could.

Jane Nielsen:

And just, Michael, on your question on SG&A. So, obviously our guidance implies significant SG&A leverage in this year. And that's really built on, it's over 600 -- well over 600 basis points and operating margin expansion of 100 basis points to pre-COVID levels. And that's really predicated on what we've done in terms of achieving savings from our organization restructuring, obviously what we've called out for Club Monaco. And as you think about upside scenarios, and I think we've guided based on our best visibility that we have today in a fairly dynamic environment. But as you think about revenue upside, as vaccination rates might accelerate worldwide, as tourism may come back, strong -- maintenance of high digital penetrations like we saw in China, those are all upside scenarios. Our strong gross margin is really going to help us with flow through there. In terms of our cost structure, I think about the big buckets of rent and occupancy, corporate costs, depreciation are all highly leverageable in our model. And so the flow through that we get on incremental sales either in wholesale, digital or in our own stores are accretive, and a nicely accretive. So, I think you will see flow through, if there is an upside scenario on sales as we typically do. But we feel very good about how our cost structure is positioned. We feel good about our ability to invest in our brands. So our guide also implies a continued higher level of marketing at that around 6% range, which is about 150 basis points higher than pre-COVID levels. We're committed to our brand elevation journey and see that marketing is a key part of that, plus digital investments and new store investments. We'll have about 50 gross new stores in this coming year, the environments, right. We're optimistic about the environment. This is the right time to go back to elevated distribution expansion. So we think we found the balance between delivering profit accretion and investing in our business.

Operator:

Thank you. The next question comes from Matthew Boss with JP Morgan.

Patrice Louvet:

Sure. In lead indicators that we look at that are, are we bringing in new consumers into the fold. And past quarter in North America, our digital platforms, new consumers of 79% versus year ago. We look at our ability continue to drive AUR, right. And you saw the strong performance. I think our strongest quarter of the fiscal year actually with AUR, up 30%. And as we look at -- as we track also brand health, so purchase intent key metrics of brand health, we continue to see progress. So those all give us confidence that the work we're doing is resonating, our product is resonating, our communication is resonating, our elevation of distribution is resonating. And then, through the specific share points, I mean you have access to this, to this data as well. We are seeing our share progress on -- quite strong on men's, renewed momentum on kids, which is a business that we've worked hard to energize and strong performance on home, which as you know is a new focus for us. And we think there's significant potential there. And then, indeed more recently, as the consumer behavior on women's ready to wear pivots back to more elevated products, pivot back to more fashion, more color, right. We're seeing women buy more into Princess dresses. We're seeing them buy more into Blazers. We're seeing them buy more into novelty sweaters. We're very well positioned in these categories. So we -- this is translating into accelerating performance for us. 30 [ph] days now, I hope to be able to report a lot more, once things are fully re-open in, into -- but at the end of this quarter we're feeling good about the momentum that we're building.

Corinna Van der Ghinst:

Thank you. Next question, please.

Laurent Vasilescu:

Good morning, and thanks for taking my questions. Jane, I think you mentioned that you took a little bit about $700 million in revenues out of the business, that on an underlying basis your revenues for fiscal year 2022 should be roughly flattish. Can you give us some sense of how we should think about that for 1Q or 1H, 2H? And then second question is, if I go back to the notes from last call you talked about the cost savings of around $180 million to $200 million at the -- majority of that should flow through the bottom line. Just curious if that's the right way to think about still where you guys -- are you going to lean into investments and how do we think about that versus 1H and 2H?

Corinna Van der Ghinst:

Next question, please.

Paul Lejuez:

Hey, thanks guys. I'm curious how you view of EBIT margins longer term might have changed as you kind of sit here today, just as you think about beyond '22. And relative to what you're guiding for this year. What do you need to see in the business to kind of achieve those goals, some top line number that you need to get to something else that needs to change within the P&L. And also just curious if you can give us a quick update on the order books for the fall in the wholesale business. Thanks.

Corinna Van der Ghinst:

Thank you. Next question, please.

Irwin Boruchow:

Hey, good morning, everyone. So Jane, just to kind of go further on US wholesale, so bigger picture. I think the US wholesale business pre-COVID was around $1.5 billion. I know Chaps is coming out, so I think that's $200 million. But can you talk to us about ultimately how you see the sizing of that channel? Are you planning -- if there's any more detail on this year and how you're planning it that'd be great. But even multi-year is the business you're planning to kind of walk away from post-pandemic that maybe you just felt is not the most efficient, maybe it's lower margin. Just kind of trying to think about $1.5 billion pre-COVID maybe two years, three years from now, where ultimately do you kind of see that landing?

Corinna Van der Ghinst:

We'll take one last question, please.

John Kernan:

Excellent. Thanks for sneaking me in.

John Kernan:

Hey, can you talk to EBIT level impacts from the shift in Chaps and then the sale of Club Monaco?

Patrice Louvet:

All right. Well, thank you, everyone for joining us today. We are very proud, Jane and I and Ralph of the resilience and agility, our teams have demonstrated in delivering a strong close to the year. Looking ahead, hopefully, you took this away from our conversation today, we are confident in our ability to deliver sustainable long-term growth and value creation not only this fiscal year but also beyond. And we look forward to sharing our first quarter fiscal year 2022 results with you in August. Until then, stay safe and have a great day.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third Quarter Fiscal 2021 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn over the conference to our host, Ms. Corinna Van Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Cory. Good morning, everyone, and thank you for joining today's call. Our third quarter performance reflected strong underlying progress on our path to quality, sustainable long-term growth. Overall, revenues improved sequentially and were in line with our expectations. Stronger-than-expected recovery in Asia was offset by the impact of continued COVID-19 resurgences across Europe, while North America was roughly in line with our expectations, even with additional COVID pressures. Meanwhile, our focus on brand elevation, improved quality of sales and cost discipline drove better-than-expected gross and operating margin expansion in the quarter with double-digit AUR growth and digital profitability, exceeding our expectations. And while COVID is likely to remain a near-term headwind, there is reason to be hopeful as we start the new year and vaccines begin to roll out. Ralph and I are incredibly proud of the dedication, resilience and agility our teams have shown in not only managing through the pandemic, but also positioning the company to emerge stronger than we came into it. As part of this, we balanced reset activities with an acceleration of our core strategies, including strengthening our brand and bolstering our marketing and new customer acquisition, expanding key categories in international markets, scaling our connected retail offerings globally, continuing to prune non-elevating distribution and further realigning our cost structure. These actions are consistent with the 5 strategic priorities that we laid out as part of our long-term plan prior to COVID. These include

Operator:

[Operator Instructions]. Our first question comes from Alexandra Walvis with Goldman Sachs.

Patrice Louvet:

Well, thank you for your question. I'll take the first part, and then Jane will cover your AUR question. So elevating our brand and attracting high-quality new consumers across all three regions, particularly in the U.S. Our top priorities, and listen, will continue to be top priorities as we come out of COVID. The general message is we're making strong progress. A few points to kind of support that. First, our data shows that our brand has strengthened through the pandemic. Specifically, if you look at brand awareness and purchase intent, they're both up versus a year ago and continuing to progress quarter-on-quarter, with particularly encouraging progress among next-gen consumers and women. The second point is that we are acquiring more customers on our digital sites. We've seen 38% growth in North America, 79% growth in Europe and more than tenfold growth in Asia in terms of new customers on our sites year-to-date. This is clearly on the back of the deliberate targeted marketing plans that we've put in place across the regions. And it's also worth noting that we're not just driving higher traffic to our digital businesses, but we're also seeing -- and I think you heard it in Jane's remarks, an increase in our full-price sales. So we're bringing in new consumers that are higher ticket and higher margin. And I think that bodes well for the future for us. The third point is really around our social media presence, which continues to deepen and grow around the world, our followers reached a record high 45 million this quarter, and we're especially encouraged by our progress on key platforms like Instagram and TikTok, YouTube, Kakao On-Line in Asia, where, as you've likely seen, we've developed some pretty unique partnership, including our recent Bitmoji Snapchat partnership. We're also driving brand heat through product as you may have seen our recent street work collaboration with Clot, which is a brand founded by Edison Chen and Kevin Poon, based out of Hong Kong. There's a lot of excitement around these products. They virtually vaporized as we put them up for access to consumers within a few seconds, they were sold out. And now you can add them at multiples of the retail price on types like StockX. So we've been happy with the response we've seen and the contribution to overall brand heat. All this, importantly, is enabled by our strong balance sheet. Jane just touched on that, which has allowed us to continue driving our strategic priorities, like brand elevation, like investing in marketing, and also reinstate our dividend in the coming quarters. So together, if you put all these elements together, this gives us confidence that we're investing in the right places to elevate our brand and drive interest and heat particularly with the next-generation that we're specifically focused on. And then on your AUR question, I'll let Jane answer that.

Operator:

The next question comes from Michael Binetti with Crédit Suisse.

Jane Nielsen:

Sure. So let's peel that apart. So starting with inventory. As we do look at while we're very clear that there is some near term disruption, which likely could last into our fiscal '22 from COVID. Our long-term optimism and especially in the second half of our fiscal year is high. And so as I think about what we're going to be overlapping, we expect that store comps will be meaningfully better as we move through the year. And certainly, as we move through the fiscal year into the second half. And that's really contingent on the vaccine and some of the abatement in the virus, which we believe in. And so we do believe that store comp will continue to be a positive factor as we move through fiscal '22. Certainly, our wholesale businesses have not been immune to the factors of COVID. And I think that as we emerge from the crisis, you'll also see we've been very tight on our sell-in. And sell-in has been under sell-out. And so there are good inventory replenishment needs. In the wholesale channel, especially as like our own channels, they come out of COVID. We feel -- our inventories were down 30% in North American wholesale. They have been sequentially down in Europe. So we feel good about our position. They're ready for fresh product, which we feel will be able to fulfill and expect momentum coming out of there. And of course, the investments that we're making in digital, as we look across our total digital business, we expect acceleration global with our total digital business in Q4. And certainly, as we finish the cleanup in North America, and you can see that domestic consumer up high teens this quarter, will be done with a lot of the daigou cleanup, and you'll start to see that acceleration coming into fiscal '22. Those are the key drivers that give us optimism in '22. We do feel comfortable about our savings estimate of 100 -- the majority of $180 million to $200 million that we announced in the first realignment plan flowing through to be an EPS driver. And with that, our additional savings that we announced today will be used to accelerate and restart all those drivers that I talked about on sales to make sure that we have the investment funds to continue our digital expansion, elevate our brand, focus on marketing, which you've seen us approach with optimism in the fourth quarter, the marketing be up 50%. Those are the drivers. The question is timing, but we do feel confident about, certainly in the back half of '22.

Matthew Boss:

Great. On North America, Patrice, maybe what inning would you peg your strategic quality of sales actions in today? And then, Jane, on SG&A, how should we think about incremental cost savings going forward relative to today's announcement, should we think about incremental cost savings from here reinvested back into the business? And if so, how would you rank more offensive investments to drive top line from here?

Jane Nielsen:

Just on the SG&A, Matt, what we feel good about is that our realignment plan is on track. We feel confident about the savings from the org restructure that will flow through fiscal '22, as we've said. And then as you think about real estate, as we called out in the announcement today, the benefits of real estate will start to be realized as we move through fiscal '22. So all of those benefits won't be realized in fiscal '22, but we'll start to realize them in fiscal '22. And that -- and we will use those savings to drive important investments in our business. Like digital, like the work that we've been doing in personalization, which you've seen drive tremendous growth in Europe and is starting to bear fruit in our domestic business in North America. Certainly, investment in China, where this year alone, we've opened 85 stores. We intend to grow stores -- new stores. We intend to continue that journey as we move forward. We believe we have distribution opportunities in Asia and also more targeted distribution opportunities in Europe and North America, and we will use the savings for that as well as increased marketing. We know that our brand and the elevation of the brand is so much of what is pulling the whole ecosystem up. So continuation of increased marketing across our brand.

Paul Lejuez:

Just how you're thinking about the range of top line outcomes in F '22, maybe relative to the pre pandemic period? And what sort of flexibility do you have in the P&L if top line is slower to recover just as I hear you talk about some of these expense initiatives. Just wondering how much you can flex those if need be as you think about F '22? And then just curious if you can share anything about what you see in the European digital business when stores close relative to how that digital business performs when stores are open?

Patrice Louvet:

And Paul, the one element I would add on the European digital commerce performance, to Jane's point, is the fantastic work our teams in the markets have done relative to connected retail capabilities. I think pretty soon, we won't be talking about digital and brick-and-mortar separately because they're now so intertwined. But as you look at these new ways of selling in the context of connected retail, we're expecting that to be an accelerator for our digital performance. And so a lot of that's been pioneered in Europe. A lot of that is what you see in these very strong numbers this quarter, where we're up 60 -- I believe 68% digital commerce in Europe. And I think that is a sustainable set of capabilities that will help us continue to accelerate progress on that front.

Irwin Boruchow:

I guess, Jane, a question for you, similar to Matthew's question on kind of where the earnings base shakes out over time. I guess I wanted to focus really on the U.S. wholesale channel. So I believe pre-COVID, you were kind of doing $1.5 billion of U.S. wholesale. You've got initiatives in place to shrink the door count and does it rationalize some of the lower margin revenue streams you had there? I guess when all is said and done, and we're on the other side of this, how much of a smaller wholesale business do you expect to be managing, if at all? And then how does that kind of translate into operating margins? Are you planning a smaller, more profitable channel? Are you kind of trying to get back to where you were? Just kind of curious at a high level how you think about it?

Operator:

Our final question comes from Simeon Siegel with BMO Capital Markets.

Jane Nielsen:

Yes. Sure. So the primary driver of our digital margin reset was our pricing and product mix strategy. So we are elevating the mix, our product mix on our digital sites. We are pulling away from -- especially in North America from those daigou discount-oriented customers. We're recruiting new customers at a higher gross margin, a bigger basket. And so that's driving a great deal of our margin expansion as well. It's primarily coming from those resets, pricing, quality consumer recruitment. And we are getting some leverage on our fixed cost base, which is well built out. And is ready to be leveraged from a growth standpoint. So we feel good about, it has multiple drivers across all the vectors. And the most work has been on the North America site. That's where we've seen the biggest ladder up in this quarter in terms of digital margins, but tremendous progress in Europe over the past over the past six quarters. And Asia, with the reboot of Asia, started off with quite healthy margins and continues to grow those margins largely on scale.

Jane Nielsen:

I love the new consumer metrics and the new consumers that we're recruiting. We're really excited about that as an investment opportunity for us. And just to -- I know I mentioned it on the script, but we're really proud that full price billing on our site up over 130%.

Operator:

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, the conference is being recorded. I'd now like to turn over the conference to our host Ms. Corinna Van Ghinst. Please go ahead.

Patrice Louvet:

Thank you, Corey. Good morning, everyone, and thank you for joining today's call. Our second quarter performance reflected solid progress on our path to return to growth. Our results were overall in line with our expectations with better-than-expected earnings driven by gross and operating margin expansion. While COVID-19 is still impacting physical store traffic and consumer behavior, we continue to take proactive measures to get ahead of these shifts and position our business to emerge from this crisis stronger than we came into it. These measures include accelerating our connected retail offerings globally, delivering high-value new customer acquisition, expanding key categories and international markets and realigning our cost structure. Throughout this period, we remain steadfastly focused on elevating our brand, and we were encouraged that underlying AUR growth outperformed our expectations this quarter, which is reflective of more personalized communications, reductions in promotional activity, geographic, channel and product mix benefit and strategic pricing increases. This acceleration of core strategies in the quarter remains consistent with the five strategic priorities that we laid out as part of our long-term plan. These include

Jane Nielsen:

Thank you, Angela. And good morning, everyone. We were encouraged by our team's execution and continued business progress in the second quarter. In the midst of a still challenging operating environment, we delivered sequential improvement across all regions, expanded our gross margins through continued AUR growth and brand elevation and reduced expenses across the company. Importantly, our balance sheet is very strong with $2.4 billion of cash and investments, enhanced by ongoing working capital efficiencies. At the same time, we continue to invest in our brands and in the channels that matter most to consumers today, notably, an increased emphasis on our digital transformation. We continue to be cautious about the pace and regional variability of COVID recovery as well as consumer behavior, especially with the rise of restrictions, with the resurgence of COVID cases, notably in Europe. We are intensely focused on what we can control in this dynamic context and on positioning the company to accelerate value creation as we emerge from the global pandemics. This includes elevating our powerful lifestyle brands and maintaining a strong balance sheet, while also realigning and streamlining our operational and expense structures. To achieve this goal, in September, we announced the first stage of our fiscal 2021 strategic realignment plan, designed to support future growth and profitability while creating a sustainable cost structure. Our full strategic review process includes the evaluation of our team organizational structures and ways of working, our real estate footprint and related costs across distribution centers, corporate offices and direct-to-consumer retail and wholesale doors and our brand portfolio. We announced actions related to the first initiative, reshaping our organization to align to our strategic growth priorities. These are estimated to result in gross annualized pretax expense savings of approximately $180 million to $200 million. We anticipate a substantial portion of these savings will flow through to the bottom line beginning in fiscal 2022. In connection with the organizational reshaping, we expect to incur a total pretax charge of approximately $160 million. The majority of this charge was recorded in the second quarter. As Patrice mentioned, we announced today that we are transitioning our North American Chaps menswear and womenswear business to a fully licensed model, starting in the second half of fiscal 2022. Although the change is not material, we look forward to updating you on the business transition and progress in the coming months. Moving on to second quarter performance. Second quarter revenues declined 30% compared to a 66% decline in Q1 with performance across all three regions, still adversely impacted by COVID. Total direct-to-consumer comps were down 28%, while global Wholesale revenues declined 37%. Our bricks-and-mortar comps were down 33% following a 66% decline in the first quarter. AUR improvements were more than offset by traffic declines of more than 40% versus last year and limited store operating hours, due to health and safety regulations, consistent with the broader environment. Looking ahead to holiday, we are proactively working to drive traffic and comps through multiple levers, which include increasing high ROI performance marketing, expanding personalization and social commerce program and leveraging our connected retail capabilities, including new features that will be rolled out for holiday. Our brick-and-mortar declines were partially offset by a 12% comp increase in our owned Ralph Lauren digital commerce business. And more importantly, our digital profitability continue to improve with Q2 digital operating margins expanding more than 1,000 basis points to last year through a combination of higher quality of sales and SG&A leverage. With digital representing our fastest-growing channel in the company, driving profitability in this business remains important, not only to our long-term margin accretion, but also to our strategy of repositioning ralphlauren.com as our digital flagship or the best expression of our brand online. Second quarter AUR growth of 26% was above our expectations, led by double-digit increases in North America and Europe. Excluding the COVID-related mix impact, underlying AUR still grew more than 20% to last year. This underlying AUR growth represented an acceleration from the first quarter and is above the low to mid single-digit growth we guided to for fiscal 2021. We plan to drive further AUR growth this year as we elevate our brands across every touch point, significantly reduced promotional depth and duration, drive favorable mix and take targeted pricing increases, particularly in North America. Our confidence in this brand elevation strategy is reinforced by our continued improvements in full price penetration rates, basket sizes and better-than-expected conversion, even as we reported higher AUR growth. Adjusted gross margin was 66.5% in the second quarter, up 500 basis points to last year. Gross margin expansion was driven by strong AUR improvements and favorable geographic and channel mix shift, as our higher AUR gross margin Asia business recovered faster than North America and Europe. Approximately two-third of our gross margin expansion was driven by our continued global improvements in pricing and promotions, with the remainder driven by mix shifts that were outsized given COVID impacts. SG&A expenses declined 19% to last year on savings from employee furloughs, store rents and government subsidies as well as lower selling and marketing expenses. Adjusted operating margin for the second quarter was 12.6%, down 230 basis points to last year. Marketing declined 31% as COVID canceled or limited the activation of key events like Wimbledon, the U.S. Open and Fashion Week. And we shifted some demand creation activities later in the year. We also continue to pivot investments from in-store and event-based engagements toward longer term brand building activities focused on digital and our values based messaging, as Patrice discussed. Moving on to segment performance, starting with North America. Revenue decreased 38% to last year. Retail comps declined 32%, driven by a 40% decline in brick-and-mortar comps, while our owned digital comps increased 10%. Brick-and-mortar comps were primarily impacted by a steady but measured recovery in retail traffic, including a significant decline in foreign tourist sales in the quarter, consistent with the broader market. AUR for the quarter was up over 20%, driven by significantly reduced promotions and our continued rollout of targeted ticket price increases in factory stores. Our digital commerce comps accelerated to 10% from 3% growth in the first quarter. Underlying sales to domestic consumers, high teens while sales to international and daigou [ph] customers declined double digits to last year, as planned. Stronger sales to domestic consumers were driven by our investments in connected retailing, such as buy online, pickup in-store and expanded personalization and targeted marketing efforts. Our digital marketing work generated a 37% increase in new customers this quarter, driving our full-price sales penetration higher. Similar to last quarter, these comp gains were tempered by a significant planned reduction in promotions to drive higher quality of sales, while also serving to reduce lower-margin sales to international daigou customers. We reduced our total site-wide promotions by 52 days compared to the prior year period. As a result, our digital AUR was also up over 20%, and gross margins for North America digital commerce expanded more than 1,000 basis points to last year. Through this fiscal year, our plan is to continue driving stronger profitability in this channel, while on the revenue side, balancing strong domestic growth with a steady reduction in sales to international promotion seeking shoppers. In North America Wholesale, second quarter revenues declined 46% as we continue to manage our shipments carefully and realign inventories to demand. The decline was partially offset by a modest shift in timing of shipments to rebalance inventory before holiday. At the end of Q2, our inventories at wholesale were clean and well-positioned, down more than 40% at North America wholesale. We are encouraged that our sell-out rates in wholesale are still significantly outperforming sell-in. However, we expect further pressure on reported sell-in over the next few quarters, as we continue to manage inventories carefully. Moving on to Europe. Second quarter revenue declined 25% on a reported basis and 28% in constant currency. Europe retail comps were down 29%, with a 35% decline in our bricks-and-mortar store comps, partly offset by a strong 26% increase in our owned digital commerce. Across Europe, our bricks-and-mortar comps were impacted by traffic headwinds similar to North America. However, AUR was up over 20% to last year, led by our ongoing strategy to elevate our factory channel. We continue to be cautious on the pace of brick-and-mortar recovery in Europe based on the growing intensity of second waves of COVID, along with other macro uncertainties. Strong momentum in our own digital commerce comps was driven by our new consumer acquisition up 30%, along with new site functionalities, connected retailing initiatives and enabled by the launch of our new brick-and-mortar, I will say new back-end LMS platform in the quarter. We were also excited to go live on Farfetch this quarter with a marketing campaign launching in time for holiday. Europe wholesale revenue declined 27% in constant currency as we continue to limit shipments to reset our inventories to demand. However, we saw continuing momentum in wholesale.com and digital pure plays sell-out performance through the period, with strong double-digit growth to last year led by key platforms such as About You, Asos and Zalando. Turning to Asia. Revenue declined 7% on a reported basis and 8% in constant currency. Our Asia retail comps improved from on a 33% decline in the first quarter to an 11% decline in Q2. Brick-and-mortar stores were down 12% partially offset by digital comps up 32%. We are encouraged that growth in the Chinese Mainland is back to pre-COVID levels of more than 30%. However, Japan continued to be the biggest headwind in the quarter, with sales declining 17%. Following our store reopenings in early June, the market entered a second wave of COVID cases which impacted our performance, along with weaker tourism. The decline was partially offset by stronger-than-expected growth on our new digital site launched in June. Other key markets, especially those with higher levels of tourism like Hong Kong continue to be on a more variable and prolonged recovery. Overall, momentum in our agent digital businesses continued through the quarter, driven by a strong performance across all key markets and channels, including our own sites and digital pure plays. Moving on to the balance sheet. We ended the second quarter with $2.4 billion in cash and investments and $1.6 billion in total debt, which compares to $1.6 billion in cash and investments and $693 million in total debt at the end of last year's second quarter. Net inventory declined 12% to last year with double-digit declines in North America and Europe and a 9% increase in Asia. While we have taken a highly cautious approach to managing inventories through the pandemic, overall, we were encouraged by our team's ability to merchandise around our core and iconic styles as well as key COVID categories like home and athleisure. Our increased agility is also enabling us to shift back into pre-COVID categories as consumers return to more normalized trends. Our tightly managed inventories, combined with our strong AUR and gross margin performance through the first half of the year give us increased confidence, that we are taking the right strategic approach to move through excess Prim 20 [ph] product, while also positioning the company for sustainable future growth. Meanwhile, our supply chain teams continue to improve our lead times and fast track capabilities to chase potential increases in demand. Looking ahead, we continue to plan around a number of demand scenarios, given the high level of uncertainty and evolving situation surrounding COVID-19. Based on our assessment of developing business trends and our strategic plans, we want to share some details on how we are thinking directionally about the rest of the fiscal year. First, we expect our financial results for both the third quarter and full year fiscal 2021 to continue to be adversely impacted by the pandemic and prolonged demand recovery. We expect gross margins to continue expanding in the second half of the year, albeit at a more moderate rate than the first half. Improved pricing and promotion, including targeted consumer messaging should continue to be the most durable driver. Based on our year-to-date progress on our brand elevation strategy, we now expect AUR to grow low double digits this year, exceeding our long-term target of low to mid-single-digit average growth annually. We expect these tailwinds to be partly offset by higher production costs in the back half. As we outlined at the start of the pandemic, we plan to clear excess full price merchandise, primarily through our factory channels. We continue to expect declines in operating expenses to moderate with the highest level of dollar spend in the third quarter around holiday. Our first half results included one-time benefits from employee furloughs, rent abatements, executive compensation reductions and government subsidies that are not likely to repeat in the second half. We also shifted a meaningful portion of marketing investments to the back half of the year to position our business for growth as we emerge from the crisis, with first half marketing expense declining 32% to last year but expected to grow about 10% in the second half. Note that cost savings associated with our organizational realignment and any additional potential actions are expected to begin primarily in fiscal 2022. Lastly, our tax rate may be higher and more volatile this year. This is due to impacts from stock compensation and non-deductible items under tax reform as well as limitations on tax benefits from losses eligible for carryback under the Cares Act. In closing, guided by our clear purpose and strategy along with the strength of our Timeless brand and Ralph's creative vision, we are encouraged by the progress we have made over the first two quarters of the year. Our brand elevation is working across every geography. We are accelerating our push into digital, and we are driving even greater cost discipline as we make difficult decisions around realigning our organization and footprint around the world. While we continue to navigate a highly dynamic global environment, our teams are laser-focused on managing through this period to position the company to return to healthy and sustainable growth. And with that, let's open up the call for your questions.

Omar Saad:

Good morning. Thanks for taking my question and congrats team on the strong profitability this quarter.

Patrice Louvet:

Good morning, Omar.

Patrice Louvet:

Sure. Well, thanks for your question. First and foremost, our strength comes from our teams and their incredible dedication, resilience and agility have fueled our progress in -- during these challenging times. Our team's engagement, coupled with a laser focus on strategic priorities and also proactively reducing our exposure to the most structurally challenged parts of our businesses, leads me to actually have great confidence that right now, the fundamentals of the company are actually stronger than when we came into this crisis. Let me elaborate on both areas. First, the strategic growth areas, and then I'll talk about how we're tackling the structural headwinds for the company. So, strategic growth focus area is really centered on elevating our brand, right? We have one of the best brands in the world at hector resiliency and authentic consumer connection during COVID. Our latest read on purchase intent over the past six months since the crisis started indicates actually our purchase intent, our brand consideration scores are up versus pre-crisis. Second point is accelerating digital growth and profitability, right? We've been adding connected retail functionality. We've driven a great focus on personalization in the interaction with our customers and also a strong drive on quality of sales. The third area is recruiting high-quality new consumers, bringing in consumers who buy at higher prices and are really at the sweet spot of our general targeting. And we also saw very strong consumer growth on ralphlauren.com over the past quarter versus prior year. Fourth area is driving high potential underdeveloped markets and categories, namely China, outerwear, and home. And then finally, it's realigning our organization and cost structure to support our future growth and deliver for the numbers we announced a few weeks ago, at least $180 million of savings. So, those are the strategic growth focus areas. And then we're really tackling head on the most challenging areas of the business, and I'll quote the top three. One is our North America brick-and-mortar wholesale presence; the second is our off-price penetration; and the third is the underperformance of our non-core brands. So we closed another 200 underperforming North America Wholesale doors over the past few months. If you step back a little bit, Omar, and you look at the past three-year time frame, we've basically reduced our North America Wholesale brick-and-mortar presence by over 50%. We closed more than 50% of our doors. We also continued to reduce the penetration of off-price in our business, significantly this past quarter. Likewise, to step back and look at the past three year focus and progress, we've reduced the penetration of our off-price business by more than half. And then finally, you heard in our prepared remarks the fact that we are transitioning the Chaps brand, which is roughly $200 million in revenue to a value-accretive, fully-licensed model. So although, we recognize we're still operating in a highly volatile environment and clearly yesterday's new restrictions in Europe are unfortunately a good reminder of this and we will need to continue to manage with agility as we have since the beginning of this pandemic as we kind of work through it. We are focused on strategically positioning the company for long-term growth and value creation. Specifically, Omar to your question on the organization reshaping work that we announced a few weeks ago. So it fits perfectly into the strategic focus areas that we have called out. We really looked ahead and said, okay, next three to five years, what are the key growth areas for the company? What are the key capabilities that we need to succeed? And how do we align our organization structure, our ways of working, our investment levels to make sure that we're taking advantage of all these growth factors. And so what you've seen through our announcement for the reshaping work is a reflection of that. And also, of course, the adjustment of our cost structure to reflect the -- where the business is today and where, again, we want to allocate our resources.

Operator:

Thank you. The next question comes from Matthew Boss with JPMorgan.

Patrice Louvet:

Sure. Good morning, Matt. Well, on the brand performance, and we don't get into the specific by brand. But what I can tell you is the bigger parts of the company is the Polo brand, and that is the part of the company that has the strongest progression rates. On the other parts of the portfolio, some of which are work-in-progress like the work that we've been doing on Lauren over the past year. We're feeling good about the pivots that have been made on product, the pivots that have been made on marketing and encouraged by the progress that we're seeing across the channels. The same is true for our luxury labels, purple label and collection and RRL [ph].

Corinna Van der Ghinst:

Next question.

Ike Boruchow:

Hey, good morning everyone. I hope you're all well. Yes. So Jane, just two quick one’s for you. So I appreciate the gross margin commentary in the back half. Could you talk a little bit more specifically about the next quarter just because of how important it is? And I know it seems like you've got some good mix benefits from China and DTC, but I'm assuming we should expect gross margin expansion in both quarters. But I'm kind of curious if you could talk around the gross margin for the upcoming quarter? And then just at a higher level, maybe it's too early to go into this, but can you possibly begin to help us think about the pacing of recovery in the U.S. wholesale channel based on your conversations with your partners, when are you expecting – quote, unquote – normalized growth rate kind of return? Just any help on the pacing of recovery in that channel specifically would be great. Thanks so much.

Corinna Van der Ghinst:

Next question please.

Dana Telsey:

Good morning. The speed model…

Dana Telsey:

Hi. And the improvement in speed with the three month lead times is very impressive. What do you see the opportunity of that going forward? Does it differ at all by classification? And what is that benefit to the gross margin going forward? Thank you.

Jane Nielsen:

And the primary benefit of this – from a gross margin standpoint is the reduction of excess and a reduction in vendor allowances and NRV, as we're able to re-demand closer and fulfill demand and fulfill product closer to reading demand, and that should be durable as we improve our reaction times.

Operator:

Thank you. The next question comes from Michael Binetti with Credit Suisse.

Patrice Louvet:

Good morning, Michael.

Jane Nielsen:

Yes. We are working hard on the margins. As I look at the actions that we announced and the combination of work that's in progress, such as the Chaps operating model, which you will see the benefit of the org reshaping work largely in fiscal 2022. And as we called out, that will be a gross savings of $180 million to $200 million. The benefit of the Chaps, while much smaller in magnitude would occur post transition in August. And then the work that we're doing on continuing ground portfolio valuation and real estate would likely flow through in fiscal 2022, but closer to year-end in fiscal 2022. In terms of -- we are focused on margin right now. Some of these actions like moving Chaps to a wholesale model will be helpful from a profitability standpoint. But obviously, as you shift to a license model, I'm sorry, that compresses your total dollars of revenue. We factored that into our thinking and are really focused on getting our -- focusing on our operating profitability. We're not guiding to sort of a time of recovery to pre-2019 levels. There's too much uncertainty out there, but that is certainly our long-term mind set.

Operator:

Thank you. The next question comes from John Kernan with Cowen.

Patrice Louvet:

Good morning, John.

Patrice Louvet:

Thanks.

Patrice Louvet:

That's a very good question, John. And it's very top of mind for us. That's why all the focus -- let's focus on digital, first and foremost. All our focus on ralphlauren.com is about brand elevation, but enhancing the experience and it's about step changing the profitability. Because anyone can grow dot com operations aggressively at no profit, right? But that's not the game we're in, or the game we're in is ralphlauren.com needs to be accretive to the region from a profitability standpoint. We have achieved that in Asia. We have achieved that in Europe, and we're on our way to achieving that in North America. You saw from our prepared remarks, our margin this past quarter in ralphlauren.com US is up 1,500 basis points, which is a massive growth. And our objective is to make sure that we're excited about moving consumers to that channel and recruiting consumers into that channel, because it will be accretive to the profitability of the region. So we're working on both making sure we're bringing in high-value customers and also have the right AUR, gross margin, SG&A structure to support that moving forward, because you're right that the direction of travel for this company is more direct to consumer in terms of split by channel, and we're keen to make sure that the profitability structure follows that.

Corinna Van der Ghinst:

Thank you.

Jane Nielsen:

Yes. I think what we're seeing now is that in -- from our order shaping work, we're going to flow through substantial -- the majority of that through to the bottom line, understanding that we will be making in -- some investments in to accelerate into growth, but I think that as you think about your model, the majority of that will flow through.

Operator:

Thank you. Our next question comes from Erinn Murphy with Piper Sandler.

Jane Nielsen:

So we saw fairly similar traffic patterns in Europe and North America to our brick-and-mortar stores. China encouraging returned to pre-COVID levels of traffic and really led across Asia. And – but we're encouraged by the trajectory we're seeing at, especially by our largest market in Japan that continues to recover following the second wave.

Erinn Murphy:

Thank you. And can I…

Operator:

Thank you. Our final question comes from Adrienne Yih with Barclays.

Jane Nielsen:

Good morning.

Adrienne Yih:

Happy to see the progress. Patrice, I guess my question for you, I liked your comment about the – attracting the new millennial customer. I was wondering if you can give us some metrics or feedback from what you're hearing from both millennial and Gen Z consumers? And then, Jane, my last question for you is your comment based on in spring 2021, you'll be in an improved inventory position. Are you seeing evidence of kind of that stabilized demand in forward bookings for spring 2021? Or is the comment more on the controllable side that you will have a better inventory position? Thank you very much.

Jane Nielsen:

Yes. In terms of our outlook for Wholesale Spring '21. We know that our inventory positions will be better. That's what we can control. Obviously, demand is -- remains the biggest uncertainty, but we're encouraged by the conversations that we've had with our wholesale partners thus far.

Operator:

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions on how to ask a question will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please, go ahead.

Patrice Louvet:

Thank you, Cory. Good morning, everyone, and thank you for joining today's call. The past few months have marked a period of extraordinary challenge, but also resilience, agility and hope. Our financial performance this quarter reflects an unprecedented three months of COVID-19 related impact around the world. We're taking the opportunity to leverage this period of disruption to accelerate our core strategic focus areas, drive new areas of growth and we aligned our resources accordingly. Building on the strong foundational work our teams had done prior to COVID, over the past few months, they have executed with incredible agility and speed to strengthen our connected retail capabilities, further rationalize our North America brick and mortar wholesale presence, and continue to build our brand through personalized consumer engagement and more values based messaging, all while pursuing our brand elevation journey as evidenced by our strong AUR in gross margin progress. Since, Ralph started our company more than 50 years ago, his focus on the long-term and the spirit of timelessness has enabled us to not only survive times of uncertainty, but drive lasting authentic connections with our consumers. To that end, we have a responsibility that goes well beyond the products we sell. And I first want to take a moment to address the persistent, systemic racial injustice in the U.S. and around the world. We've been listening to our teams and a few of the many actions we've taken over the past couple of months include

Operator:

[Operator Instructions] The first question comes from Laurent Vasilescu with Exane BNP Paribas.

Patrice Louvet:

Good morning, Laurent. Welcome back. And thank you for your question. So listen, we are determined to win in this very dynamic environment, and as I look at our core strategic choices, which you know well, we believe they are broadly still relevant today. But obviously, the landscape is shifting rapidly and we're proactively evolving our strategy to remain on offense, which includes accelerating certain strategic choices over others. So, I thought I'd share a few examples of how our teams are working with agility and resilience to bring all this to life. First on winning over a new generation, we're putting even more emphasis on purpose and values based communication, and you saw some of that with our Pride campaign, recently, coupled with targeted, personalized digital marketing which - both of which are actually resonating quite well with current consumers, and new consumers, and you'll remember our ambition is to get to one-to-one marketing, ultimately. Within our product assortment, one of the thing, I think, that really stands out for Ralph Lauren relative to the number of players in our peer group is the fact that we are a lifestyle brand. We are now attached specifically to one product category or another, we truly have this incredible ability to flex across categories. And so, we're leveraging this to put more emphasis on areas that are resonating most with consumers right now. For example, that is both our focus on the core, and also new under-developed categories that we are focusing on now, like Home or Loungewear, for example. Within our ecosystem, so you'll remember, we're looking to build holistic omni-channel ecosystems in a limited number of big cities around the world. That's our go-to-market strategy. We're putting more emphasis on connected retail and refining how we integrate these capabilities within this ecosystem strategy. So connected retail, if you're familiar with all the capabilities that are available in this space, and I am actually really pleased with the work our teams have done over the past few weeks and months to ramp up Buy Online Pickup in Store, Buy Online Ship from Store, curbside, digital client selling, virtual appointments, book appointments online, and so on. And I think, probably, the Chinese Mainland situation is probably our best example of bringing all that to life, but it's actually been very energizing to see how this has been expanded across all of our regions. Fourth thing I would call out is related to this, actually, is really taking a digital first lens to everything that we do, whether that applies to how we interact with consumers, how we interact within our teams, virtual showrooms; we had our first Purple Label virtual showrooms a few weeks ago that was very successful, or 3D designs. And then finally, our work to operate with discipline to fuel growth, which is our fifth pillar, obviously doesn't stop here. With the changing environment, we're actively looking at our complete operating structure, where we are allocating resources and where we can drive more flexibility, as Jane mentioned in her prepared remarks. Now, of course, all of this work will require reshaping of our organization and footprint that align with these updated and accelerated strategic choices, which we look forward to talking to you more about in the coming months.

Corinna Van der Ghinst:

Thank you. Next question, please.

Matthew Boss:

So, on North American wholesale, maybe - what's the best way to think about the pace of recovery as we think about North American wholesale in the second quarter or the back half of the year, relative to the 93% 1Q decline. And with that, Patrice, coming out of the pandemic, is there any way, maybe, just to elaborate on initiatives, or opportunities you see to re-map demand for the overall brand over time in the face of the partner door consolidation that we're seeing today?

Patrice Louvet:

And then, to the second part of your question in terms of re-mapping demand, and our focus is, specifically, I guess, on North America. If you look at our go-to-market strategy going forward, it has a few components. First, we want to focus on key cities, all right. And actually, which is to fund in the U.S. as we have a lot of white space opportunities from a key city standpoint. Second is, within each of these key cities, we want to make sure we have a balanced omni-channel ecosystem. And likewise here, we believe there are opportunities to rebalance it. So, what are the key components of it. First is our DTC, second is digital commerce, all right. And digital commerce is four components in our minds. It's ralphlauren.com site, and you heard Jane talk about all the work we're doing to elevate AUR, strengthen profitability, better connect with consumers moving forward. There are pure players, those - the presence is more limited in the U.S., but that business is developing, obviously, much stronger in Europe and in Asia. The third area is wholesale.com, which is very good momentum in the U.S. We're actually very pleased with the progress that we're making with our partners there. We're investing disproportionately additional capabilities with them to further accelerate our performance and enhance brand presence. And fourth is social commerce which is still nascent. So think of this as Instagram checkout, for example. We are now available on Instagram checkout. I think a little anecdote is we're are the first home business actually on Instagram checkout. We expect to see significant growth from these four components of digital commerce. And then, the third element of this plan is the top doors of our wholesale partners. And you've seen over the recent announcement that we have further reduced our footprint in wholesale to really focus even more on those top performing doors where we can both project the brand in a way that's consistent with the image we want to build and also drive the type of profitability that we know we need to achieve within this space. So, that's how we're thinking about it, we're going to leverage targeted marketing in order to guide consumers from those channel - those parts of the business that we are exiting to bring them into the parts of the business that represent the future of the company. And I have to say, over the past few months, we've ramped up our capabilities in terms of CRM consumer segmentation, consumer targeting, and we feel quite good about our ability to leverage this as a way to build our business and get back to growth and value creation in the long term.

Operator:

The next question comes from Michael Binetti with Credit Suisse.

Jane Nielsen:

Well, Michael - well, as you know, we're not giving specific guidance, but I think as you can think about the underlying gross margin expansion, if you look at Q1 in terms of gross margin, about two-thirds of the 730 basis points wasn't almost entirely channel and geography related due to COVID impact. So one-third was really driven by pricing and promotions, and underneath the covers, if you looked at AUR growth, we had our AUR growth in Q3, Q4 and into Q1, was exactly the same. So sort of the eight points that we called out in Q4, we - continued Q3, Q4, Q1, continued. So, we expect gross margin expansion for the year. I do expect there to be some volatility in underlying gross margin as we move through, and we move through some inventory management as we cycle through the year, but we are still calling for gross margin expansion for the year, with the benefits going to the - major benefit is going to be pricing and promotion work that we continue to do, the elevation work that we're doing, and continued benefits from geography, but they're going to be much less significant than what you saw in Q1. Q1, obviously, because of the impact of COVID was out stated. There are some offsets, in terms of FX, was a pressure, and I expect that to continue through the year because of our hedge positions. And some of the liquidation and excess that we move to factory has a higher cost and that has some pressure on gross margin as we move through as well. But those are the dynamics at play. We're very encouraged by our gross margin progress and expect to see it continue.

Operator:

The next question comes from Alexandra Walvis with Goldman Sachs.

Jane Nielsen:

Sure. So, Alex, the number one driver of profitability across the regions in digital was our progress on AUR. We had extremely strong AUR, double-digit growth, AUR growth in Q1, led by AUR growth very strong in North America and across Europe. So, very positive, and the largest driver. Obviously, with the digital momentum we saw, we also saw nice SG&A leverage, especially, on our digital commerce sites in EMEA and Asia, where as we called out the comps were up in the 40s, and over 50% in Asia. So, very strong growth leveraging SG&A. We really worked to drive AUR by significantly reducing site wide promotions. We were down 43 days on a - to the quarter last year and the work that we're doing that Patrice called out in terms of personalization, and specific consumer targeting and personalization, we're very encouraged by that. And I think that those results are most notable as you look at into our EMEA results. As you called out, the pressure point in North America for us is our continued work on quality of sales which has pressured our international or Diego consumers, they were down over very strong double-digits. And that was counterbalanced by high teens growth in our domestic consumers. But as I pull apart the performance differences across region, really it is that international consumer that is the challenge point in North America. But very encouraging, over a 1,000 basis points of profitability improvement, led by gross margin and SG&A improvement across all the channels.

Operator:

The next question comes from Simeon Siegel with BMO Capital Markets.

Jane Nielsen:

Yes, I think that our continued progress, and I'm really calling out underlying AUR growth, gives us even more confidence in our gross margin story, over the long-term, and that the strength of our brand gives us confidence that this continued AUR story is durable over time and into the long-term, and just gives us conviction that we're doing the right work to elevate the brands and elevate our distribution. So, I think it just strengthens our confidence in our future, and the strength of the strategy.

Jane Nielsen:

And Simeon, I just wanted to add some context to marketing spend, down 34% this quarter. But let me tell you, we remain very committed to increasing our marketing investments and growing our marketing investments faster than sales growth. In Q1, while our marketing declined, we anticipate that some of - that much of that is a shift as some of our key marketing events such as the Olympics and Wimbledon shifted out. So, you will see some of that shift for FY '21, and it will underscore our commitment to growing marketing faster than sales.

Operator:

The next question comes from Omar Saad with Evercore ISI.

Patrice Louvet:

So, product categories, first. Yes, obviously, we're selling less tuxedos and evening gowns right now, then maybe, we were prior to the crisis. Here's what we're excited about, Omar, is we are a lifestyle brand, right. So we're not pigeon-holed into tailored clothing or pigeon-holed into evening attire. We have the ability to play credibly across athleisure, across home, across - wear-at-home categories. And I think, we've been able to flex during the past quarter and as we look at our investments moving forward, we're obviously being very close to where the consumer behavior and where the consumer interests are. And making sure that we align perfectly to that, and I think we're able to do it in a way that's incredible. So, I feel good about that, and I think we will be able to navigate this crisis by flexing up and down based on where the consumer is really interested in going. As far as portraying the American dream is concerned, absolutely. I think, obviously, all the conversations we've had with our Black African-American colleagues inside the company, since the murder of George Floyd, and the discussions on racial injustice, and systemic racism, along with the conversations we had with the communities that we operate in, clearly, encouraged us to evolve how we project the American dream. How do we - what are the stories that we tell, what are the creators that we portray, how do we show up in a way that's really core to who we are fundamentally from a value standpoint, but evolve the execution to make sure that everywhere we connect with consumers, it is relevant in a 2020-2025 world.

Operator:

Our final question comes from Erinn Murphy of Piper Sandler.

Patrice Louvet:

So, our guiding principle, in terms of wholesale presence is really the combination of - and the brand show up in a way that is consistent with the image we want to build, and is the location financially attractive. So yes, as you mentioned, we've closed a bit more than 200 different locations in the U.S. over the past few months. It's pretty spread out, Erinn, across the different partners, right, including the one that declared bankruptcy, yesterday. But fully generalized, really looking at what are the top doors at our key partners and that's where we want to disproportionately focus. And then, we also want to work with them to accelerate even further digital commerce performance. As far as, what does the future entail, listen, we're going to stay agile, we're going to stay close to the market, we're going to stay close to our consumers, and we'll adjust as needed. We are finding that this significant intervention is what's needed at this point. So, I don't anticipate a major change in the coming months. But, obviously, we know in this time of uncertainty and disruption, the agile and the resilience are the ones that win, and we want to be part of that group.

Patrice Louvet:

All right. Well, listen, thank you to everyone for joining us today, and we look forward to sharing our second quarter fiscal '21 results with you this fall. And in the meantime, take good care and have a wonderful day.