Ralph Lauren (RL) CEO Patrice Louvet on Q2 2018 Results - Earnings Call Transcript

Ralph Lauren Corporation (NYSE:RL) Q2 2018 Earnings Conference Call November 2, 2017 9:00 AM ET

Executives

Evren Kopelman - VP, Investor Relations

Patrice Louvet - President & CEO

Jane Nielsen - CFO

Analysts

Matthew Boss - JPMorgan

Brian Tunick - RBC

Kate McShane - Citi Research

John Kernan - Cowen and Company

Omar Saad - Evercore ISI

Heather Balsky - Bank of America

Nancy Hilliker - Wells Fargo

Rick Patel - Needham & Company

Andrew Roberts - Guggenheim

Laurent Vasilescu - Macquarie

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter Fiscal 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions on how to ask a question will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mrs. Evren Kopelman. Please go ahead.

Evren Kopelman

Good morning, and thank you for joining Ralph Lauren's second quarter fiscal 2018 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' website.

And now, I will turn the call over to Patrice.

Patrice Louvet

Thank you, Abrein. Good morning, everyone, and thank you for joining today's call. Our second quarter results demonstrate that we continue to execute on our plan to drive efficiencies and set a strong foundation for future growth.

While we're certainly not where we want to be yet, we are encouraged that second quarter revenue was at the high end of our guidance and we outperformed on operating margin, as our quality-of-sales initiatives over delivered our expectations. This focus will continue through the rest of the year, and we are on track to deliver our full year targets.

Over the past several months, I've met with many of our key suppliers and customers and thousands of our employees all over the world, these interactions have reaffirmed my excitement about the opportunity for our brand globally, I am incredibly inspired by the passion and commitment of our teams and confident in their capabilities.

I've also spent a lot of time with Ralph, and we have developed a very close and productive partnership. I'm particularly excited by some of the early progress we're making together to drive the business forward.

Moving ahead, we are focused on reigniting quality growth, while continuing to drive productivity. This balance of growth and productivity will translate into value creation for all of our stakeholders. Our key initiatives include: First, elevating our brand by improving quality of sales and distribution.

Second, evolving our product and marketing to increase our reach and appeal with new consumers. Third, expanding our digital and international presence, and fourth, working in new ways to drive productivity and agility.

While there's still a lot of work to be done, I'd like to take you through some of the early signs of progress across each of these initiatives. First, elevating our brand by improving quality of sales and distribution.

In the second quarter, we continued to reduce our discount rates and increase our average unit retail, which was up 5% across the company's direct-to-consumer network.

Gross margin was up 300 basis points to last year. We continue to close unproductive distribution in retail and wholesale and significantly reduced off-price shipments.

Second, evolving our product and marketing to increase our reach and appeal with new consumers. Within product, we are driving a much more disciplined assortment, focusing on our icons, renewing our core items to make them relevant to today's consumer and developing limited editions to inject energy and excitement into our brand.

The result of this work is most evident in the improving sellout trend we're seeing in Polo with fall seasonal product. While it is still early in the season, we are seeing increased full price sell-through with higher AURs and gross margins versus last year in both men's and women's apparel.

Within Polo Fall seasonal products, some of the bestsellers are our icons and updated core items, including the varsity jacket, the American flag in polar bear sweaters, the denim trucker jacket, embellished military-inspired styles and novelty mist [ph] with color blocking. These renewed icons are especially resonating with millennials. We're also seeing success in the denim category with updated fits, washes, lighter weights and incorporating stretch into the majority of the overall offering.

In addition, we're beginning to offer limited-edition products on a regular basis to create more reasons for consumers to engage with us. These launches are integrated across product, digital media and our sales channels to create a consistent experience for the consumer.

As part of this, we launched the Stadium collection in September. The original Stadium collection was introduced to celebrate the 1992 Summer Olympics, and many pieces became iconic collector's items.

We released both replicas and modern interpretations at select Ralph Lauren and third-party stores around the world. We sold out several million dollars' worth within hours. Importantly, 78% of the people who purchased Stadium at a Ralph Lauren store in North America were new consumers to the brand.

Another example of limited-edition is our monthly Polo shirt launches, including the collegiate, Eldridge and torn jacket. Each has achieved strong full price sell-through worldwide. We will continue limited-edition series in the future.

In marketing, we are leveraging new channels and partnerships, especially in digital and social media that will help the brand reach and acquire new consumers. For example, I'm sure many of you saw our terrific show in September where Ralph and the team created a truly unique experience in its garage in Bedford.

We leverage our fashion show as a media event with a specific focus on Instagram, Facebook, Tmall, WeChat, Youku and RalphLauren.com. The show generated over a billion social media impressions, more than double our February show through an expanded list of global social live stream hosts and 24 hours of Instagram stories.

We also had many celebrity dressing moments that increased our social media impact, including Blake Lively, Shailene Woodley, Elle Fanning, Chance the Rapper, Bella Hadid and Kendall Jenner, both of whom walked our September show, Brooklyn Beckham and Romeo Beckham, Li Bingbing and Yao Chen among others, as well as the face of our new fragrance and brand ambassador, Jessica Chastain.

In addition, in the U.S. alone, we have three major magazine covers over the past couple of months featuring our collection dresses. These included Angelina Jolie on the cover of Harper's Bazaar 150th Anniversary issue, Jennifer Lawrence on the cover of Vogue for its 125 December anniversary issue, and J. Lo on the cover of Vanity Fair this month.

Our sports marketing also had a good summer. Based on an outstanding season, 24-year-old Polo golf ambassador, Justin Thomas, was voted PGA Tour Player of the Year, generating tremendous media exposure, including 520 million estimated impression at the PGA championship.

And our sponsorship of the U.S. Open Tennis Tournament featured our successful create-your-own customization initiative with on-site printers that drove significant traffic to our shops. In addition, the special edition court sneaker, worn by on-court tournament staff, was completely sold out and attracted new consumers to our brand.

Moving onto our third initiative, expanding our digital and international presence. We have significant growth potential in Asia, specifically in China, which represents our greatest geographic growth opportunity for the company. Over the past two years, we've elevated the brand in Asia and built a strong foundation for the business by improving quality of sales and overall profitability.

We are now beginning to pivot to quality growth while continuing our productivity work. As you know, we are underrepresented in Asia, with only 13% of our business in the region.

In the second quarter, constant currency revenue grew 4% in Asia and comparable store sales were up 3%. We expect this trend to continue in the balance of the year. A key driver of our Asia growth going forward will be Mainland China, where we have very low levels of penetration but strong brand awareness.

In fiscal 2017, we generated approximately $50 million of revenue on Mainland China, which represents less than 1% of our total company revenue. Based on Millward Brown data, we know that Polo's aided brand awareness in Mainland China is 83%.

This is a significantly higher figure than many of our competitors which have greater penetration than us in China. We will drive growth through both increased marketing and distribution, both online and with physical stores.

Within marketing, we have increased our digital efforts and engagement with local influencers. We are tailoring social content to the Chinese consumer and dressing many Chinese celebrities with social followings nearing 1 billion in total.

In September, we had over 12 million Chinese views of our fashion show. We're also ramping up our presence on digital platforms. And in the second quarter, we successfully launched on T-mall and JD.com, and with commerce on WeChat.

On these sites, we are creating digital shop in shop environments with a consistent brand experience, tailored product stories and an assortment that is carefully curated by our merchants.

On WeChat, we sold out the limited-edition Polo shirt within 48 hours. We are offering many omnichannel features to Chinese consumers, including free in-store tailoring and returns and an innovative mobile-based product authentication process using WeChat to recognize QR codes.

Complementing this digital presence in China, the team is successfully expanding our fleet of physical stores while also improving the profitability of the portfolio. Importantly we have a harmonized pricing architecture across channels.

We've opened 15 smaller format stores year-to-date in Mainland China and by the end of fiscal 2018 we expect to have a total of 60 stores on the Mainland. We have a much more rigorous approach to site selection, and these stores are generating strong sales productivity and returns that are accretive to our overall business. The average age of our customer in these stores is 34 years old, with a 50-50 male-female mix.

We're seeing clear demand for our higher-priced more fashion-forward merchandise and a higher accessories penetration rate in China compared to other geographies, which shows opportunity. These achievements provide strong proof points for our accelerated growth strategy in Mainland China.

Taken together with Hong Kong, Macau and Taiwan, our goal for Greater China is to reach almost $0.5 billion of revenue in five years from about $170 million in fiscal 2017, driven by both comp growth and new distribution guidance. We will continue to act with rigor in this market and are committed to elevating the brand and delivering sustainable, profitable growth.

In closing, we are moving in the right direction with a clear focus on creating value for all of our stakeholders by continuing to drive productivity and reigniting quality growth. Ralph and I have the same vision for the brand and the same goal, which is to get our great company back to winning. He and I are deeply committed to evolving how our iconic brand is experienced and expressed to win over consumers.

We will continue to build on our early progress by driving the four key initiatives I outlined. Elevating our brand by improving quality of sales and distribution; evolving our product and marketing to increase our reach and appeal with new consumers; expanding our digital and international presence; and working in new ways to drive productivity and agility.

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

Jane Nielsen

Thank you, Patrice, and good morning, everyone. Our second quarter results showed strong progress on resetting the business to a healthier base. Our quality of sales improvements are delivering higher AURs, lower discounts, expanded gross margins, higher inventory turns and significant growth in free cash flow.

Our performance this quarter was achieved despite meaningful impact from the tragic hurricanes that affected Texas, Florida and Puerto Rico. In total, we experienced about 1 point of comp pressure in North America as a result of the hurricanes.

But our results do not tell the full story, and I am incredibly proud of our teams for their swift and tireless actions to ensure that all our employees were safe, to bring relief their communities and to reopen our stores quickly following these devastating events.

Let me now turn to our results. Second quarter revenues declined 9% on both a reported basis and in constant currency, which was at the high end of our guidance. Adjusted operating margin was 13.4%, 100 basis points above last year on a reported basis and 70 points higher in constant currency.

Gross margin in the second quarter was up 300 basis points to last year and up 290 basis points in constant currency, driven by both average unit retail increases and discount rate reductions.

Consistent with previous quarters, approximately half of the increase was driven by reduced promotional activity and half by favorable geographic and channel mix. We also remain on track with our target expense savings for the year.

Operating expenses were down 5% to last year in the second quarter, driven by rightsizing our cost structure, closing unprofitable distribution and changing product development processes through SKU optimization. This productivity allows us to fund our early growth initiatives while delivering our performance commitments for the year.

Moving on to our segment performance. Starting with North America. We continue to execute our plan to come back to profitable growth. Revenue was down 16% in the second quarter, reflecting substantial progress on quality-of-sales initiatives. Despite the challenging top line, our team was able to expand adjusted operating margin 150 basis points.

In North America wholesale, we continue to take deliberate actions to ensure the health of our brand and to set us up for long-term success. Execution progress this quarter focused on distribution closures, brand exits, off-price reductions, receipt fullbacks and lower promotional level. These actions accounted for approximately 70% of the 22% decline in the U.S. wholesale revenue this quarter.

Our pullback in the off-price channel drove lower penetration within our North America wholesale business. This will continue through the remainder of the year. Consumer demand and channel dynamics remained challenging in North America wholesale and contributed to comp declines estimated in the mid- to high single digits.

However, our digital wholesale business continued to be a highlight and posted growth last year. We are addressing the weak underlying demand by evolving our product and marketing and by investing in our wholesale store environments to improve the consumer experience.

As an example, as part of our Stadium launch in September, we dropped a special capsule of knitwear items with the famous P wing logo in select Macy's and Bloomingdale's stores with customers lining up for the product overnight. As Patrice highlighted, early reads on fall product performance in Polo has shown an improving trend, which is promising.

In our directly operated e-commerce business in North America, comps were down 18% in the quarter, as expected, but gross margin expanded significantly as we continued our strategy to aggressively reduce promotional activity to both ensure price coherency across our channel and to enhance the overall brand and shopping experience for our digital flagship consumer.

Following our decision to shift to a cloud-based e-commerce platform, our digital and IT teams moved with urgency and outstanding dedication to implement the platform switch in time for the upcoming holiday season. As a result of their work, two weeks ago, we went live with our new cloud-based platform for RalphLauren.com in North America.

Now that our new infrastructure platform is in place, we will grow the digital flagship experience for our customers by adding functionality and evolving the creative to the second half of this year. As the new site develops, it will help us create a more brand-enhancing and consistent experience for consumers and better insights and functionality for us.

Moving on to Europe. Revenue increased 4% on a reported basis and was relatively flat with prior year in constant currency in the second quarter. Our teams in Europe delivered adjusted operating profit growth with margins up 350 basis points to last year and up 370 basis points in constant currency, driven by gross margin expansion.

Wholesale revenue in Europe decreased 1% in constant currency. The negative impact of brand exits and significant reductions in off-price liquidation was partially offset by a shift in shipment timing from the first quarter that benefited the second quarter. The underlying trend of the full price wholesale business is about flat to last year.

In the retail channel, constant currency comps were down 6% in Europe as we continued quality of sales work to rebalance pricing levels across channels. While this impacted comp growth negatively in the second quarter, gross margin and AUR were both up and the discount rate was down significantly.

Going forward, we will continue this focus in Europe, which will negatively impact comps. This is similar to the strategy we pursued in Asia, and they are now delivering positive comps.

Turning to Asia. Revenue was flat to last year on a reported basis and up 4% in constant currency. Adjusted operating margin was up 750 basis points and up 580 basis points in constant currency. Our team is reigniting growth in the Asia region while continuing to focus on productivity.

This was the second quarter of positive comps, which increased 3% in constant currency, comp growth was driven by increased traffic and conversion and were keyed in the context of strong quality-of-sales initiatives. We expect continued comp growth in Asia as we upgrade our distribution network and continue our marketing initiatives to amplify the brand.

Turning to our store fleet. We continued to improve our retail network through the closure of underperforming locations and opening new stores with improved adjacencies. In the second quarter, we opened 14 stand-alone stores and 34 concessions.

We closed 12 stand-alone stores and 37 concessions, ending this quarter with 469 stand-alone stores and 622 concessions on a global basis. At yearend, we expect our stand-alone count to be up slightly to last year and our concession network to have a net increase of 20 locations, primarily in Asia.

Moving on to the balance sheet. Our balance sheet is significantly stronger than last year and is a reflection of the operational progress we are making. At the end of the second quarter, inventory declined 26% to $865 million versus last year.

This inventory reduction is driven by prior year restructuring actions and more effective buying processes, including a proactive pullback in receipts. We will continue to focus on inventory productivity and matching inventory flows with demand.

We ended the second quarter with $1.7 billion in cash and short- and long-term investments, up from $1.1 billion at the end of last year's second quarter. Total debt at the end of the quarter was $590 million versus $692 million last year. We generated $362 million of free cash flow in the second quarter, up from $67 million in the prior year period.

Now I'd like to turn to guidance for the full year and the third quarter of fiscal 2018. As a reminder, this guidance excludes restructuring and other charges. We are maintaining our constant currency revenue guidance for fiscal 2018 and raising the low end of our operating margin guidance. We continue to expect revenues to decline 8% to 9% for the year, excluding the impact of foreign currency.

Brand and distribution exits in both wholesale and retail account for approximately half of the decline, with quality-of-sales initiatives and challenging traffic trends representing the remainder, partially offset by new distribution and product and marketing initiatives.

Foreign currency is now expected to have approximately 80 basis points of benefit to revenue growth in fiscal 2018 versus previous guidance of minimal impact, given the recent movements in foreign exchange rates.

Based on performance in the first half and targeted investments in the fourth quarter, we now expect operating margin for fiscal 2018 to be 9.5% to 10.5% in constant currency, up from our previous guidance of 9% to 10.5%.

Foreign currency is now expected to have minimal impact on operating margin for fiscal 2018 versus previous guidance of 40 to 50 basis points of pressure. For the third quarter, we expect revenues to be down 6% to 8% in constant currency. Foreign currency is expected to have approximately 160 to 170 basis points of benefit to revenue growth.

Operating margin for the third quarter is expected to be down 50 to 70 basis points in constant currency. While we expect gross margin to continue to expand into the third quarter, SG&A rate will create some pressure as we start the lap last year's expense reductions and invest in growth initiatives around marketing, product and stores. Foreign currency is estimated to benefit operating margin by approximately 10 to 20 basis points in the third quarter.

Looking towards the fourth quarter, revenue will continue to be pressured for two reasons: First, we expect to shift in wholesale shipments that benefit Q3 and pressure Q4; second, a large portion of the March quarter is driven by clearance sales post-holiday.

To support our quality-of-sales initiatives, we have planned for less clearance inventory, which will limit the clearance sales volumes this year year-over-year. This will offset some of the benefits from the Easter shift in Q4.

Also for the fourth quarter, we expect SG&A expenses to grow versus last year as we accelerate our marketing initiatives and grow our marketing investments double-digits in the second half. We believe this is the right decision for the long term as we balance near-term margin pressure with setting the company up to return to growth.

In terms of restructuring charges, we continue to expect approximately $200 million for the year. In the second quarter, we recognized $30 million of restructuring and other charges. We expect our effective tax rate for fiscal 2018 to be approximately 25% and for the third quarter to be approximately 23%.

Let me finish by reviewing our priorities for cash and capital structure. In times of dynamic change, a strong balance sheet is a strategic asset. We are committed to maintaining our strong balance sheet and investment-grade credit rating to provide strategic flexibility, liquidity and access to the capital markets. Within that context, our first priority for cash is to invest in our business and lay the foundation for future profitable growth.

Our second priority is to return capital to shareholders with a commitment to maintaining our dividend. Excess cash flow beyond current and future investment and dividend needs will be considered for future potential share repurchases. We are not planning share repurchases for fiscal 2018.

We make this determination based on the cash needs of our business, sector dynamics and with consideration for the uncertain environment around U.S. tax reform. Capital expenditures for fiscal 2018 are estimated at $225 million, down from the previous guidance of $300 million.

We want to shift capital investments behind consumer-facing initiatives that have a demonstrated proof-of-concept and healthy rate of return. In closing, we continue to make strong progress on our operational efficiencies.

We are elevating our brand and have strengthened our balance sheet and improved our cash flow so that we have the resources to fuel future profitable growth. This, combined with Ralph's enduring vision and the commitment of our teams around the world, puts us in a strong position to drive value for all our stakeholders.

With that, I'd like to open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Matthew Boss with JPMorgan. You may ask your question.

Matthew Boss

Thanks and nice early progress. So Patrice, on the four initiatives you outlined, and as we think about that time line for change here, what inning would you say each of the 4 initiatives fall into that?

Patrice Louvet

Good morning Matt. So let's take them one by one. First, elevating the brand through quality of sales and distribution. I think as you've heard, we've made a very good progress on improving the quality of our distribution, shutting down stores, exiting brands like denim and supply, pulling back in wholesale both in terms of points of distribution.

You know we're down 20% to 25% points of distribution in department stores. And also, as Jane just mentioned, significantly reducing shipments to the off-price channel's. So if you use a baseball analogy, which is very topical, this morning, I'd say probably seventh inning when it comes to quality of distribution.

On the progress for quality of sales, I'd say, on this one, we're making good progress. You've seen us reduce the discounts and that's very visible through the 5% increase in AUR this past quarter. I struggle to provide an inning on this one because this is a game that never stops, right. We want to continuously reduce our level of discounting and improve our quality of sales. So that's on the first one.

On the second one, our product and marketing. I'd say early days on products, so probably the first inning. We're beginning to see the benefits of the work that started many months ago, starting to appear in-store now.

You heard some of the examples that we quoted. I think what we're seeing is a more disciplined assortment. We're seeing fewer SKUs, we're seeing the beginning of our limited additions.

So, again, I think probably first inning there. I'd also say probably first inning on marketing. You've seen the support behind the show. We're getting more influencers to come into the brand, but a lot of our programs actually are going to start to kick in more in Q3, Q4 and beyond. So I'd say very, very early days on this one as well, with a lot more to come.

On the third one, which is expanding our digital and our international presence, likewise, I think we're early earnings on digital. We very clear, that's going to be a good vector of growth for us in the future both in North America and globally.

I think as we talked altogether a few weeks back, we really look at digital through three lenses, our own site, wholesale.com and pure players, our own sites or RalphLauren.com, Jane talk about the site that we just re-launched our platform and so now, it's about creating an amazing experience for consumers. That's going to happen over the next few months, so I'd say probably first inning on that one as well.

Wholesale.com is something we're really keen to win in, so not just play, but play to win, which means growing share. We have really good partnerships across the various regions on that.

Couple encouraging data points for this past quarter, we actually grew share in wholesale.com in Europe in Q2, and we grew share in wholesale.com in the U.S. on men's apparel and women's apparel. So we're encouraged by that, obviously a lot more to be done but a key vector of growth for us in the future as well.

And then finally, on pure players, it's early days as well because if you look obviously, we have a very good partnership with Zalando in Europe and very happy with how that's playing out. We just signed up with Tmall, JD.com and WeChat, so it's been weeks so a lot more to be done on that front. But excited about what we can do and where we can go.

On international, and what's exciting on international is there's no lack of opportunity. When you look at how our business splits today international and North America. We have significant growth potential in our international.

You've heard us call out China and Mainland China as our number one priority internationally. The team on the ground has done a lot of work to get the fundamentals right over the past couple of years, so now it's really about accelerating our growth.

So I'd say early innings in terms of the accelerating the growth. We're opening stores, we're expanding our digital footprint. We're being more active in terms of marketing with the Chinese consumer.

And then, finally, our fourth initiative, which is working in new ways to drive productivity and agility. So as you've seen I think through the numbers, the team has done I think a very good job on productivity. And this is one where I can't innings either because this game never stops, right, productivity is going to be something we're going to do nonstop in addition to reigniting growth.

We know we have areas of cost that we can do a better job on and everyone's really focused on being as effective and efficient as we can be across the entire business. And then on agility, which is critical to winning today's context, I'd say, early innings as well.

We're putting a lot of emphasis culturally on empowerment and enablement and driving a sense of urgency, putting decisions on the clock so that we just move with pace because that's what the consumers and the retailer landscape demands if we're going to get back to winning.

So, overall, as we kind of summarize the game, some phases are kind of midway through the game towards the later end of the game, assuming the game ends in nine innings. And others were at the very beginning, which I think is quite exciting for what's possible moving forward for us.

Jane Nielsen

Next question, please.

Operator

The next question comes from Brian Tunick with RBC. You may ask your question.

Brian Tunick

Thanks. Good morning, guys.

Jane Nielsen

Good morning, Brian.

Brian Tunick

Good morning, Jane. Two question, maybe Patrice can talk about how he envisions maybe the North America channel mix, particularly maybe in wholesale. What do you think the right mix of the department stores versus off-price or digital wholesale should look like over the next couple of years?

And then as we think about the revenue growth maybe in the next year or two , should we be thinking about that stabilization next year, is there a chance to grow once we get beyond sort of this pullback in distribution and quality of sales? Thanks very much.

Patrice Louvet

Yeah, good morning, Brian. So let me take the first one on the channel dynamics. So we really look at the whole ecosystem ranging go-to-market ecosystem, ranging from flagships all the way to off-price. And all the channels have a role to play for us in the future, obviously, including wholesale.

Specifically, I think as we look at wholesale, the areas we're focused on there is getting the foundations healthy, right. As I mentioned earlier, the challenging our distribution, make sure we have the right product that we show up in the right way in department stores and then we have the right marketing that goes with it.

But we do expect abutment stores continue to play an important role for us moving forward. I want to double-click on the wholesale.com part because that's an important growth factor for us in the future, as I mentioned earlier.

Off-price also has a role to play for us moving forward, but we actually want to deemphasize the role of off-price in our total business. We believe you've kind of a bit of our ahead of our in this channel, and so what it has a role to play and our consumers there anyone to appeal to. We are pulling back on off-price and we'll continue to do that for the rest of the overtime.

Jane Nielsen

Yeah, Brian I would say that definitely, as we think about the future, you're going to see, as you did this quarter, less penetration in our total wholesale mix from off-price. And obviously, as Patrice called out, digital has been a highlight in wholesale.

So I'd expect that to increase in penetration. And certainly, we have an opportunity once we right-sized wholesale to get back to share growth. So those are sort of how we think about the total ecosystem.

As I think about revenue growth following quality-of-sales initiatives, we absolutely believe that after we get through our rightsizing and quality-of-sales initiatives, quality of sales is going to be an ongoing scene I think it will be about balance and - but following the reset that we would get back to growth and obviously.

As Patrice said, in June, we're going to come back and play out the initiatives in more detail and give you a better road map for the timing of our financial metrics and our come back to growth. Next question please.

Operator

The next question comes from Kate McShane with Citi Research. You may ask your question.

Kate McShane

Good morning. Thanks for taking my question. I wondered with regards to China, sounds like you're seeing some nice green chutes. Wondered what makes this launch into China the right strategy, what have you learned about the region that you think you understand more than you did before when you pursue this market? And is there product segmentation with the region, is there more of an emphasis on one particular segment like Polo?

Patrice Louvet

So we have relatively long history in China as a company actually. Right, so if I kind of rewind the tapes a little bit, we've come through three phases. The early phase was through licensees, which ended up building distribution that I think in hindsight wasn't the right distribution for us.

So when the company took over the license in 2010, a lot of our distribution was shut down and then there was an emphasis put on luxury with the expectation that establishing the brand at the high end would be the right way to enter the market, which I think strategically was spot on, because that is the type of equity we want to build for the brand in all new markets, particularly in a market like China. But obviously, we ended up being challenged in the overall economic model of being able to support a business that was exclusively focused on luxury.

So that did not play out I think as the way it was originally intended. So we now have the benefit of all those learning's for this third phase where we are going to focus really on establishing Polo as the core of the business. We will obviously drive our luxury business as well to drive overall image, but the heart of the business for us in China will be Polo.

We're also very clear in terms of how we want to show up relative to the ecosystem, the go-to-market ecosystem I was referring to earlier, with an almost digital first mindset, so I think you've heard us talk about how we're now on WeChat, JD.com and T-mall and then also opening different store format that we have historically there. So slightly smaller stores, more focused on Polo and the early results that we're seeing are quite encouraging.

We're also tailoring our marketing to the Chinese consumers. So I think you heard us share some examples of celebrities that we're working with in China, and we actually have a long list of terrific partners in that market.

That's really resonating with the Chinese consumer and then likewise, on product, we're looking at this through the lens of the local consumer, what is the local consumer excited about, what they're looking for and how do we ensure we serve them in a very unique way.

We just spent couple of weeks in Asia actually, Jane and I, including a lot of timing in China. And what was exciting to hear from our teams and the stores is the demand there is for our higher priced products on Polo, with consumers really looking for more elevated products and accessories. So we're actually feeling pretty good about where the demand is for our brands there.

And you heard me talk earlier, and I'll stop here and turn it over to Jane, but about the average age of our consumer in China which also gives us a lot of hope for the future, our average age is 34 years old, right, which is really in the sweet spot of where we want to be, good 50-50 male-female mix.

So I think we're well up for success there. But as we've also called out in the remarks, we will proceed cautiously and we'll be very rigorous in the way we approach our investments moving forward in China.

Jane Nielsen

Yeah, Kate, I can't say enough about how important the resetting of the base and the elevation of the brand has been in building our confidence for China in the future. As you can see in our segment reporting, just three years ago, we were not profitable in the Asia region and specifically, in China. And the team has done tremendous work as you've seen notably in this quarter in Asia to really expand operating margin.

So that now, China and Asia growth is accretive over all Ralph Lauren growth. And so from a profitability standpoint and a healthy base standpoint, we're on solid footing. The brand is in great shape. We've cleaned up our distribution, which is an effort that we're continuing, and we are opening doors in a way that makes sense.

We've got flagships that build the brand. We've got Polo doors that are smaller footprint that have excellent four-wall profitability that we're building out. And as you can see, we're building out a system of concessions that get us reach with our Chinese consumers and also provide a very healthy ROI.

The gross margin in Asia is the highest that we have in the company. And so building and scaling in the Asia market is an opportunity to continue to expand operating margin, but to really be a significant factor of growth for us. The time is certainly right, and we have the right team and we are in the right position to do so now.

Next question please.

Operator

The next question comes from John Kernan with Cowen and Company. You may ask your question.

John Kernan

Good morning, everyone. Thanks for taking my question.

Jane Nielsen

Sure.

John Kernan

Patrice, you obviously, have a lot of experience globally and Ralph Lauren's a global brand, just wondering, how you thinking about Europe. We've seen a transfer a lot of global apparel brands improve in Europe recently. I'm wondering when do you think Europe can become a growth market for Ralph Lauren again? Thank you.

Patrice Louvet

Good morning, John. Thanks for your question. Well, yeah, I mean, internationally, we have both distribution growth opportunities as well as comp growth opportunities. So clearly, exciting potential for us moving forward. We just talked about Asia has been paying this penetrated market, and obviously, our primary growth driver there will be Mainland China.

Looking at Europe, right now we're implementing an enhanced focus on quality of sales and distribution where I think, again, we got ahead of our season on distribution in some parts of Europe and we have to wheel that back. We're also working on getting the right level of discounting in that market.

So that's going to create some pressure on the number of transactions and comps in the short-term. However, in the long-term, we - to your point, I think, have significant growth opportunities both from a distribution and comp growth standpoint.

We actually - so Jane and I have been traveling quite a bit we were in Europe 10 days ago, U.K., Germany, France where we spent a lot of time in the market understanding where we are and what the opportunities are.

One interesting data point is across Europe, we only have I think the precise number is 19 full price stores across the entire region, which is an indication of the upside potential that we have there look at our store footprint. We also have very promising progress on digital, I mentioned Zalando earlier and many other partners that we're working with that also indicated the significant upside there.

Then finally, as we toured a number of our wholesale partners, we know we can do a better job with our wholesale partners in Europe. So I think across all these sectors, once we've completed the work quality of sales, which is critical, we have significant growth opportunity across the region.

For example, we don't have a store, dedicated store in Spain, which is relatively sizable market. So we will get the balance right between Asia and Europe, but we're certainly looking at both regions that's growth vectors for us in the future.

Jane Nielsen

Next question please.

Operator

The next question comes from Omar Saad with Evercore ISI. You may ask your question.

Omar Saad

Thanks, good morning. Thanks for all the information. Nice quarter.

Jane Nielsen

Thank you, Omar.

Omar Saad

I wanted to ask about products. Patrice, you mentioned fashion forward product having a feel, I think that comment was probably more specific to Asia and China. But I wanted to kind of ask you more broadly how do you think about managing the different trends going on in the marketplace as you evolve product line?

Retro trends, fashion forward trends, the traditional kind of core heritage around the brand, maybe help us understand how you're thinking about evolving the product, where you it needs to go in concert with their efforts with Ralph's and the creative team? Thanks.

Patrice Louvet

Sure. Good morning, Omar. So we're looking at multiple vectors to evolve our product offering. The first one, which is going to sound pretty basic was actually critical. It's really driving a more disciplined assortment.

Having more discipline and understanding the role of this that we're introducing, eliminating the unproductive styles, better balancing offering across categories across price points, to have good, better, best propositions across the categories that matter.

The second point is there's a critical timelessness to this brand, and we have phenomenal icons and I think we've all come to the conclusion that we can do more with our Icons and put greater emphasis on our Icons and that as part of what - the early progress we are seeing this Fall season is actually driven by what's happening with our Icons.

The third area is the renewal of our - and again, this is a very important part of our business. On this area, we are looking at fits, we're looking at styles, we're looking at materials, we're looking at colors.

And you can imagine, I've been very impressed by the design team that we have in-house and have had a number of conversations with them, they're very in touch with what's going on in the market, both here and around the world, and really making sure that our propositions moving forward.

Take that into account, while also staying true to who we are, right. So we're not going to be jerked around by all the fashion trends out there in the market and lose kind of the fundamental what this brand stands for and the timelessness of it.

We will be in touch with the trends while staying true to who we are, and obviously, making sure that what we offer is exciting and relevant for the consumers that we want to serve.

You heard me talk about the limited editions and we've been excited about the reactions, the stadium and actually pretty need to see the long lines, the night before outside stores where people waiting to buy it. So we're going to continue to drive that, we're going look at partnerships moving forward as well, which I think will bring even more interest and excitement to the brand.

And then the final point, which is less about trends and style, it's more about strategic choices. There are three categories where we should be playing more actively, where we are underdeveloped and where I believe we have a basis to win. So that will also be another vector of growth as we look at overall product offering.

Evren Kopelman

Next question please?

Operator

The next question comes from Heather Balsky with Bank of America. You may ask your question.

Heather Balsky

Hi. Thank you for taking my call. Just actually a follow-up on Omar's question. Can you talk about how you're thinking about product in terms of your different channels distribution, off-price versus full-line versus outlet, and how you're going to differentiate between those channels? Thanks.

Patrice Louvet

Good morning, Heather. That's also a great question. And the headline thought here is we know we need to do a better job differentiating our propositions across channels. Things have gotten blurred and I don't think it's helping the consumer kind of navigate our brand and we want to get really clear on the role of each channel and what the value proposition is in each channel for our brand and drive greater differentiation.

And there are many different ways to drive differentiation, whether its different styles, different categories, how the products are presented and so on, and so forth. But clearly an area of focus for us moving forward, we need to and we will drive a stronger differentiation across the channels that we operate in.

Jane Nielsen

Heather, I do think that the inventory discipline in the - and the buying process discipline that we put in place will enable us to differentiate product assortments, but also maintain of the SKU efficiency and inventory efficiencies that we've been able to drive over the last year. Next question, please.

Operator

The next question comes from Ike Boruchow with Wells Fargo. You may ask your question.

Nancy Hilliker

Hi, everyone. This is Nancy Hilliker on for Ike. Great job.

Jane Nielsen

Thank you.

Nancy Hilliker

Our question - hi. Our question is obviously, you had an amazing gross margin in the quarter. Can you just talk a little bit about more about puts and takes in the back half? And given the shift, what we should expect, any into the quarters for gross margin and also actually for SG&A as well?

Jane Nielsen

So, Nancy, as we look at gross margin in the second quarter, we feel that we'll have gross margin expansion in the second half of at least 150 basis points. So as we move forward and we're seeing our gross margin trends, we've been confident in moving up that guidance on gross margin.

What you'll see in the second half in terms of SG&A is a real shift in the fourth quarter where we are going to be investing in new stores, but most notably, marketing. Jonathan Bottomley, our new Head of Marketing, has been on board. And we have a Polo campaign coming out and some real amplification in marketing.

In fact, if you look at our marketing spend, as you can see in the Q, that's been down in the first half, and it's going to be up significantly in the second half, around double-digit in the third quarter, but up significantly in the fourth quarter.

As we really believe marketing and telling our story is a great opportunity for us and a great opportunity to really get back to telling our story to position us for growth. Next question, please.

Operator

The next question comes from Rick Patel with Needham & Company. You may ask your question.

Rick Patel

Thank you. Good morning, everyone, and congrats on the progress.

Jane Nielsen

Thank you.

Rick Patel

A follow-up question on expenses. So you talked about investments in marketing, product and stores. Can you dig a little deeper and talk about which geographies will receive the most investment? I'm curious about how you're weighing investment in North America, which is your most challenging market right now, versus investing in growth areas like Asia? And if I can squeeze in a quick housekeeping one, any updates to report on tourism given the changes in FX? Thank you.

Jane Nielsen

Of course. So on the expense side, and as we think about investments by market, obviously, with our growth focus in Asia, that market will need more marketing. The marketing we've put is very effective, as Patrice noted. Our top-of-mind awareness in China is very high and really is another thing that gives us confidence for growth. So you'll see marketing go up in China.

Also, as we called out in our store profile, most of the new doors that are being opened are being opened in Asia, and most of the concessions that we're opening this year will be opened in Asia. So capital will be shifting to the China market as we build out. You'll also see capital going into Europe as we realize the opportunity for some greater store penetration in Europe, as well as some marketing.

In North America, what the focus in capital will be is more refurbishment, how do we refresh our store environment. We're fully, although there'll be some close store here opened ones there, but it really our opportunity is to show up really well in North America and give some of our stores the love that they deserve in terms of refurbishment.

You'll see marketing also in the U.S. I think we have to get back to telling our story in the U. S. Notably, on our digital site, as we - now that the - we're switched on our platform, you're going to see, especially in the third - later third and fourth quarter, more digital assets show up in marketing on our digital sites, but also telling our story in the market but in a much more digitally savvy social media way.

Patrice Louvet

There is a question, actually the latest data in North America for our U.S. retail stores, basically, sales are down low single digits. And in our European stores, sales were down from tourists mid-single digits. So, better in North America than we've seen in the long, long time actually this past quarter. In Europe, it's still pretty stable in mid down mid-singles.

Jane Nielsen

Trend continues in this quarter was up nicely, so it's encouraging.

Patrice Louvet

Yes.

Jane Nielsen

Next question, please.

Operator

The next question comes from Andrew Roberts on behalf of Bob Drbul with Guggenheim. You may ask your question.

Andrew Roberts

Hi. Good morning. So I guess, you guys launched T-mall and JD.com this quarter. I was wondering if you guys could give us any update on your thoughts of launching on Amazon in North America and elsewhere?

Patrice Louvet

Good morning, Andrew. So let me rewind a little bit on your question just to give the bigger picture on how we're seeing e-commerce, and I will answer your question. As I mentioned earlier, so e-commerce is very clearly critical for our future growth. This is going to be the way for us to reach the consumers, where they are, in the most effective way to drive - to build the brand and to drive the business.

I talked about the three buckets that we have, our own site, wholesales.com and pure players. When we look at pure players, the model we really like is actually the T-mall model where we manage our own shop in the - on their marketplace and we have a digital storefront for the brand. That's the model we're excited about.

So we continue to evaluate online partners including the one you just quoted. So we want to make sure we win in this channel. But we're also looking to do it in a way that we can build a brand and that we can show up the way the brand is intended to show up. So nothing new to report on Amazon in particular.

Evren Kopelman

We will take one last question.

Operator

The last question comes from Laurent Vasilescu with Macquarie. You may ask your question.

Laurent Vasilescu

Good morning and thanks for taking my question. Jane, I want to ask about the North American wholesale business I think it was mentioned it was down 22% and 70% of that was driven by active measures. How should we think about those metrics for the third and fourth quarter and potentially beyond?

Jane Nielsen

So we're comfortable with our guidance in terms of our total wholesale outlook, and specifically for North America, as we said. We expect that we'll see wholesale end the year in about the same range that you saw in Q2, so we're down about 22% Q2. I expect the full year will look about similar as our cleanup continues through the third and fourth quarter.

We are encouraged by what we see as progress on execution. Our underlying comp rate, as we view it, is in the mid to high single digits, and we know what we have product and marketing that we need to focus on as well as the store refreshments to change that trend as we move into FY 2019.

So about similar to the year to what you saw in this quarter, but I think that the pretty stable underlying comp trend that we are looking to address as we look at all the vectors product marketing and stores.

Patrice Louvet

Good. So we're going to close here. Thank you all for joining our call this morning. We look forward to talking to you next quarter. Have a great day. Take care.

Operator

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