雷夫·羅倫馬球 (RL) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third 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, Ms. Corinna Van Der Ghinst. Please go ahead.

Good morning, and thank you for joining Ralph Lauren's Third 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, Cori. Good morning, everyone, and thank you for joining today's call.

We're pleased to report better-than-expected third quarter results during the important holiday season as we continue to execute on our strategic priorities. As we discussed at our Investor Day last spring, our teams are focused on delivering long-term sustainable growth and value creation. In the third quarter, we outperformed our expectations on both the top and the bottom line with double-digit EPS growth. Our results were driven by double-digit revenue growth in Asia and Europe and strong sequential progress in North America with better-than-expected AUR growth globally.

During the third quarter, we continued to drive our execution and performance against the 5 strategic priorities that we laid out as part of our 5-year Next Great Chapter plan. These include: first, win over a new generation of consumers; second, energize core products and accelerate 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. As we look to close out the fiscal year, we remain on track to achieve our plans for the full year.

Let me now highlight some key progress points starting with win over a new generation of consumers. In the third quarter, we increased marketing investments by 18% to last year. We continued to shift our spend to channels that matter most to consumers today, namely digital and social. Our key marketing initiatives this quarter centered around our limited addition collections and holiday campaigns.

On our last call, we announced an exciting new collaboration with U.K.-based streetwear brand, Palace. Launched in November, the casual collection consisted of menswear pieces inspired by iconic Polo styles that the Palace creators, Lev and Gareth, have worn throughout their lives. The products sold exclusively on our Polo mobile app in the U.S., our digital flagship in Europe and across Palace's retail network. We approached the collaboration as an opportunity to reach new and younger consumers with a fresh take on products that still remain true to the DNA of the Polo brand. The collaboration generated over 2 billion impressions globally, exceeding our expectations. The Palace collection sold out in under an hour online. We were encouraged that roughly 75% of the people who purchased it globally were completely new to Ralph Lauren. The collaboration was particularly effective in engaging millennial and Gen Z consumers, with those purchasing the collection 10 years younger on average than the typical Polo men's consumer. We are now a little more than a year into our approach to drive energy and excitement around our brand with limited edition releases, and we continue to be encouraged by the traction these drops are gaining.

In December, we launched our Winter Stadium collection, which was available on our Polo mobile app in the U.S. and in key flagship stores globally. We also partnered with influential specialty retailers, including Opening Ceremony; END. clothing; IP's e-commerce site, HPX; and Selfridges. Winter Stadium generated over 1 billion impressions globally and achieved nearly 100% sell-through on our Polo app in the first day.

In addition to attracting new consumers to our franchise, we're excited to see a new fan base developing for our drops. Over half of the Winter Stadium shoppers were repeat customers who had already purchased from at least one of our limited editions previously.

We also continued our 50th anniversary celebrations in the third quarter with our holiday gift campaign, #RL50Gifts, which we amplified through social media influencers and celebrities like Emmy Rossum, Rachel Zoe, Cameron Dallas and Olivia Palermo. About 1/3 of the consumers who shopped the products highlighted in our holiday campaign were new to Ralph Lauren, and a meaningful portion of these new consumers were under the age of 35.

In addition to our holiday gifting campaign, we continued to leverage the use of celebrities and influencers across different areas of pop culture and sports. In the third quarter, Nicole Kidman, Hugh Jackman, Alex Rodriguez, Gigi Hadid and Chance The Rapper were among the stars featured in our brand. We kicked off awards season dressing with actors Chris Pine, Lady Gaga and Lupita Nyong'o.

You also may have seen Ralph's incredible custom designs for the wedding of actors Priyanka Chopra to music superstar Nick Jonas in India in December. It was the first wedding dress that Ralph has designed for a bride outside of his own family. The wedding was a global event that transcended cultures and dominated social media platforms.

Moving on to our second key initiative, energize core products and accelerate underdeveloped categories. Our strong top line performance this quarter was driven by our core products as Ralph and the design teams continue to drive excitement in the marketplace. This is consistent with our year-to-date trends and expectation that iconic and updated core styles will be a more meaningful near-term driver while we continue to develop our high potential, underpenetrated categories for the longer term.

Top-performing core products in the third quarter included Oxford shirts, half sleeve sweaters, wool and cashmere sweaters and Mesh polos. In addition, we continue to build upon our customization programs this quarter with monogramming services and expanded customization offerings in the European market. Customization continues to represent an important long-term opportunity for our direct-to-consumer channels, driving AURs that are higher than our overall digital commerce AURs, higher gross margins and no returns.

Moving to our underdeveloped categories that have significant growth potential across our brands. These include denim, outerwear, wear-to-work, footwear and accessories. Our sell-out trends in denim and outerwear, which are the furthest developed of the 5 categories, accelerated in the quarter with an improved merchandising and distribution focus, indicating a positive consumer response to our new initiatives. Outerwear performance accelerated this winter as we've continued to focus on our core nylon and down jackets while also injecting the category with new fabrications, innovation like our RL Heat launched this month and focus on end users like active, weekend and weekday dressing.

In fragrance, we launched a new campaign in January around our Ralph Lauren Romance fragrance for women, bringing a fresh take and new packaging to this iconic scent just in time for Valentine's Day. The Spring campaign features supermodel Taylor Hill as the new face of the fragrance along with her boyfriend, actor Michael Stephen Shank.

Moving on to our third key initiative, drive targeted expansion in our regions and channels. We are focused on building a compelling and competitive Ralph Lauren ecosystem in key cities globally. This includes digital distribution as well as new and renovated stores to drive growth. During the third quarter, we opened 39 new stores and concessions globally and closed 12 locations. This included 24 openings in Asia, with 9 in China, our fastest-growing market. Our China openings this quarter were focused on our key city clusters of Shanghai, Shenzhen, Beijing and Chengdu.

We continue to drive strong growth in China in the third quarter. Greater China revenue was up 19% the last year in constant currency, including nearly 40% growth in Mainland China, driven by comp growth and new stores. We are taking a disciplined approach to our new store openings in China and closely monitoring macro trends. However, we are pleased with the performance of our new doors, thus far, as they are delivering above-average productivity and profitability.

Our digital business in China continues to expand following the launch of our directly operated digital commerce site last September. We also continue to see strong momentum in our distribution with pure-play partners, including Tmall, JD.com and WeChat, during the quarter with very positive brand exposure over Singles' Day.

In Europe, we opened 2 new full-price stores and 2 net new factory stores in the third quarter. The new full price stores in Leeds and Marseille are part of our broader ecosystem strategy in those markets. Similar to China, we're actively monitoring the macro environment in Europe, including the U.K., and we'll continue to take a cautious approach to store rollout in the region as we test and learn from each new opening. However, we're still significantly underpenetrated at brick-and-mortar retail with only 23 full-price stores across Europe. And we continue to see a meaningful, long-term opportunity to build on our ecosystem strategy in the region. Our expansion plans include 2 more openings in the fourth quarter of this fiscal year.

Moving on to our fourth key initiative, lead with digital. Our global digital business, including our directly operated sites, Departmentstore.com, pure players and social commerce, was up 20% to last year in the third quarter in constant currency with strong performance across all regions. Our directly operated North America digital flagship continued on a positive growth trajectory, as planned, and delivered a 21% comp increase as we lap last year's transition to a cloud-based platform. Our focus on strong brand building and enhanced consumer experience and higher quality of sales all contributed to improved performance as we continue to reposition the site as our most important flagship. Our directly operated European digital commerce sites also showed strong improvement following the move to our new platform earlier this fiscal year. This business returned to growth in the third quarter, as planned, with a 13% comp. Enhancements to our European sites this quarter included the launch of ship from store across Europe, enabling us to leverage our in-store inventories to service demand; customization services; and our first fully localized Spanish digital commerce site. Looking ahead, we expect to see more normalized positive growth in this channel as a result of the improved brand building, consumer experience and functionality.

We also continue to drive strong performance on pure-play accounts across all regions in the third quarter. In the U.S., we expanded our presence on Stitch Fix with women's Polo and men's footwear and added 15 new digital pure-play partners in Asia and Europe.

Finally, let me touch on our fifth key initiative, operate with discipline to fuel growth. In the third quarter, we continued to challenge every cost and improve our efficiencies. This enabled us to continue ramping up our marketing investment and expand our global retail presence while increasing operating profit and expanding operating margin above our guidance. Adjusted operating expenses, excluding marketing, were slightly below top line growth in the quarter. Jane will provide more details on how we're continuing to drive productivity.

So in closing, while we are mindful of ongoing market volatility, we are energized by our continued progress this quarter on our Next Great Chapter plan. Ralph and I, along with our talented and committed teams around the world, remain focused on staying true to the timeless vision of our brand while evolving to meet the needs of consumers globally. While we are proud of the progress we're making, we will continue to relentlessly focus on excellent execution as we deliver on the commitments that we have made across every aspect of our business.

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 third quarter results demonstrate our team's continued disciplined execution of our strategy. We delivered on key metrics, including 9% AUR growth in retail, double-digit growth in digital commerce and growth and operating margin expansion, all while delivering both revenue and EPS growth. Importantly, we achieved these results in the context of navigating a more uncertain macro and geopolitical environment.

Third quarter revenues increased 5% on a reported basis and 6% in constant currency. Every region delivered top line growth, led by strong 10% sales growth in both Europe and Asia on a reported basis and a strong holiday season in North America.

Adjusted gross margin expanded 90 basis points in the third quarter and 60 basis points in constant currency, benefiting from reduced promotional activity and favorable product, geographic and channel mix. Adjusted operating margin in the third quarter was 13.9%, up 70 basis points to last year on a reported basis and 50 basis points in constant currency. Adjusted operating profit dollars grew 11% to last year.

SG&A expense, excluding marketing, slightly leveraged our strong top line growth. This quarter, we made important proactive investments in our brand and our business. We increased our marketing spend by 18% to 4.2% of sales, up from 3.8% last year. This marketing investment is overlapping the strong investments made in the second half of FY '18. Incremental investments centered on our holiday marketing campaigns and limited edition collections.

In our digital business, we also made investments to strengthen our digital platform and capabilities. We continue to make progress toward our long-term objective of increasing marketing to about 5% of sales while also focusing on productivity to achieve our operating margin expansion goal.

Our teams are intensely focused on driving operating efficiencies across our business. For example, in the third quarter, our teams across the company worked to consolidate our warehouse and office real estate footprint in North America. We completed the sale of our Beechwood distribution facility in North Carolina, reducing our footprint to 2 buildings from 4 buildings 2 years ago. This is an important step in our shared inventory strategy, which went live this week, enabling us to reduce our overall inventories, maximize full-price selling, improve the CPU cost of our DTC fulfillment and lower overhead cost. We are also significantly reducing our New York office footprint, which includes our corporate offices, showrooms and design studios.

Over the next year, we will consolidate our footprint to 4 primary locations in the New York tri-state area, down from over a dozen locations 2 years ago. Following the move in 2020, we will reduce our square footage, cost per square foot and most importantly, drive greater collaboration across our teams.

Moving on to our segment performance, starting with North America. Revenue was up 3% in the third quarter and adjusted operating margin was 22.6%, representing a 20 basis point increase to last year. In the retail channel in North America, we posted 4% comp growth in constant currency as brick-and-mortar comps were flat and our directly operated digital commerce business was up 21% as we anniversaried the change of our own digital commerce site last year and saw strong double-digit AUR increases during this holiday quarter. We are also encouraged by strong performance across our total digital ecosystem, including wholesale.com and pure plays with double-digit growth in the quarter.

We saw a continued sequential improvement in our North America brick-and-mortar comp this year, driven by 7% AUR growth in the third quarter, which more than offset traffic headwinds.

Moving on to North America wholesale. Third quarter revenue was down 3% due to planned reductions in off-price sales. These reductions will continue through Q4. For the full year, we still expect to reduce our off-price penetration within our broader wholesale channel as we strategically reposition off-price back towards its original purpose as an excess inventory clearance vehicle. While we expect volatility in our full-price wholesale business on a quarter-by-quarter basis, including the fourth quarter, our underlying trend is improving.

For Fall '18, our Q3 sellout performance at wholesale improved on both the sequential basis and relative to the prior year. At the end of the quarter, based on our estimates, we believe our inventories at our full-price wholesale partners were well positioned and below prior year levels.

For full year FY '19, we continue to expect underlying revenue to be down low to mid-single digits versus the mid to high single-digit declines last year.

Our digital wholesale business continued to grow in the third quarter, delivering high single-digit growth to last year with continued share gains in core categories.

Moving on to Europe. Third quarter revenue was up 10% on a reported basis and 13% in constant currency. Adjusted operating margins expanded 100 basis points but were down 40 basis points in constant currency. SG&A leverage was more than offset by gross margin contraction due to the faster growth in wholesale shipments, driven by a timing shift from Q4 into Q3.

In the retail channel in Europe, comps were up 4% in constant currency, driven by 13% growth in digital commerce and a 3% increase in brick-and-mortar stores compared to a 4% comp decline in Q2. The sequential improvement in our brick-and-mortar comp trend was primarily driven by our investment to get back into inventory positions, notably in outlet, and improve the breadth and depth of our product assortment. Comps in our directly operated European digital commerce business also continued to improve following our platform upgrade at the end of Q1. We saw strong quality of sales improvements, double-digit growth in AUR and a reduction in discount rates and are encouraged by the consumer response to our new platform.

Across retail, our ongoing effort to improve quality of sales continued, with AUR up 11% in the third quarter in Europe retail.

Wholesale revenue in Europe was up 20% in constant currency in the third quarter. Our third quarter growth rate benefited from the expected pull forward in the shipment timing, which will negatively impact the fourth quarter. Excluding timing shifts, we now expect our reported growth to be in the mid-single-digit range for full year fiscal '19, up from low- to mid-single digit previously, as we see the benefit from both distribution expansion and comp growth.

Turning to Asia. Revenue was up 10% on a reported basis and 11% in constant currency in the third quarter. We saw a strong performance across every market with positive growth across Japan, Korea, China and Australia. Growth was led by Mainland China with constant currency revenue growth of almost 40%. 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.

Comps in Asia increased 4% in constant currency, driven by almost 10% AUR growth. We expect continued comp growth in Asia as we invest in our distribution network and increase our marketing initiatives to amplify and elevate the brand.

In the third quarter, adjusted operating profit grew 7% to last year. Adjusted operating margin was down 30 basis points and down 10 basis points in constant currency as gross margin improvements were more than offset by increased marketing investments in the quarter. Excluding marketing, operating margin in the region would have expanded to last year.

Moving on to the balance sheet. Our balance sheet is strong. And we returned capital to shareholders, reflecting our continued operating progress. We ended the quarter with $2.1 billion in cash and investments and $687 million in total debt, which compares to $2.1 billion in cash and investments and $589 million in debt at the end of the third quarter of fiscal '18.

Consistent with our commitment to return cash to shareholders, we repurchased $208 million in shares in the third quarter for a total of $400 million year-to-date. Including dividends and share repurchases, we returned a total of $542 million to shareholders this fiscal year-to-date, up from $122 million last year. We will continue to opportunistically buy back stock as a part of our plan to repurchase $1 billion in shares through fiscal '20.

Moving on to inventory. At the end of the third quarter, inventory was up 11% to last year, moderating from a 15% increase in the second quarter. Similar to Q2, our inventory growth in the third quarter reflect strategic actions to support the following: one, earlier receipt of goods to maximize full-price selling; two, comp growth; three, new retail distribution; and four, getting back to normalized inventories in our Europe factory stores. We are also utilizing significantly less airfreight this year in order to reduce shipment costs, which impacts our level of goods in transit. We remain comfortable with the health of our overall inventory at both retail and wholesale, which continues to improve on a year-over-year basis. Looking ahead, we expect to continue reducing inventories through the end of this fiscal year to be better aligned with our sales outlook.

Now I'd like to turn to guidance for the full year and fourth quarter of fiscal '19. As a reminder, this guidance excludes restructuring and related charges. We are on track to deliver our goals for this year. We now expect revenues to be up slightly in constant currency for the full year fiscal '19. We expect a slight decline in North America and positive growth in our international businesses. Foreign currency is expected to have 80 to 90 basis points of negative impact on revenue growth in fiscal '19. We now expect operating margin for fiscal '19 to be up 60 basis points in constant currency, at the high end of our previous range of 40 to 60 basis points, with minimal impact from foreign currency. This guidance reflects our solid performance in the first 3 quarters of the year and our view of underlying trends as we execute the Next Great Chapter plan. It also incorporates our plan to better align inventory levels to our sales growth outlook.

For the fourth quarter of fiscal '19, we expect revenues to be down slightly in constant currency, with growth in North America retail and our international businesses offset by a planned reduction in North America off-price sales. Foreign currency is expected to negatively impact revenue growth by about 300 basis points in the quarter.

We continue to see several timing-related headwinds to revenue growth in the quarter, including a shift in European wholesale shipments from Q4 into Q3 and our strategic reduction in off-price sales, which is heavily weighted toward the fourth quarter this year. The timing of Easter also negatively impacts our North America retail comps by about 3 points in the fourth quarter, benefiting Q1 of next year. Operating margin for the fourth quarter is expected to be up about 70 basis points to last year in constant currency. Foreign currency is expected to negatively impact operating margin by about 60 basis points in the quarter. We now expect capital expenditures of approximately $250 million in fiscal '19, below our previous guidance of $275 million due to timing shifts into fiscal '20. Our estimated effective tax rate for fiscal '19 is unchanged at 21%. Our fourth quarter effective tax rate is estimated to be 16% to 17%.

Finally, over the past several months, we have seen increased volatility in the markets from macroeconomic and geopolitical events, and we continue to monitor the trade environment closely. While we are not immune to pressures in the broader environment, our teams are prepared for multiple scenarios. Importantly, across the company, we have clarity of purpose under Ralph's unifying brand vision: focused strategic initiatives with aligned operational and financial goals and the passion and commitment of our teams around the world. We are delivering on our plan, and we'll continue to drive execution to find the balance between addressing short-term pressures while managing for the long term.

As we look forward to fiscal '20, we remain confident in the full year outlook we presented at our Investor Day in June. This includes positive top line growth in constant currency along with operating profit growth and margin expansion for the full year. We plan to provide more details on fiscal '20 guidance when we report our fiscal year-end results in May.

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

(Operator Instructions) The first question comes from Matthew Boss with JPMorgan.

So your 3Q print exceeded expectations in the holiday season with clear winners and losers across retail. I guess, Patrice, as you reflect on the quarter, what factors do you think helped deliver the outperformance? And then, Jane, on the expense front, I guess maybe how best to think about the core leverage that you're seeing versus strategic marketing investments as we think going forward?

Sure. Thanks, Matt. Well, listen, first of all, Ralph and I are really proud that our team has been consistently executing across all our sites of our new Next Great Chapter strategy. As we look at obviously quarter-to-quarter, there are some areas of the businesses that are doing better than others and we're clearly dealing with some level of volatility in the marketplace. But I have to say, we were really pleased with the progress that we made across several areas of this business this quarter. There are 3 things I would call out that enabled us to actually come ahead of where we expected for Q3. The first one is AURs. They were better than we expected across actually all regions and all channels. And this is really the result of the continued focus we're putting on elevating the brand through improved marketing, improved engagement with our consumers, improved product and then the continuing efforts that we have on promotional pullback. We were able to drive high single digits, right. You heard Jane talk about, we were up 9% up this quarter despite what we viewed as a more promotional retail environment this past holiday. So first driver, AURs. Second driver is digital momentum. Our digital momentum clearly accelerated across all of our digital vectors, whether that's our own digital commerce site, wholesale.com or the digital pure players. Our overall digital ecosystem revenue this past quarter were up 20%. One of the important factors that was an enabler for this was our transition to the new platform. You'll recall, last year, we moved North America to a new platform for our website and then Europe more recently. And this is really allowing us to provide better storytelling, better brand building combined with better functionality and consumer experience. And we're seeing that play out in the results. The third factor is Asia, right. I know there are a lot of question marks around what's happening in China and Asia, in general. But our momentum continued in Asia. You heard Jane talk about the fact we're up 11% constant currency in total Asia; 4% comps, led by Greater China, up 19%; led by Mainland China of close to 40%; but also continued strong performance from our more established markets, Japan, Korea and Australia. So those are really the 3 key factors that enabled us to perform ahead of where we expected for the quarter. I'll turn it over to Jane on expenses.

Sure. On SG&A -- Matt, in general, our Q3 SG&A expenses were generally in line with our plan. But we had top line momentum that enabled us to proactively reinvest in the business, meaningfully, in marketing where you saw our marketing increased 18% this quarter. And recall, that's on top of a 27% increase that we did in Q3 last year. As I look forward to Q4, I don't expect that level of year-on-year marketing increases. In the fourth quarter, we significantly increased our marketing over 50%. So that will be a dynamic change as you look going through into the fourth quarter. But consistent with our strategic growth initiatives, we made some proactive investments in the faster-growing areas of our business. You heard Patrice talk about our 39 new stores that we opened, and we made some important investments in digital. And this quarter, we proactively worked to strengthen our digital capabilities, including faster delivery time, notably to the West Coast. Our test in L.A. shows that those are proving out and driving consumer demand. We also invested to make sure we had 24/7 customer support capability. So those were notable in this quarter. I think you're asking a broader question in terms of how are we looking at both short and long-term expense reductions. And what we called out this quarter, the reduction in our DC footprint is going to be an -- and the inventory consolidation we're doing is going to be important part of our productivity as we move forward. We expect that to start to pay dividends as we look forward to FY '20. And we're also continuing the work that we're doing in indirect expenses. We're really systematically -- as we've done this year, which helped us produce SG&A leverage, if you exclude marketing, we're really driving into every cost, challenging every vendor contract, looking for scale benefits, consolidation benefits. And we do see that pay dividends as we move forward. So we continue to be -- as we confirmed our long-term guidance for '20, we continue to be optimistic and also opportunistic to believe that as we return to growth, you will see SG&A leverage.

The next question comes from Michael Binetti with Credit Suisse.

Jane, I guess a couple of questions to help me unpack here for the -- as we look ahead, the composition of revenues in the model here is going to be changing a little bit next year as you have the majority of this off-price pullback strategy done, for example. AUR has been a big, big line item in the revenue growth line for a couple of years on the quality of sales work. Next year, it seems like a couple of those things would be a lot more on a like-for-like basis. How do you think -- how much do you think AUR should contribute here as the quality of sales initiatives may be slow? And what do you need from units or traffic to drive that low to mid-single-digit growth you talked about on revenues?

Yes. Well, Michael, that's a great question because one of the tenets of our strategic plan is that AUR growth is a driver of our top line growth through our long-term plan. So I see lots of opportunity for us to drive what we guided to, which was low to mid-single-digit AUR growth. And the reason I have confidence in that is the drivers that we've seen over the last 2.5 years are relatively consistent. We've been able to drive AUR growth through a mix of some modest like-for-like pricing. We've been able to reduce discounts, and we see that we have more opportunities there. And we've been able to mix into higher AUR and higher gross margin product. Those -- and the shift of our business international where we have higher AUR is also a tailwind benefit to AUR. So I'm very encouraged. I feel that AUR is what overdelivered this quarter, but it's going to be durable as we move through our plan. The cutback in off-price does help us from an AUR perspective. It is -- that they -- AUR, it tends to be lower there. It -- we tend to move through more units there. So pulling back there is completely consistent with our plan of rising AUR, fewer units, which I think is also consistent with the elevation of the brand.

The next question comes from Alexandra Walvis with Goldman Sachs.

We had a question around the North America wholesale business. So outside of that off-price pullback, it seems like the North America wholesale business was very strong. I wonder if you could dive a little bit more into the drivers of that? And then on the off-price rationalization, I wonder if you could help us out with how far through process you think that we are today. How much longer we should expect that to go on and the pieces of that business in particular that are being reduced?

Yes. So Alexandra, in terms of what we saw in our wholesale trends, we really saw strength in the third quarter in some of our core categories, notably in men's and notably in Polo. We saw a good -- we saw benefits from reduced promotionality and accordingly, better -- a reduction in our vendor allowances and natural margin increases. Those were really what we saw as core strengths in our North America wholesale business. Also our Departmentstore.com business, as we called out, was particularly strong where we gained share again in key categories and saw a strong high single-digit growth. We're also starting to overlap some of the significant door pullbacks that we made during our reset, and so we're seeing that play through. As I think about off-price pullback, it's significant in the second half, as we've been calling out for a while. Our strategic goal, so as you think about it going forward, is to really reduce the penetration of off-price to our total wholesale business. So I don't expect the pressure from off-price pullback to be as significant in FY '20 as it was in this year. But I do expect -- don't expect it to be a leverage point as we reduce into those percentage of penetration to our business.

The next question comes from John Kernan with Cowen.

Patrice, going back to the 2000 -- to the Investor Day last year, the $500 million in incremental digital sales, you certainly showed a lot of momentum this quarter, particularly in North America with digital up 21%. Can you talk about some of the drivers going into next year in digital as you've repositioned the entire platform and how we should think about that going forward?

Yes. So as we kind of peel the onion on what drove the acceleration this past quarter and what's durable, to use Jane's terminology, which I like, is really 3 factors. One is the work we're doing on brand building, right. And if you look at the past quarter, we did a lot around our 50th gift campaign. We obviously had our special limited editions, whether that's Winter Stadium or the Palace program. So the brand building piece, the storytelling piece, enhanced by the platform upgrade that we have, will continue -- we really will continuously raise the bar on that, particularly in the way that really connects with Gen Z consumers and millennials. The second part is the consumer experience on our site. And we know we have a lot of opportunity to strengthen it. There's been good progress on functionality over the past quarter ranging from free shipping progress bar to monogramming services to a dedicated Polo shirt shopping experience. And then some of the technical elements of faster downloads of our pages and the quicker delivery to consumers homes and so on. So we're going to continue to raise the bar on consumer experience and functionality. And then finally, as all the work, we continue to do on quality of sales, which was obviously a big enabler for AUR here, which continues to be an area of focus and I think will be for as long as we're in business, so for the next 50 years, which is an important part of the block. So that's our own fight, right, which is really -- we think of our own fight as the digital flagship, which then needs to set the stone for how the brand shows up on other digital platforms. If you look at then the other platform, obviously, there's wholesale.com, Jane touched on that in previous question where we're seeing good momentum. We have really good partnerships with our -- the key wholesale players. We will continue to build on that momentum where we can really connect well with the target consumers that shop there. Then there is pure play, digital pure players, right, around the world. And we continue to build our stable of select pure players that we partner with. For example, we've expanded on Stitch Fix with Polo women this past quarter in the U.S. And we continue to see good progress in Asia, in Europe with some of the key players there and obviously expanding our presence here in North America. So I think if anything, that's going to accelerate. And then the final one is social commerce, right? The ability to shop through WeChat, the ability to shop through Instagram and so on and so forth, which, today is still relatively small on -- if you look at the total picture. But we expect that to accelerate significantly because the consumer benefit, the ease-of-use there is just very compelling for our consumer target. So I think as we look at the key elements of our strategy, what we've been executing and what we need to execute moving forward, we have confidence that we can continue to stay on this track of accelerated growth with digital commerce so that we can reach the $0.5 billion that we called out for the full 5-year period.

E

Yes. John, as Patrice mentioned, we're really happy with the underlying momentum we see in our digital commerce site. In North America, just recall, this is the quarter that we overlap that site conversion. So from a trajectory run rate perspective, it's somewhat anomalous. But we feel really good about the factors that Patrice noted and the momentum it suggests for our e-commerce business.

And then maybe one additional element, which we actually didn't touch on, which is our new mobile app, particularly as we think, yes, we're bringing in new consumers, younger consumers into the brand. We launched our mobile app a little less than 2 quarters ago. Half of the consumers coming through the app are actually Gen Z or millennials. We are seeing very strong engagement rates. We are seeing fantastic sell-through of our special editions there. I encourage all of you to sign up, if you haven't yet. But that's also an important asset that we have in our digital commerce toolbox that is just at the very early stages. So I think also a very promising potential there.

The next question comes from Paul Trussell with Deutsche Bank.

I just wanted to touch base on your international performance. As you are well aware, a lot of global macro concerns over the last few months. And while the European business did have some timing elements to it, it really outperformed certainly versus my expectations. And you also already have mentioned Asia's strength a few times. Maybe just give a little bit more color about what you feel is driving those top line results outside of the Americas.

Yes. So let -- maybe let's start the tour in Europe where we did as -- overall, deliver strong performance in Europe. We're obviously keeping a close eye on the various developments there, whether that's the uncertainty around Brexit, whether those are -- that's the demonstrations going on in Paris. Those, at this point, have not had an impact on our business. We are actually feeling good about our performance in Q3 and what we're able to do moving forward. What's important to note, Paul, on this is -- for Europe is we're still quite underdeveloped from a retail presence standpoint, right? We have 23 stores. I think a year ago when we talked on this call, we had 19. So now we're moving. We're starting to open stores and build our digital ecosystem so that we have a compelling ecosystem in key cities there. So relative to our competitor set, we're incredibly underdeveloped and that we believe still have significant growth opportunities even in a challenging context. So we're being careful, we're monitoring the environment. But we are confident we have a number of growth vectors for us in the future in Europe, particularly in markets like Germany and Southern Europe, which is where the underdevelopment is greater. As far as Asia is concerned, what's exciting for us across Asia is the broad-based growth, right? While, of course, China is doing well and we have significant opportunities there, we're seeing continued performance from our current key market in Asia, which is Japan. We're seeing accelerated performance as the team applies the Japan formula to South Korea in South Korea and also in Australia. So it's broad-based. It's built on strong fundamentals. And as such -- yes, I think similar to Europe, there are a lot of question marks around China and a potential slowdown in China. We have not seen that on our business in Q3. And again, we are highly underdeveloped in China. Chinese consumer, domestic sales and traveling -- travel sales are about 5% of our total business. So when you compare that to a number of our peers that are more in the 25%, 30%, 40% penetration, you can see the upside that we have on this business. And we -- while it's very early days, we're encouraged by the response we're getting both from a consumer standpoint there, the response we're seeing in how our Polo boutiques are performing, the response we're seeing as we work with various partners: the Tmall; Luxury Pavilion; JD TOPLIFE and so on and so forth; the net space, WeChat; more recently, Go Society. So we're feeling encouraged that we've got the right elements and the right strategy to deliver growth in -- across Asia and, therefore, across international, where I mentioned, for Europe.

I would just add, Paul, that we were really pleased in Europe with the investments that we made in inventory, in outlet paid off not only to return us to positive comp growth in our outlet business, but at a meaningful AUR increase. So the -- our strategy to restore into higher AUR products paid off. It paid off on the top line. It also flowed through with a nice pickup in our AUR in Europe. We expected the timing shift in our wholesale business in Europe. We knew that -- because we are aligning our calendar that Q3 was going to be quite strong, we called that out last quarter. But really, pleased with the outlet performance that we saw in Europe.

The next question comes from Omar Saad with Evercore.

Jane, I wanted to see if you could elaborate on -- you mentioned the share -- shared inventory going live. I remember in the past, you've talked about a test in L.A. marketplace, test retailing on wholesale and retail on retail kind of inventories to drive quicker replenishment, more articulated products and inventory planning. Could you elaborate on what you're working on there and what you see as the opportunity if you kind of integrate omnichannel capabilities into the business?

Sure. What we're seeing from our initiatives on shared inventory, right now, we're in the first phase of that, which is the combination of our store, our ROS store inventory and our e-commerce inventory is a few benefits. One, it reduces inventory buffers. Two, it allows us to direct our inventory to the demand that has the highest selling price. So it speeds our -- better full-price selling, less inventory. It also speeds pick times in our warehouse and reduces our need for warehouse footprint, which reduces our overhead costs. So lots of benefits there from a shared inventory. And we are working on the next phase, which could be even greater inventory sharing across our channels, which should also generate the same kind of benefits from an inventory full-price sellout and cost reduction. We're very encouraged by the teams who've been working very hard on it, and it went live this quarter. So more to come there. And I'm sure that, that will give us even more opportunities as we look forward on allocations and store flows as well.

And maybe on the Los Angeles ecosystem project, so we're about a little more than 6 months in. The headline thought of my message, Omar, actually is L.A. is outperforming the North America region. So still early days in this pilot. But actually, we're very pleased with the way the results are coming in. What we are seeing is share gains across the market. What we are seeing is an acceleration of our digital commerce business. Actually, very strong acceleration there. And then what we're also seeing, which is quite positive, is that we're attracting new, younger consumers through the franchise. So this elevation of the brand presence across all the touchpoints, whether that's wholesale or own stores, full-price or factory and then the emphasis we're putting on digital with some localized messaging, at this point, is really paying off. L.A. is a huge region so we really want to take advantage of the upside opportunities that we have there. But the headline point at this stage is delivering well ahead of the nation.

The next question comes from Jay Sole with UBS.

Patrice, I wanted to ask you about your comments around winning over a generation. You gave a lot of great stats about how your initiatives have created, more -- a lot of impressions, a lot of buzz with Generation Z and millennials. Can you share with us some of your plans to kind of keep that momentum going into Q4, the kind of things you have planned? And can you talk about how you're converting some of that initial interest that you're getting from younger people? Is that repeat purchase that you talked about?

Sure. So here's how we think about the strategy for winning over a new generation. We got 4 specific areas. One is, we want to be where the consumer group is consuming media, right. So you will have seen, over time, how we're shifting our marketing to much more digital, much more social. And that's where the majority of our spending is right now, right. So being where they consume media. The second is being where that consumer group is shopping and purchasing, which is the shift you're seeing and that we're making towards digital commerce because we know they disproportionately shop in that space and the development of our app. As I mentioned earlier, we're seeing through the app much younger consumer coming into the brand. The third area -- so those drivers, we continue. The third area is how we leverage influencers that really connect with that target audience, right. So just as an illustration, we talked about our latest Romance relaunch, and the face of that fragrance is Taylor Hill, who really appeals to the younger population incredibly, effectively. And that's just an illustration of how we're thinking about building this mosaic of influencers that can represent all the dimensions of the brand and also connect nicely in the local markets with the target audience that we're going after. And then the fourth one are these Limited Edition and drops, which we will continue to do. We'll -- obviously, we'll keep an element of surprise as part of this effective, the surprise element that comes with it. We're also very careful not to overdo it because, otherwise, these things will run out of steam. We're being very intentional on how we pace it. But you look at the results we got behind Palace, 75% of the consumers who bought Palace were new to the Ralph Lauren brand. On average, consumers who bought Palace were 10 years younger than the average consumer for Ralph Lauren. And we're also seeing that on Winter Stadium and others. And to your point on that on retention, one of the interesting and encouraging data points for us is if you look at the purchases of our drops, consumers who bought Winter Stadium, actually, half of them had already bought a drop -- a prior drop, right, which gives us confidence that as we bring in consumers through these special activities, we're then able to keep the majority of them moving forward. So that's the broad framework that we have in place. We feel good about the progress we're making around that. And we're doing that while not forgetting our core because our core consumers are also an important part of the business. And so our job is to successfully appeal to this new group of consumer while also delivering what our current consumers are looking for.

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

Can you update us on tour sales in the U.S. given the strong U.S. dollar? I'm curious if there was a change in trend versus last quarter and to what extent you think that helped fuel your performance in Greater China. And my second question is around department store refreshes. I believe you had about 80 or so of these refreshes last year and you had planned to do more this year. Any updates on where you are with those and any call outs in terms of performance going forward?

Sure. Hi, Rick. So for tourism, based on the data that we collect, we saw foreign tourist traffic in our doors was up about 2% in the quarter. You'll recall that in Q2, it was down about 2% and in Q1, it was flattish. So we're seeing this sort of flattish to down slightly, up slightly trends in the U.S. In Europe, we saw that our foreign tourist traffic was up about 3%. That was off -- a down 21% you recall in Q2. Again, this is our data with the overall composition remain -- in terms of foreign tourist from other countries, it's remaining about consistent as we've looked from quarter-to-quarter.

And then on the door refreshes, we are continuing that because we're very pleased with the results we've gotten so far behind the doors that we have upgraded. And I quoted earlier some of the progress we're seeing in Los Angeles, which is obviously a key part of that. So we did the 81 refreshes in fiscal '18, retail sales there were up double digit, so this pay out -- paid out because actually, this -- the investment we're making is not that significant. A lot of it is improved lighting, improved layouts, fresher paints of coat, better signage, better visuals. But good returns on that. We've completed 103 refreshes in the first half of fiscal '19. And we plan to do, in total, about 150 this fiscal year and continuing to do that to affect -- over time, we want to affect least 50% of our total business on the way to 75%. We're doing that in close partnership with our key wholesale partners, including the largest one. And that they've completed their first 50% and now are on to the next 100%. We're working that hand-in-hand with them. But we're encouraged by the progress. It continues to be a focus area as we want to elevate the brand involving every single touch point.

All right. Great. Well, thank you. Thanks for all of you for joining the call today. As I hope you took away from this conversation and our press release, we're encouraged by our progress and our results as we continue to elevate the iconic business Ralph has built with teams over the past 50 years and as we continue to strengthen our connection to consumers around the world. And we look forward to sharing our fiscal year-end results and our fiscal year '20 guidance with you on the next call. So thanks for calling in and talk to you soon.

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