Ralph Lauren Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a -and-answer session. Instructions on how to ask a question will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I'd now like to turn over the conference to our host, Ms. Karina Vandegans. Please go ahead.

Good morning

and thank you for joining Ralph Lauren's First Quarter Fiscal 2020 conference call. With me today are Patrice Duve, the company's president and chief executive officer, and Jane Nielsen, chief operating officer and chief financial officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to one per caller.

During today's

call, we will be making some forward-looking statements within the meaning of the federal securities laws, including our financial outlook. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties. Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release and to our SEC filings that can be found on our investor relations website. And now I will turn the call over to Patrice.

Thank you, Corey. Good morning, everyone, and thank you for joining today's call. We delivered first quarter results in line with our overall expectations, including -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, and expense discipline across the organization. At the same time, we continued 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, win 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. Fourth, lead with digital across all activities. And fifth, operate with discipline to fuel growth. Starting with, win over a new generation of consumers. In the first quarter, we increased marketing investments by 19% to last year. We continued 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 a 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, a positive and inspiring celebration of inclusion and 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 a special 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 a YouTube series, our first gaming experience, and in-store and on-site events with influencers, celebrities, and top clients. We have more exciting initiatives still to come, including the US 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 CFDA 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 CFDA. We also announced J. Lo's fiancé, Alex Rodriguez, as the new face of our Polo Blue fragrance. Other celebrity dressing this quarter included Selena Gomez at Coachella, Emma Roberts, Oprah, JJ Lin, and K-pop band 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 on to our second key initiative, Energize 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 Core, and Seasonal Fashion. Core includes iconic Ralph Lauren styles like the classic mesh polo shirt, chino pant, army jacket, cable knit sweater, or oxford button down shirt. Seasonal Core products are iterations of our core items that are animated with fresh seasonal colorways or finishes. And Seasonal Fashion consists of more fashion-oriented and embellished products that center around a 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 and continue to be a key driver of our top-line performance. We're excited about the work Ralph and the design teams have done to re-energize the heart of the business. These styles are not only appealing to existing consumers, but also to new and younger consumers. 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 experienced 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, -to-work, footwear, and accessories. We saw strong continued momentum this quarter in denim and outerwear, which are the furthest developed of the five categories. Sell-in and sell-out trends for both categories exceeded total company performance. Based on an encouraging launch 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 -to-consumer AUR 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 on to our third key initiative, drive targeted expansion in our regions and channels. As we previously discussed, we are building a cohesive, brand elevating, raw-florn 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% the 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 partnered full-price stores and two factory stores. While we are making good progress, we still have significant expansion opportunities, with only 36 full-price stores across Europe. Moving on to our fourth key initiative, lead with digital. Our global digital ecosystem, including our directly operated sites, departmentstore.com, 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 continue to expand our distribution, notably with digital pure players. In Asia, we added two exciting new digital partners in the first quarter, Zalora in Southeast Asia and the social commerce platform of Kakao, the largest messaging platform in Korea. In Europe, we added six new wholesale digital partners in the quarter. These included Browns Fashion, a 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.com. 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 launched men's polo on Paxson.com and men's and women's polo on ASOS. We also added distribution of women's polo to Rent the Runway, joining Lauren 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 US 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.com 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 20. Let me touch on our fifth key initiative, operate with discipline to fuel growth. We continued 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 SG&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 achieves certified status as a great place to work in the U.S. 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'll turn it over to Jane, and I'll join 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. AURs were up 1% with low single-digit growth in international. This was partially offset by a 1% decline in North America AUR due to increased promotional activity in our bricks and mortar channels to move through excess seasonal fashion inventory from spring. Looking ahead, we still expect to drive AURs over the next three quarters, consistent with our guidance of low to -single-digit growth for fiscal 20 and longer term. AUR 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 AUR growth in North America as we, one, rebalance assortments across core, seasonal core, and seasonal fashion products. Two, 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 AUR drivers will be partly tempered by a continuation of increased liquidation pressure in the near term to clear seasonal fashion product for Lauren and select men's polo fashion. We will continue to balance an 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 SG&A leverage on top-line growth. Adjusted operating profit dollars grew 14% to last year. SG&A expense declined to .3% of sales, down 100 basis points to last year, driven by top-line 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 are, first, our supply chain -to-end remains an important opportunity for productivity. We reduced our Q1 air freight expense by 50% to last year as we optimized our ocean freight programs. We also realized opportunities on the product side. We re-engineered our outerwear to use innovative, recycled materials in our jackets. This enabled us to upgrade an existing product to a more premium and sustainable version for the consumer, while driving savings on raw material costs. 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 work to drive meaningful cultural shift in our organization's cost and corporate responsibility mindset. And we will continue to simplify our organization to improve agility and empower our leaders, as illustrated by some of our recent changes. 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%, a 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 AUR 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 toward 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 comprised the majority of our digital business, were up in the quarter, while foreign sales were down double digits. Similar to foreign tourist declines at our U.S. 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 overassorted, 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 two, investing in improved mobile functionality and personalization to drive more relevant content. Moving on to 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 on to 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 margins. 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 improve product mix continued in the first quarter, with AUR of 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 3% AUR 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 on to 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 year's first quarter. We repurchased $150 million in shares in the first quarter. We will continue to opportunistically buy back stock with about $600 million in repurchase planned for full fiscal 2020. 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 normalized inventories in our Europe factory stores during the second quarter of fiscal 2019. 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 top line 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, we'll 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 20. 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 for 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 SG&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%. The 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, Ralph's enduring creative vision, and the passion and commitment of our 24,000 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 1 on your touchtone phone. You will hear a tone indicating you have been placed into queue. You may remove yourself from the queue at any time by pressing star 2. 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 1 at this time. One moment, please, for the first question. The first question comes from Michael Benetti with Credit Suisse. Your line is open.

Hey, guys. Good morning. I'm Jayne Patrice. Thanks for all the – a lot of detail there. So if I try to sum up the quarter – hey, guys. So if I try to sum up the quarter, it looks like North America is still a little sluggish, but your international business very, very strong. You reiterated guidance. I have to assume you've taken into account those better international trends. What gives you confidence your international regions will be able to carry the top line, especially if North America backdrop remains sluggish, like you said? And then I had a quick follow-up, if I could.

Sure. Do you want me to answer that one first, and we'll do a follow-up later? Sure. Okay. Well, listen. Good morning. We are indeed pleased with our continued momentum both in Europe and Asia. If 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 brand, product, and distribution. All right. So let's actually start with product. Our product is actually resonating well with the Asian and European consumers, and our teams have done a very good job balancing our offering between core, seasonal core, and seasonal fashion across all of the channels, as well as – and this is important, as we think, through our AUR plans – as well as mixing into higher AUR categories like Outwear or Fleece. On the brand front, it's 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 that's the existing consumer group or the new generation that we want to bring into the family. That's probably most visible in the recent highly impactful activation that the teams have done around Wimbledon in Europe and actually in parts of Asia as well, and the unique connections that we've built with the key celebrities and influencers in China, for example. And then on the distribution front, 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 Polo boutique formats, both in Europe and in Asia. And all of that is translating into what we are working to build in key cities, which is this consumer-centric ecosystem which meets the consumer wherever he or she wants to shop. So those are, I'd say, three key drivers that have supported the Asian and European performance. As we look ahead, we're actually really energized by the growth opportunities for the many years to come. If you just think about two simple data points, right, across Europe and Asia. First is we only have 36 full-price stores across all of Europe. Once you benchmark that 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 that the group has made there over the past few months, only represents three and a half percent of our total global business. Again, when you benchmark that with a number of our peers, you get a good indication of the upside opportunities there. So we are encouraged and excited about what's 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 U.S. 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 AUR details that you gave, you know, still positive globally but negative one in North America. You said you cleared some product. Can you talk about the guidance? You signaled, you know, a slight – it seems like you're signaling a slight re-acceleration to 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 the opportunity and maybe help us reconcile that with some of the ongoing expectations to stay competitive on the promotional backdrop in the North America industry?

Sure. Well, 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 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 areas, and we've looked at opportunities to take ticket pricing in targeted and select areas. It's a part of our overall pricing approach and will really start to play out for us in the second half. That we've incorporated that into our guidance, we expect that our AUR 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 will be a little more pressure on that AUR growth, although we do expect overall AUR growth to improve more moderately in North America.

Okay. Very, very helpful. Thanks, Vian, for all the details.

Thank you. Our next question comes from Matthew Boss with JPMorgan. Your line is open.

Thanks. A nice quarter and a tough battle.

Thanks, Matt.

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 light of that, any changes specifically in your strategy necessarily to navigate the underlying regional cross currents?

Sure. So listen, as we look at the overall picture, actually the U.S. 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 tourist volatility. And our focus now is really to make sure we offset this through higher conversion and accelerated efforts in marketing the cross channels in North America. Probably three things I would call out here. The first one is indeed taking steps to mitigate the brick and mortar traffic. The second is 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 points, including elevated product as well as having the right entry price points. Two is working on our store marketing and particularly 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 platforms, probably more than we've ever done, to really activate traffic and bring traffic into the center. And then we were also raising the bar in terms of quality and targeting of our email marketing. We have a very strong database that we can leverage, and we're getting a lot more precise in terms of the messaging per the specific target group. 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, the brand elevation work that we've done over the past few years and the resulting increased value to the consumer. So that's it. That's first intervention. Second intervention, as we look to really control our destiny with DTC, is actually focusing on digital improvement. We were really pleased with the traffic performance in North America, Ralph Lauren.com this quarter, up a very healthy 20 percent, 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's very clear that that's how the consumer wants to interact, and we're investing in strengthening our mobile capabilities, whether that's how the visuals 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 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 store. So recently we just launched Find in Store, which allows you to identify in your local store through the website what products are available. You can book appointments on our website for your local store, and so on and so forth. And then finally realigning, as we talked in our prepared remarks, our buys to be better balanced across core, seasonal core, and seasonal fashion. And then the other part of controlling our destiny with BTC 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 that's building exciting brand experiences with events like the upcoming US Open, like the limited editions. We just dropped Polo Sport this past quarter, which did very well, both the denim and the silver edition. And then continuing to strengthen our connections and our 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. So new channels like Stitch Fix, 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 excited about the progress we're making there. And obviously the whole social commerce platforms that are expanding across the country. And then finally, and this is a new thought, we've talked about this since we started the Next Great Chapter plan, is really elevating our brick and mortar experience, investing in the overall store layout, in the lighting, 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 and this slightly more volatile environment gives 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, Jane. 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 on North America comp, I think we're seeing that there will be some pressure on the digital comp as we move through the year from these international flows 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, you'll start to see those payout 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 AUR-led, and so it will be back more weighted 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.

Any questions? Thank you. Thank you. Our next question comes from John Curren with Cohen. 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 you expect in China? It feels like there's obviously a lot of momentum there right now. Maybe you can talk about both the digital and physical direct expansion that's going on there right now, and then maybe have a follow-up on Europe. Thank you.

Sure. Maybe we'll talk to you on this one, Jane. So, yes, our goal is to indeed get greater China to half a billion dollars in revenue. We're making good progress again this quarter. Mainland China up 30 percent, greater China up 12 percent, continuing to see strong progress across both digital and brick and mortar. To your point on those different platforms, I mean, our thinking is really six big cities, right? We have Shenzhen, 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 Tmall, and with WeChat, right, and then also some strong partnerships from the 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 about one a week if you remove the holidays. On our way to achieving what we talked about last year in Vestaday, which is around 150 stores across greater China. And then we continue to invest in expanding our digital presence through existing platforms and new platforms and take advantage of all the key events that are happening there. And we participate in 618 recently and actually had strong performance across the board with our various partners on that, whether that was Tmall, JD, or others. And we're doing specific programs with WeChat. And so in general, we feel good about where we are relative to the glide path that we have laid out for ourselves on our way to half a billion dollars. And we sometimes get the question, are you seeing any changes with the consumer in China right now? And the answer so far is no. The brand continues to resonate well with consumers. And we're actually pleased with the mix of consumers we're 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. Yeah,

John, I would just add that we were very pleased with our digital commerce this quarter in China and across Asia. It was up 26 percent. So a real comp accelerator, we expect that dynamic to continue. We were also pleased with what we saw overall in terms of the comp acceleration that was coming from our newer Polo boutique stores that Patrice called out. Notably in China, which has been the focus of our new doors. So that is durable and we're encouraged by that continued momentum. Just

a quick follow up on Europe, about 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 some moving pieces in the 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.

Yeah, John, what we've seen in Europe, and let me just give you the component piece, is we still see the underlying trend for Europe wholesale as about mid single digits. There are obviously some shipment timings that goes on in Europe, but we've been talking about that as the underlying trend and we see that as sort of 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 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 e-commerce.

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. Jane, my question is more on the cost-saving efforts that you have done here to date. As you think about fiscal 20, where do you see buckets of opportunities on the expense side as the year progresses? You know, you spoke to some supply chain work, media buys here in Q1. Any other needle movers you can share with us as the year progresses just in light of this more volatile environment that you're seeing? And then, you know, secondly, any update on the distribution center consolidation product or the headquarter relocation project? Any update there would be helpful. Thank you.

Sure. So Kate, as we look to FY20, we do expect that the D.C. consolidation is going to be durable throughout this year in terms of the benefit that we got from consolidating those in addition to the activity that that allowed. Which was inventory 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 those are paced 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 positive as we move through the year. So, you know, not only just repacking our product using crosstalk activities, but also some of the work that we called out on product 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 that we've called out recently that we've done to simplify our organization, you will see some of that come through the payroll benefits as we move through the year. Notably in divisional cost structures and headquarter cost structures. Our work in terms of our headquarter consolidation is going well. You will not see that impact come through the financials until FY21. 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. If

I could just add, we are also reworking the different capabilities we have externally. So, indeed, you've seen the work on media, going from 12 agencies to four. We're doing that across all social and digital as well. We are expecting, we're getting, I think, both better and cheaper. So better capabilities and lower costs.

Next question, please.

Our next question comes from the Romp. Beth Leske with McCoy. 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 FY20 will come from the gross margin. Jane, is that still the case? And how should we think about the GM progression by quarter of the year? And then on marketing spend up 19%, how should we think about the second quarter in the full year?

Yes, so let me take your gross margin progression. We still, you know, as we've maintained our guidance, and we still expect about half to come from gross margin expansion for the full year, and about half to come from SG&A leverage again for the full year. As we look at the second quarter, Laurent, I see more, about two-thirds of the operating margin expansion will come from gross margin expansion, and about a third from SG&A leverage. So that's how, you know, you can think about the quarter. In terms of marketing expenses as we move through the year, you know, we had a strong first quarter, and I would expect that, you know, second quarter will be slightly less robust in terms of marketing expansion. As we anniversary a lot of our 50th anniversary activities, you'll 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 law to increase ahead of sales again this fiscal year as we work our way towards marketing investments representing about 5% of total revenue.

Very helpful. Thank you.

Last question, please.

Thank you. Our final question comes from Dana Telsey with Telsey Advisory Group. Your line is open.

Hi. Good morning, everyone. 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 AUR progress on digital, promotions versus full price by region? Thank you.

So in terms of digital progress, as we talked, we're very pleased with what we're seeing in Asia and the benefit that we've had from our replatforming 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 AUR progression on digital, our digital AURs 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, and the first half is weighted by our clearing out of some of our spring product, but you'll see those promotion and list prices go into effect more in the second half.

Got it. And then just lastly, as you think about inventory levels, how do you see them progressing through the year? Should we continue to see this rate of increase given the uncertainty with tariffs?

Starting in the second half, you will see inventory that's closer aligned with our sales. We're 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 remain flexible on that, but I think that as we move forward, you will see inventory more closely aligned to sales.

Thank

you. All right. 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.