Ralph Lauren Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren fourth quarter and full fiscal year 2023 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 a call, please press star then zero. As a reminder, this conference is being recorded I would now like to turn over the conference to our host, Ms. Karina Vandergans. Please go ahead.

Good morning, and thank you for joining Ralph Lauren's fourth quarter and full year fiscal 2023 conference call. With me today are Patrice Louvet, the company's president and chief executive officer, and Jay 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. As a reminder, last year's fourth quarter and full year included an extra week in the fiscal calendar. All growth for these periods will be discussed on a constant currency 52-week comparable basis. Reconciliations can be found in this morning's press release. During today's call, we will also be making some forward-looking statements within the meaning of the federal securities laws, including our financial outlook. Forward-looking statements are not guarantees. and our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties. Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release and to our SEC filings that can be found on our Investor Relations website. With that, I will turn the call over to Patrice.

Thank you, Corey. Good morning, everyone, and thank you for joining today's call. When we met last September here in New York, we outlined our ambition to become the world's leading luxury lifestyle company and build a business that lives up to the potential of our powerful brand. As we close out the first year of our Next Great Chapter Accelerate plan, we are particularly proud of the progress we have made on our strategic commitments in pursuit of this goal. Our teams around the world executed exceptionally well through a highly dynamic global operating environment to deliver another quarter and full year of strong performance. We over-delivered on the top line this year with 10% constant currency growth supported by all three regions. This included positive comps, further AUR growth and brand-accretive ecosystem expansion across our top 30 cities. At the same time, we continue to balance this growth with a relentless focus on productivity and operational discipline. This is enabling us to fuel our long-term initiatives and also grow our profitability on a constant currency basis. As we called out at the beginning of fiscal 23, the global environment has been and continues to be choppy. Throughout this, our teams are demonstrating agility and flexibility to respond to evolving consumer demand and market dynamics. As we continue to drive our strategy of long-term brand elevation across every region and channel, overall our performance this year underscored the general resilience of our core consumer and growing desirability of our brand around the world. This translated to another quarter of double-digit AUR growth globally, even as we took targeted actions to keep our inventories clean and well positioned. We are well aware that a subset of our consumers who are more value-oriented, are increasingly pressured by macro and inflationary headwinds. We expect these trends to persist in the near term, particularly in North America and Europe. While this demographic still represents a relatively high average household income, they are being more choiceful with their apparel dollars and seeking more value. In this context, we believe consumers will look to brands they know and trust and styles that have longevity beyond one season. In this environment, our roots in quality and timeless style are a competitive advantage, and our growing brand desirability and value perception across all demographics support this. Turning to the fourth quarter, our successful performance was guided by our three strategic pillars of long-term growth and value creation. These are First, elevate and energize our lifestyle brand. Second, drive the core and expand for more. And third, win in key cities with our consumer ecosystem. Let me take you through a few of the highlights across each of these strategic pillars. First, on our efforts to elevate and energize our lifestyle brand. We remain committed to investing in our most powerful asset, our timeless, iconic brand. to inspire and engage our consumers and ultimately drive lifetime value. We continue to build our brand desirability with consumers while also growing their value perception of Ralph Lauren. This is enabling us to grow both market share and AUR. Our value perception increased while our lifetime consumer value grew high single digits for both the fourth quarter and full year as we focus on trading consumers in, across, and up within our lifestyle portfolio. In the fourth quarter specifically, we drove a diverse range of brand activations underscoring the unique Ralph Lauren lifestyle. First, we continued to strengthen our leadership in the world of sports with our annual sponsorship of the Australian Open. Now in our third year, We significantly outperformed our plan on both sales and media impressions as we successfully leveraged our on-court presence as well as our authentic partnerships with celebrities and influencers globally. Our Lunar New Year activations across Asia included our successful Polo Bear campaigns with WeChat and Kakao, helping to drive 13% growth in social followers in the region, led by tenfold growth on Douyin. At the Oscars in March, we were proud to outfit social activist and Nobel Prize winner Malala Yousafzai in a custom Ralph Lauren collection silver sequin gown. This iconic moment resonated with consumers, garnering over 8 billion media impressions globally. And as we continue to reinforce our leading position in gaming and the metaverse, we partnered with Web3 community PoolSuite as part of our Miami ecosystem launch this spring. The immersive experience included exclusive digital Ralph Lauren outfits and our first-ever NFTs co-designed with PoolSuite members. Together, these activations are both re-engaging existing customers while also attracting new full-price consumers to our business. In our DTC businesses, we added 1 million new consumers in the fourth quarter. for a total of more than 5 million new consumers this year, consistent with our targets. This continues to skew increasingly toward next generation under 35 consumers, with whom we also drove our largest increase in luxury perception over the past year. We reached 52 million social media followers globally, a high single-digit increase to last year, driven by dynamic content on Instagram, TikTok, Weibo, and other key platforms. And our online search trends continue to significantly outpace our peers across our top markets globally, driven once again by our core categories. Moving to our second key initiative, drive the core and expand for more. Our goal of becoming the leading luxury lifestyle company starts with our unique brand positioning in the market, which stands for so much more than a single product or category. It stands for the dream of a better life. From elevated hybrid dressing to quiet luxury, Ralph and our creative teams are delivering sophisticated, timeless products to serve our consumers across their modern lifestyles. Starting with our iconic core products, which represent about 70% of sales, and remain a consistent driver of our business season after season. Our core grew low double digits in the fourth quarter, led by our spring-ready cable knit sweaters, polos, oxford shirts, chino shorts, relaxed tailoring, and silk blend shirts and day dresses. Our core also establishes the foundation and credibility to grow our high potential categories. These include women's, outerwear, and our emerging home business. Together, these high potential categories increased low teens in the quarter. Women's, our largest long-term opportunity, continued to strongly outpace total company performance. Our Accelerate plan focuses on trading her into the brand, across categories, and up to more elevated styles to drive lifetime value. with women's AUR up more than 20% in the fourth quarter. Our continued strong women's performance was supported by strong growth in handbags, as well as our global launch of women's polo intimates in March, with a particularly strong start on RalphLauren.com. Other special releases this quarter included our Creed III movie collaboration, featuring six limited edition looks worn by Michael B. Jordan in the film, and account-exclusive capsules targeted towards next-gen consumers, including our Retro Varsity release with ASOS, Polo Boxing Club collection with Mushinsa in Korea, and Icons in Madras with Beams Japan. Looking ahead, we will continue to leverage the breadth of our brand and assortments to meet consumers' evolving lifestyles. Switching to our third key initiative, Win in Key Cities with our consumer ecosystem. We continue to invest in our long-term strategy to develop our key city ecosystems around the world with a focus on elevating and connecting all our consumer touchpoints across every channel, starting with digital. Sales for our total Ralph Lauren digital ecosystem, including our directly operated sites, DepartmentStore.com, PurePlayers, and SocialCommerce increased high single digits in constant currency this fiscal year. In the fourth quarter, our Asia digital ecosystem delivered the fastest growth globally, with our owned and wholesale digital channels both contributing to 40% growth in the quarter. We were particularly encouraged by our strong Lunar New Year performance, which significantly outpaced peers. including women's up more than 60% and continued elevation with double-digit AUR growth. As part of our fully connected ecosystems, we also continue to open new physical stores that enable consumers to engage directly with our brands around the world. We opened 21 new stores and concessions, focused on our top cities globally this quarter, with the majority again in Asia, particularly the Chinese mainland. we are strongly encouraged by our continued brand momentum in China following the country's reopening. Through three years of COVID disruptions, our teams worked with agility to build our brand presence in the market. And this year's outstanding performance was a testament to those efforts. We drove full-year China sales up more than 20% in constant currency, including an acceleration in fourth-quarter sales up over 40%. Looking ahead, we expect China to remain one of our fastest-growing markets. We opened two iconic World of Raw foreign stores in Asia this quarter, in Shenzhen's Luho Mall and Pitt Street in Sydney, representing the most elevated expression of our brand to date in Australia. And here in North America, we opened a new store in Miami's Design District, showcasing the modern elegance and exceptional craftsmanship of our luxury collections. All three of these iconic stores are part of the top 30 cities we highlighted at Investor Day. They are designed to anchor our city presence and drive desirability and engagement with consumers. And finally, touching briefly on our enablers, in addition to our strategic priorities, our business continued to be supported by our five key enablers. Some of the achievements we were particularly proud of this year included the launch of our first cradle-to-cradle certified product with our luxury gold cashmere sweater, being part of Fortune's world's most admired companies, moving to number two from number six last year for our sector, and Fast Company's 2022 Brands That Matter list for a collaboration with Morehouse and Spelman Colleges. And finally, the Ralph Lauren Corporate Foundation's $25 million grant to fund five cancer centers in the US, including our newest center in Georgetown, which opened just a few weeks ago. In closing, Ralph and I are inspired by our team's performance this year, putting the company in a position of strength to deliver on our strategic commitments, even through a volatile consumer backdrop. And as the global environment remains highly dynamic, Our focus on offense, agility, and pragmatism remains the backbone of our approach moving forward. This year's progress on our accelerate plan demonstrates that we have the right plan in place even as we face a more pressured environment. We have diversified levers of growth across geography, channel, and category. a broad lifestyle portfolio of products that consumers know and trust, and that we are actively flexing with the consumer's evolving needs, and strong foundational enablers to support long-term growth and value creation, from our talented people, innovative technology and supply chain, to our balance sheet and muscle of operational discipline. And of course, all of this is underpinned by the strength of Ralph's timeless vision and our iconic brand, which continues to invite people all over the world to step into their dreams. With that, I'll hand it over to Jane to discuss our financial results, and I'll join her at the end to answer your questions.

Thank you, Patrice, and good morning, everyone. We are encouraged by this year's progress on our next great chapter, Accelerate Plan, which remains on track even with numerous macro challenges that our teams have faced this year. We leveraged our strong brand, multiple strategic growth drivers, and superior operational capabilities to deliver strong financial results in a dynamic environment. For the full year, we delivered 10% revenue growth in constant currency, exceeding our guidance with growth in every region. We expanded operating margin and grew profits ahead of top-line growth, in constant dollars, consistent with our three-year plan. Adjusted operating margin expanded to 13.7% in constant currency, with operating profit dollars up 15%. Our continued brand elevation and culture of cost discipline were key to our strong results and provided flexibility to more than offset softer gross margins as we focused on keeping inventories clean and well-positioned in the marketplace. Operating with discipline will continue to be an important element of our long-term strategic plan, with productivity helping to manage changing market dynamics and fuel our investments in sustainable long-term growth. And we continue to make important investments in our business while delivering strong shareholder returns, including more than $650 million this year in the form of our dividends and share repurchases. Exiting the year, we remain confident in both our strategic direction and our fortress foundation enablers, which are allowing us to drive our strategic initiatives even through times of uncertainty. Our full year and fourth quarter financial performance underscored this position of strength through dynamic times. Let me take you through some highlights from the quarter. Total company revenues in the fourth quarter increased 9% in constant currency, above our outlook, led by double-digit growth in Asia. Results included about 180 basis points of negative headwind from the shift of the post-Christmas sales week into the fiscal third quarter from our fourth quarter last year, as previously noted. Our digital ecosystem sales declined mid-single digits in constant currency. Q4 performance included lower European pure play results as planned, following exceptionally strong performance last year coming out of the pandemic. Sales in our owned Ralph Lauren digital sites grew mid-single digits on top of 20% growth last year. As we continue to elevate this channel, our digital AUR grew mid-teens and our full-price sales penetration increased meaningfully to last year. We plan to enhance the user experience with rich digital content and even greater customer personalization in fiscal 24. In addition to the AI machine learning capabilities we've been utilizing for areas such as inventory optimization, forecasting, and consumer engagement, we've started to leverage our early learnings to test generative AI across multiple areas of our business, from copy editing and graphics to computer programming. Total Company adjusted comparable gross margin with about flat and constant currency, in line with our guidance. Tailwinds from product mix elevation, AUR growth of 12%, and lower air freight were offset by peak levels of raw material costs, notably cotton, targeted promotions to drive conversion with our more value-oriented consumers and keep inventories healthy, and higher duties in Europe. Finally, freight turned to a 100 basis point benefit in the fourth quarter, compared to an 80 basis point headwind for the full year. Despite cost turbulence, our adjusted gross margins are tracking ahead of fiscal 19 pre-pandemic levels and were 170 basis points higher in the fourth quarter and 320 basis points higher for the full year. Adjusted comparable operating margin was 6.1% in constant currency, or 390 basis points increased to last year. Adjusted operating expenses declined 380 basis points to last year in constant currency. Marketing was 6% of sales on a more normalized cadence of planned spending compared to 10% in the prior year period. Full-year marketing was 7% of sales, in line with our annual guidance, as we continued to invest in key brand moments and innovative new platforms. Adjusted operating profit grew approximately 200% in the quarter. Moving to segment performance. The shift of post-Christmas sales from Q4 last year into Q3 this year had a disproportionate impact on both North America and Europe's fourth quarter results, particularly our retail channels. The shift represented about 270 basis points of headwind to revenue growth in North America and 120 basis points impact on Europe. Starting with North America. Fourth quarter revenues increased 2%. Stronger wholesale growth was partially offset by retail headwinds. In North America retail, fourth quarter comps declined 4% on top of a strong 21% compare last year. Similar to recent trends, strong growth in our full-price stores was offset by softer performance in outlet and digital. North America retail AUR increased another mid-single digits on top of a robust 20% growth last year, reflecting our continued brand elevation efforts around product, distribution, and marketing. This helped to mitigate targeted promotion focused on our more value-oriented consumers. Looking ahead, we expect the subsegment of consumers to remain more sensitive to near-term inflationary pressures. And this is reflected in our continued caution through fiscal 24. Beyond these headwinds, we are confident in the region's long-term trajectory, which was reinforced by improving North America brand health metrics this past year, with our strongest growth in brand awareness, perception of value for money, and luxury perception. In North America wholesale, revenues grew low double digits to last year, as we returned to a more normalized cadence of spring deliveries, following last year's supply chain disruptions. This benefited our Q4 by about 12 points and will have a roughly 13-point negative impact on our first quarter wholesale growth. Adjusting for the normalized shipment cadence, this implies underlying wholesale revenue flat to last year, similar to Q3 trends. Our wholesale AUR increased high single digits to last year as we continued to elevate product and take market share at key partners. The promotion cadence at wholesale was flat to last year, in line with our expectations. Moving on to Europe. Fourth quarter revenue increased 7% in constant currency. Retail comps increased 8% on top of a 77% post-COVID reopening comp last year. Brick-and-mortar comps were up 9%, driven by positive growth in both full-price stores and outlets, while digital comps grew mid-single digits. Europe AUR increased double digits in the quarter, with strong growth across channels. Europe wholesale grew 3% in constant currency. This was ahead of our expectations. However, we remain cautious on the channel into fiscal 24 on softening reorder rates and digital pure play performance, consistent with our previous comments. Turning to Asia, revenue increased 29% in constant currency, ahead of our expectations, with broad-based growth across each of our key markets led by China. China rebounded strongly to more than 40% growth in constant dollars, following the loosening of the zero COVID policies in the previous quarter, with consumers traveling domestically for the first time since the start of the pandemic. Our brand continues to show momentum following a strong Lunar New Year holiday. Korea and Japan also grew double digits on compelling assortments and brand engagement. and as Japan lapped last year's COVID states of emergency. Despite meaningful COVID disruptions and foreign currency headwinds through this year, we delivered our highest ever operating profit in Asia in fiscal 23. This is a testament to the growing desirability and momentum of our brand, along with the agility of our teams as they continue to drive our key city ecosystem strategy, across the region. Within our other segment, licensing grew low single digits this quarter, slightly above our plan, with encouraging results from our CHAPS license and Polo Women's Intimates launch. Looking ahead, we will fully transition out of our Lauren Men's Suiting license in Fiscal 24. While this will negatively impact our licensing revenues and overall company margins by about 20 basis points in fiscal 24, the move is consistent with our brand elevation strategy. Moving on to the balance sheet. Our balance sheet continues to be an important element of our fortress foundation, enabling us to balance strategic investments in our brand and business with returning cash to shareholders. We ended this year with $1.6 billion in cash and short-term investments and $1.1 billion in total debt. We returned $653 million in the form of our dividends and share repurchases this year, consistent with our long-term targets. Net inventory increased 10%, with growth moderating significantly on a sequential basis as we reduced goods in transit and returned to a more normalized lead times following last year's supply chain disruptions. Inventory growth still reflects higher product costs and our ongoing strategy of product mix elevation. Inventory units declined approximately 5% to last year and are healthy as we enter fiscal 24. That said, we continue to manage our inventory positions carefully. with the majority of our products still weighted to core and seasonless product that can be flexed with demand. Looking to fiscal 24, we expect inventory levels to continue to moderate through the year and ending below prior year levels. Looking ahead, our outlook contemplates a more pressured consumer spending environment, dynamic macroeconomic conditions, and foreign currency volatility, among others. We continue to plan across a range of scenarios, and our guidance represents our best assessment of market conditions and resulting consumer impacts. We are taking a pragmatic approach to our plan for this year, which assumes continued momentum in the full price channels and Asia, balanced with a more challenged value consumer backdrop in North America and Europe, with an intense focus on what we control. From our core iconic products and continued investments in new consumer acquisition to judicious inventory planning and operating expense discipline, we remain committed to driving progress on our long-term growth and profitability trajectory, despite the dynamic global environment. Importantly, we expect to deliver both revenue growth and margin expansion this year. For fiscal 24, we are guiding constant currency revenues to increase low single digits and foreign currency to benefit reported revenues by about 20 basis points. We currently expect growth to be led by Asia, up double digits, followed by low single digit growth in Europe and a low single digit decline in North America. based on softer spring trends and Q1 wholesale timing shifts. We expect operating margin to expand approximately 30 to 50 basis points in constant currency to 12.3 to 12.5%, driven by gross margin expansion of about 50 to 100 basis points. Foreign currency is expected to benefit operating margin by about 10 basis points this year. Relative to our investor day base period, this guidance implies about 80 to 100 basis points of operating margin expansion when compared to fiscal 22, holding currency constant, on track with our long-term targets. We expect gross margin to benefit from lower freight costs, continued AUR growth, and favorable product, geographic, and channel mix this year. Reduced freight costs are expected to benefit gross margin by at least 100 basis points this year. We expect these tailwinds to be partially offset by about 20 basis points of negative foreign currency impact, along with continued pressure from product costs, notably cotton, through the majority of the year. For the first quarter, we expect revenues to be flat to up slightly in constant currency. On a reported basis, including 150 basis points of currency headwind, we expect revenues to be down slightly. First quarter also includes approximately 220 basis points of negative impact from the normalized timing of spring wholesale shipments following last year's supply chain disruption, noted earlier. The timing shift is expected to negatively impact our North America growth by about five points. and North America wholesale growth by about 13 points before returning to more normalized trends in Q2. We expect first quarter operating margin expansion of about 30 to 50 basis points in constant currency, driven by gross margin expansion. We expect gross margins to be driven by lower freight, positive AUR growth, and lower wholesale mix, partially offset by higher product costs. Foreign currency is expected to negatively impact both operating and gross margins by about 50 basis points in the quarter. From a cadence perspective, we currently expect operating margin to decline in Q2 due to the timing of planned marketing and ecosystem investments and expand again in Q3 and Q4 to last year. We expect our tax rate to be in the range of 24 to 25% for the full year and roughly 23 to 24% for the first quarter. And lastly, we expect capital expenditures to be in the range of $275 to $300 million in line with our long-term guidance of 4 to 5% of sales. In closing... Led by Ralph's enduring vision, our brand continues to inspire consumers across every geography. Our dedicated, passionate teams around the world are operating with commitment and agility to execute on our next great chapter accelerate plan. We believe our elevated brand, clear strategy, and targeted investments combined with our culture of operating discipline and Fortress Foundation enablers put us in a position of strength to continue to drive long-term value creation. And with that, let's open up the call for your questions.

Ladies and gentlemen, if you wish to ask a question, please press star then one on your touchtone phone. You will hear a cue, a tone indicating you have been placed into cue. You may remove yourself from the cue at any time by pressing star two. If you are using a speakerphone, please pick up the handset before pressing the numbers. We ask that you limit yourself to one question per caller. Once again, if you have a question, please press star 1. One moment, please, for the first question. The first question comes from Matt Boss with JPMorgan.

Great, thanks, and congrats on a really nice quarter. Thanks, Matt. Thank you, Matt. So, Patrice, how are you feeling today about your long-term investor day guidance exiting year one? And can you help put us into context, just given the more challenged North American and European consumer that you called out for this year in the outlook? And then, Jane, could you just elaborate on your confidence in pricing power for the brand, as you cited strong AUR as a continued driver for your gross margin outlook in FY24?

Thank you, Matt, and good morning. Well, let me first re-ground us in the fact that we just finished an above-algorithm year on revenue and on track on profit. So we continue to build our business for the long term, and this past year's progress puts us on the path to deliver on our long-term plan. So to answer your question very simply, our long-term ambitions have not changed. And this confidence is really grounded in a number of unique strengths that which are particularly relevant in choppier environments. First of all, a brand that people love and desire that we are continuing to invest in. Second, core products that consumers know and trust that aren't based on seasonal fashion or trends. And we know that during choppier times, consumers tend to gravitate back to these more iconic categories and iconic products. And so for us here, think about Polo shirts, Oxford shirts, blazers, dresses, and even ties are back. Third is strong operational fundamentals, which I think have been demonstrated throughout the past few years. Fourth is multiple growth levers, and you saw that play out in this quarter again. And then finally, a proven ability to flex to consumer demand. So these factors give us broad confidence that we continue to be on track with the goals that we laid out about nine months ago. Now, let me offer some perspective on how we're thinking about the consumer overall to the second part of your question, and I know this is a top-of-mind question for many of you on this call. First of all, I would say our core consumer is Reselia, and we're seeing that around the world, in Asia, in Europe, and here in North America as well. And that segment is growing as we're bringing in new consumers into the Ralph Lauren family. The second point is that our consumers across every region are also responding well to our continued brand elevation strategy. This is evidenced by the fact that our brand desirability continues to strengthen, our value perception is growing, and you know we track this on a quarterly basis in our key markets. We're recruiting millions of new consumers, 5.2 this past fiscal year, including growing our highest value consumer double digits, which we're particularly excited about. And all of this while expanding AUR plus 12% this quarter, plus 77% over the past five years. The third point I would call out is that we've done a lot of work to grow our consumer base outside of North America. And today, nearly half of our business is international, and actually more than half of our profit is international. And as you saw in the last fiscal year, and particularly this last quarter, our Asia performance has been a real highlight. I'm very proud of the work that our teams have done across Asia, and in particular in China. And we anticipate another year of above algorithm growth there, broader Asia. And then finally, in North America specifically, there is continued divergence between our core high-value consumers and that subset of more value-oriented consumers that we called out in prior quarter. Clearly, those more value-oriented consumers for a smaller part of our customer base and getting smaller and smaller as we bring in more higher-value consumers into the Rothborn family are feeling increased pressure because of inflation, because of increased interest rates, and I think you've heard this from others as well. But we believe we've appropriately embedded this caution into our guide. So, net, we know where we're headed. We feel good about the multiple drivers in place to get there. I think we have a strong track record as a team and a business, and we'll manage this year with agility again. Jane, over to you on pricing power.

Yes, thank you. So, Matt, I would say an emphatic yes. We have pricing power that we expect to continue into the future. And I can't think of a better proof point than we saw this year, putting up 12% AUR growth. to offset inflation, but importantly, I think we are uniquely positioned as we go forward because our pricing power is grounded in our brand elevation journey and a proven multi-year strategy of executing a pricing strategy with multiple levers, not just like for like pricing, but product elevation, category momentum and movement. structural geographic advantages that we have that are coming through in our consumer metrics. Our consumer value perception has never been higher despite the price increases that we've taken. Our perception as a luxury brand has continued to grow and continues to grow and is certainly where our strategy intends to continue. And our model gives us flexibility, because we are keenly aware of where we are in the macroeconomic timeframe. But our pricing model and its multiple levels give us flexibility to meet consumers where they are, all while still elevating the brand. And you'll see us do that into the coming year.

Next question, please, Angela. Thank you. The next question comes from Jaisal with UBS.

Great. Great. Thank you so much. I have a two-part question. You know, the first part really follows up on some of the pricing comments you just made. You know, how does this more pressured macro environment impact your overall brand elevation strategy? You know, are you taking a more flexible approach to pricing or discounting in this backdrop? And then the second question is, you know, Jane, you talked about the fortress balance sheet the company has. How is that going to let you play offense? Patrice, I've heard you use this comment that you can play offense through this tough economic environment. But what is it going to allow you to do both from an operational standpoint and a sort of a return cash to shareholder standpoint in fiscal 24? Thank you.

Good morning, Jay, and thank you. So I think it is fair to say that the environment has been more pressured. And listen, we expect it to stay volatile as we come into this new fiscal year. We are still, you just heard that from Jane, we're still firmly committed to our elevation strategy, which we started well before COVID, over five years ago. And why? Because it's working. The strategy has served us well through stronger and weaker macro backdrops. We're seeing strong consumer response to what we are doing. And I think it's pretty clear also to Matt's earlier question that Our brands continue to have strong pricing power in the marketplace across every region, right? You saw AUR grew across every single region this past fiscal year and this past quarter. And we believe this is becoming an even bigger differentiator for Ralph Lauren relative to peers in this environment. And we are guided by the consumer here, right? And as Jane mentioned, the consumer responds to our brand elevation on product, on storytelling, on selling environments, continues to be strong, and the AUR is an outcome of all of that, and we feel quite good about our ability to continue on this journey. And then, Jane, I'll turn it over to you for some more color on the second part of Jay's question.

Sure. And, Jay, I would just add to what Patrice said on our pricing journey, that you've seen us in the last two quarters be flexible in while still putting up double-digit AUR growth, be flexible to the needs of the more value-oriented consumer. And as we think about the coming year, we've built that flexibility into the model based on what we're seeing in consumer trends. So we feel really good about that flexibility while still continuing, obviously, to elevate, even in a difficult environment. And then your question on the balance sheet. The balance sheet honestly gives us the flexibility to be brave and do what we need to do for our business. So you saw us during COVID, you know, be able to hold inventory, you know, when demand was a little softer, the strength of our brand to have such a core assortment allowed us to do that and to make sure that we could continue our elevation journey and not be forced into discounting. It allows us to be brave in investing during times of volatility, both in marketing, which you've seen us do consistently through this reset period, and we intend to continue to do even our guidance today. We expect marketing to be up 7% of sales as we move into the future, and to invest ahead of return on growth drivers. You saw us do that on digital. Invest in local sites that take some time to pay off but are good for the long-term health of the brand and consumer outreach. And invest in doors that we know will be a halo to the brand, attract consumers, and be good investments over time. So we really do believe in it as an enabler.

Next question, please. Thank you. The next question comes from John Kernan with TD Cowan.

Good morning. Congrats on the nice quarter. Thanks for taking my question.

Good morning, John.

Thank you. Can you talk to just North America in particular? A lot of us can see the macro environment here getting a little bit more difficult as we went through the spring. And just wondering what you're seeing in both the wholesale channel in North America, also the outlet retail channel. and how that's informing your view for North America embedded in the guidance this year.

So what we see in wholesale is that, as we called out in the guidance, we do see a normalization of wholesale sales that were disrupted during the supply chain, and we expect that to be a heavy headwind in the first quarter. Now, that's anomalous. We want to call it out. But underlying in terms of wholesale, we have seen some challenges in terms of replenishment orders and some caution in their more value-oriented consumers. So we've taken that into consideration as we've planned our inventories and know that they're taking a more cautious stance in both North America and in Europe as they place orders for receipts into spring. We've incorporated that into our guidance. We're more optimistic about certainly what we've seen in our full price store environment in North America. It's remained strong through this period and we're encouraged by that. We are more cautious as we came into the fourth quarter. In terms of the outlet consumer, we've been calling that out for several quarters, and we've incorporated that into our guidance as well. We are encouraged that we do see all our consumers migrating up in terms of the categories that they're buying into. They're buying higher ticket items. Those value consumers are looking for a good deal, but we do see that migration up in terms of the product assortment and we're adjusting our assortments accordingly. We did see basket growth and AUR growth across all our channels and are encouraged by that. And we will follow that while being flexible for the consumers, but encouraged by the overall store environment and feel we have the tools to flexibly move through this environment.

And also I would add to that perspective that the brand elevation strategy that we're applying is playing out well in the wholesale environment in the US. Jane, you mentioned AUR up. AUR up 8% in wholesale this past quarter in a relatively promotional environment. Over the long term, we've been growing share in men's, in women's, particularly strength recently in women's, and in children's. And I think we're nicely aligned with the strategic direction of our key wholesale partners.

Thank you.

Next question, please. Thank you. The next question comes from Chris Nardone with Bank of America.

Thanks, guys. Good morning. Can you dive a little bit deeper into your outlook for your European wholesale business and also your direct-to-consumer business this year? In particular, how should we think about the slowdown you're seeing in your digital business, and how does that compare to maybe some of the underlying trends in your brick-and-mortar channel? Thanks.

So broadly across Europe, we've been very pleased with our digital progress. We're up substantially in terms of where we were pre-COVID. It's been a source of strength for us. In terms of what we're seeing on our digital growth, We expect continued growth in digital at a more moderate pace for Europe, but continuing our AUR journey in that channel and strong performance. As we look at the wholesale channel in Europe, it is more elevated and healthier than what we've seen in North America. but we have seen pressure from pure players. Now that's playing out in our digital ecosystem in Europe and it's playing out in our wholesale business in Europe. We have adjusted our inventories accordingly and expect to continue to grow with them in the long term, but do see pressure in the near term from the pure players that'll play both into our digital ecosystem growth and will and plays out in terms of our total wholesale growth in Europe. But overall, it's an elevated offer. We continue to like our market share gains in that channel and are continuing the journey. But the pure plays are the pressure point.

And I would add that our biggest partner there is Zalando in Europe. Zalando is on the brand elevation strategy, pulling back on promotional activity, and that's very consistent with where we want to take the brand in Europe. Strategically, we feel very good about the direction that Zalando is taking.

Thank you.

Next question, please. Thank you. The next question comes from Dana Telsey with Telsey Advisory Group.

Good morning, everyone, and nice to see the progress. Two items that were called out was one on marketing spend and one on raw material costs. How are those being planned in what does it look like for fiscal 24 compared to 23? Patrice, we'd love to hear your take. Just expand a little bit on wholesale. How do you see the difference in the wholesale channel operating models, North America versus Europe versus Asia, and how you're planning the business? Thank you.

Let me tag team on this. On marketing spend, as Jane mentioned in her prepared remarks, our strategy is to spend about 7% of revenue on marketing. That's roughly where we were this past fiscal year. That's where we will be this coming fiscal year. It won't necessarily play out exactly per quarter at 7%, because obviously we have fashion shows and those types of events that will skew the numbers in a particular quarter. But directionally, 7% of revenue. We expect modest revenue growth, so you can expect the absolute dollars of marketing spend to increase on the total brand. Jane, I'll let you do the raw material.

Sure. Dana, what we see in raw materials is really... actually encouraging. What we see in terms of tailwinds is that freight will go from about an 80 basis point headwind in fiscal 23 to about 100 basis point tailwind in fiscal 24. Now, as we called out, cotton inflation was at its peak in Q4. And we expect that to continue into Q1. But as we exit the year, because we're long bought on cotton, about a year out. But as we exit the year, at the very end of the year, we will start to see cotton turn to an advantage in terms of raw materials. But we really won't realize that until fiscal 25. And so if you think about it in big buckets, cotton and freight will sort of equalize each other, but we do see some other tailwinds in terms of our air freight is stabilized and won't be a pressure point. We expect to see continued product elevation and mix and structural advantages as Asia outgrows or leads the growth from the rest of our region. So we're very encouraged by what we can see and what we have visibility to now relative to the environment that we faced in fiscal 23.

And then your question on wholesale. So just stepping back a little bit, our direction of travel from a strategic standpoint is to pivot the company further into DTC. And DTC today is about 63%, 64% for the total company. And as we guided during investor day, We expect the numbers to be north of that in the coming years. Now, we believe wholesale, quality wholesale, has an important role to play in our go-to-market model as well. If you do the world tour, in Asia, most of our business, if not all of it, is concession. So to a large extent, it's actually a DTC business. It's nicely elevated. We have really nice momentum there, as you saw in the results that we just announced. And so... you know, we're focused on running the play and continuing to drive elevation there. In Europe, it is a mix of concessions and wholesale. And in Europe, what we're working on is continued elevation. There's been some really nice work done in Germany, in France. We're looking very good in France and had really nice performance this past year in France wholesale, in the UK. In Southern Europe, there's opportunities to elevate. So we're putting emphasis on customers like El Corte Inglés, right, to make sure that we show up the way we want to show up in the appropriate doors. And then as we were just talking earlier, and Jane mentioned some of this, on pure players, pure players are an important part of our wholesale business today and will be even more important in the future. And I'm actually quite excited about some of the strategic pivots that some of the European pure players have. are doing because it really lines up nicely with our strategic approach, and I referred to an example earlier than that. And then as far as North America is concerned, kind of two tiers of wholesale left, right? Remember, we closed 66% of our wholesale doors over the past three or four years. The upper tier is performing quite strongly, and we feel good about the way we're positioned there. So think of the Sachs, the Neiman's, the Bloomingdale's of this world and consistently what we thought about our core luxury consumer being quite resilient. As far as the premium tier is concerned, our focus is on share gain. You know, these are players I think that would say if they were on this call that they're picking between the winners and the losers and they're putting investment behind the winners and pulling back on the losers. We are fortunate to be part of that winner's column based on our performance over the past few years, share growth, value creation, joint value creation with them. So we are benefiting from staffing investments from these partners. We're benefiting from capital investments from these partners as we continue to elevate our brand presence in these more limited doors given the numbers of doors that we've closed. And our focus is on share game, right? And as I mentioned earlier, over the longer term, we are growing share across all three of our segments. And we have a number of initiatives in place to continue to drive that while driving brand elevation. And I was pleased to see that our AUR was up 8%, high single digits, up 8% this past quarter in an environment that's still relatively promotional. So hopefully that gives you a bit of a sense of how we're thinking about the broader go-to-market strategy moving forward.

Great, thank you.

Next question, please. Thank you. The next question comes from Laurent Vasilescu with BNP Paribas.

Good morning. Thank you very much for taking my question and congrats on a great quarter and a full year. Jane, I would love to get a little bit more color. Thanks for Dana's question on the bridge on the gross margin. On the first quarter, can you maybe just kind of give us a little bit of a bracket on how we should think about gross margins and then Second, just following up on the investor day, I think you talked about $400 million plus of gross productivity gains. I think two-thirds of that coming from SG&A. Can you maybe just tell us or share with us any further insights or any further confidence you have to achieve those productivity gains? Thank you very much.

Sure. Let me just start with the gross margin guidance. First of all, I just want to be clear that our investor day guidance on gross margin is unchanged. And I think our guidance both this year and this quarter reaffirms that we will be back on track for making gross margin progress. As you think about the first quarter, some of the things that we have that will, for gross margin, expansion of 50 to 100 basis points will play out in the first quarter. We expect that we will still have some pressure from FX in the first quarter, but we are very encouraged by our pricing power and by the plans that we have that we'll be able to expand gross margin 30 to 50 basis points. across the business. We have the AUR plans in place. We're basically offsetting inflation and are continuing our journey to increase both our category penetration in high margin categories and our product penetration in the upper tiers of our product assortment. So we're very encouraged by that and expect you'll start to see the progress that we've called out for fiscal 24 in Q1. And as we think about the $400 million that we committed to in Investor Day, we have achieved in fiscal 23 about a third of that $400 million. So we're right on track for where we want to be. We expect another third or perhaps a little bit more in this year, in this FY24. And so we're right on track with where we want to be for that $400 million commitment. We're on pace. And of course, as a cost discipline muscle, we're always looking for more. So we have a number of initiatives. I called out some in terms of AI that we're continuing to develop as we move forward and hope to overachieve as we move through the strategic planning timeline.

Great. Thank you, Jane. All right. Well, thank you, everyone, for joining us today. And we look forward to engaging with you at our annual shareholder meeting and first quarter fiscal 24 earnings call in early August. Until then, take good care.

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