Ralph Lauren Corp

NYSE:RL

Earnings Call Analysis

Ralph Lauren Reports Strong Q2 Growth and Raises Full-Year Guidance

Ralph Lauren's second quarter of fiscal 2025 showcased a robust performance, with revenues up 6% and direct-to-consumer sales driving growth. The company reported a 10% increase in average unit retail (AUR) and a notable expansion in adjusted gross margin by 170 basis points to 67.1%. Operating expenses grew 7%, reflecting strategic investments in marketing. Internationally, revenue surged 10% in Asia and 6% in Europe, with European retail comps up 15%. Given the momentum, Ralph Lauren raised its full-year revenue growth forecast to 3-4%, up from 2-3%, while maintaining a target operating margin expansion of 110-130 basis points.

Strong Second Quarter Performance Fuels Growth Outlook

The recent earnings call from Ralph Lauren highlighted a robust second quarter in fiscal 2025, marked by an overall revenue growth of 6%, surpassing expectations. This surge was primarily driven by stronger-than-expected performance in direct-to-consumer channels. Notably, retail comparable sales (comps) climbed 10%, indicating a healthy increase in full-price selling across all regions. This performance resulted in solid operating margins and confidence to raise the full-year revenue growth outlook from a previous estimate of 2%-3% to a new range of 3%-4% in constant currency.

Margin Expansion and Operational Efficiency

Ralph Lauren demonstrated effective management with gross margins increasing by 170 basis points to 67.1%, attributed to favorable shifts towards full-price and international sales, along with lower cotton costs. Adjusted operating margins rose 120 basis points to 11.7%. The company has strategically balanced operational expenses, with a modest 7% growth, while emphasizing investments in marketing as a long-term strategy for brand elevation. The guidance for operating margin expansion for the fiscal year has also been incremented, now expected to range from 13.6% to 13.8%.

Diverse Growth Across Regions

The performance across regions was encouraging, with North America showing a 3% revenue increase despite a decline in wholesale sales. North America retail comps improved significantly to 6%. Europe outperformed with a 15% increase in retail comps, benefitting from lower discounting rates and strong product resonance with consumers, particularly in France and Germany. Meanwhile, Asia saw a healthy overall 10% increase in revenue, driven primarily by a low-teens growth in both Japan and China, reflecting ongoing brand desirability.

AUR Growth Amidst Competitive Landscape

Average Unit Retail (AUR) saw substantial growth of 10%, exceeding initial expectations, thanks to reduced discounting and strong consumer response to the full product offering. The company foresees AUR growth to stabilize to mid-single digits for the second half of the fiscal year, as they focus less on like-for-like pricing and more on product innovation and marketing campaigns. This strategic emphasis on higher-end products aligns with Ralph Lauren’s goal to enhance consumer engagement and brand loyalty.

Future Store Expansion and Market Positioning

Ralph Lauren aims to expand its presence in key international markets, especially in Europe and China, where it plans to open a total of around 70 new stores this year. The European market shows particular promise with high growth potential, while also focusing on strategic locations in the Asia-Pacific region. Furthermore, the company intends to strategically reduce department store footprints while ensuring stronger year-on-year performance, aiming for long-term market sustainability and brand elevation.

Sustainable Growth Strategy Amid Challenging Environment

The management acknowledges ongoing global uncertainties, including inflation and supply chain disruptions, but remains optimistic about underlying consumer trends and brand strength. The strategic focus on sustainability, marked by achievements in lowering greenhouse gas emissions and innovative product offerings, not only enhances brand reputation but also aligns with long-term growth initiatives. Ralph Lauren's strong balance sheet, with $1.7 billion in cash, supports both operational investments and shareholder returns, further strengthening investor confidence.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter Fiscal Year 2025 Earnings Call. [Operator Instructions]

As a reminder, this conference is being recorded.

I'd now like to turn over the conference to our host, Ms. Corinna Van Ghinst. Please go ahead.

[Corinna Van Ghinst, executive]

Good morning, and thank you for joining Ralph Lauren's Second Quarter Fiscal 2025 Conference Call. With me today are Patrice Louvet, the company's President and Chief Executive Officer; and Justin Picicci, Chief Financial Officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to 1 per caller.

During today's call, our financial performance will be discussed on a constant currency adjusted 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 and principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release and to our SEC filings that can be found on our Investor Relations website.

With that, I will turn the call over to Patrice.

[Patrice Louvet, executive]

Thank you, Corey. Good morning, everyone, and thank you for joining today's call. We delivered strong second quarter performance and are entering the important holiday season with continued momentum across our brand product assortments, geographies and channels. Our performance through the quarter and first half of the year underscore the strength of our diversified growth strategy, our growing brand desirability and our powerful engagements with an expanding and increasingly elevated consumer base across genders, generation and markets.

Around the world, our teams continue to execute with excellence on our next great chapter accelerate strategy. In the second quarter, we outperformed our expectations across the top line, as well as gross and operating margins through what remains a choppy global operating environment. This enabled us to reinvest back into our brand-building initiatives and key city ecosystems to drive sustainable growth ahead.

Our retail business across every region led our performance once again delivering double-digit comp growth. Our continued pricing power is one barometer for the strength and growing desirability of our brand in the marketplace. Retail AUR was up another 10%, on top of 9% growth last year, ahead of our expectations on a more elevated brand positioning and further reductions in discounting. At the same time, we continue to operate with discipline to improve our expense management across the organization and strengthen our balance sheet. This enables us to invest behind our strategic priorities, all while delivering profitability ahead of our expectations. All of this gives us the confidence to take up our full year outlook ahead of holiday.

Let me take you through a few highlights from the quarter where we drove continued progress across our 3 strategic pillars. As a reminder, these include: 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.

First, on our efforts to elevate and energize our lifestyle brand. We are proud to have one of the most iconic and beloved brands in the world. And our teams continue to build on the legacy that Ralph created as we connect and engage with consumers from Tokyo to Shanghai, Paris to Milan and New York to L.A. This quarter was no exception, highlighting Ralph Lauren's place at the heart of culture. Some of the exciting moments from the second quarter included, first, our spectacular summer of sports.

We were honored to once again serve as the official outfitter of Team USA in the 2024 Paris Olympics and Paralympics, a cherished partnership since 2008. From our inspiring athletes to our on-air media personalities and celebrities like Beyonce, Kendall Jenner, Tom Cruise and Billie Eilish, all sporting timeless Ralph Lauren looks, our brand was front and center for one of the most successful summer games ever.

Supported by our athlete collaborations, Ralph Lauren was the #1 most visible fashion brand during the Paris Olympics. According to third-party metrics outpacing both our athletic and luxury brand competitors. We also celebrated our 19th year as official outfitter of the championships at Wimbledon. Wimbledon consistently ranks as one of our most successful global events of the year through a range of celebrity, VIC and influencer activations, including dressing stars like Zendaya, K-pop star, Mark Lee and Pierce Brosnan this year.

Closing out the summer, our North America teams continue to amplify our sponsorship of the U.S. Open, perhaps the most electrifying grant climb of the Year. Our retro-inspired uniforms on the court were only matched by the polish style of court. Together, these summer sports campaigns delivered more than 142 billion PR impressions globally, significantly exceeding our expectations, as we focus on driving long-term brand awareness, advocacy and desirability. And kicking off New York Fashion Week, our stunning world of Ralph Lauren Spring '25 runway show in the Hampton, this September.

Inspired by the natural beauty and free spirited elegance of coastal living as only Ralph can do. The event also brought together many friends of the brand, including Naomi Campbell, Naomi Watts, Jude Law and K-pop Star Winter among many others, helping to drive more than 33 billion PR impressions and a record 205 million views of the show online. These activations are driving strong, sustainable growth in new customer acquisition and engagement.

In the second quarter, we added 1.5 million new consumers to our DTC businesses, a high single-digit increase to last year. Consistent with recent trends, this new customer acquisition was predominantly led by younger, higher value and less price-sensitive cohorts. Our brand consideration and Net Promoter Scores increased globally, led by North America and Europe, and our online search grew high double digits, significantly outpacing our competitive set. And we continue to grow our social media followers by low double digits to last year, surpassing 62 million, led once again by Instagram, Threads, Line, TikTok and Douyin.

Moving next to our second key initiative, drive the core and expand for more. Ralph and our design teams continue to create timeless, sophisticated styles reimagined for our customers' modern way of living. Our Hampton show was a great example of how we are leveraging our powerful portfolio of highly recognizable core products. Style together with newer opportunities like handbags, in order to realize our brand's full long-term potential.

Starting with our core products, which represent more than 70% of our business. Sales were up low double digits ahead of our total company growth in the second quarter. Core product highlights from the quarter included our iconic mesh Polo shirts, cable net wool and cashmere sweaters, outerwear, including quilted jackets, sport coats and Polo baseball caps. We're also encouraged by the strong growth in our Polo original label, which enables us to offer a more elevated Polo assortment within our direct-to-consumer channels.

Our high-potential categories, including women's apparel, outerwear and handbags, together increased mid-teens, strongly outpacing our total company growth rate as we continue to drive our strategy of foundational pieces to anchor her modern wardrobe. Women's highlights this quarter included cable net and bear sweaters, relaxed shirting, dresses, and our outerwear programs, including barn and work jackets.

Within handbags, we drove double-digit growth and strong gross margin expansion compared to last year. Polo Women's led this performance once again supported by our expanded collection of Polo ID silhouettes for fall. Other exciting releases this quarter included our U.S. Open capsule, Denim Daydream, our third and final drop with Noemi Glasses; our first artist in residence, celebrating denim as the fabric of America, and towards the end of the quarter, we launched our latest Ping Pony collection with a portion of proceeds going towards the fight against cancer.

Pink Pony remains an important part of Ralph Lauren's decades-long commitment to cancer prevention and treatment in underserved communities.

Turning to our third key initiative, win in key cities with our consumer ecosystem. We remain focused on developing our key city ecosystems around the world. Our ecosystem approach delivers both elevation and consistency across all of our consumer channels and touch points. Within DTC, which comprises 2/3 of our business, we drove accelerated comp growth this quarter while also expanding our presence in key markets.

Comps were up 10%, above our expectations. This outperformance was led by our brick-and-mortar stores, while our digital channel was in line with plan. Globally, we opened 25 new owned and partner stores focused on our top cities, largely in Asia. Store opening highlights during the period included Giverny, Tulsa, Wuhan and Shenzhen, among others.

By region, Growth was led by Asia, up 10% this quarter and slightly ahead of our outlook. This was followed by strong mid-single-digit growth in Europe, where our teams continue to execute well across key markets. And importantly, North America returned to growth this quarter on ongoing strength in DTC and a more normalized wholesale trend.

Looking at China specifically, revenue was up low teens once again this quarter on top of more than 25% growth last year. This was driven by a combination of double-digit new customer acquisition, solid comp growth, new full price stores and concessions and expansion on newer platforms like Douyin. Our brand desirability continues to grow as we focus, first and foremost, on building our business with domestic Chinese consumers.

As a reminder, China currently only represents 8% of our total company sales. While we are monitoring geopolitical and macro developments, along with consumer behavior closely, we still see significant long-term opportunities ahead. And our ecosystem expansion remains disciplined as we largely focus on our 6 key city clusters in the market.

And finally, touching on our enablers. Our business continued to be supported by our 5 key enablers. In September, we published our annual timeless by design report, outlining our progress in delivering citizenship and sustainability programs that both leverage opportunities and manage risk to future proof our business.

Notable highlights include achieving a 33% reduction in absolute greenhouse gas emissions as we transition to more sustainable energy sources across our value chain, and continuing to drive innovation with sustainable materials, creating our first ever 100% recycled cotton, Polo Shirt as part of our Paris Olympics collection this summer.

In closing, Ralph and I are energized by our team's terrific progress through the first half of this fiscal year. Building on the strength of our timeless brand and diversified growth drivers, we remain focused on delivering consistently strong execution in spite of ongoing volatility in the broader operating environment.

Looking ahead as the holiday season gets underway, we have momentum and we are still firmly on offense. We are executing on our long-term game plan, further elevating our brand and positioning in the marketplace while remaining focused on what we can control.

And with that, I'll hand it over to Justin to walk us through the financials, and I'll join him at the end to answer your questions.

[Justin Picicci, executive]

Thanks, Patrice, and good morning, everyone. Our fiscal '25 is off to a strong start. We drove second quarter results ahead of our expectations across every key metric, underscoring the diversity of our strategic growth drivers, along with the continued momentum and growing desirability of our brand.

Second quarter revenue growth exceeded our plan, driven by better-than-expected performance in our direct-to-consumer channel. Gross and operating margins were also above our outlook, with upside to gross margins, enabling us to mitigate supply chain disruptions while also fueling additional investments in brand building and digital.

All 3 regions contributed to operating margin expansion, and we achieved all of this while continuing to navigate a highly uncertain global operating environment. This progress through the first half of the year gives us confidence in raising the full year outlook we introduced back in May. But before I get to guidance, let me walk you through our financial highlights from the second quarter, which, as a reminder, are provided on a constant currency basis.

Total company second quarter revenue growth of 6% exceeded our outlook, led once again by our direct-to-consumer channels. Total company retail comps grew 10% as we increased our penetration of full-price selling in each of our regions. Total digital ecosystem sales, including our own sites and wholesale digital accounts, increased high single digits.

Total company adjusted gross margin expanded 170 basis points to 67.1%. This strong performance was driven by favorable mix shifts towards our full price and international businesses, AUR growth and lower cotton costs. AUR increased 10% in the second quarter. This exceeded our mid-single-digit outlook driven by greater-than-expected reductions in discounting across every region as consumers responded positively to our full '24 offering. Our AUR growth also continues to be supported by long-term mix benefits, channel, geographic and product. We still expect mid-single-digit AUR growth for the second half of the fiscal year as we rely less on like-for-like pricing this year.

Adjusted operating expenses grew 7% to 55.5% of sales, up 60 basis points to last year. The increase was driven by the planned timing of marketing investments, which represented 8.7% of sales this quarter as we focus on driving new customer acquisition and long-term brand desirability. Key campaigns included our Spring '25 runway show in the Hamptons, Team USA at the Olympics and our Grand Slam sponsorships. We continue to expect full year marketing at about 7% of sales, implying lower spend in the second half of the year, notably in Q4.

Excluding marketing, adjusted operating expense rate was flat to last year as increased reinvestment to drive our digital business was offset by corporate cost savings. And our adjusted operating margin expanded 120 basis points to 11.7%.

Moving to segment performance and starting with North America, second quarter revenue inflected back to growth, up 3% and exceeding our expectations. Continued momentum in retail more than offset a modest planned decline in wholesale, which normalized from Q1 trends. In North America Retail, second quarter comps accelerated to 6%. Brick-and-mortar comps were up 9%, with strong growth in both full price and outlet stores.

Digital comps declined 2%, improving sequentially as we invested in more targeted marketing, merchandising and site enhancements under new digital leadership. Our digital wholesale business remained encouraging with positive high single-digit sellout in the quarter. Total North America wholesale revenues decreased 3%, in line with our full-price sellout this quarter. Our wholesale AUR increased mid-single digits, stronger than recent trends on well-positioned inventories in the channel. We continue to expect our wholesale sell-in to remain generally aligned with sellout through the remainder of the fiscal year.

Our outlook still includes the planned exit of 45 department store doors this fiscal year. While the ongoing exits are not material to our financial results, we continue to proactively evaluate and refine our brand presence on a door-by-door basis.

Moving to Europe. Second quarter revenue increased 6%, driven by strong performance across our retail channels. All key markets delivered growth in the quarter with the exception of the U.K. where underlying trends are improving. In Europe retail, comps increased 15% to last year, well exceeding our expectations.

Growth was balanced across our brick-and-mortar and digital channels. Europe AUR continued to grow strongly on top of last year's high single-digit increase, driven by our brand elevation with discount rates down significantly to last year despite a competitive promotional environment.

Within DTC, we were especially encouraged by our performance in France and Germany, which both delivered high single-digit growth this quarter. Within France, specifically, we delivered our highest ever brand consideration scores led by women's and next-gen consumers, supported by our marketing amplifications around our summer of sports, including the Olympics. Europe wholesale increased slightly and below our full year outlook of low single-digit growth, reflecting strategic reductions in excess sales to the off-price channel and shifts in receipt timing to the second half of the fiscal year related to Red Sea disruptions.

Excluding these impacts, underlying growth in our Europe wholesale business would have been up approximately mid-single digits for the quarter. Looking ahead, we still expect challenging compares in our digital pure-play accounts as we lap significant restocking that took place in the second half of last year.

That said, we expect total Europe wholesale growth to improve sequentially in the second half of fiscal '25, based on solid underlying trends and the receipt shifts from Q2 into Q3 and Q4. We remain encouraged by our team's strong execution and the strengthening brand perception in Europe, especially given the ongoing dynamic operating environment across the region.

Turning to Asia. Revenue increased 10%, reflecting growth in all markets. Retail comps were up 11% on top of an 8% increase last year, with strong growth in both digital and brick-and-mortar stores. Asia results exceeded our outlook, led by strong performance in Japan and China. Japan grew low teens to last year and accelerated from first quarter trends, supported by key marketing campaigns, stronger full-price selling and continued tailwinds from inbound tourism.

China also grew low teens, consistent with our outlook for the quarter and full year, driven by comp growth, high-quality new customer recruitment and expanded distribution.

Moving to the balance sheet. Our strong balance sheet and cash flows continue to be key enablers of our Fortress Foundation, allowing us to make strategic growth investments in our business while returning cash to shareholders. We ended the quarter with $1.7 billion in cash and short-term investments and $1.1 billion in total debt. We generated about $300 million in free cash this fiscal year-to-date, enabling returns of approximately $375 million in the form of dividends and share repurchases even as we continue to make important long-term investments in our brand, technology and ecosystems.

Net inventory decreased 6% to last year, in line with our plan. Weeks of supply improved versus last year despite ongoing disruptions related to the Red Sea. Our inventories are well positioned heading into the holiday season in each of our regions, including North America, despite the 3-day East Coast port strike in early October. Our teams leveraged our agile and diversified supply chain to preemptively reroute a portion of our fall holiday receipts to the West Coast, along with select use of air freight in anticipation of a potential strike.

And we continue to closely monitor and protect incoming supply ahead of the next deadline for contract negotiations in mid-January. We still expect to end fiscal '25 with inventories generally aligned to revenue growth.

Looking ahead, our outlook remains based on our best assessment of the current geopolitical backdrop as well as the macroeconomic environment. This includes inflationary pressures and other consumer spending related headwinds, supply chain disruptions and foreign currency volatility among other considerations. For fiscal '25, we now expect constant currency revenues to increase in the range of approximately 3% to 4%, up from 2% to 3% previously.

Our outlook continues to include stronger growth in DTC and our international markets. Foreign currency is now expected to negatively impact revenue growth by about 40 to 60 basis points, down from 150 basis points previously driven primarily by improvements in Asian FX rates.

With regards to this year's revenue cadence, the third quarter is expected to be negatively impacted by the timing of this year's Thanksgiving and Christmas holidays, including a shorter holiday selling window and a shift in post-Christmas sale dates in our North America outlets into Q4. These headwinds are expected to be partly offset by a roughly 5-point shift of Europe digital comps into Q3 due to the earlier timing of Boxing day sales this fiscal year. Our fiscal fourth quarter will also be negatively impacted by a late Easter, which shifts into Q1 of fiscal '26.

Despite all of these moving pieces, we remain confident in our underlying trends and expect to deliver solid growth in both our Q3 and Q4 comps. We now expect operating margin to expand about 110 to 130 basis points, up slightly from our previous outlook to a range of 13.6% to 13.8%. In constant currency relative to our fiscal '22 Investor Day base period, this keeps us firmly on track to deliver our 15% operating margin target this year.

We expect gross margin to expand 80 to 120 basis points, driven by a favorable mix shift towards our international and full price DTC businesses, continued growth in AUR and lower cotton costs. These drivers are expected to more than offset incremental headwinds from labor, non-cotton raw material costs and rerouting inventories into the U.S. from the East Coast. And for fiscal '25, foreign currency is expected to negatively impact our gross and operating margins by about 20 basis points.

For the third quarter, we expect revenues to increase in a range of 3% to 4% in constant currency, led by our DTC channels. Wholesale is expected to continue improving sequentially from first half trends, as North America sell-in more closely aligns the sellout and Europe wholesale receipts shift from Q2 into the back half of the fiscal year.

Foreign currency is expected to benefit revenue by approximately 10 to 50 basis points. We expect third quarter operating margin to expand approximately 100 to 140 basis points in constant currency, driven by gross margin expansion. Marketing as a percentage of sales is expected to be roughly in line with last year in the third quarter to support our global holiday activations and lower in the fourth quarter. And foreign currency is expected to have a roughly neutral impact on both gross and operating margin in the third quarter.

We still expect our fiscal '25 tax rate to be in the range of 22% to 23% for the full year, while the third quarter rate is expected to be around 22%. And lastly, our outlook includes CapEx in the range of $250 million to $300 million.

In closing, we are strongly encouraged by our team's execution, focus and dedication in what continues to be a highly uncertain global operating environment. All brands are not created equal, and Ralph Lauren remains one of the most powerful and authentic brands globally. This gives us the credibility to grow not only our core businesses, but also continue to expand our high-potential categories. And we are building on our momentum.

Ralph's vision of inspiring the dream of a better life continues to resonate across generations and geographies. And we remain committed to supporting the thoughtful expansion of the businesses that will bring this vision to life over the near and longer term.

With that, let's open up the call for your questions.

[Operator]

[Operator Instructions]. The first question comes from Matthew Boss with JPMorgan.

[Matthew Boss, analyst]

Congrats on another really nice quarter. So international has been a key driver of your consistent outperformance for more than a year now. Could you elaborate on the enablers driving the outsized level of growth that you're seeing in Europe and China, what gives you confidence that this momentum can be sustainable?

And then Justin, with operating margins now tracking to mid-teens constant currency this year, could you speak to multiyear margin drivers that you see remaining?

[Patrice Louvet, executive]

I really want to start by saying that we are really proud of our team's execution in every region right now. And yes, our performance in key international markets has been quite strong in what hasn't been a particularly easy operating environment. But whether you look at China, Japan, Germany, France or Italy, we're driving elevation, we're driving domestic demand with highly engaged new and existing customers.

As you saw in our guidance increase this morning, our strategy is delivering, and we have confidence in our continued momentum ahead. So why is that? And I would call out 3 core reasons that are going to sound familiar to you, Matt. First, we have a very unique, timeless brand. that we are nurturing and investing behind. You saw this with a rolling thunder of marketing and cultural activations ranging from the Olympics to Wimbledon to the U.S. Open to an incredible fashion show in the Hamptons and more. And we remain committed to investing in our brand, not just in the summer, not just during holiday, this holiday, but really with an always-on mindset and that is serving us very well around the world.

The second point is that our teams are designing and delivering product that's resonating with consumers, across geographies and across generations. And this is really about our enduring brand codes of quality, timelessness and style, right, ranging from our powerful core, you will have heard that our core was up 70% of the business and was up double digits, so performing strongly this quarter again. And that's the foundation of this company to more innovative items based on recent trends like foreign jacket, like our Polo IV bags like Polo 67 fragrance. This broad range of products is really resonating with consumers. And I think it's this breadth and depth of Ralph Lauren lifestyle portfolio and our ability to flex that are true competitive edges in an ever cycle fashion market.

The third point is we have a proven elevated go-to-market strategy. This is well underway in places like China, and across Europe, where we've zeroed in in our Tier 1 top cities, right? We talked some of them on the call. And in North America, we are implementing a similar strategy, we're encouraged by the inflection back to growth with 5 quarters of comp growth under our belts with latest quarter, North America comps up 6. But in general, I think we see we're seeing performance across all of the key cities, be strong, starting with our brick-and-mortar stores.

So listen, I've said it before, but it bears repeating. In a volatile environment, Ralph Lauren is firmly on offense. We have momentum. Our multi-lever strategy is working, and we're going to keep executing with agility and excellence.

And with that, I'll turn it over to Justin to answer your margin question.

[Justin Picicci, executive]

Matt. So on the margin question, we're focused on delivering on our commitments, right? And that's consistent with what you've been seeing. We'll continue to balance delivering on our margin targets, while also considering and making investments that's going to deliver for the longer term.

We took up our guide for this year's operating margin expansion to $110 million to $130 million basis points up, implying that we're firmly on track with our fiscal '25 Investor Day target of that 15%, but 15% is not a ceiling. We're going to continue to focus on driving margin expansion, along with continued strategic investments to deliver long-term growth, we could see us reinvest in upside into marketing, for example. And if you think about the longer term beyond fiscal '25 strategy, the brand elevation strategy continues. And from a margin expansion perspective, it will likely be a combination of modest gross margin expansion supported by the durable levers that we've talked and expense leverage as we scale the investments that we make.

[Operator]

The next question comes from Jay Sole with UBS.

[Jay Sole, analyst]

Justin, can you talk about your confidence in Ralph Lauren's pricing power through maybe a less favorable pricing environment ahead? And how much further do you think you can go with pricing?

And then maybe, Patrice, can you just talk about the performance of the full-price stores in the U.S. in the quarter and how that impacts your view on store opening potential looking out next year and beyond?

[Justin Picicci, executive]

Our brand has been an important backbone to our pricing power. And we've put in a lot of work over the last 7-plus years to invest in and to elevate our brand. And we'll see these investments, these brand building investments continue for this holiday and also beyond. And as you know, we planned for mid-single-digit AUR growth this year, coming off a few years of like-for-like pricing that we took to offset cost inflation. As we mean less on like-for-like in the near term, our longer-term AUR drivers are remarkably durable and they're flexible, illustrating.

So on the product side, we're still elevating, starting with our core icons and tapping into category opportunities like women's like outerwear, like hand bags. Consumers are clearly gravitate into the higher end of our assortment is our marketing, our elevated experiences in our investments in quality. Another steady benefit to AUR is around our strategic and deliberate changes in geo and channel mix with a particular focus on growing that high-quality full price distribution across all of our regions.

And lastly, you'll see us continue to invest in this newer muscle of customer acquisition, focusing really on customers who enter the brand at high-value consumers, meaning they start shopping with us at full price and with bigger baskets. This customership enables us to pull back on promotions and discounts and discount less over time. So we've consistently demonstrated we can flex fees in other various levers up or down to adapt to whatever the current macro or the current pricing environment may be, including when that environment is more competitive.

And AUR, it's ultimately an outcome of these drivers, and in turn, it drives gross margin. And there, we've seen solid expansion both in the quarter and over the past few years, and we expect more of that to come as we move forward.

[Patrice Louvet, executive]

Jay, on the full price store question, well, listen, Ralph Lauren stores, full-price stores in North America continued to lead our performance consistent actually with the last 14 quarters driven by traffic, right? So we have a model that's working here. I think the things to highlight are strong continued momentum despite strong compares, we're continuing our elevation efforts in our full-price stores, those of you who get a chance to visit and hopefully, you experienced that. And we drove favorable mix from full price selling and from women's growth, which has been a disproportionate contributor to our performance.

Our promotional discounts are actually down in Q2, supporting further the full price point I was making earlier. So we feel very good about the momentum we have in our full-price stores. Our team is doing an excellent job in North America in these stores, engaging with consumers, driving client selling, showcasing products that consumers are looking for. I'm really encouraged by the progress we're making in new store openings. So we're still leaning into that. We have many opportunities around the world and in North America. You'll recall, we guided at Investor Day, 2.5 years ago, that we would open 15 to 20 new full-price stores in North America. We are on track for that.

The next one, I believe, is in San Francisco. On Jackson Street, we're happy to actually return to San Francisco with the Ralph Lauren store. So excited about that. And you're going to continue to see us drive that part of our business disproportionately, continue to expand the footprint. And what we're also really pleased about is the flow-through that we're seeing from a profitability standpoint in these stores, consistent in North America and around the world.

[Operator]

Next question comes from Michael Binetti with Evercore ISI.

[Michael Binetti, analyst]

Congrats on a nice quarter. I know you guys are busy at work. A couple for me. On U.S. wholesale down 3% in the quarter, you said it should trend forward at a pace close to sellout from here. Could this be positive this year based on what you're seeing? And maybe what are the initial orders or calendar '25 looking like?

And then on SG&A, Justin, it sounded a while that will be a bigger driver in the next multiyear plan. if we exclude marketing, SG&A was about flat on 6% revenue growth. I'm curious, can you start to lever SG&A, excluding marketing on mid-single-digit growth and how to think about timing when you see SG&A start to pivot to leverage?

[Justin Picicci, executive]

Sure. Thanks, Michael. So on the North America wholesale performance, we are encouraged. We did see, as we expected, we saw our sell-out and sell-in align in Q2 at that down low single digit. And when you pick that apart, there are green shoots there. We're seeing our more upper tier distribution work really well. We're seeing top key city doors outpace the fleet, and we're seeing digital continue to outperform in the quarter. So certainly, some green shoots say that we're leaning into.

As you know, we're calling for kind of a stabilization of that down low single digit as we hedge through the back half of the year, but certainly encouraged by the stabilization. On the SG&A leverage, our guidance for this fiscal year, as you know, implies SG&A leverage. As we saw again this quarter, we continue to balance delivering on the short term with reinvesting upside behind our business and brand to drive growth for the longer term.

And as you mentioned, looking at the first half of the year, in Q1, we delivered SG&A leverage ex marketing and in Q2, our rate was flat when you strip out marketing. We had some big brand moments in the first half of the year, some of which we didn't have in the first half of last year, like the Olympics and our fashion shows, which drove the deleverage. So we're making choiceful decisions to invest behind our brand, and you're seeing that play through. And we're still, by the way, taking up our profitability guide, right? So we're seeing it flow through both in the current year and then also for the longer term.

Overall, if you take out the quarterly timing of marketing we're delivering leverage in the first half. And looking ahead, we expect our marketing rate to rebalance versus last year, notably in Q4, which is a smaller quarter. So I think we feel pretty good about the control we have around our expenses and decisions we're making to reinvest some of that upside.

To your point on the revenue growth, the leveraging again, I think that we're pretty much there with wholesale stabilization and with our DTC growth that we've seen, I think we've got some optionality, and we do plan on delivering leverage for the full year.

[Operator]

Next question comes from Dana Telsey with Telsey Advisory Group.

[Dana Telsey, analyst]

As you think of the progress that you made both in the core assortment where basically it accelerated up low double digits from low double digits from up low singles last quarter. And the high potential categories up mid-teens from up mid-single digits. Is that in all channels? Is it globally? How do you see the increasing resonance and given you mentioned the beginning, new customers, is that part of the driver, too? And then I have a follow-up.

[Patrice Louvet, executive]

Sounds good, Dana. So I can't wait for your follow-up. Justin is jumping up a bit. Listen, as far as the product lineup is concerned and its resonance around the world, it's actually very consistent. So our core is resonating in Tokyo in Seoul, in Shanghai, in Milan, and I could go on and on. So we're seeing very consistent response to our foundational item, right, for Polo shirts, our Cable knit sweaters or sports coats, and that's exactly really exciting to see. And we're leaning into that. I think at a time where consumers are worried about the future around the world where they're more discerning on how they spend their money they really turn the brands they know, they turn the product categories they trust.

And obviously, Ralph Lauren has incredible credibility in these categories. So you're going to see that everywhere around the world, and it's not a 1 quarter phenomenon. We've been seeing that for a while. It's in part the result of our strategy, which is to focus on the core first and then expand for more. On the high potential category, same story. I mean, women's, particularly driven by Polo Women's, been doing particularly well over the past few quarters and certainly a real highlight this quarter, we are seeing that resonate everywhere around the world.

And when I travel and you see a lot of young women supporting our Polo cap or or bear sweaters, whether that's in Asia, Europe or here in North America. Same is true for outerwear. And obviously, we're now really in the season of outerwear, but we shifted that business to be an always-on business as opposed to a seasonal business, and we've seen strong consistent growth on that. And then we're really pleased with the handbag progress, right? This is driven by Polo ID and that whole collection, which is really resonating with the younger cohort. Again, you'll see that consistently around the world.

One of the things that gives us confidence moving forward is the breadth of our performance, right? This is not driven by one region, one channel, one product category. We have a very diversified growth model, and it's really playing out here. We're seeing pretty consistent performance around the world. You saw North America now back to growth, DTC comps double digit, and that's pretty true around the world. So we're running the game plan focused on our top key cities, but very consistent around the world, we're seeing very consistent consumer response. You had a follow-up data, which you're very lucky you don't give...

[Dana Telsey, analyst]

I know. For Justin, this is a just in one -- so as you think about tariffs, what percent of your goods are directly imported? How much -- and including how much comes from China? And how do you adjust either sourcing or pricing to the end consumer?

[Justin Picicci, executive]

Yes. Thanks, Dana. So our global sourcing and supply chain is agile and well positioned. We have strong partnerships around the world. And that's really served us well and been a key differentiator for us through the pandemic and beyond. And we've significantly diversified that sourcing footprint over the past 7-plus years and developed alternate production for our key product categories as well as near-shoring capabilities for our regions is as part of that global diversification, China now represents about high single-digit percentage of our globally sourced units about the same as our China sales penetration.

So we'll wait and see what, if any, future policy ultimately gets passed, but we've navigated tariffs successfully before, including not so long ago, and we're going to remain agile and continue to proactively develop and scale new global supply chain opportunities to mitigate any potential risks and disruptions.

[Operator]

Next question comes from Paul Kearney with Barclays Capital.

[Paul Kearney, analyst]

Just drilling down on comp store sales. performance in the quarter. In North America, can you provide further detail on outlet and the results from some of the changes you have made in the stores on staffing and product? And then Europe came in significantly ahead of expectations for all the reasons, Patrice, that you already went through, but what are some of the drivers versus your expectations? And how to think about that for the remainder of the year?

[Justin Picicci, executive]

Sure. So on the North America kind of trends, kind of picking a step back, really, really pleased with our performance, our brick-and-mortar comp up high single digit with our full price stores continuing to lead that performance where we saw just continued momentum, solid traffic.

On the outlet side, we also saw acceleration, really, really off the backs of some really strong traffic. So we were able to see kind of traffic drive conversion kind of picked up and so we did see a pickup compared to Q1. And I think in general for DTC, as we think about going forward, we expect continued strength, but we know we're up against a compressed holiday period, and we also have an end-of-season outlet sales shift in Q3. So we do expect continued momentum, but it's a bit of a moderation in that growth as we look forward.

On the Europe side, I think we feel -- so we took up our guide on the really strong first half outperformance. We're really encouraged by Europe. And you think about the context that we're operating in, it continues to be a very dynamic operating environment. So the 2 quarters of [ south ] performances behind us, healthy underlying trend growth in Q2 across all key markets ex the U.K., which the underlying trend was growing when you take out some of the off-price noise, we feel good taking our outlet up to that higher end of the initial guide. So leaning towards that plus low to mid-single-digit range with DTC at the higher end and wholesale at the lower end. We continue to be cautiously optimistic based upon our team's strong execution and our strengthening brand perception in the market.

[Operator]

The next question comes from Brooke Roach with Goldman Sachs.

[Brooke Roach, analyst]

Patrice, you commented a few times about strong full price sales momentum for the brand. as you evaluate the brand's discount rate overall in North America across both the full line and outlet store channels, how close are we to optimal discount rates overall and what are the plans for pricing and promotions as we move into this holiday season and beyond?

[Patrice Louvet, executive]

So I guess, headline message group is, first of all, let me start globally and then I'll double-click on North America. Globally this quarter and our general trend has been reduced promotional activity, right? And actually, that's contributed to the stronger-than-expected AUR this past quarter, up 10%. So direction of travel is reduction of discount. That applies to North America as well. And we're on an elevation journey. So our expectations will continue to mix AUR up.

I think from a like-for-like pricing, we're going to stay relatively stable for the foreseeable future. Obviously, we'll stay in touch with how costs evolve, but I think -- I don't think we're going to need any specific like-for-like pricing bar Japan, where we're working through kind of durable FX changes.

And then on the promotional front, I'd say direction of travel is elevation. So pull back on promotion is our game plan. But we're going to stay nimble right? And given the magnitude of progress we've had on AURs over the past 7 years now, we have the flexibility to get sharper where we need to get sharper, but in general, our expectation is we're going to continue to run the play as we've been doing these past few quarters, continue to pull back on promotion. I don't know, Brooke,I don't know how to define -- I wish I could give you a good answer and I don't know how to define what optimal promotional level is because it's very dependent on the competitive environment we operate in, right? If we were the only brand that would be easy to define, but consumers have choices.

But this being said, I think we're laser focused on making sure that we drive excitement with our target consumers that we drive engagement that they see the value in investing in low foreign products -- and I think as you can see from our performance this quarter and our confidence in the future, we plan to continue to run that play.

[Operator]

The next question comes from Laurent Vasilescu with BNP Paribas.

[Laurent Vasilescu, analyst]

Justin, I think you mentioned that AUR for the at think it was mentioned that AUR's expectation for the full year is to be mid-single digits, which I think applies AURs to be up low single digits, which then I don't -- does that imply that unit velocity is now starting to become positive for this year and potentially beyond? And then just quick modeling point, Justin, I think you mentioned the Boxing Day, the 5 point a tailwind to 3Q, but I think you also mentioned that the headwinds from the U.S. holiday, shorter holiday and Easter. On those 2 headwinds, can you maybe the audience parse out what those are in terms of like percentage point headwinds as we kind of model out with the 3Q and 4Q?

[Justin Picicci, executive]

Sure. Thanks, Laurent. And I'll do the second first. So in terms of the puts and takes, the compressions and the ships for the second half that we bake into the guidance, I would say the holiday shifts in depression have less than a point of net headwind on our Q3 revenue. On the flip side, we're expecting about a 1 point net benefit to our Q4 revenue from these ships. So still really solid underlying trends in the second half despite some of these puts and takes.

On the unit growth question, we do expect moderation from our Q2 AUR growth levels, but still healthy AUR growth in that low to mid-single-digit range. If you think about Q2, what's really interesting is we drove double-digit comp and double-digit AUR growth. So we're not buying share. We're taking share. And so when you think about units. We do remain focused on driving unit growth in addition to AUR. In fact, we're doing that today in targeted categories, markets, channels, think Asia, think Europe, think our full-price channels. Think our high-growth categories, handbags, sweaters. So as we lean less into like-for-like pricing with inflation cooling and AUR growth moderates, we do expect to see that gap between AUR growth and total unit growth continuing to contract.

[Operator]

The next question comes from Chris Nardone with Bank of America.

[Christopher Nardone, analyst]

Can you elaborate on your outlook for China for the rest of the fiscal year and confirm whether you've altered your expectations for the back half relative to your initial guidance. And then longer term, is there still significant opportunity to expand your door count in China? And if you could talk through how you're balancing and investing in the region today with the current macro climate?

[Patrice Louvet, executive]

Yes. Obviously, China is on many people's minds these days, Chris. So first of all, we feel very good about the momentum we've had in China. We've been growing 17 quarters in a row and through COVID, through the uncertainty on luxury through pressured consumer sentiment. So we are energized by the near- and long-term growth opportunities in China again, up 13% this past quarter. And what's driving it is the combination of new customer acquisition, double-digit growth this quarter. Solid comp growth across a meaningful store footprint now. I'll get to your question on expansion. New full-price stores. We're excited about the store. We just opened in Shenzhen that looks absolutely stunning is off to a very strong start.

And then also new platforms, right? We are learning about Douyin and learning how to do that well. Actually, our women's Polo designer is in China. As we speak with the teams to work through how best showcase Polo women's to Chinese consumers on that platform. So these drivers are durable growth drivers for the company. The brand is resonating very nicely the product categories are connecting, as I mentioned earlier, on Dana's question, really nicely with the Chinese consumer. And our focus key city ecosystem on the top 6 cities in China I think, are motoring quite nicely. So our ambition for China is unchanged.

And we -- today, China is about 8% of the total company. So still a relatively small share of Polo Ralph Kauren and the potential to be much more important. Specifically on store opening. So we guided that we're going to open about 70 stores in Asia this year, which is roughly -- it's pretty consistent with what we said in prior years. A number of those stores are in China, but we're being very disciplined, and I actually really appreciate the work our teams are doing in that market to be highly selective on where we show up, how it connects to the ecosystem and the idea is not to just expand for expansion stake and get short-term benefits, but really build the brand for the next 5 and the next 15 years.

And we continue to have significant runway in an environment that is volatile, and we obviously stay very much in touch with that, but continue to be ambitious about the opportunities for us. In China, along with other geographic opportunities in Europe, in the Western North America that really back to our diversified growth driver strategy.

[Operator]

Our final question comes from John Kernan with TD Cowen.

[John Kernan, analyst]

Congrats on another great quarter. Patrice, Europe comps up 15%. It's your least penetrated region from a DTC perspective. How are you thinking about both factory stores and full price stores in Europe? It seems like there's some green shoots here. The comps on top of what you put up last year are obviously really impressive?

[Patrice Louvet, executive]

So that's a very timely question because I was actually talking to our DTC leader from Europe yesterday in this very [indiscernible]. Listen, we're really pleased with the work our teams are doing on the ground in Europe on DTC, both actually brick-and-mortar and great performance on digital as well. So this is not a 1-quarter story. We've been delivering consistently in Europe, nicely ahead of our expectations for a few quarters now.

To your point, we're still very underpenetrated. When you benchmark to a number of our competitors, while we have expanded our store presence meaningfully as we think through kind of the next phase of growth, and we'll talk more about that next year in terms of what the next 3 years looks like, we see significant opportunities for continued store expansion either in key cities where we are already in, where our footprint is limited, right? There are a number of key cities where we only have one store, we have opportunities to do more in London. We don't know the exact number, but we have between 5 and 10 stores and there's an opportunity to do more than that.

So we're feeling good about the key cities that we are in. And then there are a number of cities where we actually don't have a footprint that remain significant opportunities for us. So we're on track with our Investor Day targets. We said we'll open between 40 and 50 full-price stores, either owned or partnered. We're on track with that.

We opened 14 new -- in total, 44 new stores since fiscal year '22. We're planning about 20 stores this fiscal year. I think we just opened this past quarter from what our EMEA leader was telling me recently 14 stores in the past quarter in Europe. So we're on track with the game plan that we've laid out. We have significant growth opportunity. But similar to my comment earlier on China, we are being very selective on where we show up, what we build and how we're going to engage with the consumer in the context of the ecosystem that we're building in each of the cities. But ambitious and excited about what the future looks like for us in EMEA and very grateful for the outstanding work that our teams are doing there across the markets.

All right. Well, listen, thank you for joining us today. We look forward to speaking with you on our third quarter earnings call in February. Until then, on behalf of Ralph, Justin and the rest of our team here at Ralph Lauren, Happy holidays and early happy holidays. Take care.

[Operator]

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