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Edited Transcript of RL earnings conference call or presentation 14-May-19 1:00pm GMT

Q4 2019 Ralph Lauren Corp Earnings Call

New York May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Ralph Lauren Corp earnings conference call or presentation Tuesday, May 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Corinna Van der Ghinst

Ralph Lauren Corporation - VP of IR

* Jane Hamilton Nielsen

Ralph Lauren Corporation - Executive VP, COO & CFO

* Patrice Jean Louis Louvet

Ralph Lauren Corporation - President, CEO & Director

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Conference Call Participants

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* Irwin Bernard Boruchow

Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst

* Kate Bridget Fitzsimons

RBC Capital Markets, LLC, Research Division - Associate VP

* Laurent Andre Vasilescu

Macquarie Research - Consumer Analyst

* Matthew Robert Boss

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Michael Charles Binetti

Crédit Suisse AG, Research Division - Research Analyst

* Omar Regis Saad

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team

* Paul Lawrence Lejuez

Citigroup Inc, Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third (sic) [Fourth] Quarter Fiscal 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Corinna Van der Ghinst. Please go ahead.

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Corinna Van der Ghinst, Ralph Lauren Corporation - VP of IR [2]

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Good morning and thank you for joining Ralph Lauren's Fourth Quarter and Full Year Fiscal 2019 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.

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Patrice Jean Louis Louvet, Ralph Lauren Corporation - President, CEO & Director [3]

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Thank you, Cori. Good morning, everyone, and thank you for joining today's call. We are pleased to report fourth quarter and full year fiscal '19 results that delivered on our commitments, with revenues, operating margin and double-digit EPS growth all coming in ahead of our outlook for both the quarter and the year.

Our fourth quarter performance was driven by double-digit revenue growth in Asia and Europe on a constant currency basis and better-than-expected AUR growth globally. North America also made continued progress on returning to a healthier base, with ongoing elevation of our brand and the planned reduction of our off-price channel penetration, though we recognize that we still have more work to do on this multiyear journey.

On balance, our company outperformed on core metrics this year with several areas of our business delivering ahead of expectations and a few that require more work. Moving forward, we're focused on leveraging the successes while also applying the learnings from this first year of our Next Great Chapter strategic plan. As we close out fiscal '19, Ralph and I are proud of the work our teams have done this year. We're encouraged by the strong progress we have made on our strategic plan to deliver long-term sustainable growth and value creation.

In a moment, Jane will take you through the fourth quarter and fiscal '20 outlook. But first, let me start by reviewing our fiscal '19 highlights across the 5 strategic priorities in our plan. As a reminder, these include: first, win over a new generation of consumers; second, energize core products and accelerate high-potential, underdeveloped categories; third, drive targeted expansion in our regions and channels; fourth, lead with digital across all activities; and fifth, operate with discipline to fuel growth.

Starting with win over a new generation of consumers. As we outlined at Investor Day last June, our goal is to recruit millions of new consumers into our brands each year. To achieve that, we've been elevating our brand-building content and increasing our marketing investment with a focus on channels that matter most to consumers today, mainly digital and social.

In fiscal '19, we increased marketing spend by 13% on top of the 10% increase in the prior year. Highlights from the year and key learnings included 2 unique fashion shows that generated record levels of global engagement for Ralph Lauren. We are creating differentiated experiences with our shows where we can engage consumers in new ways and amplify our messaging globally through in-store events and digitally.

Our exciting collaboration with U.K.-based streetwear brand Palace and limited edition launches throughout the year introduced the brand to new and younger consumers. As part of this, we activated our new Polo mobile app and partnered with influential specialty retailers around the world to reach trend-savvy consumers where they shop.

We continued to leverage the power of cultural events and influencers, notably Ralph's incredible custom designs for the wedding of Priyanka Chopra and Nick Jonas in India and our successful exhibition at INNERSECT, one of China's most innovative platforms for creatives from the world of art, food, fashion and music. And lastly, our partnerships and high visibility with Wimbledon, US Open Tennis and the U.S. team at the Ryder Cup reinforce Ralph Lauren's authentic connection to the world of sports.

As a result, we saw healthy growth in our number of Instagram followers, with a 45% increase to last year to reach over 15 million followers across our brand handles. In the fourth quarter specifically, marketing highlights included our spring '19 runway presentation, which transformed part of our Madison Avenue flagship into an immersive, Parisian-inspired Ralph's Coffee experience.

We're also leveraging key categories like fragrance to recruit a new generation of consumers. In Q4, we launched a new campaign around the iconic Ralph Lauren Romance fragrance featuring our new global ambassador, Taylor Hill.

And just a few weeks ago, you may have seen our Family is Who You Love global campaign, which captures a modern take on family however you define it. It is a positive and powerful message about inclusion that has resonated with consumers and across global press.

We're gaining traction with younger consumers as we engage with them in new, relevant and exciting ways. We are in the early stages of this journey and are focused on building momentum among both millennial and Gen Z consumers globally.

Moving on to our second key initiative, energize core products and accelerate high-potential, underdeveloped categories. In the fourth quarter and fiscal year, we made progress on our long-term plan to drive roughly half of our revenue targets through growth in core products and the other half through the expansion of 5 underdeveloped categories.

Our iconic and updated core styles continue to be a key driver of our top line performance as Ralph and the design teams generate excitement in the marketplace. We continue to innovate these core styles through the use of print, embroidery, color blocking, graphic Polo logos, our Polo Bear and customization offerings.

Moving to our underdeveloped categories that have significant growth potential across our brands. These include denim, outerwear, Wear to Work, footwear and accessories. Our performance in denim and outerwear, which are the furthest developed of the 5 categories, was encouraging this year. Benefiting from an improved product, merchandising and distribution focus, positive sales trends in these categories for both the fourth quarter and fiscal '19 indicated a strong consumer response to our new initiatives.

Notably, outerwear growth accelerated as we moved through the year, fueled by our focus on key programs such as core nylon, down, bomber and leather jackets. We were able to apply early learnings from this past winter's performance as we launch an expanded outerwear offering and coordinated marketing campaign for fall '19.

Now while accessories are expected to play a more meaningful role later in our long-term plan, we were excited to introduce our RL50 collection handbag to the market this spring. Our newest icon merges classic Ralph Lauren style with modern sophistication and artisanal leather craftsmanship. These developments represent strong progress, but we still have work to do, particularly in product areas that are not yet performing to their potential. For example, our Lauren wholesale business in North America where we need to drive a greater focus on core categories and better balance core product with fashion.

And while our core Polo products drove our performance, we have an opportunity to strengthen the appeal of our fashion concepts. We've already taken decisive action to address both of these areas with a new design direction and category strategy in place for Lauren, which should start to impact spring '20 and onward and earlier adjustments in place on our Polo design concepts.

Moving on to our third key initiative, drive targeted expansion in our regions and channels. We are focused on building a cohesive, brand-elevating Ralph Lauren experience across our retail, wholesale and digital commerce presence in key cities around the world.

In fiscal '19, we opened 135 new stores and concessions globally and closed 85 locations. This included 94 openings in Asia with 39 in China, our fastest-growing market. For the full year, Greater China revenue was up 20% to last year in constant currency, representing about 3.5% of our total company revenue. This included more than 30% growth in Mainland China on top of the 25% growth we reported last year, driven by comp growth and new stores.

In Europe, we opened 4 new full price stores and 2 new factory stores on a net basis. We are still significantly underpenetrated at brick-and-mortar retail with only 23 owned full price stores across Europe, and we continue to see a meaningful long-term opportunity to build out our ecosystem strategy in the region.

Overall, in fiscal '19, we track slightly behind our annual store openings target as we remain highly selective on real estate locations to ensure that they elevate the brand and meet our profitability targets.

Moving on to our fourth key initiative, lead with digital. Our global digital business, including our directly operated sites, department store dot-com, pure players and social commerce, was up 11% in constant currency in fiscal '19, with strong performance across all regions led by international.

Our directly operated North America digital flagship returned to positive growth during the year, as planned. Comps grew 10% compared to a 22% decline in fiscal '18 as we lapped last year's transition to a cloud-based platform. Our directly operated European digital commerce sites also showed strong improvement following the move to our new platform this fiscal year. Comps were up 6% in the fourth quarter and full fiscal year despite reduced promotional activity to elevate the brand.

We also continued to drive strong performance with digital pure play partners across all regions this year. In the U.S., in the fourth quarter, we added distribution in men's Polo to SSENSE, a leading international fashion platform known for its curated selection of luxury and streetwear brands. We also expanded our presence on Moda Operandi with Double RL and on Zulily with Chaps.

Internationally, we added 11 new wholesale digital partners in Europe in the quarter, including specialty players that resonate with younger, trend-forward consumers, like slamjamsocialism.com in Italy and KICKZ.com in Germany. We also continued to expand our digital presence in Asia, including enhancements to our WeChat shop-in-shop in China and exclusive online collaborations with high-profile partners in Japan, Korea and Hong Kong.

While encouraged by our digital commerce momentum, we see opportunities to accelerate growth of our total digital ecosystem and gain share. For example, by better leveraging our experience and assets in brand building and presentation from our own digital flagships, we can apply our best practices with those of our partners to drive higher performance and productivity on wholesale dot-com.

Let me touch on our fifth key initiative, operate with discipline to fuel growth. In fiscal '19, we continued to challenge every cost and improve our efficiencies as we progress towards a mid-teens operating margin target by fiscal '23.

Adjusted operating expenses excluding marketing grew 1.4%, below our top line growth for the year. This cost discipline enabled us to ramp up our marketing investment and expand our global retail presence while increasing operating profit and operating margin above our guidance. Jane will provide more details on how we're continuing to drive productivity.

I also wanted to give you an update on citizenship and sustainability, a topic we care deeply about. Over the last 6 months, we've undertaken a focused effort to evolve our strategy and further embed sustainability across our organization. In the coming months, we will share more about our approach to: one, creating product; two, managing our environmental impact; and three, how we champion and support our employees, the workers across our supply chain and our communities.

One recent example of how we're bringing this to life in our products was the launch of the Earth Polo in April. The Earth Polo is made entirely of recycled plastic bottles and uses a waterless dyeing process. Early consumer reaction has been strong and we look forward to sharing more as we progress in this journey.

And lastly, we recently announced 2 key organizational changes to support our strategic initiatives going forward. Jane Nielsen's role was expanded to Chief Operating Officer in addition to Chief Financial Officer. And Howard Smith, who has successfully led our international groups, was elevated to the role of Chief Commercial Officer at the end of March, adding North America to his responsibilities. We expect these changes to enable faster reapplication of proven successes.

Both promotions are extremely well deserved and further highlight the strength of our leadership.

In closing, this year's results demonstrate our progress on putting the consumer at the center of everything we do, elevating the brand and balancing growth and productivity to deliver long-term sustainable growth and value creation. Our recent global employee survey conducted by Korn Ferry demonstrates accelerated levels of engagement versus the prior year that now surpassed the high-performing norm. It's our team's excellent execution that is moving us forward, and Ralph, the leadership team and I are inspired and energized by them every day.

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

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Jane Hamilton Nielsen, Ralph Lauren Corporation - Executive VP, COO & CFO [4]

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Thank you, Patrice, and good morning, everyone. Our team's performance this quarter and throughout the year returned our company to top line growth while continuing to drive higher AUR, expand operating margin and return more cash to shareholders. It's a good start to our journey with a clear path on our work ahead.

Fourth quarter revenues increased 1.2% in constant currency and were down 1.5% on a reported basis. Our international businesses delivered double-digit top line growth in constant currency, more than offsetting both the negative impact of the Easter shift into Q1 and our deliberate reduction in North America off-price sales.

Adjusted gross margin expanded 30 basis points in the fourth quarter and 50 basis points in constant currency, benefiting from reduced promotional activity and favorable product, geographic and channel mix. Adjusted operating margin in the fourth quarter was 6.4%, up 80 basis points on a reported basis and 110 basis points in constant currency. Adjusted operating profit dollars grew 12% to last year.

SG&A expense declined to 53.8% of sales, down from 54.2% last year as we lapped the acceleration in marketing investments made in the second half of FY '18. Marketing spend declined 8% to last year in the fourth quarter but was up 13% on a full year basis as we focus on winning over a new generation of consumers.

Our dollar spending levels in the fourth quarter were roughly similar through the last 3 quarters of fiscal '19. We continue to make progress toward our long-term objective of increasing marketing to about 5% of sales while also focusing on productivity to achieve our operating margin expansion goals. We closed the year with marketing at 4.3% of sales.

Our teams are intensely focused on driving operating efficiencies across our business. Initiatives this year included consolidation of our distribution footprint from 4 buildings to 2 in conjunction with the launch of our direct-to-consumer shared inventory in North America in the fourth quarter. This will enable us to reduce our overall inventories, maximize full price selling and lower our fulfillment and overhead costs in the future.

We renegotiated over 80 vendor contracts to drive a 14% reduction in addressable expenses, generating savings without compromising quality. And we continued to simplify our organization to improve agility and empower our leaders.

Moving on to segment performance, starting with North America. Revenue decreased 7% in the fourth quarter. Adjusted operating margin was 15.9%, with a 150 basis point decrease to last year as modest gross margin expansion was more than offset by SG&A deleverage on negative retail comps.

In the retail channel in North America, comps declined 4% in constant currency, including about 300 basis points of negative impact from the Easter shift into the first quarter of fiscal '20. Our directly operated digital commerce business was up 6%, with strong double-digit AUR increases partly offset by the Easter shift.

Bricks-and-mortar comps were down 7%, modestly lower than our trends earlier in the fiscal year, largely driven by challenging traffic with foreign tourist traffic down 5% versus a 7% increase in the prior year. In our stores, we had positive AUR growth this quarter but at a more moderated rate than in prior quarters. We still expect about a 3-point shift in comp into Q1 due to Easter.

Moving on to North America wholesale. Fourth quarter revenue was down 10%. More than half of the decline was due to a planned reduction in off-price sales. As we have previously noted, we are strategically repositioning off-price back towards its original purpose as an excess inventory clearance vehicle. We will continue to pragmatically manage our off-price penetration down within our broader wholesale channel.

Excluding off-price, our underlying North America wholesale business was down low single digits in the fourth quarter. We are encouraged by the strength in our core products and are rightsizing our buys in select fashion-oriented product. We continue to monitor selling trends carefully and expect some ongoing volatility quarter-to-quarter.

Our North America digital ecosystem, including RalphLauren.com, wholesale dot-com and digital pure plays, was up slightly in the fourth quarter, negatively impacted by the Easter shift and was up high single digits for the full year as we return to growth on our own digital commerce site. Our teams are working with our digital wholesale partners to strengthen our brand imagery, storytelling and assortments to better realize the growth in this digital channel.

Moving on to Europe. Fourth quarter revenue was up 4% on a reported basis and 11% in constant currency. Adjusted operating margins expanded 360 basis points on a reported basis and 340 basis points in constant currency. Operating margin expansion was driven by strong gross margins and SG&A leverage on top line growth.

In the retail channel in Europe, comps were up 5% in constant currency driven by a 6% increase in our owned digital commerce sites and a 5% increase in our brick-and-mortar stores. Similar to last quarter, the sequential improvement in our brick-and-mortar comp trend was primarily driven by our outlet investment to get back into inventory positions, improve the breadth and depth of our product assortments and drive strong AUR growth. The 6% comp growth in our directly operated European digital commerce business was also in line with our expectations, benefiting from platform enhancements and more targeted performance marketing.

On our site, we saw strong quality of sales improvements, double-digit growth in traffic and high single-digit AUR increases, driven by positive consumer response to our new platform. Across our Europe direct-to-consumer channel, our ongoing effort to improve quality of sales continued with AUR up 8% in the fourth quarter.

Wholesale revenue in Europe was up 11% in constant currency in the fourth quarter despite a planned shift in the timing of shipments into the third quarter, which negatively impacted Q4. Europe wholesale revenues were ahead of our guidance, reflecting the benefit of modest distribution growth with existing wholesale partners.

Turning to Asia. Revenue was up 7% on a reported basis and 10% in constant currency in the fourth quarter. We saw strong performance across every market, including 30% constant currency revenue growth in Mainland China. Our product and marketing initiatives are resonating well in this region, and we continue to increase our digital efforts, expand and elevate our store fleet and engage with local influencers and celebrities.

Comps in Asia increased 4% in constant currency driven by 10% AUR growth and positive traffic. We expect continued comp growth in Asia as we invest in our distribution network and increase our marketing initiatives to amplify and elevate the brand. Adjusted operating margin was down 90 basis points to last year as SG&A leverage was more than offset by gross margin contraction due to increased inventory reserves primarily on select fashion concepts in the quarter.

Moving on to the balance sheet. Our balance sheet is strong and we returned capital to shareholders, reflecting our continued operating progress. We ended the year with about $2 billion in cash and investments and $689 million in total debt, which compares to $2.1 billion in cash and investments and $596 million in debt at the end of fiscal '18.

Consistent with our commitment to return cash to shareholders, we repurchased $470 million in shares during the year. Including dividends and share repurchases, we returned over $660 million to shareholders in fiscal '19, up from $162 million last year. We will continue to opportunistically buy back stock with about $600 million in repurchases planned for fiscal '20. We also raised our annual dividend by 10% to $2.75 for fiscal '20, on top of a 25% increase last year.

Moving on to inventory. At the end of fiscal '19, inventory was up 7% to last year, moderating from an 11% increase in the third quarter. Similar to the last 2 quarters, our inventory growth reflects strategic actions to support the following: one, earlier receipt of goods to maximize full price selling; two, comp growth; three, new retail distribution; and four, getting back to normalized inventories in our Europe factory stores and we continue to reduce our air freight to lower shipment costs.

Looking ahead, we expect inventories in the first quarter of fiscal '20 to be similar to our fourth quarter trend of up high single digits. As we anniversary our inventory initiatives in the first half, we will leverage shared inventory and a more unified buying process to better align inventory to demand.

We are also taking a more cautious approach to inventories, especially in light of the dynamic trade environment. The tariffs enacted to date have a limited impact on our business, but our teams are prepared for multiple scenarios and have accelerated the diversification of our supply chain to mitigate the long-term impact of any potential tariff outcomes.

Now I'd like to turn to guidance for the full year and the first quarter of fiscal '20. As a reminder, this guidance excludes restructuring and related charges and reflects our best assessment of the global retail landscape in the context of increased volatility from macroeconomic and geopolitical events.

For full year fiscal '20, we expect revenues to be up 2% to 3% in constant currency, consistent with our long-term plan. At current spot rates, foreign currency is expected to have about a 90 to 100 basis point negative impact on revenue growth in fiscal '20. We expect continued growth in our international businesses and stabilization in North America.

We expect operating margin for fiscal '20 to be up 40 to 60 basis points in constant currency driven by a combination of modest gross margin expansion and SG&A leverage. Foreign currency is estimated to have about 10 to 20 basis points of negative impact on operating margin in fiscal '20.

We expect the magnitude of gross margin expansion to be more modest than last year due to higher input cost, pressure from transactional FX and more normalized benefits from channel and geographic mix shift. We expect modest SG&A leverage as we balance our productivity initiatives with investments in growth.

For the first quarter of fiscal '20, we expect revenues to be up 3% to 5% in constant currency. Foreign currency is expected to negatively impact revenue growth by about 190 to 200 basis points in the quarter. The timing of Easter shift from the fourth quarter of fiscal '19 is expected to benefit North America retail comps by about 3 points in the first quarter.

Operating margin for the first quarter is expected to be up about 30 to 50 basis points to last year in constant currency. Foreign currency is expected to have roughly 10 basis points of negative impact on operating margin in the quarter. We expect capital expenditures of approximately $300 million in fiscal '20, focused on consumer-facing initiatives that have demonstrated a proof of concept and healthy rates of return, including stores and digital as well as our corporate office consolidation project.

We expect our effective tax rate for fiscal '20 to be approximately 22%, above our fiscal '19 adjusted rate of 21%, driven primarily by our expected mix shift of international earnings into some higher tax jurisdictions. First quarter of fiscal '20 tax rate is estimated at about 19%.

In closing, as we continue on our Next Great Chapter journey, we have a clearer sense of purpose and are guided by Ralph's timeless vision. We are applying the insights we've gained as we accelerate wins and navigate challenges. While we recognize that progress is not always linear, our teams are passionate, highly engaged and focused on delivering across all our strategic priorities and creating value for the long term.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Ike Boruchow with Wells Fargo.

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Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [2]

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Congrats on a great year. I guess one -- first question for Patrice. As you reflect on the first year of the Next Great Chapter plan, I guess my question is, how are you feeling about the long-term strategy 1 year in? Maybe could you go on, let us know a little bit more about where you think you've outperformed versus maybe underperformed versus prior expectations? And any need to revise any of the information you gave us at the Analyst Day?

And then a quick one, a follow-up for Jane. Just North America wholesale, would love a little bit more detail on how to think about Q1 and the rest of the year, tying together the off-price pullbacks, spring fashion softness that you highlighted for 4Q. Just any other color on that channel would be great.

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Patrice Jean Louis Louvet, Ralph Lauren Corporation - President, CEO & Director [3]

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So I guess on the first part of your question, overall, we're actually pleased with what we delivered in year 1 of our Next Great Chapter plan. While there's, of course, always more work to do, we believe our strategy is working and our plan is on track. So as a result, we remain very comfortable with the 5-year targets we laid out last June at Investor Day.

To your point on wins and opportunities, let me just touch on a few on both sides. So in terms of the things that we -- the key highlights in terms of performance, one is we returned to growth a year ahead of plan. And more importantly, we actually achieved this with a continued focus on profitable quality growth, right, and you can see that through the progress that we've made on AURs throughout the fiscal year of high single digits and through the continued expansion in operating margin throughout the year as well.

Second thing I would highlight is the fact that we've significantly increased our brand-building investments with a strong focus on social and digital to really elevate the brand, energize the brand and win over a new generation from our first strategy.

Third area to highlight is I think terrific work by Ralph, the design team and the overall organization on strengthening our core product, which has been a very important driver of the top line improvement over the past year.

And then fourth and final point in terms of highlights is the digital space and the expansion space. So we completed the digital platform upgrades for our flagships in North America and in Europe and we launched our flagship in China. Both Europe and the North America businesses inflected back to positive comps this year after a few challenging years.

We also drove, in the digital commerce space, expansion on digital pure players around the world, and you heard some examples in our prepared remarks. And then, of course, we continue our international expansion with a deliberate focus on China. And we're really pleased with the acceleration we're seeing in China, delivering 30% growth Mainland -- in Mainland China this year.

So those are probably key highlights. Key areas as we look at what are the learnings and what do we need to double down on moving forward, I'd call out 3. One is we want to accelerate our momentum on winning over a new generation. We had a strong 50th anniversary year, we gained traction with new and younger consumers, think millennials and Gen Z. We plan to continue building on this momentum into fiscal year '20 and beyond with increased investments, better targeting and stronger digital amplification of our programs.

Second point to highlight is we need to improve traffic at our U.S. brick-and-mortar stores. I think that's a consistent challenge for the industry here. So in addition to enriching the shopping experience and enhancing our product offering, we need to better leverage our marketing programs and our ecosystem approach, our omnichannel ecosystem approach to drive brick-and-mortar traffic.

And then third point I would highlight is we have opportunities on product. So as I mentioned, this year, we've had notable successes with updates to our core product. We also had some really nice consumer reactions on our limited edition releases, which we're going to continue to drive moving forward.

However, we've also had some gaps that we called out in our prepared remarks. And as you heard, we're full-on focused on actioning those aggressively. But all in all, we're pleased with the way the first year played out and really in the right notes about running the play as we move forward.

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Jane Hamilton Nielsen, Ralph Lauren Corporation - Executive VP, COO & CFO [4]

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Yes. I -- just on your question on North America wholesale. You saw us come out of the year with our full price wholesale business down in the low single digits. As I think about the coming year, our focus is really to get back to stabilize that business, really as Patrice called out, focus on the wholesale dot-com business for growth.

And as I think about the mix of full price and off-price, we've stabilized the full price but off-price will continue to be down throughout the year on a more normalized flow basis. But you will see modest declines, modest to moderate declines in the off-price business throughout the year but on a more stable basis.

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Operator [5]

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The next question comes from Matthew Boss with JPMorgan.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [6]

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Maybe on the margin front. Could you just help outline the gross margin puts and takes this year relative to the 30 to 50 basis points annual expansion outlined in the 5-year plan? And maybe just walk through some of the drivers behind the return to SG&A leverage this year.

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Jane Hamilton Nielsen, Ralph Lauren Corporation - Executive VP, COO & CFO [7]

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Sure. So we -- as we look at the coming year in terms of gross margin, we expect about half of our operating margin leverage will come from gross profit. The driver to our tailwinds are really pretty stable. The largest driver has been the -- our pricing activity and our reductions in promotion, that will continue.

What you'll see is a moderation of the benefits that we're seeing from channel mix as our wholesale business will -- our focus is on stabilization, and a moderation is a benefit of geographic mix. Those are 2 -- will still remain tailwinds. But because North America, our expectation is stabilization and that performance, those benefits will start to moderate versus what you saw this year.

Our headwinds that we see coming forward are that we will have some transactional pressure in our gross margin this year. Product cost that you saw us realize in the fourth quarter will continue notably into the first half, some of those pressures. And then we are taking a more cautious approach to inventory, and so there will be some slight pressure from inventory actions that we're taking that will impact our overall COGS.

As we look to SG&A overall, we have -- we're going to continue on our journey of cost discipline. We've had very good results from the cost leadership committees that we've established, and we're going to go -- continue to go against our indirect expenses.

You've seen us take some significant distribution actions, consolidating our footprint, working on some of our automation within our distribution sites, consolidations of inventory. Those will help from an SG&A perspective.

We're also consolidating our corporate headquarters, which will be a slight pressure point this year but will be a leverage point into the future. And we're also leveraging more digital technology, leading into digital design in our design teams, digital sample making. Those are the initiatives that are helping us get to SG&A leverage on top line growth of 2% to 3% in constant currency.

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Operator [8]

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The next question comes from Laurent Vasilescu with Macquarie.

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Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [9]

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Congrats, Jane, on your additional responsibilities. Jane, I believe you talked about 80 vendor renegotiated contracts in the fourth quarter that drove a 14% reduction in addressable expenses. Can you maybe parse out the dollar benefit in the fourth quarter? And will these cost initiatives flow through for the balance of the quarters in FY '20?

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Jane Hamilton Nielsen, Ralph Lauren Corporation - Executive VP, COO & CFO [10]

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They are part of what I just talked about in terms of the cost leadership committee. Those renegotiated expenses -- contracts resulted in a 14% decrease in those contracts. But you will see that benefit and it's part of our SG&A leverage story as we move forward. And of course, we're not done. Those 80 contracts, they're just the beginning. We intend to review all of our contracts, obviously prioritizing the largest ones and the ones that are at expiry points first, but this is an ongoing effort for us.

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Operator [11]

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The next question comes from Michael Binetti with Crédit Suisse.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [12]

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Jane, let me just -- let me ask on the operating margin guidance for this year in U.S. dollars, takes you pretty close to 12% next year, so very good progress obviously. But if we think back to the Analyst Day, I mean you gave us the range of mid-teens and if I just interpret that as 15 as one of those scenarios, that would need about 100 basis points per year after this year to get to that range, which is obviously an inflection in the margin improvement right after this year. What do you think is required in the business, at this point, to get to that scenario to see the operating margins accelerate in the out years?

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Jane Hamilton Nielsen, Ralph Lauren Corporation - Executive VP, COO & CFO [13]

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So several things. One is continuing our journey on gross margin expansion, which you'll see us do this year and which we successfully did last year. And a big part of that is continuing the AUR journey that we are on. This is an AUR-led strategy, and we've made good -- terrific progress on that, really in FY '19 with our AUR up 8%. So we have to continue that.

We will also see accelerated leverage, notably on SG&A, which we called out in Investor Day as we continue to move through to top line growth, and comp growth is an important start -- part of that story. Another part of that story is also the new doors that we're opening, which have higher productivity and higher 4-wall margins. So if those come online and stabilize, you'll see those be accretive overall to our operating margin expansion as well.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [14]

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If I could just...

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Jane Hamilton Nielsen, Ralph Lauren Corporation - Executive VP, COO & CFO [15]

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Sure. Go ahead, Michael.

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Patrice Jean Louis Louvet, Ralph Lauren Corporation - President, CEO & Director [16]

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Go ahead, Michael.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [17]

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Sorry, I didn't know if I was still on. So if I can just ask you a little bit more near term on the gross margin outlook for how we should think about it for the first quarter, given fourth quarter I think was a little bit below prior quarters but obviously against a big, big comparison a year ago. And then you had some noise from I think an outsized off-price pullback that I would have thought would have been a tailwind, I guess, to gross margin in the fourth quarter. I'm just trying to take the puts and takes that we have in the fourth quarter and roll it forward to how you're thinking about first quarter.

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Jane Hamilton Nielsen, Ralph Lauren Corporation - Executive VP, COO & CFO [18]

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So as we think about first quarter, first of all, we had a fantastic quarter in AUR growth this quarter. As we think about our guidance moving forward, we don't think it's prudent in this environment to guide to the kind of AUR growth as 8% roughly that we achieved this year into the future.

So our AUR growth is more moderated and in line with our -- the Investor Day guidance that we gave of low to mid-single-digit growth. So that's one factor. And then the other factor is, in the first half, we do have more product cost pressures that you saw come into line in the fourth quarter, move into the first and second quarters in terms of gross margin expansion.

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Operator [19]

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The next question comes from Kate Fitzsimons with RBC Capital Markets.

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Kate Bridget Fitzsimons, RBC Capital Markets, LLC, Research Division - Associate VP [20]

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I guess my question would be going back to the Investor Day, you guys spoke to $500 million in incremental digital sales. Seems like that business took a step back in here the fourth quarter, but it sounds like maybe that was due in part to the Easter shift. Can you just talk about some of the drivers into fiscal '20 on digital and how we should think about the trajectory of that business going forward?

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Patrice Jean Louis Louvet, Ralph Lauren Corporation - President, CEO & Director [21]

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Sure. Sure. Listen, the general direction has not changed because we expect low double-digit growth from our digital commerce business year-on-year to get to the target that you mentioned. And again, digital commerce for us is our own site, it's wholesale dot-com, it's pure players and then it's social commerce, and we're seeing social commerce obviously accelerate. As you look at our performance this past quarter, optically, it may look like a slowdown, but actually, it is not a slowdown, this is completely consistent with our expectations.

The Easter shift in North America is really the explanation between the 6% comp we delivered and the high single-digit number that we look to deliver quarter-to-quarter. We estimate, again, the Easter shift is worth about 300 basis points. So very consistent with what we expect and very consistent with our run rate.

There are a few things that we actually drove this quarter which should help sustain this type of performance in the area of functionality for our site, that may be worth calling out here, relative to search suggestions, checkout process. We're driving greater availability of personalization across a broader range of products. And we're also implementing -- we had implemented Apple Pay and PayPal Express payment methods to the U.S. site, and we're going to continue to raise the bar on functionality, on product and on brand building. So I think you should expect continued performance around high single digits from our North America site.

And in Europe, Europe was also in line with expectations. We're actually particularly pleased with the contributions of our Spanish sites, first time we have a Spanish language site, which launched a few months ago. And so Europe is on a mid-single-digit trajectory. That's what we delivered in Q4, that's what we expect to deliver moving forward as well.

And likewise, we've also made a number of improvements to our site, whether that's enhanced pay per click, optimizing our search engine and then also localizing our sites in Italy and Greece and Netherlands and in Poland to make sure that whatever we offer really resonates with the local consumer.

Then finishing the global tour, Asia is a very small business as far as our own site is concerned, so not material here but we were pleased with the results that came through. So all in all, looking ahead, we're still very much in line with what we called out for the $0.5 billion of digital commerce progress over the next few years. And Q4 came in consistently with our expectations, and we expect to drive this in fiscal year '20 as well.

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Jane Hamilton Nielsen, Ralph Lauren Corporation - Executive VP, COO & CFO [22]

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And I would just add, Kate, for a comment that in Q4, we saw the highest AUR growth across our digital -- our own digital e-commerce platform that we saw throughout the year. So consistent with what Patrice shared on Easter, but very positive in terms of AUR growth.

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Operator [23]

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The next question comes from Omar Saad with Evercore ISI.

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Omar Regis Saad, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team [24]

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Nice job this quarter. I wanted to ask a little bit more about the shared inventory, maybe give us more details what's really coming online there, how it works, how the consumer will experience the benefits of shared inventory, what's the opportunity to the extent you have an idea. And then maybe also if you could give a little bit more detail on your comments, Patrice, around Lauren and Polo fashion, what needs to be done there.

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Jane Hamilton Nielsen, Ralph Lauren Corporation - Executive VP, COO & CFO [25]

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So shared inventory, from a consumer perspective, it is a benefit to the consumer because we will have less out-of-stocks. We'll have better management of our inventory and more fluidity to be able to service our e-commerce customers and flow to the stores from a larger stock of inventory. So that's the net benefit to the consumer.

For us, the benefit is also that we can prioritize inventory to the highest price selling, so we'll realize more full price selling. We're bringing all the inventory into our one distribution center that is serviced by an automatic -- automated sorter, so we are getting some fulfillment benefits from the leverage of that automation, so that's a benefit for us. And it also reduces pick times. Because we have shared pick pools, we can reduce the transit time as we go into picks, and that's also a labor benefit for us.

So we're quite encouraged with -- for -- about it. The #1 advantage is for the consumer, but we also think that there are both operational savings and pricing advantages from shared inventory. We are early in our journey. We went live in Q4. We're happy with the start, but we expect that to pick up steam as we move through the year.

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Patrice Jean Louis Louvet, Ralph Lauren Corporation - President, CEO & Director [26]

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And then on the product points, Omar, let me start with Lauren. So Lauren, what we're talking about -- what we talked about in the prepared remarks is really Lauren women's business this year -- actually, our men's business is doing well, and that's a combination on the women's side of sportswear, dresses and accessories. And while we're seeing good performance around the world, we are seeing softness specifically driven by our North America wholesale business.

So as we kind of look at where the brand stands today, we actually feel good about the Lauren positioning and aesthetic, right? And we believe that can absolutely resonate with consumers. And the key causes of the Lauren challenges that we're seeing are, first, on the product front, we need to focus more on the core categories that the Lauren brand is known for and that our consumers care about and expect. So that means greater focus on knits, greater focus on denim, athleisure and dresses. Those -- there's a category choice here that we need to pivot on.

And then the second point is that we need to strike a better balance between core and fashion, and our assessment is we probably skewed too much towards fashion in recent seasons and need to rebalance that. And then on the distribution front, as you know, Lauren is primarily in the U.S. a department store brand, and so we're focused on improving Lauren in this channel. We want to gain share. The definition of success for us is gaining share there. And part of the work we're doing is also elevating the brand presentation, investing in our shop-in-shops so that we can create a more engaging and energizing environment and then again, getting the product balance right in those environments.

So what are we doing about it? First of all, we actually have a new design team in place that we put in place a few months ago. And this is a team that we believe really understands the DNA of the brand well as well as the target consumer that we're going after. They are really focus on rebuilding the key classifications that the consumer is looking for, from Lauren women's, starting with dresses and denim.

We're also looking at diversifying distribution. So while we want to win in wholesale and want to grow share there, we also want to better balance our distribution for Lauren as we've done in other parts of the world. So there's work going on in that area.

And then finally, there's always more work to do in understanding the consumer that we target, both making sure we're serving our current consumer base well and also having engaging and inspiring plans for the new consumers that we want to target.

So that's where we stand on Lauren. The plans are being activated. And as I mentioned in our prepared remarks, we expect to see the impact of these plans as early as spring '20.

As far as the seasonal fashion concepts are concerned, let me quickly define them to make sure we all have a common understanding of what we're talking about here. So we introduced new concepts, which are a sort of themed capsule, each season along with our core product in order to inject newness and excitement to our overall presentations. We believe this is an important part of attracting new consumers to the brand.

Now with these themed concepts, there's obviously a high-fashion risk component because it's about fashion, right? And sometimes you get it right, and sometimes they don't necessarily work as intended. What we've picked up in some of our recent seasonal fashion concepts is they've been actually resonating really well with our more trend-forward consumers, but they haven't been as appealing to our broader population. And so the insights for us here is that we actually need to better balance the focus on core, which as you heard us talk about, has been doing very well for us, it's obviously the heart of this company, and putting more emphasis on core and deemphasizing the focus we've had on these seasonal fashion concepts.

We still need them, we still want them, but we're going to put less emphasis on them and get the balance right between the 2. So that is -- that activation is already happening, and you'll start to see the impact of that in our fall '19 products and obviously, going forward.

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Operator [27]

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The last question comes from Paul Lejuez with Citigroup.

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Paul Lawrence Lejuez, Citigroup Inc, Research Division - MD and Senior Analyst [28]

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I just want to have a quick follow-up on your AUR comments. I'm curious if you could provide any color in terms of what you expect by region this upcoming year from an AUR perspective? And then just second, you mentioned I think the decline in the tourist traffic might have had an impact on your retail business. I'm just curious if you're happy with how that business is trending with local customers, how you feel about the outlet business just in general.

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Jane Hamilton Nielsen, Ralph Lauren Corporation - Executive VP, COO & CFO [29]

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Sure. Why don't I take those 3 components in order. And just in terms of AUR, we don't guide necessarily by region, so we don't guide AUR by region. But I can tell you that we saw overdelivery in terms of expectation in both Asia and Europe that was meaningfully a part of the overdelivery that we had for the year in terms of AUR growth.

We expect that over the course of this year, that they will be more in line with our mid-single-digit AUR growth guidance that we gave for the long term. And that really is one of the biggest changes we have from FY '19 going into FY '20. We think that's prudent. We have a lot of confidence in our ability to drive AUR. We're certainly going to lean into it. But we don't think it's prudent right now given the current environment to guide to a much higher AUR growth above our long-term guidance.

On the foreign tourist side, we saw that in foreign tourism, we're -- it was distinctly different, as you can imagine, in North America and in Europe. In North America, we saw foreign tourist traffic down 5%. Last year, at this time, it was up 7%. It's been quite choppy through the year and it's been hovering around flat. Last quarter, we saw it up 2% and ended the year around -- about down 1%. It really flows that we see the biggest driver is foreign currency. So with the strengthening of the dollar, that outcome was not surprising.

In Europe, we saw foreign traffic up 8%. We do believe that, that benefited our outlet comp in addition to the investments that we made to get back into inventory the present supply. We're very happy with the results that we've seen there and that we've put up to date. But Europe was really a sequential story in terms of foreign tourism. It was down double digits in the first half and up mid-single digits and ending at up high single digits as we closed out the year but was down 6% for the year.

Overall, as I look at our outlet business across North -- especially across North America because that's where I think you saw some pullback that was a little bit below where we expected. Certainly, the foreign tourist traffic that we just called out was a factor in that. We also called out some of the product softness that occurred in Lauren. And we think we have some price balancing opportunity to make sure that we have some good opening price points and clearance balance for our more price-sensitive consumer. We're on it. We are enhancing our marketing initiatives, including window signage and targeted emails to make sure that we can address traffic, which is the biggest metric that we're focused on as we move forward.

And of course, from a product perspective, we are looking at our execution of the Lauren brand as we speak, knowing that some of our pre-spring contents -- concepts need to be addressed. And we're balancing the assortment as we speak from an opening price point and clearance balance perspective for our more value-sensitive consumers.

So we see it. We are happy with that business, it's a great margin business and we think we know what we need to do to make sure that we're back on track as we move forward.

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Patrice Jean Louis Louvet, Ralph Lauren Corporation - President, CEO & Director [30]

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Good. Well, listen, thank you, everyone, for joining our call today. As I think you'd probably heard, we're encouraged by our progress and our results as we continue to elevate the iconic business Ralph and our teams have built over 50 years as we continue to strengthen our connections to consumers around the world. We've got clear strengths and momentum that we want to build on. We also have opportunities that we need to go address that we're all focused on. And we look forward to sharing our first quarter fiscal '20 results with you in late July. So thanks and have a great day.

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Operator [31]

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