Q3 2024 Ralph Lauren Corp Earnings Call
Ladies and gentlemen, thank you for see any by welcome to the Ralph Lauren third 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.
Have you should require assistance during the call. Please press Star then zero as a reminder, this conference is being recorded I would now.
Speaker Change: I'd like to turn over the conference to our host Mr Arena Vander Getz. Please go ahead.
Speaker Change: Good morning, and thank you for joining Ralph Lauren's third quarter fiscal 'twenty 'twenty four 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.
Speaker Change: To one per 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.
Speaker Change: 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.
Speaker Change: 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 Web site.
Speaker Change: With that I will turn the call over to Patrice.
Patrice Hubei: Thank you Cory and.
Patrice: Good morning, everyone and thank you for joining today's call.
Patrice: This holiday quarter, our campaigns around the world celebrated a season of giving marked by warm reflection and comfort that inspires people to dream of the best things in life and share them with those they love.
Patrice: Immersing people in our world of easy elegance, and sophistication has epitomize Ralph Lauren over 57 years.
Patrice: And we continue to deliver this quarter after quarter to an ever expanding audience to our next great chapter accelerate plan.
Patrice: This combination of magic and logic translated to strong financial performance in the third quarter, our biggest quarter of the year.
Patrice: With top and bottom line results that exceeded our expectations along with significant EPS growth.
Patrice: As we continue to navigate a dynamic global operating environment. Our teams remain keenly focused on what we can control.
Patrice: This starts with our timeless and highly desirable brand, which is resonating with consumers all around the world and enabling continued pricing power in the market.
Patrice: Our ability to leverage a broad powerful portfolio of core products that we can flex with evolving consumer needs.
Patrice: Our continued deliberate shift toward our direct to consumer channels, where we can best deliver are elevated and connected consumer experiences.
Patrice: And which once again led growth in the quarter.
Patrice: And all of this is underpinned by the agility and operational discipline, we have built into our business. So that we can continue fueling our strategic growth initiatives for the long term.
Patrice: As we outlined at our last Investor day.
Patrice: We are strongly encouraged that we have built a sustainable and resilient model with multiple diversified drivers for long term growth and value creation.
Patrice: Our third quarter performance was a clear example of how we're driving progress across our three strategic pillars.
Patrice: As a reminder, these include first elevate and energize our lifestyle brand second.
Patrice: Let me take you through a few highlights across each of these areas.
Patrice: First on our efforts to elevate and energize our lifestyle brand.
Patrice: We continue to harness the power of our iconic brand as we expand across geographies and demographics cutting through culture across fashion celebrity sports gaming and music moments.
Patrice: During the third quarter G campaigns included first our holiday season for Dreaming Activations in every region generating nearly 8 billion global impressions.
Patrice: These included immersive holiday gifting content unique G City takeovers across New York, Shanghai, London and Berlin.
Patrice: And our singles day stream in China.
Patrice: Second our polo, Ralph Lauren artist in residence campaign, featuring Navajo designer Naomi glasses.
Patrice: Which is the first in a series of groundbreaking partnerships focused on empowering and celebrating artisans within the communities that have historically inspired our designs.
Patrice: This campaign was not just a galvanizing cultural moment for our organization, but also resonated strongly with consumers.
Patrice: Driving more than 3 billion impressions and our highest engagements ever on tick tock.
Patrice: We also outfitted an incredible roster of inspiring women.
Patrice: Including America, Ferrero, Jodie Foster gradually and J Lo at the L women in Hollywood event.
Patrice: Gino Monet, and Kate Balk at our Boswell in Miami.
Patrice: And go Ravi Kumari Princess of Jai poor for a high profile fundraiser at the dazzling City Palace in Jaipur, India.
Patrice: And who could forget Taylor Swift, who chosen all American Ralph Lauren look for the cover of time magazine as they are 2023 person of the year.
Patrice: These activations helped to fuel our strongest quarter of new consumer acquisition and brand affinity since the pandemic.
Patrice: We added 1.7 million new consumers to our DTC businesses up high single digits, the last year driven by all regions.
Patrice: Our net promoter scores accelerated along with positive momentum in brand consideration and purchase intent.
Patrice: And we grew our followers on social media by low double digits to last year led by tick Tock, Instagram Wechat and Dorian.
Patrice: Moving next to our second key initiative drive the core and expand for more.
Patrice: Consumers continue to turn to brands, they know and trust and styles that live on beyond one season.
Patrice: And this holiday was no exception.
Patrice: As Ralph and our design teams seamlessly married sophisticated casual with styles exuding, the luxury and glamour of the season.
Patrice: Our iconic core products, representing about 70% of our business grew low double digits in the quarter ahead of total company growth.
Patrice: From our mesh polo's in Oxford shirts tour logistically soft cashmere sweaters and versatile Blazers, we have established a broad and highly recognizable portfolio of icons that drive our business through both choppy and more stable times alike.
Patrice: And we are incredibly proud of the work Ralph and our creative teams are doing to drive newness and excitement behind these styles. So they appeal to our most loyal and new consumers alike.
Patrice: Performance in core was led by our cable knit sweater and cotton woolen cashmere.
Patrice: Quilted and down jackets.
Patrice: In sports coats and arrange a tweed tartan Plaid stretch corduroy and party ready velvets.
Patrice: As we continue to build on the long term foundation of our core we also delivered strong growth in our high potential categories, including womens outerwear and home.
Patrice: Together these high potential categories increased low double digits to last year.
Patrice: This was led again by womens our most significant long term growth opportunity.
Patrice: Driven by an elevated assortment with AUR up mid teens.
Patrice: Performance was supported by our cashmere slag and polo bear sweaters.
Patrice: Sophisticated wall and cashmere coats bill.
Patrice: Blazers and heritage Tweed and modern knit tools.
Patrice: And cocktail and evening dresses.
Patrice: Other special releases this quarter included our polo country, an element skateboards capsule, a limited edition collection of unisex polo countries styles and elements skateboards celebrating the great outdoors.
Patrice: We sold over 2000 skateboards, highlighting the lifestyle reach of our brand and appeal to younger consumers.
Patrice: Our limited edition Polo I D handbag collaboration with Mr bags in China, which sold out within one minute on wechat.
Patrice: Our innovative love of the land collaboration with Navajo designer Naomi glasses, Ralph Lauren's first artist in residence.
Patrice: And the annual and much loved that Ralph Lauren Pink Pony collection, supporting Ralphs 30 year commitment to cancer care and research.
Patrice: Looking ahead, we will continue to drive our core icons, while leveraging the breadth of our brand and assortments to fueled excitement and desirability.
Patrice: Turning to our third key initiative, winning T cities with our consumer ecosystem.
Patrice: Our key city ecosystems around the world drive elevation and deliver consistency through all of our consumer channels and touch points.
Patrice: Each of these ecosystems is anchored by direct to consumer channels, including our stores and digital commerce sites, which combined already represent about two thirds of company sales.
Patrice: During the quarter, we drove accelerated comp growth, while also expanding our connected ecosystems across key markets glue.
Patrice: Globally, we opened a total of 17, new stores and concessions focused on our top cities with the majority again in Asia.
Patrice: While comps in our Ralph Lauren stores and one digital sites were strong around the world. We were particularly encouraged by the continued improvement in our outlet trends.
Patrice: The key outlet actions, we implemented in the first half of the year from our optimized staffing to assortment enhancements and emphasis on quality and value.
Patrice: This well through holiday and we will continue to be drivers as we look ahead.
Patrice: In addition to our existing fleet, we opened a select number of iconic Ralph Lauren stores in the quarter, including.
Patrice: Our new emblematic store at Singapore's Marina Bay Sands, the first door to offer our luxury collections in southeast Asia.
Patrice: Our first Ralph Lauren store in the Czech Republic, and Prague's Historic old town.
Patrice: As well as in Charlotte North Carolina.
Patrice: And our first Ralph's coffee shops in Paris, and the UAE.
Patrice: We also launched a Ralph Lauren digital flagship site in Canada, following our Toronto store opening last quarter.
Patrice: Combined with our elevated wholesale presence these are helping us introduce a cohesive connected retail experience to our consumers across the Canadian market buyer.
Patrice: By region growth was again led by Asia, with particularly strong performance in China, where sales increased more than 30% this quarter on both comp and new store growth.
Patrice: This was ahead of our expectations, even with last year's easier compares due to the surge in Covid cases.
Patrice: We are still in the earlier stages of brand building in China with meaningful outperformance versus peers in the quarter on consumer kpis, including brand awareness consideration and net promoter scores.
Patrice: Our team delivered another successful singles day focused on brand building with Ralph Lauren Dot C N sales up 25% on lower discounting and higher AUR as to last year.
Patrice: Our early performance to date undue yen has also been very encouraging following our limited launch last fall with an expanded rollout this spring.
Patrice: And finally touching on our enablers.
Patrice: In addition to our strategic priorities our business continued to be supported by our five key enablers.
Speaker Change: I'll share a few highlights from the quarter.
Speaker Change: As we drive towards best in class digital technology and analytics, we tested our sophisticated predictive buying model in our European and Asian stores this quarter.
Speaker Change: With our initial rollout limited to select sweaters knit tops and caps. This artificial intelligence driven model enables better in stock availability on sizing and best selling products to drive incremental sales and improve conversion base.
Speaker Change: Based on this early success, we plan to continue scaling it skews to an expanded range of categories and markets over time.
Speaker Change: As we continue to integrate citizenship and sustainability to future proof our business. We're also proud to be named once again, one of Forbes' world's best employers in 2023.
Speaker Change: In closing.
Speaker Change: Ralph and I are energized by our team's excellent execution through this important holiday season. This quarter's performance reinforces how the power of our iconic brand together with our multi levered strategy delivers.
Speaker Change: We are firing on multiple cylinders, while not dependent on a single geography channel or category for growth.
Patrice: In this model combined with our unique agility in the remarkable dedication of our teams is what will continue to differentiate Ralph Lauren through these dynamic times.
Patrice: 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.
Jean: Thank you Patrice and good morning, everyone. We entered this holiday season with a clear game plan, we invested in brand momentum around the world expanded giftable core and seasonal products to delight, our consumers and drove key operational improvements and flexibility to.
Jean: Gate near term macro headwinds this quarter's strong performance was a testament to the agility of our teams and the resilience of our next great chapter accelerate plan, coupled with the power and global reach of our iconic brand.
Jean: We reported third quarter revenue adjusted operating profit and double digit EPS growth above our outlook and we achieved this while continuing to strengthen our brand proposition around the world.
Jean: And investing in our key strategic priorities to enable sustainable growth into the future.
Jean: Top line exceeded our guidance driven by comp acceleration in DTC with momentum in all retail channels globally operating margin expansion was also ahead of our outlook, despite our strategic investments and ongoing cotton headwinds as we focus on operating with discipline in an evolving global.
Jean: Environment, and we returned approximately 425 million to shareholders in the form of dividends and share repurchases. This fiscal year to date in line with our long term guidance.
Jean: Let me take you through our third quarter financial highlights, which as a reminder are provided on a constant currency basis.
Jean: Our accelerating brand momentum and investments in key holiday campaigns resulted in 5% total revenue growth. This was above our outlook led by strong double digit growth in Asia and holiday outperformance in Europe revenue in North America was approximately flat to last year.
Jean: In line with our expectations.
Jean: Each of our DTC channels contributed to topline growth in the period with total DTC penetration expanding approximately 400 basis points to last year, adding.
Jean: Adding stability and resiliency to our business consistent with our N G C strategy.
Jean: Total company comp increased 9% accelerating sequentially across all three regions, Ralph Lauren stores continued to lead our global performance.
Jean: Our positive outlet comps continue to improve following investments in service and expanded core product assortments driving solid traffic AUR and basket size growth in every region.
Jean: Comps in our owned Ralph Lauren digital sites increased 8% on top of 11% growth last year as we prioritize ongoing investments to expand our footprint and improve the customer experience online total digital ecosystem sales were also up high single digits.
Jean: Including a strong recovery in Europe, as our largest pure play account return to growth.
Jean: Total company adjusted gross margin expanded 130 basis points to 66, 5%, reflecting our long term elevation work.
Jean: This was consistent with our outlook driven by lower freight expense favorable channel and geographic mix and 9% AUR growth.
Jean: These more than offset ongoing cotton cost headwinds and targeted promotions to drive conversion during key holiday sale periods.
Jean: Cotton cost will start to abate at the end of our Q4, beginning with our spring 'twenty four collections as previously indicated we are planning a moderation in AUR growth based on a reduced need to pass like for like cost inflation onto the consumer. Nevertheless, we plan to continue driving positive.
Jean: You are increases as a result of our growing brand desirability ongoing product mix elevation and favorable geographic and channel mix.
Jean: Adjusted operating expenses increased 7% to 52% of sales a 100 basis point increase to last year. The increase as a percentage of sales was driven largely by channel and geographic mix shifts in the quarter with our DTC and international businesses contributing a significant.
Jean: Lee higher share of sales in the period versus last year.
Jean: This quarter's strategic investments focused on our key city ecosystems marketing investments and enhancing the consumer experience and service levels across our DTC channels variable selling expenses also rose as a result of stronger retail sales growth.
Jean: Marketing was seven 5% of sales up slightly from last year to support our high impact holiday activations delivering improvement across our consumer metrics, including brand consideration net promoter scores and purchase intent, we still expect full year marketing at around seven.
Jean: Percent of sales.
Jean: Moving on to segment performance, starting with North America third quarter revenue was approximately flat to last year in line with our expectations as stronger growth in retail was offset by a reduced sell into the wholesale channel.
Jean: In North America retail third quarter comps increased 5% led by a double digit increase in our Ralph Lauren stores are outlet performance continued to improve with positive comps driven by our product elevation and our recent interventions to improve the selling experience in retail environments.
Jean: Despite taking targeted promotions during the key holiday periods are outlet AUR increase strongly and discount rates declined versus last year.
Jean: Comps in our owned Ralph Lauren Dotcom site were up 4% on top of 9% growth last year. In addition to a strong response to our Black Friday event recent site enhancements such as upgraded search and navigation drove higher conversion in the quarter. We also launched our Canadian.
Jean: Digital site in the quarter.
Jean: In North America wholesale revenues decreased 15% in line with our expectations as we proactively focus on aligning inventory with softer demand trends, we continue to evaluate our brand presence in each door and exited approximately 20 department store doors this year.
Jean: While we plan to manage this channel carefully into calendar 'twenty four we were encouraged by our improving sell out trends, which meaningfully outperformed our sell in this quarter, our AUR and the channel was also up on a year over year basis.
Jean: Moving onto Europe revenue increased 6% with performance led by our DTC channels. This was above our expectations as strong growth across the continent more than offset continued consumer and macro headwinds in the U K results included roughly five points of negative <unk>.
Jean: Packed from the earlier timing of wholesale deliveries and lapping last year's favorable post COVID-19 wholesale allowances.
Jean: Retail comps increased 11% on top of a strong 11% compare last year with similar performance in our brick and mortar and digital sites.
Jean: We drove strong momentum across brands and categories in Europe with growth led by gifting seasonal sweaters, and outerwear, which are AUR accretive.
Jean: Europe wholesale was approximately flat to last year, but included about 11 points of net headwinds from unusual impacts of wholesale allowances and earlier receipts strong underlying growth was supported by wholesale reorders, which returned to more normalized trends in the quarter.
Jean: Following the recent Destocking at digital wholesale accounts.
Jean: While our Europe business has performed better than expected through the first three quarters of the year, we remain cautious on the fourth quarter and into fiscal 'twenty, five given highly dynamic geopolitical and macro conditions in the region.
Jean: Turning.
Jean: To Asia revenue increased 17% with double digit growth across our largest markets of Japan, China, and Korea Asia retail comps were up 14% with strong growth in both digital commerce and brick and mortar stores.
Jean: China sales increased more than 30% on continued brand momentum, including successful singles day events as we lapped last year's Covid impact.
Jean: Third quarter sales in Japan were up low double digits overall inbound tourism recovered to pre pandemic levels, although Chinese travelers to Japan are still down 70%.
Jean: Sales in Korea also rebounded to low double digit growth benefiting from our recent marketing activations and a shift in the timing of the chew suck holiday from Q2 last year.
Jean: Moving on to the balance sheet, our strong balance sheet and 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. We ended the third quarter with $1 9 billion in cash and short term investments.
Jean: And $1 1 billion in total debt.
Jean: Net inventory decreased 15% below our revenue growth trend with units also down double digits. The decline was driven by stronger than expected Q3 sales and our continued efforts to ensure healthy wholesale inventories.
Jean: As we transition into spring, we believe overall inventory levels are well positioned relative to our outlook for each region. We still expect to end fiscal 'twenty four with healthy inventories below prior year levels with an improved ability to chase into potential demand as a result of our.
Jean: Dave buying model.
Jean: 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 potential supply chain disruption and foreign currency.
Jean: <unk> among others.
Jean: For fiscal 'twenty, four we still expect constant currency revenues to increase low single digits now centering on about 2% compared to our previous outlook of 1% to 2%. Our outlook continues to embed caution around the wholesale channel where year to date.
Jean: Demand has been softer than prior year.
Jean: Foreign currency is now expected to benefit revenue growth by about 10 basis points. We continue to anticipate operating margin expansion of approximately 30 to 50 basis points in constant currency to 12.3 to 12, 5% foreign currency is.
Jean: Now expected to have a roughly neutral impact on full year operating margin.
Jean: We now expect gross margin expansion in the range of 140 to 180 basis points in constant currency up slightly from 120 to 170 basis points. Previously this is driven by favorable freight cost further mix shift toward international.
Jean: And DTC and continued growth in a you are more than offsetting full year cotton inflation.
Jean: Gross margin expansion is anticipated to more than offset expense deleverage due to mix shift and key strategic investments for the fourth quarter. We expect revenues to increase in a range centered around 2% in constant currency with stronger trends in retail versus continued caution in wholesale.
Jean: Well in both North America, and Europe foreign currency is expected to negatively impact revenues by roughly 160 basis points, while we remain cautious on North America, we expect modest sequential improvement in Q4 with stronger trends in DTC offsetting continued softness in wholesale.
Jean: In Europe fourth quarter sales are still expected to be negatively impacted by the earlier timing of wholesale shipments. Excluding this impact we expect underlying trends in Europe to increase slightly in Q4.
Jean: And in Asia, we anticipate growth will be closer to our full year guide for the region of up low double digits as we lap a more normalized compare following the easy Covid compares in Q1 and Q3.
Jean: We expect fourth quarter operating margin to expand approximately 350 to 400 basis points in constant currency largely driven by gross margin expansion with about 40% and 50 basis points of negative foreign currency impact on our operating and gross margin respectively.
Jean: We now expect our tax rate to be in the range of 19% to 20% for the full year due to discrete tax benefits recognized in Q3, and roughly 22% to 23% for the fourth quarter and.
Jean: And capital expenditures are now expected in the range of $200 million to $225 million.
Jean: In closing Ralph's vision has always been about inspiring people to step into the dream of a better life and this holiday quarter was no exception.
Jean: We are proud of our team's strong execution on our next great chapter accelerate plan through what continues to be a highly dynamic operating environment. We are focused on what we can control shifting to GTC harnessing big data and AI and of course.
Jean: Operating and balance sheet discipline.
Jean: This puts us in a position of strength as we continue to deliver our commitments and drive long term value creation and with that let's open up the call for your questions.
Speaker Change: Ladies and gentlemen, if you wish to ask a question. Please press Star then one on you touched on phone you were here a tone, indicating do you have in place into Q you may remove yourself from the queue at any time by pressing star two.
Speaker Change: If you're using a speaker phone please pick up the handset before pressing the numbers, we ask that you limit yourself to one question per caller. Once again, if you have a question. Please press star one.
Speaker Change: One moment please for the first question.
Speaker Change: The first question comes from Matthew Boss with J P. Morgan.
Matthew Robert Boss: Thanks, and congrats on a great quarter.
Matthew Robert Boss: Thank you Beth Thanks, Matt.
Matthew Robert Boss: We think about next year and maybe as we think multiyear is do you see this as a ceiling for that business or how best to think about longer term operating margin opportunity.
Speaker Change: Good morning, Matt. Thank you for your question.
Speaker Change: What I would say is resilience is built into every facet of our approach.
Speaker Change: So we can stay on offense as we pursue sustainable long term growth.
Speaker Change: So what gives us confidence a few things to call out first we continue to invest in our brand and our way of living so that we can continue to deliver cultural cultural moments and drive desirability across regions and demographics.
Speaker Change: Listen our focus on high impact Q2, and Q3 marketing really enabled us to hit the ground running coming into this holiday season.
Speaker Change: And it helped accelerate consumer metrics top line outperformance and the continued elevation in what I think we can all say it was a pretty promotional environment.
Speaker Change: The second point is really around our products right and our broad portfolio of iconic core products.
Speaker Change: Some trends right really focus on style and elegance all on trends.
Speaker Change: Allow us to flex as consumer needs of all.
Speaker Change: The third area.
Speaker Change: Regards to our go to market model and our GTC channels in DTC.
Speaker Change: Well now represents about two thirds of the company. So majority of the business at GTC for Ralph Lauren.
Speaker Change: DTC channels are really where the world of Ralph Lauren comes to life most powerful.
Speaker Change: Where we engage most directly with the consumer and have the most ability to impact the consumer experience.
Speaker Change: And that's where we've invested most.
Speaker Change: And we delivered healthy comp growth across all of our direct to consumer channels this quarter.
Speaker Change: Including our Ralph Lauren stores, our own digital sites and outlet and.
Speaker Change: In Asia in Europe, and in North America.
Speaker Change: So as you've seen our plan is supported by multiple drivers of growth its not based on a single area.
Speaker Change: The diverse opportunities across categories channels across key cities in every single region.
Speaker Change: I think this is really evident from Q3 with double digit growth not just in China up 30% in China, We're really proud of the team doing that but also proud of the work. Our teams are doing in Japan, Korea, Germany, where we grew double digits in this quarter as well.
Speaker Change: In North America, which saw positive comp results across our DTC channels this quarter as well.
Speaker Change: Our core product is working that's about 70% of the company.
Speaker Change: Womens and high potential categories more broadly are also working.
Speaker Change: So this is all underpinned by our agility and operational discipline muscles, which had been built over time and I think you'll see them in action. During this last quarter you can see the way we're managing our inventory as you can see the way our diversified global supply chain is helping us navigate volatility all around the world.
Speaker Change: And we expect this to continue to serve us really nicely moving forward knowing that volatility is really our new normal.
Speaker Change: So Matt our model is resilient, it's differentiated we've created a sustainable approach for long term growth and value creation in these dynamic times.
Speaker Change: And I'll, let James provide perspective on March.
James: Yes, Matt. So we are still firmly committed to our 15% constant currency operating margin, we think it's the right Oh.
James: For our businesses.
James: Typically to your question is do I see any constraints.
James: Obviously, we're operating in a volatile and dynamic operating environment, we're not immune to that but what gives me confidence is our organizations agility too.
James: Address those changes navigate them effectively.
James: And lean into our multiple engines of growth be it different geographies different products.
James: Via different channels that we drive as you saw strike GTC this quarter so effectively.
Speaker Change: And I don't view, 15%.
Speaker Change: As a ceiling at all that's why we've identified these high potential category women's handbags and pledging speeds at home.
Speaker Change: Those businesses can scale over the longer term and provide new engines for growth and profitability great.
Speaker Change: Great next question. Please thank.
Speaker Change: Thank you next question comes from Michael Binetti with Evercore ISI.
Michael Binetti: Hey, guys great quarter, Thanks for taking our questions here I guess a couple.
Michael Binetti: Technical ones North America, 15% wholesale.
Michael Binetti: A decline in the quarter nice to see you guys controlling it where you can in the D to C business.
Michael Binetti: That number though I think you said P O S at wholesale as well ahead of.
Speaker Change: Sell in on wholesale, but it sounds like ours are increasing in the channel you're maintaining a cautious posture. There still is there is there a point on the horizon, where do you see those two numbers should start to converge Jane all of it and and also I guess Europe has to stand out here I want to make sure I understood. The 11% growth rate would have been five points higher in.
Speaker Change: In the quarter that comes out of fourth quarter, but even with that it looks like you're planning for.
Speaker Change: A deceleration in Europe and in the fourth quarter I know you've been planning that market very cautiously for a long time, it's nice to see you coming in above here.
Speaker Change: Above your guidance, but is maybe a little bit more context on what you think the underlying growth rate is in Europe and in the fourth quarter and how we should think about that market are 24 are you seeing any less pressure on the wholesale side, there maybe just a little bit of color. Please.
Speaker Change: Sure Let me start with your first your first question on wholesale.
Speaker Change: So we did see you know.
Speaker Change: Our sell in down 15% in North America, what's encouraging is that our sell out was down about mid single digits in the quarter and we had low single digit increases in AUR now Michael what underscoring that is we wanted to be competitive or didn't intend to be moved.
Speaker Change: Backward in that channel through the holiday season, we were intentional about our sell in as we came off a softer spring and fall we wanted to make sure that our receipts reflected a more cautious view of seasonal inventory and we were able to backfill into stronger coach.
Speaker Change: Sure.
Speaker Change: And and replenishment items, so as I look into the future, especially in the fourth quarter I've seen more balance between sell out and sell in and I think the expectation of what we saw in sell out this quarter is a good indicator of what we'll see in Q4 and then on Europe.
Speaker Change: We were really pleased with what we saw in Europe.
Speaker Change: This quarter.
Speaker Change: Overall, our business performed above our expectations, we had solid growth in every market.
Speaker Change: With some softness in the U K based on the inflation and some consumer pressures that we had had there but really we saw.
Speaker Change: Strong continued full digital pure play strength as well as good wholesale strength with accelerating DTC trends. There's some of the investments that we've talked about specifically in North America also paid dividends in Europe as we invested back in.
Speaker Change: In store service and really the marketing momentum with our new consumers.
Speaker Change: As I think about Q4, we do remain cautious.
Speaker Change: It's a and inflation pressured environment, obviously the situation in the middle East and the situation in the Ukraine are closer in on Europe.
Speaker Change:
Speaker Change: See some pressures in Europe, and in Spain, with inflation, but I do see that over the course of the quarter that what you'll see in wholesale is the underlying growth is going to be pretty stable and then we're going to come in as we've talked about in Europe with some ups and down.
Speaker Change: <unk> and and some timing shifts that we expect Europe to perform in the low single digit range for the year again, I know there is some quarter to quarter volatility based on timing shifts.
Speaker Change: Thank you and every place your bets and maybe I'll just add one data point on your first perspective, which is on North America wholesale where indeed.
Speaker Change: We need to be cautious moving forward. We are encouraged by our digital wholesale performance. This past quarter, which was up mid single digits. So the challenge really is stores driving traffic in the stores driving conversion in the stores working closely with our wholesale partners to activate this.
Speaker Change: Thank you next question Angela.
Speaker Change: Your next question comes from Jay sole with UBS.
Jay Sole: Great. Thank you so much so maybe Patrice just to follow up on those last comments can you just talk about your enthusiasm for your direct consumer business, particularly opening stores given the comments you made in your opening remarks, you maybe just compare where you how you feel about it now versus say 90 days ago.
Patrice Hubei: There was enthusiastic Jay so if I step back a little bit just think about our go to market model.
Patrice Hubei: Really focused on top 30 cities around the world.
Patrice Hubei: Building an ecosystem that is led by PTC, but incorporates quality wholesale within that and we know as we look at our our footprint, particularly in North America and in Europe.
Patrice Hubei: In China actually that we have the opportunities to expand our full price store presence and you've seen us do this at a relatively healthy clip.
Patrice Hubei: Probably most actively in China, but more recently in Europe and in North America, as we think through the model going forward, we're still going to operate with its focus on the top 30 cities build this ecosystem and lean into DTC. So I mentioned earlier that you see is about two thirds of the company, we expect that percentage to increase.
Patrice Hubei: Overtime.
Patrice Hubei: Because thats really where we had the opportunity to better engage with the consumer and provide a full Ralph Lauren experience. This being said quality wholesale continues to play a role in the mix moving forward, we've committed to a number of store openings during investor day, and we still stay stay true to that but this year, it's about 80 stores.
Speaker Change: Great next question please.
Speaker Change: The next question comes from Brookdale trick Oldman Sachs.
Brookdale: Good morning, and thank you for taking our question is healthy improvement in the outlet channel again, this quarter and I know a lot of ground's been covered on DTC, but I was hoping you could elaborate on the changes that are working best there and your plans for further actions to drive continued accelerated improvement from here in outlet in both north.
Speaker Change: Erica and Europe. Thank you.
Speaker Change: Yeah. So Brett we were really pleased with what we saw in the outlet channel.
Speaker Change: And what we see working is that the investments that we've made in our brands.
Speaker Change: Are paying off.
Speaker Change: Across our channels with particularly in the outlet channel, we've seen nice solid growth in traffic across all three regions. Additionally.
Speaker Change: Some of the very targeted promotion activity that we did.
Speaker Change: During the peak holiday selling periods, working very effectively, especially in the outlet channel and we're able to do that while still increasing AUR across all three regions. We also see a role for the investments that we made in service. So we increased our service and our.
Speaker Change: Doors, and we're seeing conversion as a result of that obviously brand investments and service investments are durable.
Speaker Change: Overtime and as we said will be led by our consumers on our elevation journey and be very targeted in addressing some of our value oriented consumers over time.
Speaker Change: Great next question please.
Speaker Change: Thank you. Your next question comes from Laurent <unk> with BNP Paribas.
Laurent: Good morning. Thank you very much for taking my question Jane I think you mentioned for the fourth quarter. The operating margin on a constant currency basis will be up 350 to 400, that's largely driven by gross margin.
Laurent: If I recall correctly Jane.
Laurent: Commodity.
Laurent: Hum.
Laurent: One of the commodities and tour tailwind doesn't really happen until the last month of the quarter. So I'm just curious to know like.
Laurent: How what the drivers are for that gross margin drop for the fourth quarter and then.
Laurent: If you could possibly for the audience, maybe quantify how much cotton was a headwind over the last few years.
Laurent: Is it fair to assume that it was about 300 basis points cumulatively and.
Laurent: And if that's the case, how do we think about that as it turns into a tailwind. Thank you very much.
Speaker Change: Hey, good morning, with Iran, and thank you for the question. So you're right. We've guided 350 to 400 basis points largely driven by that is the equal guidance that we gave in gross margin driven by gross margin and so SG&A becomes a neutral factor and <unk>.
Speaker Change: We still have over 100 points of tailwind from freight even even with consideration of the Red Sea as we come into the fourth quarter. So that's a durable factor for us as we exit this year, we're gonna have favorable benefits from channel and geographic.
Speaker Change: Mix Kimbler about similar I think to what you saw.
Laurent: This quarter and then the big change there are two big changes the big change is the carton becomes a tailwind at the very end of the quarter its been a meaningful headwind over the course of the year of about 110 basis points. So as it becomes a tailwind the pressure that we felt from cotton.
Laurent: <unk> has reduced significantly.
Laurent: Also AUR growth becomes a more powerful driver in gross margin as we expect our AUR trajectory to be about similar we are we expect to get more efficiency, especially in our promotion leverage you saw us be.
Laurent: Quite focused in the holiday quarter as we've come into the fourth quarter will be less Vogue less focused and we have less inventory that has to go out and end of season sale, but that's a gross margin benefit.
Laurent: Cotton is still a slight I just wanted to be clear the cotton still a slight headwind in the quarter, but again vastly reduced and that's the key drivers that we see as I look at cotton over the last several years, it's important to note that even today cott is still about 25% above pre COVID-19 levels.
Laurent: It hasn't gone down to pre Covid levels and I expect that that's you know.
Laurent: It was the best visibility that we have that that's a stable point for cotton, but it's actually been a little less than the 300 basis points Laurent I would say, it's been about a 110 basis points. This last year and a little over 100 basis points to 150 basis points in the previous year.
Speaker Change: Next question please.
Speaker Change: Next question comes from Chris <unk> with Bank of America.
Chris: Great. Thanks, guys good morning.
Chris: Just wanted to know how think about the impact to your operating margin next year in a scenario where wholesale selling starts to improve globally.
Chris: And then heard you loud and clear on reiterating the 15% constant currency target for operating margins next year, but can you provide an update on where we are in your cost savings program that you outlined at your Investor day, and your ability to pull that lever if sales and macro volatility continues this year. Thank you very much.
Laurent: Okay.
Laurent: Yes.
Speaker Change: Chris what we see as a as we talked about a more balanced focus between sell in and sell out.
Speaker Change: Next year, we think that that it will be a favorable <unk> dynamic in terms of Oh why margin expansion and we can couple that with the momentum that we're seeing in our in.
Speaker Change: In our DTC channel, So we view that as as favorable although in aggregate, we're still cautious about the channel as we enter into fiscal 'twenty five, but we don't expect to see the level of our sell in decline that you saw particularly in North America This quarter and then.
Speaker Change: And from our $400 million gross savings plan. We are on track for that plan, we delivered about a third of it in fiscal 'twenty three will deliver another third in fiscal 'twenty for the difference between 23 and 24 is it a little more balanced in our cost of goods sold line versus the SG&A line.
Laurent: And we feel we're on track to delivering the full 400 million as we close out the year and of course, we'll be very disciplined about resource allocation. We've made some significant investments. This this quarter and this year and we'll expect those investments to scale and an ear to growth and profitability as we go into fiscal.
Laurent: 25.
Speaker Change: Thank you your next question.
Laurent: Next question comes from John Kernan with TD Cowen.
John Kernan: Excellent and congrats on the results of the night.
John Kernan: <unk> comps and a another strong car just Patricia you talked about women's home accessories handbags.
John Kernan: Handbags in particular is incremental growth categories can you remind us where we are as a percent of the mix with some of those categories.
John Kernan: Others have trended since you put out the targets for the next great Chapter plan in 2022, John we haven't guided specifically in terms of the relative percentages.
John Kernan: So we did say that the women's opportunity was quite meaningful 56% of our customers walking into our stores or shopping input on our website are women and yet women's is represented less than 25% of the company business. So you can expect that percentage to go up but we haven't guided a specific breakouts, we do we do.
John Kernan: Have a lot of confidence in the potential of these categories I'm really pleased with the customer response across our women's portfolio of women's really led to dance this quarter again.
John Kernan: And it really resonating nicely outerwear is also category that where we're leaning and you've heard others say the season was challenging and certainly the temperatures were maybe a little milder than anyone would have liked but our outerwear outperformed for US again this quarter. It seems doing a great job developing a line of products across different outerwear categories, that's really resonating and as we look at.
John Kernan: We still see a lot of runway, particularly on women's outerwear moving forward strong performance with our handbag business. We lost the RL 888, which was hard to Miss in a number of our key cities around the world very nice response to that was continued momentum on the polo IV bag in the little partnership or not little bit the partnership we had.
John Kernan: With Mr bags in China.
John Kernan: And also good progress on home with new capability building as we bring in northern part the licensing partner on furnishing all in all these categories. Our AUR accretive. So if you think about the different categories I laid out. These when you look ahead in terms of what's gonna be accelerators for the company both in absolute top line and from an <unk>.
John Kernan: And margin standpoint.
John Kernan: Forward to continuing to build on the momentum that we have at lease spaces.
Speaker Change: Thank you maybe a couple of more questions Angela.
Speaker Change: Your next question comes from Dana Telsey with Telsey Advisory group.
Dana Lauren Telsey: Hi, good morning, everyone and nice to see the nice results just as you think about your channels of growth and obviously DTC being so much more important than wholesale one of the interesting things on wholesale is the stronger results that you saw in Europe. This quarter with the reorder trends anything we should be thinking about the wholesale business.
Speaker Change: Reorder trends in Europe and.
Speaker Change: What it could mean for North America is there anything to parse apart on North America, and then just lastly on the whole digital side of the business. What are you seeing in terms of the mix whether it's is it AUR growth is it new customer activation is it more from existing customers and how you see that growing as a percent of sales. Thank you.
Speaker Change: <unk>.
Speaker Change: So just in terms of what we saw in in Europe on in wholesale we were really pleased with what we saw.
Speaker Change: Overall in wholesale, especially as we look at our Europe growth on an underlying basis, where it was even stronger I think what as we step back the Venice the differentiator in Europe is that.
Speaker Change: The wholesale channel itself is more elevated and our Ralph Lauren Lauren consumer is also more elevated and that doesn't mean, we don't have learnings that can apply in North America I think as we look at assortment composition and as we as we look at marketing opportunities.
Speaker Change: Europe has some great best demonstrated practices and there's certainly an opportunity to.
Speaker Change: To cross pollinate those issues, but those are the primary differences in what we see in terms of performance and then Dana on the digital front, let's start with North America. So North America comps were up 4% digital was really driven by traffic alright that was key traffic we saw improvements on conversion.
Dana Lauren Telsey: Mascot size, what's really exciting and the new consumers that we are recruiting and I mentioned in my prepared remarks, we're up $1 7 million new consumers this last quarter as well.
Dana Lauren Telsey: The momentum we have on brand is attracting higher value younger consumers and we're seeing that play out very clearly.
Dana Lauren Telsey: In digital if I look at the other regions, we were Super pleased with the performance in Europe with digital up 12%.
Dana Lauren Telsey: This was also driven by very strong traffic during the holiday events and new capabilities that the teams have put in place there and then finally Asia, which is a smaller smaller base and newer flagships also very strong momentum up 25% versus plus 21% last compare and I think.
Dana Lauren Telsey: Same thing new consumers higher value consumers younger consumers.
Dana Lauren Telsey: Progress on conversion and this one as we look at this channel.
Dana Lauren Telsey: <unk> for the future, we still see significant runway right. This business is a little less than 30% of our total company.
Dana Lauren Telsey: We had guided to continued acceleration within this channel.
Dana Lauren Telsey: As we build new capabilities, we just launched a new search engine in the U S. We've also re we.
Dana Lauren Telsey: Remember our mapped our product presentations, we expect to see continued progress in this space. So we feel good about the results that the teams are achieving across all three regions with more to come.
Speaker Change: Thank you, let's go to the last question. Please Angela.
Angela: Thank you our final question comes from Rick Patel with Raymond James.
Rick Patel: Good morning, and I'll add my congrats as well.
Rick Patel: Should we think about the flow through of outperformance as we go forward because you know for the year. It looks like you raised guidance for gross margins, but less so on operating margins I'm curious, which areas might be getting incremental spend here and then secondly, just zooming out.
Dana Lauren Telsey: Which areas of the business.
Dana Lauren Telsey: Looked at the store investments to as we think about continuing the strong momentum.
Dana Lauren Telsey: So Rick I think as we look at our flow through on outperformance.
Rick Patel: It's really going to be about the cadence of our investments and continuing to stay focused on our.
Rick Patel: Our productivity metrics as you do look at flow through especially on the gross margin line Vgc.
Rick Patel: While we've been able to on wholesale softness lean into DTC, which is a good thing it is our strategy.
Dana Lauren Telsey: The gross margin does have to cover some of that higher level of SG&A. We've been able to I think was real agility balanced that and of course as we look forward, we'll look at that balance between flowing through.
Dana Lauren Telsey: Outperformance and making investments in our business as we've looked at where to invest in our business. We're very encouraged by the investments that we've made in digital.
Dana Lauren Telsey: No that that's an important part of our future and we're going to continue to make those investments equally developing our ecosystem as I said earlier, we are on track for delivering 250, new stores over the three year time horizon. We believe that stores are an important part of our brand presentation.
Dana Lauren Telsey: And in our customer service experience, so you'll see us continue to drive that and then finally our brands.
Dana Lauren Telsey: One of the things that we are proudest of this quarter is the momentum in our brand and our underlying health with our consumers. Our NPS score was higher purchases 10 score was higher our value perception score was higher and so we believe in our brands, we will always inverse.
Dana Lauren Telsey: In it and we think it will pay dividends not only in the short term, but in the long term.
Speaker Change: Alright, well. This is the end of our call. So thank you everyone for joining US today, we look forward to sharing our fourth quarter and year end results with you in May and until then take care and have a great day.
Speaker Change: Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.