Q2 2024 Ralph Lauren Corp Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Ralph Lauren second quarter fiscal year 2024 earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions on how to ask a question.
Will be given at that time, if you should require assistance during the call. Please press Star then zero as a reminder, this conference is being recorded I would now like to turn over the conference to our host Ms carrying a van against please go ahead.
Good morning, and thank you for joining Ralph Lauren's second quarter fiscal 2024 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 one per <unk>.
Caller.
During today's call are financial performance will be discussed on a constant currency basis.
Our reported results, including foreign currency can be found in this morning's press release.
We will also 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 with that I will turn the call over to Patrice.
Thank you Corey.
Good morning, everyone and thank you for joining today's call.
We continued to deliver solid progress on our next great chapter accelerate plan in the second quarter.
Through an uncertain global macro environment.
Our iconic brand and timeless products continue to resonate with consumers all around the world.
And our multiple engines of growth across categories and regions enable our teams to deliver against our strategic and financial commitments.
Even in a choppy backdrop.
Second quarter results exceeded our expectations on the top and bottom line.
We were particularly encouraged by an acceleration in our retail performance with positive comps across every region and channel in the period.
The strength and growing desirability of our brand is underpinned by our continued pricing power.
With AUR up another 10% on top of 18% growth last year.
In addition, consistent with our plan, we continue to focus on balance sheet and expense discipline.
This is fueling our investments in high impact brand moments spanning geographies and demographics.
All while delivering profitability ahead of our expectations.
Looking ahead as the important holiday season gets underway, we are executing on our long term game plan and keenly focused on what we can control.
We are elevating our brands and positioning in the marketplace, while staying grounded in the realities of the macro environment.
With more than six consecutive years of AUR growth.
A cumulative increase of over 70%.
We are confident in our pricing power in the market.
Now it's important to remember that AUR growth is an output.
Of our overall elevation work.
That has included evolving our product categories product mix and shopping experiences in addition to promotional pullback.
This fundamental reset in our pricing architecture.
Gives us the flexibility to continue driving our long term brand elevation, while also reacting with agility to near term inflationary pressures.
Turning to the second quarter or performance was guided by our three strategic pillars to drive long term growth and value creation.
These are first.
Elevate and energize our lifestyle brand.
Second.
Drive the core and expand for more.
And third.
Winning key cities with our consumer ecosystem.
Let me take you through a few highlights across each of these strategic pillars.
First on our efforts to elevate and energize our lifestyle brand.
We continue to invest in our most powerful asset.
Our timeless iconic lifestyle brand.
The Ralph Lauren brand resonates across geographies and demographics.
Powerful Lee cutting through a wide range of cultural moments.
Across fashion music gaming sports and more.
Some highlights from the quarter included first.
September marked our return to New York fashion week.
With a rustic romantic show at the Brooklyn Navy yard.
Where ralph and our design teams presented a women's show highlighting our brains quintessential easy elegance and relaxed refinement.
Supported by our Activations across 25 key markets and influential guests from J Lo and carried the Levine to liebig being in Sofia Richie Grange.
We drove 24 billion impressions globally with outsized growth in our luxury perception ratings in North America.
Next we reinforced our brand leadership in the world of sports with our sponsorships of the U S Open Wimbledon and Ryder Cup.
Our brand showed a powerful lee on the courts, and green and on celebrities and Influencers enjoying sport in our iconic spectator style.
We also continued to innovate in the world of gaming to engage new and younger consumers launching our latest partnership with Fortnite.
Reis to greatness immerses players in a unique experience blending luxury fashion gaming and exploration.
Engagement exceeded our expectations with over half a million unique visitors to the experience.
And the livestream activation, reaching 2 million total views.
In China.
We celebrated the 30th anniversary of our cult classic double RL brand.
With an immersive two day event with V. I C celebrity and Influencer attendees featured in a motorcycle tour around Chengdu city, horseback riding and vintage collection storytelling.
Other celebrity highlights from the quarter included dressing beyond say in her Renaissance World Tour.
And Taylor Swift and Jennifer Lawrence, both sponsored and effortless polo looks on the streets of New York.
Together. These activations are both re engaging existing customers, while also attracting new high value consumers to our business.
We added 1.3 million new consumers to our DTC businesses in the second quarter consistent with recent trends.
And this continues to skew increasingly towards next generation under thirty-five consumers.
We reached 55.9 million social media followers globally.
A low double digit increase to last year with.
With unique activations across line tick tock.
In our recent launch on Dewey and driving engagement.
And our online search trends continued to significantly outpace our peers globally.
Moving next to our second key initiative.
Drive the core and expand for more.
In uncertain times consumers continue to turn to brands, they know and trust and styles that have longevity beyond one season.
Timeless classics has always been our core proposition.
And Ralph and our design teams continued to deliver.
With an unwavering focus on the quality and quiet luxury that are central to our way of living.
Our iconic core products, representing about 70% of our business.
Grew high single digits in the second quarter.
The head of total company growth.
And core penetration to sales increased by roughly 500 basis points.
Underscoring the importance and resilience of our icons through choppy times.
Strong performance in our core was led by our iconic cable knit sweater and cotton in Kashmir Quill.
Quilted jackets and vests.
Irritates, Tweed lasers, and unconstructed sports coats.
Our kids business improved sequentially this quarter led by girls with strength across seasonal fall sweaters dresses outerwear and baby gifts.
Our core also establishes the foundation and credibility to grow our high potential categories.
These include womens outerwear, and our emerging home business.
Together these high potential categories increased low double digits in the quarter.
We continued to drive strong growth in womens our most significant long term opportunity.
On an elevated assortment with AUR up mid teens.
Similar to men's performance was supported by our core icons this fall.
Including sweaters Gardner.
Godman dice shirts.
Versatile mid and full length skirts, taking her from day to night.
And our iconic Blazers and heritage Tweed and modern knit fabrications.
In the second quarter, we also launched our most comprehensive women's handbag campaign to date with the introduction of our newest icon the RL 888.
With a 360 degree launch across key cities.
We are establishing the category in a way that is authentic to our brand with a focus on quality Italian craftsmanship and leathers.
Expressed in Ralph Lauren's elegant aesthetic.
Other special releases this quarter included or sports sponsorship collections with U S open and Wimbledon sales significantly outperforming our expectations.
Our limited edition P wing Fortnite, sneaker boots, which is now reselling to collectors for up to four times the retail price.
And in September together with Rizzoli, we launched a way of living a stunning hardcover book celebrating Ralph Lauren signature home collections over 40 years.
Looking ahead, we will continue to leverage the breadth of our brand and assortments to create excitement and desirability in addition to driving customer loyalty.
Onto our third key initiative.
When in key cities with our consumer ecosystem.
Our key city ecosystems around the World drive elevation in connection through all of our consumer channels and touch points.
Each of these ecosystems is anchored by direct to consumer channels, which already represent about two thirds of company sales.
Our strong retail comps this quarter were supported by continued momentum across both core polo products and luxury collections.
And our precision engagement with consumers, who have the potential for long term loyalty and outsized lifetime value.
While comps in our Ralph Lauren stores, and one digital sites were strong around the world.
We were particularly encouraged by improved performance in our outlet business, where comps were also positive in every region.
Key outlet actions, we implemented in the first half of the year from the assortment changes to optimize staffing and highly targeted promotions appealing to a more value oriented consumers.
Positioned as well as we head into holiday.
In addition to our existing fleet, we opened a select number of iconic Ralph Lauren stores in the quarter.
Including Marina Bay Sands in Singapore, and renovated experiences in Brussels and Stockholm.
And in North America, we're excited to build our first ever key city ecosystem in Canada.
Starting with Toronto, where we opened our first Ralph Lauren store at York Dale Center this quarter.
And just a few weeks ago, we launched our Canadian digital Commerce site.
Ralph Lauren Docs see a helper.
Helping us deliver connected retail experiences to our consumers across the market.
Globally, we opened a total of 16, new stores and concessions focused on our top cities this quarter.
With the majority again in Asia, particularly in China.
Our performance in China remains a standout.
With sales up more than 20% this quarter.
This was ahead of our expectations driven by strong brand momentum and high quality new consumer recruitment.
Looking ahead, we still see significant opportunities to drive our business with global Chinese consumers.
Then finally touching on our enablers.
In addition to our strategic priorities our business continued to be supported by our five key enablers.
I'll share a few highlights from the quarter.
Within our best in class digital technology and analytics capabilities.
We enhanced our Ralph Lauren Dotcom digital flagship in App this quarter.
This included new search capabilities and improve navigation.
Which helped deliver a more personalized experience and drive conversion.
We also continued our early testing of generative AI.
For example, leveraging the technology to create select product descriptions on our digital site.
As we continue to integrate citizenship and sustainability into our business. We are excited to share that we signed a collective power purchase agreement to scale, our purchasing of solar power in Europe.
This initiative created by the fashion pack bring.
It brings us one step closer to reaching our goal to power our direct operations with 100% renewable electricity by 2025.
And just a few weeks ago, the Ralph Lauren Corporate Foundation announced our newest Ralph Lauren Center for cancer Prevention at Usc's Norris Cancer Center Hospital.
This center will represent our third center in the U S and our first one on the West coast.
As we continue our efforts to improve access to high quality cancer screening services and treatment for underserved communities.
In closing Ralph and I are proud of our team's progress creativity and dedication while navigating a dynamic environment.
As we enter holiday in the second half of the year, we remain focused on what we can control as we deliver on our multiple levers for growth across regions and categories.
Our strengthening brand desirability.
Sustainable pricing power.
And consistency of execution continue to differentiate Ralph Lauren through challenging times.
And underpinning all of our growth opportunities.
Is the enduring power of our iconic lifestyle brand, which continues to inspire people all over the world to step into their dreams.
With that I'll hand, 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. We drove second quarter results ahead of our expectations, while making strategic growth investments that will continue to support our business in the second half and in the long term.
Second quarter revenue growth exceeded our guidance driven by better than expected performance in our DTC channels in North America, and Europe, along with continued momentum in Asia led by China.
Gross and operating margins were also above our outlook, despite ongoing cost headwinds and high levels of strategic investments in the quarter as claims.
Our continued brand elevation favorable channel and geographic mix shifts.
Coupled with our focus on cost savings and productivity fueled our investments in sustainable long term growth.
Leveraging our strong cash flow, we delivered approximately $275 million to shareholders in the form of dividends and share repurchases. This fiscal year to date, we are on pace with our long term shareholder return commitments, while maintaining our fortress balance sheet, one of our key enablers that serves us well.
Through times of uncertainty.
With this discipline, we enter the holiday season, with clean and healthy inventories.
With our elevated brand clear strategy and targeted investments. We are proud of the progress we are making on our multiyear next great chapter accelerate plan.
We remain committed to both our fiscal 'twenty outlook outlined back in May and our three year targets, while recognizing that we are still operating in a highly volatile environment.
Let me take you through our second quarter financial highlights, which as a reminder are provided on a constant currency basis.
Total company revenues in the second quarter increased 2% led by double digit growth in Asia revenue in North America, and Europe declined slightly to last year with Europe impacted by timing shifts as noted on our last call.
Total company comp increased 6% with all three regions delivering positive comp growth in the period.
Led by our Ralph Lauren stores, and digital notably our outlet comps improve with both stronger traffic and stabilizing conversion trends.
Total company adjusted gross margin expanded 80 basis points to 65.4%.
This was better than our outlook as strong AUR growth lower freight expenses and favorable channel and geographic mix more than offset ongoing pressure from higher cotton costs.
We continue to expect stronger gross margin expansion in the second half of the year as cotton headwinds start to moderate and inventories remain clean and well positioned.
AUR increased 10% on top of 18% growth last year with balanced growth across all regions and channels driven by our long term strategy of brand and product elevation.
This more than offset targeted promotional activity in the quarter focused on driving conversion with our value sensitive consumers.
Adjusted operating expense increased 10% to 55.5% of sales driven by this year's cadence of higher marketing talent to support our strategic growth areas and long term investments in our key city ecosystems, notably in store customer service, New digital site law.
<unk> and search engine upgrades.
Marketing was 8% of sales compared to 7% last year, we continue to expect full year marketing at around 7% of sales consistent with our long term guidance, including a more normalized growth in the second half.
Moving on to segment performance, starting with North America second quarter revenue declined 1% ahead of our expectations with stronger growth in our retail business offset by expected wholesale declines in a softer environment for the channel in North America retail second quarter comp.
<unk> increased 4%, representing a meaningful improvement over our first quarter trends comps were positive in every channel, including outlet, which started to benefit from our recent interventions to strengthen the customer experience and selective promotions to drive conversion with value oriented.
Consumers.
Comps in our owned Ralph Lauren Dotcom site grew 4% a 12 point improvement from Q1, as we continue to drive personalization and targeted marketing activations.
All DTC channels delivered at least mid single digit AUR growth alongside these comp improvements.
In North America wholesale revenues declined 7% to last year in line with our expectations as we carefully manage sell into the channel to align with softer consumer demand.
While this channel is also experiencing some challenges related to macro inflation pressures. We are encouraged that our top 100 doors are significantly outperforming the rest of the fleet following our targeted investments in renovations and service levels in.
In addition, our wholesale AUR continued to grow up mid single digits on product mix elevation and controlled inventory levels. Looking ahead, we are maintaining a cautious outlook on the channel and remain focused on aligning inventory levels to demand.
Moving onto Europe revenue declined slightly in the second quarter ahead of our expectations results included five points of negative impact from the earlier timing of fall twenty-three wholesale deliveries into the prior quarter and lapping last year's favorable post COVID-19 wholesale allowances.
Retail comps increased 6% with one digital commerce up 14% and brick and mortar comps up 5% on similar performance and Ralph Lauren and outlet stores.
Europe AUR increased high single digits in the quarter.
Digital comps were higher than our expected full year run rate as new sites accelerated growth.
Similar to North America, we added targeted incremental seasonal promotions to drive conversion, which meaningfully benefiting Q2. Conversely, we expect Q3 digital comps to be negatively impacted by a calendar shift in boxing day sales to Q4.
Europe wholesale declined 7% to last year in line with expectations, including approximately nine points of headwinds from the items noted previously.
Looking ahead. These drivers are expected to negatively impact our Q3 and Q4 growth by about 12 and four points respectively.
Turning to Asia revenues increased 13% with growth led again by China.
China sales increased more than 20% on top of a strong compare of more than 30% last year on continued brand momentum.
Second quarter sales in Japan were up low double digits.
We expect continued momentum in Asia in the second half of the year with growth in China outpacing the rest of the region.
Within our other non reportable segments licensing revenue declined high single digits in line with our plan to transition out of our Lauren mens suiting license as a part of our long term elevation journey drove the entire decline and we will continue to impact segment results for the.
<unk> of fiscal 'twenty four.
Moving on to the balance sheet, our strong balance sheet and healthy cash flows are key enablers of our fortress foundation and allow us to make strategic growth investments in our business, while returning cash to shareholders even through dynamic times, we ended the second quarter with 1.5.
5 billion in cash and short term investments and 1.1 billion in total debt.
Net inventories declined 5% aligned with our expectations and below our revenue growth trend with units down high teens inventories decreased double digits in North America on a more normalized timing of receipts and cautious topline outlook for the region.
Inventories in Europe also declined in constant currency, while Asia levels reflected our strong expected growth rates, we still expect to end fiscal 'twenty four with inventory below prior year levels.
Looking ahead, our outlook remains based on our best assessment of the current geopolitical backdrop as well as the macroeconomic environment.
This includes inflationary pressures and other consumer spending related headwinds and foreign currency volatility among others.
For fiscal 'twenty, four we still expect constant currency revenues to increase low single digits centering on a range of 1% to 2% our outlook Embeds slightly increased caution around the wholesale channel where year to date demand has been soft foreign currency is now expect.
Did to negatively impact reported revenues by about 50 basis points due to unfavorable shifts symbols Asian, and European exchange rates versus our prior outlook.
We continue to expect top line growth to be led by Asia, followed by low single digit growth in Europe, and we still expect a low single digit decline in North America based on softer spring trends in the first half and wholesale timing shifts in Q1.
We continue to anticipate operating margin expansion of approximately 30 to 50 basis points in constant currency to 12, three to 12, 5%.
Foreign currency is expected to have roughly 10 basis points negative impact on full year operating margin.
We expect gross margin expansion in the range of 120 to 170 basis points in constant currency up from about 100 basis points. Previously this is driven by more favorable freight cost mix shifts towards international and DTC and <unk>.
Continued growth in AUR more than offsetting full year cotton inflation.
Gross margin expansion is anticipated to more than offset higher operating expenses as we invest in key strategic initiatives, particularly around digital key city ecosystem expansion marketing and sustainability.
Relative to our Investor day base period guidance still implies about 80 to 100 basis points of operating margin expansion when compared to fiscal 'twenty, two holding currency constant on track with our long term targets.
For the third quarter, we expect revenues to increase 1% to 2% in constant currency led again by Asia Foreign currency is expected to negatively impact revenues by roughly 30 basis points.
We remain cautious on North America, and expect similar trends to Q2 with softness in wholesale offsetting stronger trends in DTC.
In Europe third quarter sales are still expected to be negatively impacted by the timing of earlier fall shipments and from lapping last year's favorable post COVID-19 wholesale allowances.
Excluding these unusual impacts we expect underlying trends in Europe to be more in line with our full year outlook for the region of low single digit growth.
We expect third quarter operating margin to be roughly flat in constant currency with about 10 basis points of foreign currency benefit.
We expect constant currency gross margin expansion of 100 to 150 basis points, largely offset by a higher proportion of marketing and ecosystem investments planned in the second and third quarter of the fiscal year.
We now expect our tax rate to be in the range of 22% to 23% for the full year and roughly 23% to 24% for the third quarter.
And capital expenditures are expected to be around $250 million.
In closing our year to date performance demonstrates the agility of our teams to deliver continued strong execution along with progress on our next great chapter accelerate plan.
Led by Ralph's enduring vision, our teams around the world are consistently driving brand desirability with products and experiences that resonate across generations geographies and lifestyles.
Even as we navigate near term challenges our multiple engines of growth along with our fortress Foundation put us in a position of strength to continue to deliver our commitments and drive long term value creation.
With that let's open up the call for your questions.
Ladies and gentlemen, if you wish to ask a question. Please press Star then one on you touched on palm.
You will hear a tone, indicating you've been placed into Q you may remove yourself from the queue at any time by pressing star tier.
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One moment please for the first question.
The first question comes from Michael Binetti with Evercore ISI.
Hey, guys great to talk to you thanks for taking our questions here.
Maybe two quick ones here Patricia you guys maintained the outlook for the year you referred to obviously the macro uncertainty in the prepared remarks, what what do you. What do you think about as the factors in your control that you that enabled you to maintain the back half commitments and beyond especially if the environment deteriorates further from here and then I guess.
Maybe a jump ball for both of you, but how do we think a little bit beyond this year on the wholesale side.
Particularly in North America, you made some comments on your thoughts on the channel now do you feel like the channel is under inventoried at this point and how do you think about the opportunity to fill in wholesale next year as we look a little bit beyond the calendar here.
Alright, well good morning, Michael welcome back.
Thanks for your questions.
And our teams continue to execute really well in a tough environment.
And while we're planning for things to remain choppy for the foreseeable future I think this quarter showed once again that we can deliver on our commitments.
There are few reasons for that and I just want to call out the top three.
First one is our brand is our most powerful asset and we're driving momentum and desirability.
As we cut through culture and appeal across generations through a variety of platforms I actually think we have probably one of the most diversified.
Broadest marketing programs in our space ranging from.
The fashion show, we did recently New York fashion week.
Two sports partnerships Wimbledon Ryder Cup U S opened just this last quarter to addressing celebrities like Beyonce you heard that in the prepared remarks, trashy influencers worrying us spontaneously.
Gaming with Fortnite, so a broad range of activities, we continue to invest in our brands for the long term and we're seeing consumers respond to that.
The second point, which is actually.
Quite important dream.
Challenging periods like this for consumers is our iconic.
Core products anchor us.
Thank beautifully made cashmere sweaters Navy Blazers three jackets.
Oxford shirts.
Really the foundation of a wardrobe and these timeless products deliver through cycles and when.
Things get more challenging we all consumers tend to gravitate back to core products products and brands, They know and trust.
And in addition to that we continue to have significant growth opportunities in women's and in outerwear and then the third point.
And you heard this in our prepared remarks is our DTC channels.
Really where we can best control the consumer experience.
These channels today represent two thirds of our business. So DTC is two thirds of our Florida business.
Different picture than a few years ago and as you saw actually our our performance in that channel is accelerating with positive comps across.
Every channel brick and mortar and digital across every region.
So in addition to this I think we've also built over the past few years.
And agility muscle that's integrated into our operating model and I think you saw this in this past quarter. For example, we make fast product assortment changes meaning.
Leaning even further into our core products in order to improve traffic and conversion in DTC and you saw that play out in the numbers.
We delivered enhanced staffing in our retail stores to improve the customer experience.
And online we also made a number of changes relative to search and more personalized pages, which also drove an acceleration both from a traffic conversion and ADT standpoint in those important channels.
And while we continue to elevate our brand.
This wouldn't be a Ralph Lauren call, if I didn't talk about AUR.
You see this play out in increased AUR again, this quarter up 10% in an environment that's relatively in terms from a promotional standpoint.
And we were able to grow AUR double digits, while having limited targeted promotional actions for our more value oriented consumers.
Closed the deal and drive conversion.
So listen we're operating in a very uncertain world, but I think that's become the norm.
We know how to navigate this and our iconic brand our multiple growth drivers and our agility muscle really help us to stay on offense.
And importantly, we have the operational discipline and the balance sheet to enable continued investment in growth.
So I think when you look across the marketplace. These are all very important differentiators.
Are we going to continue to focus on what we can control to win and create value in the marketplace.
When it comes to wholesale since it's a jump ball James you got the ball.
So even though I can't jump.
Let me just frame the thinking that we have on wholesale.
Longer term and today wholesale is an important environment for us for consumer discovery, we know from our consumer work that when a consumer buys an experience as Ralph Lauren quality, we can hook, there and so it's an important and profitable channel for that.
Courtney consumer discovery.
You know just from.
What we've done.
For many years, our focus on managing our matching sell in to demand and tight inventory management is something that we're doing today, our inventories are well controlled and something that as we think about the future is something that we have to continue to lean into along.
With leveraging our core which resonates well with that consumer being able to chase into variable demand.
Allows us to meet those consumer needs that I think will serve us well into the long.
Long term working with our partners to personalize our market our marketing with loyal consumers that we have across the channel and then importantly, all wholesale is not created equal there's a bifurcation between top tier wholesale where we're growing.
And and doors across the market top city top doors are performing meaningfully better.
The imbalance of fleet and that's where we can do some interventions that Patrice described that are working on DTC like investing capital in renovating make sure we have great environment investing with our partners in greater service levels, we know that that works those doors.
Are performing better and is a place where we can concentrate resources and get an ROI. So I think we have a good operating game plan and strategic game plan for wholesale where we you saw us pull back in about two thirds of our doors, we evaluate everyday where should we be and looking at that too on a door by door basis, and we'll continue to do that.
Into the future.
Thank you Angela next question please.
The next question comes from Bob <unk> with Guggenheim.
Hi, good morning.
Thanks for taking the question.
<unk>.
<unk>.
Hey, Bob I guess.
Jane.
Can I follow up on the balance sheet the balance sheet very strong we've heard.
Some of your peers update their capital allocation strategy.
But can you just referred to as early uncertain environment. How are you planning to manage the balance sheet capital allocation going forward or are you doing anything differently and also can you just elaborate a bit more in terms of I don't know country trends really what youre seeing throughout Europe.
With the outlook that you've given us thank you.
Sure. Thanks for the question.
You know the current operating environment is volatile, but our performance through it makes us even more committed to our strong balance sheet and culture of operating discipline. All of the things that are really critical to our fortress Foundation.
With the agility of our team, it's what really enables us to continue to drive the plans through tougher times.
And we think that our fortress foundation and the way, we manage our balance and our commitment to capital allocation is increasingly a strong differentiator for us and we're always interesting interested in doubling down on just differentiation. So I think the short answer is we're going to continue I'm passionate about.
Our discipline in managing our balance sheet and sticking with our capital allocation principles, which drives growth and investment.
And returns capital to shareholders and it's not just words and principles, it's producing results for our shareholders. We're on track with our capital allocation and shareholder return commitments that you heard us talk about at Investor day at the halfway Mark we've returned about $1 billion to shareholders in the form of share repurchases and dividends.
Yeah.
Our cash position remains extremely strong we're in a net cash position and our leverage is nearing our historical levels.
And those levels are usually low with our target of one to two times.
EBITDA leverage and our inventories are clean.
Our inventories are down 5% this quarter with units down double digit and importantly, North America inventory was down double digits in Europe in constant currency was down mid single digits again, we expect to end the year tight inventory discipline than that.
The inventory will be down as we ended the year improving our overall churn so we're more committed than ever it Bob.
Yes.
Three trends that we're seeing across Europe.
Well I'll jump on that.
So we're training balls here.
So Bob I think there are a few observations that apply to all of the regions and then I'll give you specifics for each individual one so the observation that apply to all of the regions as environment is choppy, but our core consumer remains resilient alright, and we're seeing nice growth with our core consumer are higher value less.
<unk> sensitive.
And that's true across all three regions. We're also seeing really good performance. This quarter I think it's one of the highlights of the quarter in our DTC channels across all the regions. So every channel every region positive comp growth.
Brick and mortar and digital.
Third area is.
We are continuing to recruit new consumers and we're continuing to recruit new consumers in Asia, and North America and in Europe higher value less price sensitive younger consumers and our general internal metrics of traffic and ADT in AUR are consistently up across all three regions. So those are.
Common elements.
We have seen improvement in our outlets.
With our particularly our more value sensitive consumers the interventions that gene and I have been talking about has been impactful during the past quarter. So we're quite encouraged by the strengthening that we've seen in our outlet channel and our ability to really connect with that smaller consumer group, but still there are value oriented consumer now if I look at things by regions.
North America, our biggest region down 1%.
Again, DTC growing right comps up 4% and DTC in North America.
Growing across all the channels the pressure Jane mentioned that is more in wholesale and here we have differentiation between high end wholesale as you highlighted Jane <unk>.
The Saks Bloomingdale's Neiman Marcus is of this world, where we are growing the top doors of our largest partners where we are also.
And you're basically flattish and then the doors that were more challenged are or kind of think store 100 and beyond.
And we have an action plan to go strengthen that that you heard from James in Europe on the face of it were down 1% actually if you do like for like we're actually up.
I think three.
3%.
Take care.
So you remove the timing shifts from a wholesale standpoint.
Twice here, we're seeing strong performance in DTC across all the channels.
Wholesale continues to be challenged again on the face of it but if you take the timing shifts.
Archie wholesale grew in Q2 in Europe, and we're seeing a really nice rebound with one of our largest partners in Europe. So that's quite encouraging for the future.
In Asia were up 13% on a constant currency basis, nice diversified growth across our key markets, China being the fastest growing region for us they're up 20%, both mainland and HMT. So we're feeling really good about the continuing momentum we have enough in that region that Brian is Reza.
<unk> the product offering is connecting nicely and the teams are doing an excellent job executing our cecity ecosystem approach in our top six cities.
Japan delivered a nice quarter with double digit growth in Japan is not yet benefiting from the return of group tourism from China. So there is more growth to come down the road.
That parts of.
The region and then we've seen solid growth across southeast Asia.
The balance of the region. So hopefully that gives you a bit of a sense of calm.
Commonalities a lot of common elements across the different regions and then what's unique to each individual one.
Next question. Please. Thank you. The next question comes from Matthew Boss with Jpmorgan.
Great. Thanks.
Patrice So maybe could you elaborate on the structural building blocks that you've put in place, which you think drove the material acceleration of direct to consumer here today, and then how you see the brand position into holiday to potentially continue to take share and then Jane could you just outline the drivers of the raised gross margin outlook.
For this year and if there's any change to mid teens operating margins as the target as we think to next year.
Good morning, Matt. So you know our game plan continues to be driven by our overall goal which is <unk>.
<unk> strategy, which is brand elevation across our three pillars.
Brand building.
Driving the core and expanding some more from a product standpoint and.
Expanding our key city ecosystem.
What we've seen in terms of short term interventions that have really resonated well in DTC has been.
The work that we've done on products.
Leaning harder into core because during these challenging times as I mentioned earlier consumers are gravitating towards.
<unk> core products and for US those are more elevated product so less less.
These are all items less of Tees shorts, and fleece and <unk>.
What a truly iconic Ralph Lauren products, three jackets, Oxford shirts.
Suit separates cable knit sweater.
That's on the product.
When it comes to digital.
Parts of the improvement has been also driven by an enhanced search capability that we've implemented as well as different Brian presentations for our PDP.
Product description pages, which are driving both traffic ADT and conversion.
For all outlets in particular, we looked at our staffing model to make sure that we're providing the consumer with a great experience every single day and hour of the week and that shift is actually translated into stronger traffic stronger ADT stronger AUR across the channel and then I referred to our broad marketing pro.
Graham earlier, and I think the team is doing a really nice job, making sure that each individual element is connecting with that target customer.
We're seeing the benefits of that and then finally I would add.
Jan I mentioned earlier that for those more value oriented consumers.
We have done in a very limited in a very targeted way promotional activity that has helped close the sale with them.
What we're pleased about is this inherent agility that we built into our model over time enables us to continue to grow AUR six year in a row and have the flexibility to be point.
Pointed on promotional activity where needed most.
Most most relevant in those more value oriented channels in terms of how we're set up for holiday.
I think we're actually well positioned we've got a game plan. That's clearer we're executing the strategy that we have had in place for some time now we are seeing consumers respond nicely to both our marketing and our product offering.
You know, we're keeping an eye on on the volatility of the situation.
We feel good about the momentum we have going into the holiday period you saw the.
The vast number of marketing activities, we had in Q2 that gives us momentum going into the holiday season.
The pivot on product that we've been able to make positions us really nicely in terms of showcasing our core strengths, which is our iconic propositions.
And each channel each region has the flexibility and the agility to respond to what we see in the market.
So while we recognize the environment continues to be choppy and will likely be for the foreseeable future I think we're well positioned coming into holiday.
Just on gross margin that we were really pleased to raise our.
Outlook to 120 to 170 basis points of gross margin expansion in constant currency for the clear there are really three primary drivers.
<unk>.
We still are seeing upside in freight notably in ground transportation, that's more than offsetting cotton headwinds now so more opportunity in freight we are also seeing upside in AUR, we put up.
Double digit AUR growth this quarter, while growing.
Gross margin and reigniting DTC. So we believe that for Q3 and four we have upside to our AUR and channel mix.
The acceleration in DTC that Patrice called out in Q2, we would expect that performance to continue.
For the balance of the year.
We still have a cost headwind in cotton, but again I think we've more than fully offset that.
And we're seeing some of our productivity initiatives.
Flow through.
As we said a little more balanced in Cogs and SG&A, but we are realizing those productivity initiatives and that's a tailwind to gross margin as well so very encouraged by that.
And as we look at the progress we've made this year, there's no change in our Investor day guidance to mid teens.
Constant currency, Oh, why growth, we remain firmly committed to that goal.
And firmly committed to our outlook in FY 'twenty four while recognizing that we're operating in a highly volatile environment. We know what we need to do we need to continue our top line growth, we need to continue to drive our cost productivity.
And we need the investments that we're making and the investments that we're making we know will pay off.
Not only in the second half but into FY 'twenty five so we were.
Happy to remain committed to our Investor day guidance of mid teen.
Next question please.
Thank you. The next question comes from Rick Patel with Raymond James.
Thank you good morning, and congrats on strong execution in a tough macro.
I was hoping you could help us understand the higher comps in the outlet channel.
<unk> results given the pressure on the consumer there can you talk about the changes that you implemented that drove that result, and how we should think about the sustainability of that growth going forward.
Sure.
Good morning, Rick.
It's really.
The execution of the different strategic pillars that we have in place so.
First I think as we talked earlier.
The leaning into our core products.
And we've seen consumer strong consumer response, both on the men's business very strong response on our women's business.
Strong improvement on our kids business.
So leaning into core products has been intervention, one rig that's going to keep going alright.
You mentioned number two has been customer experience and making sure that we're surfacing the customer in the right way consistently throughout the week and we knew we had some opportunities too.
Rebalance staffing and strengthening staffing in some areas to make sure that the customer walking through the door.
Getting the type of experience that they deserve from from Ralph Lauren.
Number three is marketing activities and targeted marketing activities for that shopper for that consumer leveraging both the centers capabilities on platforms and our own database.
And then point number four relates.
Specifically to connected retail and how we leverage our connected retail capabilities now unless you've been in some of our outlets recently, but we've implemented endless aisle screens for example, where now you can shop the entire catalog from that store.
Full price outlet anything thats available within the Ralph Lauren catalog, we also have digital client telling.
Outlet customers, which has also been useful.
And driven the performance this past quarter.
Sure.
Structural so we will continue to pay benefits moving forward and then finally.
As I highlighted earlier for those more value oriented consumer who need that need that little support.
To close the deal.
We have been able to implement limited targeted promotional activity for the more value oriented consumers while still.
Being able to expand AUR in that channel so five four interventions.
Really proud of the how nimble the organization has been as we've read consumer behavior competitive environment.
And we feel good that these interventions will serve us well through holiday and beyond.
Thank you next.
Thank you and next question comes from Dana Telsey with Telsey Advisory group.
Hi, good morning, everyone and congratulations on the nice improvement.
One of the things I noticed is when you hi, when you talked about your core product and the improvement that you saw just in the core product I think it was up high single digits compared to the first quarter up mid single digits. In addition to the continuing strength of the women's outerwear and home business is up low double digits in the.
Core business anything new on pricing newness in product that that youre seeing there that could continue as we move forward and then on the AUR growth of 10%. How are you thinking of the magnitude of AUR growth for the balance of the year and with new and new introductions like the R. L. A.
88 is that helping to drive AUR growth and are you seeing anything different by region. Thank you.
Good morning, Dana so in terms of evolutions.
Products and products in general what we're seeing is the consumer really gravitating towards this sophisticated casual more elevated style.
Alright, and Thats been consistent we're seeing that both across men's and women's that really plays nicely too.
What Ralph and the teams have built over time, which is this notion of.
Quality.
Luxury authenticity.
That's pretty I think pretty unique unique to Ralph Lauren and these are the categories that I highlighted earlier, so our cashmere cable knit sweater or Tweed jackets are garment dye, Oxford shirts.
As a as illustration of that we were going to continue to drive that I think.
That's what consumers are looking for right now as they are more towards fill in where they invest they want to invest in pieces that are timeless, but they can wear beyond one specific season. So we feel that's one intervention second intervention, which you will likely have seen Dana because you're quite close to all of this is the elevation that were doing on on polo with the <unk>.
Expansion of silver label.
We are beautiful campaign recently.
Sure.
Filmed in goodwill the goodwill festival that kind of highlights these beautiful new products with leather outerwear.
<unk> suits beautiful sweaters, and you're going to see us continue to lean into that because we're seeing strong consumer response.
And then on the women's side.
You highlighted it we've been really pleased with the continued momentum we're seeing on on women's both on polo.
On collection and on Lawrence for Cross our women's portfolio and again. These are iconic Ralph Lauren styles that you that you know well and that are really resonating with consumers right now.
Just on the near term trajectory of AUR as he as you mentioned up 10%. This quarter. We do expect there to be that we are past the peak of product cost pressures. So.
The pressure to price with inflation abate slightly in the balance of the year and I think we were planning on AUR being in the high single digit range as we close out the year. So again strong AUR growth, what we're seeing is that consumers.
Our penetrating into our higher priced products that we're seeing a penetration increase into.
Products over a $100. We're also seeing our new consumers penetrate the new consumers that we're recruiting penetrate into higher.
Our products, so higher individual products and higher basket, that's really given us the flexibility to do what Patrice talked about which is reach a more value oriented consumer with some highly targeted.
Discounts leveraging R.
Our one to one marketing personalization, so that we can reach them directly I don't expect to change in our AUR journey in the near term.
And as Youll recall AUR is really for US is about many levers. It's founded in the brand elevation journey that we're continuing it youll see US continue our product mix elevation, which is going to where the consumers.
Where consumer demand is going but also building that agility and flexibility for us to continue to expand gross margins, we took up our guidance.
<unk> continued to drive strong DTC question.
Dana is the way we talk about it a lot with our marketing teams is.
The following model trade in.
Trade up trade across right and those are the three kind of levers for us to drive growth.
And given the breadth of our product offering and our lifestyle propositions.
We have significant trade up opportunities. So maybe you sell less T shirts more Tweed jacket.
Earl 888 bags, more alpha where more sofas.
So trade up as a significant growth opportunity, which will serve us for years.
Now decades trade across same thing we bring you trade you in and then there are so many different categories, which can trigger across.
So I think these levers of growth.
Again roll back up to the diversification of growth drivers that this company has.
Alright.
It is time to close so thank you for joining us today, and we look forward to sharing our third quarter results with you in February.
Dave.
Yeah.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.