Ralph Lauren Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions on how to ask a question would 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'd now like to turn over the conference to our host, Ms. Karina Vanderkins, please go ahead.

Good morning, and thank you for joining Ralph Lauren's first quarter fiscal 2024 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, our financial performance will be discussed on a constant currency basis. Our reported results, including foreign currency, can be found in this morning's press release. 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'll turn the call over to Patrice.

Thank you, Cori. Good morning, everyone, and thank you for joining today's call. We started year two of our Next Great Chapter Accelerate Plan with continued progress on our long-term strategic commitments. Our solid first quarter performance highlights both the power of our iconic brand around the world and our diversified engines of growth. First quarter results exceeded our expectations on both the top and bottom line in what continues to be a highly dynamic global operating environment. We delivered positive comps, stronger value perception and luxury credentials, and targeted ecosystem expansion across our top cities in the period. Our growing brand desirability also drove double-digit AUR growth on top of last year's strong gains. And we will continue to invest in our product quality and sustainability, selling environments, and authentic brand messaging to sustain our growth and long-term pricing power in the marketplace. At the same time, we continue to balance this growth with a relentless focus on agility and operational discipline to respond to evolving market dynamics. This enables our operating profit and margin expansion, even as we invest for the long term. We continue to be mindful of macroinflationary challenges facing our more value-oriented consumers, particularly in North America. That said, we are more than offsetting softness from this cohort with growth in our full price businesses. Turning to the first quarter, our solid performance was guided by our three strategic pillars to drive 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 highlights across each of these strategic pillars. First, on our efforts to elevate and energize our lifestyle brand. We are investing in our most powerful asset, our timeless iconic brand, to inspire and engage our consumers, drive brand desirability in the market, and ultimately grow lifetime value. We continue to diversify and optimize our marketing across a variety of media and platforms as we deliver a clear, differentiated story to our target consumers in order to trade them in, across, and up our lifestyle portfolio. During the quarter, first we drove some of our highest engagements globally through iconic celebrity dressing moments, This was led by Jennifer Lopez at the Met Gala in May, delivering over 8 billion global media impressions, and her look landed on multiple best-dressed lists across TV, digital, social, and print outlets. Other celebrity highlights included Taylor Swift, spotted on the streets of New York in our Wellington bag and all-white polo ensemble, singer and actress Crystal Young in Cannes, First Lady Jill Biden at the coronation of King Charles. And you may have caught a recent episode of And Just Like That, which features characters Charlotte and Rock outfitted in Ralph Lauren at a fun fictional polo photoshoot, highlighting the multi-generational appeal of our brand. Second, we have worked to reinforce our luxury lifestyle positioning through iconic lifestyle partnerships and activations in key global cities. We paired our recent Milan flagship openings with key campaigns to fuel excitement in this influential fashion capital this spring. This included the return of Men's Purple Label to Milan Fashion Week in June and our second annual participation at Salone del Mobile, part of Milan Design Week, where we showcased our emerging home business. Similarly, across Europe and Asia, we drove brand heat through experiential events like our California Dreaming Key City Takeovers, exclusive private client events, and influencer campaigns to build our presence in both new and existing ecosystems, from Paris to Shanghai, Tokyo, and Seoul. And most recently, we reinforced our leadership in the world of sports with another successful Wimbledon sponsorship, where we delivered our highest ever results on social conversations, on-site merchandise sales, and global PR impressions. Ralph Lauren truly embodies the heritage and tradition of this iconic tournament. In addition to our beautiful on-court presence, we also captured our iconic spectator style on celebrities and influencers like Ariana Grande and David Beckham, which we amplified globally. Together, these activations are both re-engaging existing customers while also attracting new, high-value consumers to our business. In our DTC businesses, we added 1.2 million new consumers in the first quarter, consistent with recent trends. This continues to skew increasingly toward next generation under 35 consumers. And we reached 53.5 million social media followers globally, a high single digit increase to last year, driven by Instagram, Line, TikTok, WeChat, and other key platforms. And our online search trends continue to outpace our peers globally. driven by spring icons and accessories. Moving to our second key initiative, drive the core and expand for more. Ralph and our design teams continue to create sophisticated, timeless products that meet our customers' modern lifestyles, underpinned by the quiet luxury that is a hallmark of our brand. Starting with our iconic core products, which typically represent about 70% of sales, and are a consistent driver of our business season after season. Our core grew mid-single digits in the first quarter, ahead of total company growth, and penetration to total sales increased by 350 basis points, underscoring the importance and resilience of our icons through choppier times. This was led by our iconic cable knit sweaters and cardigans, linen shirts and chinos, double knit sweatshirts, rugby shirts and tailored suit separates. We continue to see evidence that consumers are turning to brands they know and trust and styles that have longevity beyond one season. Our roots in quality and timeless style remain a competitive advantage in this context, supporting our strengthening value proposition. 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 double digits in the quarter. Women's, our largest long-term opportunity, continues to outpace total company performance, supported by our Spring 23 California Dreaming Collection, inspired by the natural beauty, optimism, and glamour of the West Coast, polos, day dresses and lightweight skirts in seasonal florals and silks, newer wide leg bottoms, and encouraging growth in our Polo ID handbags. Other special releases this quarter included the launch of our Polo Mirim sneaker, our first luxury sneaker that is 100% plastic free. Leveraging our investment in natural fiber welding, Mirim is made with an innovative combination of natural rubber, cotton, cork, and plant oil. 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, winning key cities with our consumer ecosystem. We remain committed to developing our key city ecosystems around the world. with a focus on elevating and connecting all of our consumer touchpoints across every channel. At the same time, we are clearly pivoting our business toward direct-to-consumer, which already represents about two-thirds of our sales. Our investments in high-quality new customer recruitment and increasingly elevated distribution are working. Our full-price retail channels led the growth in the quarter, consistent with recent trends. This is helping to mitigate near-term inflationary headwinds facing a subsegment of more value-sensitive consumers. Our positive retail comps were supported by continued momentum in our core polo products and luxury collections, along with improving foreign tourist sales and successful clienteling by our dedicated sales teams. This performance more than offset continued pressure in our outlet comps which were challenged by our more promotional North American market. We opened a select number of iconic World of Raw Foreign stores in the quarter, notably in Amsterdam, Tainan, and Kuala Lumpur, featuring an elevated assortment and prime luxury adjacencies. These stores are designed to anchor our city presence and drive desirability and engagement with consumers. We opened a total of 28 new stores and concessions focused on our top cities globally this quarter, with the majority again in Asia, particularly in China. China sales accelerated to more than 50% growth, with easier compares following last year's Shanghai lockdowns. We were particularly encouraged by our strong 618 performance, which outpaced peers and reinforced our new customer acquisition in the markets. and over 40% of our transactions were generated from new consumers. Looking ahead, we still expect China to remain one of our fastest growing markets. Within our digital businesses, sales for our total Ralph Lauren digital ecosystem, including our directly operated sites, departmentstore.com, pure players, and social commerce were flat this quarter. Strong growth in our international markets more than offset declines in North America, where the digital channel has also become more promotional. This quarter's digital performance was clearly below our long-term targets, and we implemented key interventions during the quarter, which will continue into the fall season. Encouragingly, we started to see improvement in our North America digital trend from June onward, as Jane will discuss in a moment. And finally, touching on our enablers. In addition to our strategic priorities, our business continued to be supported by our five key enablers. I'll share a few highlights from the quarter. As part of our ongoing work to deliver superior operational capabilities, we are implementing process improvements and new tools to streamline our value chain and drive long-term margin opportunities. Our recent work, has resulted in a 25% reduction in our overall spring 24 SKU count, even as we continue to develop our high potential categories. Within citizenship and sustainability, we were proud to be recognized as a top rated ESG performer by Sustainalytics as we work to embed sustainability in all we do. And within our people and culture, We were recently named a Best Company for Women to Advance by Parity.org for the fourth consecutive year. In closing, Ralph and I are energized by our team's solid start to this fiscal year. We continue to focus on offense, agility, and pragmatism in these dynamic times, and we believe Ralph Lauren is firmly in a position of strength to deliver on our strategic commitments. Underpinned by Ralph's timeless vision and the strength of our iconic brand, 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 consumer 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. 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 delivered a solid start to fiscal 24 with first quarter results ahead of our expectations. This quarter's performance demonstrates the broad-based strength of our strategy and the agility of our teams in a highly dynamic global operating environment. This gives us confidence in delivering on both our long-term commitments as well as the fiscal 24 outlook we outlined in May. We drove positive first quarter revenue growth, exceeding our guidance. We returned to gross margin expansion this quarter with clean inventories, all while overcoming peak raw material costs. And our culture of cost discipline enabled us to deliver 100 basis points of adjusted operating margin expansion to 13.7%, with operating profit dollars up 9%. We continue to make important investments in our business while delivering strong shareholder returns, including roughly $100 million in in the form of dividends and share repurchases this quarter. Our first quarter financial performance underscores our position of strength through dynamic times. Let me take you through some of the highlights from the quarter. Total company revenues in the first quarter increased 1% above our outlook. Strong performance in Europe and Asia more than offset a decline in North America. which was negatively impacted by a wholesale timing shift into the prior quarter, as noted on our last call. Our digital ecosystem sales were about flat, with growth in international offsetting a decline in North America. Total company adjusted gross margin expanded 130 basis points versus last year to 69.3%. This was above our outlook, driven by lower freight expense and 15% AUR growth, along with favorable channel, geographic, and product mix. The cost of raw materials, notably cotton, continued to be a headwind in the quarter, as expected. Looking ahead, we plan to continue leveraging price to offset cost inflation, which will moderate this fall from peak spring 23 levels. As a reminder, our long-term approach to AUR continues to be a multi-pronged strategy driven by product mix elevation, more personalized and targeted promotion, select like-for-like increases based on competitive benchmarking, disciplined inventory management to limit excess, and favorable geographic and channel mix shifts. We expect these drivers to continue delivering positive, albeit a more modest level of AUR growth longer term. Adjusted operating expenses increased 40 basis points to 55.6% of sales in the first quarter. Marketing was 6% of sales compared to 7% last year. As noted on our last call, we are shifting a higher proportion of marketing and ecosystem investments into the second quarter of this fiscal year, driving expense deleverage in Q2. However, we continue to expect full-year marketing at around 7% of sales, consistent with our long-term guidance. Moving to segment performance, starting with North America. First quarter revenues decreased 10%. This included about five points of negative impact from the normalized timing of spring wholesale shipments following last year's supply chain disruption, as previously noted. The rest of the decline was largely driven by continued inflationary pressures on our more value-oriented consumers. In North America retail, first quarter comps declined 6% following a 5% increase last year. we continued to deliver strong growth in our Ralph Lauren stores while performance was softer than expected in outlet and digital. In our channels with exposure to value-oriented consumers, notably outlet, inflation continues to pressure consumers' spending and the competitive set has grown increasingly promotional. Our North America digital business was also pressured in April and May. However, we delivered improved trends toward the end of June as we implemented key actions to improve our sales and conversion in the channel. Looking ahead, we expect to drive modest sequential improvement in our retail business through the rest of fiscal 24. We have proactively adjusted our fall 23 buys to focus on our core. We are launching new digital enhancements as well as our Canada digital flagship this fall. And we are making key investments in personalized communication and leveraging selective promotions to drive conversion and keep inventories healthy. These actions remain consistent with our initial guidance for fiscal 24. In North America wholesale, revenues decreased mid-teens to last year. the return to a normalized cadence of spring deliveries had a 12-point negative impact on our growth in the channel this quarter. Our wholesale AUR increased 11% as we continued to elevate our product mix while keeping our wholesale inventories clean. We remain cautious on the channel through the rest of this year on softer reorders and broader challenges in the channel. Moving on to Europe. First quarter revenues increased 7%. While this was ahead of our expectations, the first quarter included a roughly five-point benefit from earlier timing of Fall 23 wholesale deliveries. Retail comps were up 2% on top of a strong 34% compare last year, which benefited from a sales resurgence post-Omicron. Brick and mortar comps rose 1%, led by Ralph Lauren Storrs. Europe AUR increased mid-teens in the quarter. Our Europe digital ecosystem grew mid-single digits in the quarter, driven by an 8% comp in our own digital commerce and the wholesale timing shift, which also benefited our digital accounts. Europe wholesale increased 11%, driven by the earlier fall shipments. While this timing shift will negatively impact our wholesale sell-ins by an estimated four points in both Q2 and Q3 respectively, it should also position us well to capture full-price sales in season. Aside from the wholesale timing shifts, We are maintaining our full-year fiscal 24 Europe outlook of low single-digit growth, reflecting our continued caution on the macro environment and digital wholesale channel. Turning to Asia, revenue increased 18% with growth across each of our key markets, led again by China. China accelerated to more than 50% growth as we lapped significant COVID-related restrictions in the prior year period. Our brands demonstrated strong momentum during the Golden Week and 6-18 festivals. First quarter sales in Japan increased high single digits despite a slow recovery in inbound tourism and our continued near-term caution on the market. Within our other non-reportable segments, Licensing revenue declined high single digits in line with our plan. The decline reflects the previously disclosed transition out of our Lauren Men's Suiting License as part of our broader brand elevation strategy. The exit will continue to impact segment results for the remainder of the fiscal year until we lap it in fiscal 25. 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 the first quarter with $1.7 billion in cash and short-term investments and $1.1 billion in total debt. We are tightly controlling our inventory levels and driving efficiencies with net inventory up 1% this quarter and in line with our top line growth. Increases in Asia and Europe were largely offset by a high single digit decline in North American inventories. We expect second quarter inventory growth to continue moderating, which should position our brands well ahead of the important holiday season. Looking ahead. Our outlook remains based on our best assessment of the current macroeconomic environment, including inflationary pressures and other consumer spending-related headwinds, and foreign currency volatility, among others. For fiscal 24, we still expect constant currency revenues to increase low single digits. Foreign currency is now expected to negatively impact reported revenues by about 20 basis points due to unfavorable shifts in Asian exchange rates versus our prior outlook. We continue to expect top-line growth to be led by Asia, up double digits, followed by low single-digit growth in Europe. We still expect a low single-digit decline in North America based on softer spring trends in the first half and wholesale timing shifts in Q1. We continue to anticipate operating margin expansion of approximately 30 to 50 basis points in constant currency to 12.3 to 12.5 percent. Foreign currency is expected to have a roughly neutral impact on full-year operating margin. We now expect gross margin to expand about 100 basis points with reduced freight costs favorable geographic and channel mix, and continued growth in AUR, more than offsetting cotton inflation. Gross margin expansion is anticipated to more than offset higher operating expenses as we invest in the key strategic initiatives outlined at Investor Day, particularly around digital and key city ecosystem expansion, as well as marketing and sustainability. Relative to our investor day base period, 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. For the second quarter, we expect revenues to be flat to slightly up in constant currency, led by growth in Asia. We remain cautious on North America, but expect sequential improvements following Q1's negative timing shifts. Conversely, we expect second quarter Europe and digital ecosystem sales to be sequentially weaker, both due to the earlier fall shipments reported in Q1. Excluding the shift, we expect underlying trends in Europe to be more in line with our full-year outlook for the region of low single-digit growth. We expect second quarter operating margin in the range of 9 to 9.5% in constant currency and 9.5 to 10% on a reported basis. We expect constant currency gross margin expansion of 40 to 60 basis points to be more than offset by higher operating expenses due to the timing of strategic investments as previously indicated. This includes key digital ecosystem and marketing investments, notably the shift of our fashion show into the second quarter from the third quarter of last year. From a cadence perspective, our outlook implies stronger revenue growth in the second half of the year, driven by our merchandising actions, marketing activations for fall holiday, and the investments just noted. In addition, we will start to lap negative inflationary impacts from the second half of last year. We continue to expect operating margins to expand in Q3 and Q4 and for the full year on both a reported and constant currency basis. We now expect our tax rate to be in the range of 23 to 24 percent for the full year and roughly 21 to 22 percent for the second quarter. and capital expenditures are expected to be in the range of $250 to $275 million. In closing, inspired by Ralph's enduring vision, our teams around the world continue to demonstrate agility and dedication every day as we execute on our next great chapter, Accelerate Plan. While we remain acutely attuned to the near-term challenges facing certain areas of our business We believe in our strategic priorities, investing in lifelong consumer relationships, leveraging our powerful core products and high potential categories, and developing our key city ecosystems. These priorities, combined with our passionate teams, put us in a position of strength to continue to deliver our commitments and drive long-term value creation. 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 touch-tone phone. You will hear a tone indicating you have been placed into queue. You may remove yourself from the queue at any time by pressing star two. If you are using a speaker phone, Please pick up the handset before pressing the numbers. We ask that you limit yourself to one question per caller. Once again, if you have a question, please press star then 1 at this time. One moment, please, for the first question. The first question comes from Matt with JP Morgan.

OK, great. Thanks, and good morning. Morning, Matt.

Morning, Matt.

So, Patrice, to take a step back, your first quarter total company results outperformed expectations on a consolidated basis, but your first quarter and your outlook are still below the long-term guidance for North America. So, do you believe you can still achieve your long-term investor day top-line algorithm? And then, Jane, any change or just what is your confidence in mid-teens operating margins next year for the company?

Well, good morning, Mike. Thank you for your question. Yes, first of all, overall, our teams did a very good job delivering on our top and bottom line commitments for this quarter, even with ongoing challenging backdrops across the different regions. As you know, our strategy has multiple growth engines, meaning resilience is embedded in our strategy and in our plan. If you look at it across regions, and then we'll zoom into North America, Our second largest business, Europe, continues to hold up well despite macro headwinds. We're also feeling very good about the way our performance came in on China and broader Asia. You saw China up 50% this quarter. Now, while North America is facing some pressure in the near term, our core consumer, which is a more elevated consumer, continues to be resilient, and we have the right strategies in place to drive growth well beyond these headwinds. In fact, a couple data points to illustrate that. First of all, our value and also our luxury brand perception scores are going faster in North America than any other region in the world. And if I provide additional perspective, if you look at it from a channel perspective, our emphasis and investments are in DTC, which is now about two-thirds of our North America business and where we have the biggest growth opportunity. From the product perspective, we have multiple opportunities across high potential categories from auto wear to home and to women's more broadly. On brand, we continue to invest in new customer acquisition. You saw that this quarter again, 1.2 million overall, good chunk of that coming from North America, as well as key brand moments like our upcoming US Open partnership and our upcoming fashion show early September. And then finally, Our key enablers here are also quite important. Our inventory levels are healthy. We go into back to school, we're going to go into holiday in a really good place. And our operating discipline and balance sheet give us the flexibility to continue investing in our growth, to continue investing in our elevation. So we're also well positioned as conditions improve in North America and beyond. So I would say even with these near-term pressures, Matt, we're confident that we're in a strong position to perform. and deliver over the long term, and that's really where all our focus is.

Yeah, and just to follow up on the second part of your question, I would say, yes, we're on track. We are still working towards our investor day targets, although our performance is likely to remain a little choppy given the volatile macroeconomic conditions. But we're really encouraged by our first five quarters of top line and margin progress and constant currency. Importantly, you know, I think we feel that we have the right strategy and that our multiple engines of growth give us the flexibility to lean in where we need to and where we're strong when some parts of our business are challenged. So I think that those things are what's giving us confidence. And as we look forward, we still see opportunity to reach our long-term financial algorithms.

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

Great. Thank you so much. You know, my question, Jane, is for you. The company continues to report, you know, strong AUR growth after six years of consecutive gains. How much further can the AUR journey continue and how much runway do you realistically have? And then maybe if I can add a second one for Patrice, you know, you touched on high potential categories in the prepared remarks. Can you just kind of take us into a little bit deeper dive on that and just tell us what's changed over the 90 days, the last 90 days, give you more confidence that those categories can be meaningful revenue growth drivers for the company over the next, you know, year plus.

Sure. Thanks for the question, Jay. You know, stepping back a bit, we are really confident in our long-term brand elevation journey. You know, as we said at Investor Day, we have three key drivers of long-term revenue growth. New customer recruiting, select unit growth, and AUR growth. So with regards to your question and AUR specifically, we're confident in our AUR strategy and expect our multi-pronged approach to drive continued, albeit a more moderate level of AUR growth as we look ahead. You've seen us elevate across products, the consumer experience, stores, and our brand positioning, and AUR is an output of this journey. Importantly, as we've elevated, our consumer value perception metrics have continued to increase, even again this quarter. These factors, you know, taken together are really what give us confidence in our long-term AUR trajectory. That said, We're keenly aware of the current environment, and we continue to keep a really sharp focus on the value we are driving and delivering. With some of these pressures, we're seeing some of our more value-oriented consumers need us to lean in a bit more during select key consumer value-seeking moments, like back to school and holiday. And our guidance contemplates this as we move forward. As cost inflation starts to moderate ahead, we'll adjust our like-for-like pricing elements of our AUR strategy accordingly. And we're not expecting double-digit AUR growth every quarter from here. But overall, the elevation strategy hasn't changed, and we plan to continue AUR growth this year and beyond.

And then, Jay, on your question regarding high potential categories, we've been really pleased with the continued strength on those businesses. If you kind of zero in on the three that we called out, so outerwear, women's more broadly with handbags being an element for that, and then also home, those categories delivered ahead of company trend, both in Q1 and as it did last fiscal year, actually low double digits across the board. So all three are in a good position. The standout is clearly women's, where we have fantastic momentum across all brands within our portfolio. with probably Polo being even further highlight. And I think as we look at the capabilities needed to win across all three of these, we feel very nicely positioned, not just for the next two or three quarters, but actually for the years to come in terms of tapping into these significant growth opportunities.

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. Jane, I would love to ask about the 2Q guide. I think that's where the focus is, unfortunately, in your term. But just can you give us a bridge on the first quarter marketing spend? I forgot. I missed that number. But if you can give us a little bit more color why the operating margin would be 9.5% to 10% constant currency. And then I saw the increase to gross margin for the full year on a CC basis. I would have expected that you saw had foresight on commodity and freight costs 90 days ago. So is the increase due to geomix or less promotions in the marketplace because of your inventory levels?

All right, Leroy. Could you just repeat your question on marketing? You broke up a bit.

I'm so sorry about that. I'm overseas. I was asking what the marketing spend was for 1Q as well as how do you think about the 2Q marketing spend because there's a shift with the fashion show.

Sure.

So, Mark, as we look at the second quarter, you know, what we're seeing is we continue to be cautious about the overall consumer environment. You'll see as we called out in the first quarter that the wholesale timing shift in Europe will impact us in the second quarter. You will start to see sequentially from here some improvement in what you saw in North America wholesale. And in fact, as we look at North America more broadly, I think you'll see a sequential improvement while we're still cautious, sequential improvement on the top line as we move through. And just to keep in mind in our second quarter guidance, APAC is overlapping its strongest growth of the year last year as we came out of some of the COVID-related shutdowns. On the marketing side, what you'll see in terms of our spend, this first quarter we were about 5.7% of sales. you'll see us go to 8% of sales in marketing in the second quarter. On a dollar growth basis, that will be our peak marketing dollar growth. But as is our tradition, our highest dollar spend in marketing will be in Q3 aligned with the holiday quarter. And then as we look at your question on our second quarter OI margin, What you're really seeing is in that second quarter, you'll see the impact to OI margin of the shipments in Europe into the first quarter coming out of the second quarter. Also, as we've seen some softness in North America wholesale, we've been able to lean into our DTC channels, specifically in North America, which has a gross margin benefit, which we're calling out in our full-year guidance, but carries heavier SG&A expense, but is OI margin neutral. And that's playing through what you're seeing in terms of expense to leverage. And that said, on SGA expenses overall, as Patrice mentioned, we are playing offense. So we are not pulling back on our investments in our digital platforms, in Q2. We are investing to make sure that we can go live on a new website in Canada and that we will implement later in the second half a new search engine, as well as our continued advancement of store opening. So we're not backing off building growth into the future. I do understand the investments are in Q2, but these are both long-term benefits and some benefits that will play out in the second half of the year. And then just in terms of gross margin, we're confident in our gross margin guidance. Mixed shift plays a small role, but we are realizing the benefits of freight, which we called out in May, will give us about 100 basis points of benefit as we move through fiscal 24. That's about offset by cotton. But as we look forward to FY25, we expect cotton to turn into a tailwind. you know, at the very end of the quarter. We're also seeing with our AUR at 15%, we're really confident in our ability to continue to elevate with AUR as an outcome of that. And we're confident in that as we move forward, although I said it will moderate as the need for like-for-like pricing due to inflation also moderates. Thank you.

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

Good morning, everyone. As you talk about the pressures of the value consumer and the AUR increases, what are you seeing globally that value consumer, whether in North America, Europe, or in Asia, versus the more higher-end consumer and helping to drive the AUR growth? Is there a difference?

Good morning, Dana. So we actually are really pleased to see how our core consumer, which is a more elevated consumer, responding to our product offering right particularly as we pivot more towards sophisticated casual which is really where the interest is at this point and which really plays to our core strengths so think chinos food separates cable knit sweaters Oxford shirts and those kind of things and consumers responding well to that elevation and you know the core consumer represents the bulk of our business and this is true both in Asia you know in Even in China, where we have our highest AUR, we're continuing to drive AUR. But this is true in Europe. It's also true across North America. So core consumer is resilient around the world, responding well to our overall product offering and AUR expansion. As a reminder, our AUR is a combination, as Jane mentioned earlier, of four different factors, right? Product mix, channel and region mix, more targeted pricing, promote pricing, like-for-like pricing, and pull back on promotional activity. As far as the value-oriented consumer is concerned, we really see that dynamic primarily in North America. And that group is becoming a smaller and smaller part of our overall customer makeup because, as you know, as we recruit new consumers, we're recruiting new higher-value customers. I think what we're seeing with that customer, which frankly isn't surprising given the inflationary context, is pressure on what they invest in in terms of the choices that they make. Where we're seeing the greatest price sensitivity data is on our basic categories, which I might coin the COVID categories, right? So we're seeing pressure on tees, on fleece, on shorts. But overall, we're continuing the AUR expansion journey. We are seeing our value perception continue to increase. So we're not just taking, you know, blank pricing like maybe other players might. We are actually being very deliberate on elevating products, elevating our storytelling, elevating our shopping experience, which drives value, enhanced value perception, which then enables us to drive AUR, which gives us, to Jane's earlier point, confidence that we can continue to do that as we continue to enhance the makeup of our customer base, higher value customers, resilient customers around the world.

And then just kind of get your perspective on the wholesale channel. and when you see it return to stabilization and even growth go forward, given the timing shifts that have occurred? Thank you.

You know, as we look at wholesale, Dana, I think it's really a story of different regional factors. So overall, what we're expecting is that In North America, as I mentioned, Q1 will be the low point in terms of wholesale growth, and we expect to build roughly sequentially as we move through the year while exiting in flat to positive range for North America wholesale. And then with Europe, we've obviously called out that the plus 10% that we saw in Europe this quarter had some opportunities that we took for full price selling to ship in a little earlier. That'll have about a four-point impact to Europe in queues two and three. But we would expect Europe overall for the year to have some, you know, flat to down low single digit in our wholesale business.

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

Great. Good morning. So in terms of your North America retail business, how should we think about the level of promotional activity that you're embedding in your outlook for this upcoming holiday season compared to last year? And then how should we think about top line in North America retail? Should we also see financial improvements starting in 2Q? Thanks.

Thanks for your question, Chris. I think what we're calling out both in our guidance and in our intent is that, as Patrice mentioned, we are seeing value-oriented consumers really responding during key sort of what I would say consumer moments. And so what we've left in our algorithm is contemplated in our guidance is some select targeted promotional activity specifically for that value consumer. So you'll see us go sharp back to school. You'll see us be sharp in key holiday moments, Black Friday specifically, the days leading up to Christmas, especially Cyber Monday. But what we're calling out is that we'll continue AUR growth, albeit at a more moderate rate, and AUR growth that leads to gross margin expansion. So this is not at all moving away from our brand elevation strategy. It's about being agile, responding to key consumer moments in a targeted basis. And you've seen us go to the top end of our gross margin range. So we've got a good handle on where we need to be. And I would say that if you look at our inventories, up 1% this quarter, we don't have pressure to be promotional. We wanna go where the consumer is going, respond to the consumer need for value at select times, but not at all be pressured in terms of moving backwards. We're about brand elevation and AUR growth while being smart and pragmatic in this current environment. So from North America, top line standpoint, you know, as we've called out and we've looked at revenue, we expect North America, as we put in place some key interventions like outlet interventions that we just talked about, like the digital ecosystem investments with Canada going live in Q3, like key brand moments like the fashion show, we expect North America revenues to increase, especially in the second half, where we would expect them to be in positive territory. Next question, please.

Thank you. The next question comes from Bob Durbel with Guggenheim.

Hi. Good morning. Jane, I was wondering if you could spend a little more time on new customer acquisition, sort of success that you're seeing both domestically and internationally, and sort of how you expect that to unfold over the next few quarters.

Yes, Bob, and then I'll turn it over to Patrice. We were really happy with the 1.2 million new consumers that we saw engage with the brand in Q1. As you look backwards, you've seen us be pretty consistent on that trajectory I think it's really an outcome of, one, the investments we've put in the brand, and two, the investments we've made in our consumer intelligence group and our use of AI and elasticity models to really drive more personalized communication with these new consumers. And it's really an important part of our AUR and revenue growth journey. You know, we're now, if you think back, when we used to promote to drive new consumers, our next great chapter strategy has really been about enticing higher value consumers into the brand with content and products that they respond to and being available in channels where they want to shop.

Yeah, Bob, I would add probably three things. First of all, we're seeing this growth of new consumers consistently over time, right? Cause every quarter we were talking about one, the one and a half million new consumers. So we've got an engine that's delivering consistently and it's delivering consistently around the world. This is not just dependent on, you know, more emerging market growth. So we're excited about that both in our core markets like North America, Europe, and also Asia. The second point is this is really the outcome of how we've expanded our marketing activity portfolio. which now ranges from powerful, experiential fashion moments, like the one we're about to do early September, or what we just did in Milan with men's, to high-impact celebrity dressing. You saw some of the highlights for the past quarter, and we're doing this consistently, to partnerships with key sports platforms that are really resonating, particularly with that younger consumer, Two, now presence in gaming and metaverse-related activities that's also helping us engage in a different environment. Two, fantastic work by our teams in the markets on social media platforms, right? You heard the numbers earlier today, 53 million and a half, 53.5 million new followers on social media across all the different platforms around the world. So this engine that's been put in place that has a diversity of activities that's targeted to different generations, different genders, that's enhancing brand equity, is the engine that will consistently drive new customer acquisition. We talk a lot about AUR when it comes to Ralph Lauren, but it's important to remember that our growth algorithm is dependent on three elements. New consumer recruiting, select unit growth, and AUR. And we feel really good about all three.

Thank you.

Next question. Thank you. Sitting in for Paul Lesheres, we have Tracy Kogan with Citigroup.

Thank you. Two questions. I was hoping you could just detail some of the drivers in the women's business and what's the – you know, the growth in the Lauren brand versus the Polo products. And then secondly, I was hoping you could talk about, I think you said your U.S. wholesale AUR was up 11%, and I was wondering what you expect for wholesale AUR for the year and whether you're getting any pushback from your wholesale partners on price increases you may have taken in the U.S. Thanks.

Sure. So the key success drivers behind our overall women's portfolio are really the three key factors. First of all, we have a product offering that's really resonating with our target consumer. And if you think about what's happening around the world right now, and there's a lot of conversations around quiet luxury, what Ralph Lauren has stood for from the time this company was founded 56 years ago has been quality, has been timeless style, has been confidence in what you're buying, And that's what consumers are looking for today, and particularly what women are looking for today. So the way this is translating from a product category standpoint is growth in linen, growth in suit separates, growth in our dresses business. We're starting to see some early exciting momentum on our handbag business. And this is playing out across both collection, polo, and Lauren. The other element that's actually really supporting particularly our polo and our Lauren business is the elevation work that we're doing. is really moving up in terms of product proposition, is moving up in terms of storytelling, is moving up in terms of how we present the product both online and in-store. I think the consumer is responding really nicely to that. As I mentioned earlier, within our high potential categories, our highest performing category is actually our women's business. We have a proposition that's resonating with consumers around the world. This elevation journey is clearly connecting. The product line that we offer is relevant for what consumers are looking for today. And we're very excited about what the future holds for this business.

Yeah, I would just add, Tracy, that Polo Women significantly outpaced both our total growth and led our women's growth with up high single digits. with Lauren pacing about it company level of growth a little bit ahead. So we are very encouraged by that. The second part of your question, which is wholesale AUR up 11% this quarter, we still see a strong trajectory for AUR at wholesale. But like in our DTC business, we expect that AUR growth to moderate as the like for like pricing moderates as inflation pressures abate. We called out that fall was our peak pressure in terms of cotton costs. We'll start to see those moderate into spring, and you'll see some moderation in our wholesale AUR. I would say the support from our retail partners has been tremendous. This has been a multi-year journey that we've partnered together on. They see the power of elevating the brand. They see the power of the brand. And we're both benefiting from improved consumer desirability that's pulling through into migration of the consumer into higher-end products. So product mix has been a factor in that. And so continued AUR elevation, but similar to DTC's moderation.

Let's go to the last question, please, Angela. Thank you. Our final question comes from John Kernan with TD Cowen.

Excellent. Thanks for taking my question. Jane, how should we think about inventory dollars? It looks like they're sitting around $1.2 billion as of the first quarter. Still, you've got some easier compares, I guess, as we go through the rest of the year. Where do you think inventory dollars should land as we head towards the back half of the year? When do you think we'll start to see some meaningful declines off of what was fairly elevated levels last year? Thank you.

Yeah, John, I think that, you know, as we called out last year, you'd start to see our inventory levels moderate and align with sales. We've achieved that. Now, throughout the year, I think what we plan is that you will see inventory declines as we exit the year, as we start to focus on getting weeks on hand in line with pre-COVID levels. And we feel very good, not just about our outlook for declining inventory dollars, but also about the health of our inventories, how we're positioned in core, that really gives us the flexibility to be agile with demand variability. So we feel good about how we're positioned. We think we're in excellent shape relative to some of our industry peers. And expect higher inventory turns as we exit the year.

Okay. Well, listen, thank you, everyone, for joining us today. We look forward to sharing our second quarter results with you in November. And until then, take care. Have a great day.

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