Ralph Lauren Corp - Class A (RL) — Q1 2019 Earnings Call Transcript

Good morning and thank you for joining Ralph Lauren first quarter fiscal 2019 conference call. With me today are Patrice Louvet, the company's President and Chief Executive Officer; and Jane Nielsen, Chief Financial Officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to one 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 Web site. And now I will turn the call over to Patrice.

Thank you, Evren. Good morning everyone, and thank you for joining today's call. We're pleased to report first quarter fiscal 2019 results that reflect progress on our next great chapter's strategic growth plan that we shared with you at our investor day in June. We're encouraged by this start to the new fiscal year, as first quarter results showed improvement in both the top and bottom line. A few of our team's key achievements this quarter included high single-digit growth in our average unit retail globally, double-digit growth in Asia, our key growth region, and digital commerce up high single digits. This solid start enables us to modestly improve our outlook for the year. Our long-term plan is based on our three guiding principles: first to put the consumer at the center of everything we do. Second, to elevate and energize our brands, and third, to balance growth and productivity. With these principles in mind we are focused on executing our five key strategies. First, win over a new generation of consumers. Second, energize core products and accelerate high-value underdeveloped categories. Third, drive targeted expansion in all regions and channels. Fourth, lead with digital across all activities. And fifth, operate with discipline to fuel growth. Let me take you through the progress we've made in the first quarter across these initiatives, starting with the first one, win over a new generation of consumers. Our goal is to recruit millions of new consumers into our brand each year. To achieve that we're continuing to increase our marketing investment and shift our spend to digital channels that matter most to consumers today. In the first quarter, we increased our marketing spend by about 20% compared to last year. Our primary communication was our Spring Polo campaign featuring our iconic white Polo shirt. We told our brand's story in a fresh way that drove results. Sales of our Polo shirts in the first quarter outpaced our overall revenue trend, and were up double digits in men's. We also continue to drive interest and excitement among our target consumers through limited additional launches. In the first quarter, we continued to leverage our iconic heritage and deep archives to launch CP93. This collection originally launched in 1993 and celebrated the America's Cup sailing race. Marketing communication utilized both archival assets and a newly shot campaign to celebrate the heritage while generating new excitement for the updated capsule collection. The collection performed well with many styles selling out within days. We also continue to leverage the power of cultural events and influencers. This came to life recently at Wimbledon at the end of the first quarter. As the official outfitter of the event, we amplified our sponsorship and increased our reach on digital and social media through celebrity dressing and events with influencers. For example, British actress, Poppy Delevingne, took over Polo's Instagram stories and shared her stylish take on Wimbledon. Other celebrities including Emma Watson, Gemma Chan, Luke Evans, Eddie Redmayne, Eason Chan, F4, and Coco Lee, all wore Polo to the event. We generated over six billion total impressions globally from extensive social media presence. As we said at our investor day, our influencer and celebrity strategy spans various parts of culture, from artists to movie stars to athletes. This diverse group of influencers represents different aspects of our brand and engages different consumer segments. In the world of sports, we renewed our sponsorship agreement with top professional golfer, Justin Thomas, who will continue to serve as brand ambassador for Polo Golf. And we also launched a new RLX collaboration with Billy Horschel. In the entertainment world, at the Met Gala in May, in New York, several celebrities were dressed in our brand, including Rosie Huntington-Whiteley, Lily Aldridge, Priyanka Chopra, Kerry Washington, Shailene Woodley, Ansel Elgort, and Jimmy Fallon. Our spring '18 Purple Label campaign featured Japanese actor and pop star Akira across a combination of digital, print, and outdoor media. Now, moving on to our second key initiative, energize core products and accelerate high-value underdeveloped categories. In our five-year plan, we expect half of our growth will come from core product categories, with the other half driven by high-value underpenetrated categories. We believe the key to energizing the core and driving a differentiated point of view in the marketplace is to combine Ralph and our creative team's iconic brand vision with deep insight and understanding of consumers around the world. This approach is gaining traction as our renewed core styles and icons drove a sequential improvement in our sellout trend in key categories for the spring-summer season. Performance was led by our Polo brand in both men and women's. We saw product successes in our core items where we brought newness and interest through the addition of novelty like embroidery, print, and color blocking as well as refreshed fabrics and increased functionality. Within our core, strong categories in men's included Polo shirts, woven shirts in both our Oxford fabric and the newly-introduced natural stretch poplin, and our new chino pants with stretch fabrications. In women's Polo, dresses are trending well with consumers responding to our long shirt dresses in a number of different styles. Customization also continued to help energize our core product offerings. We had a pop-up custom shop at Wimbledon that offered exclusive prints as part of our Wimbledon capsule collection which sold through very well. In addition, our new small format store in Beverly Center in the Los Angeles market has a successful create-your-own shop that already represents approximately 10% of the store's sales. We also made progress on building out underdeveloped categories that have significant growth potential across all brands. These include denim, wear to work, outerwear, footwear, and accessories. Starting with denim, a fabrication that is core to our brand and where consumers have told us they expect us to play. Building off of the strong momentum of fiscal year '18, our sales in denim were up mid single digits in the first quarter, outpacing total company revenue growth. We saw traction in all channels of distribution with updated fits, washes, and lighter weight fabrications in both men's and women's. Outerwear was another strong category where lighter weight and functional fabrics in both casual weekend and wear-to-work styles for spring-summer drove growth. First quarter outerwear sales were up high single digits year-over-year across our brands. Our improved merchandising is driving full-price sell-through and lowering discounts. In the first quarter, average unit retail was up 8% across our direct-to-consumer network. We're making encouraging progress across multiple fronts on product. And we are pleased with the improving consumer response that we're seeing. Moving on to our third key initiative, drive targeted expansion in all regions and channels. We're focused on building a compelling and competitive ecosystem that includes digital distribution, new small format stores, and renovated stores and shops to drive comparable growth. As we discussed at investor day, international is a key growth opportunity for the company as we are underdeveloped in markets like China and select European countries. Mainland China is our largest near-term opportunity, and our momentum in this region continued in the first quarter. Revenue in China was up over 25% in constant currency in the quarter, including over 40% growth in Mainland China. Our digital business in China continued to grow rapidly through Tmall, JD.com, and WeChat. This growth was supported by targeted marketing through social media and influencer engagements. On the store front, we opened seven new points of distribution in China in the first quarter, and we're on track to open more than 50 stores for fiscal 2019. Our new small store formats are performing well. As we continue to expand and raise our brand awareness, we are on track to achieve our long-term goals of reaching $500 million of revenue in five years in China. Another key element of our distribution strategy is to provide a consistent, elevated experience across all channels. To achieve this we continue to improve the quality of our distribution through our store and shop refresh programs globally. We are elevating our distribution and our brands through improvements in fixturing, lighting, layout, and visual merchandising. We continue to see a good return on our investments with these projects. Moving on to our fourth key initiative, lead with digital. Our overall digital business, including our directly operated sites, department store.com, pure players, and social commerce, was up 7% globally in the first quarter. This was driven by 24% growth in international, with North America up slightly. We expect to drive an acceleration of our overall digital growth as our directly operated North American digital flagship returns to growth. In the first quarter, this business showed a significant sequential improvement with a 2% decline versus the high teen declines we reported last year. We expect our site to return to growth in the second quarter as we reposition it as our most important flagship door and continue to improve the consumer experience. In the first quarter, we added improved product detail pages, 360-degree product videos, delivery date estimates, and automated product recommendations among other enhancements. In Europe, we also continue to elevate and improve our digital presence. In the first quarter we upgraded the technology platform of our directly operated digital flagship, similar to what we implemented in North America last fall. The new site offers a significantly improved consumer experience, including enhanced search tools and filters, more engaging and easier to shop product pages, more personalized predictive recommendations, and a streamlined checkout. We also continue to drive market share gains within digital at our key retail partners and in our core categories globally. For example, in Europe, we ran high-impact campaigns with 21 partners across the region. This included the department store websites and key online pure play customers like ASOS, Zalando, UGG, Mr. Porter, and Boost. The digital campaigns showcase the versatility of our Polo shirt and how to style it. This significantly increased our brand visibility and drove sales growth. In Asia, we launched Polo on Tmall's luxury pavilion during the quarter. We also launched a mini program on WeChat which is a digital pop-up shop featuring the CP93 collection. In addition, we executed a successful Polo-branded sticker campaign on Japan's main social messaging app, Line, which more than tripled our followers. Finally, let me touch on our fifth key initiative: operate with discipline to drive growth. In the first quarter, we continued to challenge every cost and improve our efficiencies. This enabled us to fund the significant increase in our marketing investment while expanding operating margin and increasing operating profit. Adjusted operating expenses, excluding marketing and the impact of foreign currency, were up less than 1% in the first quarter. We also continue to make progress implementing a more efficient, streamlined end-to-end process. Discipline in our product assortments and inventory drove improved SKU productivity and full price selling. This resulted in higher average unit retails and gross margins. We increased the flexibility and efficiency of our global supply chain, which is critical in today's rapidly changing environment. While the tariffs announced so far have a minimal impact on our business, we are keeping a close eye on developments. We believe our strong global supply network should help mitigate the long-term impact of potential scenarios. In closing, we are executing our next great chapter plan, and we are encouraged by our early progress and the continued improvement in the underlying trends in our business. Our teams around the world are embracing our new strategic framework and are focused on executing with excellence. Ralph and I continue to be inspired by their passion and commitment every day. With that, I'll turn it over to Jane, and I'll join her at the end to answer your questions.

Thank you, Patrice, and good morning everyone. Our first quarter results were strong and showed continued progress on strengthening the brand and driving execution. Our key initiatives are delivering strong average unit retail growth, lower discounts, higher gross margins, and operating profit growth. First quarter revenue increased 3% on a reported basis and 1% in constant currency. This was above our guidance driven by strong performance in Asia and the benefit of wholesale shipment timing in both Europe and North America. Asia revenue grew 16% in constant currency in the quarter. Our initiatives across product, marketing, and shopping experience are resonating strongly in this region and give us increased confidence in our strategy for Asia and our other regions. In the quarter, we saw higher sell-through on spring-summer products led by mid single-digit growth in the Polo brand. Adjusted gross margin expanded 120 basis points in the first quarter and 110 basis points in constant currency benefiting from reduced discount rates and favorable product mix. Adjusted operating margin in the first quarter was 11.1%, up 90 basis points compared to last year on a reported basis and 70 basis points in constant currency. In the first quarter, we stepped up our marketing significantly off of a low base last year. Planned investment in marketing was up over 20%. For the full year, we are planning marketing to grow high single to low double digits with incremental growth in the second quarter to support the global amplification of our 50th anniversary fashion show. We are progressively increasing marketing investments towards our long-term goal of approximately 5% of sales. We plan to fund the majority of the increase through productivity to achieve our operating margin expansion goals. Moving on to our segment performance, starting with North America, revenue was down 2% in the first quarter and comparable sales were down 3% in constant currency. Adjusted operating margin was 22.9%, representing a 150 basis points increase compared to last year. Importantly, and similar to last quarter, all channels contributed to gross margin improvements in the first quarter. Let me review the North America results across channels: first, our directly operated e-commerce business; second, our stores; and third, our wholesale business. Digital commerce comparable sales on our directly operated site in North America declined 2% in the first quarter. As expected, this presented a significant sequential improvement in our trend. As Patrice mentioned, we are repositioning RalphLauren.com as the most important flagship door. As part of our strategy execution, we are continuing quality of sales initiatives on our e-commerce site at a more moderate pace. Full-price sales on the site were up about 5% in the quarter. Average unit retail was up 9%, and the discount rate was down 300 basis points compared to last year as we continue to reduce the penetration of deep markdowns in the business. Moving on to our stores, brick-and-mortar comparable sales in North America were down 3% in the first quarter. The timing of Easter pressured comparable growth by approximately three points in North America this quarter. Therefore, the underlying comparable sales were roughly flat excluding that impact. As we mentioned last quarter, Easter compressed the total company comparable sales by approximately one point in Q1. As a reminder, in the fourth quarter of 2019, Easter will negatively impact North America comparable sales by about three points and total company sales by about one point. At a more macro level, foreign tourist sales were flat compared to last year in the first quarter, less robust than the 7% growth in the fourth quarter reflecting currency fluctuations. Moving on to North America wholesale, the first quarter revenue decline of 1% reflects a significant sequential improvement. This is partially driven by an intentional shift in timing of some of the shipments, benefiting Q1, but negatively impacting Q4. As we mentioned last quarter, our department store spring-summer 2018 season-to-date sell-out improved sequentially and we expect continued improvement in the fall season as we benefit from shop renovations and evolved product and marketing. Importantly, in the wholesale channel, our digital wholesale business continues to grow with share gains in men's and kids. As a reminder, our revenue trend in North America wholesale will look more challenging in the second half of the year. This is due to the timing of off-price shipments with significant declines planned in the second half and the ongoing impact of Bon-Ton. Our focus remains on building high-quality growth with our partners in the North America wholesale channel. Moving on to Europe, revenue increased 8% on a reported basis and 2% in constant currency in the first quarter. Adjusted operating margins were flat, but were down 10 basis points in constant currency driven by challenges at our factory stores. In the retail channel, European comparable sales were down 8% in constant currency with growth in digital commerce more than offset by declines in our stores. We upgraded our European digital commerce platform for our directly operated business at the end of the first quarter. We leveraged learning from the North America conversion last fall to manage the business successfully ahead of the transition, resulting in strong sales in Q1. However, as anticipated, we did see some disruption from our transition, which impacted the start of the second quarter. Brick-and-mortar comparable sales specifically in our outlet stores continue to be pressured by inventory, traffic, and product assortment challenges. We continue to work to elevate our brand and distribution and saw progress in our average unit retails in Europe retail, with AUR growth of 9% in the first quarter. We are implementing a number of changes in our product assortments and promotion structures to improve the traffic and conversion trends in these outlet stores. We expect these initiatives will start impacting the business in the second half of fiscal '19. Wholesale revenue in Europe increased 13% in constant currency in the first quarter partially benefiting from a shift in shipment timing. This will negatively impact second quarter revenues. We believe our underlying trend in the channels is low to mid single-digit growth, which we expect to return to this level in the second half of the year. We continue to see momentum in our wholesale digital business growing double digits in the first quarter and expanding market share. Turning to Asia, revenue was up 19% on a reported basis and 16% in constant currency in the first quarter. We saw a strong performance across every market in Asia, including 10% growth in Japan, over 40% growth in Mainland China, and over 20% growth in greater China, all in constant currency. Our product and marketing initiatives are resonating well in this region, and we continue to increase our digital efforts in engagement with local influencers and celebrities. For example, our Polo shirt campaign generated over a billion impressions as we continued to build key celebrity partnerships. Comparable sales in Asia increased 6% in constant currency in the first quarter, continuing the positive trend from fiscal '18. We drove strong double-digit comparable growth across our digital business. We expect further comparable growth in Asia as we continue to upgrade our distribution network and increase our marketing initiatives to amplify and elevate the brand. We also continued to drive quality of sales in Asia. In the first quarter, average unit retail was up 10% and discount rates were down. Adjusted operating margin was up 280 basis points compared to last year in the first quarter in Asia and 290 basis points in constant currency. We will continue with prudent quality of sales actions in Asia. We are encouraged by our top-line growth and our ability to leverage our investments to drive steady operating margin expansion. Turning to our store suite, we continue to improve our retail network through the closure of underperforming locations and opening new stores with improved adjacencies and productivity. During the first quarter, we opened 14 standalone stores and 12 concessions. We closed two standalone stores and 11 concessions ending the quarter with 484 standalone stores and 633 concessions on a global basis. Moving on to the balance sheet, in this quarter and throughout this year, we continue to strengthen our balance sheet and return capital to shareholders, reflecting the operational progress we are making. We ended the quarter with $2.1 billion in cash and investments, up from $1.7 billion at the end of last year's first quarter. Total debt at the end of the quarter was $587 million compared to $590 million last year. Inventory increased 3% on a constant currency basis at the end of the first quarter reflecting investments to support our European factory initiatives and direct-to-consumer expansion. We expect inventory growth by year-end to be slightly ahead of our sales. This will support our DTC expansion and adjustment efforts to restore inventories in select channels following significant pullback. Consistent with our commitment to return cash to shareholders, this quarter we raised our dividend by 25% and repurchased $100 million of our shares. Now I'd like to turn to guidance for the full year in the second quarter of fiscal '19. As a reminder, this guidance excludes restructuring and related charges. For the full fiscal year '19, while it is still early in the year, we now expect revenues to be down slightly in constant currency. This is based primarily on our Q1 results. We continue to expect the decline in North America and growth in our international business. Foreign currency is expected to have a minimal impact on our revenue growth for fiscal '19. We expect our revenue trend will be more challenging in the second half of the year versus the first half. This is due to heavier planned reductions in off-price shipments in Q3 and Q4, the timing of wholesale shipments that benefited Q1, and the lack of an Easter holiday in Q4. Excluding these factors, we expect to see continued improvement in our trend. We now expect operating margin for fiscal '19 to be up 40 to 60 basis points in constant currency. This will be driven by about 75 basis points of gross margin expansion. Foreign currency is expected to have minimal impact on operating margin for fiscal '19. This guidance reflects our solid performance in the first quarter and our view of the underlying trends as we execute the next great chapter plan. In addition, this year we will see the one-time benefit of our repatriation activity in our interest income of $35 million to $40 million and interest expense of approximately $25 million to $30 million in fiscal 2019. For the second quarter of fiscal '19, we expect revenues to be flat to down slightly. Foreign currency is expected to negatively impact revenue growth by approximately 30 to 50 basis points in the quarter. Operating margin for the second quarter of fiscal '19 is expected to be up about 30 basis points compared to last year in constant currency. Foreign currency is estimated to be a slight benefit to operating margin in the quarter. We continue to expect capital expenditures of approximately $275 million in fiscal '19 focused on consumer-facing initiatives that have demonstrated a proof of concept and healthy rates of return including stores, digital, and marketing. We now expect our effective tax rate for fiscal '19 to be approximately 21%. The second quarter of fiscal 2019 tax rate is estimated at approximately 22%. In closing, as I said at investor day in June, we are building the right foundation. We are focused on executing our next great chapter plan, and we are beginning to see progress across our growth initiatives. Inspired by Ralph's creative vision, our teams around the world are delivering. And this quarter demonstrates that we are on the right path toward long-term sustainable growth and value creation. With that, let's open up the call to your questions.

Good morning, and thanks for taking my question. Your digital commerce results showed improvement in Q1. Can you talk about the drivers and what you expect for growth in FY '19? And separately, Jane, another gross margin beat. Can you parse out the gross margin drivers for the quarter, and how should we think about the gross margin cadence for the next few quarters?

Hey, good morning, Laurent. Well, first of all, I appreciate the fact that the first question is on digital, and it's one of our core strategies to lead with digital. So, a couple of things: one is we did make good progress this quarter on digital commerce with sales up 7% versus last year. Particularly strong growth in international, right, we were up 24% in international. And we had slight growth in North America. As we talked at the investor day, the way we look at digital commerce is really through kind of four lenses. First one is our own sites or ralphlauren.com, the second one is departmentstore.com, which is a significant channel; third are pure players; and then fourth is social commerce. So let me just give you a quick perspective on each one. So starting with our own site and think of this -- this is roughly half of our digital commerce business. Our own site, around the world, the growth was up slightly in Q1. What we're particularly proud of is the acceleration in the North American site. Last year we reported significant declines throughout the entire year. We're still down in Q1, but only down 2%. We look forward to next quarter when we'll be able to report actual growth on this site, which I think we've all been working hard to achieve, so good progress there. We improved functionality and brand presentation on our U.S. site, and we will continue to drive that. As far as the U.S. is concerned, I think you've heard in our prepared remarks, we upgraded our platform, basically replicating what we did in the U.S. a few months ago. We're also quite hopeful that we'll see much stronger consumer engagement moving forward in Europe. So that's our own site. And as far as departmentstore.com is concerned and pure players, let me lump them together just for simplicity purposes. We actually grew double digits in Q1 across that channel. Market share growth is very important for us, and we gained market share in our key categories across the key players. So that business is probably another -- the balance of the 50% that I talked about for our own site. Finally, we are ramping up on social commerce. It's still a negligible part of our business, but as we talked during the investor day we believe this will become a significant part of digital commerce moving forward. We had our first real activity in China through the mini program we did on WeChat, which we focused specifically on our CP93 limited edition. So think of that as -- it's basically a digital pop-up store, and we saw a very good consumer response there. You're going to see us ramp up our activities on the social commerce front as well. So that's kind of the perspective across the four channels. As we look out to the balance of the fiscal year we expect to accelerate our pace of growth in digital commerce and deliver high single-digit growth across the full year with double-digit growth internationally. And then Jane, I guess on gross margin.

Yes. Good morning, Laurent. On gross margin, Q1 was strong. It was ahead of our expectations. We went into this quarter, June is a highly promotional quarter. We were able to pull back on our promotion levels and discounts. That was the number one driver of our 120 basis point gross margin expansion. The other driver was some favorable product mix that we saw across the business. Those were very encouraging. I think you saw it in our average unit retail increase of 8%, that it really was a strong quarter in terms of being driven by promotional pullback and quality of sales initiatives. As I look forward to FY'19, we are expecting to be in about the 75 basis points of gross margin expansion. That will be driven -- continue to be driven by the pullback in promotions and discount levels. But there are two factors that we expect to become increasing pressures. One is increasing product costs. We expect that to become a headwind of about 30 basis points as we move through the quarter. It was about a 20 basis point benefit in Q1. Also, we continue to expect that FX switches from a tailwind to a headwind in the back half. FX was about a 10-point benefit in Q1, but should be a headwind by the time we get to Q4. So, as I think about the cadence of gross margin as we move through the year, I think it'll remain consistent in two and three with our guidance range. The most challenging quarter in terms of gross margin is Q4 when we face FX headwinds and some increased product cost pressures. Next question, please.

Hey guys. Good morning, and congrats on a nice quarter. Let me just ask you about average unit retail for a second. That continues to be up pretty nicely, you've mentioned it a few times. And that's even though you had some pretty meaningful off-price shipments added in the North America side, I guess, or at least a shifting of some of those shipments. I know you mentioned June was a highly promotional quarter. So, maybe that impact is less throughout the year. But how much of the average unit retail increase that we're seeing at this point, this late in the quality of sales game is from initial price points versus the ongoing reductions in promotionality or off-price? And then if I could just add a second, maybe some context around that sequential acceleration in the North America wholesale business, it's not lost on us. You gave us a nice new table to look at by channel there. But that was, I think, about a 20 percentage point increase quarter-to-quarter. I know you had some timing shifts with off-price, but also we see some new distribution in places like Amazon and Urban Outfitters for the Chaps brand. So, maybe you could help us isolate a couple of the drivers or maybe just size a few of those drivers so we can understand that big acceleration?

Yes, so why don't I start with average unit retail, and then we'll move on to sort of the wholesale timing and cadence. Average unit retail progress was really broad-based and is an indication of the work that we're doing to improve both our promotional stance and the work that we're doing on merchandising and product. The largest driver is still our pullback from promotion, but we are seeing benefits of assorting into higher price points. We saw that come through both in North America and the international business, in retail, and in our digital business. So, really across the board, strong average unit retail growth, really a bit out ahead of where we expected the business to be, but we expect average unit retail growth as a part of our strategy, as I called out during investor day. So, we continue to expect that we'll see average unit retail expansion. But largely, Michael, to your point specifically, it's mostly our quality of sales work. As we look at our overall wholesale business, we really have a dynamic going on here that in the first half of the year, especially in this quarter, we moved some of our off-price shipments from Q4 last year into Q1 and Q2 this year. So, that is part of the acceleration that you're seeing in overall wholesale. We think the underlying trend in our North America wholesale business is down mid single digits. While we got some benefit from shipment timing, the pressure still remains in terms of challenging traffic trends, some of our quality of sales work that we continue to do, some door closures, and Bon-Ton. I expect that you'll start to see -- we'll call out the underlying trend. We expect our full-priced wholesale business will improve sequentially as we move through the year. Again, there's some choppiness, but the underlying trends will improve. As you look in Europe, there's some shipment timing going around. We expect that business' underlying trend is up low to mid single-digit. As we come into the second half, you'll start to see those underlying trends normalize because we'll be through some of the shipment timing.

Hi, good morning. This is Grace Smalley on for Matt Boss, thank you for taking my question. Just on the North America same-store sales, I think in brick-and-mortar trends may have decelerated very slightly relative to last quarter, even once you ship out the Easter shift. Is that fair? And if they were out can we think about what drove that? Thank you.

Good morning, Grace. Yes, that is correct. Our North America brick-and-mortar comparable sales slowed from Q4. So down three reported; if you exclude the Easter impact, it's actually basically flat versus last year. A couple dynamics, one if you look at actually the base period we were working against a much tougher comp. Q1 last year was down four, whereas Q4 was down 12. The second piece is we did see a shift in tourist business. While our tourist sales were up 7% in Q4, they were flat in Q1. We see that as being driven by some of the currency fluctuations that we have all observed. But what you can expect from this business is actually continued improvement on the overall comparable sales trends. If you look at it over time, we are progressively strengthening from a comparable sales standpoint, and that's generally what we expect for the balance of the fiscal year as our new product and new marketing activities kick in.

Hi, good morning. Thank you for taking my questions.

Heather, good morning.

Good morning. I was hoping first, you guys seem pretty confident in e-commerce turning in the second quarter. Could you speak to quarter-to-date trends? And then with regards to Europe and the turnaround there, can you just elaborate a little bit on the changes you're making in terms of the merchandising? Thanks.

We can't give you quarter-to-date perspective. I can give you some perspective on what drove the improvement in Q1 in North America being a little more granular than the earlier question from Laurent. One, we stabilized the new platform, right. We launched the new platform last fall, during the holiday period. We had to work out some kinks as we worked the transition. We've now done the majority of that. Two is we've really strengthened the functionality of the site. Being very consumer-centric, understanding what the consumer expects from the site. And so that ranges from delivery timings, to ratings and reviews, to 360 video on the product, and so on which we know is resonating well with the consumer. Three is the brand presentation as a whole is better, right. We want this to be our global flagship. We know we still have work to do to elevate the brand presentation, but we made progress in Q1. Obviously, we've also lapped some significant discount rate reductions. We're getting to a more normalized situation. We will continue to improve our quality of sales on the site. There's still work to be done, but our average unit retail growth was healthy, I think it was 5%. Our discount rate is down 300 basis points, so we're making progress on the quality of sales front. You can expect all that to continue. We are cautiously optimistic. We obviously need to execute, but I think a lot of the interventions we're making both from an operational and consumer-facing standpoint is resonating with the consumer.

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

Next question please.

Great, thanks. Good morning. I guess I had a question on Europe. I would love to hear kind of what you're seeing broadly in that market in particular. It sounds like you guys are still working through a few assortment challenges, so specific on that. And then secondly, as it relates to the broad promotional environment in Western Europe, have you seen any changes as you've moved through the middle of the year now? Thank you.

Yes, so what we're seeing in Europe on our side is that the environment is a little bit more challenged. We saw some pressure in the foreign tourist sales overall in Europe. This quarter what we saw was that foreign tourist activity was down about 15%. While we look at that relative to last year, we're down about 6%. That is pressure overall in Europe as we look at our business specifically. We have seen some challenge in our European outlet business. While we believe that foreign tourists are an impact there, we also believe that our own assortment had gotten too basic. We need to get back into stock on seasonal newness and innovation. Newness is part of our inventory build for this quarter, and we expect in the second half that you'll start to see improved trends in our own business. We've done a lot of work this quarter and will continue to do a lot of work in quality of sales, so we step back from promotional levels. We do see that environment to be somewhat promotional as we move through this quarter.

As we're talking earlier, if you look at the various channels, so you've covered that the factory outlet situation. Obviously on the .com side, we are in the middle of implementing our new platform, so we see encouraging signs, work to do but encouraging signs. We expect that to actually accelerate. As far as wholesale is concerned, while as you mentioned generally, we did have timing impacts with Q1. The overall health of our wholesale business in Europe is actually good and the team is doing some really good work there, so our key opportunity and challenge to work on really is the quality of sales force that we're doing for the factory.

Thank you. Good morning, nice to see the lot of the defense initiatives you guys are putting in really playing out in terms of the margin and the average unit retails. I wanted to ask maybe for an update on the product side, what you're excited about and where you think you are in terms of getting the product where you want to be across different channels and the different sub-brands, and opportunities you're excited about on the product side coming up.

In general, we are right where we expect to be from a product evolution standpoint. We're feeling good about a number of categories. If you look at our results in this past quarter, we actually saw growth both in men's and women's with the focus on Polo and across most of our apparel categories. This is pretty broad-based in terms of improvement. What we're seeing is our focus on icons is really paying off, so let's obviously drive our icons. The second element is the renewal of our core is beginning to resonate with consumers, a combination of both adding novelty, right, things like embroidery, things like printing are resonating well. We also refreshed our fabrics, pushing a greater focus on functionality again, being consumer-centric and being clear on what the consumer is expecting from us. Our denim products are actually also doing well. We have good momentum from last fiscal year, and we are building on that momentum this first quarter with mid-single-digit growth. Our outerwear business, which is another focus category for us, was also high single-digit. So where we focus and are being really disciplined in terms of what we want to drive our activity on, we are seeing positive responses from the consumer. To your question on brands, where we are seeing the greatest progress at this point is Polo. But we are also seeing improvements on Lauren, so we are encouraged by that.

Good morning. Thank you for the question. I wonder if you could help us with an update on your strategic initiatives in the U.S. market. In particular an update on the strategy and LA and now that you are a few months into the region refresh. Also, I was wondering if you've seen a material discrepancy between those stores that could be refreshed and the control group.

As far as LA is concerned, really elevating the entire LA ecosystem is really the strategy there. We started in May indeed, yeah, it's very early there, so I'm always cautious to draw conclusions a few weeks in but if you push me, I would say early indicators are encouraging. We are seeing growth in the LA market that's slightly ahead of what we are experiencing across the country. We are also seeing from a consumer standpoint that we are attracting a new younger consumer, so we are quite encouraged by those early signs. We have also seen an acceleration of our digital commerce business in the region. The headline thought on this is so far, so good. I wouldn't take any of this to the bank yet; I think we are in the very early stages of implementation. But we are seeing encouraging signs including with our new small format store in Beverly Center. As we look ahead, we really want to expand our brick-and-mortar footprint through small format stores that are more productive, more dynamic, more flexible, and better connected. Just a few weeks into the opening of that store, we are actually also seeing encouraging responses from consumers.

On product cost, let me pass it into to the two buckets of your questions. What we are seeing on our elevated product is that we are able to get both average unit retails and AUR increases to the whole market as we elevate the product, so that's the good news. The challenges I was pointing out are really centered in key input areas like polyester, cotton, some wage inflation, and some freight costs that are manifesting themselves as you compete in a tight U.S. trucking market. We are working with our suppliers to offset some of these costs to look at how we work through air freight reductions to improve our freight costs. But that's really the center pressure points that we are seeing in overall product cost.

Good morning everyone, and congrats on the progress early in the year. I have a couple of follow-ups on Omar's product question. The first one is you have five underpenetrated categories, and it looks like you are making some pretty good progress with outerwear and denim. As we think about the other three categories, ready-to-wear, footwear, and accessories, do you expect to see an acceleration at some point in fiscal '19, or is that going to be an out-year event? And then, my second question is really around some of these product drops. They've obviously been very successful, and they draw a lot of interest in the brand. As we think about the future, can these ever become big enough to be growth drivers on their own with the right inventory investment, and how frequently can you recycle some of your more successful ones like Snow Beach without hurting the brand appeal?

As far as the underdeveloped categories are concerned, we have good momentum on denim and outerwear, and actually wear to work; I didn't mention that. We are off to a nice start on wear to work both on men and women with much more to come. Yes, some of it will impact this fiscal year on wear to work. On the footwear and accessories piece, that one, as we talked during Investor Day, it's going to be a slower burn because we have work to do on building our capabilities and making sure we have the right design capabilities, merchandising capabilities, and sourcing plan. Obviously, we have great teams in place doing that work now. I don't know that you will see a significant impact in fiscal year '19. We are driving all five, but I think you'll see the strongest progress is going to be denim, outerwear, and wear to work. As for the drops, yes, they have worked really well for us. We are excited about that. We are very cautious on frequency because the risk is you exhaust the consumer and then it loses all its interest and excitement. We think we have the right pace. We have some exciting things coming in the fall which we will be announcing in a couple of months, so we will keep that frequency, and we will not accelerate it.

Hey, good morning everyone. Let me have my congrats; Jane, just two quick ones for you on Europe. We know about the European website re-platforming. And it sounds like it should be a little bit of a headwind in the near term. Could you help us how to think about European e-commerce comparable sales in the second quarter? It sounds like this should be negative, but just kind of want to understand that a little better. And then, you mention the tourism was down 15% in Europe this quarter. I'm just curious how that compares to what you saw three months ago.

Sure, so I expect that e-commerce will be down sort of mid single-digit in the second quarter. I expect in the second half to be back to growth, and it's really from what we are seeing from transition as we look at some of the redirects and affiliates and email setup that those will have sort of a compressive pressure in the second quarter. What we were seeing in foreign tourist sales in Europe specifically in the fourth quarter was about down 20%, and that was worse than we saw in Q4 '17. So, we're looking at this down 20, down 15. The Euro did pressure from I think foreign currency lightened a bit as we moved into the first quarter, and foreign tourists tend to drag a bit as they don't follow currency trends precisely over time.

Listen, thanks to all of you for joining the call. As I think you can tell, Ralph and I and Jane and the whole team are encouraged by the progress we are making as we implement our new strategic framework. Everyone is laser-focused on bringing it to life around the world, so we can get consumers excited about our brand across channels. We look forward to talking to you next quarter. Thank you, and have a great day.