Q2 2022 Ralph Lauren Corp Earnings Call
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Ladies and gentlemen, thank you for stadium.
Welcome to the Ralph Lauren.
Second quarter fiscal year 2000.
'twenty earnings call at this time.
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A quick question.
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Ms.
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Good morning, and thank you for joining Ralph Lauren's second quarter fiscal 2022 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 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 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.
And now I will turn the call over to Patrice.
Thank you Corey.
Everyone and thank you for joining today's call.
We are delivering strong progress on our fiscal 'twenty two plan with.
With second quarter performance exceeding our expectations across all key financial and consumer engagement metrics.
Our brand elevation strategy, which cuts across our product marketing and distribution channels is resonating with consumers in every region.
We're driving these results despite greater than unexpected disruptions in the global supply chain.
<unk> extended COVID-19 restrictions in key markets like Japan.
And while we continue to face a volatile environment.
The work, we have done to build a resilient supply chain over the last several years as.
As well as our significant AUR elevation will continue to be competitive advantages as we navigate emerging challenges and mitigate risk.
To give you some context and color.
Our supply chain is intentionally diversified across multiple markets.
A key initiative, we started over four years ago.
This allows us to quickly shift production when certain markets are affected by COVID-19 or other issues.
We've created a strategic supplier program, whereby we prioritize our partners with a presence across multiple markets, enabling these shifts to happen even more seamlessly.
And we have proven pricing power.
Elevating our AUR across every channel and geography over the last four and a half years. So that we have room to absorb near term pressures, we've seen in our business such as tariffs or current inflationary headwinds.
This built in agility gives us confidence as we continue to navigate a volatile global operating environment ahead, but I want to be clear that this is not just about our ability to play defense.
Even as macro challenges arise or subside.
Ralph Lauren is firmly driving offense to position the company for long term sustainable growth.
We are leveraging our strong momentum to further accelerate investments across brand building personalization and new customer recruiting digital in key markets and categories in the months ahead.
Reflecting on the last quarter, a few key highlights.
First.
Our overall recovery is outpacing our expectations.
This was led by outperformance in Europe, and North America with.
With Asia in line with our plan and positive to fiscal 'twenty or double L Y Despite extended COVID-19 measures.
Our product Assortments resonated strongly with consumers globally.
Second.
Our digital momentum continues.
Following our recent work across product pricing and promotions last year.
And our digital operating margins continue to be strongly accretive to our overall company margin rate.
And third our elevation strategy, it's translating across all channels, including positive trends in wholesale across regions.
On top of all of this.
We made further progress toward our long term target of mid teens operating margins.
With second quarter margins of 17%.
Representing the highest Q2 rate since fiscal 13.
We achieved this even as we continued to reinvest for future growth.
And plans to increase returns to shareholders over the next several quarters.
Our performance demonstrates our team's strong execution against our five strategic pillars that we outlined at the start of our next great Chapter plan.
Let me share a few highlights from the quarter across each one.
First on our efforts to win over a new generation.
We continue to invest in our brand building initiatives to drive both new customer acquisition and retention in order to fuel long term growth.
In the second quarter, we further strengthened our brand consideration purchase intent and net promoter scores globally.
Well, Ralph Lauren brand sentiment also improved across every region.
Some of our key campaigns underpinning. These results included the.
The continuation of our summer of sports program with the U S. Open tennis championships here in New York.
As well as team USA is victory at the 2021 Ryder Cup in golf.
These came on the heels of our sponsorship of the U S Olympic team in Tokyo earlier in the quarter.
Together these campaigns generated over 71 billion media impressions in the second quarter as we continue to inspire new generations of athletes and dreamers.
In September we celebrated the return of fashions biggest on the met gala.
What better opportunity to showcase this year's theme of American fashion.
And then with one of the most iconic American brands Ralph Lauren.
Celebrities and Influencers from Jennifer Lopez, and Ben Affleck, the chance the rapper and Lily Aldridge were featured in our designs driving strong engagement and traffic to our channels.
Ralph designed of Lilly colleagues wedding dress.
Some of you will know her as Emily and Paris garnered worldwide media attention.
And we were excited to announce a new collaboration this quarter with the ZIP at toll a meta versus or virtual world.
Where users avatars can socialize and create content.
This partnership represents the latest frontier in digital engagement, and which users can purchase exclusive digital wall horn apparel for their three D. Avatars for the first time ever.
Early engagement has outpaced our expectations with 100000 items already sold in just a few weeks.
In all we added one 4 million new consumers to our direct to consumer channels alone this quarter, a 19% increase to last year.
And our total social media followers continue to grow reaching $46 9 million globally led by Instagram.
Moving to our second key initiative energize core products and accelerate high potential underdeveloped categories.
Ralph and our design teams continue to inspire consumers around the world as they begin to incorporate sophisticated casual styles back into their closets.
While still seeking elevated comfort with categories like loungewear.
We are uniquely positioned to capture this evolving hybrid way of dressing given the breadth of our portfolio.
And we're also making strong progress on our high potential categories like outerwear and denim.
During the second quarter, we drove our core sportswear categories, along with seasonal styles, such as transitional sweaters and fleece as we headed into early fall selling.
On the men's side, we saw strength across bottoms, including denim active styles and shorts as well as sweaters and performance fees.
Though a small parts of our business prior to Covid tailored clothing and dress shirts continued to show sequential improvement.
In womens we drove outsized performance in sweaters sweatshirts mid layer knits and bottoms.
Outerwear, including transitional quilted jackets updated lasers in denim jackets also grew double digits to double L y.
This should bode well for the key outerwear selling period of fall and holiday.
We also launched our new Rob's club fragrance globally with a digital first campaign, featuring Lucas Saba and Gigi Hadid.
This marked our first major fragrance launch in China.
And in its first months it ranked among the top three men's fragrances in key markets around the globe, including in the U S.
And more than 75% of purchases on Ralph one dot com were made by consumers who are new to the Brian.
This takes me to our third key initiative drive targeted expansion in our regions and channels.
We continued the build out of our brand elevating key city ecosystems around the world in the second quarter with.
With 35, new stores and concessions opening in top cities globally and 13 locations closed.
The majority of these store openings were in Asia, and particularly the Chinese mainland which continues to represent a significant long term growth opportunity for our brand.
Despite COVID-19 related shutdowns in July and August.
Our mainland sales were still up more than 25% to last year.
And more than 70% of double L y in constant currency.
And comp trends rebounded quickly in September once restrictions were lifted.
We opened our second emblematic store experience in China at Shanghai as Kari Center. This quarter following our first opening in Beijing. This spring.
Emblematic concept provides an example of how we are transforming the retail experience.
With digital integration throughout exciting in store Activations and hospitality features like Ralph's coffee that are fueling new consumers acquisition.
Early performance is well ahead of our expectations and these stores are also lifting overall growth trends in their respective omnichannel ecosystems.
Moving 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 grew approximately 45% in the quarter in constant currency and.
And 50% to double L y.
Our digital momentum continues.
Even as traffic returns to physical stores drives.
Driving a benefit to our overall operating margin mix.
This is the result of our continued digital investments focused on concentration data analytics and AI to serve our consumers through an elevated connected retail experience.
Now touching on our work to operate with discipline to fuel growth.
As I mentioned, our teams continue to operate with agility and focus to mitigate supply chain headwinds delivering better than expected gross and operating margins in the second quarter.
At the same time, we continued to drive expense discipline as we accelerate both near term and multiyear investments in the back half of the year to fuel long term growth.
And lastly on our brand portfolio, we successfully transitioned chaps from our North America wholesale business to a license model in the second quarter as previously announced this.
This completes our exit from moderate priced U S Department stores.
Enabling our teams to focus on our core namesake brands and elevated positioning in the marketplace.
I also want to take a moment to highlight our ongoing work to integrate citizenship and sustainability into everything we do.
We recently announced the launch of the U S. Regenerative cartoon fund in partnership with the soil Health Institute.
Funded by the Ralph Lauren Corporate Foundation.
This program works directly with farmers to transition 1 million acres of American cotton crop plan to regenerative production.
In all it has said to eliminate 1 million metric tons of carbon dioxide equivalent from the atmosphere by 'twenty 'twenty six.
With increasing sustainable cotton supply.
And making important progress in the urgent call to action on climate.
We are proud to share today that this program is being recognized at the Cop 26 International meeting on climate as an innovation spread partner by the agriculture innovation mission for climate.
In addition, <unk>.
This quarter, we joined the global fashion agendas strategic partner group to prioritize sustainability and fashion.
As well as the Ellen Macarthur Foundation as a partner in its mission to create a circular economy for apparel.
And we were also honored to be recognized as one of the 2021 best places to work for people with disabilities.
By the disability equality index.
And as one of the world's best employers of 2021 by Forbes.
In closing.
Ralph and I are strongly encouraged by the company's progress through the first half of the fiscal year.
All channels and geographies are showing strong momentum as we build on the healthier Foundation, we set over the past 18 months.
Our performance along with the resilience of our supply chain and pricing power in the market give us confidence as we accelerate our investments in the back half to support long term growth.
So with that I'll turn it over to James 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 second quarter results outperformed our expectations with progress across each of our key strategic initiatives, even in the midst of continued COVID-19 and supply chain headwinds around the world.
Performance. This quarter was driven by strong top line growth led by our full price wholesale channels globally.
And broad based outperformance in Europe.
Continued digital momentum across owned and third party channels further gross margin expansion on top of last year's Covid mixed benefits with double digit AUR growth and elevated product mix more than offsetting higher freight.
And higher than expected operating margins, including cost savings benefits improved wholesale margins and favorable channel mix shifts from wholesale and digital.
Second quarter revenues increased 26% to last year with positive growth in every region led by Europe and North America.
Compared to second quarter fiscal 'twenty or double L. Y revenues declined 12%. However, this included approximately eight points of negative impact from last year's strategic reset of our distribution and our chaps business, which moved to a license model.
Total digital ecosystem sales grew approximately 45% in constant currency to last year, and 50% just Apple L y, including 35% growth in our own digital business.
Momentum continued across every region, reflecting our strong assortments.
Abandoned connected retail capabilities and high impact marketing.
Digital margins were also strongly accretive to our second quarter profitability consistent with last year and about 1300 basis points higher than double L y.
Total company adjusted gross margin was 67, 3% in the second quarter up 80 basis points to last year on a reported basis and 50 basis points in constant currency. Despite increased freight headwinds of approximately 150 basis points.
Gross margins were better than expected despite lapping last year's unusual COVID-19 mixed benefits.
Driven by better pricing and promotion along with favorable product mix and last year's supply chain organization streamlining.
Adjusted gross margins increased 580 basis points to double L y.
Second quarter AUR grew 14% on top of 26% growth last year with increases across every region.
This represents our 18th consecutive quarter of AUR gains as we continue on our brand elevation journey.
And it gives us strong confidence in our sustained pricing power as we mitigate mid to high single digit product cost inflation, starting in the second half of the year.
Adjusted operating expenses increased 17% to last year to 755 million and declined 5% compared to double L y reflecting our restructuring savings.
Increase to last year was driven by higher marketing and compensation as we lapped last year's furloughs and store closures due to COVID-19.
Marketing increased 83% to six 1% of sales in the quarter.
With a focus on new customer acquisition and long term brand building initiatives.
Operating expenses were below our initial plan as we shifted about $25 million of investment into the second half of the year based on Covid disruptions.
In the second half, we will increase marketing and talent investments to support growth this holiday and in customer acquisition to drive longer term growth.
Adjusted operating margin for the second quarter was 17, 1% up 450 basis points to last year, and 220 basis points to double L. Y. This was above our guidance of 13% to 14% margin largely driven by improvements in Europe, and North America wholesale.
Excluding the timing shift operating margin would still well ahead of our plan above 15% move.
Moving to segment performance, starting with North America second quarter revenue increased 30% to last year supported by strong product Assortments, new customer acquisition and market share gains.
Compared to double L Y North America revenues declined 20%, but included a 15 point headwind from our strategic distribution reset and chaps similar to Q1.
In North America retail revenues grew 34% to last year.
Comps increased on improved traffic and 23% AUR growth, reflecting our continued elevation around product marketing and more targeted pricing and promotions.
Brick and mortar comps increased 31% driven by double digit growth in AUR basket sizes and traffic all.
Although foreign Tourist's sales improved significantly to last year, they were still down more than 80% to double L Y due to continued softness in international travel.
Comps in our owned digital Commerce business grew 32%. This quarter. This was driven by a strong product offering along with high quality, new consumer acquisition and retention of last year's new consumers, resulting in higher full price sales.
New consumers increased 12% to last year and more than 50% to double L y.
And retention of the new consumers acquired last year improved meaningfully as we become increasingly effective at targeting and personalization.
In North America wholesale revenues increased to 23% to last year. This was ahead of our expectations as the foundational work, we completed through Covid to reset our inventories elevate our product mix exit lower tier wholesale doors and significantly reduced off pre.
<unk> penetration is delivering improved top line growth and quality of sales.
Total sell out was up low double digits in the second quarter to double L. Y led by continued market share gains in men's kids and home.
Lauren women's continued to stabilize sequentially, including share gains in women's ready to wear.
Overall wholesale AUR growth continues to accelerate up 30% to double L Y as we elevated our assortments and pulled back on seasonal promotions in the channel.
And our momentum on wholesale dot com drove digital sell out growth of more than 45% to both last year and double L y.
All of this is enabled by a healthier brand positioning in wholesale 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 second quarter revenue increased 38% on a reported basis and 36% in constant currency above our expectations revenue inflected to positive growth on a double L Y basis, this quarter with all key markets performing better than planned.
Led by Germany, and France.
The U K, our largest market in the region and earliest to reopen this spring also continued to perform better than planned on strong demand.
Europe comps increased 27% in the quarter bricks and mortar comps were up 28% driven by improved traffic AUR and basket sizes.
Digital commerce comps increased 24% on top of a 26% comp last year, when COVID-19 related closures shifted more business online.
Europe wholesale exceeded our expectations again, this quarter driven by stronger sell out and Reorders Apple digital wholesale as well as traditional wholesale accounts.
Turning to Asia.
Revenue increased 14% on a reported basis and 13% in constant currency, our Asia retail comps increased 7% with 69% growth in digital commerce, and 4% growth in bricks and mortar stores.
Continued strong momentum in China, and Korea, this quarter more than offset extended COVID-19 restrictions in Japan, our largest market in the region as well as Australia, Malaysia and Singapore.
In total COVID-19 related closures and operating restrictions negatively impacted Asia sale by about three 5% in the quarter.
And while the Chinese mainland still grew more than 25%. This quarter. Our performance was also tempered by Covid Lockdowns from late July through August.
On a positive note mainland comps rebounded quickly in September once stores reopen.
Japan comps also started to improve towards the end of the quarter with the government lifting all states of emergency following the end of our fiscal Q2.
Our digital ecosystem continued to accelerate in Asia. In Q2. This was supported by our successful to suck Thanksgiving Holiday campaign in Korea, Kishi, Valentine's day in China, and an overall momentum in our newer digital flagships in China.
Japan and Hong Kong.
Moving on to the balance sheet, we ended the quarter with $3 1 billion in cash and investments and $1 6 billion in total debt, which compares to $2 4 billion in cash and investments and $1 6 billion in total debt last year.
Net inventory increased 5% modestly below our plan due to global supply chain delays.
While we expect continued variability as inventory flows from quarter to quarter. We believe our inventories are well positioned across key categories and channels to meet demand for the upcoming holiday and spring 'twenty two seasons overall, we expect to improve our.
Tori positions as supply chain headwinds subside and plan to end the year with inventories that are aligned to sales crap.
As we move into the second half of this fiscal year, we are recommitting to our long term capital allocation priorities outlined prior to Covid.
This includes first reinvesting in our strategic growth priorities, including brand marketing and elevation digital and expansion of our key city ecosystems to drive long term sustainable growth.
Second with peak pandemic closures likely behind US we are focused on returning 100% of our free cash flow to shareholders in the form of dividends and share repurchases.
We reinstated our dividend in the first quarter and we expect this to grow in line with durable net income growth.
And we expect to resume our share repurchase program starting in the second half of this fiscal year with about 580 million remaining under our current share authorization.
Looking ahead.
Our outlook is based on our best assessment of the current macro environment, including global supply chain challenges and Covid related disruptions, we expect the quarterly cadence this year to remain volatile given dynamic conditions across our markets.
For fiscal 'twenty, two we are raising our revenue growth to 34% to 36% growth to last year in constant currency on a 53 week basis.
Excluding approximately 700 million in annualized revenue, we reset during the pandemic.
This includes department store exits.
Off price Andi do reductions and the licensing and sale of Chaps and club Monaco.
This implies revenues up high single digits to fiscal 'twenty.
Foreign currency is expected to negatively impact full year revenues by about 20 basis points.
We expect gross margins to expand at the high end of our prior range of 50 to 70 basis points or roughly 450 basis point increase to double L y.
Our outlook improved on more favorable pricing and product mix. This year, despite increased freight costs, which we now expect to be in the range of 130 to 150 basis points due to our plans to use more airfreight to fulfill strong demand in the back half.
As a reminder, we renegotiated our ocean freight rates for the year in Q1 raw material, notably cotton were purchased roughly a year in advance resulting in slightly favorable product costs through the first half of fiscal 'twenty two.
This is followed by mid to high single digit estimated cost increases in our second half ending March and through calendar 2022.
Would we expect to more than offset with continued AUR growth and productivity improvements.
We raised our AUR outlook to high single digit growth this year above our long term annual guidance of low to mid single digits as we continue our elevation work.
We still expect operating margins of 12 to 12, 5%, which compares to four 8% operating margin last year and 10, 3% in fiscal 'twenty.
We continue to expect operating margin rates for the back half of the year to moderate from first half levels based on.
Increased second half marketing investments of approximately 7% to 8% of sales, reaching our full year target of at least 6% of sales this year.
Increased airfreight expense in the back half of the year and our assumption of more normalized channel mix compared to last year's Covid disruptions for the full year, our increased revenue outlook implies high teens operating profit dollar growth compared to double L y.
Pre COVID-19 levels.
For the third quarter, we expect constant currency revenues to increase approximately 14% to 16%.
Foreign currency is expected to negatively impact revenues by about 140 basis points.
While our teams are still actively focused on managing through global supply chain disruptions, we remain confident in our ability to deliver the right product at appropriate level to meet consumer demand over the holiday selling period.
We expect operating margins of about 13% to 13, 5% in the third quarter.
Roughly in line with last year.
This is seen modest gross margin expansion largely offset by the timing shift in strategic investment.
Input cost inflation and mix headwinds I noted a moment ago.
We now expect the full year tax rate to be about 21% to 22% with a third quarter tax rate of around 22% to 23%.
In closing our strong first half performance underscores the timelessness of Ralph's creative vision, the power of our brand and our strengthening consumer base.
With these as our foundation, we will leverage our momentum and invest in the key strategic initiatives that will support our long term growth.
And within a highly dynamic global environment, our teams around the world are executing with agility and playing offense to deliver long term value creation for all our stakeholders with that let's open up the call for your questions.
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One moment please for the first question.
First question comes from Dana Telsey Telsey Advisory group.
Good morning, everyone and congratulations on the continued progress and performance.
I wanted to ask.
Thank you.
You discussed some of the drivers of your recent outperformers, just a few moments ago on the call what elements do you consider sustainable moving forward given the shifting environment and where do you see the biggest risk to your strong performance looking ahead and then if you could just touch on the accretion of the digital margins and where you see.
That going that would be helpful. Thank you hey, good morning. Thank you for your question.
We're certainly encouraged by the strong first half we've had this fiscal year.
And what's really important to note from a mindset standpoint is we still have massive runway ahead of us.
To a large extent our brand continues to be much bigger than our business.
So our performance so far has given us proof points and the confidence to continue investing.
In the multiple opportunities for growth that we had ahead of US there are four that I would call out Dana the first one which is really our lifeblood right as customers new customer acquisition and.
And you've seen the numbers this past quarter up 19% versus last year, we're bringing in a younger consumer we're bringing in a higher value consumer a more profitable consumer and less promotion sensitive consumer we're very excited about that momentum and we're going to continue to invest in this space.
To expand our footprint and also of course drive retention and we're seeing very good progress on retention for customers that we've brought on over the past few quarters.
Second area is around product.
And the breadth of our product portfolio, and which we've talked in prior forms really sets us apart from many other brands in this space right. We have a lifestyle portfolio that ranges from the exceed those in evening gowns, all the way to sweat shirts.
And as you see consumers progressively reinvest into more elevated casual we're incredibly well positioned to meet that demand and that's part of what's driven the success. In Q2 is this ability to meet this hybrid customer expectation.
Both more elevated products.
Also continued interest in athleisure, and we've been able to balance both well on top of that we've talked a lot about our high potential underdeveloped categories and we've seen really nice momentum in these categories, but again relatively early days in sneakers outerwear.
Denim for example, so much more runway there.
Third area is digital.
And as you know we've done a lot of work to reset here resets on product resets on pricing reset on brand presentation, we're seeing really good momentum in this channel across both our own sites up.
35% across pure players in bricks and clicks up 57% this past quarter total digital at 45%. What's exciting here is the momentum on digital continues as the stores are reopening. So we're seeing consumers with an omnichannel mindset continue to engage both digitally and also in our stores, we're obviously going to.
We continue to invest in capabilities in this space functionality.
Connected retail experience.
Notably and you've touched on it our margin in digital continues to be accretive to our total company margin.
That is one of the I think one of our most exciting achievements over the past year. The team has done a fantastic job to reset both product pricing promotion operations cost structure in a way that this is accretive across all three regions and our expectations is that we'll continue.
We expect digital to be our fastest growing channel for the years to come and we're really pleased that the digital margin is accretive to the company our margin and we have full confidence that will continue and expand and then the final thing I would call out in terms of drivers is our focus on key cities. You know, we don't look at markets as much by country.
We really look at them as key cities and building and partner for the jargon, but building a connected omnichannel ecosystem in each of the key cities, that's playing out really nicely the combination of brick and mortar pure play wholesale brick and click and our general digital wrapper.
We're seeing very strong response from the consumer in those cities, where we've made these investments you have a couple of examples in our prepared remarks are things that have happened recently in Shanghai.
In Beijing, and we have more to come.
In the following quarters.
When I look at the model we have there the success, we're seeing with it and the opportunities. We have ahead of the same thing with long runway in terms of our ability to go build these ecosystems around the world. So four key drivers that certainly drove the performance in Q2 and will continue to play out for us for the long term.
As far as risks are concerned the biggest risks we're facing are clearly macro related.
Alright from supply chain to cost inflation headwinds I mean, those are very real which touch on these in the script and we believe we're actually very well positioned to mitigate them because of our brand pricing power.
18 quarters in a row of AUR growth with multiple levers to drive AUR because of our newly diversified agile faster supply chain that is not dependent on one specific supplier of one specific country.
So these are these.
Headwinds are there they are real but we are very confident in our ability to mitigate them and so I would say in this context. The biggest mistake, we could make with these macro headwinds and in these external pressures is actually to shift to defense.
Right and as you've seen in our plans right now we're on offense, we're executing our plans while mitigating the headwinds we've got the resources to invest in the business. Our focus is on fueling our momentum next quarter the quarter after that and for the long term.
Thank you for your question Dan.
Thank you. The next question comes from Jay sole with UBS.
Great. Thank you so much I have a two part question. My first question is can we talk a little more about the current cost inflation environment. How are you expecting increased cost impact your ability to drive long term AUR in operating margin from here.
And my second question is a small question is just could you talk about the pace of share buybacks would you expect to use all the authorization that you have available in the current fiscal year. Thanks, so much.
Sure Good morning, Jay.
Let me take your first question in two parts.
First on the AUR trajectory, we are very confident in our ability to continue our elevation journey from here, we expect to continue driving both positive AUR.
And gross margin gross margin expansion in the back half of fiscal 'twenty, two and through our long term plan.
Over the last 18 consecutive quarters of AUR growth, we've developed a proven multi lever approach to pricing with a focus on creating value for the consumer and it's working.
So while we're still comfortable with our overall long term guidance of low to mid single digit AUR growth. It's fair to expect that our AUR rates will be on the higher end.
Over the next year as we work through higher cost.
And.
And we work those into our broader financial algorithm.
On your operating margin question, we're still well on track towards our goal of mid teens operating margin.
Our full year fiscal 'twenty two guidance puts us firmly on a path with around 200 basis points of expansion to pre COVID-19 levels.
And we're planning to achieve this on lower on a lower reset base of revenues and with a Y dollars substantially higher than pre COVID-19 levels as well.
Embedded within our guide our gross margins are expanding in spite of cost inflation.
And we're reinvesting back in the business because we have momentum.
As Patrice mentioned, we finally, we firmly believe that now is the right time to invest in the long term, we've reset to a more profitable base and we're seeing strong momentum in our brands and we have the right tools in place to drive expanded AUR and gross margin.
Now on your question about the pace of share buybacks. So we have as you've noted 580 remaining in our authorization I would expect that.
Over the historically, we've done about 500 million over the course of the fiscal year.
I would expect us to do at least that pace as we close out the year, but of course, we'll be looking.
Looking at the AR at the value created accretion potential of the share by buybacks looking at the market, but I think you can expect us to go at least as fast as we have historically in terms of about $500 billion of a four quarter. Thank.
Thank you next question please.
Thank you. The next question comes from Michael Binetti with Credit Suisse.
Hey, guys. Thanks for taking our question.
So Jamie maybe just a couple quick ones here, maybe you could help us disaggregate how much.
In North America slowed a little bit in both channels, maybe you could help us just disaggregate how much the business transition line items impacted both the channels in North America in the quarter and then I'd be curious if you might be able to help us think about how much supply chain may have held back North America and <unk> just to get an idea of what the magnitude of what's going on there is and then.
Patrice you know you've got you've got the wholesale AUR is up now for a couple of quarters in a row I mean, we've heard good news on that in the retail side for a long time. So now that we've got a couple of quarters of AUR is going up in that channel as we look back kind of into 2018 analyst day, which I know is ancient history at this point, but you thought this business could do mid sixties.
Gross margins at that time and as we're looking at it now you've got.
You've got AUR is I think in a much better place than what you imagine at that time would be I'd be curious to hear what you think the potential for this business is.
Going forward and then I guess, James just one last one I think fourth quarter operating margin is guided sub 4%.
And maybe just help us think about how much conservatism is baked in there versus actual cost that you're planning rising in the business. Thanks.
Sure why don't I take.
The first part of your question in terms of the Disaggregated in North America.
Growth.
If you think about North America growth.
As we move into.
This second quarter.
We're really encouraged by the strong overall strong performance in North America, we have a much stronger foundation for growth solid momentum in the business.
Where we had to do most of the reset work in digital and in wholesale.
And our Q2 guidance did assume a sequential double L y slowdown.
Ex resets as we werent expecting the same level of upside that we saw in Q1.
Based on some of the inventory restocking that we did in Q1.
But overall Q2 was still in line.
Or better than our expectations I think that the other aspect.
In North America was we did see some traffic softness in the outlet centers as the Delta variance started to rise sort of mid to late summer, which impacted traffic overall, but we certainly saw that impact now.
Encouragingly, we do see our conversion in our comp outpaced the traffic in outlet, but that was also part of the.
A bit of a slowdown that we saw through this summer do you I think the supply chain is impacting impacted.
In passing some of that yes, I know that.
We had less air freight coming in during that mid summer levels. So we were a little slow to get fall on the floor and make that transition.
And so I do expect that that impacted North America. When we started to air freight in and we became more aggressive in air freight as we closed out September we saw the we saw rising comps in our outlet doors and we're very encouraged by that so I do think it had an impact you know theres a lot of <unk>.
Mix going on but I do think it had an impact and we were encouraged.
By the acceleration that we saw in September.
And then on wholesale AUR and gross margin expectations. So first of all we're actually really pleased with the progress thats happening in wholesale on AUR and it's really to use a baseball analogy really early innings on this one right probably first inning you saw the number in the release.
Our U S wholesale up 30% versus double L y.
With strong momentum there and what I really like about the progress there is multiple levers.
Well, it's getting smarter on promotions one.
<unk>.
Where to implement them, it's like for like pricing, it's investing into higher value items. So all these levers that we've seen play out in DTC. We're also seeing play out in wholesale and we're working very closely with our partners and actually we're very aligned in the approach that we want to drive moving forward. So I think long runway on AUR growth and expansion.
And in our wholesale and fundamentally healthier business as a result of it when it comes to gross margins guidance, Michael we're not going to change our guidance long term at this point, we're still as Jane mentioned very committed to our mid teens operating margin.
Very confident in our ability to get there I think at this point mid <unk> for gross margin expectation in the near term as is consistent with what we said and consistent with how to how to think about it.
And then once we have the opportunity to kind of guide for the next phase of growth and we can really look at that together, but the general message is consistency of expectations.
With a focus, especially on the ability to deliver mid teens operating margins for this company and on your question regarding Q4 implied op margin you know it is our smallest quarter and it certainly are traditionally our smallest quarter from it on an OE basis, we are making substantial investments that Patrice noted.
Largely on.
New consumer acquisition, and a new digital sites and digital investments all of which will pay dividends into the future. It's not a one and done kind of return on investment. These will be long term investments were committed to making them where could the upside come really if we see.
<unk> revenues strengthen.
Beyond our expectations into the fourth quarter.
Supply chain.
Especially the logistics aspect of supply chain resolves quicker than we expected you could see some flow through there the pressures are twofold other than the small quarter, we're moving into some of the higher costs that we're seeing.
On a product basis.
And you saw that we've taken up some of our.
We estimate on freight now moving to 130 to 150 basis points.
Obviously, given freight was 60 basis points in the first quarter 150 in the second quarter the back half.
To get to our range is more substantial than that so you see that pressure in the back half.
Thank you next question please.
Thank you. The next question comes from Matthew Boss with J P. Morgan.
Great. Thanks.
Maybe on the product side could you just help walk through key changes maybe by category or collection that you've made to increase relevance with younger consumers as we exit the pandemic.
Curious what you're most excited about into holiday and then last how do you see the brand positioned in a world potentially of greater overall casual ization.
So Matt I'm going to broaden your point because the way we appeal to the younger consumer is also through how we present some of our core products right. So how to make a white polo shirt relevant for that younger consumer and I think through the pivots, we made a marketing going on the platforms that run.
Innate the most with that younger consumer whether that's picked off course not.
Participating in those activities that are most relevant for them like gaming REIT engaging in the meta versus like what we've done recently with the ZIP codes, where we've seen very high level of engagement. So the shift in our marketing has really helped.
Broadening the appeal to the younger consumer and we see it in our data as I mentioned.
Up front.
Dana's question, we are seeing a younger consumer coming into the franchise as a result of the marketing content and targeting on the product front.
We have of course also leveraged.
Categories that resonate the most with that younger consumer polo sports, which we re energized and I think it was really clear positioning though is resonating very nicely elevated athleisure.
And fleece is also conducting nicely with that consumer and then you know some of our core some of our core products or our sweaters or she knows our denim.
Some of our more elevated outerwear has also resonated quite resonating quite nicely with that younger consumer so as I look at the broad categories that have been successful in the past quarter and as we look ahead in terms of where we've invested.
We feel very nicely positioned broadly and.
And in particular for that younger consumer whether that's again denim investments in sneakers driving a more a more elevated casual that is resonating with that group both on the men's side.
And on the on the women's side and.
Actually very encouraged that.
The progression were making in terms of attracting that younger.
Higher value customer is not a one quarter phenomenon. We've now seen this for a number of quarters and is the direct results of interventions targeted interventions, we are making across product across marketing and across.
Brian distribution.
Next question please.
Thank you and our next question comes from Brookfield Schoolman sacks.
Thank you good morning, and thanks, so much for taking our question.
Patrice and Jane in your remarks, you called out marketing and other multi year strategic investments to support long term growth as a driver of SG&A investment into the second half I was wondering if you could talk a little bit more about the most important spend initiatives within SG&A. This year into the back half what is within your control.
Accretive to long term brand health and are there any other components of SG&A that are that are rising whether that's rising.
Labor or giving given the wall or other types of aspects of oven inflation, where do you see that opportunity into calendar 'twenty two thank you.
So maybe we'll tag team on this one in terms of broad buckets broken truth, where we're focusing our investments moving forward that we expect to drive long term growth are one new customer acquisition.
Alright younger customer higher value customer and we now have the tools with the consumer intelligence group that we have in place with our ability to target and tailor the messaging to really be providing very high rois on these types of investments. So we've seen the success behind them, we're going to dial that up across the region.
The second is continue to fuel our digital momentum right and that's a combination of functionality on our own sites.
Elements of connected retail work that we're doing with our wholesale partners and Youll see we have a number of exciting things coming online over the next couple of quarters. When it comes to our digital capabilities. In addition to localizing sites, so expanding our footprint into into new markets with a localized propositions from our Ralph Lauren Dotcom.
Standpoint, and then the third one is continuing to invest in building our store footprint in the context of our key city ecosystem and we've had two good examples recently with Shanghai, and Beijing and Theres more to come there. So these are investments that will not just generate an impact over the next one or two quarters, but there are.
There will be long lasting AR will have long lasting effect, we really look at lifetime value of customers that we bring in to the franchise and we're actually really pleased with the profiles, we're bringing in we're really pleased with our retention performance.
So these three areas will will have a long runway in terms of.
Contributions to growth and value creation.
If I'm correct just to as you think about you know some.
Some of the components of SG&A, we've talked about marketing.
Being at least 6% obviously with some of the shift we did the 25 million that came out of the first half and went into the second half you'll see heavier marketing spend into the second half because we're able to you know sort of post COVID-19 and restrictions and shutdowns.
We're able to activate.
Things like the Australian open them and as you know we have the.
Events coming up the fashion show fashion week coming up those things will be activated and that's a portion of the spend that shifted so you will see this back half be closer to 7% 8% of sales.
Relative to our run rate, which is about five 8% of sales into this quarter for the first half now outside of SG&A versus lap outside of marketing I'm sorry.
Versus last year F&B is normalizing.
Last year, we had furloughs and we had government subsidies during the height of the pandemic.
We're obviously open across all our stores now.
And and we are seeing some wage rate pressure it's been most notable in.
Our distribution centers with temporary and hourly workforce and in our retail doors.
I'm pleased to say that we are well staffed right now.
But there is some inflation in wages that we saw and of course, we're committing this year to two opening new doors as a part of our drive towards them.
Direct to consumer we're gonna open 90, new doors. This year and there is some investment and expenses associated with that now as you're asking in terms of what do we have control of overall, we're committed to making these investments.
We do have some control over marketing as you saw us exercise in the first half to make sure we're in tune with local markets and the debt.
Operating dynamics that we're working with today, we do feel now is the right time, just with the holiday and what we're seeing in terms of opening around the country. Now is the right time to invest and as Patrice mentioned, we're also investing in local E. Commerce sites have a very strong our ROI.
And payback after the first 10 months.
The last question.
Thank you our final question comes from John Kernan with Cowen.
Alright excellent thanks for squeezing me in.
Jonathan.
Good morning, good things.
So maybe back to North America to $700 million in revenue that were taken out of the business globally I think a lot of that is from new.
North America, just curious how should we we should think about wholesale and retail.
Within North America, and what a sustainable growth rate in North America might look like as we exit the pandemic.
So let me just start with the $700 million of pressure, which youre exactly right is predominantly in North America, and what's going to manifest itself.
Through wholesale.
Most significantly is the pressure from the chaps moving to a license model.
That's a little more than 10 points of pressure in the second half to our wholesale business.
I think it's absolutely the right strategic move underlying.
Ex that reset we expect continued.
<unk> momentum.
Outside of Chaps.
Our wholesale business and higher levels of profitability as Patrice.
Mentioned.
In retail.
Obviously club Monaco will be excluded from our overall corporate.
Got it.
Results, but in retail we expect as as the situation of Covid normalizes that we'll see better traffic back to the store, we've got strong conversion rates strong AUR growth plans.
Already put up and plan for balance of year that will help us drive overall.
Overall retail we're planning for some store openings in North America, and continuing comp growth on a long term basis, we haven't yet guided.
The region, but we do expect North America is on a healthy base and is positioned for growth from here out you see the digital momentum you see us gaining share in wholesale.
And we're very encouraged by what our existing store base can do in a new store base, Yes, I think if you. Indeed, if you kind of step back and so what are the drivers in North America is going to be moving forward and you heard me say last quarter. It was last quarter never been this confidence in our ability to win in North America since I started and that comp that comp.
And confidence completely holds true as we speak together today as Jay mentioned, if you look at the key vectors of growth moving forward digital right. We now have after a painful reset.
Dealing with Daegu dealing with the site that was over promotional that didn't have the right product offering we now feel very good about our Ralph Lauren Dot Com site in the U S. Both in terms of how the brand is presented are engaging with consumers.
The retail capabilities that come with it and of course the profitability.
So that's the first element second element as you mentioned is our is our retail footprint right, both productivity and our outlets and expanding our own full price store footprints with more to come in this space, but we know that there is an opportunity for us to increase our presence physical presence from a DTC standpoint, and a number of.
Key cities in the U S and that work is well underway.
With a format that we're excited about the new brand presentation that we're excited about and then the final point is now wholesale which used to be a drag in a bit of an albatross candidly around our necks.
Now reset is known a healthy base, both the brick and mortar side, where we've close as a reminder, 65% of all our locations over the past three or four years and the digital front you saw the digital numbers.
The digital growth numbers from wholesale this quarter were quite strong and we believe are only the beginning of a long journey. So.
Multiple vectors of growth between as you mentioned, we're not ready to guide.
North America longer term, but I think.
Both of our behalf I think I could say, we have a lot of confidence in our ability to not only grow but win in this market right. The last thing I would leave you with this recent latest share readings, we're growing share in men's go ensuring kids grow ensuring home, we're growing share in women's ready to wear and theres more to come. So we've got really nice momentum at healthy Foundation anywhere.
First thing to win.
Alright with that we're going to close it here. Thank you for joining US today, we look forward to sharing our third quarter fiscal 'twenty two results with you in February in the meantime, we hope to welcome you at the Polo Bear little advertising never hurts, which just reopened here in New York City, a couple of weeks ago, where you can experience the magic of the Ralph Lauren.
Style.
Thank you for joining and have a great day.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.