Ralph Lauren Corp

NYSE:RL

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions on how to ask a question will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

[Corinna Van der Ghinst, IR]

Good morning and thank you for joining Ralph Lauren's first quarter fiscal 2020 conference call. With me today are Patrice Louvet, the Company's President and Chief Executive Officer; and Jane Nielsen, Chief Operating Officer and Chief Financial Officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to one per caller.

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

And now, I will turn the call over to Patrice.

[Patrice Louvet, President and CEO]

Thank you Cori. Good morning everyone and thank you for joining today's call. We delivered first quarter results in line with our overall expectations including better than expected operating margin and double-digit EPS growth. Our performance this quarter was driven by strong continued momentum in our international markets both Europe and Asia and expense discipline across the organization. At the same time we continued to invest in elevating our brands and stabilize our North America business against a more volatile backdrop.

As we indicated at the start of this fiscal year we are monitoring the global retail environment closely particularly around trade and macro conditions. Our teams remain intensely focused on managing through potential industry headwinds and executing on our strategic plan to deliver long-term sustainable growth and value creation. The three principles underlying this work include putting the consumer at the center of everything we do, elevating the brand, and balancing growth and productivity.

During the first quarter we continue to drive our performance against the five strategic priorities that we laid out as part of our five year plan. These include first, win over new generation of consumers; second, energized core products and accelerate high potential underdeveloped categories; third, drive targeted expansion in our regions and channels; four, lead with digital across all activities; and fifth, operate with discipline to fuel growth.

Starting with win over a new generation of consumers. In the first quarter we increased marketing investments by 19% to last year. We continued to shift our spend to channels that matter most to consumers today namely digital and social. Our key marketing initiatives this quarter centered around our Earth Polo launch, our new family campaign, and key sporting events that have cultural resonance and global appeal. In April we launched our Earth Polo made entirely of recycled plastic bottles and a waterless dyeing process. While the launch marked an important early step in our long-term sustainability efforts, it is only the beginning of our journey which I'll discuss in more detail momentarily. The product generated a strong consumer response and the campaign had a meaningful impact from a marketing perspective with over a 1 billion earned media impressions globally and strong social media attraction.

We also launched our Family is Who You Love global campaign in April, a positive and inspiring celebration of inclusion in modern families however you define them. This combined with our pride campaign and capsule collection in June also drove over a 1 billion media impressions globally. We kicked off our summer sports program with the golf majors including a special capsule collection with Ralph Lauren Golf Ambassador Justin Thomas. And more recently you may have seen our high impact activations around Wimbledon where we are the official outfitters. We launched an integrated global campaign in July combining Wimbledon heritage with Gen Z activations including a YouTube series, our first gaming experience, an in-store and on site events with influencers, celebrities, and top clients. We have more exciting initiatives still to come including the U.S. Open Tennis Championships next month.

We continued our partnerships with celebrities and influencers globally in the quarter. You may have seen Jennifer Lopez in the Ralph Lauren at the CFDA Awards this June as she collected the fashion icon award. Ralph Lauren earned the highest media impact value across all brands from the event according to the CFDA. We also announced JLo's fiancé Alex Rodriguez as the new face of our Polo Blue fragrance. Other celebrity dressing this quarter included Selena Gomez at Coachella, Emma Roberts, Oprah, J.J. Lynn and K-pop band BTS. And lastly you may have seen that Ralph received honorary knighthood from Great Britain in June in recognition of his extensive philanthropic efforts, influence on global style, and longtime love of British heritage and culture. Ralph is the first American designer to receive this honor which garnered worldwide media attention. It was a very special moment for Ralph, his family, and all of us at Ralph Lauren.

Moving on to our second key initiative, energize core products and accelerate high potential under developed categories. We continue to drive our product assortment across three different areas which for clarity we are defining as core, seasonal core, and seasonal fashion. Core includes iconic Ralph Lauren styles like the classic mesh polo shirt, Chino pants, army jacket, cable knit sweater, or Oxford button down shirt. Seasonal core products are iterations of our core items that are animated with fresh seasonal color ways or finishes. And seasonal fashion consists of more fashion oriented and embellished products that center around a seasonal theme or collection. This includes our limited edition series that deliver newness and excitement.

In Q1 our core and seasonal core styles resonated well across channels and continued to be a key driver of our top line performance. We're excited about the work Ralph and the design teams have done to reenergize the heart of the business. These styles are not only appealing to existing consumers but also to new and younger consumers. As we discussed last quarter we are working to get the mix right across these three product categories for each channel better aligning to consumer demand. In Q1 we took clear actions to focus our teams on the strategic rebalancing.

First, we expanded the scope of our experienced international merchant team to lead a new global merchandising effort that now includes North America. This team is now leveraging their proven track record of sharply aligning buys to consumer demand and successfully targeting a new younger consumer to the North American market. Second, our design teams have increased our penetration of core and seasonal core versus seasonal fashion products to focus on our most productive and appealing styles starting with our spring 2020 collections. While our penetration of seasonal product will become more balanced we will continue to leverage these propositions along with our special projects and limited edition capsules like this quarter's Polo Sport to bring newness and excitement to the marketplace.

Moving through our five high potential underdeveloped categories that have significant growth potential across our brands, these include denim, outerwear wear, wear to work, footwear, and accessories. We saw strong continued momentum this quarter in denim and outerwear which were the furthest developed of the five categories. Sell in and sell out trends for both categories exceeded total company performance. Based on an encouraging launch last fall we are rolling out an expanded presentation of outerwear at our own DTC and wholesale channels for Fall Winter 2019. Touching on product pricing which Jane will address in more detail in her prepared remarks, our total direct to consumer AUR was up 1% in the first quarter on top of a strong 8% increase in the first quarter of last year. While still positive this moderation primarily reflects the steps we are taking to reduce our disproportionate seasonal fashion inventory in North America.

Moving on to our third key initiative, drive targeted expansion in our regions and channels. As we previously discussed we are building a cohesive brand elevating Ralph Lauren experience across our retail, wholesale, and digital commerce presence in key cities around the world. During the first quarter we opened 21 new stores and concessions globally and closed nine locations. This included 13 openings in Asia with seven in Greater China, our fastest growing market. Our eco system approach continued to drive strong growth in Greater China in the quarter with sales up 12% the last year in constant currency including nearly 30% growth in Mainland China driven by comp growth and new stores. In Europe we opened four owned and partnered full price stores and two factory stores. While we are making good progress we still have significant expansion opportunities with only 36 full price stores across Europe.

Moving on to our fourth key initiative lead with digital. Our global digital eco system including our directly operated sites, department store dot-com, pure players, and social commerce increased 1% in the first quarter in constant currency. Strong growth of nearly 10% in international was partly offset by mixed results in North America. Across international we continued to expand our distribution notably with digital pure players. In Asia we added two exciting new digital partners in the first quarter, ZALORA in Southeast Asia and the social commerce platform of Kakao, the largest messaging platform in Korea.

In Europe we added six new wholesale digital partners in the quarter. These included Browns Fashion, a key specialty player that resonates with younger trend leading consumers and curated luxury retailers Fenwick both in the UK. Our directly operated digital sites in Europe also saw strong momentum delivering 22% comp growth this quarter.

Turning to North America, our overall digital eco system in this market performed below our expectations in the quarter. Very strong double-digit growth in digital pure players was more than offset by softer trends on Ralph Lauren and Wholesale Dot Com. First starting with digital pure players, we continued to see strong momentum with partners who are extending our reach to new and younger consumers. In the first quarter we launched men's polo on PacSun.com and men's and women's polo on ASOS. We also added distribution of women's polo to Rent the Runway joining Lauren and Club Monaco on that platform which resonates with our target next generation consumer.

Second, comps in our own North America digital site were flat. Softness was primarily driven by a decline in sales to international consumers on our U.S. site due to FX headwinds and increased import regulations in key Asian markets and select underperforming products within Lauren in men's polo seasonal fashion styles. And lastly North America Wholesale.com was also weaker than expected driven primarily by the product issues we discussed on Lauren similar to Q4 trends. North America digital commerce is clearly an area of intense focus for us as we work toward consistently delivering our long-term target of low double-digit digital growth globally. Under our new global merchandising effort we've taken decisive action to rebalance our assortments and expect these changes to start flowing through in the back half of fiscal 2020.

Let me touch on our fifth key initiative, operate with discipline to fuel growth. We continued to challenge every cost and improve our efficiencies in the first quarter. Adjusted operating margin expansion of a 110 basis points exceeded our expectations driven by disciplined expense management and SG&A leverage. This cost discipline enabled us to continue expanding our marketing investment and global retail presence while increasing operating profit and operating margin.

And lastly I'd like to touch on the citizenship and sustainability strategy we launched in June which we call Design the Change. Our strategy and accompanying report represent our commitment to create more sustainable products, reduce our overall environmental footprint across our operations, and support and empower our teams and partners around the world. We introduce 16 key citizenship and sustainability goals that touch every area of our business and drive accountability across our organization. Key targets we expect to reach by 2025 range from reducing water usage by 25% across our operations and value chain to achieving gender parity within our leadership at Ralph Lauren. As we continue to cultivate the best talent to deliver on our strategy, we are proud that Ralph Lauren achieved certified status as a great place to work in the U.S. for the second year in a row. We were also recognized in the Top 50 on Forbes annual list of America's best employers for women.

In closing we are focused on executing our strategic plan to deliver long-term sustainable growth and value creation. Each member of our engaged and motivated global team is contributing to deliver on our plan and I know I speak for Ralph and the entire leadership team when I say that we are inspired and energized by their dedication and excellent execution every day. With that I'll turn it over to Jane and I'll join her at the end to answer your questions.

[Jane Nielsen, COO and CFO]

Thank you Patrice and good morning everyone. Our first quarter financial results were in line with our expectations led by ongoing strength in Europe and Asia and growth in North America despite a more volatile retail backdrop. Globally our teams delivered solid top and bottom line results including operating margin expansion and double-digit EPS growth and we made progress against several of our key strategic initiatives globally. First quarter revenues increased 5% in constant currency and 3% on a reported basis. Our international business which represents about 45% of our sales delivered 7% top line growth in constant currency while North America delivered growth of 3%.

Adjusted gross margin was up 10 basis points in the first quarter on a reported basis and flat in constant currency slightly better than our expectation of flat to down in the first half. Gross margins benefited from favorable product, geographic and channel mix largely offset by increased promotional activity in North America. Total company retail comps grew 2% in the quarter, AURs were up 1% with low single-digit growth in international. This was partially offset by a 1% decline in North America AUR due to increased promotional activity in our bricks and mortar channels to move through excess seasonal fashion inventory from spring. Looking ahead we still expect to drive AUR over the next three quarters consistent with our guidance of low to mid single-digit growth for fiscal 2020 and longer-term.

AUR growth this year will be driven primarily in Europe and Asia by our ongoing strategy to elevate the brand, improve pricing and promotions, and accelerate product mix shifts such as an increased penetration of fleece and outerwear. We also expect positive albeit more moderate levels of AUR growth in North America as we one, rebalance assortments across core, seasonal core, and seasonal fashion products; two, mix into higher priced product categories; and three, take targeted price increases in select categories based on competitive benchmarking and where we have a proven opportunity to play. Our guidance assumes that these North America AUR drivers will be partly tempered by a continuation of increased liquidation pressure in the near-term to clear seasonal fashion product for Lauren and select men's polo fashion.

We will continue to balance an appropriate level of promotional activity with our long-term strategy of improving quality of sales and elevating the brand. Adjusted operating margin in the first quarter was 12.2% up 110 basis points as our teams drove SG&A leverage on top line growth. Adjusted operating profit dollars grew 14% to last year. SG&A expense declined to 52.3% of sales down 100 basis points to last year driven by top line leverage and cost reduction initiatives. Marketing spend increased 19% in the first quarter. We continue to make progress towards our long-term objective of increasing marketing to about 5% of sales while also focusing on productivity to achieve our operating margin expansion goal.

Our teams remain focused on driving operating efficiencies across our business. Some key areas of savings to highlight in the first quarter are first, our supply chain end to end remains an important opportunity for productivity. We reduced our Q1 air freight expense by 50% to last year as we optimized our ocean freight programs. We also realized opportunities on the products side. We reengineered our outerwear to use innovative, recycled materials in our jackets. This enabled us to upgrade an existing product to a more premium and sustainable version for the consumer while driving savings on raw material costs.

Our work on corporate expenses also continued. Our focus on reviewing and putting nearly all our vendor contracts out to bid is generating savings without compromising quality. We continue to see a double-digit reduction in associated expenses through our renegotiated contracts. In Q1 we reduced our media partners around the world from 12 agencies to 4 and consolidated our media buys under one global lead partner to drive scale and efficiency. We also completed the sale of our corporate jet in the first quarter and donated the entirety of the proceeds to the Polo Ralph Lauren Foundation as we work to drive meaningful cultural shift in our organizations cost and corporate responsibility mindset. And we will continue to simplify our organization to improve agility and empower our leaders as illustrated by some of our recent changes.

Moving on to our segment performance starting with North America, revenue increased 3% in the first quarter with growth from wholesale and newly renovated stores partly offset by weaker than expected retail comps. Adjusted operating margin was 21.9%, a 100 basis point decrease to last year largely due to gross margin contraction on higher promotional activity across channels. In the retail channel in North America comps were up 1% including about a 300 basis points of benefit from the Easter shift into the first quarter. Brick and mortar comps increased 1%, softness was driven by continued traffic, challenges and a modest decline in AUR due to increased promotions this spring to clear select seasonal fashion product and keep inventories healthy. In the first quarter foreign tourist traffic was down 3%.

While traffic trends were disappointing in the quarter notably in May we were encouraged by improvements we implemented towards the end of the period including an outlet. Moving forward we will continue to test and implement additional measures to mitigate traffic challenges such as improved search optimization, marketing partnerships with our mall center operators, and more targeted signage. Comps in our North America directly operated digital commerce business were flat below our expectations. We believe this was due to a combination of two factors; first, we saw diverging trends between sales to domestic versus international shoppers in the quarter. Domestic sales which comprised the majority of our digital business were up in the quarter while foreign sales were down double-digits.

Similar to foreign tourists declines at our U.S. brick and mortar stores, we attribute this decline to increased headwinds from FX along with more punitive import restrictions in key Asian markets. Second, last quarter we called out a few areas where we were over assorted including select Lauren and men's polo seasonal fashion styles. We're actively addressing these issues by rebalancing our product offering as Patrice discussed. We expect declines in international shoppers to continue pressuring our North America digital comps through the rest of fiscal 2020 based on FX and tighter import restrictions with the biggest decline in Q2. However, we expect improved trends from our domestic online shoppers starting in the back half of the year. Our teams are focused on driving higher conversion among domestic consumers through one, favorable product mix towards categories like outerwear and two, investing in improved mobile functionality and personalization to drive more relevant content.

Moving on to North America wholesale, first quarter revenue was up 2%. Excluding off-price our underlying North America wholesale business was also up slightly in the first quarter. We still expect Q1 will be the strongest quarter of the year as the North America retail environment has become somewhat more volatile in recent months. Moving on to Europe, first quarter revenue was up 2% on a reported basis and 7% in constant currency. Adjusted operating margins expanded 100 basis points on a reported basis and 10 basis points in constant currency. Operating margin expansion was driven by strong gross margins.

In the retail channel in Europe comps were up 4% driven by a 22% increase in our own digital commerce sites and a 2% increase in our brick and mortar stores. Our increase in directly operating European digital commerce business was above our expectations driven by solid merchandising execution and a strong double-digit traffic increase. Our sites benefited from platform enhancements and more targeted performance marketing and further localization of our Spanish and Italian sites in the quarter.

Across our Europe direct to consumer channels our ongoing effort to elevate the brand and improve product mix continued in the first quarter with AUR of 2% on top of a strong 9% increase last year. Wholesale revenue in Europe was up 5% in constant currency in the first quarter and ahead of our expectations reflecting solid sell in trends and modest distribution growth with both digital and wholesale partners similar to the last few quarters.

Turning to Asia, revenue was up 4% on a reported basis and 8% in constant currency in the first quarter. We saw solid performance across nearly every market in Asia led by Mainland China sales growth of nearly 30% in constant currency. Our product and marketing initiatives are resonating well in this region and we continue to increase our digital efforts, expand and elevate our store fleet, and engage with local influencers and celebrities. Comps in Asia increased 5% driven by 3% AUR growth and a strong contribution from our newer doors. We expect continued comp growth in Asia as we invest in our distribution network and increased our marketing initiatives to amplify and elevate the brand. Adjusted operating margin was up 150 basis points to last year driven by strong gross margin expansion.

Moving on to the balance sheet, our balance sheet remains strong and we continue to return capital to shareholders. We ended the year with about 2 billion in cash and investments and 692 million in total debt which compares to 2.1 billion in cash and investments and 587 million in debt at the end of last year's first quarter. We repurchased a $150 million in shares in the first quarter, we will continue to opportunistically buy back stock with about 600 million in repurchase plan for full fiscal 2020.

Moving on to inventory, at the end of the first quarter inventory was up 11% to last year. The highest growth rate was in Asia to support our strategic expansion of retail distribution in that market. This was followed by Europe where we started making investments to get back into normalized inventories in our Europe factory stores during the second quarter of fiscal 2019. We still expect to anniversary these increases as we move into the second half of this fiscal year.

And lastly inventory growth in North America modestly outpaced top line growth in the first quarter which was partially driven by our decision to accelerate select portions in inventory to get ahead of potential China tariffs. We continue to expect inventories in the second half to be more closely aligned to our sales outlook. In light of the dynamic trade environment particularly China and BREXIT we will continue to opportunistically evaluate our inventory shipments to North America and the UK and diversify our global supply chain.

Now I'd like to turn to guidance for the full year and second quarter of fiscal 2020. As a reminder this guidance excludes restructuring and related charges and reflects our best assessment of the global retail landscape in the context of increased volatility for macroeconomic and geopolitical events. For the full year fiscal 2020 we continue to expect revenues to be up 2% to 3% in constant currency. Foreign currency is expected to have about a 90 to 100 basis point negative impact on revenue growth in fiscal 2020. We expect continued strength in our international businesses and a more challenging outlook for North America.

We continue to expect operating margin for fiscal 2020 to be up 40 to 60 basis points in constant currency driven by a combination of modest gross margin expansion and SG&A leverage. Foreign currency is estimated to have about a 10 to 20 basis points of negative impact on operating margin in fiscal 2020. For the second quarter of fiscal 2020 we expect revenues to be up about 1% in constant currency. Foreign currency is expected to negatively impact revenue growth by about 90 to 100 basis points in the quarter.

Operating margin for the second quarter is expected to be up 40 to 60 basis points in constant currency. Margin expansion is more weighted towards the first half of the year based on the timing of our marketing and new store investments. Foreign currency is expected to be about a 20 basis point headwind in the second quarter. We continue to expect capital expenditures of approximately 300 million in fiscal 2020 focused on consumer facing initiatives that have demonstrated a proof of concept and healthy rates of return including stores and digital as well as our corporate office consolidation project. We continue to expect our effective tax rate for fiscal 2020 to be approximately 22%. Second quarter tax rate is estimated at 23%.

In closing we are committed to delivering on our next great chapter plan while navigating a more volatile global retail backdrop. We believe we have the key elements to achieve our long-term strategic targets, a strong balance sheet, a clear strategic roadmap, Ralph's enduring creative vision, and the passion and commitment of our 24,000 team members around the world. With that let's open up the call to your questions.

[Operator]

[Operator Instructions]. The first question comes from Michael Binetti with Credit Suisse. Your line is open.

[Michael Binetti, Credit Suisse]

Hey guys, good morning Jane and Patrice, thanks for all the -- a lot of detail there.

[Jane Nielsen, COO and CFO]

Good morning Michael.

[Michael Binetti, Credit Suisse]

Hey guys, so if I tried some of the quarter looks like North America is still a little sluggish but your international business is very, very strong. Your reiterated guidance I would like to assume has taken into account better international trends. What gives you confidence your international regions will be able to carry the top line especially if North America backdrop remains sluggish like you said and then I had a quick follow-up if I could?

[Patrice Louvet, President and CEO]

Good, let me answer that one first and we will do your follow up later.

[Michael Binetti, Credit Suisse]

Sure.

[Patrice Louvet, President and CEO]

Okay, well listen good morning. We are indeed pleased with our continued momentum both in Europe and Asia. If you kind of step back and look what the key drivers were for the performance there, they really center around the work our teams have done on brand, product, and distribution, alright. So let's actually start with product. Our product is actually resonating well with the Asian and European consumers and our team has done a very good job balancing our offering between core, seasonal core, and seasonal fashion across all the channels as well as and this is important as we think through AUR plans as well as mixing into higher AUR categories like outerwear or fleece.

On the brand front it is actually I find really inspiring to see the work that our teams are doing to elevate the brand and connect with our target consumers whether that's an existing consumer group or the new generation that we want to bring into the family. That's probably most visible in the recent highly impactful activation that the teams have done around Wimbledon in Europe and actually in parts of Asia as well and the unique connections that we've built with the key celebrities and influencers in China for example.

And then on the distribution front our teams are elevating our presence in existing quality distribution points while expanding both online and you heard a few examples through our prepared remarks and in full price stores leveraging our new Polo boutique formats both in Europe and in Asia. And all of that is translating into what we are working to build in key cities which is this consumer centric eco system which means the consumer wherever he or she wants to shop. So those are I would say three key drivers that have supported the Asian and European performance.

As we look ahead we're actually really energized by the growth opportunities for the many years to come. If you just think about two simple data points right across Europe and Asia, first is we only have 36 full price stores across all of Europe. Once you benchmark that versus where the consumer opportunity is versus where the competitive set is significant growth opportunities. Second is China only represents today despite a good progress that the group has made there over the past few months, only represents 3.5% of our total global business. Again when you benchmark that with a number of our peers you get a good indication of the upside opportunities there. So were encouraged and excited about what's ahead in both Europe and Asia.

What's also really important is many of the success drivers that we're seeing in Europe and Asia actually were very relevant for us in the U.S. as we continue to work on stabilizing and pivoting this important market back to growth. And I think you've seen that we've made a number of organizational changes over the past few months that will enable us to rapidly leverage these learnings in North America.

[Michael Binetti, Credit Suisse]

Sure, thanks for the detail. If I could just ask Jane back to your comments on AUR details that you gave, still positive globally but negative one in North America. You said you cleared some product, can you talk about the guidance, you signaled slight -- it seems like you're signaling a slight reacceleration of low to mid single-digits for the remainder of the year. In particular you mentioned some targeted price increases in North America. We haven't heard that from you in a while. Can you talk about where you see opportunity and maybe help us reconcile that with some of the ongoing expectations to stay competitive on the promotional backdrop in the North America industry?

[Jane Nielsen, COO and CFO]

Sure, well as we look at pricing Michael we really see opportunities that we've called out in the past. So we continue to work on sharper promotion, we are continuing to move into better product and category mix, and a better balance of our merchandising assortment which is going to be favorable to pricing as we move forward. And then as you noted we called out that we have done competitive benchmarking and looked at select opportunities to take to get pricing in targeted and select areas. It is a part of our overall pricing approach and will really start to play out for us in the second half. But we've incorporated that into our guidance, we expect that our AUR journey will improve as we move into the second half while being cognizant that in North America with our efforts especially in the second quarter to move through some of our spring products, there will be a little more pressure on that AUR growth although we do expect overall AUR growth to improve more moderately in North America.

[Michael Binetti, Credit Suisse]

Okay, very, very helpful. Thanks again for all the details.

[Operator]

Thank you. Our next question comes from Matthew Boss with J.P. Morgan. Your line is open.

[Matthew Boss, J.P. Morgan]

Thanks, a nice quarter in a tough backdrop.

[Jane Nielsen, COO and CFO]

Thanks Matt.

[Matthew Boss, J.P. Morgan]

Maybe Patrice on the North American Apparel landscape both at wholesale and your own retail, I guess what exactly have you seen change versus maybe three or six months ago and I guess in light of that any changes specifically in your strategy necessarily to navigate the underlying reaching at cross currents [ph]?.

[Patrice Louvet, President and CEO]

Sure, so listen as we look at the overall picture actually the U.S. consumer remains relatively healthy, right, in our space. But we have taken a slightly more cautious view of the retail environment for the year ahead. We continue to clearly see challenges with brick and mortar traffic like both full price and outlets including foreign tourist volatility. And our focus now is really to make sure we offset this through higher conversion and accelerated efforts in marketing across channels in North America. Probably three things I would call out here, the first one is taking steps to mitigate the brick and mortar traffic and the promotional headwinds, right.

So if you look at the factory channel in particular we have a number of interventions underway. One is making sure we've got the right product mix and improving our offering across all the price points including elevated products as well as having the right entry price points. Two is working on our store marketing and particularly the window signage which is very important for this business. And then also working on marketing outside of the center to bring people into the center. So we're partnering with the landlords and leveraging all their platform probably more than we've ever done to really activate traffic and bring traffic into the center.

And then we were also raising the bar in terms of quality and targeting of our e-mail marketing. We have a very strong database that we can leverage and we're getting a lot more precise in terms of the messaging for the specific target group. So the combination of those factors we believe will lead to an improvement. And then you heard Jane talk about targeted price increases as well, right, where we believe we have largely driven by what we think the consumer reaction will be but where we believe we have pricing opportunities versus competition driven by I think the brand elevation work that we've done over the past few years. And the resulting increased value to the consumer. So let's say that's first intervention.

Second intervention as we look to really control our destiny with DTC it is actually focusing on digital improvement. We were really pleased with the traffic performance in North America RalphLauren.com this quarter up a very healthy 20%. Alright, so we want to fuel that but we also want make sure we're also translating that into strong conversion. So a number of interventions underway here, investments in mobile, about two thirds of all of our transactions are in mobile so it's very clear that that's how the consumer wants to interact and we're investing in strengthening our mobile capabilities whether that's how the visuals show up, how quickly the downloads happen, and so on and so forth. But you'll see significant progress on this front. Investment and personalization which we know is highly effective and that's actually coming in on stream over the next few days and weeks.

Working on our omnichannel capabilities, we are really connecting the website to our stores so recently we just launched find in-store which allows you to identify in your local store through the website what products are available, you can book appointments on our website for your local store, and so on and so forth. And then finally realigning as we talked in our prepared remarks our buys to be better balanced across core, seasonal core, and seasonal fashion. And then the other parts of controlling our destiny with DTC is the marketing activities that you've seen us do and you'll see us continue to do and accelerate in parallel with the increased investments and that's building exciting brand experiences with events like the upcoming U.S. Open, like limited editions we just dropped Polo Sport this past quarter which did very well both in denim and the silver edition. And then continuing to strengthen our connections and our activations of influencers and celebrities.

Then finally we are investing in kind of the store experience and also exploring new channels particularly in the digital front alright so new channels like [indiscernible] Rent the Runway we now have three of our brands on Rent the Runway; Lauren, Club Monocle, and more recently Polo Women's was launched on Rent the Runway and we're seeing very positive response, we're excited about progress we're making there. And obviously the whole social commerce platforms that are expanding across the country.

And then finally and this is a new thought, we've talked since we started the next chapter plan is really elevating our brick and mortar experience, investing in the overall store layout, in the lighting, in the fixtures, and in the overall experience we provide consumers both in wholesale, in factory, and in our full price stores. So the combination of these factors and this slightly more volatile environments give us confidence that we can continue to make progress in North America to stabilize the business and its growth.

[Matthew Boss, J.P. Morgan]

Great, and then maybe just a follow up Jane, help us to think about the components of the North American comp maybe between e-commerce and brick and mortar, if we were thinking about the second quarter versus the back half of the year?

[Jane Nielsen, COO and CFO]

Yeah I think on North America comp I think we're seeing that there will be some pressure on the digital compass we move through the year from these international flows that we called out in this quarter. But in the second half we believe that on digital some of the investments that we're making in personalization and driving better mobile conversion will start -- you'll start to see those pay out in the back half. And then in terms of the overall bricks and mortar comp you will see some improvement as we move through the year, again part of that is AUR led and so it'll be back more weighted in the second half as we move into the layers of pricing that we talked about.

[Matthew Boss, J.P. Morgan]

Great, best of luck.

[Jane Nielsen, COO and CFO]

And that's all Easter adjusted Matt.

[Matthew Boss, J.P. Morgan]

Okay, thank you.

[Operator]

Thank you. Our next question comes from John Kernan with Cowen. Your line is open.

[John Kernan, Cowen and Company]

Hi, good morning Patrice and James. Thanks for taking my question. I wanted to go back to international, obviously a point of strength. And maybe go back to some of the targets you laid out at the Investor Day about a year ago. Can you talk about the $500 million in revenue you expect in China, it feels like there's obviously a lot of momentum there right now, maybe you can talk about both the digital and physical direct expansion that's going on there right now and then maybe have a follow up on Europe? Thank you.

[Patrice Louvet, President and CEO]

Sure, you will attack this one Jane. So yes our goal is to indeed get Greater China to $0.5 million in revenue. We're making good progress. Again this quarter Mainland China up 30%, Greater China up 12%, continuing to see a strong progress across both digital and brick and mortar. To your point on those different platforms, I mean our thinking is really six big cities [indiscernible] Shanghai, Beijing, Taipei, and Hong Kong. And we build omnichannel eco systems across all of these with both brick and mortar presence, some more iconic elevated presence, and some kind of hard working from the revenue productivity stand point with our new Polo Boutiques coupled with our work with pure players and we've got a really nice partnerships and momentum with JD, with Timor [ph] and with WeChat and then also some strong partnerships from the concession stand point. And we're continuing to drive where we are and expand.

So we expect from a brick and mortar standpoint to open about 40 stores this fiscal year so about one a week if you remove the holidays. And on our way to achieving what we talked about last year on Investor Day which is around 150 stores across Greater China and then we continue to invest in expanding our digital presence through existing platforms and new platform and take advantage of all the key events that are happening there. So, we participated in 618 recently and actually had strong performance across the board with our various partners on that whether that was team JD or others. And we're doing specific programs with WeChat. And just so in general we feel good about where we are relative to the guide path that we had laid out for ourselves on our way to $0.5 billion and we sometimes get the question are you seeing any changes with the consumer in China right now and the answer so far is no. But the brand continues to resonate well with consumers and we're actually pleased with the mix of consumers we're getting both from a gender standpoint men and women, pretty balanced and also from an age standpoint, we're bringing in a lot of young consumers into the franchise.

[Jane Nielsen, COO and CFO]

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

[John Kernan, Cowen and Company]

Just a quick follow up on Europe, your strength there both in wholesale, retail, and within digital as well. So just wondering how we should think about Europe as your frame of guidance for the rest of the year, I know there's some moving pieces in macro environment so just how should we think about the quarterly flow of Europe as we go into the rest of the year? Thank you.

[Jane Nielsen, COO and CFO]

Yeah, John what we've seen in Europe and let me just give you the component pieces, we still see the underlying trends for your wholesale as about mid single-digit. There are obviously some shipment timing that goes on in Europe but we've been talking about that as the underlying trend and we see that as sort of the ongoing underlying trend for Europe wholesale. On the bricks and mortar side you've seen us have a pretty steady positive comp. We'd expect that to continue especially as we are overlapping the investments that we made in our factory outlet channel. That overlap will start to -- the benefit of that overlap with the investments that we made in inventory will start to tail off in the second half as we anniversary that but we're still encouraged by our bricks and mortar comp in Europe. And then as we anniversary the replatform of our digital site in Europe the first half will be stronger than the second half as we anniversaried that overlap but positive trends in Europe in e-commerce.

[John Kernan, Cowen and Company]

Got it, thank you.

[Operator]

Thank you. The next question comes from Kate Fitzsimons with RBC Capital Markets. Your line is open.

[Kate Fitzsimons, RBC Capital Markets]

Yes, hi, good morning. Thank you for taking my question. Jane my question is more on the cost saving efforts that you have done year-to-date. As you think about fiscal 2020 where do you see buckets of opportunities on the expense side as the year progresses, you spoke to some supply chain -- media buy here in Q1, any other movers [ph] you can share with us as the year progresses just in light of this more volatile environment that you're seeing? And then secondly, any update on the distribution center consolidation product or the headquarter relocation project, any update there would be helpful? Thank you.

[Jane Nielsen, COO and CFO]

Sure, so Kate as we look to FY20 we do expect that the DC consolidation is going to be durable throughout this year in terms of the benefit that we got from consolidating those in addition to the activities that allowed which was inventory consolidation. So that will continue and are procurement work on indirect expenses is also durable through the year. So we take on obviously the largest vendor contracts first but we are systematically moving through nearly all of our indirect vendor renegotiations and those are paced through the year as those contracts expire and are renewed. So you can expect to see that continue through the year. And supply chain efficiencies that we are working with our wholesale partners on should also be positive as we move through the years. So not only just repacking our product, using cross stock activities but also some of the work that we called out on product suppliers where we can make products more sustainable and more cost advantaged is ongoing work.

In terms of and also just organizational agility, based on some of the work that we've called out recently that we've done to simplify our organization you'll see some of that come through the payroll benefits as we move through the year notably in divisional cost structures and headquarter cost structures. Our work in terms of our headquarter consolidation is going well. You will not see that impact come through the financials until FY21. This is the year as we move that we do have some double rent expenses but you will see that be a durable benefit as we move through and we're very pleased with the supply chain consolidation. I'd say it's right on track with our expectations.

[Patrice Louvet, President and CEO]

If I could just add, we were also reworking the different capabilities we have externally. So, indeed you have seen the work on media going from 12 agencies to 4, doing that across all social and digital as well. We are getting nothing but better and cheaper so better capabilities and lower cost.

[Jane Nielsen, COO and CFO]

Next question please.

[Operator]

Your next question comes from Laurent Vasilescu with Macquarie. Your line is open.

[Laurent Vasilescu, Macquarie]

Good morning and thanks for taking my question. On the last call it was noted that half of the operating margin leverage expected for us by 2020 will come from the gross margin. Jane is that still the case and how should we think about the GM progression by quarter of the year? And then on marketing spend up 19%, how should we think about the second quarter and the full year?

[Jane Nielsen, COO and CFO]

Yes, so let me take your gross margin progression. We still -- as we've maintained our guidance and we still expect about half to come from gross margin expansion for the full year and about half to come from SG&A leverage again for the full year. As we look at the second quarter Laurent I see more, about two thirds of the operating margin expansion will come from gross margin expansion and about a third from SG&A leverage. So that's how you can think about the quarter.

In terms of marketing expenses as we move through the year we had a strong first quarter and I would expect that second quarter will be slightly less robust in terms of marketing expansion as we anniversary a lot of our 50th anniversary activities. You'll see some leverage from marketing in the second quarter but then you'll see marketing growth in the third and fourth quarter.

[Patrice Louvet, President and CEO]

We expect marketing all to increase ahead of sales again this fiscal year as we work our way towards marketing investments representing about 5% of total revenue.

[Laurent Vasilescu, Macquarie]

Very helpful, thank you.

[Jane Nielsen, COO and CFO]

Thank you, last question please.

[Operator]

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

[Dana Telsey, Telsey Advisory Group]

Hi, good morning everyone. As you think about the digital business and the progress that you're making there, how do you dissect it by region and also the AUR progress on digital promotions versus full price by region? Thank you.

[Jane Nielsen, COO and CFO]

So in terms of digital progress as we talked we're very pleased with what we're seeing in Asia and the benefit that we've had from our replatforming in Europe and the growth of those markets. We are investing in North America. I think Patrice call highlighted some of the pressures from international and we expect those benefits to start to play out in the second half and we're encouraged by that. In terms of our AUR are progression on digital, a) our digital AURs will really follow what we're putting in place across all of DTC and so the second half as we take some targeted pricing will be more robust than the first half. And the first half is weighted by clearing out of some of our spring product. But you'll see those promotion and list prices go into effect more in the second half.

[Dana Telsey, Telsey Advisory Group]

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

[Jane Nielsen, COO and CFO]

Starting in the second half you will see inventory that's closer aligned with our sales. We are trying to be quite flexible Dana as we manage BREXIT implications as well as China duty implications. And so we're going to be opportunistic as we were in this quarter and we accelerated some inventory into North America. So we're going to -- we're going to remain flexible on that but I think that as we move forward you will see inventory more closely aligned to sales.

[Dana Telsey, Telsey Advisory Group]

Thank you.

[Patrice Louvet, President and CEO]

Alright, very good. Well listen, thanks to all of you for joining this morning and we look forward to our next call early November. Have a great day.

[Jane Nielsen, COO and CFO]

Thank you.

[Operator]

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