雷夫·羅倫馬球 (RL) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Fourth Quarter and Full Year Fiscal 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I will now 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 Fourth quarter and Full Year Fiscal 2020 Conference Call. With me today are Patrice Louvet, the company's President and Chief Executive Officer; and Jane Nielsen, Chief Operating Officer and Chief Financial Officer. After prepared remarks, we will open up the call for your questions. (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, Cory. Good morning, everyone, and thank you for joining today's call. The spread of COVID-19 around the world has been devastating, and our thoughts are with the many impacted by the virus. The pandemic has not only affected our organization and recent financial performance, but it has had unprecedented consequences on the communities we operate in around the world.

Under these extraordinary circumstances, our teams have responded to the call with agility and resilience working tirelessly from their living rooms and kitchen tables across time zones. Ralph and I want to recognize and thank them for their dedication and commitment. Our objective is to emerge from this period stronger than we came into it. And before we review our recent financial performance, I want to spend some time on the actions we are taking to ensure we not only endure through this crisis, but are positioned to thrive long term.

From the start of the outbreak, we moved quickly to protect the safety and well-being of our employees, consumers and communities. This included widespread store and office closures, led by Asia in late January, followed by Europe and North America in March. Like many of you, we are working in new ways across the company, including working from home, and we've implemented new health and safety measures where that is not possible.

We also took proactive steps to ensure the long-term financial health of our business, including expense reductions, further strengthening our balance sheet and liquidity and pivoting our supply chain to adjust inventories to changing demand. Meanwhile, we accelerated efforts to drive sales to our digital ecosystem as consumers stayed home.

On the expense side, we've been addressing our most significant fixed cost around the world. This includes ongoing work with our landlords to negotiate rent relief and pausing all new store build-outs. We reduced corporate expenses, including a freeze on all global travel and hiring during the crisis. And in April, we announced pay cuts for our executives, Board and me, along with furloughing or flexing down a significant number of our employees across the company. Ralph is foregoing his bonus for fiscal '20 and his entire salary for fiscal '21.

We have also focused on delivering on our purpose in the communities in which we operate. For example, in March, we donated $10 million toward emergency COVID relief through our Ralph Lauren Corporate Foundation. These funds will support the COVID-19 Solidarity Response Fund, our long-standing partners in Cancer Care, our Employee Relief Fund to support Ralph Lauren employees in need and the CFDA/Vogue Fashion Fund for COVID-19 relief. We also mobilized our teams and supply chain to deliver 250,000 masks and 50,000 isolation gowns to support medical staff. And we are providing 1.5 million units of comfort apparel, hundreds of meals and even Ralph's Coffee for frontline workers across many of our key markets.

Next, I want to share some perspective on our experience managing through COVID in Mainland China over the past few months. As we prepare to reopen markets around the world, we're applying learnings and strategies from China where the recent recovery gives us confidence that we are making the right decisions now to position our company for long-term sustainable growth and value creation. We started the quarter with strong, continued momentum in Mainland China, our fastest growing market, with sales up more than 35% in January, driven by all of our direct-to-consumer channels. By early February, we closed nearly all of our stores in the market due to COVID. We took early strategic actions across marketing and distribution in China, which we have applied in our other markets as the pandemic continued to spread.

First, we quickly shifted our marketing to focus on optimistic messages around family, togetherness and giving, values that have always been an authentic part of who we are. We partnered with celebrities like JJ Lin, Jim and Wang Leehom to amplify our messaging. This content resonated well with our consumers across Asia, driving over 124 million video views and a 33% increase in positive brand mentions on social media in Q4 versus Q3.

Second, we accelerated our digital and omnichannel capabilities in China in the fourth quarter to better serve our consumers during the store closures and beyond. We were excited to launch digital clienteling, with virtual appointments and customized filing recommendations based on shopper's previous purchases. This program helped to mitigate traffic declines and leverage store inventories while consumers stayed home. We expanded our Buy Online Ship From Store program to provide greater convenience and limit face-to-face interactions as stores reopen. These initiatives, combined with our digital marketing, drove a 76% increase in China digital sales in the fourth quarter, significantly outperforming the broader apparel industry in February and March. These programs are being tested and rolled out in North America and Europe. And over the coming weeks, we're exploring other contactless options like curbside pickup and self-checkout in many locations.

As our China stores reopened in early March, we implemented new safety measures across our stores, offices and distribution centers to protect both our employees and consumers. Store measures include frequent deep cleanings, providing masks for employees and strongly encouraging them for shoppers, and limiting capacity inside our stores to ensure social distancing.

While our digital business led the recovery in Mainland China with a return to pre-COVID growth rates in March, we were encouraged by the recovery in our brick and mortar stores resulting from these omnichannel and in-store programs. We saw steady improvement in Mainland sales from high double-digit declines in February at the peak of our closures, ramping back to positive growth in early May. We expect Mainland China to return to pre-COVID growth trends by Q2.

Although we expect the shape and timing of recovery curves to look different in each market, our experience and lessons from China are informing our actions across the rest of Asia, Europe and North America. Despite challenging conditions around the world, I strongly believe this crisis is creating opportunities for our business to emerge leaner, more agile and ultimately take market share. All of this is enabled by the strength of our balance sheet and our brands, coupled with the ingenuity and commitment of our diverse global teams.

Turning now to fourth quarter and fiscal '20 results. While COVID-19 was clearly the biggest headwind we faced this year, we were encouraged by our underlying progress on our Next Great Chapter Plan prior to the pandemic with our business on track to exceed top and bottom line targets. Our brand elevation work, inclusive of product, marketing and distribution, came together to deliver positive AUR growth across all 3 regions for both the quarter and the year. So while the future remains relatively uncertain, we are confident that the key strategic pillars of our Next Great Chapter Plan still hold true. Let me touch briefly on a few of these areas.

First, in our efforts to win over a new generation, we have created unique and lasting connections with consumers over the first 2 years of our plan. And we believe that now more than ever, is the time to build on this momentum and solidify our iconic brand leadership. Globally, Ralph Lauren brand consideration accelerated through the fourth quarter and into April, outperforming our benchmark peers in each region. Our total social media followers surpassed 43 million in the fourth quarter, a double-digit increase to last year.

This was led by very strong increases on TikTok, one of the fastest-growing social media platforms for Gen Z. While we only launched TikTok last summer, we are encouraged that we've already established ourselves as 1 of the top 3 luxury brands on the platform. Going forward, as markets reopen, we will continue to focus on the type of values-based messaging that is resonating with consumers across geographies. This work will be underpinned by the targeted personalized marketing that we started earlier this year to drive higher quality of sales. Our brands are defined by values like optimism, quality and togetherness, which are especially relevant in the current context. We will continue to tap into these authentic values to drive momentum across digital and social channels in fiscal '21.

Second, we continue to energize our core products and accelerate our high-potential, underdeveloped categories this year, led by outerwear and denim. Starting with Ralph's original vision, it has never been just about one category or one item, but rather it's about the lifestyle, which means we can credibly flex across our breadth of products and categories as consumer behaviors change. And with the emergence of COVID, we have seen consumers gravitate towards the simple and true luxuries in life: family, togetherness, the outdoors. Within our assortments, this has translated to stronger sales of comfort categories such as loungewear, athleisure and home.

In addition, the competitive advantage of our well-established core is becoming even more evident. Over the course of this year, we had rebalanced our assortments towards core products, which have faster lead times and less markdown risks versus seasonal fashion items that only live for one season. As the industry grapples with excess spring inventory due to COVID, our increased penetration of core gives us more strategic flexibility to work through our inventories and drive AUR growth.

With regards to our third key initiative, targeted expansion, we continue to build out our ecosystem approach of a cohesive, brand-elevating Ralph Lauren experience across retail, wholesale and digital commerce around the world in fiscal '20.

Prior to COVID, we opened 25 net new stores and concessions globally. This included 18 net openings in China, our fastest-growing market. While we are carefully evaluating our footprint across direct-to-consumer and wholesale channels in this rapidly evolving environment, we continue to see significant long-term opportunities for our brand in underpenetrated markets led by China and parts of Europe.

Our fourth key initiative is lead with digital. Earlier, I talked about how we accelerated digital and omnichannel initiatives in China this quarter, which are now being implemented in other parts of the world. In addition, we continue to expand our global digital commerce presence across new platforms and partnerships, including our April launch on Instagram Checkout, our first social commerce platform in North America, and we are launching our digital commerce site soon in Japan. We're also making meaningful strides in digitizing how we work, which is an important part of our journey to drive faster lead times, minimize physical waste and reduce costs.

In fiscal '20, we launched our digital library and 3D design studio. This represents a major milestone for our company as it will eventually enable us to digitize our entire end-to-end process from product development all the way to how we communicate with our consumers. We started this process by digitizing all of our Polo core styles, raw materials and trims onto a digital library. Starting in fiscal '21, we will create 3D prototypes for all of our core Polo products, replacing traditional physical samples. We've already created thousands of 3D prototypes in fiscal '20 and it's only the beginning, especially as our teams learn to work in new ways from home.

And lastly, touching on our initiatives of operating with discipline to fuel growth. A key element of our long-term plan has been to balance growth with productivity, which includes driving a culture of cost discipline across our organization. This has come into even greater focus in the context of COVID as we drive deeper near-term expense reductions and align our cost structure and inventories through a shifting retail landscape. The pandemic has also highlighted the importance of continuing our journey to integrate citizenship and sustainability into our business.

We started this fiscal year by launching our Design the Change strategy, outlining our commitments to create more sustainable products, reduce our overall environmental footprint across our operations, and support and empower our teams and partners around the world.

Some key achievements this year included reaching our gender parity goal of equal representation in our leadership positions at the VP level and above more than 3 years ahead of our target; the launch of our Earth Polo shirt made entirely from recycled plastic bottles; a new commitment to power all of our globally-owned and operated offices, distribution centers and stores with 100% renewable electricity by 2025. And building upon that, we are now in the process of setting science-based greenhouse gas reduction targets, which we will detail in this June's annual Design the Change report.

In addition, as suppliers around the world struggle with large-scale order cancellations in response to COVID, we reaffirmed our commitment to pay for all finished goods and goods already in production this spring. We are working with our partners to develop new sources of support and long-term job security for factory workers as we look to strengthen our supply chain partnerships not just for the upcoming season, but for years to come.

In closing, over the course of more than 50 years, our company has endured many challenging times, and the current crisis will certainly not be the last. Our purpose of inspiring the dream of a better life through authenticity and timeless style rings as true today as it did when Ralph started this business. And it will continue to guide us in these moments as we make tough decisions in the short term to protect the integrity and health of our brands, so that we emerge from this challenging period in a position of strength. The foundational work that we have done to put the consumer at the center of everything we do, elevate our brands and balance growth and productivity, all while maintaining a strong balance sheet, has positioned us well to manage through the current environment. And we are privileged to have one of the greatest assets of all, the strength of our timeless global brand.

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. This quarter's performance was a study in contrast. We started the spring season with strong continued momentum on our brand elevation journey, with AUR and margins exceeding our expectations as we delivered improved merchandising, expanded digital capabilities and elevated marketing and continued the rollout of targeted pricing increases across channels. This was followed by a very sudden decline in sales as we closed stores across Asia, followed by Europe and North America in accordance with guidelines from government and local health authorities.

While our teams remain committed to our long-term strategy centered around brand elevation and targeted expansion, we are focused on managing through the near term so that we can emerge from this crisis stronger than we came into it and pivot quickly back to growth.

We started by leveraging some key strengths: a healthy balance sheet, strong liquidity, focused execution, all made possible by our passionate and agile teams. Now more than ever, our strong balance sheet is a source of competitive advantage, giving us resilience and flexibility to continue executing our plan and elevate our brand during challenging times.

We ended fiscal '20 with $2.1 billion in cash and investments and $1.2 billion in total debt, which compares to $2 billion in cash and investments and $689 million in debt at the end of last year. Given the uncertain environment created by COVID-19, we announced several measures to preserve cash and strengthen liquidity. Building on what Patrice shared, these include: First, flexing our costs where possible to align to our top line and carefully managing ongoing expenses and investments to a variable demand outlook. We are currently evaluating what the right operating cost structure and distribution footprint should be across retail and wholesale as we enter a new normal. Second, a reduction in planned capital expenditures to approximately $175 million to $200 million in fiscal '21. Third, in order to maximize our liquidity, we have temporarily suspended share buybacks. We will also temporarily suspend our dividend following the April payment that was declared in early March. This is a proactive measure to preserve cash, and our Board will revisit this quarterly as we move through the pandemic. And lastly, we drew down $475 million from our revolver in the quarter and are considering additional capital measures to bolster our cash balance.

Net inventory at the end of fiscal '20 was down 10% to last year. The decline largely reflected a significant increase in inventory reserves of about $160 million to keep our inventories aligned with demand and continue our brand elevation as we move forward. Our teams are managing an unprecedented situation, but we are confident that we are taking the right strategic approach to work down excess spring '20 product while also positioning the company for future growth.

Similar to our previous practices, we will also take a targeted approach to clearing excess merchandise. First, with the majority of the traditional spring '20 selling season lost to COVID closures, our merchants are taking the opportunity to better align our assortments to consumer behavior. As stores reopen, we will extend the season to focus on Wear-Now Styles from June through August in order to maximize full price selling and mitigate markdown risk. This includes shifting some of this season's product to warmer weathers markets.

Second, we plan to reassort a portion of our finished products into upcoming seasonal collections, including full price and factory channels. A key benefit of our classic timeless aesthetic is that many of our iconic styles resonate with consumers season-after-season. This merchandise is in pristine condition in our warehouses and has not yet been seen by consumers. While requiring us to hold some inventories longer than usual, this should drive strong AURs and margins once these products are brought to market and enable us to drive our AUR growth trajectory as quickly as possible.

Third, we will utilize the full range of our channels to clear product, including targeted markdowns where product is already on selling floors, our factory stores and off-price wholesale. We have also committed to 1.5 million units of product donations to support medical workers across our 3 regions. We anticipate this process will take longer than a broad strokes end-of-season liquidation. However, our inventory reserve process aligns our inventories to expected demand. This was evident in our reserve actions in the fourth quarter. This process allows our teams to move strategically through inventories while protecting the health of our brands.

And lastly, as we look forward, our work to reduce lead times has been a benefit under the current circumstances, enabling our teams to cancel a substantial portion of our shipments for the fall season, about 2/3 of our seasonal buys. Our shorter lead times on core product and fast-track capability launched last holiday will enable us to get quickly back into inventories as demand returns, while limiting our exposure to additional excess inventory risk.

Moving on to our fourth quarter performance. Fourth quarter revenues declined 15% on a reported basis and 14% in constant currency. Prior to COVID, our business was on track to deliver positive revenue and comp growth for both the quarter and the full year.

Our digital ecosystem, including our directly-operated flagship sites, department store dot-com, digital pure players and social commerce, increased mid-single digits in the fourth quarter and high single digits for the full year in constant currency. This was driven by strong double-digit growth in Asia and Europe for both periods. Meanwhile, North America improved from flat performance in the first half to mid-single-digit growth in the second half of the year, as planned, all despite COVID-related disruptions.

Adjusted gross margin was 59.1% in the fourth quarter compared to 60.1% last year. Continued improvement in pricing and promotions was more than offset by foreign currency headwinds and unfavorable geographic mix due to lower sales in Asia and Europe. AUR growth of 8% continued to exceed our expectations.

SG&A declined 2% to last year on lower selling expenses and marketing and a modest amount of rent relief achieved in the quarter, primarily from Asia. Adjusted operating loss for the fourth quarter was $43 million compared to operating income of $96 million last year.

Marketing declined 8% in constant currency as we shifted the timing of investments back into the Q3 holiday period and reduced performance marketing while stores were closed. For the full year, marketing growth of 3% continued to outpace our top line growth as we work to win over a new generation of consumers.

Moving on to segment performance, starting with North America. Revenue decreased 11% to last year. Retail comps declined 13%, driven by a 15% decline in bricks and mortar comps and a 7% decline in our own digital comps. Brick and mortar comps were impacted by significant traffic declines as foreign tourist traffic slowed and we closed all stores in March. Prior to the outbreak, however, the full price and factory comps were trending up mid- to high single digits in January and February, driven by AUR growth and improved product assortments.

AUR for the quarter was up low double digits across our brick and mortar fleet, driven by our continued rollout of targeted ticket price increases, reduced promotional cadence and stronger product mix. Comps in our North America directly-operated digital commerce business were down 7%.

Traffic and conversion were negatively impacted by 2 proactive decisions on our part. First, with the onset of COVID in March, we suspended all promotional activity and performance-driven marketing to our site as our employees and consumers focused on their safety and well-being. Second, we temporarily closed our U.S. distribution center in late March for deep cleaning and new safety protocols. While our site was still technically operational, delayed order fulfillment negatively impacted our conversion rates. As we resumed our marketing activities and limited DC operations in April, we saw a meaningful improvement in both digital traffic and comps.

In North America wholesale, fourth quarter revenue declined 12%. Prior to store closures in mid-March, our sell-out performance was improving slightly on a year-over-year basis to down mid-single digits, driven by rebalanced assortments and improved product offering. The additional declines were driven by order cancellations in the last few weeks of March as our customers closed stores due to COVID.

Moving on to Europe. Fourth quarter revenue declined 19% on a reported basis and 16% in constant currency. Europe retail comps declined 16%, driven by an 18% decrease in our brick and mortar stores and a 2% decrease in our own digital commerce sites.

Across our Europe direct-to-consumer channels, our ongoing effort to elevate the brand and improve product mix continued in the fourth quarter, with AUR up 10%. This is consistent with our long-term strategy to drive higher quality of sales and price harmonization in the marketplace.

Digital commerce comps on our own site were pressured by a temporary closure of our distribution center and a pause on product-driven marketing due to COVID, similar to North America. Total digital ecosystem sales grew double digits in constant currency, driven by performance in both Wholesale Dot Com and digital pure players.

Europe wholesale revenue declined 18% in constant currency, driven by COVID-related pressures at bricks and mortar stores. These declines were partially offset by strong double-digit growth in our digital pure play and Wholesale Dot Com businesses.

Turning to Asia. Revenue declined 22% on a reported basis and 21% in constant currency in the fourth quarter. AUR increased high single digits as our product and marketing initiatives continue to resonate well in the region. While performance varied by market, we saw the biggest percentage declines in Mainland China, the epicenter of the pandemic, where the majority of our stores were closed for about 5 weeks. Brick and mortar sales trends improved sequentially from trough levels in February turning positive in early May. Despite significant challenges from store closures across Asia, we were encouraged by continued momentum in our digital businesses in the quarter, with our digital ecosystem up high teens driven by strong momentum in China and Korea.

Looking ahead, as we navigate the current environment, we remain, first and foremost, committed to the safety of our employees, partners and consumers. Due to the high level of uncertainty and the evolving situation surrounding COVID-19, we are suspending future guidance. We expect our financial results for the first quarter and full year fiscal '21 to be significantly negatively impacted by the pandemic.

In the near term, we are focused on positioning the company to get back to sustainable growth and value creation as quickly as possible. This includes preserving balance sheet strength, aligning our cost base in inventories to the new normal and optimizing our distribution, all while protecting the health of our brands.

Though the timing and path of recovery in each market presents many uncertainties, we have developed scenarios through which we plan to safely return our businesses to growth. As Patrice outlined, China was our first market to emerge from business closures, laying out a path to normalization, and we will leverage many of these key learnings as we reopen around the world.

In closing, we are proud of the focus, agility and passion our teams have demonstrated through personally and professionally challenging times. We believe the Ralph Lauren brand has momentum, we have the right strategic priorities and the discipline to manage through this period and emerge in a position of strength. Now as ever, we are proud to have an iconic brand and to be led by Ralph's creative vision. This has endured the test of time.

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

(Operator Instructions) Our first question comes from Dana Telsey with Telsey Advisory Group.

One for Patrice and one for Jane. Patrice, as you think about, how are you adapting your Next Great Chapter strategy to the new global retail environment and the changing behavior coming out of COVID? And then one for Jane. Can you please help me put together the first quarter into context for us or provide any assistance with the cadence on the rest of the year?

Great. Dana, thank you for your question. So let me start by saying that, fortunately, we actually entered this crisis in a position of strength and with momentum, right? We have a solid balance sheet and cash position. We've been expanding our direct-to-consumer and digital presence. We've created a more flexible and diversified global supply chain. And we have a brand that credibly flexes across categories, underpinned by values that are really resonating in this moment, think timelessness, optimism, togetherness, trust. We've also done a lot prior to the crisis to build agility and resilience in our teams, and this is obviously now more relevant than ever. So given the solid foundation, we believe we ultimately have an opportunity to gain market share as we emerge from this crisis.

With respect to our Next Great Chapter strategy, the strategic pillars of our plan completely hold true today in the current environment, but there's a clear opportunity to accelerate some of the priorities. Let me give you 3 examples. There are many more, but the 3 I would highlight are: First, continuing to accelerate digital, right? We transformed our digital selling platforms over the last 3 years, new e-commerce platform, new OMS system, mobile personalization and connected retail streams. So we have a strong infrastructure in place when it comes to digital commerce and connected retail. We're fast tracking and scaling new digital capabilities like digital clienteling and other forms of virtual selling. And we're encouraged by our progress and early reads so far, including understanding what we've done in China recently.

The second thing I'd call out is assessing our store footprint. So we still believe in the role of the store, and we're encouraged by the early connected retail interventions like curbside pickup, for example, but we're going to continue to review our store portfolio in the context of our omnichannel strategy. And especially within North America wholesale, this means continuing to concentrate on our most productive brick and mortar doors, which are generally the top doors of our wholesale partners anyhow, as we also grow select Wholesale Dot Com opportunities.

And the third example I would call out, Dana, is around scaling new ways of working for us. And we've been able to do things in weeks and days that typically would have taken us months or years to do. This includes our ability to work remotely around the world, continuing to digitize our end-to-end value chain and also driving a culture of cost discipline, which is obviously critical in the current environment that we're in. So the strategic pillars of our strategic -- of our Next Great Chapter Plan still hold true in this environment. And we are feeling actually quite good about that. But there's a clear opportunity to accelerate some of the priorities, some of which I just called out for you. And then I think, Jane, you'll cover the Q1 question.

Yes. Dana, we're not giving guidance for Q1, but let me just give you some color and shape about how we're thinking about it. We expect right now that Q1 will be the quarter with the most significant impact from COVID as we see it now. On an order of magnitude basis considered Q1 in contrast to Q4. In Q4, we had 2 weeks of closures approximately versus about 8 to 10 weeks of closures in Q1. And even after opening stores, we've seen a gradual and elongated recovery period. As you look across every region, we expect the impact of COVID to be most pronounced in Q1. I think that's probably very clear for North America and Europe where we were closed almost the entirety of April and May with stores just starting to come back online. Today, a little less than 50% of North America stores are now open. And in Europe, which is a bit further ahead, about 2/3 of the stores are now open. But all with -- operating with reduced hours, reduced traffic and with new social distancing requirements. Compared to our experience in Mainland China and Korea, we do expect a more prolonged recovery with improvement over time. And obviously, this is going to vary by market.

In Asia, which was ahead of the curve and where we're 90% open, we still will see the biggest impact in Q1 where markets like Japan, Southeast Asia and Australia and even parts of China, saw large COVID impacts in the first quarter. We are encouraged by the way that the digital sales are leading as infrastructure opens, and our teams are very clear that opening stores is the first step to getting back to comp growth. So we're all focused on that and prioritizing that. And just as you think about expenses in FY '21 from a cadence standpoint, from a cost perspective, as you saw in our 8-K, we took substantial actions as we closed out the fourth quarter. We furloughed about 80% of our workforce in April and this will continue through June. And as we begin to ramp back up, employees and infrastructure to support sales in late June, and we'll stage that with -- as demand stabilizes. But our largest SG&A reductions will be in Q1 and a little bit over 25%, and then it will moderate for -- the reductions will moderate there as demand stabilizes. So a little bit of color on the quarter and our expectations in what we're seeing in the market for the year.

The next question comes from Matthew Boss with JPMorgan.

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

In terms of my question, there's a lot of uncertainty right now regarding the wholesale channel and how you're partnering and responding both right now. And as you look to the back half of this year and into 2021, calendar 2021, can you just talk about how you see that channel potentially ramping in terms of the recovery and what you can do to manage through the additional uncertainty in terms of them closing stores and tightly managing inventory?

Sure. So as I step back and we look at kind of our long-term plan and strategy, we expect the bulk of our growth to come from direct-to-consumer and Wholesale Dot Com. As far as brick and mortar wholesale is concerned, our focus is really on making sure, as it has been over the past couple of years actually, that we are in the right locations in a way that is brand-enhancing and financially attractive, right? So this will likely mean that as we work through the year with our partners, we will be calling some of the smaller doors working with them. Importantly, for all of you on the call, the recent bankruptcies from JCPenney's and Neiman Marcus actually don't impact us. Our business is nonexistent at JCPenney's and relatively small at Neiman Marcus. But I'd say, Heather, our emphasis is really, when it comes to the wholesale space, JCPenney's and Neiman Marcus wholesale.com, Wholesale Dot Com, which has got a nice momentum over building capabilities with our partners and then making sure that we have the right footprint going forward in that space.

And what we've seen is that as we closed out in March together in partnership with our wholesale partners, we stopped a number of shipments to make sure that our inventory level remained in good balance, knowing that they would face closures as we did. So we feel good about where our inventories are. We are planning conservatively as we move into the hot fall season. But the good news is as demand develops, because of our case capabilities and our ability to refill from core, we feel we have the flexibility to meet demand with our wholesale partners as it evolves without needing -- without -- while managing inventories tightly and maintaining a good full price selling environment.

The next question comes from Matthew Boss with JPMorgan.

Great. We'll try this again. Patrice, maybe as we think about and measure the strength of the Ralph brand as you see it today, what are you seeing in April and May e-commerce trends as we think about the U.S. and Europe? Jane, I think you talked about a meaningful improvement. Have you seen trends return to positive territory? And then with more than half of your stores now reopen, what kind of initial productivity are you seeing at brick and mortar so far to start back in the reopening process?

Good. So I guess starting at high level on brand perception. We've actually been really encouraged by how our performance on consideration has increased during this crisis. So quantitative measures, both in Asia, Europe and North America, where across all 3 regions we've seen brand consideration scores go up over the past few weeks. We attribute that to all the work that we've done on values communication and also all the philanthropic work that we've done across the region. So a feeling that we've got good tailwinds there. As far as e-commerce is concerned, we -- let me start east first. I guess, we're feeling very good about the performance in China. I think you heard us say February, March up 76% while the overall sector was down, so we were gaining share in that environment. We can give you some color on the specific weeks for March and April, which Jane will give you. But I think overall, with all the new capabilities that we've put in place, whether that's digital clienteling, whether that's all the connected retail capabilities, we are encouraged by the progress we're making on dot-com. And I was joking with the team last week that actually, at this point, given the stores are not fully opened yet, we are, to some extent, a digital pure player, that's our biggest business today.

Yes. Matt, let me give you some color on what we've seen on a quarter-to-date basis across the regions. APAC, as we said, we closed out Q4 very strong across Asia on our e-commerce business and that has only built. So April and into May, we've seen very strong and positive e-commerce trends closing out in the -- sometimes, we've seen rates of triple-digit growth in APAC, so very strong. In Europe, while we did see some -- we reported down 3% on our own platform in Q4 as we've come out and especially as we closed out April, and I think people saw the end of the crisis, we've been seeing very strong trends across Europe. So we've had double -- solid double-digit growth in Europe on a very high quality of sales number where we're seeing double-digit growth in AUR on our e-commerce site in Europe. So strong quality of sales and strong momentum.

North America, which is probably the furthest behind in regions in terms of store openings and recovery, we reported down 7% in the fourth quarter. And it's really been in May that we've started to see e-commerce back to solid and double-digit growth, but it's been building on a week-over-week basis, so encouraging there. So we do see, as our stores open, digital leads and it starts to build over time.

As we've gotten -- we're sort of in the early days, if you will, in terms of store opening productivity, 50% open in North America and really very early on that journey, 2/3 open in Europe. Still early days on that journey, which makes our experience anecdotal. I can tell you, in China, as stores reopened, traffic remained weak in the initial weeks but with strong conversion. So buyers who are coming to the store were motivated and ADTs, average daily transactions, average value transactions were up strongly. Conversion was up strongly and AUR has continued to be up strongly. I can give you some -- we're not -- it's early days, but I can tell you, as we think about our trajectory in -- overall in Asia, that it will be different in North America. But coming out of January, we saw -- if I think about the Asia, we were up strongly in January, up 40%. February saw the biggest declines, down well over 80%. March, we started to recover, digital sales started to come back. In April, sales were down high single digits. And so far in May, we're really encouraged by the improvements. Everything was turning positive in early May as Beijing and other larger cities restrictions lifted, and we expect to be strongly back to growth in Q2 of this year in Mainland China. So encouraged by that trajectory, don't expect to be a cookie-cutter approach across the regions, but that's what we've seen so far.

Our next question comes from Michael Binetti with Crédit Suisse.

Now Jane, I want to ask you 2 things. I guess, first on the inventory and the write-off and the decision to exclude some of that from the gross margin line in the quarter. I think that's a little different than how we've seen some others in the sector treating it. So maybe a little bit on how you got to the $160 million number. How did that inventory get treated on the P&L as you sell-through it? And maybe just a little bit of help on how to think about what we're going to see as you move through that in the first quarter. And then separately, on the AUR, I guess, a longer-term question, because this has been the real engine behind your revenue and gross profit dollar growth for several years. You've mentioned it a lot of times today. Now the apparel world is about to go on a huge sale, given what we've heard around the space. I have no doubt you'll tell me the AUR story continues to be critical to long term. But maybe you could just help us think about what adjustments you need to think about in the near term given the state of inventory in the channel, the level of markdowns that seem like they're coming across the space, the store closures we know about in the brick and mortar world, et cetera?

Sure. That's a power-packed question, so let me take it one layer at a time. Let me step back and tell you why we decided to report both our NRV reserve and our bad debt as a non-GAAP item. We believe that it is entirely related to the experience of COVID, where we lost a selling season. So it's not a business as usual NRV reserve. It was significant. The process that we went through as a team was we took stock of all of our inventory flows, our commitments at suppliers on a fabric basis, and then went back to our strategy and said, what can we reasonably move through to continue our quality of sales journey with our own liquidation channels, with stretching the seasons while moving into warmer-weather channels and reassorting the line in coming seasons? And then what do we remain with? And how do we reserve appropriately to protect the AUR and gross margin progress that we've done to date. So we really looked at it, a complete life cycle view. That's not a different process. We've been doing that process for well over 2 years. The magnitude and the onetime impact was greater. So we -- that's why we reflected it.

If our NRV reserve is too small or too great, we will take that on what we reserved, we will take that also on a non-GAAP basis below the line so that you and our investors can track our true progress on gross margin as we move through this COVID environment. So that's our rationale. We'll take -- if there is better selling, then you'll see an adjustment on a non-GAAP item in NRV.

As a good vendor, I want to remind you that we know that we have made a commitment to pay for products that were perhaps cut but we did not have the ownership of in Q1. There will be some reflection of that in Q1. The magnitude we'll disclose in Q1.

As I look at overall the -- your question on the AUR story, you're exactly right. You know me well. We are continuing this AUR journey. And that is -- and that was really behind some of the actions you saw us take in the fourth quarter. We're committed to it. And so we took an inventory reserve that protects that. I think the good news is that the long-term drivers of AUR growth are still intact. We're elevating our product, we're elevating our marketing, and we're elevating our shopping experience. We have shown that we can take strategic price increases and have a positive consumer reaction. That -- Q3, we posted 8% AUR. Q4, we were able to maintain 8% AUR. I'm not guiding, but I expect that our AUR journey that's consistent with our long-term guidance in FY '21, low single-digit to mid-single-digit, will continue through this year. Will it be more variable? Perhaps, but we have a clear idea of what we need to do to move through our inventory positions. Part of that will be that we are keeping inventory in our warehouses to reassort it into the line that our designers are working on right now, so that we have a cohesive line in spring and get full price sell-through on some of that product. And we're really having success in targeting promotion. Targeting promotions more effectively and more efficiently. We've been able to reduce promotion days and this personalization is proving highly effective as a lever to drive AUR.

North America in the fourth quarter had AURs up 10%. So really significant and positive growth there. So we have every intent to continue that journey. So we are excited about that. Know that there's some variability, but we feel our actions in the fourth quarter and our plans for this year are completely consistent with our continued AUR journey.

Our next question comes from Ike Boruchow with Wells Fargo.

I guess just 2 from me. So you gave a lot of helpful color, Jane, on the U.S. reopening. I think just maybe more in closed mall. I don't know if you have enough of a sample size, but I'm kind of curious if you have differing results on reopening volume there. And then you talked about off-price exposure kind of coming up a little bit. You guys have spoken about bringing that down for the past couple of years. Does the new world we're in right now kind of change your thought process on that? Do you kind of need to go back to the off-price channel in a bigger way because of what's going on in the wholesale channel in the U.S.? Would love your thoughts there as well.

Good. So let's start with your first question on open-air malls versus kind of closed malls. Yes, we have seen a difference between open-air malls and closed mall. Open-air malls, obviously, rebounding faster. And to just to give you a sense of the split of our business with kind of open-air malls and open-air stores versus closed, in North America and in Europe, the vast majority of our stores are actually in open-air environments. Think 85% to 90%. So I think from that standpoint, we're actually well positioned. Those consumers were more comfortable shopping in that space, and then over time, they'll become more comfortable with the closed space. But the vast majority of our business is in open-air. And then on the off-price, Jane, over to you.

Yes. So I got you. In this quarter, our off-price sales were down on a year-over-year basis. And so that's a combination of working with our partners, and we had some excess liquidation. But as I move into next year, we see that, that channel will continue to be an opportunity for excess liquidation, and it will not be a part of our growth trajectory. I expect it to decline this year on a year-over-year basis. And we've worked through -- we are going to work through the inventory by leaning into what we talked about in terms of reassorting the line, extending Wear-Now season, charitable donations, and of course, liquidating some excess through off-price. But I don't expect it to be a growth area of our business.

Our next question comes from Jay Sole with UBS.

I have 2 questions. One, Patrice, you mentioned at the top of the call you're focused on denim this year. A lot of people have been talking about categories like denim maybe -- have been a little bit less popular with consumers focusing on things to wear at home or things to exercise in. And so can you maybe just tell us a little bit more about how you think this pandemic will change consumers' outlook on denim?

And then secondly, given that a lot of talk about the wholesale channel and maybe some store closures out there, how do you feel about your full-price store model in the U.S.? I think instead of rolling out more full-price stores, do you feel comfortable that you have a plan to do that if you need to at this point?

Sure, Jay. So let's start with the product categories. We are tracking very closely kind of consumer interest across different categories. And you're right that we've seen an acceleration in loungewear, an acceleration in athleisure, we've also seen an acceleration in the home business. The good news with our brand is we're a lifestyle brand, right? So we're not focused only on one category. We actually have a broad range of offerings. And I think we're credible across a broad range of categories. So we will -- we have actually started to pivot. If you go on our website, you will see that we've pivoted to a more emphasis on loungewear and athleisure. I don't think the -- we're going to move away from the focus on denim because we expect over the mid to long term that, that continues to be a growth category. But I talked a lot about agility earlier and it's critical for us as we think about consumer behavior, and that's both true in how we engage with consumers in terms of messaging but also where we put the emphasis from a category standpoint.

Yes. Jay, we continue to believe that we have a significant opportunity to build stores for FY '21, we're expecting to open approximately 90 to 100 stores. We are very happy with our model in Asia, we've been working on penetration in Europe, and we're still working on the North America model. We do believe that there is an opportunity, but we know that the role of the store is changing. And so we're evaluating our footprint with -- to reflect these consumer changes. But we do think that there's an opportunity for us to pivot to DTC, and it remains an important part of our strategy.

Our next question comes from John Kernan with Cowen.

Nice job managing through a difficult environment. I wanted to take your thoughts on how we should think about the wholesale channel in North America with some of your full-price partners and how they're planning the back half of the calendar year. We've heard orders down in excess of 30%, 40%. Just wondering if the environment ends up being better than what some people have planned to date. Can people chase into that? And can you see better trends than maybe some of the numbers we're hearing from the wholesale community to date?

So with our wholesale partners, we are planning conservatively with them and align to what they've indicated in terms of their fall holiday demand. So I think that we are focused on our AUR journey, focused on keeping our inventories well controlled and healthy. So we're planning conservatively, but consistent with our wholesale partners planning as we move forward. We still see digital as an opportunity for growth there and we're pursuing that. We were able to cancel about 2/3 of our fall holiday orders, take stock of where we were on an inventory level and then fill in to make sure that we have fulsome assortments for fall holidays that are better aligned to demand. So we've been working on this as we saw the crisis emerge, but we're fully aligned with where our wholesale partners are indicating and conservatively plan.

And I think on your question, John, relative to our ability to chase, which we spend a lot of time on, so we feel that we're in a good place. We've done a lot of work to increase the responsiveness of our supply chain. We have the digitization that I referred to earlier, has obviously been a key enabler to that. The other thing that I think really separates us from many of our peers is core is such an important part of our business, right? And we are known for number of core iconic SKUs. Now the good news is the core SKUs are the easier and faster SKUs to chase into, right? And we've also platformed fabrics. The team has done a wonderful job platforming the fabrics and various trims and others. So we have the ability on core to go fast. And then finally -- and I don't know if you remember when I referred to this, I think it was like 2 or 3 quarters ago, we've developed a fast -- what we've called the fast-track capability internally. I think I gave you the example of the sweatshirt that we had developed with one of our wholesale partners from idea to shipment 16 days, right, coming from Asia. And I think at Ralph Lauren, sometimes we're known for more longer lead times than days. Sometimes we've been talked about months rather than days. This capability we've scaled up since we developed it. So this fast-track capability is -- will be a fantastic platform for us to react to what we see in the market as we work with our wholesale partners.

All right. Well listen, thanks to all of you for joining our call today. On behalf of all of us here at Ralph Lauren, we wish you and your families the best of health and safety. Take good care, and we'll talk to you in a few months. Have a great day. Thank you.

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