Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Ralph Lauren second quarter fiscal 2020 earnings call.
That's fine all participants are in listen only mode. Later, we will conduct a question answer session.
Structures on how to ask a question will be given at that time.
You ship requires just starting to call. Please press Star then see real as a reminder, this conference is being recorded.
I like to try to over that confidence to our wholesomeness Kareena band again. Please go ahead.
Good morning, and thank you for joining Ralph Lauren second quarter fiscal 2020 conference call with me today are Patrice movie, the company's President and Chief Executive Officer, and Jane Nielsen, Chief Operating Officer, and Chief Financial Officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to one per caller.
During today's call, we will be making some forward looking statements within the meaning of the federal securities laws, including our financial outlook forward looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward looking statements.
Our expectations contain many risks and uncertainties principal risks and uncertainties that could cause our results to differ materially from our current expectation are detailed in our at UGI filings to find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results you should refer to this morning's earnings release and to our FCC.
Filings they can be found on our Investor Relations website, and now I will turn the call over to Patrice.
Thank you corn good morning, everyone and thank you for joining todays call.
We delivered second quarter results slightly ahead of our overall expectations, including better than expected revenues expanded operating margin double digit EPS growth.
Our performance this quarter was driven by ongoing momentum in our international markets.
Europe and Asia.
Balanced gross margin expansion an expense management.
Meanwhile, we continue to invest in brand elevation and execute initiatives to stabilize or North America business against the more volatile backdrop.
As we indicated at the start of this fiscal year, we're monitoring the global retail environment closely, particularly around trade and medical conditions.
Our teams remain intensely focused on managing through volatile industry dynamics and executing on our strategic plan to deliver long term sustainable growth and value creation.
As I shared before the three principles underlying this work include.
Putting the consumer at the center of everything we do.
Elevating the brand balancing growth and productivity.
During the second quarter, we continued to drive our performance across the five strategic priorities that we laid out as part of a five year plan.
These include.
First.
And over a new generation that consumers.
So I can't energize core products and accelerate high potential under developed categories.
Hard drives targeted expansion in or regions and channels.
For.
Need with digital across all the activities that's true.
Operate with discipline to fuel growth.
Starting with went over a new generation consumers.
We continue to invest in media channels that matter, most consumers today, namely digital and social.
And are on track toward our long term marketing investment target of 5% to sales.
In the second quarter marketing declined 10% to last year due to timing of investments as we anniversary our landmark Fiftyth anniversary celebrations last fall.
Our key marketing initiatives this quarter centered around our September fashion show experience.
Wimbledon and U.S. open tenants partnerships as well as our Ralph Lauren and friends collaboration.
This September we presented an exciting fall 2019 collection to a one other kind immersive experience fashion hospitality and live entertainment, we called Ralphs club.
Our jobs age inspired nightclub seamlessly integrated guess into the show itself.
As the multi talented gentleman a inspired us with the performance for the ages.
Influencers and celebrities from around the world.
From Taylor Hill to keep lunch at Monday morning, Asap for Henry Golding, JJ Lynn and one of them wanting joined in the evening.
It was our most viewed live stream today as we continue to leverage our global digital reach with more than 10 billion total media impressions around the event.
In Asia alone, we generated over 32 million life and video views of the show.
Moving onto our sports engagements.
We closed out or some other sports program with our official sponsorship of the U.S. Open tennis Championships here in New York.
The U.S. open combined with our high visibility Wimbledon partnership earlier in the summer.
Drove over 17 billion media impressions globally.
Building on the April release of our Earth polo shirt made entirely from recycled plastic bottles.
The official ball people were outfitted in uniforms using the same innovation the tennis ball cams collected from the tournament this year.
We'll be used to produce next year's uniforms.
This is a great example of our design the change sustainability strategy coming to life across our products.
Further amplify our sponsorship.
We partnered with take talk the social media platform, but loved by gender.
Coming to first luxury brand to drive a digital commerce campaign on the platform.
Our campaign leveraged influencers and custom content to drive more than half a million views and significant click through to Ralph Lauren Dot com.
And lastly, we finished out the corner with our Ralph Lauren and friends 25th anniversary capsule collection in September .
It playful owed to lead character, Jennifer Aniston instructional work experience that Ralph Lauren.
Featured exclusively a bloomingdales and on Ralph Lauren Dot Com the campaign generated over 1 billion media impressions alone.
Finally, as you may have seen we recently celebrated the upcoming Hbr release of very Ralph directed by the award winning Susan lease you.
The documentary follows Rahlves journey from his childhood in the Bronx, It's a building an iconic lifestyle business and becoming in emblem of American style around the world.
I Hope you all watch it life on HBIO on November 12.
Moving onto our second key initiative energized core products and accelerate high potential underdeveloped categories.
In the second quarter, Ralph in our design team continued to drive excitement in core product categories. While also leveraging the Halo of limited edition releases and expanding into high potential underdeveloped categories top selling categories for fall 2019 to date have included.
Lightweight down jackets.
Windbreakers fleece, and casual woven shirts, including Oxford shirts.
We continue to work to consistently get the balance core.
Core and fashion right across each brand and this thing channels. This quarter, we released the limited edition draw.
Indigo Stadium in September .
Fired by our original 1990 to pull stadium collection.
Pieces included signature silhouettes, such as our popular jacket, windbreaker terror way track pens and fleets.
David with Indigo died treatments.
The release was available exclusively on or pull up.
Influential specialty accounts like opening ceremony, Fred Ziegel, H.B. eggs and bodega as well as so like Ralph Lauren stores and retailers internationally. Other exciting projects. This quarter included an exclusive use oriented capsule collaboration with a sauce available globally online.
And especial collection celebrating our 35th anniversary of Polo, Ralph Lauren in Korea.
We continue to make solid progress this quarter on our five under developed categories as well.
Include denim outerwear wear to work footwear and accessories.
Then them sell outperformed our total top line trends in the second quarter.
And as we were approached upcoming winter season outerwear sell ins are strongly outpacing our overall sales dropped.
Meanwhile, our Ralph Lauren and friends collection leverage our expanding wear to work initiatives with modern pieces for both men and women rooted in the Roswell anesthetic.
In fragrance, we launched the latest iterations of romance for women and polo Red for men.
Focused on reaching a new generation of consumers. The campaigns featured a Ralph Lauren Ambassadors Taylor Hill for beyond romance, and <unk> El Gordo foot pull the red remix.
Moving onto our 30 initiatives.
Targeted expansion in our regions and channels.
Our long term expansion strategy remains focused on building a cohesive.
Brenda elevating Ralph Lauren experience across our retail wholesale and digital commerce presence in key cities around the world.
During the second quarter, we opened 20, new stores and concessions globally and close to 21 locations.
This included 15 openings in Asia.
We also completed door refreshes in key markets around the world, including our positive that Madeleine flagship store in Paris, and factory door renovations in North America and China.
Where we continue to elevate our fleet across every touch point.
Our consumer centric ecosystem approach through strong results in the quarter with China mainland sales up more than 20% in constant currency.
Driven by comp growth and new stores.
Total China sales were up modestly to last year in constant currency, including Hong Kong headwinds, which Jane will discuss in her remarks.
In Europe , we open for owned and partner at full price stores.
Well, we're making good progress we still have significant expansion opportunities with only 40 full price stores across Europe .
All of this complemented by our successful digital commerce expansion.
Which brings me to our fourth key initiative lead with digital.
Our global digital ecosystem, including our directly operated flagship sites Department store Dot com pure players and social commerce increased low teens in the second quarter in constant currency.
The strong performance was driven by more than 30% growth in international.
Well this was tempered by more modest growth in North America.
North America digital sales were positive.
And ahead of expectations improving sequentially from first quarter trends.
Starting with Europe digital sales were up double digits in the quarter with strong performance across each channel.
We added 70, new wholesale digital partners, including lots to do one of the largest digital pure players in France.
Our directly operated digital sites in Europe also saw continued momentum.
Delivering 13% comp growth this quarter.
Recent enhancements include it optimizations to our mobile site and checkout process.
And the new digital Commerce like Chip for Ireland, as we continued to drive our localization efforts by market.
We also recently launched Instagram shopping in Europe .
In Asia.
Digital ecosystem sales were also solid led by China.
We added five exciting new digital partners in the second quarter, including sequel luxury E Commerce platform in China.
Yes shop, the number one multimedia retailer in Korea.
Uhhuh wheat, and leading omnichannel retailer targeting younger consumers in Japan.
We also continued to elevate our presence with key digital pure players like team all during the quarter.
Turning to North America.
Second quarter comps on Ralph Lauren Dot com were up 2% and better than expected.
Similar to the first quarter, we continued to experience declines from international consumers on our U.S. site.
Due to FX headwinds and increased import regulations in key Asian markets.
However.
Sales to domestic shoppers were up single digits slightly better than first quarter trends as we started to improve our mobile user experience and drive more targeted email marketing.
Under our new global merchandising effort. We're also rebalancing our buys emphasize stronger selling core and seasonal core products going forward.
Our digital performance should start to reflect these initiatives along with further improvement in mobile and personalization to drive conversion more in the back half of fiscal 20.
Lastly, we continued to build partnerships with new digital platforms in North America, which are extending our reach to new and younger consumers.
In the second quarter, we launch men's polo sportswear on revolve dot com and it's just a site forward.
We also launched Lauren ready to wear and dresses on newly.
The new subscription service from urban Outfitters targeting our next generation consumer.
Touching on our 50 initiative operate with discipline to fuel growth.
And the second quarter, we continue to challenge every cost and improve our efficiencies.
Adjusted operating margin expansion of 100 basis points exceeded our expectations driven by gross margin expansion disciplined expense management and lower marketing spend in the quarter.
This cost discipline enabled continued expansion of our global retail presence, while increasing operating profit and operating margin.
Looking at our supply chain year to date, we've continued to increase its flexibility and deficiency.
With the enactment of list for terrorists from China in the quarter. We've continued our multi pronged effort to mitigate the cost impact.
This includes first working with our existing partners within China drive increased productivity.
Second further diversifying our supply chain outside of China.
Over the past few years, we've reduced our U.S. exposure to China from over 40% so about 22% by the end of this fiscal year.
And moving to approximately mid teens for fiscal 21.
Third.
While we are focused on driving the first two strategies to mitigate as much of the tariff headwind as possible and minimize the direct impact to the consumer. We are also planning targeted global price increases as previously discussed the central part of our next great Chapter strategy is raising a you are to elevate the brand globally.
And create value.
We begin phasing in strategic ticket price increases in our North American outlet channel in late September .
Our North America full price wholesale and direct to consumer doors will reflect targeted price increases starting with our spring 20 Assortments.
Leveraging the success, we've had implementing this strategy in Asia and Europe .
Ticket increases reflect our competitive benchmarking analysis.
And our focus on the value proposition for our consumers.
Jane will provide further detail on a you are and the expected financial impact of tariffs in her prepared remarks.
In closing.
In the context of a more volatile environment.
We continue to deliver solid progress on our next great chapter plant.
Ralph and I are proud of our team's execution this quarter as they delivered across each of our strategic pillars with passion and excellence.
Together, we remain focused on driving each of these areas to deliver long term sustainable growth and value creation for all of our stakeholders.
With that I'll turn it over to Jane.
Joined her at the end answer your questions.
Thank you Patrice and good morning, everyone. Our teams delivered solid top and bottom line results in the second quarter with expansion in both gross and operating margin driving operating profit growth and double digit EPS growth.
Globally. We also continued to make progress against our key strategic initiatives in the quarter with encouraging early signs of progress in our direct to consumer business in North America, our largest market.
These included positive brick and mortar and digital comps in North America, as well as Europe and Asia.
When you are improvement on top of difficult compares and inventories more closely aligned to our topline growth.
Second quarter revenues increased 1% on a reported basis and 2% in constant currency.
Our international business, which represents about 45% of our sales delivered 7% topline growth in constant currency, while North America was down 1% total company retail comps grew 2% in the quarter.
Adjusted gross margin was up 60 basis points in the second quarter on a reported basis and up 80 basis points in constant currency gross margins benefited from you our growth of 2% with favorable channel and geographic mix, coupled with pricing promotion.
In management and product assortment.
All three regions delivered positive you our growth.
Looking ahead, we expect second half AIU are to be incrementally stronger than the first half the year.
Having our full year expectation of low single digit day, you are grows for fiscal 20.
This will be driven by.
One targeted price increases in select channels and categories based on competitive benchmarking and where we have a proven opportunity play.
To accelerated product mix shifts touches and increased penetration of fleece and outerwear for fall holiday, which are already resonating well with consumers.
And three are ongoing strategy of pulling back promotions to improve quality of sales and elevate the brand globally across each of our distribution channel.
While we are closely watching the broader competitive environment and in season trends, we're pleased with our inventory positions and remain focused on managing our inventories discipline in order to many great promotional risk.
Adjusted operating margin in the second quarter was 14.9% up 100 basis points on reported basis and up 130 basis points in constant currency.
Adjusted operating profit dollars grew 8% to last year.
S. DNA expense declined to 46.6 percentage sales down 30 basis points to last year, driven by cost reduction initiatives and lower marketing expense.
Marketing decreased 10% in the quarter as we anniversary last year's higher investments around our Fiftyth anniversary show unrelated events. However, we continue to expect marketing spend to grow ahead of our sales for full year fiscal 20.
Our teams remain focused on generating operating efficiencies across our business. Some key highlights from our second quarter included.
First we realized continued efficiencies across our supply chain, including incremental productivity with our existing strategic sourcing partners.
Reduced freight costs contracts and lower air freight costs, all contributing to mitigating the cost of list for tariffs.
On the product side, we reduced product cost in outerwear, while also improving our on time delivery rate by over 30% in order to drive sales and margin in this high potential Underpenetrated category.
At the same time, we also improves our overall value proposition by significantly increasing the use of sustainable materials.
Outerwear production.
Our continued work on corporate expenses delivery to 10% reduction in corporate overhead. This includes our ongoing vendor renegotiation process, where we are addressing over 100 global indirect spend contracts. This year driving the savings of about 15% from our previous contra.
Thanks.
And we continue to digitize the way, we work to drive productivity and a better consumer experience.
We recently completed successful transition of our order management system, Ralph Lauren Dot Com in North America, which will enable the implementation of new Omnichannel functionality.
An improved mobile experience personalization and more.
All added significant savings to our previous provider.
Moving onto our segment performance.
Starting with North America revenue decreased 1% in the second quarter as growth in our retail business was more than offset by our wholesale revenue declines.
Adjusted operating margin was 22.7% 800 basis point decrease to last year with operating margin expansion in our retail businesses more than offset by gross margin contraction in SGN 80 leverage in our wholesale business on lower sales.
In the retail channel in North America comps were up 2% as both brick and mortar comps in sales on our own digital commerce sites each grew 2%.
Brick and mortar comps were driven by a 2% increase in eight you are in the second quarter. We tested targeted email offers improved outlet windows signage and leverage page search optimization to mitigate traffic challenges at factory.
Our income conversion both improved in the quarter and we continue to focus on driving better traffic trends through increased marketing refresh store experiences and product improvement, including expansion underdeveloped categories like outerwear comps in.
Our North America directly operated digital Commerce business were up 2% above our expectations positive growth from domestic consumers was partially offset by lower sales to international shoppers on our U.S. site as Patrice discussed we expect reduced sales to.
International shoppers to continue to pressure on North America digital comps through the rest of fiscal 20.
Through the second half digital sales to our domestic online shoppers are expected to improve.
Our teams are focused on driving higher conversion among domestic consumers through one favorable product mix towards categories, like outerwear, and fleece and to investing in improved mobile functionality site architecture and personalization to drive more.
Relevant content.
Moving onto North America wholesale.
Second quarter revenue declined 6%, excluding off price our underlying North America wholesale business was down high single digits in the second quarter as expected.
Well our market share increased slightly in our men's polo business, we continue to see modest share declines in womens as Lauren underperformed the market.
We continue to work on improving our product mix, while also driving a return to core categories in Laurent women's.
Additionally, we continue to improve the consumer experience in the wholesale channel.
In store refreshes expansion into under penetrated categories and increased marketing.
With North American now mobilized under new leadership at both wholesale and regional levels. It will take some time for a wholesale business to start reflecting these improvements.
Moving onto Europe .
Second quarter revenue was up 3% on a reported basis and 8% in constant currency.
Adjusted operating margins expanded 170 basis points on a reported basis and 220 basis points in constant currency.
Operating margin expansion was driven by strong gross margins and SGN a leverage.
In the retail channel in Europe comps were up 3% driven by a 13% increase in our own digital commerce sites, and a 2% increase in our bricks and mortar stores.
The increase in our directly operated European digital Commerce business was above our expectation driven by solid merchandising execution and traffic increases.
Our sites continue to benefit from platform enhancements were targeted performance marketing and further localization of regional sites.
Across our Europe direct to consumer channels are ongoing effort to elevate the brand and improved product mix continued in the second quarter.
You are up 6% on top of the strong 8% increase last year.
Wholesale revenue in Europe was up 7% in constant currency in the second quarter and also ahead of our expectations. This strong performance reflected solid sell out trends driving stronger reorders, particularly with our digital pure play partners.
Modest distribution growth with both digital and wholesale partners similar to the last few quarters and a shift in timing of shipments to a key digital pure play account from the back half of fiscal 20 into Q2.
Turning to Asia revenue was up 4% on reported basis and 5% in constant currency in the second quarter.
We saw solid performance across nearly every market in Asia, including China mainland sales growth of over 20% in constant currency, our product and marketing initiatives are resonating well in this region and we continue to increase our digital efforts expand and elevate our store.
Firstly engage with local influencers and celebrities.
Comps in Asia increased 1% was positively you our growth and a strong contribution from our newer doors.
In Hong Kong, where we have several important retail doors heavy protest disruption drove the equivalent of 48 full days of store closures during the quarter.
These closures along with significantly lower tourism drove declines in our Hong Kong business and negatively impacted our total Asia comp by about three points.
While we expect Hong Kong to remain a near term headwinds. We are encouraged by continued momentum in the rest of Asia and we still expect positive fiscal 20 comp growth for this segment as we invest in our distribution network and drive marketing to amplify and.
The brand.
Adjusted operating margin was up 140 basis points to last year, driven by strong gross margin expansion moving onto the balance sheet, our balance sheet remains strong and we continue to return capital to shareholders.
We ended the year with about 1.6 billion in cash and investments and 693 million in total debt.
Which compares to 1.9 billion in cash and investments and 684 million in debt at the end of last years second quarter.
We accelerated our share repurchases to 250 million in shares in the second quarter, we will continue to Opportunistically buy back stock and remain on track to complete our target of about 600 million in repurchases for fiscal 20.
Moving on to inventory at the end of the second quarter inventory was up 2% to last year, improving significantly from up 11% at the end of the first quarter.
Inventory growth was driven by Asia to support our strategic expansion a retail distribution in that market.
North America inventory growth was moderately above sales trends, but improved sequentially and Europe inventories were down significantly as we started to anniversary last year's investments in our factory stores.
We continue to expect second half inventories to remain relatively aligned with our sales outlook.
Now I'd like to turn to guidance for the full year and third quarter fiscal 20 as a reminder, this guidance excludes restructuring and related charges and reflects our best assessment of the global retail landscape in the context of increased volatility for Matt.
Correct, Technomic and geopolitical events.
For the full year fiscal 20, we are maintaining guidance of 2% to 3% revenue growth in constant currency introduced at the beginning of this year, but now expect results closer to the low end of this range.
Foreign currency is now expected to have about 130 basis points of negative impact on revenue growth based on currency shifts, we're maintaining our operating margin guidance for fiscal 2040 to 60 basis points expansion in constant currency driven primarily.
We buy gross margin expansion and slight SG any leverage.
Foreign currency is estimated to have about 20 basis points of negative impact on operating margin in fiscal 20.
While these topline expectations are still within our original guidance our outlet now incorporates intensifying headwinds and some continued temporary door closures in Hong Kong pressuring, both Asia comps and retail expense leverage Nevertheless, we are maintaining.
Our full year operating margin guidance, despite the headwinds from Hong Kong, along with increased tariffs related startup costs as we build out new regional sourcing operations and our initiatives to prepare for a potential Brexit based on the tariffs enacted today.
Gauge our guidance includes about $10 million in negative impact to our fiscal 2000 cost of goods.
Meanwhile, we've maintained our commitment to accelerate marketing investments to position the company for sustainable long term growth.
We now expect other income of approximately $10 million for the year down to the prior year as a result of lower interest rates and accelerated share repurchases, reducing our interest income.
The third quarter fiscal 20, we expect revenues to be flat in constant currency foreign currency is expected to negatively impact revenue growth by 70 to 90 basis points in the quarter.
We expect disruptions in Hong Kong to negatively impact revenues by about $10 million in the quarter operating margin for the third quarter is expected to be flat to down 20 basis points in constant currency. This is primarily due to timing of SG any investments with our highest style.
Our marketing in the third quarter this year and temporary duplicate rent as we consolidate our New York headquarters more than offsetting gross margin expansion in the quarter.
Foreign currency is expected to have a minimal impact on the operating margin in the third quarter.
Third quarter tax rate is estimated at 21%.
In closing, we continue to be vigilant regarding the geopolitical and macroeconomic environment.
And we are committed to maintaining discipline on costs and inventory as we elevate the brand and returned the company to sustainable growth and value creation.
We are proud of the work our teams around the world are doing to execute on our next great Chapter plan.
Guided by Ralphs creative vision, our teams are executing with agility.
Passion for the brand.
With that let's open up the call for your questions.
Yes.
Ladies and gentlemen, if you wish to asked a question. Please press star one.
I think I touched on follow you inherit tone, indicating Jeff been placed into Q.
Remove itself from the Q at any time by pressing star to FBR. Your Dennis Speakerphone. Please pick up the headset that for pressing the numbers. We ask that you limit yourself to one question per caller. Once again, if you have a question. Please press star one at this time one moment. Please for the first question.
The first question comes from Paul Trussell with Deutsche Bank. Your line is open.
Good morning, and congrats on quite solid results.
There are a number of notable headwinds in the marketplace. Some of which has led to your peers to reduce their go forward expectations in your view what drove your outperformance in Q2 and what are you seeing in the business that enables you to maintain your earnings guidance.
The full year and on North America, specifically could you speak to your surprising positive comps and the outlook for the region. Thank you.
Hey, good morning, Paul Thanks, Thanks for your question.
The first thing I really want to say is I'm really proud of.
Teams executed this quarter.
As you mentioned, we were able to exceed expectations, while dealing with a wide range of challenges from.
Tariffs the Hong Kong situation, the Brexit uncertainty and the further acceleration of our supply chain.
This coupled with the organizational changes that we talked about over the past few months really gives us confidence that we should just continue to run the play.
Your next we try to find obviously with the higher degree of agility that's required in today's call. Thanks.
On the specific drivers of this quarter's performance. We believe are sustainable Theres, probably four I would call out the first one is.
The fact that we're seeing good momentum.
New consumers with current consumers.
And we've had it gives you heard during our prepared remarks, a number of high impact marketing activities. During the quarter. One I would highlight is the obligation we did on Wimbledon globally through celebrities and influencers around the world.
Second drivers products.
Well I think what we've seen this quarter is the beginning of a better balance between core seasonal core and passion product.
Coupled with exciting growth in outerwear as we go into the holiday season.
Third area is distribution the one of our big priorities is to continue to elevate the brand presence the shopping experience for consumers wherever they shop.
You've got in brick and mortar or in digital we're also continuing to expand both in Europe and Asia.
Terrific and growth opportunities moving forward in those two regions of the final point is while we're investing behind all these initiatives.
We are continuing to drive operating efficiencies and cost is.
I'll specifically to your question on North America, we were very pleased with the we called performance this quarter a 2%.
The keeping I would highlight here is the progress we made an offer full price stores were the result of marketing.
And really bringing consumers into the store the results of engagements with our VIP.
And the change we made in our compensation structure to really drive a total team push.
Our respective stores.
Really played out very nicely. We're also encouraged by the progress we're making on our website.
Similarly with domestic consumers.
And also continued to see strong probably good progress.
Yes.
Yes, I would say Paul.
We're really pleased with.
Q2, and our ability to maintain our fiscal 20 guidance.
Yes.
Some of the headwinds that we name from Hong Kong.
It's about 25 to 30 cents.
Yes.
And what we've really been able to do is too.
Have our teams.
In a very agile fashion.
And what we're seeing is continued momentum on.
Yeah.
Let's start bricks and mortar.
Version improvements that we're seeing in our stores, notably in North America.
And continued strong performance.
Correct.
Uh huh.
Two.
To hold our overall operating margin guidance our revenue guidance.
So we're really proud of the teams that we see those drivers is.
Next question.
Our next question comes from Michael Binetti with Credit Suisse. Your line is open.
Hey, guys. Good morning, Thanks for taking my questions I had my congrats on a quarter, especially in North American comp.
That's number you've seen in while thank you can you.
Any initial response those U.S. price increases would be helpful. But I did want to talk about the outlook for second half for managing the guidance you gave us implies the operating profit growth rate to slow and even potentially turn negative on a year over year basis at the end of the year.
18 analyst day guidance assumes.
Operating profit growth each year can you give us some high level thoughts on how to think about the you know the lower even negative growth rate.
At the end of this year and how you see that starting to improve into next year in particular, North America operating margins have been negative on a year over year basis. I think it's I think it's really a symptom of the ongoing declines in wholesale and you guys make very good money in that channel. So those losses are profitable can you speak to how you look at North American margins in the second half. Thanks.
Sure.
In terms of.
Part of your question, which is you asked.
Price increases we're still in early days as you'll recall Michael we.
The first tranche of prices.
In.
In late September early October .
Well, it's too soon to call. We are encouraged by what we saw through school.
Early days.
So is it.
It is.
Our guidance for you our growth in the low single digit range.
And then.
Yeah.
Well we.
Anticipate some headwinds.
Third quarter from an.
Margin perspective, we are guiding and maintaining our guidance for Oh expansion for the fiscal year.
Puts us in line.
Continued operating margin expansion.
Our next chapter.
As we laid out the guidance we knew that.
Things would.
Better than others.
In case, we're certainly encouraged.
Gross margin progress we're making.
And that other things things would take.
Longer term like North America.
Wholesale.
Really focus on our pressure areas.
Brian .
Ill.
We're back to Mark.
Asking in marketing.
Partners.
We are really focused on.
In that channel.
The ultimate.
And so we still feel good.
To our five year guidance.
Mid teens.
Margin target.
<unk>.
Next question.
Our next question comes from Matthew Boss with JP Morgan Your line is open.
Thanks, and congrats on a nice quarter.
Thanks So.
On the gross margin, maybe Jim what was the breakdown of the 80 basis points constant currency expansion in the second quarter, how best to think about puts and takes for the back half a year and then as we think multiyear.
I guess, maybe Jane again, how would you rank the buckets of continued gross margin expansion opportunity versus any headwinds to consider as as we're thinking beyond this year.
Sure.
Let me lay out what happened in this quarter first as I think it.
As I look at.
Pricing.
Management sorting in two higher.
Gross margin.
Overall product.
It's a little over [noise].
The benefit.
Yes.
Margin expansion.
We also gossip.
Channel.
No we expect those.
Hello.
Through the course of the plan with greater in Leicester.
Hey.
And.
Obviously, we had.
Called out the pressure points FX.
Ongoing.
Then is it.
Small today based on the tariffs.
That were enacted in Q2, but we expect to be the biggest point.
Sure.
Now counterbalancing that as we move into the back half we expect.
Pricing actions.
We'll start.
Yes.
And we go in with tighter inventory positions.
<unk>.
Sure.
Positions as we move through the.
So encouraging star.
We thought we'd be.
But a driver through.
Okay.
Next question.
Thank you. The next question comes from Ike Boruchow Huh with Wells Fargo. Your line is open.
Hey, good morning, everyone. Let me add my congrats two quick ones for Jane I think can you just help us understand what's embedded in the North America wholesale plan for the back half and if there's any variability between Q3 in Q4, but any color around off price versus you know.
The traditional U.S. wholesale within that and then just really quickly you would comment that I think that the Q2 digital comp had some benefit from a timing from a very big partner should we be expecting the digital European comps to be.
Much less robust in the back half or any specific quarter, just trying to understand what's going on there. Thank you.
Sure.
A multipart question all right, let me start with.
The first part.
What's embedded in our back half.
We don't guide.
Region.
Certainly not channels than I can tell you what we see.
With our now out trend.
Yeah.
We continue.
Yes.
We are focused on trends we have.
Believes that we'll be making added.
Into this brings it will be better.
Letters out trends.
Expectations for the revenue.
Which is sell.
And.
That's our expectation.
[noise] always working.
And.
That you'll start to see that.
But that'll be closer to the start.
If you think about the color on overall.
America off price.
Order off price, especially in North America.
As essentially.
Yes.
We had a pullback.
Our.
Got it business.
In order to keep our inventories clean had some slow.
Overall.
That's it.
Yeah.
Yes.
As we move through the back.
Sure.
And then on Q2 and back half European digital trends.
We did in preparation for holiday accelerate a little bit of shipments into into Q2 to one of our larger customers.
And that we expect that for fiscal 20 digital comps will be at a more normalized level. Following last year's replatforming of the second half, but that will be it that the total ecosystem low double digit comp.
Next question please.
Thank you. The next question comes from Kate Fitzsimmons with RBC capital markets. Your line is open.
Yes, hi, good morning, I'll add my congratulations.
I wanted to dig a bit more.
More into the North American digital complex to can you just speak to what drove that sequential gain sounds like you saw some resonance with the mobile investments domestically. So just wanted to hear more about what changes were made in the quarter and what gives you confidence that business can can continue to improve go forward and I guess when you benchmark your digital and mobile expense.
Brands relative to peers, what do you really see has the opportunity go forward as we look to 2020. Thank you.
Sure. So we had a number of things that kicked in the quarter and then we continuously.
Raised the bar, which look for me, it's a continued journey.
The first intervention is the mobile dimension, which you touched on so optimizing the mobile experience through.
Both better site navigation and better search functionality.
The second piece is we don't Apple pay right and we want to make sure that we have all the payment approaches that are target consumers.
I want to use the third area is as we looked at our email segmentation, we will more precise in our email targeting and so we're seeing some benefits from the I expect that to actually strengthened overtime.
In the last one which is important because we want to make sure. We provide great customer service, we've moved to actually 24 seven.
Customer service KOL support during this quarter, obviously, we're going to continue continue to do that and then as you look at the next phases of capability. We're building on the site.
Continuing to build out the mobile functionality personalization big focus areas for us.
And then the whole conducted retail piece was by online find in store and a buy online pickup in store.
So those have been drivers that have helped our business this past quarter the progress was.
I remember last time, we talked about how there's a bifurcation between our domestic consumer our international business. So our domestic consumer progress was solid this quarter or international business continues to be pressured because of the foreign exchange dynamic and because of the import restrictions, particularly in China.
Yeah, I would just add that we expected some of that international pressure will continue to simulate balances this year.
Next question.
Thank you. The next question comes from Dana Telsey with Telsey Advisory Group. Your line is open.
Hi, Good morning, everyone and also I want to say congratulations on the nice progress.
As you think about Hong Kong and obviously the uncertainty there how are you planning that going forward. It down 27% that you had this quarter. How do you see that progressing and then on new channel distribution that you mentioned countries, how do you balance out new channels with wholesale.
Where do you see the endgame winding up with wholesale whats the percentage sales and perhaps some of these new channels and is there a margin differential. Thank you.
Yes.
Let's start on Hong Kong, and then I'll turn it over to.
So as we look at Hong Kong this year.
Water.
It was up about a three point.
Pressure overall Asia comp as we look forward to Q3, we're expecting that pressure to accelerate and it will be about four to five point of negative impact on Asian comp as we move forward, we've seen like like many others that tourists tariff.
Tourist fall off has accelerated.
And enjoy door closures due to do to protest, we don't expect improve and it's embedded in your guidance.
For Q3.
And then on the shuttle play.
So it wasn't with very simple principle.
We want to be where the consumer wants to shop us and it's clear that there's some new models that consumers are excited about.
Where we want to play so rental.
Subscription.
So right on rental I think we've actually been on rent the wrong way for several months. We just started on newly we're excited about that and there are other platforms that were looking up the initial results are quite encouraging so very early days.
But encouraged by the progress subscription whether that's the tricks or trunk club was also performing well for US we want to make sure. We are there and we play to win there and then we're starting on retail already so we had an activity with the pop in the UK, where results were quite encouraging and obviously given the nature of our brand timeline.
And this.
Yes, basically more more style driven than seasonal fashion driven more focus on quality. We think we're actually very well positioned to play to win in that segment listen to your Crystal ball is going to be as good as mine Dan on this one in terms of what share of the business. It will be down the road will the consumer I think will tell us that based on.
On their behaviors and the services that we can offer but our mindset is we want to build an ecosystem that consumer centric and within that Echo system wholesale still has done a very important role to play both brick and mortar then dot com and so we want to make sure. We're where we are where the consumer expenses to be we are well set up.
For success in those channels, where the brand can show up in the right way as well as in the in the developing new channel I think the key thing for me here and then what I'm very proud of the work that the teams are doing here is the agility that the organization is demonstrating because typically we wouldn't necessarily be a as nimble.
All on some of these new opportunities and I think theres been a lot a wonderful work done internally to take advantage of these opportunities and to have a bit of first mover advantage on some of them.
Last question please.
Thank you all our final question comes from Rick Patel with Needham and company. Your line is open.
Good morning, and well done managing the tough environment.
Question on marketing so it sounds like.
Sounds like some of the efforts to leverage the targeted performance styles are working very well should we expect more that's in the back half and does that mean that you'll move away from some of that brand building investments you've made in the past or should marketing grow across all channels. Thank you.
Thank you very well this it first of all our goal is one to one marketing right. I mean, that's that's where we want to go no. That's probably a few years away still but that's certainly the personalization journey we are on.
Across all elements of our marketing so you will see again.
Well I couldn't get down the quarter by quarter specifics on this but you will see us continue to increase personalization focus both on mobile.
On our site and or email activities.
So that the though the page that you get when you sign on source like is dramatically different than the pizza I get when Iceland on.
That will not be done at the expense of overall brand building activities like our shows like our partnerships with sports like limited additions.
But it's really about being more efficient than the way we spend our money I think what we'll find with personalization is actually we will be able to give you a little more effective and efficient with each dollar beings, but we're still on the trajectory to get to 5%.
Sales expense in marketing by the end of the five year phase, we expect marketing to continue to go ahead of revenues. This year as well just like we have over the past the pass to fiscal years. So think of those playing across the palace of marketing tools, but indeed with a deliberate focus on ultimately getting to one to one marketing.
And I expect marketing dollars.
To grow in the second.
Alright.
Well listen thanks to all of you for joining US today, we look forward to sharing our third quarter fiscal 2003 results with you in early February and in the meantime have a great day.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.
Okay.
Yes.