Q1 2020 Earnings Call
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And gentlemen, thank you for standing by welcome to the <unk> first quarter fiscal 2020 earnings call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session instructions on how to ask the 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 now like to turn over the conference to our whole Smith Corrina Van der Ghinst. Please go ahead.
Did you want to see good morning, and thank you for joining Ralph Laurens first quarter fiscal 2020 conference call with me today are Patrice do Li the Companys, President and Chief Executive Officer, and Jane Nielsen, Chief Operating Officer, and Chief Financial Officer.
After prepared remarks, we will open up the call for your questions, which we ask that you limit to one per caller during today's call, we will be making some forward looking statements within the meaning of the federal securities laws, including our financial outlook.
Forward looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward looking statements our expectations contain many risks and uncertainties principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.
To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results you should refer to this mornings earnings release and to our SEC filings that can be found on our Investor Relations website.
And now I will turn the call over to Patrice.
Thank you Cory.
Good morning, everyone and thank you for joining todays call.
We delivered first quarter results in line with our overall expectations.
Including better than expected operating margin and double digit EPS growth.
Our performance this quarter was driven by strong continued momentum in our international markets, both Europe and Asia.
An expense discipline across the organization.
At the same time, we continue to invest in elevating our brands and stabilize our North America business against a more volatile backdrop.
As we indicated at the start of this fiscal year, we're monitoring the global retail environment closely, particularly around trade and macro conditions.
Our teams remain intensely focused on managing through potential industry headwinds and executing on our strategic plan to deliver long term sustainable growth and value creation.
The three principles underlying this work include.
Putting the consumer at the center of everything we do.
Elevating the brand and balancing growth and productivity.
During the first quarter, we continued to drive our performance against the five strategic priorities that we laid out as part of our five year plan.
These include.
First we're in over a new generation of consumers.
Second.
Energize core products and accelerate high potential underdeveloped categories.
Third drive targeted expansion in our regions and channels.
For.
Lead with digital across all activities and fifth.
Operate with discipline to fuel growth.
Starting with went over a new generation of consumers.
In the first quarter, we increased marketing investments by 19% to last year.
We continue to shift our spend to channels that matter most to consumers today, namely digital and social.
Our key marketing initiatives this quarter centered around our Earth polo launch.
Our new family campaign, and key sporting events that have cultural resonance and global appeal.
In April we launched our Earth polo.
Made entirely of recycled plastic bottles and the waterless dyeing process.
While the launch marked an important early step in our long term sustainability efforts. It is only the beginning of our journey, which I'll discuss in more detail momentarily.
The product generated a strong consumer response, and the campaign had a meaningful impact from a marketing perspective.
With over a billion earned media impressions globally and strong social media traction.
We also launched our families who you love Global campaign in April .
The positive and inspiring celebration of inclusion in modern families. However, you define them.
This combined with our Pride campaign and capsule collection in June .
Also drove over a billion media impressions globally.
We kicked off our summer sports program with the golf majors.
Including Especial capsule collection with Ralph Lauren Golf Ambassador Justin Thomas.
And more recently you may have seen our high impact activations around Wimbledon.
Where we are the official outfitter.
We launched an integrated global campaign in July combining Wimbledon heritage with Gen Z Activations, including you tube series, our first gaming experience and install an onsite events with influencers celebrities and top clients.
We have more exciting initiatives still to come including the U.S. Open tennis Championships next month.
We continued our partnerships with celebrities and influencers globally in the quarter.
You may have seen Jennifer Lopez in Ralph Lauren at the Cfds Awards. This June as she collected the fashion Icon Award.
Ralph Lauren earned the highest media impact value across all brands from the event according to the FDA.
We also announced J those fiance, Alex Rodriguez as the new phase of our polo Blue fragrance.
Other celebrity dressing this quarter included Selena Gomez it could chela Emma Roberts.
Oprah Jay Jay Lynn and capable ban bts.
And lastly, you may have seen that Ralph received honorary knighthood from Great Britain in June .
In recognition of his extensive philanthropic efforts.
Influence on global style, and longtime love of British Heritage and culture.
Ralph is the first American designer to receive this honor.
Which garnered worldwide media attention.
It was a very special moment for Ralph his family and all of Us at Ralph Lauren.
Moving onto our second key initiative energized core products and accelerate high potential underdeveloped categories.
We continue to drive our product assortment across three different areas.
Which for clarity, we are defining as core seasonal dcor and seasonal fashion.
Army jacket cable knits, sweater, or Oxford button down shirt.
Seasonal core products, our integration of our core items, there are animated with fresh seasonal color ways or finishes.
And seasonal fashion consist of more fashion oriented and embellish products that center around the seasonal theme or collection.
This includes our limited edition series that deliver newness and excitement.
In Q1, our core and seasonal core styles resonated well across channels.
As we discussed last quarter, we're working to get the mix right across these three product categories for each channel better aligning to consumer demand.
In Q1, we took clear actions to focus our teams on this strategic rebalancing.
First we expanded the scope of our experience international merchant team.
To lead a new global merchandising effort that now includes North America.
This team is now leveraging their proven track record of sharply aligning buys to consumer demand and successfully targeting a new younger consumer to the North American market.
Second our design teams have increased our penetration of core and seasonal core versus seasonal fashion product to focus on our most productive and appealing styles.
Starting with our spring 20 collections.
While our penetration of seasonal product will become more balanced we will continue to leverage these propositions along with our special projects and limited edition capsules like this quarter's polo sport to bring newness and excitement to the marketplace.
Moving to our five high potential underdeveloped categories that have significant growth potential across our brands. These include denim outerwear wear to work footwear and accessories.
We saw strong continued momentum this quarter in denim and outerwear, which are the furthers developed of the five categories sell in and sell out trends for both categories exceeded total company performance based on an encouraging launched last fall.
We are rolling out an expanded presentation of outerwear.
At our own DTC and wholesale channels for fall Winter 19.
Touching on product pricing, which Jane will address in more detail in her prepared remarks.
Our total direct to consumer you arm was up 1% in the first quarter.
On top of a strong 8% increase in the first quarter of last year.
While still positive this moderation primarily reflects the steps we are taking to reduce our disproportionate seasonal fashion inventory in North America moving onto our third key initiative drive targeted expansion in our regions and channels. As we previously discussed we are building a cohesive brand elevating Ralph Lauren experience across our retail wholesale and digital commerce presence in key cities around the world.
During the first quarter, we opened 21, new stores and concessions globally and closed nine locations.
This included 13 openings in Asia.
With seven in greater China, our fastest growing market.
Our ecosystem approach continued to drive strong growth in greater China in the quarter.
With sales up 12% to last year in constant currency.
Including nearly 30% growth in mainland China, driven by comp growth and new stores in Europe , We opened four owned and partner at full price stores and two factory stores.
While we are making good progress we still have significant expansion opportunities with only 36 full priced stores across Europe .
Moving onto our fourth key initiative.
Lead with digital.
Our global digital ecosystem, including our directly operated sites Department store Dotcom pure players and social commerce increased 1% in the first quarter in constant currency.
Strong growth of nearly 10% in international was partly offset by mixed results in North America.
Across international we continued to expand our distribution, notably with digital pure players.
In Asia, we added two exciting new digital partners in the first quarter.
This is a Laura in southeast Asia, and the social commerce platform of cow, the largest messaging platform in Korea.
In Europe , we added six new wholesale digital partners in the quarter.
These included Brown's fashion key specialty player that resonates with younger trend leading consumers.
And curated luxury retailer Fenwick both in the UK.
Our directly operated digital sites in Europe also saw strong momentum.
Delivering 22% comp growth this quarter.
Turning to North America.
Our overall digital ecosystem in this market performed below our expectations in the quarter.
Very strong double digit growth in digital pure players was more than offset by softer trends on Ralph Lauren and wholesale dotcom.
First starting with digital pure players, we continue to see strong momentum with partners, who are extending our reach to new and younger consumers.
In the first quarter, we launch men's polo on packs on dotcom.
In men's and women's polo on a sauce.
We also added distribution of women's polo, the rent the runway, joining Loren and club Monaco on that platform, which resonates with our target next generation consumer.
Second comps in our own North America digital site were flat.
Softness was primarily driven by a decline in sales to international consumers on our use site.
Due to FX headwinds and increased import regulations in key Asian markets.
And select underperforming products within Lauren and men's polo seasonal fashion styles.
And lastly, North America wholesale dotcom was also weaker than expected driven primarily by the product issues, we discussed on Lauren similar to Q4 trends.
North America digital Commerce is clearly an area of intense focus for us.
As we work toward consistently delivering our long term target of low double digit digital growth globally.
Under our new global merchandising effort, we've taken decisive action to rebalance our Assortments and expect these changes to start flowing through in the back half of fiscal 2000.
Let me touch on our five key initiative operate with discipline to fuel growth.
We continue to challenge every cost and improve our efficiencies in the first quarter.
Adjusted operating margin expansion of 110 basis points exceeded our expectations.
Driven by disciplined expense management and SGN a leverage.
This cost discipline enabled us to continue expanding our marketing investment and global retail presence.
While increasing operating profit.
And operating margin.
And lastly, I'd like to touch on the citizenship and sustainability strategy, we launched in June .
Which we call design the change.
Our strategy and accompanying report represent our commitment to create more sustainable products reduce our overall environmental footprint across our operations and support and empower our teams and partners around the world.
We introduced 16 key citizenship and sustainability goals that touch every area of our business and drive accountability across our organization.
Key targets, we expect to reach by 2025 range from reducing water usage by 25% across our operations and value chain.
To achieving gender parity within our leadership at Ralph Lauren.
As we continue to cultivate the best talent to deliver on our strategy.
We are proud that Ralph Lauren achieved certified status as a great place to work in the us for the second year in a row.
We were also recognized in the top 50 on Forbes annual list of America's Best employers for women.
In closing.
We are focused on executing our strategic plan to deliver long term sustainable growth and value creation.
Each member of our engaged and motivated global team is contributing to deliver on our plan.
And I know I speak for Ralph and the entire leadership team when I say that we are inspired and energized by their dedication and excellent execution every day.
With that I will turn it over to Jane and our joint her at the end to answer your questions.
Thank you Patrice and good morning, everyone.
Our first quarter financial results were in line with our expectations led by ongoing strength in Europe , and Asia and growth in North America, Despite a more volatile retail backdrop.
Globally, our teams delivered solid top and bottom line results, including operating margin expansion and double digit EPS growth.
And we made progress against several of our key strategic initiatives globally.
First quarter revenues increased 5% in constant currency and 3% on a reported basis.
Our international business, which represents about 45% of our sales delivered 7% top line growth in constant currency, while North America delivered growth of 3%.
Adjusted gross margin was up 10 basis points in the first quarter on a reported basis and flat in constant currency slightly better than our expectation of flat to down in the first half.
Gross margins benefited from favorable product geographic and channel mix, largely offset by increased promotional activity in North America.
Total company retail comps grew 2% in the quarter.
Ooh wise were up 1% with low single digit growth in international.
This was partially offset by a 1% decline in North America, you are due to increased promotional activity in our bricks and mortar channels to move through excess seasonal fasten inventory from spring.
Looking ahead, we still expect to drive alar over the next three quarters consistent with our guidance of low to mid single digit growth for fiscal 20 and longer term.
Ooh our growth this year will be driven primarily in Europe , and Asia by our ongoing strategy to elevate the brand improve pricing and promotions and accelerate product mix shifts such as an increased penetration of fleece and outerwear.
We also expect positive, albeit more moderate levels of eight you are growth in North America. As we won rebalancing assortments across core seasonal dcor and seasonal fashion products to mix into higher priced product categories and three take targeted price increases in select categories based on competitive benchmarking and where we have a proven opportunity to play.
Our guidance assumes that these north America, you are drivers will be partly tempered by a continuation of increased liquidation pressure in the near term to clear seasonal fashion product for Loren and select men's polo fashion.
We will continue to balance and appropriate level of promotional activity with our long term strategy of improving quality of sales and elevating the brand.
Adjusted operating margin in the first quarter was 12.2% up 110 basis points as our teams drove SGN a leverage on top line growth.
Adjusted operating profit dollars grew 14% to last year.
As she any expense declined to 52.3% of sales down 100 basis points to last year, driven by topline leverage and cost reduction initiatives.
Marketing spend increased 19% in the first quarter, we continue to make progress toward our long term objective of increasing marketing to about 5% of sales while also focusing on productivity to achieve our operating margin expansion goals.
Our teams remain focused on driving operating efficiencies across our business. Some key areas of savings to highlight in the first quarter. Our first our supply chain end to end remains an important opportunity for productivity.
We reduced our Q1 airfreight expense by 50% to last year as we optimize our ocean freight programs. We also realized opportunities on the product side.
We reengineered, our outerwear to Youd initiative recycled materials and our jackets. This enabled us to upgrade an existing product to more premium and sustainable version for the consumer while driving savings on raw material cost.
Our work on corporate expenses also continued our focus on reviewing and putting nearly all our vendor contracts out to bid is generating savings without compromising quality.
We continue to see a double digit reduction in associated expenses through our renegotiated contracts in Q1, we reduced our media partners around the world from 12 agencies to four and consolidated our media buys under one global lead partner to drive scale and efficiency.
We also completed the sale of our corporate jet in the first quarter and donated the entirety of the proceeds to the polo Ralph Lauren Foundation.
As we were.
Moving on to our segment performance, starting with North America revenue increased 3% in the first quarter with growth from wholesale and newly renovated stores, partly offset by weaker than expected retail comps.
Adjusted operating margin was 21.9% 100 basis point decrease to last year.
Largely due to gross margin contraction on higher promotional activity across channels.
In the retail channel in North America comps were up 1%, including about a 300 basis points of benefit from the Easter shift into the first quarter brick and mortar comps increased 1% softness was driven by continued traffic challenges and a modest decline in a you are due to increased promotions. This spring to clear select seasonal fashion product and keep inventories healthy.
In the first quarter foreign tourist traffic was down 3%.
While traffic trends were disappointing in the quarter, notably in May we were encouraged by improvements we implemented towards the end of the period, including an outlet.
Moving forward, we will continue to test and implement additional measures to mitigate traffic challenges such as improved search optimization marketing partnerships with our mall center operators and more targeted signage.
Comps in our North America directly operated digital Commerce business were flat below our expectations. We believe this was due to a combination of two factors.
First we saw diverging trends between sales to domestic versus international shoppers in the quarter.
Domestic sales, which comprise the majority of our digital business were up in the quarter, while foreign sales were down double digits.
Similar to foreign tourists declines at our us brick and mortar stores. We attribute this decline to increased headwinds from FX, along with more punitive import restrictions in key Asian markets.
Second last quarter, we called out a few areas, where we were over assorted, including select Lauren and men's polo seasonal fashion styles.
We're actively addressing these issues by rebalancing our product offering as Patrice discussed.
We expect declines in international shoppers to continue pressuring our North America digital comps through the rest of fiscal 20 based on FX and tighter import restrictions with the biggest decline in Q2.
However, we expect improved trends from our domestic online shoppers starting in the back half of the year. Our teams are focused on driving higher conversion among domestic consumers through one favorable product mix towards categories like outerwear and to investing in improved mobile functionality and personalization to drive more relevant content.
Moving onto North America wholesale first quarter revenue was up 2% excluding off price our underlying North America wholesale business was also up slightly in the first quarter.
We still expect Q1 will be the strongest quarter of the year as the North America retail environment has become somewhat more volatile in recent months.
Moving onto Europe .
First quarter revenue was up 2% on a reported basis and 7% in constant currency.
Adjusted operating margins expanded 100 basis points on a reported basis and 10 basis points in constant currency.
Operating margin expansion was driven by strong gross margin.
In the retail channel in Europe comps were up 4% driven by a 22% increase in our own digital commerce sites, and a 2% increase in our brick and mortar stores.
Our increase in directly operating European digital Commerce business was above our expectations driven by solid merchandising execution and a strong double digit traffic increase our sites benefited from platform enhancements and more targeted performance marketing and further localization of our Spanish and Italian sites in the quarter.
Across our Europe direct to consumer channels, our ongoing effort to elevate the brand and improved product mix continued in the first quarter with AIU are up 2% on top of a strong 9% increase last year.
Wholesale revenue in Europe was up 5% in constant currency in the first quarter and ahead of our expectations, reflecting solid sell in trends and modest distribution growth with both digital and wholesale partners similar to the last few quarters.
Turning to Asia revenue was up 4% on a reported basis and 8% in constant currency in the first quarter.
We saw solid performance across nearly every market in Asia led by mainland China sales growth of nearly 30% in constant currency.
Our product and marketing initiatives are resonating well in this region and we continue to increase our digital efforts expand and elevate our store fleet and engage with local influencers and celebrities.
Comps in Asia increased 5% driven by three present, you our growth and a strong contribution from our newer doors. We expect continued comp growth in Asia as we invest in our distribution network and increase our marketing initiatives to amplify and elevate the brand.
Adjusted operating margin was up 150 basis points to last year, driven by strong gross margin expansion.
Moving onto the balance sheet.
Our balance sheet remains strong and we continue to return capital to shareholders.
We ended the year with about $2 billion in cash and investments and $692 million in total debt, which compares to $2.1 billion in cash and investments and $587 million in debt at the end of last years first quarter.
We repurchased $150 million and shares in the first quarter. We will continue to Opportunistically buy back stock was about 600 million in repurchase plan for full fiscal 20.
Moving on to inventory at the end of the first quarter inventory was up 11% to last year.
The highest growth rate was in Asia to support our strategic expansion of retail distribution in that market.
This was followed by Europe , where we started making investments to get back into a normalized inventories in our Europe factory stores during the second quarter of fiscal 19.
We still expect to anniversary these increases as we move into the second half of this fiscal year, and lastly inventory growth in North America modestly outpaced topline growth in the first quarter, which was partially driven by our decision to accelerate select portions of inventory to get ahead of potential China tariffs.
We continue to expect inventories in the second half to be more closely aligned to our sales outlook.
In light of the dynamic trade environment, particularly China, and Brexit will continue to Opportunistically evaluate our inventory shipments to North America, and the UK and diversify our global supply chain.
Now I'd like to turn to guidance for the full year and second quarter of fiscal 2000.
As a reminder, this guidance excludes restructuring and related charges and reflects our best assessment of the global retail landscape in the context of increased volatility from macroeconomic and geopolitical events.
For the full year fiscal 20, we continue to expect revenues to be up 2% to 3% in constant currency.
Foreign currency is expected to have about a 90 to 100 basis point negative impact on revenue growth in fiscal 20.
We expect continued strength in our international businesses and a more challenging outlook for North America.
We continue to expect operating margin for fiscal 20 to be up 40 to 60 basis points in constant currency.
Driven by a combination of modest gross margin expansion and SGN a leverage.
Foreign currency is estimated to have about a 10 to 20 basis points of negative impact on operating margin in fiscal 20.
For the second quarter of fiscal 20, we expect revenues to be up about 1% in constant currency.
Foreign currency is expected to negatively impact revenue growth by about 90 to 100 basis points in the quarter.
Operating margin for the second quarter is expected to be up 40 to 60 basis points in constant currency.
Margin expansion is more weighted toward the first half of the year based on the timing of our marketing and new store investments.
Foreign currency is expected to be about a 20 basis point headwind in the second quarter.
We continue to expect capital expenditures of approximately $300 million in fiscal 20.
Focused on consumer facing initiatives that have demonstrated a proof of concept and healthy rates of return, including stores and digital as well as our corporate office consolidation project.
We continue to expect our effective tax rate for fiscal 20 to be approximately 22%.
Second quarter tax rate is estimated at 23%.
In closing we are committed to delivering on our next great chapter plan, while navigating a more volatile global retail backdrop. We believe we have the key elements to achieve our long term strategic targets.
A strong balance sheet.
A clear strategic roadmap.
Ralphs enduring creative vision.
And the passion and commitment of our 24000 team members around the world.
With that let's open up the call to your questions.
Ladies and gentlemen, if you wish to ask a question. Please press Star then wanting a touchtone phone you will hear a tone, indicating you have in place and to kill you may remove yourself from the queue at any time by pressing star. Two if you are using a speakerphone. 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 at this time.
One moment please for the first question.
The first question comes from Michael Binetti with Credit Suisse. Your line is open.
Hey, guys. Good morning, James Patrice Thanks for all the.
A lot of detail there.
So my if I try to someone from the border Hey, guys. So if I try to fill up the quarter looks like North America still a little sluggish, but your international business very very strong.
The writer reiterated guidance I assume is taken into account those better international trends what gives you confidence.
Your international regions, we'll be able to carry the topline, especially if.
America backdrop remains sluggish like you said.
I had a quick follow up if I could.
Sure you want to answer that one first I will do a follow up later sure sure.
Okay, well listen good morning, we we are pleased with our continued momentum both in Europe and Asia.
Yes, you kind of step back and look what the key drivers were for the performance there they really centered around the work.
Our teams have done on brown.
Product and distribution.
All right, so, let's let's actually start with product.
Our products are resonating well with the Asian, and European consumers and our teams have done a very good job balancing our offering between core.
Seasonal dcor and seasonal fashion across all the channels as well as and this is important as we think through are you our plans as well as mixing into higher you are categories like outerwear roughly.
On the brand from its actually I find really inspiring to see the work that our teams are doing to elevate the brand and connect with our target consumers, whether thats through existing consumer group.
For the new generation that we want to bring into the family.
That's probably most visible in the recent highly impactful activation of the teams have done around Wimbledon.
In Europe , and actually in parts of Asia as well.
And the unique connections that we filled with the key celebrities and Influencers in China for example.
And then on the distribution from our teams are elevating our presence in existing.
Quality distribution points.
While expanding both online and you heard a few examples through our prepared remarks.
And in full price stores, leveraging our new pull the boutique formats, both in Europe and in Asia, and then all of that is translating into what we are working to build in key cities, which is consumer centric.
Ecosystem, which means the consumer wherever he or she wants to shop.
So those are the three three key drivers of that.
Have supported the Asian and European performance.
As we look ahead, we're actually really energized by the growth opportunities for many years to come.
If you if you just think about tools simple data points right across Europe and Asia. First is we only have 36 full price stores across all of Europe .
Once you benchmark versus where the consumer opportunity is versus where the competitive set is significant growth opportunities.
Second is China only represents today despite the good progress as the group has made there over the past.
Few months only represents 3.5% of our total global business again, when you benchmark.
With a number of our peers you got a good indication of the upside opportunities. There. So we are encouraged and excited about whats ahead in both Europe and Asia.
What's also really important is many of the success drivers that we're seeing in Europe and Asia.
Actually were very relevant for us in the us.
As we continue to work on stabilizing and pivoting this important market back to growth.
And I think you've seen that we've made a number of organizational changes over the past few months that will enable us to rapidly leverage these learnings in North America.
Sure.
Thanks for the detail if I could just ask Jane back to your comments on you are details that you gave.
Still positive globally, but negative one in North America. You said you you cleared some product can you talk about the guidance you signaled slight it seems like you're signaling a slight re acceleration in a low to mid single digits for the remainder of the year. In particular, you mentioned some targeted price increases in North America, we haven't heard that from you in a while can you talk about where you see opportunity and maybe help us reconcile that with.
Some of the ongoing expectations.
To stay competitive on the promotional backdrop in the North American industry.
Sure well as we as we look at pricing, Michael we really see opportunities that we've called out in the past. So we continue to work on sharper promotion.
We are continuing to move into a better product and category mix and a better balance of our merchandising assortment, which is going to be favorable to pricing as we move forward and then as you noted we called out that we have done competitive benchmarking and looked at select opportunities to take to take ticket pricing in target in select areas.
It's a part of our overall pricing approach and we'll really start to play out for us in the second half.
That we've incorporated that into our guidance. We expect is that are you our journey will improve as we move into the second half while being cognizant that in North America.
With our efforts, especially in the second quarter to move through some of our spring product there'll be a little more per.
Pressure on that you are growth, although we do expect overall you are growth to improve more moderately in North America.
Okay very very helpful. Thanks, again for all the details.
[laughter].
Thank you. Our next question comes from Matthew Boss with JP Morgan Your line is open.
Thanks, and nice quarter and this helps bautzer.
Thanks, Matt maybe pit.
Maybe patrice on the North American apparel landscape, both at wholesale and your own retail I guess, what exactly have you seen change versus maybe three or six months ago and I guess in in a in light of that any changes specifically in your in your strategy necessarily need to navigate the underlying regional crosscurrents.
Sure. So it wasn't as we look at the the overall.
Picture actually the us consumer remains relatively healthy right in our space.
But we have taken a slightly more cautious view of the retail environment for the year ahead.
We continue to clearly see challenges with brick and mortar traffic.
Right, both full price and outlets, including foreign tourists volatility.
ER and our focus now is really to make sure we offset this through higher conversion and accelerated efforts in marketing across channels in North America, probably three things I I would call out here.
The first one is in D. is taking steps to mitigate the brick and mortar traffic and the promotional headwinds right. So if you look at the factory channel in particular, we have a number of interventions underway. One is making sure. We've got the right product mix and improving our offering across all the price price points, including elevated product as well as having the right entry price points.
Two is working on our store marketing and particularly the the window signage, which is very important for this business.
And then also working on marketing outside of the center to bring people into the center. So we're partnering with the landlords and leveraging all their platform falling more than we've ever done.
To really activate traffic and bring traffic into the center and then we were also are raising the bar in terms of quality and targeting of our email marketing a we have a very strong database that we can leverage and we're getting a lot more precise in terms of the messaging for the specific target groups. So the combination of those factors, we believe will lead to an improvement.
And then you heard Jane talk about targeted price increases as well right, where we believe we have you know obviously driven by what we think the consumer reaction will be but where we believe we have pricing opportunities.
Versus competition, driven by I think that brand elevation work that we've done over the past few years and.
And the resulting increase value to the consumer so I'd say, that's first intervention taken intervention as we look to really control our destiny with DTC.
It was actually focusing on digital improvement we were really pleased with the traffic performance in North America.
A doctor Ralph Lauren Dotcom this quarter up a very healthy 20%.
Right, So we want to fuel that.
But we also want to make sure. We're also translating that into strong conversion.
So a number of interventions underway here investments in mobile.
About two thirds of our transactions are in mobile. So it was very clear that thats, how the consumer wants to interact and we're investing in strengthening our mobile capabilities, whether that's how the visual show up how quickly the downloads happen and so on and so forth, but you'll see significant progress on this front investment in personalization, which we know is highly effective and.
You know, that's that's actually coming on stream over the next few days and weeks.
Working on our omni channel capabilities.
So really connecting the website to our stores. So recently, we just launched find in store, which allows you to identify you know in your local store through the website. What's what products are available you can book appointments on our web site for your local store and so on and so forth and then finally realigning as we talked in our prepared remarks are.
Our buys to be better balanced across core seasonal core.
And seasonable fashion and then the other parts of controlling our destiny with DTC is the marketing activities that you have seen us do and you will see us continue to do and accelerate.
In parallel with the increased investments and Thats building exciting brand experiences such and with events like the upcoming US open like limited additions, we just drop polo sport this past quarter, which did very well both the denim and the silver edition and then continuing to strengthen our connections in or Activations of Influencers and celebrities.
And then finally, we are investing in kind of the store experience and also exploring new channels, particularly in the digital front right. So new channels like Citrix.
Like rent the runway, we now have three of our brands on rent the runway Lauren Club Monaco.
And more recently polo women's was launched on rent the runway, we're seeing very positive response, we're exciting about progress, we're making there and obviously the whole social commerce platforms that are expanding across the country.
And then finally and this isn't a new thought we've talked this since we started the next chapter plan is really elevating our brick and mortar experience investing in.
The overall store layout in the lighting in the.
In the fixtures and in the overall experience we provide consumers both.
In wholesale.
In factory and in our full price stores. So the combination of these factors in this.
You know slightly more volatile environments give us confidence that we can continue to make progress in north America to stabilize the business and pivot to growth.
Great and then maybe just a follow up James how best to think about the components of the North American comp maybe between e-commerce and brick and mortar. If we were thinking about the second quarter versus the back half of the year.
Yeah, I think it on North America comp I think were seeing that.
There will be some pressure on the on the digital comp as we move through the year from the international.
Uh huh.
Flowers that we called out in this quarter, but in the second half we believe that on digital some of the investments that we're making in personalization and driving better mobile conversion will start you'll start to see those pay out in the back half and then in terms of the overall bricks and mortar comp you will see some improvement as we move through the year again part of that is a you are led and so it will be back more weighted in the in the second half as we move into the layers of pricing that we talked about.
Great Best of luck and that's all Easter adjusted now.
Okay. Thank you.
Okay. Thank you.
Thank you. Our next question comes from John Kernan with Cowen Your line is open.
Hi, Good morning, Patrice and Jane Thanks for taking my question.
Sure.
I wanted to go back to international obviously, a point of strength.
And maybe go back to some of the targets you laid out.
At the Investor day about a year ago.
Can you talk about the $500 million in revenue would you expect in China.
It feels like there's obviously a lot of momentum that right now.
Maybe you can talk about both the digital and physical.
Direct expansion, that's going on with that right now and then maybe we have a follow up on Europe . Thank you.
Sure Tony will tag team. This one Jane so yes, our goal is to indeed get greater China to half a billion dollars in revenue were making good progress again this quarter.
Mainland China up 30% in greater China up 12% continuing to see a strong progress across both digital and brick and mortar.
To your point on those those different class when I mean, our thinking is really six big cities right Shenzen, Chengdu, Shanghai, Beijing, Taipei, and Hong Kong, and we build omnichannel ecosystems across all of these with both brick and mortar presence some.
More iconic elevated presence and some kind of harder working from the revenue productivity standpoint, with our new polo boutiques coupled with.
Our work with pure players and we've got really nice partnerships and momentum with JD with team all and with a we chat right and and then also some some strong partnerships and bus concession standpoint.
And we're continuing to drive where we are and expand so we expect from a brick and mortar standpoint to open about 40 stores this fiscal year.
So back to about a one a week if you remove the holidays.
On our way to achieving what we talked about last year at Investor day, which is around 150.
Stores across greater China.
And then we continue to invest in expanding our digital presence.
Through existing platforms, and new platform and take advantage of all the key events that are happening. There. So you know we part we participate in 618 recently ER and actually had strong performance across the board with our various partners on that whether that was CMO JV or others.
And we're doing specific programs with we chat.
And just so in general we feel good about where we are relative to the glide path that we laid out for ourselves on our way to a half a billion dollars and you know we sometimes get the question where are you seeing any changes with the consumer in China right now and the answer so far is no or with the brand continues to resonate well with consumers and we're actually pleased with the mix of consumers were getting both from a gender standpoint men and women pretty balanced and also from an age standpoint, we're bringing in a lot of young consumers into the franchise. It John I would just add that you know we were very pleased with our digital commerce.
This quarter in China and across Asia. It was up 26% so real comp accelerator, we expect that dynamic to continue we were also pleased with what we saw overall in in terms of the comp acceleration that was coming from our newer pollo critique stores that Patrice called out.
Notably in China, which has been the focus of our new doors. So that that is durable and day and we're encouraged by that continued momentum.
Just a question on Europe , Yes, just a quick follow up on Europe strength, there both in wholesale retail and.
Within digital as well so just wondering how we should think about Europe .
As you frame the guidance for the rest of the year.
I know, there's there's a there's some moving pieces.
Macro environment there too so just how should we think about the quarterly flow of Europe as we go into the rest of the year. Thank you.
Yes, John what we've seen in Europe , and let me just give you the component pieces, we still see the underlying trend for Europe wholesale as about mid single digits. You know there are obviously some.
Shipment timing that goes on in Europe , but we've been talking about that as the underlying trend that we see that is.
Third the ongoing underlying trend for Europe wholesale on the bricks and mortar side, you've seen us have a pretty steady positive comp.
We'd expect that to continue.
Especially as we're overlapping the.
Investment that we made in our factory outlet channel that overlap will start to you know the benefit of that overlap of the investments that we made in inventory will start to tail off in the second half as we anniversary that but but we're still encouraged by our bricks and mortar comp in Europe , and then as we anniversary the replatform of our digital site in Europe . The first half will be stronger than the second half as we anniversary that overlap, but positive trends in Europe .
Got it thank you.
Thank you. The next question comes from Kate Fitzsimmons with RBC capital markets. Your line is open.
Yes, hi, good morning. Thank you for taking my question. Okay. Jane My question is more on the cost saving efforts that you have done year to date as we think about fiscal 20, where do you see buckets of opportunities on the expense side as the year Progressive you spoke to some supply chain work media buys here in Q1.
Any other needle mover you can share with us as the year progressed is just in light of this more volatile environment that you're seeing.
And then secondly, any update on the distribution center consolidation product or the headquarter relocation project.
Any update there would be helpful. Thank you.
Sure.
So cadence as we look to it F Y 20, we do expect that the DC consolidation is going to be durable throughout this year in terms of the benefit that we got from consolidating though is in addition to the.
The activity that that allowed which was inventory can salary consolidation so that will continue.
And our procurement work on indirect expenses is also durable through the year. So we take on obviously the largest vendor contracts first but we are systematically moving through nearly all of our indirect vendor renegotiations and knows our pace through the year as those contracts expire and are renewed. So you can expect to see that continue through the year and supply chain efficiencies that we are working with our wholesale partners on should also be a positive as we move through the year. So you know not only just repacking our product using cross dock activities, but also some of the work that we called out on products suppliers, where we can make products more sustainable and more cost advantaged is ongoing work in terms of and also just organizational agility based on some of the work.
Now that we've called out recently that we've done to simplify our organization you will see some of that come through in payroll benefits as we move through the year.
Notably in divisional cost structures and headquarter cost structures.
The our work in terms of our headquarter consolidation is going well you will not see that impact come through the financials until F. Y 21. This is the year as we move that we do have some double rent expenses, but you will see that be a durable benefit as we move through and we're very pleased with the supply chain consolidation I'd say, it's right on track with our expectations.
No.
Who knows if I could just add we were also reworking the different capabilities we have externally.
So indeed, there you've seen the work on media right going from 12 agencies to for doing that across all social and digital as well and we are rigs, but we're getting nothing both better and cheaper to a better capabilities and locals.
Next question please.
Your next question comes from the Ron Vasilescu with Macquarie. Your line is open.
Good morning, and thanks for taking my question on the last call. It was noted that half of the operating margin leverage expected for US why 20 will come from the gross margin.
Jane is that still the case and how should we think about the GM progression by quarter over the year and then on marketing spend up 19% how should we think about the second quarter and the full year.
Yes so.
Let me take your gross margin progression we.
We've maintained our guidance.
And we still expect.
Come from gross margin expansion for the full year and about half to come from SGN, a less leverage again for the full year as we look at the second quarter.
I see more about two thirds of the operating margin expansion will come from gross margin expansion and about a third.
SGN a leverage so that's how you can think about the quarter in terms of marketing expenses, we as we move through the year.
You know we had a strong first quarter and I would expect that you know you a second quarter will be slightly less robust in terms of marketing expansion as we anniversary a lot of our fiftyth anniversary activities, you will see some leverage from marketing in the second quarter, but then you'll see marketing growth in the third and fourth quarter. We expect marketing all to increase ahead of sales again this fiscal year as we work our way towards.
Marketing reps the investments representing about 5% of total revenue.
Very helpful. Thank you.
Thanks last question please.
Thank you. Our final question comes from Dana Telsey with Telsey Advisory Group. Your line is open.
Hi, good good morning, everyone. As you think about the digital business Hi, as you think about the digital business and the progress that you're making there how do you dissect it by region and also the AIU our progress on digital promotions versus full price by region. Thank you.
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So in terms of digital progress and as we talked we're very pleased with what we're seeing in Asia and the benefit that we've had from our re platforming in Europe and the growth of those markets.
We are investing in North America, I think Patrice called highlighted some of the pressures from international.
And we expect those benefits to start to play out in the second half and we're encouraged by that in terms of our eight you are progression on digital.
Uh huh.
Eight the our digital age you ours will really follow what we're putting in place across all of DTC and so the second half as we take some targeted pricing will be more robust than the first half.
In the first half is weighted by our clearing out of some of our spring product.
But you will see those up promotion and list prices go into effect more in the second half.
Got it and then just just lastly, as you think about inventory levels, how do you see them progressing through the or should we continue to see this rate of increase given the uncertainty with terrorists.
You know starting in the second half.
You will see inventory that's closer aligned with our sales were trying to be quite flexible Dana as we manage Brexit.
Implications as well as China duty implications and so we're going to be opportunistic as we were in this quarter and we accelerated some inventory into North America.
So we're going to we're going to remain flexible on that but I think that as we move forward you will see inventory more closely aligned to sales.
Thank you.
Alright, very good well listen thanks to all of you for joining this morning.
And we look forward to our next call early November have a great day. Thank you.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.