雷夫·羅倫馬球 (RL) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ralph Lauren First Quarter Fiscal 2019 Earnings Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mrs.

Evren Kopelman.

Please go ahead.

Good morning, and thank you for joining Ralph Lauren's First Quarter Fiscal 2019 Conference Call.

With me today are Patrice Louvet, the company's President and Chief Executive Officer; and Jane Nielsen, Chief Financial Officer.

(Operator Instructions)

During today's call, we will be making some forward-looking statements within the meaning of the federal securities laws, including our financial outlook.

Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements.

Our expectations contain many risks and uncertainties.

Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.

To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release and to our SEC filings that can be found on our Investor Relations website.

And now I will turn the call over to Patrice.

Thank you, Evren.

Good morning, everyone, and thank you for joining today's call.

We're pleased to report first quarter fiscal 2019 results that reflect progress on our Next Great Chapter strategic growth plan that we shared with you at our Investor Day in June.

We're encouraged by the start to the new fiscal year as first quarter results showed improvements in both the top and bottom line.

A few of our key achievements this quarter included: high single-digit growth in our average unit retail globally; double-digit growth in Asia, our key growth region; and digital commerce up high single digits.

This solid start enables us to modestly improve our outlook for the year.

Our long-term plan is based on our 3 guiding principles: first, to put the consumer at the center of everything we do; second, to elevate and energize our brands; and third, to balance growth and productivity.

With these principles in mind, we're focused on executing our 5 key strategies: first, win over a new generation of consumers; second, energize core products and accelerate high-value, underdeveloped categories; third, drive targeted expansion in our regions and channels; fourth, lead with digital across all activities; and fifth, operate with discipline to fuel growth.

Let me take you through the progress we've made in the first quarter across these initiatives, starting with the first one, win over a new generation of consumers.

Our goal is to recruit millions of new consumers into our brand each year.

To achieve that, we're continuing to increase our marketing investment and shift our spend to digital channels that matter most to consumers today.

In the first quarter, we increased our marketing spend by about 20% to last year.

Our primary communication was our Spring Polo campaign, featuring our iconic white Polo shirt.

We told our brand story in a fresh way that drove results.

Sales of our Polo shirts in the first quarter outpaced our overall revenue trend, and were up double digits in men's.

We also continued to drive interest and excitement among our target consumers through limited edition launches.

In the first quarter, we continued to leverage our iconic heritage and deep archives to launch CP93.

This collection originally launched in 1993 and celebrated the America's Cup sailing race.

Marketing communication utilized both archival assets and a newly shot campaign to celebrate the heritage while generating new excitement for the updated capsule collection.

The collection performed well with many styles selling out within days.

We also continued to leverage the power of cultural events and influencers.

This came to life recently at Wimbledon at the end of the first quarter.

As the official outfitter of the event, we amplified our sponsorship and increased our reach on digital and social media through celebrity dressing and events with influencers.

For example, British actress, Poppy Delevingne, took over Polo's Instagram stories and shared her stylish take on Wimbledon.

Other celebrities, including Emma Watson, Gemma Chan, Luke Evans, Eddie Redmayne, Eason Chan, F4 and CoCo Lee, all wore Polo to the event.

We generated over 6 billion total impressions globally from extensive social media presence.

As we said at our Investor Day, our influencer and celebrity strategy spans various parts of culture, from artists to movie stars to athletes.

This diverse group of influencers represents different aspects of our brand and engages different consumer segments.

In the world of sports, we renewed our sponsorship agreement with top professional golfer, Justin Thomas, who will continue to serve as brand ambassador for Polo Golf.

And we also launched a new RLX collaboration with Billy Horschel.

In the entertainment world, at the Met Gala in May in New York, several celebrities were dressed in our brand, including Rosie Huntington-Whiteley, Lily Aldridge, Priyanka Chopra, Kerry Washington, Shailene Woodley, Ansel Elgort and Jimmy Fallon.

Our Spring '18 Purple Label campaign featured Japanese actor and pop star, Akira, across a combination of digital, print and outdoor media.

Now moving on to our second key initiative, energize core products and accelerate high-value, underdeveloped categories.

In our 5-year plan, we expect half of our growth will come from core product categories with the other half driven by high-value, under-penetrated categories.

We believe the key to energizing the core and driving a differentiated point of view in the marketplace is to combine Ralph and our creative team's iconic brand vision with deep insight and understanding of consumers around the world.

This approach is gaining traction as our renewed core styles and icons drove a sequential improvement in our sellout trend in key categories for the Spring/Summer season.

Performance was led by our Polo brand in both men's and women's.

We saw product successes in our core items where we brought newness and interest with the addition of novelty, like embroidery, print and color blocking, as well as refreshed fabrics and increased functionality.

Within our core, strong categories in men's included Polo shirts, woven shirts in both our oxford fabric and the newly introduced natural stretch poplin and our new chino pants with stretch fabrications.

In women's Polo, dresses are trending well with consumers responding to our long shirt dresses in a number of different styles.

Customization also continued to help energize our core product offerings.

We had a pop-up custom shop at Wimbledon that offered exclusive prints as part of our Wimbledon capsule collection, which sold through very well.

In addition, our new small-format store in Beverly Center in the Los Angeles market has a successful create-your-own shop that already represents approximately 10% of the store sales.

We also made progress on building out underdeveloped categories that have significant growth potential across our brands.

These include denim, wear to work, outerwear, footwear and accessories.

Starting with denim, a fabrication that is core to our brand and where consumers have told us they expect us to play.

Building off of the strong momentum of fiscal year '18, our sales in denim were up mid-single digits in the first quarter, outpacing total company revenue growth.

We saw traction in all channels of distribution with updated fits, washes and lighter weight fabrications in both men's and women's.

Outerwear was another strong category, where lighter weight and functional fabrics in both casual weekend and wear-to-work styles for Spring/Summer drove growth.

First quarter outerwear sales were up high single digits year-over-year across our brands.

Our improved merchandising is driving higher full price sell-through and lower discounts.

In the first quarter, average unit retail was up 8% across our direct-to-consumer network.

We're making encouraging progress across multiple fronts on product, and we're pleased with the improving consumer response that we're seeing.

Moving on to our third key initiative, drive targeted expansion in our regions and channels.

We're focused on building a compelling and competitive ecosystem that includes digital distribution, new small format stores and renovated stores and shops to drive comp growth.

As we discussed at Investor Day, international is a key growth opportunity for the company as we are underdeveloped in markets like China and select European countries.

Mainland China is our largest near-term opportunity, and our momentum in this region continued in the first quarter.

Revenue in China was up over 25% in constant currency in the quarter, including over 40% growth in Mainland China.

Our digital business in China continued to grow rapidly through Tmall, JD.com and WeChat.

This growth was supported by targeted marketing through social media and influencer engagements.

On the storefront, we opened 7 new points of distribution in China in the first quarter, and we're on track to open more than 50 stores for fiscal 2019.

Our new small store formats are performing well.

As we continue to expand and raise our brand awareness, we're on track to achieve our long-term goals of reaching $0.5 billion of revenue in 5 years in China.

Another key element of our distribution strategy is to provide a consistent, elevated experience across all channels.

To achieve this, we continue to improve the quality of our distribution through our store and shop refresh programs globally.

We are elevating our distribution and our brands through improvements in fixturing, lighting, layout and visual merchandising.

We continue to see a good return on our investments with these projects.

Moving on to our fourth key initiative, lead with digital.

Our overall digital business, including our directly operated sites, departmentstore.com, pure players and social commerce, was up 7% globally in the first quarter.

This was driven by 24% growth in international with North America up slightly.

We expect to drive an acceleration of our overall digital growth as our directly operated North America digital flagship returns to growth.

In the first quarter, this business showed a significant sequential improvement with a 2% decline versus the high teen declines we reported last year.

We expect our site to return to growth in the second quarter as we reposition it as our most important flagship door and continue to improve the consumer experience.

In the first quarter, we added improved product detail pages, 360-degree product videos, delivery date estimates and automated product recommendations among other enhancements.

In Europe, we also continued to elevate and improve our digital presence.

In the first quarter, we upgraded the technology platform for our directly operated digital flagship, similar to what we implemented in North America last fall.

The new site offers a significantly improved consumer experience, including enhanced search tool and filters, more engaging and easier-to-shop product pages, more personalized predictive recommendations and a streamlined checkout.

We also continued to drive market share gains within digital at our key retail partners and in our core categories globally.

For example, in Europe, we ran high-impact campaigns with 21 partners across the region.

This included department store websites and key online pure play customers, like ASOS, Zalando, YOOX, MR PORTER and Boozt.

The digital campaigns showcased the versatility of our Polo shirt and how to style it.

This significantly increased our brand visibility and drove sales growth.

In Asia, we launched Polo on Tmall's Luxury Pavilion during the quarter.

We also launched a mini program on WeChat, which is a digital pop-up shop, featuring the CP93 collection.

In addition, we executed a successful Polo-branded sticker campaign on Japan's main social messaging app, LINE, which more than tripled our followers.

Finally, let me touch on our fifth key initiative, operate with discipline to fuel growth.

In the first quarter, we continued to challenge every cost and improve our efficiencies.

This enabled us to fund a significant increase in our marketing investment while expanding operating margin and increasing operating profit.

Adjusted operating expenses, excluding marketing and the impact of foreign currency, were up less than 1% in the first quarter.

We also continued to make progress implementing a more efficient, streamlined end-to-end process.

Discipline in our product assortments and inventory drove improved SKU productivity and full price selling.

This resulted in higher AURs and gross margin.

We increased the flexibility and efficiency of our global supply chain, which is critical in today's rapidly changing environment.

While the tariffs announced so far have a minimal impact on our business, we are keeping a close eye on developments.

We believe our strong global supply network should help mitigate the long-term impact of potential tariff scenarios.

In closing, as we execute our Next Great Chapter plan, we are encouraged by our early progress and the continued improvement in the underlying trends in our business.

Our teams around the world are embracing our new strategic framework and are focused on executing with excellence.

Ralph and I continue to be inspired by their passion and commitment every day.

With that, I'll turn it over to Jane, and I'll join her at the end to answer your questions.

Thank you, Patrice, and good morning, everyone.

Our first quarter results were strong and showed continued progress on strengthening the brand and driving execution.

Our key initiatives are delivering strong AUR growth, lower discounts, higher gross margins and operating profit growth.

First quarter revenues increased 3% on a reported basis and 1% in constant currency.

This was above our guidance, driven by strong performance in Asia and the benefit of wholesale shipment timing in both Europe and North America.

Asia revenue grew 16% in constant currency in the quarter.

Our initiatives across product, marketing and shopping experience are resonating strongly in this region and give us increased confidence in our strategy for Asia and our other regions.

In the quarter, we saw higher sell-through on Spring/Summer product, led by mid single-digit growth in the Polo brand.

Adjusted gross margin expanded 120 basis points in the first quarter and 110 basis points in constant currency, benefiting from reduced discount rates and favorable product mix.

Adjusted operating margin in the first quarter was 11.1%, up 90 basis points to last year on a reported basis and 70 basis points in constant currency.

In the first quarter, we stepped up our marketing significantly off a low base last year.

Planned investment in marketing was up over 20%.

For the full year, we're planning marketing to grow high single to low double digits with incremental growth in the second quarter to support the global amplification of our 50th anniversary fashion show.

We're progressively increasing marketing investment towards our long-term goal of approximately 5% of sales.

We plan to fund the majority of the increase through productivity gains to achieve our operating margin expansion goals.

Moving on to our segment performance, starting with North America.

Revenue was down 2% in the first quarter, and comps were down 3% in constant currency.

Adjusted operating margin was 22.9%, representing 150-basis point increase to last year.

Importantly, and similar to last quarter, all channels contributed to gross margin improvement in the first quarter.

Let me review the North America results across channels: first, our directly operated e-commerce business; second, our stores; and third, our wholesale business.

Digital commerce comp in our directly operated site in North America declined 2% in the first quarter.

As expected, this represented a significant sequential improvement in our trend.

As Patrice mentioned, we are repositioning ralphlauren.com as the most important flagship door.

As part of our strategy execution, we're continuing quality-of-sales initiatives on our e-commerce site at a more moderate pace.

Full price sales on the site were up about 5% in the quarter, AUR was up 9% and discount rate was down 300 basis points to last year as we continue to reduce the penetration of deep markdowns in the business.

Moving on to our stores.

Bricks-and-mortar comps in North America were down 3% in the first quarter.

The timing of Easter pressured comp growth by approximately 3 points in North America this quarter.

Therefore, the underlying comp was about flat, excluding that impact.

As we mentioned last quarter, Easter compressed total company comp by approximately one point in Q1.

As a reminder, in the fourth quarter of 2019, Easter will negatively impact North America comps by about 3 points and total company by about one point.

At a more macro level, foreign tourist sales were flat to last year in the first quarter, less robust than the 7% growth in the fourth quarter, reflecting currency fluctuations.

Moving on to North America wholesale.

The first quarter revenue decline of 1% reflects a significant sequential improvement.

This is partially driven by an intentional shift in timing of some off-price shipments that benefited Q1 but negatively impacted Q4.

As we mentioned last quarter, our department stores' Spring/Summer 2018 season-to-date sellout improved sequentially, and we expect continued improvement in the Fall season as we benefit from shop renovations and evolved product and marketing.

Importantly, in the wholesale channel, our digital wholesale business continues to grow with share gains in men's and kids.

As a reminder, our revenue trend in North America wholesale will look more challenging in the second half of the year.

This is due to the timing of off-price shipments with significant declines planned in the second half and the ongoing impact of Bon-Ton.

Our focus remains on building high-quality growth with our partners in the North America wholesale channel.

Moving on to Europe.

Revenue increased 8% on a reported basis and 2% in constant currency in the first quarter.

Adjusted operating margins were flat but were down 10 basis points in constant currency, driven by challenges at our factory stores.

In the retail channel, European comps were down 8% in constant currency with growth in digital commerce more than offset by declines in our stores.

We upgraded our European digital commerce platform for our directly operated business at the end of the first quarter.

We leveraged the learnings from the North America conversion last Fall to manage the business successfully ahead of the transition, resulting in strong sales in Q1.

However, as anticipated, we do see some disruption from our transition, which impacted the start of the second quarter.

Bricks-and-mortar comps, specifically in our outlet stores, continued to be pressured by inventory, traffic and product assortment challenges.

We continued to work to elevate our brand and distribution and saw progress in our AURs in Europe retail with AUR growth of 9% in the first quarter.

We're implementing a number of changes in our product assortments and promotion structures to improve the traffic and conversion trends in these outlet stores.

We expect these initiatives will start impacting the business in the second half of fiscal '19.

Wholesale revenue in Europe increased 13% in constant currency in the first quarter, partially benefiting from a shift in shipment timing.

This will negatively impact second quarter revenue.

We believe our underlying trend in the channel is low to mid single-digit growth, which we expect to return to this level in the second half of the year.

We continue to see momentum in our wholesale digital business, growing double digits in the first quarter and expanding market share.

Turning to Asia.

Revenue was up 19% on a reported basis and 16% in constant currency in the first quarter.

We saw strong performance across every market in Asia, including 10% growth in Japan, over 40% growth in Mainland China and over 20% growth in Greater China, all in constant currency.

Our product and marketing initiatives are resonating well in this region, and we continue to increase our digital efforts and engagement with local influencers and celebrities.

For example, our Polo shirt campaign generated over 1 billion impressions as we continue to build key celebrity partnerships.

Comps in Asia increased 6% in constant currency in the first quarter, continuing the positive trend from fiscal '18.

We drove strong double-digit comp growth across our digital business.

We expect further comp growth in Asia as we continue to upgrade our distribution network and increase our marketing initiatives to amplify and elevate the brand.

We also continued to drive quality of sales in Asia.

In the first quarter, average unit retails were up 10% and discount rates were down.

Adjusted operating margin was up 280 basis points to last year in the first quarter in Asia and up 290 basis points in constant currency.

We will continue with prudent quality-of-sales actions in Asia.

We are encouraged by our top line growth and our ability to leverage our investments to drive steady operating margin expansion.

Turning to our store fleet.

We continue to improve our retail network through the closure of underperforming locations and opening new stores with improved adjacencies and productivity.

During the first quarter, we opened 14 stand-alone stores and 12 concessions.

We closed 2 stand-alone stores and 11 concessions, ending the quarter with 484 stand-alone stores and 633 concessions on a global basis.

Moving on to the balance sheet.

In this quarter and throughout this year, we continue to strengthen our balance sheet and return capital to shareholders, reflecting the operational progress we are making.

We ended the quarter with $2.1 billion in cash and investments, up from $1.7 billion at the end of last year's first quarter.

Total debt at the end of the quarter was $587 million compared to $590 million last year.

Inventory increased 3% on a constant currency basis at the end of the first quarter, reflecting investments to support our European factory initiatives and direct-to-consumer expansion.

We expect inventory growth by year-end to be slightly ahead of our sales.

This will support our DTC expansion and adjustment efforts to restore inventories in select channels, following significant pullbacks.

Consistent with our commitment to return cash to shareholders, this quarter, we raised our dividend by 25% and repurchased $100 million of our shares.

Now I'd like to turn to guidance for the full year and the second quarter of fiscal '19.

As a reminder, this guidance excludes restructuring and related charges.

For the full fiscal year '19, while it is still early in the year, we now expect revenues to be down slightly in constant currency.

This is based primarily on our Q1 results.

We continue to expect a decline in North America and growth in our international business.

Foreign currency is expected to have a minimal impact on our revenue growth for fiscal '19.

We expect our revenue trend will be more challenging in the second half of the year versus the first half.

This is due to heavier planned reductions in off-price shipments in Q3 and Q4, timing of wholesale shipments that benefited Q1 and the lack of an Easter holiday in Q4.

Excluding these factors, we expect to see continued improvement in our trend.

We now expect operating margin for fiscal '19 to be up 40 to 60 basis points in constant currency.

This will be driven by about 75 basis points of gross margin expansion.

Foreign currency is expected to have minimal impact on operating margin for fiscal '19.

This guidance reflects our solid performance in the first quarter and our view of the underlying trends as we execute the Next Great Chapter plan.

In addition, this year, we will see the onetime benefit of our repatriation activity in our interest income of $35 million to $40 million and interest expense of approximately $25 million to $30 million in fiscal 2019.

For the second quarter of fiscal '19, we expect revenues to be flat to down slightly.

Foreign currency is expected to negatively impact revenue growth by approximately 30 to 50 basis points in the quarter.

Operating margin for the second quarter of fiscal '19 is expected to be up about 30 basis points to last year in constant currency.

Foreign currency is estimated to be a slight benefit to operating margin in the quarter.

We continue to expect capital expenditures of approximately $275 million in fiscal '19, focused on consumer-facing initiatives that have demonstrated a proof of concept and healthy rates of return, including store, digital and marketing.

We now expect our effective tax rate for fiscal '19 to be approximately 21%.

The second quarter of fiscal 2019 tax rate is estimated at approximately 22%.

In closing, as I said at Investor Day in June, we are building the right foundation.

We are focused on executing our Next Great Chapter plan, and we are beginning to see progress across our growth initiatives.

Inspired by Ralph's creative vision, our teams around the world are delivering, and this quarter demonstrates that we are on the right path toward long-term sustainable growth and value creation.

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

(Operator Instructions) The first question comes from Laurent Vasilescu of Macquarie Capital.

Your digital commerce results showed improvement in Q1.

Can you talk about the drivers and what you expect for growth in FY '19?

And separately, Jane, another gross margin beat.

Can you parse out the gross margin drivers for the quarter?

And how should we think about the gross margin cadence for the next few quarters?

Well, first of all, I appreciate the fact that the first question was on digital since one of our core strategy is to lead with digital.

So a couple of things.

One is we did make good progress this quarter on digital commerce with sales up 7% versus last year, particularly strong growth in international, right.

We were up 24% in international, and we had slight growth in North America.

As we talked at the Investor Day, the way we look at digital commerce is really through kind of 4 lenses.

First one is our own sites, so ralphlauren.com.

The second one is departmentstore.com, which is a significant channel.

Third are pure players, and then fourth is social commerce.

So let me just give you a quick perspective on each one.

So starting with our own site -- and think of this, this is roughly half of our digital commerce business.

Our own sites around the world, the growth was up slightly in Q1.

And what we're particularly proud of is the acceleration in the North American site.

Last year, we reported significant declines throughout the entire year.

We're still down Q1, but only down 2%.

And we look forward to next quarter when we'll be able, I think, to report actually growth on this site, which I think we've all been working really hard for to achieve.

So good progress there.

We improved functionality and brand presentation on our U.S. site, and we will continue to drive that.

As far as Europe is concerned, I think you heard in our prepared remarks, we upgraded our platform, basically replicating what we did in the U.S. a few months ago.

And we're also quite hopeful that we'll see much stronger consumer engagement moving forward in Europe.

So that's our own site.

Then as far as departmentstore.com is concerned and pure players, let me lump them together, just for simplicity purposes.

We actually grew double digits in Q1 across that channel.

And obviously, market share growth is very important for us, and we gained market share in our key categories across the key players.

So that business is -- the -- probably another -- the balance of the 50% that I talked about for our own site.

And then finally, we are ramping up on social commerce.

It's still a negligible part of our business.

But as we talked during Investor Day, we believe this will become a significant part of digital commerce moving forward.

We had our first real activity in China actually through the mini program we did on WeChat, which we focused specifically on our CP93 Limited Edition.

And so think of that -- it's basically a digital pop-up store, and we saw very good consumer response there.

So you're going to see us ramp up our activities on the social commerce front as well.

So that's kind of the perspective across the 4 channels.

As we look out to the balance of the fiscal year, we actually expect to accelerate our pace of growth in digital commerce and deliver high single-digit growth across the full year with double-digit growth internationally.

And then, Jane, I guess on gross margins.

Yes.

On gross margin, Q1 was strong.

It was ahead of our expectations.

We went into this quarter -- June is a highly promotional quarter, and we were able to pull back on our promotion levels and discounts.

That was the #1 driver of our 120 basis point gross margin expansion.

The other driver was some favorable product mix that we saw across the business, and so those were very encouraging.

I think you saw it in our AUR increase of 8%, that it really was a strong quarter into -- in terms of being driven by promotional pullback and quality-of-sales initiatives.

As I look forward to FY '19, we are expecting to be in about the 75 basis points of gross margin expansion.

That will be driven -- continue to be driven by the pullback in promotions and discount levels.

But there are 2 factors that we expect to become increasing pressures.

One is increasing product cost.

We expect that to become a headwind of about 30 basis points as we move through the quarters.

It was about a 20 basis point benefit in Q1.

And we continue to expect that FX switches from a tailwind to a headwind in the back half.

FX was about 10 points of benefit in Q1 but should be a headwind by the time we get to Q4.

So as I think about the cadence of gross margin as we move through the year, I think it'll remain -- we were slightly out ahead in Q1.

It should be about consistent in 2 and 3 with our guidance range, and then the most challenging quarter in terms of gross margin is Q4, when we face FX headwinds and some increased product cost pressure.

The next question comes from Michael Binetti with Crédit Suisse.

Congrats on a nice quarter.

Let me just ask you about AUR for a second.

That continues to be up pretty nicely, you've mentioned it a few times, and that's even though you had some pretty meaningful off-price shipments added in the North America site, I guess, or at least the shifting of the -- of some of those shipments.

I know you mentioned June was a highly promotional quarter so maybe that impact is less through the year.

But how much of the AUR increase that we're seeing at this point, this late in the quality of sales game, is from initial price points versus the ongoing reductions in promotionality or off-price?

And then if I could just ask -- add a second.

Maybe some context around that sequential acceleration in the North America wholesale business.

It's not lost on us you gave us a nice new table to look at by channel there, but that was, I think, like about a 20 percentage point increase quarter-to-quarter.

I know you had some timing shifts with off-price, but also we see some new distribution in places like Amazon and Urban Outfitters, for the Chaps brand.

So maybe you could help us isolate a couple of the drivers or maybe just size a few of those drivers so we can understand that big acceleration.

Yes.

So why don't I start with AUR and then we'll move on to sort of the wholesale timing and cadence?

AUR progress was really broad-based and really is an indication of the work that we're doing to improve both our promotional stance, but also the work that we're doing on merchandising and product as we're seeing the largest driver is still our pullback from promotion, but we are seeing benefit of assorting into higher price points.

We saw that come through both in North America and the international business, in retail and in our digital business.

And so really, across-the-board, strong AUR growth, really, a bit out ahead of where we expected the business to be.

But we expect AUR growth is a part of our strategy, as I called out during Investor Day, and so we continue to expect that we'll see AUR expansion.

But largely, Michael, to your point, specifically, it's mostly our quality of sales work.

As we look at overall wholesale -- our overall wholesale business, we really have a dynamic going on here that in the first half of the year, we -- especially in this quarter, we moved some of our off-price shipments out of Q4 last year into Q1 and Q2 this year.

And so that is -- that's some of the acceleration that you're seeing in overall wholesale.

We think the underlying trend in our North America wholesale business is down mid-single digit.

We -- while we got some benefit from shipment timing, the pressures still remain in terms of challenging traffic trends, some of our quality-of-sales work that we continue to do, some door closures and Bon-Ton.

I expect that you'll start to see -- we'll call out the underlying trend.

We expect our full price wholesale business will improve sequentially as we move through the year.

Again, there is some choppiness that'll go on, but the underlying trend will improve.

And then as you look in Europe, there's a lot -- there's some shipment timing going on.

We expect that that business underlying trend is up low to mid single-digit.

And as we come into the second half, you'll start to see those underlying trends normalize because we'll be through some of the shipment timing.

The next question comes from Matthew Boss with JPMorgan Chase.

This is Grace Smalley on for Matt Boss.

Just on the North America same-store sales.

I think in brick-and-mortar, trends may have decelerated very slightly relative to last quarter, even once you strip out the Easter shift.

Is that fair?

And if so, what -- how can we think about what drove that?

Yes, that is correct.

Our North America brick-and-mortar comp slowed from Q4, so down 3% reported.

If you exclude the Easter impact, it's actually basically flat versus last year.

A couple of dynamics.

One, if you look at actually the base period, we were working against a much tougher comp, right?

Q1 last year was down 4%, whereas Q4 last year was down 12%.

The second piece is we did see a shift in tourist business.

While our tourist sales were up 7% in Q4, they were flat in Q1.

And we see that as being driven by some of the currency fluctuations that we have all observed.

But what you can expect from this business is actually continued improvement on the overall comp trends.

If you look at it over time, we are progressively strengthening from a comp standpoint, and that's certainly what we expect for the balance of the fiscal year as our new product and new marketing activities kick in.

The next question comes from Heather Balsky with Bank of America Merrill Lynch.

I was hoping, first, you guys seem pretty confident in e-commerce turning in the second quarter.

Could you speak to quarter-to-date trends?

And then with regards to Europe and the turnaround there, can you just elaborate a little bit more on the changes you're making in terms of the merchandising?

So listen, we can't give you quarter-to-date perspective.

I can give you some perspective on what drove the improvement in Q1 in North America, being a little more granular than the earlier question from Laurent.

One, we stabilized the new platform, right?

We launched with the new platform last fall, during the holiday period.

We had to work out some kinks as we worked the transition.

We've now done the majority of that.

Two is we've really strengthened the functionality of the site, being very consumer-centric, understanding what the consumer expects from this site.

And so that ranges from delivery timings to ratings and reviews, to a 360 video on the product and so on, which we know is resonating well with the consumer.

Three is the brand presentation as a whole is better, right, and we want this to be our global flagship.

And we know we still have work to do to elevate the brand presentation, but we made progress in Q1.

And obviously, we've also lapped some significant discount rate reductions, and so we're getting to a more normalized situation.

We will continue to improve our quality of sales on the site.

There's still work to be done.

But our AUR growth was healthy.

I think it was 5%.

Our discount rate's down 300 basis points, so we're also making progress on the quality-of-sales front.

And so you can expect all that to continue.

We are cautiously optimistic.

We obviously need to execute.

But I think a lot of the interventions we're making, both from an operational and consumer-facing standpoint, is resonating with the consumer.

Yes.

Heather, I would just add that we also are really encouraged with the full price growth that we see on our e-commerce site, and that was up 5% this quarter, which is very encouraging.

The next question comes from Erinn Murphy with Piper Jaffray.

I guess I had a question on Europe.

I would love to hear kind of what you're seeing broadly in that market, in particular.

It sounds like you guys are still working through a few assortment challenges, so specific on that.

And then secondly, as it relates to the broad promotional environment in Western Europe, have you seen any changes as you've moved through the middle of the year now?

Yes.

So what we're seeing in Europe on our side is the environment is a little bit more challenged.

We saw some pressure in the foreign tourist sales overall in Europe.

This quarter, what we saw was that foreign tourist activity was down about 15%.

While we look at that relative to last year, we're down about 6%.

That is a pressure overall in Europe.

As we look at our business, specifically, we have seen some challenge in our European outlet business.

While we believe that foreign tourists are an impact there, we also believe that our own assortment had gotten too basic and that we need to get back into stock on seasonal newness and innovation newness.

That's part of our inventory build this quarter.

And we expect in the second half, that you'll start to see an improved trend in our own business.

We've done a lot of work this quarter, and we'll continue to do a lot of work in quality-of-sales.

So we've stepped back from promotional levels.

We do see that environment to be somewhat promotional as we move through this quarter.

Yes.

And I think as we were talking earlier, if you look at the various channels -- so you covered the factory outlet situation.

Obviously, on the dot.com side, we are in the middle of implementing our new platform.

So we see encouraging signs.

We have work to do, but encouraging signs.

So we expect that to actually accelerate.

And as far as wholesale is concerned, while, as you mentioned, Jane, earlier, we did have timing impacts for Q1, the overall health of our wholesale business in Europe is actually good, and the team is doing some really good work there.

So our key opportunity and challenge to work on really is the quality-of-sales work that we're doing for factory.

Erinn, what was this -- we missed your -- we didn't hear your second question or we didn't hear it clearly.

Well, the second part was just on the promotional environment.

I think Jane hit that.

Just kind of broadly, it sounded like it was picking up a little bit in the back half of the quarter.

But that was my second part of the question.

Okay.

The next question comes from Omar Saad with Evercore ISI.

Nice to see the -- a lot of the defense initiatives you guys putting in really playing out in terms of the margin and AURs.

Wanted to ask maybe for an update on the product side, what you're excited about, where you think you are in terms of getting the product where you want it to be across different channels and the different sub brands and opportunities you're excited about on the product side coming up.

I don't know if there's a [big] capsule collections (inaudible).

In general, we're right where we expected to be from a product evolution standpoint.

We're feeling good about a number of categories.

If you look at our results in this past quarter, we actually saw growth both on men's and women's with a focus on Polo and across most of our apparel categories.

So this is pretty broad-based in terms of improvements.

What we're seeing is our focus on Icons is really paying off.

So that's obviously job one for all of us, continue to drive our Icons.

The second element is the renewal of our core is beginning to resonate with consumers, a combination of both adding novelty, right, things like embroidery, things like printing, is resonating well and, also, refreshing our fabrics, pushing greater focus on functionality, again, being consumer-centric and being clear on what the consumer is expecting from us.

So stretch in our chinos, we mentioned that in our prepared remarks, is resonating well with the consumer.

Our denim products are actually also doing well.

We had good momentum last fiscal year.

We're building on that momentum this first quarter with mid-single-digit growth.

Our outerwear business, which is another focus category for us, was up high single digits.

So where we focus, and we're being really disciplined in terms of what we want to drive our activity on, we are seeing positive response from the consumer.

To your question on brands, where we're seeing the greatest progress at this point is Polo, but we are also seeing improvements on Lauren, so encouraged by that.

So I'd say, listen, the game plan is kind of on track, but we know we still have work to do.

And we're really focused on making sure we're bringing the vision to life and being true to who we are while connecting clearly with what the consumer expects from us across the markets, right.

And Jane touched on this earlier.

Some of our products -- what's resonating is maybe different in China than it is in wholesale North America, and we're making sure we're adapting to the local needs and expectations of the consumers we're targeting.

The next question comes from Alex Walvis with Goldman Sachs.

I wonder if you could help us with an update on your strategic initiatives in the U.S. market, in particular, an update on the strategy in L.A. now that you're a few months into the region refresh.

And also, the refresh of some of the department stores in the market, I was wondering if you'd seen a material discrepancy between those stores that you had refreshed and the control group.

My second question was on product cost.

I just wanted to follow up on a question from Laurent earlier.

You gave us some helpful color on the progression of the impact of product cost on the gross margin.

I was just wondering if you could break that down a little bit in terms of the drivers of that, how much of that is proactive quality improvements, how much of it is commodity industry headwinds and so on.

Sure.

I think Jane and I will tag team this one.

As far as L.A. is concerned, so really elevating the entire L.A. ecosystem is really the strategy there.

We started in May indeed -- yes, it's very early days, right?

So I'm always cautious to draw any conclusions a few weeks in.

But if you push me, I would say early indicators are encouraging.

We're seeing growth in L.A -- in the L.A. market that's slightly ahead of what we're experiencing across the country.

We are also seeing, from a consumer standpoint, that we're attracting a new, younger consumer.

So we're quite encouraged by those early signs.

And then we actually saw also an acceleration of our digital commerce business in the region.

So the headline thought on this is so far, so good.

But frankly, I wouldn't take any of this to the bank yet.

I think we're in very early stages of implementation.

But we're seeing encouraging signs, including with our new small format store in Beverly Center.

As you know, as we look ahead, we really want to expand our brick-and-mortar footprint through small format stores, more productive, more dynamic, more flexible, better connected.

And a few weeks into the opening of that store, we're actually also seeing encouraging response from consumers.

Then on the improvement of wholesale refreshes, so we're continuing to do that.

We are continuing to see benefits from doing that.

We have a great partnership with our lead wholesale partner, who, as you know, is focused on upgrading their top 50 doors, and we're working really hand-in-hand with them on driving those top 50 doors, a number of which actually are in the Los Angeles region.

And I think we're also thinking through what's the next phase of upgrades as our partner looks to expand that program.

So across-the-board, continuing to drive that, seeing a return on investment for those upgrades and getting solid consumer response.

And Alex, on product cost, let me parse it into the 2 buckets of your questions.

What we're seeing on our elevated product is that we are able to get both AIR and AUR increases to hold margin as we elevate the product, so that's the good news.

The challenges that I was pointing out are really centered in key input areas like polyester, cotton, down, some wage inflation as well as some freight costs that are manifesting themselves, as you can see it in tight U.S. market trucking capacity.

Now we are working with our suppliers to offset some of those costs, to look how we work through airfreight reductions, to improve our freight cost.

But that's really the center pressure point that we're seeing in overall product cost.

The next question comes from Rick Patel with Needham & Company.

Congrats on the progress early in the year.

I have a couple of follow-ups on Omar's product question.

So the first one is you have 5 under-penetrated categories, and it looks like you're making some pretty good progress with outerwear and denim.

As we think about the other 3 categories, ready-to-wear, footwear, accessories, do you expect to see an acceleration at some point in fiscal '19?

Or is that going to be an out-year event?

And then my second question is really around some of these product drops.

They've obviously been very successful, and they drove a lot of interest in the brand.

As we think about the future, can these ever become big enough to be growth drivers on their own with the right inventory investment?

And how frequently can you recycle some of your more successful ones, like Snow Beach, without hurting the brand appeal?

Great, great, great questions, Rick.

So as far as the underdeveloped categories are concerned, we have good momentum on denim and outerwear and actually wear-to-work.

I didn't mention it, but we're off to a nice start on wear-to-work, both on men's and women's, with much more to come, and yes, some of it will impact this fiscal year on wear-to-work.

On the footwear and accessories piece, that one, as we talked during Investor Day, is going to be a slower burn because we've got work to do on building our capabilities and making sure we have the right design capabilities, right merchandising capabilities, right sourcing plan.

And obviously, we have great teams in place doing that work now, so I don't know that you'll see a lot -- a significant impact in fiscal year '19.

Obviously, we're driving all 5. But I think where you'll see the strongest progress is going to be denim, outerwear and wear-to-work.

As far as the drops are concerned, yes, they have worked really well for us, so we're excited about that.

We are very -- I'm going to address your second point first, we're very careful on frequency, right, because the risk is you exhaust the consumer, and then it loses all its interest and excitement.

So we think we have the right pace.

We have some exciting things coming in the fall that we'll be announcing in, I guess, a couple of months.

So we'll be keeping that frequency.

We will not accelerate it.

And then we're also thinking through how do we expand this to our women's business, because most of our drops -- or actually, the vast -- all of our drops so far have been focused on men's.

And women deserve special drops too, although it will probably be a different approach to it.

As far as size, I would not expect these to be big enough to drive the overall numbers from a pure sales standpoint, right?

These are marketing activities, first and foremost.

Similar to what we do with the Olympics, it's not about driving sales of that specific capsule.

It's about leveraging this capsule to tell the brand story, to bring Ralph's vision to life in a new fresh way, and that's how we view these.

So we like the sales performance.

We're obviously excited when things sell out within hours or days.

But the fundamental objective is -- it's part of our storytelling for the brand and to really make sure that we're bringing newness and freshness and a different perspective on the overall brand.

The last question comes from Ike Boruchow with Wells Fargo.

Good morning everyone.

Let me add my congrats.

Jane, just 2 quick ones for you on Europe.

We know about the European website replatforming, and it sounds like it should be a little bit of a headwind in the near term.

Could you help us how to think about European e-comm comps in the second quarter?

It sounds like they should be negative, but just kind of want to understand that a little better.

And then you mentioned that tourism was down 15% in Europe this quarter.

I'm just curious how that compares to what you saw 3 months ago.

Sure.

So why don't I start with the expectation for Europe e-commerce?

I do expect that e-commerce will be down sort of mid-single-digit in the second quarter, and then I expect it, in the second half, to be back to growth.

And it's really from what we're seeing from transition as we look at some of the redirects and affiliates and email setup, that those'll have sort of a compressive pressure in the second quarter.

What we were seeing in foreign tourist sales sort of in the -- in Europe, specifically, in the fourth quarter was about a down 20, and that was worse than we saw in the Q4 of '17.

And so we're looking at this down 20%, down 15%.

The euro did -- the pressure from, I think, foreign currency lightened a bit as we moved into the first quarter, and foreign tourists tend to drag a bit as they don't follow currency trends precisely, but over time.

So not unexpected, but a little bit of abatement from foreign tourist pressure in Europe as we moved into the first quarter.

Good.

Thank you.

Well, listen, thanks to all of you for joining the call.

As I think you can tell, Ralph and I and Jane and the whole team are encouraged by the progress we're making as we implement our new strategic framework, and so now everyone is laser-focused on bringing it to life around the world so we can get consumers excited about our brand across channels.

We look forward to talking to you next quarter.

Thank you, and have a great day.

Ladies and gentlemen, that does conclude the Ralph Lauren First Quarter Fiscal 2019 Earnings Conference Call.

Thank you for your participation.

You may now disconnect.