Ralph Lauren Corporation (RL) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third Quarter Fiscal 2019 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 our host, Ms. Corinna Van der Ghinst. Please go ahead.

Good morning and thank you for joining Ralph Lauren third quarter fiscal 2019 conference call. With me today are Patrice Louvet, the Company's President and Chief Executive Officer; and Jane Nielsen, Chief Financial Officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to one per caller. During today's call, we will be making some forward-looking statements within the meaning of the Federal Securities Laws, including our financial outlook. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties. Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release and to our SEC filings that can be found on our Investor Relations website. And now I will turn the call over to Patrice.

Thank you, Cory. Good morning everyone and thank you for joining today's call. We're pleased to report better than expected third quarter results during the important holiday season, as we continue to execute on our strategic priorities. As we discussed at our Investor Day last spring, our teams are focused on delivering long-term sustainable growth and value creation. In the third quarter, we outperformed our expectations on both the top and the bottom line with double-digit EPS growth. Our results were driven by double-digit revenue growth in Asia and Europe and strong sequential progress in North America with better than expected AUR growth globally. During the third quarter, we continue to drive our execution and performance against the five strategic priorities that we laid out as part of our five-year Next Great Chapter plan. These include; first, win over a new generation of consumers; second, energize core products and accelerate underdeveloped categories; third, drive targeted expansions in our regions and channels; fourth, lead with digital across all activities; and fifth, operate with discipline to show growth. As we look to close up the fiscal year, we remain on track to achieve our plans for the full year. Let me now highlight some key progress points starting with new generation of consumers. In the third quarter, we increased marketing investments by 18% to last year. We continue to shift our spend to channels that matter most to consumers today, namely digital and social. Our key marketing initiatives this quarter centered around our limited edition collections and holiday camping. On our last call, we announced an exciting new collaboration with UK-based streetwear brand Palace. Launched in November, the capsule collection consists of menswear pieces inspired by iconic Polo styles that the Palace creators Lev and Gareth have worn throughout their lives. The products sold exclusively on our Polo mobile app in the U.S, our digital flagship in Europe and across Palace's retail network. We approach the collaboration as an opportunity to reach new and younger consumers with a fresh take on product that still remain true to the DNA of the Polo brand. The collaboration generated over 2 billion impressions globally exceeding our expectations. The Palace collection sold out in under an hour online. We were encouraged that roughly 75% of the people who purchased it globally were completely new to Ralph Lauren. The collaboration was particularly effective in engaging the Millennial and Gen Z consumers with those purchasing the collection, 10 years younger on average than the typical Polo men consumer. We are now little more than a year into our approach to drive energy and excitement around our brand with limited edition releases, and we continue to be encouraged by the traction these drops are gaining. In December, we launched our Winter Stadium collection which was available on our Polo mobile app in the U.S. and in key flagship stores globally. We also partnered with influential specialty retailers including Opening Ceremony and Clothing, Hypebeast's e-commerce site HBX and Selfridge's. Winter Stadium generated over 1 billion impressions globally and achieved nearly 100% sell through on our Polo app in the first day. In addition to attracting new consumers to our franchise, we're excited to see new fan base developing for our drops. Over half of the Winter Stadium shoppers were repeat customers who had already purchased from at least one of our limited editions previously. We also continued our 50th anniversary celebrations in the third quarter with our holiday gifts camping RL50gifts which we amplified through social media influencers and celebrities like Emmy Rossum, Rachel Zoe, Cameron Dallas and Olivia Palermo. About one third of the consumers who shop product highlighted in our holiday camping were new to Ralph Lauren and a meaningful portion of these new consumers were under the age of 35. In addition to our holiday gifting campaign, we continue to leverage the use of celebrities and influencers across different areas of pop culture and sports. In the third quarter, Nicole Kidman, Hugh Jackman, Alex Rodriguez, Gigi Hadid and the Chance the Rapper were among the stars featured in our brand. We kicked off reward season dressing with actors Chris Pine, Lady Gaga and Lupita Nyong'o. You've also maybe have seen Ralph's incredible custom designs for the wedding of actress Priyanka Chopra to music superstar Nick Jonas in India in December. It was the first wedding dress that Ralph has designed for a bride outside of his own family. The wedding was a global event that transcended cultures and dominated social media platforms. Moving onto our second key initiative, energize core products and accelerate underdeveloped categories. Our strong top line performance this quarter was driven by our core products as Ralph and the design teams continue to drive excitement in the marketplace. This is consistent with our year-to-date trends and expectations that iconic and updated core styles will be a more meaningful near-term driver while we continue to develop our high potential underpenetrated categories for the longer-term. Top performing core products in the third quarter included Oxford shirts, Half-Zip sweaters, Women's Cashmere sweaters and Mesh Polo. In addition, we continue to build upon our customization program this quarter with monogramming services and expanded customization offerings in the European market. Customization continues to represent an important long-term opportunity for direct-to-consumer channels, driving AURs at a higher than our overall digital commerce AURs, higher gross margins and no returns. Moving to our underdeveloped categories that have significant growth potential across our brands these include denim, outerwear, wear to work, footwear and accessories. Our sell of trends in denim and outerwear, which are the further developed of the five categories accelerated in the quarter with an improved merchandising and distribution focus, indicating a positive consumer response to our new initiatives. Outerwear performance accelerated this winter as we continue to focus on our core nylon and down jackets while also injecting the category with new fabrications, innovation like our RL Heat launch this month and focus on end users like active, weekend and weekday dressing. In fragrance, we launch a new camping in January around the Ralph Lauren Romance fragrance for women bring a fresh take a new packaging to this iconic scent just in time for Valentine’s Day. The spring campaign featured supermodel Taylor Hill as the new face of the fragrance, along with her boyfriend actor Michael Stephen Shank. Moving on to our third key initiative, drive targeted expansion in our regions and channels. We are focused on building a compelling and competitive Ralph Lauren ecosystem in key cities globally. This includes digital distribution as well as new and renovated stores to drive growth. During the third quarter, we opened 39 new stores and concessions globally and closed 12 locations. This included 24 openings in Asia with nine in China, our fastest-growing market. Our China openings this quarter were focused on our key city clusters of Shanghai, Shenzhen, Beijing, and Chengdu. We continue to drive strong growth in China in the third quarter. Greater China revenue was up 19% to last year in constant currency including nearly 40% growth in mainland China, driven by comp growth and new stores. We are taking a disciplined approach to our new store openings in China and closely monitoring macro trends. However, we are pleased with the performance of our new doors thus far as they are delivering above-average productivity and profitability. Our digital business in China continues to expand following the launch of our directly operated digital commerce site last September. We also continue to see strong momentum in our distribution with pure play partners including Tmall, JD.com, and WeChat during the quarter with very positive brand exposure over single-stay. In Europe, we opened two new full-price stores and two net new factory stores in the third quarter. The new full-price stores in Leeds and Marseille are part of our broader ecosystem strategy in those markets. Similar to China, we are actively monitoring the macro environment in Europe including the UK that will continue to take a cautious approach the store rollout in the region as we test and learn from each new opening. However, we are still significantly underpenetrated at brick-and-mortar retail with only 23 full-price stores across Europe, and we continue to see a meaningful, long-term opportunity to build out our ecosystem strategy in the region. Our expansion plans include two more openings in the fourth quarter of this fiscal year. Moving on to our fourth key initiative, lead with digital. Our global digital business including our directly operated sites, departmentstore.com, pure players and social commerce was up 20% to last year in the third quarter in constant currency with strong performance across all regions. Our directly operated North America digital flagship continued on the positive growth trajectory as planned and delivered a 21% comp increase as we lap last year's transition to the cloud-based platform. Our focus on strong brand building and enhanced consumer experience and higher quality of sales, all contributed to improve performance as we continue to reposition the site as our most important flagship. Our directly operated European digital commerce sites also showed strong improvement following the move to our new platform earlier this fiscal year. This business returned to growth in the third quarter as planned with a 13% comp. Enhancements to our European sites this quarter included the launch of shift from stores across Europe, enabling us to leverage our in-store inventories to service demand, customization services and our first fully localized Spanish digital commerce site. Looking ahead, we expect to see more normalized positive growth in this channel as a result of improved brand building, consumer experience and functionality. We also continue to drive strong performance on pure play accounts across all regions of the third quarter. In the U.S. we expanded our presence on Stitch Fix with women's Polo and men’s footwear and added 15 new digital pure play partners in Asia and Europe. Finally, let me touch on our fifth key initiative operate with discipline to fuel growth. In the third quarter, we continue to challenge every cost and improve our efficiencies. This enabled us to continue ramping up our marketing investment and expand our global retail presence while increasing operating profit and expanding operating margin above our guidance. Adjusted operating expenses excluding marketing were slightly below top line growth in the quarter. Jane will provide more details on how were continuing to drive productivity. So in closing, while we are mindful of ongoing market volatility, we are energized by our continued progress this quarter on our Next Great Chapter plan. Ralph and I along with our talented and committed teams around the world remain focused on things through to the timeless vision of our brand while evolving to meet the needs of consumers globally. While we are proud of the progress we're making, we will continue to relentlessly focus on excellent execution as we deliver on the commitments that we have made across every aspect of our business. With that, I'll turn it over to Jane and I'll join her at the end to answer your questions.

Thank you, Patrice and morning everyone. Our third quarter results demonstrate our teams continued disciplined execution of our strategy we delivered on key metrics including 9% AUR growth in retail, double-digit growth in digital commerce and growth and operating margin expansion, all while delivering both revenue and EPS growth. Importantly, we achieved these results in the context of navigating a more uncertain macro and geopolitical environments. Third quarter revenue increased 5% on a reported basis and 6% in constant currently. Every region delivered top line growth led by strong 10% sales growth in both Europe and Asia on a reported basis and strong holiday season in North America. Adjusted gross margin expanded 90 point in the third quarter and 60 basis points in constant currency benefiting from reduced promotional activity and favorable product, geographic, and channel mix. Adjusted operating margin in the third quarter was 13.9%, up 70 basis points from last year on a reported basis and 50 points in constant currency. Adjusted operating profit dollars grew 11% to last year. SG&A expense excluding marketing slightly leverage our strong top line growth. This quarter we made important proactive investment in our brand and our business. We increase our marketing spend by 18% to 4.2% of sale up from 3.8% last year. This marketing investment is overlapping the strong investments made in the second half of FY '18. Incremental investment centered on our holiday marketing campaign and limited edition collection. In our digital business, we also made investments to strengthen our digital platform and capabilities. We continue to make progress toward our long-term objective of increasing marketing to about 5% of sale while also focusing on productivity to achieve our operating margin expansion goal. Our teams are intensely focused on driving operating efficiencies across our business. For example in the third quarter our teams across the Company's work to our warehouse and office real estate footprint in North America, we completed the sale of our Beachwood distribution facility in North Carolina, reducing our footprint to two buildings from four buildings two years ago. This is an important step in our shared inventory strategy which went live this week, enabling us to reduce our overall inventory, maximize full-price selling, improve the CPU cost of our DTC fulfillment and lower overhead cost. We are also significantly reducing our New York office footprint which includes our corporate office, and design studios. Over the next year, we will consolidate our footprint to four primary locations in the New York try state area, down from over a dozen locations two years ago. Following the move and 2020, we will reduce our square footage, cost per square foot and most importantly drive greater collaboration across our teams. Moving to our segment performance, starting with North America, revenue was up 3% in the third quarter and adjusted operating margin was 22.6% representing a 20 basis point increase to last year's. In the retail channel in North America, we posted 4% comp growth in constant currency as brick-and-mortar comps were flat and our directly operated digital commerce business was up 21% as we anniversary the change of our own digital commerce sites last year's and saw strong double digit AUR increases during this holiday quarter. We are also encouraged by strong performance across our total digital ecosystem including wholesale.com and pure play with double-digit growth in the quarter. We saw continued sequential improvement in our North America brick-and-mortar comp this year, driven by 7% AUR growth in the third quarter, which more than offset traffic headwinds. Moving onto North America wholesale, third quarter was down 3% due to planned reductions in off-price sales. These reductions will continue through Q4. For the full year, we still expect to reduce our off-price penetration within our broader wholesale channel as we strategically reposition off-price back towards its original purpose as an excess inventory clearance vehicle. While we expect volatility in our full-price wholesale business on the quarter-by-quarter basis including the fourth quarter, our underlying trend is improving. For fall 18, our Q3 sell out performance at wholesale improved on both of sequential basis and relative to the prior year. At the end of the quarter, based on our estimates, we believe our inventory at our full-price wholesale partners well-positioned and below prior-year levels. For full year FY '19, we continue to expect underlying revenue to be down low to mid single digits versus the mid to high single-digit declines last year. Our digital wholesale business continued to grow in the third quarter, delivering high single-digit growth to last year with continued share gains in core categories. Moving on to Europe third quarter revenue was up 10% on a reported basis and 13% in constant currency. Adjusted operating margin expanded 100 basis points but were down 40 points in constant currency. SG&A leverage was more than offset by gross margin contraction to do the faster growth in wholesale shipment driven by timing shift from Q4 into Q3. In the retail channel in Europe, comps were up 4% in constant currency, driven by 13% growth in digital commerce and a 3% increase in brick-and-mortar stores, compared to 4% comp decline in Q2. The sequential improvement in our brick-and-mortar trend was primarily driven by our investment to get back into inventory positions notably in outlet and improve the breadth and depth of our product assortment. Comps in our directly operated European digital commerce business also continued to improve following our platform upgrade at the end of Q1. We saw strong quality of sales improvements, double-digit growth in AUR and a reduction in discount rate and are encouraged by the consumer response to our new platform. Across retail, our ongoing effort to improve quality of sales continued you AUR up 11% in the third quarter in Europe retail. Wholesale revenue in Europe was up 20% in constant currency in the third quarter. Our third quarter growth benefited pull forward in the shipment timing which will negatively impacts the fourth quarter. Excluding timing shift, we now expect our reported growth to be mid-single digit range for full year fiscal 19, up from low to mid single-digit previously as we see the benefit from both distribution expansion and comp growth. Turning to Asia, revenue was up 10% on a reported basis and 11% in constant currency in the third quarter. We saw strong performance across every market with positive growth across Japan, Korea, China and Australia. Growth was lead by Mainland China with constant currency revenue growth of almost 40%. Our product and marketing initiatives are resonating well in this region and we continued to increase our digital efforts engagement with local influencers and celebrities. Comps in Asia increased 4% in constant currency, driven by almost 10% AUR growth. 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. In the third quarter, adjusted operating profit grew 7% to last year, adjusted operating margin was down 30 basis points and down 10 basis points in constant currency, as gross margin improvements were more than half by increased marketing investments in the quarter. Excluding marketing, operating margin in the region would have expanded to last year. 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 quarter with 2.1 billion in cash and investments and 687 million in total debt, which compared to 2.1 billion in cash and investments and 589 million in debt at the end of the third quarter of fiscal 18. Consistent with our commitment to return cash to shareholders, we repurchased 208 million shares in the third quarter for a total of 400 million year-to-date. Including dividends and share repurchases, we returned a total of 542 million to shareholders this fiscal year-to-date, up from 122 million last year. We will continue to opportunistically buy back stock as a part of our plan to repurchase of billion dollars in shares through fiscal 20. Moving onto inventory, at the end of the third quarter, inventory was up 11% to last year, moderating from a 15% increase in the second quarter. Similar to Q2, our inventory growth in the third quarter 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 normalize inventory in our Europe factory stores. We are also utilizing significantly less airfreight this year in order to reduce shipment costs, which impact level of goods and transit. We remain comfortable with the health of our overall inventory at both retail and wholesale which continues to improve on year-over-year basis. Looking ahead, we expect to continue reducing inventories through the end of this fiscal year to be better aligned with our sales outlook. Now, I'd like to turn to guidance for the full year and fourth quarter of fiscal 19. As a reminder, this guidance excludes restructuring and related charges. We are on track to deliver our goals for this year. We now expect revenues to be up slightly in constant currency for the full year fiscal 19. We expect a slight decline in North America and positive growth in our international businesses. Foreign currency is expected to have 80 to 90 basis points of negative impact on revenue growth in fiscal 19. We now expect operating margin for fiscal 19 to be up 60 basis points in constant currency at the high end of our previous range of 40 to 60 basis points with minimal impact from foreign currency. This guidance reflects our solid performance in the first three quarters of the year and our view on underlying trends as we execute the Next Great Chapter plan. It also incorporates our plan to better align inventory levels to our scales growth outlook. For the fourth quarter of fiscal 19, we expect revenues to be down slightly in constant currency with growth in North America retail and our international businesses offset by a planned reductions in North America off-price sale. Foreign currency is expected to negatively impact revenue growth by about 300 basis points in the quarter. We continue to see several timing related headwinds to revenue growth in the quarter including a shift in European wholesale shipments from Q4 into Q3, and our strategic reduction in off-price sales, which is heavily weighted toward the fourth quarter of this year. The time of Easter also negatively impacts our North America retail comps by about three points in the fourth quarter benefiting Q1 of next year. Operating margin for the fourth quarter is expected to be up about 70 points to last year in constant currency. Foreign currency is expected to negatively impact operating margin by about 60 basis points in the quarter. We now expect capital expenditures of approximately 250 million in fiscal 19. Below our previous guidance of 275 million due to timing shifts into fiscal 20, our estimated effective tax rate for fiscal 19 is changed to 21%. Our fourth quarter effective tax rate is estimated to be 16% to 17%. Finally, over the past several months, we have seen increased volatility in the market from macroeconomic and geopolitical events, and we continue to monitor the trade environment closely. While we’re not immune to pressure in the broader environment, our teams are prepared for multiple scenarios importantly across the Company we have clarity of purpose under Ralph's unifying brand vision, focused strategic with aligned operational and financial goals, and the passion and commitment of our team around the world. We are delivering on our plan and will continue to drive executing that finds the balance between addressing short-term pressures while managing for the long term. As we look forward to fiscal 20, we remain confident in the full year outlook we presented at our investor day in June. This concludes positive top line growth in constant currency along with operating profit growth and margin expansion for the full year. We plan to provide more details on fiscal 20 guidance when we report our fiscal year end results in May. With that, let’s open up the call for your questions.

Thank you. [Operator Instructions] The first question comes from Matthew Boss with JP Morgan. You may ask your question.

Your 3Q print exceeded expectations in holiday season with clear winners and losers across retail. I guess Patrice, as you reflect on the quarter, what factors do you think helped deliver the outperformance? And then Jane, on the expense front, I guess maybe how best to think about the core leverage that you're seeing versus strategic marketing investment as we think going forward?

Listen, first of all, Ralph and I are really proud that our team has been consistently executing across all our sites of our new Next Great Chapter strategy. As we look at obviously quarter-to-quarter, there are some areas of businesses that are worth better that others, and we're clearly dealing with some level of volatility in the marketplace. But I have to say, we’re really pleased with the progress that we made across several areas of this business this quarter. There are three things I would call out that enabled us to actually come ahead of where we expected for Q3. The first one is AUR. They were better than we expected across actually all regions and all channels. And this is really the result of continued focus we’re putting on elevating the brand through improved marketing, improve engagement with our consumers, improve products and then the continuing efforts that we have on promotional pullback. We’re able to drive high single digit, right. You've heard Jane talk about we were up 9% this quarter despite what we view as a more promotional environment this past holiday. Well, first driver AUR, second driver is digital momentum. Our digital momentum clearly accelerated across all of our digital sectors whether that's our own digital commerce site, wholesale.com or the digital pure players. Our overall digital ecosystem revenues this past were up 20%. One of the important factors that was an enabler for this was our transition to the new platform, you'll recall, last year, we moved North America to a new platform for our website and then Europe more recently. And this is really allowing us to provide better storytelling, better brand building, combined with better functionality and consumer experience and we seen that play out in the result. The third factor is Asia, right. I know there is lot of question marks what’s happening in China and Asia in general, but our momentum continued in Asia. You've heard Jane talked about, we grew up 11% constant currency in total Asia, 4% comps led by greater China of 19%, led by Mainland China of close to 40%, but also continued strong performance from our more established markets Japan, Korea, and Australia. So, those are really the three key factors that enabled us to perform ahead of where we expected for the quarter. I will turn it over to Jane on…

Sure. On SG&A, Matt, in general our Q3 SG&A expenses were generally in line with our plan. But we had top line momentum that enabled us to proactively reinvest in the business. Meaningfully in marketing, where you saw our marketing increased 18% this quarter. And recall that's not half of a 27% increase that we did in Q3 last year. As I look forward to Q4, I don't expect that level of year-on-year marketing increases in the fourth quarter. We significantly increased our marketing over 15%. So that will be a dynamic change as you look going through into the fourth quarter. But consistent with our strategic growth initiatives, we made some proactive investments in the faster growing areas of our business. You heard Patrice talk about our 39 new stores that we opened and we made some important investments in digital. And this quarter we proactively worked to strengthen our digital capabilities including faster delivery times notably to the West Coast. Our test in L.A. shows that those are proving out and driving consumer demand. We also invested to make sure that we have 24/7 customer support capability. So those were notable in this quarter. I think you're asking a broader question in terms of, how are we looking at both short and long-term expense reductions? And what we called out this quarter, the reduction in our DC footprint is going to be an important -- and the inventory consolidation we're doing is going to be important part of our productivity as we move forward. We expect that to start to pay dividends as we look forward to FY '20. And we're also continuing the work that we're doing in indirect expenses. We're really systematically as we've done this year which helped us produce SG&A leverage, if you exclude marketing, we're really driving into every cost challenging every vendor contract looking for scale benefits, consolidation benefits and we do see that pay dividends as we move forward. So we continue to be as we confirmed our long-term guidance for '20 we continue to be optimistic, also opportunistic to believe that as we return to growth, you will SG&A leverage.

The next question comes from Michael Binetti with Credit Suisse. You may ask your question.

Jane, I guess, a couple of questions to help me unpack here further. As we look ahead the composition of revenues in the model here is going to be changing a little bit next year as you have the majority of this off-price pullback strategy done for example? AUR has been a big, big line item in the revenue growth line for a couple of years on the quality of sales work. Next year it seems like a couple of things will be a lot more on a like-for-like basis. How do you think -- how much do you think AUR should contribute here as the quality-of-sales initiatives may be slow? And what do you need from units or traffic to drive that low to mid single-digit growth you talked about on revenues?

Yes. Well Michael, it's a great question, because one of the tenets of our strategic plan is that AUR growth is a driver of our top line growth through our long-term plan. So I see lots of opportunity for us to drive what we guided to which was low to mid single-digit AUR growth. And the reason I have confidence in that is the drivers that we've seen over the last 2.5 years are relatively consistent. We've been able to drive AUR growth through a mix of some modest like-for-like pricing. We've been able to reduce discounts and we see that we have more opportunities there. And we've been able to mix into higher AUR and higher gross margin product. Those -- and the shift of our business international where we have higher AUR is also a tailwind benefit to AUR. So I'm very encouraged. I feel that AUR is what over delivered this quarter, but it's going to be durable as we move through our plan. The cutback in off-price does help us from an AUR perspective. It is that the -- AUR, it tends to be lower there. It tends -- we tend to move through more units there. So pulling back there is completely consistent with our plan of rising AUR fewer units which I think is also consistent with the elevation of the plan.

The next question comes from Alexandra Walvis with Goldman Sachs. You may ask your question.

We had a question around the North America wholesale business. So outside of that off-price pullback it seems like the North America wholesale business was very strong. I wonder if you could dive a little bit more into the drivers of that? And then on the off-price rationalization, I wonder if you can help us out with how fast with that process you think that we are today? And how much longer we should expect that to go on and the pieces of that business in particular that are being reduced? Thank you.

Yes. So, Alexandra, in terms of what we saw in our wholesale trends, we really saw strength in the third quarter in some of our core categories notably in men's and notably in Polo. We saw good -- we saw benefits from reduced promotionality and accordingly better -- a reduction in our vendor allowances and natural margin increases. Those were really what we saw as core strengths in our North America wholesale business. Also our departmentstore.com business as we called out was particularly strong where we gained share again in key categories and saw strong high single-digit growth. We're also starting to overlap some of the significant door pullbacks that we made during our reset, and so we're seeing that play through. As I think about off-price pullback, it's significant in this second half as we've been calling out for a while. Our strategic goal, so as you think about it going forward is to really reduce the penetration of off-price to our total wholesale business. So I don't expect the pressure from off-price pullback to be as significant in FY '20 as it was in this year. But I do expect -- I don't expect it to be a leverage point as we reduce the percentage of penetration to our business.

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

Patrice going back to the 2000 -- to the Investor Day last year, the $500 million in incremental digital sales you certainly showed a lot of momentum this quarter particularly in North America with digital up 21%. Can you talk about some of the drivers going into next year in digital as you've repositioned the entire platform and how we should think about that going forward?

Yes. So as we kind of feel the -- and what drove the acceleration this past quarter and what's durable to use Jane's terminology which I like, it's really three factors. One is the work we're doing on brand building. And if you look at past quarter we did a lot around our 50th gift campaign, we obviously had our special limited editions whether that's Winter Stadium or the Palace program. So the brand building piece of the storytelling piece enhanced by the platform upgrade that we have will continue. We really -- continuously raised the bar on that particularly in the way that really connects with Gen Z consumers and Millennials. The second part is the consumer experience on our site. And we know we have a lot of opportunity to strengthen it. There's been good progress on functionality over the past quarter ranging from free shipping progress bar to monogramming services to a dedicated Polo shirt shopping experience. And then some of the technical elements of faster downloads of our pages, quicker delivery to consumers homes and so on. So we're going to continue raise the bar on consumer experience and functionality. And then finally as all the work we continue to do on quality of sales which was obviously a big enabler for AUR here, which continues to be an area of focus and I think will be for as long as we're in business. So for next 50 years which is an important part of the block, so that's our own fight, right, which is really we think of our own digital flagship which then needs to set the stone for how the brand shows up on other digital platforms. If you look at then the other platform, obviously there's wholesale.com, Jane touched on that in previous question where we're seeing good momentum, we have really good partnerships with our -- the key wholesale players. We will continue to build on that momentum where we can really connect well with the target consumers that shop there. Then there is pure play -- digital pure players. Right, around the world and we continue to build our stable, a select pure players that we partner with. For example we've spent on Stitch Fix with Polo women this past quarter in the U.S. and we continue to see good progress in Asia, in Europe with some of the key players there and obviously expanding our presence here in North America. So I think if anything -- that's going to accelerate. And then the final one is social commerce, right. The ability to shop through WeChat, the ability to shop through Instagram and so on and so forth which today is still relatively small on the -- if you look at total picture, but we expect that to accelerate significantly because the consumer benefit the ease-of-use there is just very compelling for our consumer target. So I think as we look at the key elements of our strategy, what we've been executing and what we need to execute moving forward we have confidence that we can continue to stay on this track of accelerated growth with digital commerce so that we can reach to $0.5 billion that we called out for the full five-year period.

Yes. John just as Patrice mentioned, we're really happy with the underlying momentum we see in our digital commerce site. In North America, I'll just recall this is the quarter that we overlapped that site conversion. So from a trajectory run rate perspective it's somewhat anomalous. But we feel really good about the factors that Patrice noted and the momentum it suggests for our e-commerce business.

And then maybe one additional element which we actually didn't touch on, which is our new mobile app, particularly as we think we're bringing in new consumers, younger consumers into the brand. We launched our mobile app little less than two quarters ago. Half of the consumers coming through the app are actually Gen Z or Millennials. We are seeing very strong engagement rates. We are seeing fantastic sell-through of our special editions there. I encourage all of you to sign up if you haven't yet, but that's also an important asset that we have in our digital commerce toolbox that is just at the very early stages. So I think also a very promising potential there.

The next question comes from Paul Trussell with Deutsche Bank. You may ask your question.

I just wanted to touch base on your international performance. As you are well aware a lot of global macro concerns over the last few months, and while the European business did have some timing elements to it, it really outperformed, certainly versus my expectations. And you also already have mentioned Asia a few times. Maybe just give a little bit more color about what you feel is driving those top line results outside of the Americas?

Yes. So maybe let's start the tour in Europe, where we did as -- overall delivered strong performance in Europe. We're obviously keeping a close eye on the various developments there, whether that's the uncertainty around Brexit whether those are the demonstrations going on in Paris, those at this point has not had an impact on our business. We are actually feeling good about our performance in Q3 and what we are able to do moving forward. What's important to note Paul on this is for Europe, as we're still quite underdeveloped from a retail presence standpoint right, we have 23 stores. I think a year ago when we talked on this call we had 19. So now we're moving, we are starting to open stores and build our digital ecosystem so that we have a compelling ecosystem in key cities there. So relative to our competitors, we're incredibly underdeveloped and then we believe we still we have significant growth opportunities even in the challenging context. So we're being careful, we're monitoring the environment, but we are confident we have a number of growth factors for us in the future. In Europe, particularly in markets like Germany and Southern Europe which is where the underdevelopment is greater. As far as Asia is concerned what's exciting for us across Asia is the broad-based growth, right. While of course China is doing well and we have significant opportunities there, we're seeing continued performance from our current key market in Asia which is Japan. We're seeing accelerated performance as the team applies the Japan formula to South Korea in South Korea and also in Australia. So it's broad-based. It's built on strong fundamentals. And so I would say, I think similar to Europe, there are a lot of question marks around China and a potential slowdown in China. We have not seen that on our business in Q3. And again we are our highly underdeveloped in China. Chinese consumer domestic sales and traveling -- travel sales are about 5% of our total business. So when you compare that to a number of our peers that are more in the 25%, 30%, 40% penetration, you can see the upside that we have on this business. And we -- while it's very early days, we're encouraged by the response we're getting both from a consumer standpoint there, the response we're seeing in how our Polo boutiques are performing, the response we're seeing as we work with various partners the Tmall Luxury Pavilion, JD Toplife and so on and so forth and that's pays WeChat more recently Golf society. So we're feeling encouraged that we've got the right elements and the right strategy to deliver growth in -- across Asia and therefore across international with what I mentioned for Europe.

I would just add Paul that we were really pleased in Europe, with the investments that we made in inventory in outlet paid off not only to return us to positive comp growth in our outlet business, but at a meaningful AUR increase. So the -- our strategy to restore into higher AUR products paid off. It paid off on the top line. It also flowed through with a nice pick up in our AUR in Europe. We expected the timing shift in our wholesale business in Europe. We knew that because we are aligning our calendars that Q3 was going to be quite strong. We called that out last quarter, but really pleased with the outlet performance that we saw in Europe.

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

Jane I wanted you to see if you could elaborate on -- you mentioned the share inventory going live. I remember in the past you've talked about a test in L.A. marketplace test retailing in wholesale and retail -- on retail kind of the inventories to drive quicker replenishment, more articulated products and inventory planning. Could you elaborate on what you're working on there and what you see as the opportunity, that you kind of integrate omni-channel capabilities into the business? Thanks.

Sure. What we're seeing from our initiatives on shared inventory, right now, we're in the first phase of that which is the combination of our store, our ROS store inventory and our e-commerce inventory is a few benefits. One, it reduces inventory buffers. Two, it allows us to direct our inventory to the demand that has the highest selling price. So it's -- better full price selling, less inventory. It also speeds stick-times in our warehouse and reduces our need for warehouse footprint, which reduces our overhead costs. So lots of benefits there from a shared inventory. And we are working on the next phase which could be even greater inventory sharing across our channels which should also generate the same kind of benefits from an inventory full price sellout and cost reduction. We're very encouraged by the teams. We're working very hard on it and it went live this quarter. So more to come there and I'm sure that that will give us even more opportunities as we look forward on allocations and store close as well.

And then, yes, on the Los Angeles ecosystem project, so we're about a little more than six months in. The headline for -- my message Omar actually is L.A. is outperforming the North America region. So still early days in this pilot, but actually we're very pleased with the way the results are coming in. What we are seeing is shared gains across the market. What we are seeing is an acceleration of our digital commerce business actually very strong acceleration there. And then what we're also seeing which is quite positive is that we're attracting new younger consumers through the franchise. So this elevation of the brand presence across all the touch points whether that's wholesale or own stores, full price or factory, and then the emphasis we are putting on digital with some localized messaging at this point is really paying off. L.A. is a huge region, so we really want to take advantage of the upside opportunities that we have there. But the headline point at this stage is delivering well ahead of the nation.

The next question comes from Jay Sole with UBS. You may ask your question.

Patrice, I wanted to ask you about your comments around winning over new generation. You gave a lot of great stats about how your initiatives have created a lot of impressions and a lot of buzz with Generation Z and Millennials. Just share with some of your plans to kind of keep that momentum going into Q4. The kind of things you have planned and if you can talk about how you're converting some of that initial interest that you're getting from younger people into that repeat purchase that you talked about? Thank you.

Sure. So here is how we think about the strategy for winning over new generation. We've got four specific areas. One, is we want to be where the consumer group is consuming media right. So you -- you've seen over time how we're shifting our marketing to much more digital, much more social and that's where the majority of our spending is going now. All right so being where they consume media, the second is being where that consumer group is shopping and purchasing, which is the shift you're seeing that we're making toward digital commerce because we know they are disproportionately tough in that space. And the development of our app, as I mentioned earlier, we're seeing through the app, much younger consumer coming into the brand. The third area, so those two are -- continue. The third area is how we leverage influencers that really connect with that target audience. Right, so just as an illustration, we talked about our latest Romance re-launch and the face of that fragrance is Taylor Hill who really appeals to the younger population incredibly effectively, and that's just an illustration of how we're thinking about building this mosaic of influencers that can represent all the dimensions of the brand and also connect nicely in the local markets with the target audience that we're going after. And then, the fourth one are these Limited Edition and drops, which we will continue to do. Obviously we'll keep an eye on it to surprise as part of the success is to surprise on that that comes with it. We're also very careful not to overdo it, because otherwise these things will run out of steam. We've been very intentional on how we paste it. But if you look at the results we've got behind Palace, 75% of the consumers who bought Palace were new to the Ralph Lauren brand. On average consumers who bought Palace were 10 years younger than the average consumer for Ralph Lauren. And we're also seeing that on Winter Stadium and others. And to your point and then on retention, one of the interesting and encouraging data points for us is if you look at the purchases of our drops, consumers who bought Winter Stadium, actually half of them had already brought a drop, a prior drop, right which gives us confidence that as we bring in consumers through these special activities, we're then able to keep a majority of them moving forward. So that's the broad framework that we have in place. We feel good about the progress we're making around that. And we're doing that while not forgetting our core, because our core consumers are also important part of the business. And so our job is to successfully appeal to this new group of consumer, while also delivering what our current consumers are looking for.

Thank you. The final question comes from Rick Patel with Needham & Company. You may ask your question.

I'll add, my congrats as well and thank you for squeezing me in here. Can you update us tour sales in the U.S. given the strong U.S. dollar? I'm curious if there was a change in trend versus last quarter and to what extent you think that helped fuel your performance in Greater China? And my second question is around department store refreshes. I believe you had about 80 or so of these refreshes last year and had planned to do more this year. Any updates on where you are with those and any call outs in terms of performance going forward?

Sure. Hi Rick. So for tourism based on the data that we collect we saw foreign tourist traffic in our doors was up about 2% in the quarter. You'll recall that in Q2 it was down about 2% and in Q1 it was flattish. So we're seeing this sort of flattish to down slightly, up slightly trends, in the U.S. In Europe we saw that our foreign tourist traffic was up about 3%. That was off a down 21% you recall in Q2. Again this is our data, with the overall composition remain in terms of foreign tourist from other countries remaining about consistent as we've looked from quarter-to-quarter.

And then on the door refreshes we're continuing that because we're very pleased with the results we've gotten so far behind the doors that we have upgraded. And I quoted earlier some of the progress we're seeing in Los Angeles which is obviously a key part of that. So we did 81 refreshes in fiscal '18, with just sales they were up double-digit, so this pay up -- paid up because actually the investment we're making is not that significant. A lot of it is improved lighting, improved layouts, fresher paint of code, better signage, better visuals but good returns on that. We've completed 103 refreshes in the first half of fiscal '19, and we plan to do a total about 150 this fiscal year, and continuing to do that to effect, over time we want to effect at least 50% of our total business, on the way the 75%, we're doing that in close partnership with our key wholesale partners including the largest one, and they've completed the first 50 and now they are onto the next 100. We're working that hand-in-hand with them. So encouraged by the progress, it continues to be a focus area as we want to elevate our brand as possible in a single touch point. All right Rick, well thank you. Thanks for all of you for joining the call today. As I hope you took away from this conversation in our press release we're encouraged by our progress and our results as we continue to elevate the iconic business Ralph as built with teams over the past 50 years. And as we continue to strengthen our connection to consumers around the world, and we look forward to sharing our fiscal year-end results in our fiscal year '20 guidance with you on the next call. So thanks for calling in and talk to you soon.

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