Ralph Lauren Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third 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 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 our conference over to our host, Ms. Karina Van Der Gans. Please go ahead.

Good morning, and thank you for joining Ralph Lauren's third quarter fiscal 2020 conference call. With me today are Patrice Louvet, 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 continue to make strong progress on our next great chapter plan. With third quarter results ahead of our overall expectations, including better than expected revenues, operating margin, and double-digit EPS growth. Over the important holiday season, our teams consistently executed across each of our strategic priorities, enabling us to elevate our brand and deliver for our consumers across every touchpoint. The solid foundations we've put into place to reposition and elevate our brands help to drive positive comp growth across all three regions excluding the impact of Hong Kong this quarter. We were also encouraged by AUR growth of 6% as we invest in brand elevation through our products, marketing, distribution, and unique consumer experiences. At the same time, we continue to execute key initiatives to stabilize our North America business against an evolving retail landscape. As I've shared before, The three principles underlying this work include putting the consumer at the center of everything we do, elevating the brand across all consumer touchpoints, and balancing growth and productivity. And we're doing all of this while managing through volatile industry dynamics, including the recent coronavirus outbreak, which we are actively monitoring. Our top priorities are to keep our employees and consumers safe, and to heed the advice of local and international health authorities. The situation is a dynamic one, and we will continue to assess the implications for our business across retail, corporate, and our supply base. Our thoughts are with the many impacted by this virus. During the third quarter, we drove our performance across the five strategic priorities that we laid out as part of our five-year plan to deliver long-term, sustainable growth and value creation. 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, We're investing in media channels that matter most to consumers today, namely digital and social, and remain on track towards our long-term marketing investment target of 5% of sales. In the third quarter, marketing increased 16% to last year as we shifted investments back into the key holiday selling period. We're encouraged by consumer engagement across generations through our campaigns and programs, notably Our total social media followers surpassed 40 million in the third quarter, a double-digit increase to last year, led by a 30% organic increase on Instagram. Let me touch on some of the highlights from our holiday campaigns this quarter. First, we launched a fully integrated holiday campaign across social media, television, our own stores and digital sites, and wholesale environments, which we called Every Moment is a Gift. Among the exciting activations online, we drove strong engagement through our Snapchat holiday shopping filter and our first-ever global digital game, the Holiday Run, where our iconic Polo Bear dashed through the streets of New York City, Paris, London, and Tokyo to collect festive baubles and signature Ralph Lauren products. We also launched a digitally targeted campaign for our Lauren women's ready-to-wear business in North America this season. Featuring supermodel and mom Lily Aldridge along with her family, it was the first dedicated campaign for the brand in many years that had significant media support behind it. We were encouraged by the early consumer response as we worked to get the Lauren women's business back on a positive trajectory. On our North America mobile app, we drove a successful seven days, seven drops program featuring limited edition releases, and one-of-a-kind experiences. A highlight of the week was our Five Horsemen Rugby shirt, which sold out in just 15 minutes online. And congratulations to Ralph Lauren Golf Ambassador Justin Thomas. He captured his 12th career win at the Century Tournament of Champions last month, wearing RLX to capture the number one spot in the FedExCup standings. Moving on to our second T initiative, energize core products, and accelerate high-potential underdeveloped categories. In the third quarter, Ralph and our design team drove excitement in core product categories while also expanding into our five high-potential underdeveloped categories. While we were pleased with the overall performance of these categories, our outerwear and fleece programs were the clear standouts this holiday, outperforming our total sales trends on both a sell-in and sell-out basis. Popular styles included heavyweight parkas, quilted car coats, light and mid-weight down jackets, windbreakers, and Sherpa styles. Other successes this season included woven shirts, sweaters, and denim. In addition to the holiday drops on our mobile app, we released our limited edition Polo Sports Outdoors collection in November. The products retailed on our own digital commerce sites, North America app, and select flagship stores around the world. We also partnered with influential specialty retailers including Bodega, Fred Siegel, Essence, Browns in the UK, and Beams in Asia. Other exciting projects this quarter included an exclusive holiday capsule with Zolando, the Polo Sport collaboration with Mushinsa, one of the largest fashion online retailers in Korea, and a WeChat mini program for Singles Day in China. Moving on to our third key initiative, drive targeted expansion in our regions and channels. Our long-term expansion strategy remains focused on building a cohesive, elevated Ralph Lauren experience across our retail, wholesale, and digital commerce presence in key cities around the world. During the third quarter, we opened 48 new owned and operated stores and concessions globally and closed 31 locations. This included 37 openings in Asia. We also continue to invest in door refreshes across our own stores and wholesale partners in key markets as we work to elevate our fleet across every touchpoint. Our city-by-city ecosystem approach drove strong results in the quarter, with Chinese mainland sales up more than 30% in constant currency, driven by comp growth and new stores. Total China sales were up 6% the last year in constant currency, despite headwinds in Hong Kong that we discussed last quarter. In Europe, we opened six owned and partnered full-price stores, including Polo Boutiques in Covent Garden in London, Torino, Aix-en-Provence, and Lisbon. We're making good progress, but we still have significant expansion opportunities with only 46 full-price stores across Europe. With all of this complemented by our successful expansion into new specialty wholesale accounts and digital commerce growth. Which brings me to our fourth key initiative, Lead with Digital. Our global digital ecosystem, including our directly operated flagship sites, departmentstore.com, pure players and social commerce, increased low double digits in the third quarter in constant currency. The strong performance exceeded our expectations across all three regions. This was driven by double digit growth in Europe and Asia, with North America up high single digits, improving from flat performance in the first half. Starting with Europe, digital sales were up high teens in the quarter, with solid performance across both owned and wholesale digital accounts, led by digital pure play retailers. We added six new partners, including Luisa Viaroma in Italy, Sock Shop in the UK, and Brown Hamburg in Germany. Our directly operated digital sites in Europe also saw further momentum, delivering 15% comp growth this quarter. Highlights included the November launch of our Polo mobile app in the UK, our first app launch outside of North America, and a new digital commerce flagship for Switzerland as we expand our localization efforts by market. In Asia, digital ecosystem sales were also up double digits, led by the Chinese mainland. We launched new partnerships this quarter with Meijer in Australia, as well as Timon's luxury-selected platform in China. Lastly, our digital growth in China accelerated on the launch of buy-online, ship-from-store fulfillment to leverage our store inventories. These omni-channel orders contributed to roughly half of our digital growth in the quarter. Turning to North America, third-quarter comps on RalphLauren.com were up 6%. largely in line with our expectations. We saw softness from international consumers due to FX and import restrictions in Asia, similar to the first half of the year. However, sales to domestic shoppers grew single digits as we started to drive improvements in mobile, site personalization, and rebalancing our buys to emphasize stronger selling core and seasonal core products. Lastly, we continued to build partnerships with newer digital platforms in North America, which are extending our reach to new and younger consumers. In the third quarter, we launched Women's Polo on Daily Look, a premium subscription-based personal styling service, and Men's Polo on Simmons, a specialty designer boutique online. We also added kids to Rent the Runway, joining our Lauren, Women's Polo, and Club Monaco brands on the platform. Touching on our fifth key initiative, operate with discipline to show growth. In the third quarter, we focused on challenging every cost and improving our efficiencies. Adjusted operating margin expanded 10 basis points, slightly ahead of our expectations, with stronger than expected top-line growth, partly offset by the planned timing of higher investments around holiday marketing and new stores. One important margin driver for us, and a central part of our next great chapter strategy, is raising AUR. to elevate the brand globally and create value. We're using multiple levers to realize AUR increases, including lower discounts, elevated product mix, geographic and channel shifts, and strategic ticket price increases. We began phasing in strategic ticket price increases in our North America factory outlet channel in late September, followed by our North America full price wholesale and direct to consumer doors in spring 20. Leveraging the success we've had implementing this strategy in Asia and Europe, these ticket increases reflect our competitive benchmarking analysis and our focus on providing a superior value proposition for our consumers. We were encouraged by the impact of these initial price increases this fall. While traffic was still a headwind for our factory business, we were able to drive positive comps in this channel through an 8% increase in AUR in the quarter. This was on top of 8% AUR growth last year and well above our expectations. Though it is still early in this journey, we are focused on elevating our brand positioning in the North American market and globally as part of our AUR-led strategy. And finally, I want to provide an update on our journey to further integrate citizenship and sustainability into our business. More than 50 years ago, Ralph built our company based on the idea of timelessness, creating products that are meant to be worn, loved, and passed on to the next generation. This continues to inspire everything we do as we build a business to deliver value for our shareholders and all of our stakeholders for the next 50 years. As part of this work, in December, we announced a new commitment to power all of our globally owned and operated offices, distribution centers, and stores with 100% renewable electricity by 2025. We also took the Arctic Shipping Pledge, committing to reroute shipping to avoid the environmentally delicate Arctic area. Driving diversity and inclusion across our business is another important piece of this work. and we are pleased to report that we have achieved our gender parity goal of equal representation in our leadership positions at the VP level and above more than three years ahead of our target. In closing, Ralph and I are energized by our team's execution over the important holiday quarter, and we are encouraged by the progress we are making on our next great chapter plan across the business. While we are mindful of the challenges across our markets globally, we are intensely focused on delivering on the commitments we have made across every aspect of our business as we look to drive long-term, sustainable growth and value creation for all of our stakeholders. And before I turn it over to Jane... Sadly, I want to note the recent passing of our longtime board member and friend, Arnold Aronson. On behalf of Ralph and the entire organization, I want to express our deepest gratitude for his kindness, wisdom, and service to our company over nearly two decades. Now over to Jane, and I'll join her at the end to answer your questions.

Thank you, Patrice, and good morning, everyone. Our third quarter results demonstrates solid execution of our strategy through this holiday season and our team's agility in navigating a dynamic global geopolitical and retail environment. We delivered top and bottom line growth and good progress across key metrics, including 6% AUR growth, double-digit growth in digital commerce, and growth and operating margin expansions. coupled with solid inventory control. Third-quarter revenues increased 1% on a reported basis and 2% in constant currency. Every region posted positive revenue growth driven by mid-single-digit constant currency growth in Europe and Asia, despite the ongoing headwinds in Hong Kong, as well as slight growth in North America. Excluding the impact of Hong Kong, Total company top line grew 2.5% in constant currency, and every region delivered positive comps as we worked to elevate our brand across every consumer touchpoint, drive product quality, reduce promotional levels, and enhance our digital presence. Adjusted gross margin was up 60 basis points in the third quarter, both on a reported and constant currency basis. Gross margins benefited from AUR growth of 6% on better pricing, lower promotions, and elevated product mix, along with favorable channel and geographic mix. These more than offset investments in product elevation and sustainability and diversification of our supply chain. Looking ahead, we are encouraged by the early results of our fall pricing actions and expect our AUR strength to continue through the rest of the year, driving our full-year expectation of low single-digit AUR growth for fiscal 20. Our inventory positions for both our direct-to-consumer and wholesale businesses are current and well-controlled coming out of this holiday season. And, We remained focused on managing our inventories with discipline and leveraging our supply chain agility and responsiveness. Adjusted operating margin in the third quarter was 14%, up 10 basis points on a reported basis and in constant currency. Adjusted operating profit dollars grew 3% to last year. Adjusted operating expense increased to 48.2% of sales. up 50 basis points to last year, both on a reported basis and in constant currency. Marketing was the key driver, with spending up 16% in the quarter as we shifted investments back into the key holiday selling period versus last year's focus on our 50th anniversary show and related events in the second quarter. We still expect marketing spend to grow ahead of sales for the full year fiscal 20 as we invest behind our brands with an emphasis on digital media. Excluding marketing, our adjusted operating expense leveraged 20 basis points to last year as our teams generated operating efficiencies across our business. Some key highlights from third quarter include, first, We continue to drive efficiencies across our end-to-end supply chain, including incremental savings across facilities, labor, air freight and consolidation of materials, all contributing to mitigate the impact of tariffs. This work is also delivering an improved experience for our consumers, including faster delivery speeds on digital orders. Over the peak holiday period, for example, we more than doubled our penetration of orders delivered in two days or less over the prior year. We also piloted a new fast-track model in the quarter where we were able to meaningfully accelerate the development of special product concepts from design to shelf. Leveraging our investments in digital product development, we designed, produced, and delivered an exclusive fleece sweater to a key wholesale customer in just 16 days, right in time for Black Friday. While just one early example, we expect this model to be a growing part of our supply chain as we continue our progress toward our three-, six-, and nine-month lead time targets. Moving on to segment performance, starting with North America. Revenue increased slightly in the third quarter as strong growth in our retail business more than offset wholesale revenue declines. Adjusted operating margin was 22.3%, a 30 basis point decrease to last year, with operating margin expansion in our retail businesses more than offset by SG&AD leverage in our wholesale business on lower sales. In the retail channel in North America, comps were up 4% and ahead of our expectations, driven by 4% brick-and-mortar comps and 6% comps on our owned digital commerce site. Brick-and-mortar comps were driven by an 8% increase in AUR on top of 7% growth last year. This strong growth reflects our targeted price increases and a reduction in promotions, along with an improved product offering, new marketing activations, and rebalanced assortments towards stronger selling core and under-penetrated categories. We also made key operational improvements, such as the rollout of RFID technology across our fleet to improve out-of-stock replenishment sales. In addition, new staffing optimization tools in our stores drove productivity and improved service in peak periods. Our factory business led our AUR increase in North America with improved conversion. While traffic continued to be a headwind in the channel, we are focused on driving better traffic trends through enhanced digital marketing and refreshed and differentiated store experiences. Comps in our North America directly operated digital commerce business were up 6%. Our investments in mobile, personalization, and site navigation drove positive growth from domestic consumers in the third quarter. Our digital business also benefited from favorable product mix towards categories like outerwear and fleece, along with a timing shift into the third quarter as we saw higher sell-through in the holiday period versus clearance period in Q4. Excluding this shift, we still expect second half comps to improve incrementally compared to first half comps. Sales to international shoppers purchasing on our U.S. site and shipping to U.S. addresses remained soft in the third quarter and should remain a headwind through the rest of fiscal 20. Moving on to North America wholesale. Third quarter revenue declined 8% in line with expectations. Excluding a decline in off-price sales, our underlying North America wholesale business was also down high single digits. However, our full-price sellout improved from recent trends. In the near term, we are focused on improving the consumer experience in the wholesale channel through in-store refreshes, expansion into under-penetrated categories, and increased marketing. Our inventories in the wholesale channel are clean and down on a year-over-year basis. We are driving a more favorable product mix, emphasizing core categories and testing targeted brand marketing for Lauren Women's. We continue to expect it will take some time for our wholesale business to start reflecting these strategic improvements, which have shown success in our direct-to-consumer channels. Moving on to Europe. Third quarter revenue was up 3% on a reported basis and 5% in constant currency. Adjusted operating margin expanded 300 basis points, both on a reported and constant currency basis. Operating margin expansion was driven by strong gross margins and SG&A leverage. In the retail channels in Europe, comps were up 3%, driven by a 15% increase in our own digital commerce sites. and a 2% increase in our brick-and-mortar stores. The increase in our directly operated European digital commerce business was above our expectations, driven by strong AUR growth, solid merchandising execution, and traffic increases, along with a shift in seasonal product sales similar to our North America site. Across our Europe direct-to-consumer channels, our ongoing efforts to elevate the brand and improve product mix continued in the third quarter, with AUR up 10% on top of an 11% increase last year. This is consistent with our long-term strategy to drive higher quality of sales and price harmonization in the marketplace. Wholesale revenue in Europe was up 5% in constant currency and also ahead of our expectations. Similar to Q2, the strong performance reflected solid sellout trends driving stronger reorders, particularly with our digital pure play partners. Turning to Asia, revenue was up 5% on both a reported and constant currency basis in the third quarter. Excluding the impact of Hong Kong, where protest-related store closures and tourism declines were an ongoing headwind, Asia revenues were up 9%. This solid performance was driven by several markets in Asia, led by Chinese mainland sales growth of over 30% in constant currency. Our product and marketing initiatives are resonating well in this region, and we continue to drive our digital efforts, expand and elevate our store fleet, and engage with local influencers and celebrities. Comps in Asia decreased 1% with slight AUR declines. Excluding Hong Kong, Asia comps were up 2%. Store closures and traffic declines to Hong Kong remained a challenge in the third quarter, but we were able to partially mitigate some of this impact by pulling forward a friends and family event in our factory stores. We continue to expect Hong Kong to remain a near-term headwind especially with the emerging impact of the coronavirus, as Patrice mentioned. Adjusted operating margin was down 50 basis points to last year on a reported basis and down 70 basis points in constant currency, driven by SG&A deleverage in Hong Kong. Excluding Hong Kong, margins were up 130 basis points in constant currency. Moving on to the balance sheet. Our balance sheet remains strong and we continue to return capital to our shareholders. We ended the quarter with about $1.9 billion in cash and investments and $694 million in total debt, which compares to $2.1 billion in cash and investments and $687 million in debt at the end of last year's third quarter. We repurchased $98 million in shares in the third quarter and for a total of $498 million in repurchases year-to-date. We will continue to opportunistically buy back stock and remain on track to complete our target of about $600 million in repurchases for full fiscal 20. Moving on to inventory. At the end of the third quarter, inventory was down 1% to last year and flat in constant currency. we still expect to end the year with inventories relatively aligned to our sales outlook. Now, I'd like to turn to guidance for the full year and fourth 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. Specifically, our outlook still incorporates the impact of tariffs, Brexit, and protest-related business disruption in Hong Kong. At this early stage, our guidance does not include potential impact from the coronavirus outbreak, given the dynamic nature of the situation. However, we are monitoring developments closely and will be transparent about the expected impact, providing updates if needed. For full year fiscal 20, we still expect revenues to be in the range of 2% to 3% growth in constant currency. Based on a better than expected holiday, revenues should be slightly better than the low end of the range we guided to last quarter. Foreign currency is expected to have about 110 to 130 basis points of negative impact on revenue growth based on currency shifts. We now expect operating margin expansion at the high end of our previous range of 40 to 60 basis points in constant currency, driven primarily by gross margin expansion and slight SG&A leverage. Foreign currency is estimated to have about 10 basis points of negative impact on operating margin in fiscal 20. Based on the timing of shipments, our guidance now assumes a little less than $10 million of negative tariff impact to our fiscal 20 cost of goods. We expect the majority of this impact in our fourth quarter. However, based on our supply chain diversification out of China and recent tariff reductions, we estimate tariffs will have about $12 to $15 million of total impact in fiscal 21. We now expect our full-year tax rate to be about 20%. For the fourth quarter of fiscal 20, we expect revenues to be up slightly, both on a constant currency and on a reported basis. Foreign currency is expected to negatively impact revenue growth by about 50 basis points in the quarter. We expect protest disruptions in Hong Kong to negatively impact our Asia comp by about 5 points in the quarter. Operating margin for the fourth quarter is expected to be up slightly in constant currency and on a reported basis. Similar to Q3, this is primarily due to timing of SG&A investments, with our highest number of new store openings weighted to the back half of the year, largely offsetting gross margin expansion in the quarter. Fourth quarter tax rate is estimated at 26%. above our full year expected rate based on our expectation of discrete one-time items. We look forward to sharing the details of our fiscal 21 guidance when we report our fiscal year end in May. In closing, we are proud of the focus, agility, and passion our teams around the world demonstrated this holiday quarter. Guided by Ralph's vision, our teams elevated our brand, delivering comp, AUR, and profit growth, all while maintaining discipline on inventories and costs. While we are navigating and watching the challenges in the broader environment closely, we are, first and foremost, committed to the safety of our employees, partners, and consumers. We believe we have the right strategy and team to deliver across our strategic priorities and create value for the long term. With that, let's open up the call for your questions.

Ladies and gentlemen, if you wish to ask a question, please press star one on your touchtone phone. You will hear a tone indicating you've been placed into queue. You may remove yourself from queue at any time by pressing star two. If you're using a speakerphone, please pick up the headset 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 Adrienne Yee with Barclays Capital.

Good morning, and congratulations on continued progress in a very tough environment. Good morning, Adrienne. Thank you. Good morning. So, Patrice, you gave such great color on sort of the AUR and what was driving the pricing increases. It's accelerated in the back half of the year from the first half, despite the tougher compares. Obviously, you talked about where you were taking selective price increases. What have you learned about the price elasticity, particularly in North America? And does this give you confidence in your ability to continue to take pricing up, you know, over the next year or so? Thank you.

Great. Thank you for your question. Well, let me just step back a little bit to kind of give you the overall way of how we're thinking about this. The first thing I would say is brand elevation is really at the core of our strategy, right? And AUR is obviously then a key component to that. The second point on AUR is we have four drivers for AUR that we're working on. One is pulling back on promotional support. And actually, in the last quarter, we reduced our promotional pressure. The second is leveraging product mix, and you saw us invest in categories that had higher AUR like outerwear and fleece. The third is obviously leveraging geographic and channel mix. And then the final point is indeed targeted pricing. Now, we've actually started this journey of taking targeted pricing in the context of this broader AUR strategy in international, I'd say, past 18, 24 months. And we've been pleased with the results that we've achieved there. But it's really important to understand that it isn't just pricing and isolation. It's the result of work that we've done on elevating the brand across all the touchpoints, the work we've done on inventory, on product, on brand, on distribution that enables that. We're at a stage now where we think the conditions are set for us to execute that in North America. So as you mentioned, we now have about a quarter under our belt in the factory outlet channel, which is where we started. We're encouraged both by the way the teams have executed because they've done a terrific job, and the consumer response across the board because we saw significant AUR growth. Now, AUR growth in isolation doesn't make any sense. It's growth that needs to drive comp, and we're pleased with the 4% comp growth that we achieved in North America. In terms of then expanding this across... the ecosystem for North America, the plan is actually to do that now. So literally as we speak, we are implementing pricing for the consumer on the floors, both in our full price stores that are wholesale, leveraging the learnings that we've picked up in our execution in factory outlets. And we're at the very beginning of this journey. We were quite encouraged by what we've seen so far. And to the point on, you know, guidance long-term relative to our expectations for AUR growth, we continue to expect AUR to grow low to mid-single digits throughout the lifetime of the plant.

Thank you. The next question comes from Michael Bonetti with Credit Suisse. Your line is open.

Hey, guys. Let me start with congrats on a really nice quarter in what sounds like a tough holiday. Thanks, Michael. I want to ask you, in North America, wholesale down 8% was a bigger decline than we've seen since maybe fourth quarter last year, and you were going against a big off-price correction in the fourth quarter last year, lapping a negative 10. If I add this to some comments you just made on now starting to raise prices in wholesale, I'm trying to think of how you guys think about the North America wholesale numbers going forward from here. Obviously, the compare gets easier. You've got some pricing. But then do you think we're at a point where we can – you can see turning a corner on North America wholesale turning positive yet at some point during the course of fiscal 21. And then I also want to ask you about how you're thinking through all the dynamics you just laid out about margins for next year. It sounds like you're happy with how the increased marketing is going. Obviously, the results are there on the top line. But I'm wondering how you're thinking about gross margin as well for next year, which has been a nice contributor for several years now. You did say AUR should keep moving in the right place. You're happy with tickets. I'm wondering if you still think the gross margin and SG&A dynamics we've seen in the first two years of the plan should be similar next year.

Yeah, Michael. It's Jane. So let me answer the AUR gross margin question first, and then I'll go to North America wholesale. So we're really encouraged with what we saw in North America in Q3 from a gross margin standpoint. led by the AUR increases with comp growth. Those AUR increases really reflected our ability to both continue our discount reduction journey. We're starting to see a nice contribution from product mix and the elevation of products, better assortments, better rebalancing of the core, the things we've been talking about. So early stages, but we're starting to see that in this quarter. And then the consumer response to the ticket increases were also very positive. So that's what's giving me confidence in continued gross margin expansion. Obviously, we've guided that for Q4, but I do think that the things that we've called out as durable, reductions in promotions, targeted consumer value-oriented price increases, product mix benefits, and then some tailwind benefits from geographic and channel shifts, Those things are durable. And we're able to manage some of the cost inflation and tariff impacts through working those levers. So I continue to remain optimistic that gross margin is a driver for us today, obviously what I've guided to for the future, but is also durable to the plan. Now, the magnitude, we're pretty clear on our guidance. but I'm encouraged and I think it's a strength for us. So good progress there. Then if I turn to your North America wholesale question, I will tell you that, again, off-price was down, I would say, meaningfully more than our full-price business. So double-digit decline last year, double-digit decline this year, and again, The flow of off-price is related to excess flow. Our inventory is clean, and so we're really, I think, looking at that channel from a strategic standpoint the way it should be, which is they're good partner stuff, they're an opportunistic way for us to liquidate excess, and that's what you're seeing come through. In terms of the timing of North America wholesale coverage, we know that that will take some time, right? So what is encouraging to us is that we're on the right track. Strong comp growth in DTC in North America this quarter. The underlying trend in comp is encouraging. While I still think quarter by quarter there'll be some choppiness, the underlying trend is encouraging, and we believe that we're taking the right actions in wholesale, as Patrice called out, in terms of rebalancing assortments focusing on sell-out, which we did see improve this quarter, and restarting some targeted marketing within the channel that's showing some very early signs of positive trends. So we're pleased with that. And we're overall pleased with our marketing investments and the way they're enabling our brand elevation and price increases. So still encourages how that will flow through on OI margins. Next question, please.

Thank you. The next question comes from Matthew Boss with J.P. Morgan.

Great, thanks, and congrats on a nice quarter. Maybe, Patrice, and I know this is somewhat higher level, but as we think about differentiated versus undifferentiated retail, I guess maybe what inning overall do you see the brand today in North America? So maybe If you could touch on wholesale distribution, how you feel about your existing department store doors, maybe the number and the quality of the doors that you're in. I know Jane just touched on off-price. And then at retail, where you see the opportunity from a footprint perspective in terms of what you have today and the opportunity that you have going forward.

Well, Jane is very happy that we're back to baseball analogies. So listen, on the differentiation front, I think we're in the very early innings in North America actually, right? So if you ask me for a number, I'd probably say two out of nine. I think we see opportunities to actually in the context of the brand elevation strategy to increase our presence in higher end wholesale where we see options both in North America and actually around the world. We're also in kind of the current wholesale footprint. You know we've reduced it significantly already, right? We're down 25% from where we were about three years ago to make sure that the brand shows up in the right place. We continue to assess the locations on a very regular basis, working closely with our partners. So this is also a dynamic process. As far as DTC is concerned, we believe we have opportunities, obviously, to continue to fuel our dot-com operations, right, which is a very important factor. of the DTC part of our business. And also similar to our thinking internationally with the introduction of polo boutiques, we believe there is an opportunity in North America to expand our DTC footprint, smaller format stores. So that won't happen tomorrow morning, but as we look at kind of the next few years and where we want to take the brand and how we want to drive interactions with consumers across the country, we do believe there are opportunities to expand the footprint so that the brand is better represented in a more dispersed way across the entire country, all guided by our brand elevation strategy, right? That's really the filter that we use to decide where we should be and then how do we ensure the differentiation is very clear by channel for the consumer, both online and brick and mortar, so that he or she knows exactly where what to get in which location and how the brand will show up differently based on the different environments.

Next question, please.

Thank you. The next question comes from Omar Saad with Evercore ISI.

Thanks. I'd add my congratulations. Nice quarter, guys. Appreciate all the information. I wanted to ask a follow-up on the sales guidance. You know, you're obviously a really strong quarter. You know, your comps accelerated. You came in above your number. But you kind of kept the full year guidance the same. Are there any timing issues going on especially with all the AUR upticks, it feels like an easier comparison in the fiscal fourth quarter. It feels like there could be some opportunity for revenue upside there. Is there something I'm missing? And then a follow-up on the coronavirus, and maybe it's related. We're hearing stories of double-digit million population cities that are a bit like ghost towns right now and some pretty significant comp declines. Wondering if you're seeing any meaningful impact in your business in real time And is there anything on the supply chain side we should think about in terms of disruption there potentially? Thanks.

All right. Why don't I unpack your question in terms of the guidance first and in terms of revenue upside. What we are saying, and I think we called it out in the script, is obviously Hong Kong will have a more meaningful impact as we head into the fourth quarter. We've seen travel bookings deteriorate from the third to the fourth quarter. And this is obviously a big quarter for Hong Kong given that it was Lunar New Year. And so we called out and we had about a three-point impact to Asia Comp in the third quarter. That moved to about a five-point impact in the fourth quarter. So that's one factor. that's going into that. And then we called out some digital commerce that we had very, we had stronger than expected digital commerce as we look at that. And underneath the covers of that in both Europe and in North America, what we saw is that we sold out stronger at full price. We had less inventory feeding clearance in the fourth quarter. That's a good quality of sales move. You know, we're pleased with this. And so you'll see some of that sitting on our digital comps in the fourth quarter as we move forward. We also have some, given the shorter holiday season, we move to fulfill demand to make sure consumers had a good service experience and we'll have some more process returns in the fourth quarter. and we were less promotional at the end of the third quarter. So those are some things that are sitting in digital. So those two things are the biggest things that are guiding our fourth quarter revenue call.

And then on the coronavirus, and obviously it's a highly dynamic situation, right? But if we take a snapshot today for us in China, we have about half of our fleets closed. So we have about 110 stores. Roughly half of that is closed as we speak today. Obviously, we monitor that very closely. As far as supply chain is concerned, well, first of all, the other thing I would say relative to our business penetration in China, just for the benefit of the whole group, is while the China opportunity is a massive growth opportunity for us, to some extent it's a blessing to be underpenetrated today because our business today, China represents less than 4% of the total company business. Now, we still are very bullish about our ability to win long-term in that region and very excited about what we can do there. On the supply chain front, I'd say the same thing, Omar, very dynamic situation. We have been working, as you know, over the past year, two years, to diversify our supply chain so that we're less dependent on one market, less dependent on China. So we have a greater ability to leverage a footprint that's much broader and much more flexible It's, you know, we're in the middle of the Lunar New Year vacation. We'll need to see, and which has been extended by a week, we'll need to see how the employees return to the various factories post the vacation. So we're watching it. We are working on being as agile as possible. And, you know, we'll make sure we make the best of the situation that we're dealing with. The priority in all of this, right, because this is a human situation, we can't lose sight of the human dimension of all this, obviously, is is to make sure that our employees are safe, our consumers are safe, and that we follow very closely the guidance both from the local and the global authorities on this health crisis.

Next question.

Thank you. The next question comes from Aaron Murphy with Piper Sandler.

Great. Thanks. Good morning. Just a couple of questions for me. I guess, Patrice, just on the speed to market opportunities, you gave that 16-day example. Could you just talk a little bit more about where that product was produced As you assess the opportunity, how repeatable is this process? And then just a follow-up for Jane on the North American wholesale, can you talk a little bit more during the quarter of what did you see with men's polo versus Lauren within the full-price business? Thank you.

I'm glad you took note of that example. That's actually really good. You know, it was a pilot exercise for us. It was a sweatshirt that we developed with one of our wholesale partners, and we did executed from idea to delivery to the partner in 16 days. We're not going to move our entire supply chain to 16 days. What's key, our lens is to understand what is the timing required to be well positioned to win in a specific category, in a specific geography, in a specific channel. So we still have kind of our nine, six, three monthly times. And then there are some projects where we want to have this ability to react in the span of days. The specific project, Aaron, was sweatshirt, I believe manufactured in mainland China, and something that's replicable, which is why we share it as an example. It's a pilot, but I think it's an indication also that our organization is becoming more agile, more aggressive in terms of how to manage timelines, and also more creative. So I think you're going to continue to see from us faster lead times, but not just for the sake of lead times, also just to understand what's required to to win in the marketplace.

And Aaron, I would just add that we remain confident in achieving the goal that we laid out in Investor Day, that we will get to more than 50% of our products on a six-month or less lead time. And we're making great progress on some of our key categories in moving, you know, almost 80% of our sports shirts onto six months or less and even working on faster tracks. So great progress by our supply chain in that area. And then to the second part of your question regarding what we're seeing, what we saw on Polo and the Lauren brand, we did see across the company that the Polo brand really drove our growth. And specifically in North America Wholesale, we saw the Polo brand be stable and a driver for us. The Lauren brand, you know, we're seeing some positive signs, but they're very early based on the marketing that Patrice called out and some targeted work that we're doing with our wholesale partners that one, makes us believe that the Lauren opportunity is an opportunity in North America wholesale. that our consumer is still there, and that when we assort into the right categories with the right product quality and right consumer value, that the consumer will respond. And so we saw some encouraging trends there. I'd say too early to call the turnaround. It will take some time, but some encouraging signs. Great. Next question, please.

Thank you. The next question comes from Alex Walvis with Goldman Sachs.

Good morning. Thanks so much for taking the question. You commented on some pretty strong performance in the outerwear segment through the quarter, which was a tough category for some others, so some good progress there. I wonder if you could share some comments on the other underdeveloped categories. You mentioned denim was strong. Any comment on where we are in the progression for accessories, footwear, where to work, and so forth?

Sure. Yeah, we were actually really encouraged by the growth on outerwear. And, frankly, I'm becoming even more bullish on the size of price on that part of the business as we build capabilities in-house. So good momentum on outerwear. Denim also performed well for us and actually contributed to the solid trends on our men's business. I think the team is doing a very good job in terms of understanding the customer we want to serve, developing product that resonates, and then finding a way to communicate and execute it in store in a way that really connects with the consumer. We're making good progress on where to work. Probably the key thing to highlight here is the way we are complementing our line, particularly on Polo Women's, and some of the work that's also underway on Lauren. Really make sure that we have the right offering to meet that kind of where-to-work consumer need. So good progress there. And if you remember, this is an oversimplifier, but we really want to shift to being a kind of seven-day brand solution as opposed to maybe two or three days a week, both for men and women. So I'm encouraged by the progress we're making there. As far as footwear and accessories, so we had talked about the fact at Invest Today that footwear and accessories progress and impact would be more backloaded in the five-year program. which is why you're seeing further acceleration on outerwear and denim first. But we are making good progress on footwear and accessories. Job one for us was really building capability, right, working with Ralph, having the right design talent both on bags and on shoes. We brought some extraordinary talent from key players in this space that have joined us over the past year, year and a half, so that we make sure we've got people that really understand fundamentally how these categories work. And then now working on bringing these products to life in the market, these things take a bit of time. So I expect the impact to be most visible in the outer years of the plan. But we're starting to see some encouraging signs on different parts of the portfolio that give us confidence that we're making the right progress and that we will see the benefits that we expect from those two categories as well.

Last question, please, Angela.

Thank you. Our final question comes from Rick Patel with Natum & Company.

Good morning, guys. Thanks for squeezing me in and I'll add my congrats as well. I was hoping you could provide some more color on Europe wholesale. You reported some nice growth there despite the negative impact of some timing shifts. Is there anything to call out aside from digital wholesale accounts and how sustainable is this growth as we think about the run rate for this segment?

You know, I think we're encouraged. We've been consistently calling out Our Europe wholesale underlying trend is being in the range of what we call that for the long term, sort of in that low to mid single-digit growth. Obviously, our peer play partners are leading that growth, but we're also encouraged with what we're seeing in our core more traditional bricks and mortar partners in terms of their trajectory both on a comp basis, store sales growth within those areas and some distribution expansion that we're seeing on a more regional basis with partners that we've had for a number of years. So that's very encouraging to us. I think we see this as durable growth and we're encouraged by the progress that we're making and where the brand sits within the wholesale European ecosystem. I think it's elevated. The pricing is accretive to our overall portfolio, and our inventories are in good shape there. So we're very pleased with the progress in that business.

Good. So thank you, everyone, for joining us today. We look forward to sharing our fiscal year-end results and fiscal year 21 guidance with you on our next call in early May. Until then, have a great time. Thank you. Bye-bye.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.