雷夫·羅倫馬球 (RL) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter Fiscal 2021 Earnings Call. (Operator Instructions) As a reminder, the conference is being recorded.

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

Good morning, and thank you for joining Ralph Lauren Second Quarter Fiscal 2021 Conference Call. With me today are Patrice Louvet, the company's President and Chief Executive Officer; and Jane Nielsen, Chief Operating Officer and Chief Financial Officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to 1 per caller.

During today's call, we will be making some forward-looking statements within the meaning of the federal securities laws, including our financial outlook. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties. Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.

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

And now I will turn the call over to Patrice.

Thank you, Cory. Good morning, everyone, and thank you for joining today's call. Our second quarter performance reflected solid progress on our path to return to growth. Our results were overall in line with our expectations, with better-than-expected earnings driven by gross and operating margin expansion.

While COVID-19 is still impacting physical store traffic and consumer behavior, we continue to take proactive measures to get ahead of these shifts and position our business to emerge from this crisis stronger than we came into it. These measures include accelerating our connected retail offerings globally, delivering high-value new customer acquisition, expanding key categories and international markets and realigning our cost structure. Throughout this period, we remain steadfastly focused on elevating our brand, and we were encouraged that underlying AUR growth outperformed our expectations this quarter, which is reflective of more personalized communications; reductions in promotional activity; geographic, channel and product mix benefits; and strategic pricing increases.

This acceleration of core strategies in the quarter remains consistent with the 5 strategic priorities that we laid out as part of our long-term plan. These include: first, win over a new generation of consumers; second, energize core products and accelerate high-potential, 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. I will touch on a few of these areas in a moment. But first, let me review a few highlights related to our recovery this quarter.

Overall, we were encouraged that our performance improved sequentially in each of our geographies, led by Asia and across our digital channels globally. Nevertheless, while we are confident in our strategy to return to growth, we remain cautious as our path to recovery may not be linear over the next few months, given meaningful traffic headwinds and a significant amount of uncertainty in the global environment.

Looking across our regions. Asia is the furthest along on the path to recovery. This was driven by positive sales in the Chinese Mainland, which returned to pre-COVID growth levels of more than 30% as government restrictions were lifted, as well as in Korea. Strong sequential improvement in our North America and Europe comp trends in the second quarter and we continue to monitor each of our markets closely.

By channel. While our brick-and-mortar performance was still challenged due to store traffic headwinds, we reported solid digital comps in all 3 regions this quarter. This was driven by expanded connected retail offerings and an emphasis on product categories, like home and loungewear, that are resonating with consumers today, with notably less focus on formal, tailored workwear and occasion dressing.

Within our wholesale business, we were also encouraged by sequential progress across regions this quarter, particularly on a sell-out basis and led by Wholesale Dot Com. Our sell-in continues to improve but is lagging our recovery in direct-to-consumer, as planned, as we exited department store doors in the first quarter and focused on prioritizing inventory management in this environment. This near-term discipline is integral to building price harmonization across our ecosystem and to protecting the elevation and long-term equity of our brands.

Next, I want to spend a moment digging a little deeper into our digital transformation, which cuts across everything we do, from how we create the best possible experience for our consumers to new ways of working as a company and with our partners. On the consumer-facing side, the continued acceleration of connected retail is central to our recovery and return to growth. We now have a comprehensive offering of connected retailing options, enabling our consumers to interact with the world of Ralph Lauren in new and more personal ways. These include virtual client selling and appointment booking; buy online, pick up in store; curbside pickup; mobile checkout; and contactless payments.

We launched our pilot Ralph Lauren virtual store experience this quarter, bringing our Beverly Hills flagship store experience online through a mix of multimedia and augmented reality capabilities. Wherever you are in the world, you can shop and interact with this unique store experience through your device. Along with our expanded connected retail options, we plan to roll out more virtual flagship shopping experiences this holiday and beyond.

In addition to our consumer-facing enhancements, we also continue to digitize how we work as an organization. This quarter we began to roll out our digital value chain initiative that will streamline how we bring products to market and make it easier for our teams to stay connected and agile. Some key components of this include: implementing 3D digital product creation in virtual fittings; rolling out digital showrooms; and expanding our stepwise buying capabilities, enabling us to make purchase decisions closer to market. While I am encouraged by the successful rollouts in the midst of COVID, we still have significant opportunity to continue integrating digital into how we work to enable greater effectiveness and efficiency.

Turning now to our efforts to win over new generation. In the second quarter, we continued to ramp up our personalization initiatives, including targeted e-mail campaigns with predictive AI and high-reach paid social media, helping to drive traffic and conversion to our channels.

We added more than 1 million new customers to our direct-to-consumer platforms alone in Q2. And as consumers are learning to live and work in new ways, we are likewise developing new ways of inspiring and engaging them. Let me share a few of the highlights from Q2. First, we were the first-ever fashion brand to enable consumers to mix and match branded garments inspired by real-life designs on Snapchat through our Ralph Lauren Bitmoji collection. Over 10 million users dressed their Bitmoji in Ralph Lauren and tried on the collection over 250 million times this quarter. Our 360-degree marketing campaign included influencer and celebrity partnerships with a live stream concert by chance the wrapper from our Chicago flagship and an augmented reality portal on Snapchat. Successfully connecting with Gen Z audiences, Ralph Lauren reached leadership share of voice on social media through this launch.

We also announced the winner of our Polo Design for Good contest in Q2, entitled Just Let Me Breathe by artist Michelle Smith. This was a great example of how we are engaging with our superfans, who submitted their art work for display on an exclusive Polo shirt with the campaign generating more than 300 million PR impressions. It also connects to our core values, which Ralph established more than 50 years ago when he started this company, with all proceeds of the winning shirt going to COVID-19 relief.

Other high-impact activities to recruit new consumers this quarter included our partnership with the popular Netflix show Elite, outfitting BTS' official music video for Dynamite, a campaign supporting the Wimbledon foundation in the absence of this year's tournament and our continued sponsorship of the US Open Tennis and PGA Championships, as we further strengthen our position in the world of sports globally. These initiatives help to deliver an acceleration of our global brand awareness and purchase intent since the start of the pandemic, particularly with next-generation consumers. And our total social media followers exceeded 44 million in the second quarter, led by our expansion on TikTok as well as double-digit growth on Instagram.

Looking ahead, our upcoming holiday campaigns will focus more than ever before on digital experiences, from the expansion of our virtual stores to our Polo Bear game with a live stream gaming event on Twitch. Our campaigns will also feature a much greater emphasis on gifting this holiday across all of our channels. This represents a key opportunity globally, with 74% of consumers we surveyed recently highlighting Ralph Lauren as a brand that is great for gifting.

I also want to touch on our work to operate with discipline to fuel growth. Our ongoing focus on balancing growth with productivity has been an important element of our long-term plan. And this discipline is even more critical as we make hard choices to realign our cost structure so we can position the company to emerge from COVID stronger than we came into it and pivot back to growth. In the second quarter, we announced the first major action related to our fiscal 2021 strategic realignment plan, the simplification of our organizational structure. This is designed to enable our teams to move with even greater agility and focus on what matters most, including our digital transformation.

Another element of our strategic review process we discussed last quarter was an assessment of our brand portfolio. Today, we announced that we are transitioning our Chaps business to a fully licensed model. This shift is consistent with our long-term strategy from several aspects. First, it will enable us to put even greater focus on elevating our core namesake brands in the marketplace; second, it will reduce our total direct exposure to the North America brick-and-mortar department store channel, notably the more moderate tiers; and third, this move will create incremental value for the company by setting up Chaps to deliver on its potential with an experienced partner in the sector that is focused on nurturing the brand.

We are making good progress on our multipronged realignment plan, which gives us increased confidence in our ability to start fiscal '22 strong with the right foundations in place.

Importantly, I also want to take a moment to touch on our ongoing work to integrate citizenship and sustainability into everything we do. Q2 marked the kickoff of our participation in the CEO Action for Racial Equality fellowship, focused on advancing racial quality and social justice in public policy, and the McKinsey Black Leadership Academy aimed at developing and empowering our next-generation of black leaders on a global scale.

On the sustainability front, we were excited to announce a minority investment in Natural Fiber Welding, a leading sustainable material science start-up that has revolutionized the use of natural fibers and reuse of cotton waste into patented high-performance materials. Our investment will help to expand the market and ecosystem that supports the use of recycled cotton.

In closing, Ralph and I want to thank our teams for their incredible resilience, dedication and agility as we continue to navigate through challenging conditions around the world. In this unprecedented environment, we recognize the opportunity to accelerate key strategic priorities and continue to deliver Ralph's iconic vision in an elevated way to all of our consumers across all of our channels.

And before I turn it over to Jane, I want to extend a warm welcome to our newest Board member, Valerie Jarrett. Valerie's breadth of experience across the private and public sectors and unparalleled expertise in government, law and business will bring great perspective to the boardroom. And Ralph and I are confident that her experience and leadership will be invaluable.

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

Thank you. Ms. Nielsen, your line is open.

Thank you, Angela, and good morning, everyone. We were encouraged by our team's execution and continued business progress in the second quarter. In the midst of a still challenging operating environment, we delivered sequential improvement across all regions, expanded our gross margins through continued AUR growth and brand elevation and reduced expenses across the company.

Importantly, our balance sheet is very strong with $2.4 billion of cash and investments, enhanced by ongoing working capital efficiencies. At the same time, we continue to invest in our brands and in the channels that matter most to consumers today, notably, an increased emphasis on our digital transformation.

We continue to be cautious about the pace and regional variability of COVID recovery as well as consumer behavior, especially with the rise of restrictions with the resurgence of COVID cases, notably in Europe. We are intensely focused on what we can control in this dynamic context and on positioning the company to accelerate value creation as we emerge from the global pandemic. This includes elevating our powerful lifestyle brands and maintaining a strong balance sheet, while also realigning and streamlining our operational and expense structures.

To achieve this goal, in September, we announced the first stage of our fiscal '21 strategic realignment plan, designed to support future growth and profitability while creating a sustainable cost structure. Our full strategic review process includes the evaluation of: our team organizational structures and ways of working; our real estate footprint and related costs across distribution centers, corporate offices and direct-to-consumer retail and wholesale doors; and our brand portfolio.

We announced actions related to the first initiative, reshaping our organization to align to our strategic growth priorities. These are estimated to result in gross annualized pretax expense savings of approximately $180 million to $200 million. We anticipate a substantial portion of these savings will flow through to the bottom line, beginning in fiscal '22. In connection with the organizational reshaping, we expect to incur a total pretax charge of approximately $160 million. The majority of this charge was recorded in the second quarter.

As Patrice mentioned, we announced today that we are transitioning our North American Chaps menswear and womenswear business to a fully licensed model, starting in the second half of fiscal '22. Although the change is not material, we look forward to updating you on the business transition and progress in the coming months.

Moving on to second quarter performance. Second quarter revenues declined 30% compared to a 66% decline in Q1, with performance across all 3 regions still adversely impacted by COVID. Total direct-to-consumer comps were down 28%, while global wholesale revenues declined 37%. Our bricks-and-mortar comps were down 33% following a 66% decline in the first quarter. AUR improvements were more than offset by traffic declines of more than 40% versus last year and limited store operating hours due to health and safety regulations, consistent with the broader environment.

Looking ahead to holiday, we are proactively working to drive traffic and comps through multiple levers, which include increasing high-ROI performance marketing; expanding personalization and social commerce programs; and leveraging our connected retail capabilities, including new features that will be rolled out for holiday.

Our brick-and-mortar declines were partially offset by a 12% comp increase in our owned Ralph Lauren digital commerce business. And more importantly, our digital profitability continued to improve, with Q2 digital operating margins expanding more than 1,000 basis points to last year through a combination of higher quality of sales and SG&A leverage.

With digital representing our fastest-growing channel in the company, driving profitability in this business remains important, not only to our long-term margin accretion but also to our strategy of repositioning ralphlauren.com as our digital flagship or the best expression of our brand online.

Second quarter AUR growth of 26% was above our expectations, led by double-digit increases in North America and Europe. Excluding the COVID-related mix impact, underlying AUR still grew more than 20% to last year. This underlying AUR growth represented an acceleration from the first quarter and is above the low to mid-single-digit growth we guided to for fiscal '21. We plan to drive further AUR growth this year as we elevate our brands across every touch point; significantly reduce promotional depth and duration; drive favorable mix; and take targeted pricing increases, particularly in North America. Our confidence in this brand-elevation strategy is reinforced by our continued improvements in full-price penetration rates, basket sizes and better-than-expected conversions, even as we reported higher AUR growth.

Adjusted gross margin was 66.5% in the second quarter, up 500 basis points to last year. Gross margin expansion was driven by strong AUR improvements and favorable geographic and channel mix shift as our higher-AUR-gross-margin Asia business recovered faster than North America and Europe. Approximately 2/3 of our gross margin expansion was driven by our continued global improvements in pricing and promotions, with the remainder driven by mix shifts that were outsized given COVID impacts.

SG&A expenses declined 19% to last year on savings from employee furloughs, store rents and government subsidies as well as lower selling and marketing expenses. Adjusted operating margin for the second quarter was 12.6%, down 230 basis points to last year. Marketing declined 31%, as COVID canceled or limited the activation of key events like Wimbledon, the U.S. Open and Fashion Week. And we shifted some demand-creation activities later in the year. We also continue to pivot investments from in-store and event-based engagements toward longer-term brand-building activities focused on digital and our values-based messaging, as Patrice discussed.

Moving on to segment performance, starting with North America. Revenue decreased 38% to last year. Retail comps declined 32%, driven by a 40% decline in brick-and-mortar comps, while our owned digital comps increased 10%. Brick-and-mortar comps were primarily impacted by a steady but measured recovery in retail traffic, including a significant decline in foreign tourist sales in the quarter, consistent with the broader market. AUR for the quarter was up over 20%, driven by significantly reduced promotions and our continued rollout of targeted ticket price increases in factory stores.

Our digital commerce comps accelerated to 10% from 3% growth in the first quarter. Underlying sales to domestic consumers grew high teens, while sales to international and daigou customers declined double digits to last year, as planned. Stronger sales to domestic consumers were driven by our investments in connected retailing, such as buy online, pickup in-store and expanded personalization and targeted marketing efforts. Our digital marketing work generated a 37% increase in new customers this quarter, driving our full-price sales penetration higher. Similar to last quarter, these comp gains were tempered by a significant planned reduction in promotions to drive higher quality of sales while also serving to reduce lower-margin sales to international daigou customers.

We reduced our total site-wide promotions by 52 days compared to the prior year period. As a result, our digital AUR was also up over 20%, and gross margins for North America digital commerce expanded more than 1,000 basis points to last year. Through this fiscal year, our plan is to continue driving stronger profitability in this channel, while, on the revenue side, balancing strong domestic growth with a steady reduction in sales to international promotion-seeking shoppers.

In North America wholesale, second quarter revenues declined 46% as we continued to manage our shipments carefully and realigned inventories to demand. The decline was partially offset by a modest shift in timing of shipments to rebalance inventory before holiday. At the end of Q2, our inventories at wholesale were clean and well positioned, down more than 40% at North America wholesale. We are encouraged that our sell-out rates in wholesale are still significantly outperforming sell-in. However, we expect further pressure on reported sell-in over the next few quarters as we continue to manage inventories carefully.

Moving on to Europe. Second quarter revenue declined 25% on a reported basis and 28% in constant currency. Europe retail comps were down 29%, with a 35% decline in our bricks-and-mortar store comps, partly offset by a strong 26% increase in our owned digital commerce. Across Europe, our bricks-and-mortar comps were impacted by traffic headwinds similar to North America. However, AUR was up over 20% to last year, led by our ongoing strategy to elevate our factory channel. We continue to be cautious on the pace of brick-and-mortar recovery in Europe based on the growing intensity of second waves of COVID, along with other macro uncertainties.

Strong momentum in our owned digital commerce comps was driven by our new consumer acquisition, up 30%, along with new site functionalities, connected retailing initiatives and enabled by the launch of our new brick-and-mortar -- I'm sorry, new back-end OMS platform in the quarter. We were also excited to go live on FARFETCH this quarter with a marketing campaign launching in time for holiday.

Europe wholesale revenue declined 27% in constant currency as we continued to limit shipments to reset our inventories to demand. However, we saw continuing momentum in Wholesale Dot Com and digital pure players' sell-out performance through the period, with strong double-digit growth to last year, led by key platforms, such as ABOUT YOU, ASOS and Zalando.

Turning to Asia. Revenue declined 7% on a reported basis and 8% in constant currency. Our Asia retail comps improved from a 33% decline in the first quarter to an 11% decline in Q2. Brick-and-mortar stores were down 12% partially offset by digital comps, up 32%.

We are encouraged that growth in the Chinese Mainland is back to pre-COVID levels of more than 30%. However, Japan continued to be the biggest headwind in the quarter, with sales declining 17%. Following our store reopenings in early June, the market entered a second wave of COVID cases, which impacted our performance, along with weaker tourism. The decline was partially offset by stronger-than-expected growth on our new digital site launched in June. Other key markets, especially those with higher levels of tourism, like Hong Kong, continue to be on a more variable and prolonged recovery.

Overall, momentum in our Asian digital businesses continued through the quarter, driven by a strong performance across all key markets and channels, including our own sites and digital pure plays.

Moving on to the balance sheet. We ended the second quarter with $2.4 billion in cash and investments and $1.6 billion in total debt, which compares to $1.6 billion in cash and investments and $693 million in total debt at the end of last year's second quarter.

Net inventory declined 12% to last year, with double-digit declines in North America and Europe and a 9% increase in Asia. While we have taken a highly cautious approach to managing inventories through the pandemic, overall, we were encouraged by our team's ability to merchandise around our core and iconic styles as well as key COVID categories, like home and Athleisure.

Our increased agility is also enabling us to shift back into pre-COVID categories as consumers return to more normalized trends. Our tightly managed inventories, combined with our strong AUR and gross margin performance through the first half of the year, give us increased confidence that we are taking the right strategic approach to move through excess spring '20 product, while also positioning the company for sustainable future growth. Meanwhile, our supply chain teams continue to improve our lead times and fast-track capabilities to chase potential increases in demand.

Looking ahead, we continue to plan around a number of demand scenarios, given the high level of uncertainty and evolving situation surrounding COVID-19. Based on our assessment of developing business trends and our strategic plans, we want to share some details on how we are thinking directionally about the rest of the fiscal year.

First, we expect our financial results for both the third quarter and full year fiscal '21 to continue to be adversely impacted by the pandemic and prolonged demand recovery. We expect gross margins to continue expanding in the second half of the year, albeit at a more moderate rate than the first half. Improved pricing and promotion, including targeted consumer messaging, should continue to be the most durable driver. Based on our year-to-date progress on our brand-elevation strategy, we now expect AUR to grow low double digits this year, exceeding our long-term target of low to mid-single-digit average growth annually. We expect these tailwinds to be partly offset by higher production costs in the back half. As we outlined at the start of the pandemic, we plan to clear excess full-price merchandise, primarily through our factory channels.

We continue to expect declines in operating expenses to moderate with the highest level of dollar spend in the third quarter around holiday. Our first half results included onetime benefits from employee furloughs, rent abatements, executive compensation reductions and government subsidies that are not likely to repeat in the second half. We also shifted a meaningful portion of marketing investments to the back half of the year to position our business for growth as we emerge from the crisis, with first half marketing expense declining 32% to last year but expected to grow about 10% in the second half. Note that cost savings associated with our organizational realignment and any additional potential actions are expected to begin primarily in fiscal '22.

Lastly, our tax rate may be higher and more volatile this year. This is due to impacts from stock compensation and nondeductible items under tax reform as well as limitations on tax benefits from losses eligible for carryback under the CARES Act.

In closing, guided by our clear purpose and strategy along with the strength of our timeless brand and Ralph's creative vision, we are encouraged by the progress we have made over the first 2 quarters of the year. Our brand elevation is working across every geography. We are accelerating our push into digital, and we are driving even greater cost discipline as we make difficult decisions around realigning our organization and footprint around the world.

While we continue to navigate a highly dynamic global environment, our teams are laser-focused on managing through this period to position the company to return to healthy and sustainable growth.

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

(Operator Instructions) Our first question comes from Omar Saad with Evercore ISI.

Congrats team on the strong profitability this quarter. Patrice, understanding that the current COVID environment is highly unpredictable, there's not a lot of visibility, but if you look beyond the near-term headwinds, can you elaborate on your comments of -- that you plan to emerge from the crisis stronger than you came into it? And could you include a discussion also of the recently announced reorg last month and how that fits in?

Sure. Well thanks for your question. First and foremost, our strength comes from our teams, and their incredible dedication, resilience and agility have fueled our progress in -- during these challenging times. Our team's engagement, coupled with a laser focus on strategic priorities and also proactively reducing our exposure to the most structurally challenged parts of our businesses leads me to actually have great confidence that, right now, the fundamentals of the company are actually stronger than when we came into this crisis. Let me elaborate on both areas, first, the strategic growth areas, and then I'll talk about how we're tackling the structural headwinds for the company.

So strategic growth focus area is really centered on elevating our brand, right? We have one of the best brands in the world. It has shown resiliency and authentic consumer connection during COVID. Our latest read on purchase intent over the past 6 months since the crisis started indicates actually our purchase intent, our brand consideration scores are up versus precrisis. Second point is accelerating digital growth and profitability, right? We've been adding connected retail functionality, we've driven a great focus on personalization in the interaction with our customers and also a strong drive on quality of sales. The third area is recruiting high-quality new consumers, bringing in consumers who buy at higher prices and are really at the sweet spot of our general targeting. And we also saw very strong consumer growth on ralphlauren.com over the past quarter versus prior year. Fourth area is driving high-potential, underdeveloped markets and categories, namely China outerwear and home. And then finally, it's realigning our organization and cost structure to support our future growth and deliver, per the numbers we announced a few weeks ago, at least $180 million of savings. So those are the strategic growth focus areas.

And then we're really tackling head on the most challenging areas of the business and I'll quote the top 3. One is our North America brick-and-mortar wholesale presence, the second is our off-price penetration and the third is the underperformance of our noncore brands. So we closed another 200 underperforming North America wholesale doors over the past few months. If you step back a little bit, Omar, and you look at the past 3-year time frame, we've basically reduced our North America wholesale brick-and-mortar presence by over 50%. We've closed more than 50% of our doors.

We also continued to reduce the penetration of off-price in our business significantly this past quarter. Likewise, if you step back and look at the past 3 year focus and progress, we've reduced the penetration of our off-price business by more than 1/2.

And then finally, you heard in our prepared remarks the fact that we are transitioning the Chaps brand, which is roughly $200 million in revenue to a value-accretive, fully licensed model.

So although we recognize we're still operating in a highly volatile environment, and clearly, yesterday's new restrictions in Europe are unfortunately a good reminder of this and we will need to continue to manage with agility, as we have since the beginning of this pandemic as we kind of work through it, we are focused on strategically positioning the company for long-term growth and value creation.

Specifically, Omar, to your question on the organization reshaping work that we announced a few weeks ago, so it fits perfectly into the strategic focus areas that we have called out. We really looked ahead and said, okay, next 3 to 5 years, what are the key growth areas for the company? What are the key capabilities that we need to succeed? And how do we align our organization structure, our ways of working, our investment levels to make sure that we're taking advantage of all these growth factors? And so what you've seen through our announcement for the org reshaping work is a reflection of that, and also, of course, the adjustment of our cost structure to reflect the -- where the business is today and where, again, we want to allocate our resources.

The next question comes from Matthew Boss with JPMorgan.

Great. So Patrice, could you speak maybe to the range of current business trends that you're seeing across the portfolio, specifically Polo versus Lauren.

And then, Jane, how best to think about the progression of revenues in the back half of the year relative to the 30% decline in the second quarter? And maybe specifically, do you believe a return to consolidated growth is feasible by the fourth quarter?

Sure. Matt, well on the brand performance, and we don't get into the specifics by brand, but what I can tell you is the bigger parts of the company is the Polo brand, and that is the part of the company that has the strongest progression rates.

On the other parts of the portfolio, some of which are work in progress, like the work that we've been doing on Lauren over the past year, we're feeling good about the pivots that have been made on product, the pivots that have been made on marketing and encouraged by the progress that we're seeing across the channels. The same is true for Luxury labels, Purple label and Collection and Double RL.

Yes. Matt, from a second half perspective, here's what we were encouraged by in the quarter: we were really encouraged by the progress we saw from Q1 to Q2. Now as we think about the future, there is a high degree of uncertainty surrounding the second wave shutdowns. In our assessment, this is the biggest potential impact to second half recovery and is why we continue to plan around a number of demand scenarios. We're obviously encouraged by the recovery in the Chinese Mainland getting back to pre-COVID levels of growth, but are cautious given the announcements of what we saw in Europe, particularly in France and Germany and the rising case count in North America.

Given the current dynamics, we're not guiding for when we will return to pre-COVID levels. We're looking at trends in terms of the challenges in bricks-and-mortar traffic; the tourism trends that will take longer to recover; and the work that Patrice referenced, which is our proactive cleanup of North America distribution, notably in wholesale and in off-price wholesale.

And from a timing perspective, obviously, we expect at this point that recovery will continue to be led by Asia, followed by Europe and North America, subject to second wave.

So we continue -- I think our teams continue to manage agilely through this. We think it's prudent not to give guidance, given what's happening in the marketplace today. But we are managing what we can control through the second half, and that's price, AUR, gross margin, expense.

The next question comes from Ike Boruchow with Wells Fargo.

Yes. So Jane, just two quick ones for you. So appreciate the gross margin commentary in the back half. Could you talk a little bit more specifically about the next quarter, just because of how important it is? And I know it seems like you've got some good mix benefits from China and DTC, but I'm assuming we should expect gross margin expansion in both quarters. But I'm kind of curious if you could talk around the gross margin for the upcoming quarter.

And then just at a higher level, maybe it's too early to go into it -- into this, but can you possibly begin to help us think about the pacing of recovery in the U.S. wholesale channel based on your conversations with your partners? When are you expecting "normalized" growth rates to kind of return? Just any help on the pacing of recovery in that channel specifically would be great.

Thanks, Ike. So we're not guiding to specific gross margins by quarter, but I can tell you that we do expect expansion in gross margin as we move through the second half. And I believe that our drivers are durable in the third and fourth quarter. And we're very much encouraged by the progress we've made, albeit, I do expect that gross margin expansion is not going to be at the pace that you saw in the first half.

In terms of the pacing of wholesale, what we've said is we do expect, given what we see today in terms of the environment, that spring '21 will continue to improve from where we're at today. We know that fall '20 was constrained by our proactive inventory management, with inventories down 40% in North America wholesale. We do expect the spring sell-in to improve sequentially, but this is going to be a paced recovery. And obviously, our wholesale partners are watching what's happening in North America as carefully as we are. So there's still a bit of uncertainty in that environment, but that's our expectation.

The next question comes from Dana Telsey with Telsey Advisory Group.

The speed model and the improvement in speed with the 3-month lead times is very impressive. What do you see the opportunity of that going forward? Does it differ at all by classification? And what is that benefit to the gross margin go forward?

So speed has been the real focus area for us. I'm glad you called it out, Dana. And now we're at a stage where more than 25% of our business is on less than 3-month lead times, whereas last year, if you had asked me what that number was, it would have been low single digits. So tremendous progress from our GM&S team to build capabilities with our suppliers to move a lot faster. We're really looking at the 3-, 6-, 9-month blocks, but what you can expect from us is a continued acceleration of the pace.

We have a project that the team developed recently as part of our vote campaign that was actually achieved in a matter of days, not even months, not even weeks, but a matter of days, which gives me a lot of confidence that we're continuing to build the capabilities that will enable us to be incredibly reactive, which, obviously, in this environment, is critical. It gives us the ability to chase even further, which, again, is critical in this environment.

So Dana, I suspect a year from now when we sit down together and look at our rate of development, that we -- you will continue to see very strong progress on speed for the company.

And the primary benefit of this from a gross margin standpoint is the reduction of excess and reduction in vendor allowances and NRV is we're able to read demand closer and fulfill demand and fulfill product closer to reading demand, and that should be durable as we improve our reaction times.

The next question comes from Michael Binetti with Credit Suisse.

Jane, I have two different questions. I think it will go to Jane, but Patrice, any color helpful, too. But you've got a number of projects going on with the distribution channels, the regions, the pricing structure, the store fleet and some of the costs in the investment lines here. They all have different durations, they all have different payback periods. But when you add it up, when and how do you think the prioritization of the projects, as you laid them out, to realistically translate to revenue growth back above the levels we saw in fiscal '19 or fiscal '20?

And then as a follow-up, maybe to look at it a little bit of a different way through the profitability lens. Maybe a different way to ask it is what level of sales do you think you need to achieve the level of EBIT dollars that you saw in fiscal '19? Because I know you're working hard on the margins as well.

Yes. We are working hard on the margins. As I look at the actions that we announced and the combination of work that's in progress, such as the Chaps operating models, which -- you will see the benefit of the org reshaping work largely in fiscal '22. And as we called out, that'll be a gross savings of $180 million to $200 million. The benefit of the Chaps, while much smaller in magnitude, would occur post transition in August. And then the work that we're doing on continuing brand portfolio evaluation and real estate would likely flow through in fiscal '22, but closer to year-end in fiscal '22.

In terms of -- we are focused on margin right now. Some of these actions, like moving Chaps to a wholesale model, will be helpful from a profitability standpoint. But obviously, as you shift to a license model, I'm sorry, that compresses your total dollars of revenue. We've factored that into our thinking and are really focused on getting our -- focusing on our operating profitability. We're not guiding to sort of a time of recovery to pre '19 levels, there's too much uncertainty out there. But that is certainly our long-term mindset.

The next question comes from John Kernan with Cowen.

Congrats on all the progress and managing the business through this environment. Maybe just to dovetail on that -- on the prior question, how should we think about the mix shift to direct and digital on your overall margin structure? Historically, the wholesale business was a higher-margin business for the company, I think, globally, particularly in North America. So how do we think about that overall margin structure of the company when going more direct seems like an enormous initiative for the company?

That's a very good question, John. And it's very top of mind for us. That's why all the focus -- let's focus on digital, first and foremost. All our focus on ralphlauren.com is about brand elevation but enhancing the experience and it's about step changing the profitability. Because anyone can grow dotcom operations aggressively at no profit, right, but that's not the game we're in. The game we're in is ralphlauren.com needs to be accretive to the region from a profitability standpoint. We have achieved that in Asia. We have achieved that in Europe and we're on our way to achieving that in North America.

You saw from our prepared remarks, our margin this past quarter in ralphlauren.com U.S. is up 1,500 basis points, which is a massive growth. And our objective is to make sure that we're excited about moving consumers to that channel and recruiting consumers into that channel because it will be accretive to the profitability of the region.

So we are working on both making sure we're bringing in high-value customers and also have the right AUR, gross margin, SG&A structure to support that moving forward because you're right that the direction of travel for this company is more direct-to-consumer in terms of split by channel. And we're keen to make sure that the profitability structure follows that.

And we expect to close this year achieving the goal of having digital be accretive to the region in every region that we operate in and exceeding in North America our wholesale margins. So that's a big accomplishment.

Excellent. And maybe just one more follow-up. The $180 million to $200 million gross cost savings, can you talk about how -- when we approach our Excel models, how we should think about that for fiscal '22 on the overall SG&A dollar base and any potential offsets to those gross savings?

Yes. I think what we're seeing now is that in org -- from our org reshaping work, we're going to flow through substantial -- the majority of that through to the bottom line, understanding that we will be making some investments in -- to accelerate into growth. But I think that, as you think about your model, the majority of that will flow through.

Our next question comes from Erinn Murphy with Piper Sandler.

My question is around the 40% traffic decline you called out for Q2. Could you just share how it looked by region?

And then maybe more specifically, as we've moved into the third quarter with Europe in the second wave, you've obviously spoken to some caution. What are you seeing now? And are the retailers there, are they kind of a little bit more cautious as they order for spring/summer '21?

So we saw fairly similar traffic patterns in Europe and North America to our brick-and-mortar stores. China encouragingly recurred -- returned to pre-COVID levels of traffic and really led across Asia. And -- but we're encouraged by the trajectory we're seeing, especially by our largest market in Japan that continues to recover following the second wave.

And on your European wholesale question, I think what we've seen is actually encouraging progress from our partners, both wholesale kind of brick-and-click and also pure players. And as you know, we have a very strong pure player business in Europe. Listen, the recent flare-ups happened yesterday, so I don't know that, that's been reflected in the numbers yet, and obviously, we approach this with a good level of caution. But we were encouraged with what we -- the response we were getting to our product portfolio from our European wholesale partners for spring '21.

Our final question comes from Adrienne Yih with Barclays.

Happy to see the progress. Patrice, I guess, my question for you, I liked your comment about the -- attracting the new millennial customer. I was wondering if you can give us some metrics or feedback from what you're hearing from both millennial and Gen Z consumers?

And then, Jane, my last question for you is your comment based on kind of spring 2021, you'll be in an improved inventory position. Are you seeing evidence of kind of that stabilized demand in forward bookings for spring 2021? Or is the comment more on the controllable side that you will have a better inventory position?

Sure. So Adrienne, on the consumer front, we're actually very excited about the response we're seeing from millennials/Gen Z consumers. As you know, we have very deliberate actions to appeal to that customer group, whether that's where we show up from a media standpoint; whether that's the type of activity that we have, like our pretty special Bitmoji program; or whether that's the type of influencer that we partner with. But what we have seen in terms of next-generation performance over the past 2 quarters is actually significant progress within the customer base below the age of 35 basically across all 3 regions. Now you would expect that in China because a big chunk of population is there, but we're also seeing that actually in Europe and in North America.

So with the tracking that we now do, we -- I think we've got much greater visibility to that. Encouraged by the traction, and obviously, we'll continue to fuel it. And you saw in our earnings release that we intend to increase our marketing spending in the back half, so Q3, Q4, plus 10% versus last year. A good deal of the activities that will be funded are specifically targeted at the millennial/Gen Z population.

Yes. I mean in terms of our outlook for wholesale spring '21, we know that our inventory positions will be better. That's what we can control. Obviously, demand is -- remains the biggest uncertainty, but we're encouraged by the conversations that we've had with our wholesale partners thus far.

Well listen, thank you, everyone, for joining us today. We look forward to sharing our third quarter fiscal '21 results with you in February. And in the meantime, stay safe, and have a great day.

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