Ralph Lauren Corporation (RL) Q4 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Fourth Quarter and Full Year Fiscal 2021 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'd now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Good morning, and thank you for joining Ralph Lauren's fourth quarter and full year fiscal 2021 conference call. With me today are Patrice Louvet, the company's President and Chief Executive Officer; and Jane Nielsen, Chief Operating Officer and Chief Financial Officer. After prepared remarks, we will open up the call for your questions, 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. As we close out this fiscal year, Ralph and I are proud and inspired by the way our teams have navigated through the pandemic. They have demonstrated their resilience, agility, and ongoing passion for our brand and our consumers in a year unlike any other. Their commitment and execution shine through in our better-than-expected fourth quarter results. Against the volatile backdrop of the past year, we took action that has enabled us to emerge from this period a fundamentally stronger company, than when we came into it. This includes first, across all three regions, we accelerated our work to elevate our brands while also strengthening and simplifying our brand portfolio. We're also engaging more meaningfully with consumers and driving increased marketing to deliver higher brand awareness and purchase intent coupled with higher AURs. Second, we re-positioned each of our channels and reduced our exposure to secularly challenge areas of distribution, particularly in North America. Within wholesale, we focused our brick-and-mortar presence on our healthier stores and significantly reduced our off-price penetration. Within direct-to-consumer, we accelerated our shift to digital, step changing profitability by over 1,000 basis points, as we added new connected retail capabilities and drove quality of sales. Third, we established a stronger, digital infrastructure globally, while also ramping up our investments in consumer analytics, personalization, and high value new customer acquisition. Fourth, within our supply chain, we further diversified across geographies and meaningfully shortened lead times. With approximately two-thirds of our products now in lead times of six months or less, two years ahead of our goal to reach 50% and compared to just 20% five years ago. And lastly, we created a leaner, more agile cost structure. This operating discipline is enabling us to accelerate growth investments across areas like marketing, digital, and our key city ecosystems with further expansion in select underpenetrated markets this year. Overall, these actions position our business for healthier, more sustainable growth as we emerge from COVID. And beyond the foundational work we delivered this year, we strongly believe our brand is uniquely positioned to capture share both during this transitional post-pandemic period and longer term. Ralph has created a lifestyle brand that is inclusive and marked by spirit of togetherness, optimism, and love. And we believe this is the kind of luxury that people are creating in this moment. The breadth of our lifestyle portfolio means we have the ability to continue meeting consumers desires through comfort and timely [indiscernible], while also delivering on their increasing appetite to reintegrate elevated dress your styles back into their wardrobes. Over the coming quarters, you will see us progressively evolve our assortments accordingly. Before I speak to our growth drivers, I want to share a few of the highlights from our five strategic pillars this quarter and year. First, on our efforts to win over a new generation. Some of our key campaigns this year included our Ralph Lauren Bitmoji Collection on Snapchat with over 1 billion try-ons to date. Our first of its kind Virtual Store Experiences, which now includes five of our iconic flagships globally, our Spring '21 Collection featuring a live performance from Janelle Monae, with over 36 million video views and more than 8 billion total impressions. Our limited edition Polo collaboration with Edison Chen's CLOT brand, ahead of the Lunar New Year, which sold out in less than two minutes on our WeChat Mini-Program in China, and with over 6 billion total impressions. And our debut sponsorship of the Australian Open, which resonated particularly well across Asia. And more still to come with our summer sports program, including the Tokyo Olympics starting in just over two months. In all, we added approximately 4 million new consumers through our direct-to-consumer platforms alone this past fiscal year. And our total social media followers exceeded 45 million led by Instagram, TikTok, Kakao, and Snapchat. This takes me to our priority of leading with digital. Fiscal 2021 was a transformational year in digitizing our consumer platforms and experiences, as well as how we work as a company. And we were proud to deliver significant acceleration in digital performance across each of our regions with total digital ecosystem growth of more than 60% this quarter. We accelerated the roll-out of connected retail programs to enable our consumers to interact with our brands in new and more personal venues. Among the many new capabilities we added this year, highlights included digital catalogs, Buy Online-Pick Up in Store and curbside pickup, mobile checkout, contactless payments, and Klarna payment installments. Connected Retail options now represent a high-single-digit percentage of our retail revenues in North America, and a high-teens percentage in Europe, up from low-single digits in both regions prior to COVID. We also continued to roll out digital flagships in Japan and Hong Kong, while adding new partnerships with influential digital partners around the world like Farfetch. In the fourth quarter, we also rolled out digital ID tagging to 50% of our total products and are on track to reach a 100% by end of fiscal 2022. These not only enable product authentication and support future circularity, but also provide consumers access to detailed product information. In addition to our consumer-facing enhancements, we made significant stride this year in digitizing how we work as a company. This includes the adoption of virtual showrooms and continuing to expand our 3D digital product creation. Touching on our work to operate with discipline to fuel growth, we accelerated key actions this year to realign our cost structure, many of which I outlined at the outset of our call. The third and final stage of our fiscal 2021 strategic realignment plan was our announcement last week to sell Club Monaco, expected to close in Q1. This sale combined with our previously announced action on shifting Chaps to a licensed model will enable us to further focus our resources on our core namesake brands. Club Monaco has been an important parts of Ralph Lauren for over two decades now. We are proud of the brand's evolution over that time, thanks to the passion and dedication of its talented, experienced, and engaged global team. We believe that this is the right step forward for the brand, and we are confident in the brand's strong future under Regent’s stewardship. With this step and the actions we've taken as part of our strategic realignment plan, we continue to progress on our brand elevation journey as we deliver Ralph's vision in today's dynamic environment creating values for all of our stakeholders in fiscal 2022 and beyond. Importantly, I also want to take a moment to highlight our ongoing work to integrate citizenship and sustainability into everything we do. Navigating a highly dynamic global retail environment in the midst of COVID-19, our first priority was to ensure the safety and well-being of our employees, partners and communities. This year, we donated hundreds of thousands of PPE, the frontline workers, 3 million products to frontline workers and families indeed, doubling our initial commitment and $10 million in COVID-19 relief from the Ralph Lauren corporate foundation to support our employees. communities and charitable partners. We were also proud to be named once again one of Forbes 2021 America's Best Employers for Diversity, capping off an important and defining year of employee engagement, round tables and learning opportunities for our organization. Within sustainability, we launched our circularity strategy, as well as color on demand, the revolutionary platform aimed at delivering the world's first scalable zero waste water cotton dyeing system. We are open sourcing the first phase of the platform to the fashion industry. Our hope is that we will see broad industry adoption, so that together we can make progress in addressing one of our sectors biggest area of income. We look forward to sharing our comprehensive progress on our citizenship and sustainability journey in our 2021 Design the Change report this June. Looking to fiscal year 2002, though still volatile given ongoing COVID closures and global supply chain disruptions, we are optimistic on a more favorable operating environment ahead. Consistent with the five pillars of our Next Great Chapter plan, we expect top line growth over the next year to be driven by a combination of continuing to scale digital, which now represents more than 25% of our total sales; expanding our key city ecosystems, led by fast growing markets like China, in addition to our under-penetrated areas in North America and Europe; accelerating marketing investments, Including new consumer acquisition targeting and personalization; and continuing on our brand elevation journey more broadly across our distribution and product assortments, driving further AUR growth, coupled with unit growth. Furthermore, we have confidence in a new post-pandemic fashion cycle based on the strong full price performance of our Spring '21 Collections. Our consumers are starting to gravitate back to newness, color and the styles we are best known for, such as our Iconic mesh polos, blazers and denim. This trend comes on top of the continued momentum we are seeing in, fleece, tees, novelty sweaters and other casual styles that have resonated with the past year. With our brand's unique ability to a short compelling products across Sportswear, loungewear and dressier styles, we will be consumer's growing demand across these categories in the coming season. In closing, Ralph and I want to reiterate how proud we are of the dedication, resilience and agility, our teams have demonstrated as we worked through a challenging year on many levels. We enter fiscal year 2022 stronger than we came into the crisis. With a stronger go-to market model, in more streamlined cost structure, more resilient supply chain and then iconic brand, well positioned to capitalize on the relax with sophisticated style consumers are craving. As we look ahead, we have significant opportunity, and a world-class team focused on becoming and even more elevated more direct-to-consumer, more digital, more global and more diverse equitable and sustainable company. And before I pass it to Jane, a couple of updates regarding our Board. Hubert Joly, will step into the role of Lead Independent Director, previously held by Frank Bennack, while Frank will continue to serve our Board. In addition, Ralph and I would like to extend our thanks to Joel Fleishman, who plans to retire from our Board of Directors this July for his leadership, significant contributions to the company and unflagging support and kindness. With that, I'll turn it over to Jane, to discuss our financial results. And I'll join her at the end to answer your questions.

Thank you, Patrice, and good morning, everyone. With the extraordinary efforts of our teams around the world, we closed out the year significantly stronger than we came into it, in terms of both our financial performance as well as our key strategic initiatives. Our fourth quarter and full year results reflected increased agility across our organization as macro conditions and consumer behaviors evolved. A significant leap forward on our elevation journey as we re-positioned our distribution and accelerated our pricing gains. Our digital transformation from how we serve our consumers to the way we work and driving digital margin accretion and a better aligned operational and expense structure overall. This year we delivered the highest gross margin in the company's history, even excluding the one-time mix benefits of COVID. Our underlying gross margin for fiscal 2021 was about 64.2%. We also strengthened our balance sheet through this year of uncertainty and are pleased to announce the reinstatement of our dividend in the first quarter of fiscal 2022. And as Patrice mentioned, we announced the final stage of our strategic realignment plan with the sale of Club Monaco contributing about 40 basis points to 50 basis points to operating margins this year. These actions step the right foundation and strategic focus for our teams as we enter fiscal 2022. Moving on to our fourth quarter performance. Our business returned to growth in the fourth quarter. Total revenues increased 1% compared to an 18% decline in the third quarter. All regions improved sequentially with positive growth in Asia and Europe on a reported basis, despite continued COVID-related disruptions. North America also returned to positive comps this quarter driven by significant digital acceleration. Global wholesale revenues increased 1% and direct-to-consumer revenues were up 4%. Total digital ecosystem sales accelerated to more than 60% with double-digit growth in every region up from mid-single digits in the first nine months of the year. And we delivered digital margins that were accretive within every region and to our total company rate expanding more than a 1,000 basis points in the fourth quarter and full year. We achieved this outstanding result through a combination of higher quality of sales and operating expense leverage. This was an important step as we work toward our mid-teens company operating margin target and continue to drive digital expansion in the years to come. Total company adjusted gross margin was 62.9% in the fourth quarter, up 380 basis points to last year. Gross margin expansion was primarily driven by strong AUR growth, along with favorable geographic and channel mix shifts. Product costs were also lower as we lapped last year's tariff impacts in North America, partially offset by higher freight costs this year. Around 80 basis points of fourth quarter and 150 basis points of full year gross margin expansion was driven by unusual mix shifts due to COVID. Fourth quarter AUR growth of 30% represented our 16th consecutive quarter of AUR gains, as we continue on our brand elevation journey. Underlying AUR growth of about 20% was driven by a combination of reduced promotional activity, improved full price selling on our new Spring Collections and strategic price increases. Looking ahead, we remain confident in our long-term target of low to mid-single digit AUR growth supported by the same multi-pronged strategy of product elevation, acquisition of new full-priced consumers and favorable channel and geographic mix, while also ramping up our targeting and personalization efforts. Operating expenses declined 4% to last year driven by reductions in compensation, rent and other expenses as we started to realize the early benefits of our fiscal 2021 restructuring. Adjusted operating margins for the fourth quarter was 3.4%, up 680 basis points to last year. Marketing in the fourth quarter accelerated to 44% growth as we reactivated in-person activities continue to drive high impact digital campaigns and personalization and shifted certain investments from the first three quarters of the year due to COVID lockdowns. For the full year, marketing increased to 6% of sales, up from 4.5% the prior year. With sales growth expected to accelerate in fiscal 2022, we expect marketing to remain at an elevated level to support our long-term brand building, digital activations and key events like the Olympics, US Open and Wimbledon. Moving on to segment performance. Starting with North America. Fourth quarter revenue decreased 10% to last year, but continued to improve on a sequential basis, including an earlier than expected return to positive retail comps, up 3%. Comps in our owned digital commerce business were up 25% this quarter, accelerating from 9% in Q3. Underlying sales to domestic consumers accelerated to over 50% up from high teens in Q3, while the sales to international daigou consumers declined double digits to last year as planned. We reduced our site-wide promotions by 50 days compared to the prior year, as we continue to elevate our digital experience driving AUR up more than 40% and gross margins up more than 700 basis points to last year in the channel. At the same time, we continue to invest in new consumer acquisition, up 78% in the fourth quarter and 45% for the full year. These new consumers are transacting at higher gross margin rates and larger basket sizes, and represent a higher penetration of consumers under 35. Stronger sales of new Spring '21 product offering along with continued investments in Connected Retailing helped deliver a significant increase in our full-price sales this quarter, which grew more than a 150% to last year. Brick-and-mortar comps improved sequentially to down 2% in the quarter with meaningful improvements in AUR, basket size and conversion. Traffic was down 23%, but in selected to positive growth in the last three weeks of March, as we started to lap COVID shutdowns, while foreign tourist sales were down about 75%. In North America wholesale, fourth quarter revenue declined 22%, as we continue to manage our sell-in carefully through the Spring season. However, we were encouraged by positive sell-out performance along with double-digit AUR increases to both last year and LLY. Our inventories in the marketplace were clean and well positioned at year-end declining nearly 30% at North America wholesale. And we expect a meaningful turnaround in our sell-in trends as we enter Q1. Our sales to off-price were down double-digits as planned, reducing our penetration to the channel by about 450 basis points for the full year. Overall, we completed our distribution reset plans in North America this year across digital, department stores and off-price, enabling us to enter fiscal 2022 with a healthier, more elevated brand positioning. We ended fiscal 2021 with North America brick-and-mortar full price wholesale penetration at about 10% of total company revenues, down from mid-teens last year, as we continue to accelerate our wholesale.com, direct-to- consumer and international expansion. Looking ahead, we are encouraged by the positive momentum in our direct-to-consumer comps, including digital acceleration and quality wholesale improvement. Moving on to Europe. Fourth quarter revenue increased 5% on a reported basis, and was down 4% in constant currency. Europe retail comps were down 45% with 65% decline in brick-and-mortar stores, partially offset by continued acceleration in our own digital commerce, up 79%. More than half our stores were fully closed in the quarter, similar to last spring. Nevertheless, we were able to drive significantly better performance compared to our Q1 lockdown as strong momentum across digital help to offset brick-and-mortar headwinds. About 80% of our stores in the region are now fully open versus a little over 50% at the end of Q4. Strong momentum in our own digital commerce comps was driven by new consumer acquisition and personalization, up 75%. Europe wholesale revenue increased 29% in constant currency. COVID-related challenges, a brick-and-mortar wholesale were more than offset by stronger performance in our wholesale digital account. This quarter's wholesale performance significantly exceeded our expectations, despite ongoing COVID headwinds underscoring both the strength of our partnerships as well as our successful pivot to digital in the market. And while COVID restrictions continue to pressure, many of our key European markets into fiscal 2022, we are encouraged that the UK, our largest market in the region emerge from lockdowns in mid-April and is showing early signs of pent-up demand. Underlying macro indicators are also encouraging with an improving pace of vaccination roll-out, high levels of consumer savings and consumer purchases shifting back toward our pre-COVID categories this spring. Turning to Asia; revenue increased 35% on a reported basis, and 28% in constant currency in the fourth quarter. Our Asian retail comps increased 23% with brick-and-mortar stores up 21%, and digital up, 59%. All of our key markets reported positive growth led by the Chinese mainland, which was up 145% in constant currency and more than 70% to LLY. Korea also accelerated to 50% growth. Japan, our largest market in the region grew mid-single digits, despite COVID restrictions in the first half of the quarter. We are encouraged that our digital businesses continue to accelerate even as brick-and-mortar trends have strengthened. This was supported by a successful Lunar New Year campaign with sales up 75% to LLY. Strong momentum in our newer digital flagships in China, Japan and Hong Kong and powerful partnerships like a cow in Tmall's Luxury Pavilion, where we became the number one menswear brand this quarter. Looking ahead, we are watching Japan carefully, due to a new state of emergency imposed in April, which is included in our Q1 guidance. Nevertheless, we are encouraged that the rest of our key markets in Asia have returned to a more normalized growth trajectory. And we still see significant long-term growth opportunities in the region and particularly in China, which now represents about 6% of total company revenues nearly double the penetration from a year ago. Moving on to the balance sheet. We ended the year with $2.8 billion in cash and investments, and $1.6 billion in total debt, which compares to $2.1 billion in cash and investments and $1.2 billion in total debt last year. Net inventory increased 3% to support future growth compared to depressed levels of down 10% at the end of last year as COVID hit. Looking ahead, our outlook is based on our best assessment of the current macro environment, which includes ongoing COVID-related disruptions to the global supply chain, as well as key markets still operating under government restrictions, primarily in Europe and Japan. For fiscal 2022, we expect constant currency revenues to increase approximately 20% to 25% to last year on a 52-week comparable basis. We expect double-digit growth in each region led by Europe and North America, due to the significant COVID-related closures in the prior year. We estimate the 53rd week will contribute an additional 140 basis points to this year's revenue growth. We expect gross margins to contract 40 basis points to 60 basis points as we lap last year's unusual geographic and channel mix benefits due to COVID closures. This implies about a 100 basis point expansion to last year's underlying gross margin ex-COVID. Gross margins should benefit from product mix, reduced costs following, organization reshaping, as well as further improvements in pricing. We expect these drivers to be offset by duties significantly higher freight costs and global supply chain pressures, notably in the first quarter and consistent with the broader industry. Overall, we are watching a highly volatile and inflationary input cost environment into fiscal 2022. SG&A should grow at a more moderate rate than revenues. Inflation along with continued investments in marketing, new stores and digital will be mitigated by continued expense discipline and restructuring savings. As a result, we expect operating margins of about 11%, expanding approximately 620 basis points to last year and exceeding our pre-pandemic levels. As previously discussed, we deliberately exited or reduced several areas of our business in fiscal 2021 to accelerate our brand elevation strategy. These include transitioning Chaps from an owned to a fully licensed model, exiting more than 200 US department store doors, significantly reducing our off-price business, and shrinking our exposure to international daigou sales on our ralphlauren.com site in North America. Combined with the sale of Club Monaco expected to close in the first quarter, these strategic actions represent a little more than $700 million in revenues compared to fiscal 2020. This implies expected fiscal 2022 revenues that are roughly flat to pre-pandemic levels on an underlying basis. For the first quarter, which still includes the operational results of Club Monaco, we expect revenues to increase approximately 140% to 150% in constant currency. We expect gross margins to decline approximately 575 basis points, as we lap last year's one-time COVID mix benefits due to store closures and from higher freight headwinds in the quarter. We expect operating margin of 7% to 7.5% with gross margin contraction more than offset by significant operating expense leverage. We expect to end fiscal 2022 with inventories up 12% with higher growth in the first half of the year, as we continue to build back into demand. We expect capital expenditures of approximately $250 million to $275 million in line with our pre-pandemic targets, as we continue to focus on building out our key city ecosystems and digital infrastructure. In closing, in the midst of an unprecedented year, our teams showed tremendous dedication and agility as we fundamentally strengthened our business. Led by Ralph's enduring vision, we are leveraging the time listeners and authenticity of our core brands, while taking on learnings to evolve with the changing needs of the consumer across our product, platforms and new ways of working. And while we are still navigating a highly dynamic environment, we are confident, we have the right foundation to drive sustainable growth over the coming year and beyond. With that, let's open up the call for your questions.

[Operator Instructions] First question comes from Omar Saad at Evercore ISI.

Thanks for taking my questions. So look during COVID, you guys have made some really fundamental changes to your distribution, cost structure, the organizational structure, pared back some brands. If we look out beyond the recovery year, which I'm sure you and many others in the space will enjoy accelerating sales, but can you talk about how your brands are positioned to win in the post-pandemic world over the next few years, longer term, and Patrice can you include a discussion of how you think about balancing brand health and probability -- profitability versus chasing sales, i.e., how important is it for Ralph Lauren to return to consistent growth again. Thanks.

Good morning, Omar. Thank you for your question. So, listen we're not only well positioned to benefit from new fashion cycle as we emerge from COVID and as consumers return to the category into the stores, but we've also really strengthened the foundations of our business and laid the groundwork over the past year for a sustainable multi-year growth trajectory of a healthier base. So to your point, yes, of course, the comps will look attractive for the coming 12 months, but because of the base period, but obviously our lens has been beyond that looking to the next three years to five years for the company. So, as part of the work, we've of course accelerated digital, you saw that in the numbers we just announced and established infrastructure for Connected Retail around the world, and that's going to have benefits on a long-term basis. But as I step back, I think there are really three key differentiators that I would highlight to underline how we see our competitive advantage and our long-term growth potential. The first one is the strength of our brand. And over the past year, we've actually seen our purchase intent increase across all of our key markets, which we track now on a monthly basis. And as you saw with our AUR numbers, we continue to progress on our elevation journey, up 30% this quarter, up 26% this fiscal year, 16 quarters in a row of AUR growth reflection of our brand elevation journey. The other point I would highlight is that we're seeing that our brand aesthetic that's anchored in luxury classics, right. So elevated flows that you can live in is resonating with consumers who are looking for a different kinds of luxury coming out of the pandemic. One important data point for us in this brand strength area is our ability to recruit new consumers. Over the past year, we've brought in more than 4 million new consumers into our franchise and these new consumers are generally younger, higher basket size, and higher profitability, and it's really only the beginning. I think we now have a consumer recruiting machine that's working very well across all of our key markets. So first area is really strength of our brand, Omar. Second area is the breadth of our lifestyle portfolio. And I think this enables us to flex across categories. The flex across different consumer interests and desires, whether that's athleisure, loungewear, or more sophisticated casual, and also expand into high potential underdeveloped categories like home or like outerwear. Third area is our resources and particularly our cash position. As you know and we've prided ourselves of that, we manage our balance sheet conservatively. And I think the past years indicated that, that was probably a good choice, and we are in a position now where one, we can restart dividends as you heard Jane mentioned earlier. And two, we have the fuel to invest in critical growth areas like digital, like marketing, and like store openings. So, we feel very good about where we are in terms of our ability to fund the investment opportunities for growth to your point. I think it's fair to say that our brand remains bigger than our business. And as we look at our opportunities around the world, both on the category, consumer segment and geographical standpoint, we have many vectors of growth, even more focus now on the Ralph Lauren namesake brands posts and moves that we've made on Chaps and recently announced on Club. So listen, on top of these three differentiators, which I think are evergreen and real point of difference for us, we have the benefit of an incredibly talented global organization, that's really proven its resilience and agility and scale during this crisis. We have a diversified and flexible supply chain. And I think the portfolio that's now well-defined and tight, so we can really focus on those key value drivers. So while we're not completely done with COVID, as you look at what's happening in Japan, what's happening in parts of Europe and other parts of Asia, I am incredibly encouraged by our positioning and by the foundations that we've laid for the short, the mid, and the long-term as we pivot back to offense not only this coming year, but for the years to come. To your question on quality of sales and general growth, listen we're in growth mode, right. We're in growth and value creation mode. We have a number of engines for growth. We will continue our brand elevation journey, which I think will be evergreen for this company. So, our expectation is to continue to drive AUR, obviously at a more modest pace than this past year. We continue to drive AUR. Our expectation is to continue to recruit new consumers, and we also expect to start to grow units, all right. And that's really the vectors of growth moving forward. So yes, Ralph Lauren is a growth company, value creation company, obviously, we will do it profitably as we've been doing, but we're excited about what's possible for us moving forward.

And Omar, I would just add that, your question about the balance between brand, health and profitability, I mean that's the core of our strategy. We believe elevation of our brand, elevation of our distribution drives improved profitability and value creation, and I think our guidance that we're back to growth and back to OI margin accretion relative to pre-COVID levels is a proof point in and that’s what our strategy is going to deliver.

Next question, please.

Thank you. The next question comes from Michael Binetti with Credit Suisse.

Hey, guys. Thanks for taking our questions here and all the detail today. Let me ask at a high level. North America has been a big focus for a while. How are you feeling about the North America business now? A lot of the initiatives that you mentioned that you were trying to clean up over the last year are focused in that market. So how are you feeling about the North America business now, your ability to grow sustainably in the core market? And maybe you could help us by touching on a few of the key elements driving the plan. And then my second question is on SG&A, as we look at the guidance for fiscal 2022. I'm trying to -- you've done a lot of work on that line, Jane. And if I'm trying to think if the revenues come in, in an upside scenario, where it is SG&A go, if revenues beat your plan to try -- we're trying to think about how the fixed versus floating in SG&A relative to what we know about this business pre-COVID? What's the flow through on upside revenues, if you could.

Sounds good. Well, good morning, Michael, and Jane and I will answer on your questions. Listen, big picture. I have the most confidence now in our ability to win in North America, since starting with the company close to four years ago. That's really the way I feel right now by looking at where we are, what we've done and the key drivers of growth and value creation for that region. We have significant growth opportunities across the entire region. We are under developed in many key cities across the US, particularly in the West and in the South. And we have significant opportunity to expand our direct-to-consumer Connected Retail footprint. So of course is going to be the easy compares versus in fiscal year 2022 versus this past fiscal year, but all of the long-term drivers that I talked about in response to Omar's question apply here as well in our home market, of course. As you mentioned, specific to North America, the past three years or four years has been a year of reset. It's been a year of clean up, to get to a healthy base, to be positioned for growth. And so most of that work is complete now. The vast majority of it is complete. The recent interventions on our brand portfolio kind of being the closing elements of it. And we are clearly pivoting to offense across North America, across channels. We see multiple vectors of growth going forward. So if I take them one by one, first of all, our own digital, all right, which you saw the numbers this past quarter, 25% in total. Our domestic customers up 50% versus year ago, as we haven't delivered these kind of numbers on our own digital. I think since we've really been tracking it. So we're excited about the progress we're making there. The numbers are starting to reflect the higher and more margin accretive underlying growth, now that the daigou cleanup is mostly done. And this is a reflection of product that's really resonating with the consumer connected retail capabilities that the consumer is taking advantage of better functionalities on the sites and a much more effective segmentation targeting and personalization. Second area is our own retail stores, right, where our business model, our brand elevation and our Connected Retailing initiatives are working. And you're seeing the progress in the past quarter. We're driving back to sustainable positive comps and AUR. We're encouraged to see that the brick-and-mortar trends are beginning to improve. And just one data point, but our March comps were up strong double digits to last year and on a two-year stack. And with only 44 price stores, when you and I have talked this, right, we still -- we see a significant opportunity to expand our key city strategy and actually our North America team is in the field now visiting a number of locations, as we speak, we're going to do it very selectively and with a strong focus on Connected Retail centered around the consumer. And then finally on wholesale, where we've made dramatic changes over the past few years. A couple of data points. Our wholesale presence is down in terms of doors is down 61% over the past three years to four years. Our off-price penetration is down 50% over the past three years to four years. So massive resets that are now complete and now we are seeing accelerating growth, accelerating penetration of wholesale.com, where we've got very good momentum and wonderful partnerships here in the US. And we're starting to grow share in our existing wholesale doors. Past quarter, we grew share in men's. We grew share in kids, we grew share in home, and we're seeing more recently our women's business start to respond as well. So we have a healthier -- we have healthier partnerships. We have a cleaner footprint from both a digital and brick-and-mortar standpoint in wholesale. And so net -- I'd say, Michael, I feel very good about where we are, and obviously we got to deliver. But I think we're very well positioned now to win in North America.

And just, Michael, on your question on SG&A. So, obviously our guidance implies significant SG&A leverage in this year. And that's really built on, it's over 600 -- well over 600 basis points and operating margin expansion of 100 basis points to pre-COVID levels. And that's really predicated on what we've done in terms of achieving savings from our organization restructuring, obviously what we've called out for Club Monaco. And as you think about upside scenarios, and I think we've guided based on our best visibility that we have today in a fairly dynamic environment. But as you think about revenue upside, as vaccination rates might accelerate worldwide, as tourism may come back, strong -- maintenance of high digital penetrations like we saw in China, those are all upside scenarios. Our strong gross margin is really going to help us with flow through there. In terms of our cost structure, I think about the big buckets of rent and occupancy, corporate costs, depreciation are all highly leverageable in our model. And so the flow through that we get on incremental sales either in wholesale, digital or in our own stores are accretive, and a nicely accretive. So, I think you will see flow through, if there is an upside scenario on sales as we typically do. But we feel very good about how our cost structure is positioned. We feel good about our ability to invest in our brands. So our guide also implies a continued higher level of marketing at that around 6% range, which is about 150 basis points higher than pre-COVID levels. We're committed to our brand elevation journey and see that marketing is a key part of that, plus digital investments and new store investments. We'll have about 50 gross new stores in this coming year, the environments, right. We're optimistic about the environment. This is the right time to go back to elevated distribution expansion. So we think we found the balance between delivering profit accretion and investing in our business.

Next question, please.

Thank you. The next question comes from Matthew Boss with JP Morgan.

Great, thanks. So, Patrice, maybe to dig a little further into the pivot to offence [ph] that you cited. Could you just maybe speak to some of the lead indicators in the business that you're seeing. Maybe we could just elaborate on the market share opportunity. I think you cited men's, kids and home, and then women's over time. Just what gives you confidence in those individual category.

Sure. In lead indicators that we look at that are, are we bringing in new consumers into the fold. And past quarter in North America, our digital platforms, new consumers of 79% versus year ago. We look at our ability continue to drive AUR, right. And you saw the strong performance. I think our strongest quarter of the fiscal year actually with AUR, up 30%. And as we look at -- as we track also brand health, so purchase intent key metrics of brand health, we continue to see progress. So those all give us confidence that the work we're doing is resonating, our product is resonating, our communication is resonating, our elevation of distribution is resonating. And then, through the specific share points, I mean you have access to this, to this data as well. We are seeing our share progress on -- quite strong on men's, renewed momentum on kids, which is a business that we've worked hard to energize and strong performance on home, which as you know is a new focus for us. And we think there's significant potential there. And then, indeed more recently, as the consumer behavior on women's ready to wear pivots back to more elevated products, pivot back to more fashion, more color, right. We're seeing women buy more into Princess dresses. We're seeing them buy more into Blazers. We're seeing them buy more into novelty sweaters. We're very well positioned in these categories. So we -- this is translating into accelerating performance for us. 30 [ph] days now, I hope to be able to report a lot more, once things are fully re-open in, into -- but at the end of this quarter we're feeling good about the momentum that we're building.

Well, that Patrice's comment is predicated on North America data. Based on our best estimates, we are also seeing share gains in Europe, in wholesale.

Thank you. Next question, please.

Thank you. The next question comes from Laurent Vasilescu with Exane BNP Paribas.

Good morning, and thanks for taking my questions. Jane, I think you mentioned that you took a little bit about $700 million in revenues out of the business, that on an underlying basis your revenues for fiscal year 2022 should be roughly flattish. Can you give us some sense of how we should think about that for 1Q or 1H, 2H? And then second question is, if I go back to the notes from last call you talked about the cost savings of around $180 million to $200 million at the -- majority of that should flow through the bottom line. Just curious if that's the right way to think about still where you guys -- are you going to lean into investments and how do we think about that versus 1H and 2H?

Sure. So Laurent, the $700 million is going to be a little more pronounced in the second half than in the first half, that's primarily driven by that we'll have Club Monaco in our results for Q1, and we'll have some residual Chaps business before the license shift in our business through Q1 and Q2. So you'll see a little bit of out-sized based on those two factors. The other, the daigou repositioning and wholesale door closures and off-price pullbacks those were relatively ratable through the year. But I think those two factors are what will distort 1H and 2H. And then on the $180 million of cost savings, about a $140 million is -- those savings are recorded in SG&A, because of our supply chain and product development organization streamlining about $40 million of that will be -- is embedded in COGS, and will flow through in COGS. And in terms of the year, it's also fairly ratable through the year. And we were encouraged in Q4, that we got an early start on that savings. The investment focus is that you point out are what I mentioned in terms of marketing versus pre-COVID levels, that 150 basis points increase in marketing. And then the store investments and digital investments, as you will see us invest as Patrice mentioned in more localized sites and some digital investments in content digitizing our supply chain. All of those are contemplated in our guidance.

Next question, please.

Thank you. The next question comes from Paul Lejuez with Citigroup.

Hey, thanks guys. I'm curious how you view of EBIT margins longer term might have changed as you kind of sit here today, just as you think about beyond '22. And relative to what you're guiding for this year. What do you need to see in the business to kind of achieve those goals, some top line number that you need to get to something else that needs to change within the P&L. And also just curious if you can give us a quick update on the order books for the fall in the wholesale business. Thanks.

Sure. So in terms of our operating margin guidance on a longer-term basis, what we see is that our mid-teens operating margin guidance over the next several years is still the right goal for us. Obviously, COVID put a question mark in terms of timing to achieve. But I think as we come out of this year, we're back on about 100 basis points of margin expansion from pre-COVID levels. Obviously we're expanding margins over 600 basis points to last year. That feels like a good trajectory and a balance of growth delivering operating margin profitability and investing in our business to make sure that it's a long-term value creating growth. And then, in terms of what we're seeing on what we have to see this year, obviously we've signaled a return to growth. We've signaled underlying gross margin expansion on the backs of AUR growth that's more in line with our long-term guidance of low to mid-single digits. We have to room maintain our operating expense discipline, while still investing in our business and making sure that those businesses yield the high ROI's that we've seen through this COVID period. We've got great results on ROI from personalization and targeting and marketing investments that really lean on our brands authenticity and heritage and value. So overall, I think we are feeling confident about our plan. Obviously, we're watching the trajectory of COVID carefully. It does imply a continued recovery rate in traffic. It does imply that the closures that we see in Europe will be completed in June. So that's a variable and we're watching disruptions in the supply chain fairly, carefully. In terms of fall orders, what we're seeing in Europe is, that Europe is up. You saw strong wholesale performance in Europe, that frankly exceeded our expectations given European closures. Europe is up on a versus last year of course, but also on a LLY basis. And in the US we're seeing strong improvement outperforming the broader wholesale trend and our sell-in is much better align now to sell-out. You saw over the past year we've been carefully managing inventories. We're now better aligned with positive sell-out in the fourth quarter and going forward we're seeing the order book better aligned to our sell-out trends, which were encouraged by.

Thank you. Next question, please.

Thank you. The next question comes from Ike Boruchow with Wells Fargo.

Hey, good morning, everyone. So Jane, just to kind of go further on US wholesale, so bigger picture. I think the US wholesale business pre-COVID was around $1.5 billion. I know Chaps is coming out, so I think that's $200 million. But can you talk to us about ultimately how you see the sizing of that channel? Are you planning -- if there's any more detail on this year and how you're planning it that'd be great. But even multi-year is the business you're planning to kind of walk away from post-pandemic that maybe you just felt is not the most efficient, maybe it's lower margin. Just kind of trying to think about $1.5 billion pre-COVID maybe two years, three years from now, where ultimately do you kind of see that landing?

Of course. So what I feel really good about in North America, which Patrice commented on in his question is that we are essentially done with the repositioning that we needed to do across our broad wholesale channel. So wholesale of course is off-price, which we've significantly reshaped strategically and taken down materially. And we feel good about that business that is now strategically re-positioned to be what it should be, which is a vehicle for excess liquidation. We feel really good that we got out ahead of closing some of the 232 doors in North America. We feel like our store footprint is now elevated and appropriate to move forward. And you're starting to see us gain market share in the channel. And we feel good about the growth that you -- that we're seeing in wholesale.com. And view that as the continued source of growth for us as we move forward. You saw significant pick up in wholesale.com in North America and in Europe in the fourth quarter. So, we feel good about the Proofpoint [ph] and the trends on the back of some pilot initiatives, dedicated resourcing and dedicated content that we put there. So just for sizing, we feel like the North America will be a source of growth for us. It will also be a source of sustainable growth for us driven by digital, driven by pure plays and driven by market share gains in the district footprint, distribution footprint, which we now feel very good about.

We'll take one last question, please.

Thank you. Our final question comes from John Kernan with Cowen.

Excellent. Thanks for sneaking me in.

Go ahead.

Hey, can you talk to EBIT level impacts from the shift in Chaps and then the sale of Club Monaco?

So the sale of Club Monaco, this year should add about 40 basis points to 50 basis points of operating margin, accretion. And then Chaps, while it has a meaningful hit on the bottom line is, will generate more dollars on the bottom line, but it's relatively small.

All right. Well, thank you, everyone for joining us today. We are very proud, Jane and I and Ralph of the resilience and agility, our teams have demonstrated in delivering a strong close to the year. Looking ahead, hopefully, you took this away from our conversation today, we are confident in our ability to deliver sustainable long-term growth and value creation not only this fiscal year but also beyond. And we look forward to sharing our first quarter fiscal year 2022 results with you in August. Until then, stay safe and have a great day.

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