Q1 2022 Ralph Lauren Corp Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome to the Ralph Lauren for first quarter fiscal year 2022 earnings call.
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Good morning, and thank you for joining Ralph Lauren's fourth quarter and full year fiscal 2021 conference call with me today are Patrice Hubei, 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 1 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 for 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 expectations are detailed in our SEC 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 SEC filings that can be found on our Investor Relations website.
Now I will turn the call over to Patrice.
Thank you Corey.
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 dependent.
They have demonstrated the resilience.
Julien and ongoing passion for our brands in Europe consumers in a year unlike any other.
Their commitment and execution shines through in our better than expected fourth quarter results.
Against the volatile backdrop for 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.
All 3 regions, we accelerated our work to elevate our brands, while also strengthening and simplifying our brand portfolio.
We're also engaged in more meaningfully with consumers and driving increased marketing to deliver a higher brand awareness and purchase intent.
With higher AUR.
Second.
We repositioned each of our channels and reduced our exposure to securely challenged areas of distribution, particularly in North America.
Within wholesale we focused our brick and mortar presence on our healthier stores and significantly reduce our off price penetration.
Within direct to consumer we accelerated our shift to digital step changes in profitability by over a 1000 basis points as we added new connected retail capabilities and dual quality of sales.
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Okay, you may begin.
Good morning, and thank you for joining Ralph Lauren's first quarter fiscal 2022 conference call with me today are Patrice <unk>, 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 1 per caller.
Sure.
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 expectations are detailed in our SEC filings for <unk>.
Non 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 SEC filings that can be found on our Investor Relations website, and now I will turn the call over to victory.
For you Corey Hey, if Theres 1 thing we've learned over the past 18 months, its agility and the importance of agility so apologies.
Apologies for the false start now.
Now we're ready to go.
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 on 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.
In 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 continued 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 5 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're focused on new consumer acquisition and retention.
And both global and localized campaigns that capture consumer's 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 putting them forward Sun hung mean.
British Proserv for Lucie Campbell and G to esports League of Legends Superstore Records.
In the world of golf.
We celebrated our brand ambassador mucus Hustles first major win at the U S Women's Open championship.
And we were excited to welcome LPGA professional golfer andreoli as the newest phase of our women's golf for them.
Combined these summer sports campaigns generated more than 8 billion total impressions globally in the quarter.
And there's still more to come in.
In August and September.
For the 2021 Ryder Cup.
In the U S Open tennis championships right here in New York.
We also announced our launch this quarter as the official outfitter of G to 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 a 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 well.
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 womens were seeing improvements across dresses.
<unk> sweaters novelty fleece jackets and handbags.
And we're also driving better performance in bottoms.
Including new fashion silhouettes.
Wide leg as well as new fabrications like silk and linen.
We are rebuilding the penetration of these categories into fall 'twenty, 1 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 pastime.
And evoke Ralph lifelong love of the sport.
Launched in May for 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 for the consumer.
Our spring Polo shirt campaign included the launch of our polo color shop.
Fully made to order customized polo's and our updated Earth polo and expanded colors.
And we launched polo, Colonia intense and updated fragrance for a new generation.
And our new Stirrup 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 reopen we're back on offense. This year with the build out of our brand elevating key city ecosystems around the world.
This ecosystem approach ensures that 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 in.
And our ecosystem approach delivered strong growth again this quarter.
With mainland sales up more than 50%.
We are opening 2 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 and elevated immersive brand experience at a significantly lower investment than our traditional flagships.
Our Beijing store opened at the end of April and suddenly tune mall.
1 of the top shopping locations in the country.
In addition to featuring a ralph's coffee.
Suddenly 2 and integrates innovative smart retail and digital activations throughout the store in partnership with Tencent.
This includes <unk>.
Endless aisle technology.
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.
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.
We will help further develop our ecosystems in these key markets.
Which already include our smaller format polo boutiques.
Concessions and.
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 'twenty levels.
We have shifted more of our marketing clients selling 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 Department store Dot 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 <unk>.
Led by our wholesale digital and pure play channels.
Okay.
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 continued to drive expense discipline in the first quarter in order to fund our long term strategic investments and global expansion.
Digital and brand building.
We're 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 reported.
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 stroke hilarity 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 our 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.
All other 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-19 resurgence is and the pace of traffic recovery.
The actions, we took to strengthen the foundations of our brand and our business last year.
Our 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 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 Jean to discuss our financial results and I'll join her at the end to answer your questions.
Thank you Patrice and good morning, everyone.
Our first quarter performance exceeded our expectations as our teams navigated challenges with agility, our brands connected with consumers and our strategy drive high quality growth.
Upside performance this quarter was driven by faster recovery in both North America, and Europe led by our wholesale channel.
Strong performance across Asia, despite extended COVID-19 headwinds in Japan.
Celebrated digital growth with further digital margin expansion and continued brand elevation with high teens AUR growth.
And we continue to drive expense discipline across our business, while investing in high ROI initiatives to drive operating margins significantly above our expectations.
First quarter revenues increased 182% to last year on a reported basis and 176% in constant currency.
Growth was positive in every region led by North America.
Compared to first quarter fiscal 'twenty or double L. Y revenues declined 4%. However, this includes approximately 7 points of negative impact from last year's strategic reset to our distributions and 2 other chaps business, which transitions to a license model.
This month.
Total digital ecosystem sales accelerated to more than 80% growth in constant currency, both for last year and double L y, including 50% growth in our own digital business.
Our performance improved sequentially in every region, reflecting our strong assortments expanded connected retail capabilities and high impact marketing.
North America delivered the strongest sequential improvement with digital ecosystem sales increasing more than 50%.
From low double digits last year.
Digital margins also continued to strengthen and we're strongly accretive.
Every region profitability.
Total company adjusted gross margin was 69, 8% in the first quarter down 200 basis points to last year on a reported basis and down 260 basis points in constant currency.
This was significantly better than expected as we lapped last year's unusual COVID-19 mixed benefits driven by better pricing and promotion along with favorable product mix and the benefit of supply chain organization streamlining.
Adjusted gross margins increased 530 basis points to double L y.
First quarter AUR growth grew 17%, marking our 17th consecutive quarter of AUR gains as we continue on our brand elevation journey.
This came on top of 25% growth last year, while stores were closed.
Adjusted operating expenses increased 39% driven by higher compensation and rent as we lapped last year's furloughs and store closures during COVID-19 shutdowns.
Adjusted expenses declined 2% compared to dabble L y.
We more than doubled our first quarter marketing investments over the last year substantially reduced levels at the start of the pandemic.
Compared to first quarter of fiscal 'twenty marketing increased 39% as we focused on digital initiatives and re activating key brand momentum as markets reopened around the world.
We expect to maintain an elevated level of marketing this year at around 6 percentage of sales to support consumer engagement acquisition and our long term brand building initiatives.
Adjusted operating margin for the first quarter was 16, 8% compared to a margin loss of negative 35, 7% last year and 460 basis points ahead of double L Y operating margin.
This was well above our guidance of 7% to 7.5% due to stronger than expected replenishment in our wholesale and digital channels, which generate highly accretive margins versus our total company right.
Moving on to segment performance, starting with North America first quarter revenue increased 300% to last year driven by strong spring Assortments.
Improving consumer sentiment and expanded store reopening as we lap the peak of store Lockdowns last spring.
Compared to double L Y North America revenues declined 8%, but included an 18% headwind from our strategic distribution resets and chat.
In North America retail revenues grew 189% to last year comps increased 176% on improved traffic and nearly 40% AUR growth, reflecting our continued elevation around product marketing and more targeted pricing and promotion.
Yeah.
Brick and mortar comps increased 278% driven by stronger AUR basket sizes and traffic as most stores reopened although foreign tourist's sales improved significantly to last year. They were still nearly 70% low double L Y due to continued.
Softness in international traffic.
And travel.
Comps in our own digital Commerce business grew 51% this quarter accelerating from 25% in Q4 as we continue to focus on new consumer acquisition product elevation and enhancing the user experience. While we expect continued momentum in this channel.
We note the prior year compares build sequentially after Q1.
In North America wholesale revenues increased to $215 million compared to $23 million last year as we carefully restock into the channel and lap last year's minimal shipments to customers during the shutdown sales.
Sales meaningfully outperformed our expectations driving the biggest upside to our guidance this quarter.
The foundational work, we completed through Covid to reset and elevate our inventories exit lower tier wholesale doors and significantly reduce our off price penetration is starting to deliver to deliver strong early results across every key metric.
In North America wholesale full price sell out is exceeding our sell in total sell out was up high teens to double L. Y in Q1 led by market share gains in men's kids home and women's footwear.
And we are also encouraged by early sequential improvements in women's ready to wear.
Wholesale AUR growth continues to accelerate up more than 20 per cent to double L. Y. This represents our strongest wholesale pricing gains in the last 6 years.
And our focus on wholesale dot com is working with digital sell out up more than 50% in Q1 and more than 75% to double L y.
Coming out of the pandemic, our wholesale partnerships are stronger healthier and more collaborative with a focus on marketing improved digital capabilities and the right product assortment and an appropriate level of inventories as we build back into demand.
And we see more to come as we are still in the early stages of driving our brand elevation strategy in this channel.
Moving onto Europe first quarter revenue increased 194% on a reported basis and 179% in constant currency above our expectations.
First quarter comps increased at 98% with 154% increase in brick and mortar as stores reopen and at 23% increase in digital commerce.
This strong early pent up demand that started in the U K. This April with followed by better than expected reopening trend across France, Germany, and Italy, Despite extended lockdowns in the quarter.
Ultimately, 20% of our stores were fully closed in Q1 with additional stores operating under partial closures or other restrictions.
All of our major markets reopen by the end of June.
Digital commerce outperformed despite a challenging 44% comparison last year, when COVID-19 related closures shifted more business online.
While our digital comps partially benefited from extended Lockdowns across Europe. This quarter. The results also reflected stronger spring assortment growth and connected retail and our targeted marketing efforts.
Europe wholesale exceeded our expectations again, this quarter driven by stronger sell out and Reorders in both digital wholesale as well as traditional wholesale accounts.
Turning to Asia revenues increased 68% on a reported basis and 61% in constant currency, our Asia retail comps increased 43% driven by similar performance across our brick and mortar stores and digital commerce.
Our digital ecosystem continued to accelerate in Asia. In Q1. This was supported by our successful $5.20, Gifting campaign 618 shopping event live streamed from our newly opened Stanley to in store and momentum in our newest digital flagships in China.
Japan and Hong Kong.
Japan, our largest market in Asia was negatively impacted by an extended state of emergency for the majority of the quarter. These restrictions drove a roughly 6 point headwind to the region's overall growth in Q1 despite.
Despite this our teams were able to successfully mitigate these headwinds with stronger performance across the rest of the region.
This was led by the Chinese mainland, which was up more than 50% to last year and 70% to double L Y in constant currency driven by a strong product assortment localized marketing initiatives and new store openings Korea was also up more than 30%.
Last year, and 40% to double L y.
Japan returned returned to normal operations in late June and started to ramp up vaccinations. However, the government declared another state of emergency in July ahead of the Olympic games, and we expect a slower recovery in Japan This year.
Moving onto the balance sheet.
We ended the year with $3 billion in cash and investments and $1.6 billion in total debt, which compares to $2.7 billion in cash and investments and $1.9 billion in total debt last year, we are confident in our ability to meet our debt leverage requirements ratio requirements.
In Q2, and eliminate capital allocation restrictions in our bank waiver.
Net inventory increased 4% to support increasing demand this compared to a 22% decline last year, when we limited shipments to brick and mortar channels at the height of Covid shutdowns last spring.
Supply chain challenges are increasing the variability of inventory flows quarter to quarter.
Looking ahead our.
Outlook is based on our best assessment of the current macro environment, which includes ongoing COVID-19 related disruptions.
The global supply chain challenge and the global supply chain challenges, we expect the quarter cadence this year to be volatile given dynamic conditions across our markets. This includes potentially uneven pace of recovery by region and channel as well as the timing of investments.
As markets reopen.
For fiscal 'twenty, 2 we now expect constant currency revenues to increase approximately 25% to 30% to last year on a 53 week basis.
Excluding approximately $700 million in annualized revenues, we deliberately reduced during the pandemic.
<unk> Department store exits off price and I do reductions Chaps and club Monaco. This implies revenues up slightly to fiscal 'twenty.
Foreign currency is expected to contribute about 30 basis points to full year revenue growth.
We now expect gross margin to expand 50 to 70 basis points, even as we lap meaningful geographic and channel mix benefits due to last year's Covid closures. This implies roughly 440 basis point increase to fiscal 'twenty.
Our outlook includes slightly higher freight headwinds of approximately 100 to 120 basis points versus our previous expectation of about 100 basis point.
However, this is more than offset by our expectation of stronger AUR growth of mid to high single digits above our long term guidance of low to mid single digits annually as we continue our long term elevation work.
We now expect operating margin of 12 to 12, 5% up from our 11% outlook previously.
This compares to a 4.8% operating margin last year and 10.3 in fiscal 'twenty, We expect operating margin for the remaining 3 quarters to moderate from Q1 levels based on increased marketing investments as planned to get to our target of 6 <unk>.
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6% of sales this year increased.
Increased freight pressure in the back half of the year and our assumption that the higher margin wholesale replenishment that we saw in the first quarter does not continue as demand start to normalize.
For the full year, we expect operating profit dollars to increase meaningfully compared to fiscal 'twenty pre COVID-19 levels.
For the second quarter, which no longer includes club Monaco, we expect constant currency revenues to increase approximately 20% to 22% foreign currency is expected to contribute about 50 basis points to revenue growth.
We expect operating margin of about 13% to 14% in the second quarter.
This includes gross margin of flat to up 20 basis points as we continued to drive AUR and product mix largely offset by higher freight as we lap last year's Covid mixed benefits.
We also expect modest operating expense leverage and restructuring savings, partially offset by higher marketing and new stores we.
We expect full year tax rate to be about 24% with the second quarter tax rate about 24 to 25 per cent.
In closing we are proud of our team's agility and execution around the world. This quarter as Patrice mentioned, we are still managing through a highly dynamic environment. We are firmly back on offense with this strong start to the year.
And this is only the beginning.
Guided by Ralph's original vision and our purpose of inspiring the dream of a better life through authenticity and timeless style, we are connecting with consumers in more exciting and innovative ways than ever before.
Over the coming quarters and beyond you'll continue to see us driving our targeted strategic investments in key growth opportunities in order to deliver value for all our stakeholders with that let's open up the call for your questions.
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1 moment please for the first question.
The first question comes from Brooke Roach at Goldman Sachs.
Good morning, and thank you for taking our question can.
Can you. Please elaborate on what drove the outperformance in Q1, and perhaps where you see the most upside or downside risk to your updated fiscal 'twenty 2 guidance from here and Jane as a follow up with a 12 to 12, 5% operating margin outlook and your sites for the year. How are you thinking about the levers to achieve your mid teens longer term operating margin target. Thank you.
Hey, Good morning Brook. Thanks for your question to kick us off so first off.
You 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 dot com business was up more than 75 per cent to double L. Y. All 3 of these numbers for vs double L Y, which we think is the more relevant benchmark period.
The reset work that we did to create a healthier foundation in wholesale for the past few quarters is really starting to play out nicely and in our 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 has 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.
Cross our digital channels.
So therefore I would 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.
And investments back into our business.
And Brook I would just add that many of the risk factors that we highlighted at the start of the year did not materialize in this quarter and they were not as much of a headwind as we originally anticipated.
And on the second part of your question based on the strong Q1, B, we felt comfortable raising our full year guidance on strength in digital and improved gross margin outlook with higher AUR and our ability to flow through top line outperformance to operating margin.
That being said the global environment remains volatile and our guidance continues to incorporate a number of factors.
First it's clear that Covid is an over and we are watching the impact across our markets from both a demand recovery as well as from a supply chain perspective, and second we expect to have.
Have increased inflationary pressures.
Whether it's from freight raw materials or labor to be a headwind as we move through the year and lastly, while we are focused on strong growth trajectory in fiscal 'twenty..2 we're very focused on long term.
Growth and sustainable value creation, and as Patrice mentioned, we're going to continue to invest in profitable growth and as we look towards a mid teens operating margin, which we still think is the right long term outlook for our business, we would say that.
That we will continue we get to mid teens margins based on continued revenue recovery, although lower than our original expectation of a $7 billion revenue Mark in our original investment day. Thanks to the foundational work that we did through COVID-19, but it'll continue to be a.
Sorry of expanded gross margin.
And op and SG&A expense leverage to the top line.
And we can do this based on a the expectation of a of a low single digit comp growth as we've noticed as we've noted earlier in prior quarters, we still feel confident about that that's still our long term goal and we feel great about the progress we've made in this year in <unk>.
Getting closer to that goal.
Next question please Angela.
Thank you. The next question comes from Matthew Boss with Jpmorgan.
Great. Thanks, and congrats on a really nice quarter again, guys. Thank you Matt.
So patrice 17% AUR growth on top of 25 per cent a year ago.
Maybe by region for by category, where are you seeing the greatest upside relative to plan as maybe you had laid it out as.
As it relates to pricing power and then as we think moving forward, where do you see the greatest opportunity remaining as you continue down the brand elevation path.
So youre right. Some of it was 17% this quarter and just to frame it for for everyone on the call. This is our 17th quarter.
For the AUR growth. Okay, now, we know our AUR growth over the past 12 to 18 months has been has been outsized and our long term guidance on that as 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.
Not the biggest areas of progression for the 1 thing I would really called out is actually the progress from North America wholesale.
Because we haven't grown AUR in wholesale in North America in a long long time years.
And I think through the great partnership that we have with our with our wholesale players here in the market as well as the brand elevation work the work on products for work on marketing the work on presenting the brand in a more.
Engaging way, it's translating into meaningful AUR growth do you think we quoted the number up over 20% versus double L Y in North America wholesale and listen this is not a 1 quarter pop.
We are confident in our 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 in North America, our own or in all of our own website.
Where we saw again very meaningful progression on AUR this quarter I think.
For the 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 celebrating our presentation and as a result, we have the ability to drive AUR through the 4 vectors that we've been talking.
Historically together 1 is being much more targeted in surgical in our promotional activity to his strategic price increases where we believe we can offer competitive value relative to our peer set 3.
<unk> is continuing to invest in product mix and you see us invest in outerwear and home now in those other products, obviously carry much greater AUR levels, and then finally channel and and country mix.
So that's some specificity, but all in all that.
We've actually grown here you are really nice to you.
The board and we're really pleased with our performance across regions across channels, which indicates again the brand elevation work that we're doing is is sticking index of consumers see the value in what we have to offer.
And Matt I would just add that you know we are really at the start of this journey in North America, and we see significant upside as Patrice mentioned the wholesale pricing is very encouraging you saw strong AUR growth.
In North America, and I think we're really encouraged by the team's ability to add levers of pricing as we move forward, notably our new consumer acquisition.
With those new consumers transacting, a higher AUR and bigger basket sizes is a really nice additional lever that we feel confident in and are confident that we've proved out the ROI of investing in that new consumer acquisition. So we feel like there is more upside as we move forward I think north.
Erica is encouraging but also we're encouraged by the pricing that we put up in our more developed markets like a like Asia, which is all as led in terms of AUR levels, but continues to grow nicely as we continue our brand elevation, Germany.
Thank you your next question.
Thank you. The next question comes from Michael Binetti with Credit Suisse.
Hey, guys. Thanks for all the details here first of all a lot from my Congrats I know you guys said a lot of hard work to clean up the business last year, we can see the results of it here.
A couple for me.
Similar to Matt's question on the AUR, how do you think about the sustainability of gross margins here. It's above you know the run rates above where 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.
You started to resold the North America wholesale channel and Patrice I heard in your voice you were 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 attempt to your sound greedy, but you know as we've watched some of the peers report here lately I wonder if Ralph Lauren would've 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 can.
Try to Dimensionalize for US how you think about the September quarter, and North America wholesale channel trend the <unk>.
GAAP between selling and sell through do you feel like you've held it back and that going to continue to normalize or how should we think about the continuation of the refill of the wholesale channel in North America.
Sure Michael that's it you got to power a power packed question there, but let me let me start on gross margin because I think we really step back from our gross margin journey, which you know we didn't start during Covid started 4 years ago, it's really been a.
A couple of big things, it's the power of our brand our belief in it and our investment in it and the belief that we should be elevating all touch points to the consumer that's what's given us the durability of our pricing journey and that's what's really binney.
Allowed us to continue to expand gross margin, we still believe in that journey.
Well this.
We also see that we have stronger products than ever before at or what you know our breadth of categories and our strength for both opening price points, which we've maintained during this pricing journey and elevated price points, which our consumers are telling us.
That they have a strong and strong demand for has been an important part of our product mix journey and gives us confidence in our ability to continue to drive our gross margin. We also see the durability of our tailwind longer term we should.
<unk> to see geographic benefits and channel benefits as we lean into direct to consumer and lean into digital those are the things that underneath the covers are really driving our long term gross margin journey, which we believe is durable.
For the next several years, maybe not at the pace that we've seen during COVID-19, certainly, but strong but our gross margin expansion and you continued to see that and that's taking up our guidance to now expanded margins for the balance of the year and just a couple of comments on the wholesale channel.
We're very pleased with what we saw in in the wholesale trajectory this year.
We've often we've said throughout COVID-19 that our scale.
Out and sell in would start to normalize while sell out exceeded sell in this quarter, we expect that to normalize and be strong as we move through with our partners in recovery, we're very encouraged by the comp performance.
In our North America wholesale business, which was up double digits and we're very pleased by the strong pace of growth that we saw in our digital wholesale business I think we're working more collaboratively and in greater partnership with our wholesale partners than ever before.
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 in North America over the past few years were down 66% in terms of wholesale doors over the past for years right. So we're seeing the benefit of that healthier brick.
And more of a base and then we're also seeing the benefit of the amazing partnership we have on the digital front, where you saw significant acceleration of our wholesale dot 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 Assortments and continuing to oversee the our assortment.
Thank you next question.
Thank you. The next question comes from Erinn Murphy with Piper Sandler.
Great. Thanks, Good morning, a couple for any for any other firstly I was hoping you could share a little bit more about the category outperformance you named a number of categories include.
Including you know polo shirts for men kind of tailored bottom waidelich bottoms for them in and just going back to your Investor Day, you talked about non core categories as being a half a billion dollars of incremental growth just with what you've seen on consumer behavior has the complexion of the categories in the non core area change just curious on how you're thinking.
About the growth there and then I've got 1 follow up sure. So I'll take that 1 and I'm sure you'll follow this regime.
Low.
So on mens, it's indeed, a pivot towards newness in the pivot towards more elevated products.
And so.
Sports Jackets sports coats polo shirts trousers denim in full for 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.
<unk> sweaters Jack.
Jackets.
And bottoms are the key areas are in for for womens and as far as are we like to call them high potential categories as opposed to the 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 homes for 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 a 3 or 4 years back.
And we're going to continue to invest in that heavily you will see that in our in our fall assortment is 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 or activating from a marketing standpoint, it really rethinking the way the product needs to show up from a distribution point Oh you know.
The most recent additions for 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.
Great and then my follow up is just on the tourist level I think you talked about it being down 70% versus double L. Y can you just share kind of your outlook over the next 12 to 18 months are there any signs of life of Europe for reopening.
There or even here in North America, and just kind of how we should think about the rebound as we look forward. Thank you.
While we are in the what we saw tourist sales improved slightly in North America, they're still down 69% to double L y O but.
But we did see some improvement on a sequential basis, but international travel remained limited to most regions. Our assumption in fiscal 'twenty..2 is that we've assumed continued headwinds from tourist sales as we expect foreign travel to be under pressure through the fiscal year for.
Oren tourism tends to be a lagging indicator, but fortunately we are focused on capturing more domestic travel opportunities.
Coming out of the pandemic and you'd know we've noted are suddenly tune store, which is outperforming in tourist market like Beijing and local domestic travel to some of our flagship says that we're also leaning into and we have a limited presence in travel retail and have.
Peyton 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 out and really increased marketing, which we've doubled.
This quarter to engage with that consumer before they start on their travel as as the markets start to recover but our expectation is that'll happen after fiscal 'twenty to next question. Please.
Thank you for the next question comes from Omar Saad with Evercore ISI.
Thanks, very much for taking my question another great quarter.
Wanted to ask a quick follow up on all the discussions around your wholesale partners and the improved kind of more collaborative relationships for having there.
Do you have any thoughts on whether the kind of legacy markdown support vendor model vendor markdown support model.
Maybe kind of on.
On the decline and then less relevant going forward and then.
I also wanted to get you guys talk a little bit more about the E comm acceleration with younger consumers update with those consumers.
What role do they play in the.
New pricing newfound pricing power of the brand. Thanks.
Certainly as we look at our global wholesale footprints are we want to drive greater focus on moral and 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 that's really the Indian tons, and that's where that's 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 extend there is a new sustainable in a sustainable way.
When it comes to recruiting new consumers on a R e-commerce sites.
Understood. Your question correctly, Omar I mean actually we're quite energized by the progress we're making in terms from new younger consumer recruiting on our side. It's the result of a combination of factors right..1 our marketing investments are up significantly just as a reminder, our marketing this year 6 percentage of revenue.
2 years ago for 5 for sensor 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 shirts to our activities on Sports Olympics Wimbledon.
Gaming right you saw that we signed a partnership with with G to N and in particular would you agree with the record. So that's there there's 1 other superstars there because that's where the consumers and that's we want other we're going to appeal to the younger consumer we're where he or she <unk>.
Consumes media, where he or she engages in and we're seeing gaming is an important components 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 cloth brand also significant excitements 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.
For strategic pillars.
We think through our increased marketing and a more targeted approach we have the ability to do that and I think the numbers would bear that out to James 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 are 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 isn't just to bring them in is to make sure. They stay in the family and here are our ability to target them with much more personalized messaging through digital is proving to be a very effective tool for those so it's a journey.
To be continued though where were excited and encouraged by the momentum we have with that net.
X generation consumer Omar I, just wanted to add just on your comment about vendor allowance and the relevant full price selling takes vendor allowances off the table and when I look at our progress this quarter, our full price sell out was up 100, almost 150 per cent and it was up almost 20.
Sent on a double L Y basis, that's the power that eliminates the need for vendor allowances, it's the power of our brand and that's what we're committed to delivering.
Next question.
Thank you. The next question comes from Lauren L. S scale with Exane BNP Paribas.
Good morning, and congrats on great results.
I wanted to ask about the operating margin Jane and Patrice you just delivered nearly a 17% operating margin once you.
For 13% to 14% operating margin, which would imply 2 wage operating margins would be single digits.
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 you know 18 points of headwind due to the strategic actions, which would suggest that North America, and a core basis really big growth.
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 it for FY 'twenty 2.
Well there we will have the headwinds of the reset that we did so you're exactly right North America was down 8%. If you consider the reset it was up about 3 per cent.
Yeah.
A pent up 10.
Is that right yeah, yeah, Okay for the company up 3 and a half without the resets North America, specifically up to I apologize. So so north America would be up 10, if you take out all of the resets in Q1, even though on a double L Y basis. It was down 8 we're guiding now.
212 to 12, and a half per cent operating margin there.
That puts US 200 basis points ahead of pre COVID-19 levels on a lower revenue base. So we're feeling very good about our progress towards our mid teens operating margin. We do note as we move through the year that we had some exceptional replenishment opportunities in.
Wholesale.
Both digitally digital pure players and our wholesale partners, which comes through at a high incremental margins.
And don't anticipate that level of replenishment as we move for word and we know that some of the freight pressures and some of the raw material pressures will.
We will continue to be a headwind in the balance of the year you will recall the wrong that we buy on long term contracts and so some of that long term pricing starts to fade.
Fade out as we move into higher price lead lag layers as we move through the year and we are where we've incorporated this into our guidance, but we've taken up our freight impact for 100 basis points to 120.
Our basis points for the year the key lever for the balance of the year is really top line momentum now we're watching a number of factors COVID-19 the delta variant and the supply chain very carefully but we're very encourage it's still early in the year we feel.
Confidence, we feel like we're back on offense and but we have a clear eyed view of where where the risk is and the opportunities across our across channels and the opportunities across our brand. Thank you we'll take the last question.
Thank you Dan last question comes from Ike for a child with Wells Fargo.
Hey, Thanks for squeezing me in congrats for truth chain, great job from I guess, maybe James a quick question on margins.
The digital commentary you guys are giving you not only seeing pretty meaningful revenue acceleration in that channel, especially in North America, but the profitability metrics are pretty impressive I think you'd talked about about 1400 basis points of margin improvement on a 2 year basis. I think you said that it's now accretive to the total company out there.
<unk> margin, which is implying it's mid teens or better how how does that change the.
The algorithm to get you to the mid teens margin, maybe even quicker than what you would've thought prior at the analyst day. When you think about how digital is mixing in and the margin drivers within that channel.
Yes, so digital the digital reset is a key and powerful driver for us to get to our operating margin expansion, even on a lower revenue base. So.
I just wanted to clarify not only is it accretive to total company right too, but it's accretive to every region and when you look at the operating margins of the region. They are meaningfully ahead, because they don't have the overhead charges of our total company margin. So to have it be accretive in every region is even.
A higher bar than than accretive to total company and it's accretive in every region. We're very proud of that that can be a lever that we can now lean into and have it be margin accretive. It's a new it's a critical strategic reset for us and and I think we'll only.
As the only securing and building our confidence in our ability to get to a mid teens margin. So we're very encouraged by our continued expansion in digital margins this quarter.
All right.
Thank you everyone for joining us today, we look forward to sharing our second quarter fiscal 'twenty 2 results.
With you in November and in the meantime, stay safe and have a great day.
Okay.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.