Earnings Call Transcript
RALPH LAUREN CORP (RL)
Earnings Call Transcript - RL Q1 2022
Operator, Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal Year 2022 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. As a reminder, this conference is being recorded. I would now like to turn over the conference to our host, Ms. Corinna Van Der Ghinst. Please go ahead.
Corinna Van Der Ghinst, Host
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.
Patrice Louvet, CEO
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 brands and 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 average unit retail prices; second, we repositioned each of our channels and reduced our exposure to secularly challenged 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.
Corinna Van Der Ghinst, Host
Good morning, and thank you for joining Ralph Lauren's First Quarter Fiscal 2022 Conference Call. With me today are Patrice Louvet, the company 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 from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties, principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release and to our SEC filings that can be found on our Investor Relations website. And now I will turn the call over to Patrice.
Patrice Louvet, CEO
Thank you, Cory. If there's one thing we've learned over the past 18 months, it’s agility and the importance of agility. So, apologies for the false start. And now we're ready to go into our prepared remarks. So good morning, everyone, and thank you for joining today's call. Our teams delivered exceptional first quarter performance on both our top and bottom line results and across every geography. Our brand is resonating with consumers around the world as we lean into the breadth of our offering to deliver the products they are craving in this new normal. And all of our regions are in a healthier, more profitable growth trajectory. Even as we continue to execute through COVID-related challenges, it is clear that Ralph Lauren is back on offense. A few highlights to note. First, building on our consistent brand elevation work in the direct-to-consumer business. We are now seeing accelerated demand and increased average unit retail prices in our wholesale channel. Second, our digital growth is accelerating following our pricing and promotional reset work last year, and our digital margins continue to be accretive across every region. And third, we continue to make strong progress toward our long-term target of mid-teens operating margins. We delivered the highest first quarter company operating margin since fiscal 2014, even as we more than doubled our marketing investment and continue to reinvest in key areas of growth like digital, key city ecosystem expansion, and our consumer targeting and personalization. Our performance demonstrates consistent execution against the five strategic pillars that we outlined at the start of our Next Great Chapter plan. Let me share a few highlights from the quarter. First, on our efforts to win over a new generation, as we continue to invest in marketing, we are focused on new consumer acquisition and retention and both global and localized campaigns that capture consumers' optimism and desire to come together as we progressively emerge from the challenges of the past year. Some of our key campaigns in the first quarter included our summer of sports, which we kicked off with our Olympics campaign in North America as the official outfitter of Team USA. In June, we amplified our Wimbledon campaign with a diverse group of athletes, celebrities, and influencers such as South Korean superstar and Tottenham forward, Son Heung-min; British pro-surfer, Lucy Campbell; and G2 eSports League of Legends superstar, Rekkles. In the world of golf, we celebrated our brand ambassador, Yuka Sasou's first major win at the US Women's Open Championship, and we were excited to welcome LPGA professional golfer, Andrea Lee, as the newest face of our women's golf brand. Combined, these summer sports campaigns generated more than 8 billion total impressions globally in the quarter. And there's still more to come in August and September with the 2021 Ryder Cup and the US Open Tennis Championships right here in New York. We also announced our launch this quarter as the official outfitter of G2 eSports, one of the world's premier professional esports organizations. We are proud of this first-of-its-kind partnership in fashion and gaming as we continue to drive new ways of reaching next-generation consumers in key channels where they engage. In all, we added more than 1 million new consumers to our direct-to-consumer channels alone this quarter. And our total social media followers continue to grow, exceeding 46 million globally, led by Instagram. This takes me to our second key initiative, energize core products and accelerate high potential underdeveloped categories. As markets reopen around the world, consumers are shifting back to many of the key categories that drove our business prior to the pandemic, while we also continue to develop new and high-potential categories. While casual styles are still resonating, we're also seeing a progressive return to sophisticated casual. Given the breadth of our assortment, we have the unique ability to respond to consumer shifting appetite, reintegrating more elevated styles into our assortments as we scale back on stay-at-home categories. On the men's side, we're seeing a resurgence in polo shirts, sports coats, trousers, denim, footwear, and accessories for our core brands. In women's, we're seeing improvements across dresses, elevated sweaters, novelty fleece, jackets, and handbags. And we're also driving better performance in bottoms, including new fashion silhouettes like wide leg as well as new fabrications like silk and linen. We are rebuilding the penetration of these categories into Fall '21 and beyond as consumers make the transition back to the office and social activities. Our spring performance gives us increased confidence that we will have the right assortments to meet consumers' needs moving forward. Other product highlights from the quarter included our first of several special collections with Major League Baseball. These limited capsules celebrate the heritage of America's favorite past time and evoke Ralph's lifelong love of the sport. Launched in May across all of our channels, including social, digital, our stores, and wholesale, the initial capsule generated over 5 billion media impressions, along with significantly higher spend compared to our average total consumer. Our spring polo shirt campaign included the launch of our Polo Color shop, fully made to order customized polos, and our updated Earth Polo in expanded colors. And we launched Polo Colonia Intense, an updated fragrance for a new generation and our new eyewear collection as we continue to elevate and innovate across our licensed categories as well. Moving on to our third key initiative, drive targeted expansion in our regions and channels. With most of our key markets now fully reopened, we are back on offense this year, with the build-out of our brand elevating key city ecosystems around the world. This ecosystem approach ensures a consistently elevated experience across our digital, social, and physical channels, both in our direct-to-consumer and wholesale networks. As part of this, in the first quarter, we opened 18 new stores and concessions in priority locations globally, mostly in Asia, and closed 11 locations. China continues to be a significant long-term growth opportunity and our ecosystem approach delivered strong growth again this quarter, with Mainland sales up more than 50%. We are opening two new emblematic store experiences this year in Beijing and Shanghai. With a smaller footprint than our existing flagships around the world, this new format offers consumers an elevated immersive brand experience at a significantly lower investment than our traditional flagships. Our Beijing store opened at the end of April in Sanlitun Mall, one of the top shopping locations in the country. In addition to featuring Ralph's coffee, Sanlitun integrates innovative, smart retail and digital activations throughout the store in partnership with Tencent. This includes endless aisle technology, virtual try-ons, and in-store treasure hunts using QR codes and customization stations where consumers use our WeChat Mini Program to order customized products from their mobile phones. Though still early, the store has significantly outperformed our initial expectations, and we're excited to build on our presence in China with the opening of our emblematic Shanghai location in just a few weeks. Both stores will immerse consumers in the world of Ralph Lauren and will help further develop our ecosystems in these key markets, which already include our smaller format Polo boutiques, in fashions, and digital presence across our own site and key partners. And as foreign tourism continues to be a headwind compared to fiscal 2020 levels, we have shifted more of our marketing, clienteling and merchandising to capture local shoppers and regional tourists, along with driving digital commerce. This takes me to our priority of leading with digital. Our global digital ecosystem, including our directly operated sites, department store websites, pure players, and social commerce, accelerated to more than 80% growth in the first quarter in constant currency, up from about 60% in Q4. While traffic is starting to return to physical stores, the strength in digital is exceeding our expectations, driving a benefit to our overall operating margin mix. North America drove the biggest improvement this quarter, increasing more than 50% across both owned and wholesale digital channels. Meanwhile, Europe and Asia momentum continued with growth of more than 100% in each region in Q1, led by our wholesale digital and pure-play channels. Our investments in digital continue to focus on content creation for all of our platforms, enhanced digital capabilities to improve the user experience, and continuing to leverage AI and data to serve our consumers even more effectively. Touching on our work to operate with discipline to fuel growth, we continue to drive expense discipline in the first quarter to fund our long-term strategic investments in global expansion, digital, and brand building, while also working toward our target of mid-teens operating margins. We also successfully completed the sale of Club Monaco at the end of the first quarter as planned. And as previously announced, Chaps will transition from our North America wholesale business to a license model in Q2. These actions will enable us to further focus our resources on our core namesake brands and elevated positioning in the marketplace. I also want to take a moment to highlight our ongoing work to integrate citizenship and sustainability into everything we do. In June, we published our annual Design the Change report, outlining our updated commitments and actions to drive our impact and champion the lives touched by our business. While I encourage all of you to download the full report from our corporate website, I'll highlight a few important additions this year. We committed to comprising our global leadership team of at least 20% underrepresented race and ethnic groups by 2023. As part of our comprehensive circularity strategy, we set a target to use 100% recycled cotton in our products by 2025 and to launch additional resale and recycling opportunities for our consumers by 2022. We also announced a goal to achieve net zero greenhouse gas emissions across our operations and supply chain by 2040, as we continue to work on reducing our carbon footprint throughout our value chain. And beginning this fiscal year, we will incorporate key ESG metrics into our executive compensation plans. In closing, Ralph and I are very encouraged by the strong start to the fiscal year. Our teams are executing with passion and continue to embrace the agility they demonstrated throughout the challenging and unpredictable last 18 months. While we will continue to monitor key macro challenges closely for the balance of the year, notably around inflation, supply chain disruptions, COVID resurgences, and the pace of traffic recovery, the actions we took to strengthen the foundations of our brand and our business last year are enabling us to deliver results even earlier than we expected. Looking beyond this period of unusual COVID compares, we are increasingly confident in our ability to drive sustainable growth. More than ever, led by Ralph's iconic vision, our teams are intensely focused on executing on our strategic plan to continue to protect and elevate our brand while realizing the significant growth opportunities that exist for our business in every market. With their passion, talent, and careful execution, Ralph and I are confident in our ability to deliver attractive long-term growth and value creation for all of our stakeholders. 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.
Jane Nielsen, CFO
Thank you, Patrice, and good morning, everyone. Our first quarter performance exceeded our expectations as our teams navigated challenges with agility, our brands connected with consumers, and our strategy drove high-quality growth. Upside performance this quarter was driven by a faster recovery in both North America and Europe led by our wholesale channels, strong performance across Asia, despite extended COVID headwinds in Japan, accelerated digital growth with further digital margin expansion, and continued brand elevation with high teens average unit retail growth. We continue to drive expense discipline across our business while investing in high ROI initiatives to drive operating margins significantly above our expectations. First quarter revenues increased 182% compared to last year on a reported basis and 176% in constant currency. Growth was positive in every region, led by North America. Compared to first quarter fiscal 2020, revenues declined 4%. However, this includes approximately seven points of negative impact from last year's strategic reset to our distribution and to our Chaps business, which transitions to a license model this month. Total digital ecosystem sales accelerated to more than 80% growth in constant currency, both to last year and the like last year, including 50% growth in our own digital business. Our performance improved sequentially in every region, reflecting our strong assortments, expanded connected retail capabilities, and high-impact marketing. North America delivered the strongest sequential improvement with digital ecosystem sales increasing more than 50%, up from low double digits last year. Digital margins also continue to strengthen and are strongly accretive to every region's profitability. Total company adjusted gross margin was 69.8% in the first quarter, down 200 basis points compared to last year on a reported basis and down 260 basis points in constant currency. This was significantly better than expected as we lapped last year's unusual COVID mix benefits driven by better pricing and promotion, along with favorable product mix and the benefit of supply chain organization streamlining. Adjusted gross margins increased 30 basis points compared to last year. First quarter average unit retail growth grew 17%, marking our 17th consecutive quarter of average unit retail gains as we continue on our brand elevation journey. This came on top of 25% growth last year, while stores were closed. Adjusted operating expenses increased 39%, driven by higher compensation and rent as we lapped last year's furloughs and store closures during COVID shutdowns. Adjusted expenses declined 2% compared to last year. We more than doubled our first quarter marketing investments over last year's substantially reduced levels at the start of the pandemic. Compared to first quarter fiscal 2020, marketing increased 39% as we focus on digital initiatives and reactivating key brand moments as markets reopened around the world. We expect to maintain an elevated level of marketing this year at around 6% of sales to support consumer engagement, acquisition, and our long-term brand-building initiatives. Adjusted operating margin for the first quarter was 16.8%, compared to a margin loss of negative 35.7% last year and 460 basis points ahead of last year’s operating margin. This was well above our guidance of 7% to 7.5% due to stronger-than-expected replenishment in our wholesale and digital channels, which generate highly accretive margins versus our total company rate. Moving on to segment performance, starting with North America. First quarter revenue increased 300% compared to last year, driven by strong spring assortments, improving consumer sentiment, and expanded store reopenings, as we lapped the peak of store lockdowns last spring. Compared to last year, North America revenues declined 8%, but included an 18% headwind from our strategic distribution resets and Chaps. In North America Retail, revenues grew 189% compared to last year. Comparable sales increased 176% on improved traffic and nearly 40% average unit retail growth, reflecting our continued elevation around product, marketing, and more targeted pricing and promotions. Brick-and-mortar comparable sales increased 278%, driven by stronger average unit retail, basket sizes, and traffic as most stores reopened. Although foreign tourist sales improved significantly compared to last year, they were still nearly 70% below last year due to continued softness in international traffic and travel. Comparable sales in our own digital commerce business grew 51% this quarter, accelerating from 25% in Q4, as we continue to focus on new consumer acquisition, product elevation, and enhancing the user experience. While we expect continued momentum in this channel, we note the prior year comparisons build sequentially after Q1. In North America Wholesale, revenues increased to $250 million compared to $23 million last year as we carefully restocked into the channel and lapped last year's minimal shipment to customers during the shutdown. Sales meaningfully outperformed our expectations, driving the biggest upside to our guidance this quarter. The foundational work we completed through COVID to reset and elevate our inventories, exit lower-tier wholesale doors, and significantly reduce our off-price penetration is starting to deliver strong early results across every key metric. In North America wholesale, full-price sell-out is exceeding our sell-in. Total sell-out was up high teens compared to last year in Q1, led by market share gains in men's, kids, home, and women's footwear. And we are also encouraged by early sequential improvements in women's ready-to-wear. Wholesale average unit retail growth continues to accelerate, up more than 20% compared to last year. This represents our strongest wholesale pricing gains in the last six years. And our focus on wholesale.com is working with digital sell-out up more than 50% in Q1 and more than 75% compared to last year. Coming out of the pandemic, our wholesale partnerships are stronger, healthier, and more collaborative with a focus on marketing, improved digital capabilities, the right product assortment, and an appropriate level of inventories as we build back into demand, and we see more to come as we are still in the early stages of driving our brand elevation strategy in this channel. Moving on to Europe. First quarter revenue increased 194% on a reported basis and 179% in constant currency, above our expectations. First quarter comparable sales increased at 98% with a 154% increase in brick-and-mortar as stores reopened and a 23% increase in digital commerce. The strong early pent-up demand that started in the UK this April was followed by better-than-expected reopening trends across France, Germany, and Italy despite extended lockdowns in the quarter. Approximately 20% of our stores were fully closed in Q1 with additional stores operating under partial closures or other restrictions. All of our major markets reopened by the end of June. Digital commerce outperformed despite a challenging 44% comparison last year when COVID-related closures shifted more business online. While our digital comparable sales partially benefited from extended lockdowns across Europe this quarter, the results also reflected stronger spring assortments, growth in connected retail, and our targeted marketing efforts. Europe wholesale exceeded our expectations again this quarter, driven by stronger sell-out and reorders in both digital wholesale as well as traditional wholesale accounts. Turning to Asia. Revenues increased 68% on a reported basis and 61% in constant currency. Our Asia retail comparable sales increased 43%, driven by similar performance across our brick-and-mortar stores and digital commerce. Our digital ecosystem continued to accelerate in Asia. In Q1, this was supported by our successful 520 gifting campaign, the 618 shopping event live-streamed from our newly-opened Sanlitun store, and momentum in our newest digital flagships in China, Japan, and Hong Kong. Japan, our largest market in Asia was negatively impacted by an extended state of emergency for the majority of the quarter. These restrictions drove a roughly 6-point headwind to the region's overall growth in Q1. Despite this, our teams were able to successfully mitigate these headwinds with stronger performance across the rest of the region. This was led by the Chinese Mainland, which was up more than 50% compared to last year and 70% compared to last year in constant currency, driven by a strong product assortment, localized marketing initiatives, and new store openings. Korea was also up more than 30% compared to last year and 40% compared to last year. Japan returned to normal operations in late June and started to ramp up vaccinations. However, the government declared another state of emergency in July ahead of the Olympic Games, and we expect a slower recovery in Japan this year. Moving on to the balance sheet. We ended the year with $3 billion in cash and investments and $1.6 billion in total debt, which compares to $2.7 billion in cash and investments and $1.9 billion in total debt last year. We are confident in our ability to meet our debt leverage ratio requirements in Q2 and eliminate capital allocation restrictions in our bank waiver. Net inventory increased 4% to support increasing demand. This compared to a 22% decline last year when we limited shipments to brick-and-mortar channels at the height of COVID shutdowns last spring. Supply chain challenges are increasing the variability of inventory flows quarter-to-quarter. Looking ahead, our outlook is based on our best assessment of the current macro environment, which includes ongoing COVID-related disruptions, the global supply chain challenges. We expect the quarter cadence this year to be volatile given dynamic conditions across our markets. This includes potentially uneven pace of recovery by region and channel as well as the timing of investments as markets reopen. For fiscal 2022, we now expect constant currency revenues to increase approximately 25% to 30% compared to last year on a 53-week basis. Excluding approximately $700 million in annualized revenues, we deliberately reduced during the pandemic, including department store exits, off-price and digital reductions, Chaps, and Club Monaco, this implies revenues up slightly compared to fiscal 2020. Foreign currency is expected to contribute about 30 basis points to full year revenue growth. We now expect gross margin to expand 50 to 70 basis points even as we lap meaningful geographic and channel mix benefits due to last year's COVID closures. This implies roughly 440 basis point increase to fiscal 2020. Our outlook includes slightly higher freight headwinds of approximately 100 to 120 basis points versus our previous expectation of about 100 basis points. However, this is more than offset by our expectation of stronger average unit retail growth of mid to high single digits above our long-term guidance of low to mid-single digits annually as we continue our long-term elevation work. We now expect operating margin of 12% to 12.5%, up from our 11% outlook previously. This compares to a 4.8% operating margin last year and 10.3% in fiscal 2020. We expect operating margin for the remaining three quarters to moderate from first quarter levels based on increased marketing investments as planned to get to our target of 6% of sales this year, increased freight pressure in the back half of the year and our assumption that the higher margin wholesale replenishments that we saw in the first quarter does not continue as demand starts to normalize. For the full year, we expect operating profit dollars to increase meaningfully compared to fiscal 2020 pre-COVID levels. For the second quarter, which no longer includes Club Monaco, we expect constant currency revenues to increase approximately 20% to 22%. Foreign currency is expected to contribute about 50 basis points to revenue growth. We expect operating margin of about 13% to 14% in the second quarter. This includes gross margin of flat to up 20 basis points as we continue to drive average unit retail and product mix, largely offset by higher freight as we lap last year's COVID mix benefits. We also expect modest operating expense leverage and restructuring savings, partially offset by higher marketing and new stores. We expect a full year tax rate to be about 24% with the second quarter tax rate about 24% to 25%. In closing, we are proud of our team's agility and execution around the world this quarter. As Patrice mentioned, we are still managing through a highly dynamic environment. We are firmly back on offense with this strong start to the year and this is only the beginning. Guided by Ralph's original vision and our purpose of inspiring the dream of a better life through authenticity and timeless style, we are connecting with consumers in more exciting and innovative ways than ever before. Over the coming quarters and beyond, you'll continue to see us driving our targeted strategic investments in key growth opportunities to deliver value for all our stakeholders.
Operator, Operator
The first question comes from Brooke Roach at Goldman Sachs.
Brooke Roach, Analyst
Good morning and thank you for taking our question. Can you please elaborate on what drove the outperformance in Q1? And perhaps where you see the most upside or downside risk to your updated fiscal 2022 guidance from here? And Jane, as a follow-up, with the 12% to 12.5% operating margin outlook in your sights for the year, how are you thinking about the levers to achieve your mid-teen longer-term operating margin target? Thank you.
Patrice Louvet, CEO
Hey, good morning, Brooke. Thanks for your question to kick us off. So, first off, I actually really want to take a moment to acknowledge the tremendous execution and agility of our teams in the first quarter as we got back on offense as a company. I'd say the key drivers of this quarter's outperformance were, first, the stronger-than-expected recovery in North America and Europe, especially in wholesale, which, as you know, is accretive to overall margins. Just a couple of data points to illustrate that, our North America wholesale average unit retail was up more than 20%. Our sell-out – full price sell-out was up in the high teens, and our wholesale.com business was up more than 75% compared to last year. All 3 of these numbers are versus last year, which we think is the more relevant benchmark period. The reset work that we did to create a healthier foundation in wholesale over the past few quarters is really starting to play out nicely and in a brand-enhancing way. The second point I would call out is the fact that we drove the right elevated product and brand messaging with consumers. Ralph and our design team have done a great job of creating assortments that are resonating with consumers. We've been really pleased with our ability to win in casual, while at the same time, winning in more sophisticated casual as the consumer pivots back into that direction. And the third point I would call out is our pivot to digital and connected retail, which is really driving accelerated growth and margin accretion across our digital channels. Therefore, I'd say we are feeling confident in the sustainability of our growth going forward, driven by a structurally healthier base, an important pivot in North America wholesale and digital, and investments back into our business.
Jane Nielsen, CFO
And Brooke, I would just add that many of the risk factors that we highlighted at the start of the year did not materialize in this quarter. And there were not as much of a headwind as we originally anticipated. And on the second part of your question, based on the strong Q1 beat, we felt comfortable raising our full year guidance on strength in digital and improved gross margin outlook with higher average unit retail prices and our ability to flow through top line outperformance to operating margin. That being said, the global environment remains volatile and our guidance continues to incorporate a number of factors. First, it's clear that COVID isn't over, and we are watching the impact across our markets from both a demand recovery as well as from a supply chain perspective. And second, we expect to have increased inflationary pressures whether it's from freight, raw materials, or labor to be a headwind as we move through the year. And lastly, while we're focused on strong growth trajectory in fiscal '22, we're very focused on long-term growth and sustainable value creation. As Patrice mentioned, we're going to continue to invest in profitable growth. As we look towards a mid-teens operating margin, which we still think is the right long-term outlook for our business, we would say that we will continue to get to mid-teens margins based on continued revenue recovery, although lower than our original expectation of a $7 billion revenue mark in our original investment day, thanks to the foundational work that we did through COVID. But our progress continues to be a story of expanded gross margin and SG&A expense leverage to the top line. We can do this based on the expectation of low single-digit comp growth, as we've noted earlier in prior quarters. We still feel confident about that. That's still our long-term goal, and we feel great about the progress we've made in this year in getting closer to that goal.
Corinna Van Der Ghinst, Host
Next question, please.
Operator, Operator
The next question comes from Matthew Boss with JPMorgan.
Matthew Boss, Analyst
Great. Thanks and congrats on a really nice quarter again, guys.
Jane Nielsen, CFO
Thank you.
Patrice Louvet, CEO
Thank you, Matt.
Matthew Boss, Analyst
So Patrice, 17% average unit retail growth is on top of 25% a year ago. Maybe by region or by category, where are you seeing the greatest upside relative to plan as maybe you had laid it out, as it relates to pricing power? And then, as we think moving forward, where do you see the greatest opportunity remaining as you continue down the brand elevation path?
Patrice Louvet, CEO
So you're right. It's 17% this quarter. And just to frame it for everyone on the call, this is our 17th quarter of average unit retail growth. Now we know our average unit retail growth over the past 12 to 18 months has been outsized and our long-term guidance on that is more low to mid-single digits. But we're really pleased with the progress that the team has made on continuing to elevate the brand and drive average unit retail growth concurrently. Matt, the biggest areas of progression. The one thing I would really call out is actually the progress on North America wholesale. Because we haven't grown average unit retail in wholesale in North America in a long time, years. I think through the great partnership that we have with our wholesale players here in the market, as well as the brand elevation work, the work on products, the work on marketing, and the work on presenting the brand in a more engaging way, it's translating into meaningful average unit retail growth. You think we quoted a number up over 20% versus last year in North America wholesale. Listen, this is not a one-quarter pop. We are confident in our trajectory moving forward, working closely with our partners to continue to drive average unit retail in wholesale. The other area I would call out is actually North America, our own website, where we saw, again, very meaningful progression on average unit retail this quarter, I think, up north of 40%. So quite healthy. Again, we're not pricing. We're not elevating average unit retail in a vacuum. This is the outcome of brand elevation work, again, elevating the product, elevating our marketing, elevating our presentation. As a result, we have the ability to drive average unit retail through the four vectors that we've been talking about historically together. One is being much more targeted and surgical in our promotional activity. Two is strategic price increases where we believe we can offer competitive value relative to our peer set. Three is continuing to invest in product mix, and you see us invest in outerwear, in home, now and those products obviously carry much greater average unit retail levels. Finally, channel and country mix. So that's some specificity. But all in all, Matt, we've actually grown average unit retail really nicely across the board, and we're really pleased with our performance across regions and across channels, which indicates again that the brand elevation work that we are doing is sticking and that the consumers see the value in what we have to offer.
Jane Nielsen, CFO
Yes. And Matt, I would just add that we are really at the start of this journey in North America, and we see significant upside. As Patrice mentioned, the wholesale pricing is very encouraging. You saw strong average unit retail growth in North America. We're really encouraged by the team's ability to add levers of pricing as we move forward. Notably, our new consumer acquisition with those new consumers transacting at higher average unit retail and bigger basket sizes is a really nice additional lever that we feel confident in and confident that we've proved out the ROI of investing in that new consumer acquisition. So we feel like there is more upside as we move forward. I think North America is encouraging, but also we're encouraged by the pricing that we put up in our more developed markets like Asia, which has led in terms of average unit retail levels, but continues to grow nicely as we continue our brand elevation journey.
Corinna Van Der Ghinst, Host
Thank you. Next question, please.
Operator, Operator
The next question comes from Michael Binetti with Credit Suisse.
Michael Binetti, Analyst
Hey, guys. Thanks for all the details. First, I'll offer my congrats. I know you guys did a lot of hard work to clean up the business last year. We can see the results of it here. A couple for me. Jane, similar to Matt's question on the average unit retail. How do you think about the sustainability of gross margins here? It's above – the run rate is above what you thought about at the Analyst Day, a couple of years back. It's been just such a source of upside to both our numbers and your plan for so many quarters. And it doesn't sound like the underlying drivers are slowing down at all. So I'd love your thoughts there. And then I guess in the quarter, as you started to refill the North America wholesale channel, and Patrice, I heard in your voice, you're very happy with that. The growth rate improved by about 100 basis points sequentially compared to the fourth quarter. So good numbers by any standards. And I don't mean to tempt or sound greedy, but as we've watched some of the peers report here lately, I wonder if Ralph Lauren would have seen wholesale up even more. And the only reason I ask that is because you've been very measured about the pace of restocking that channel. I wonder if you could try to dimensionalize for us how you think about the September quarter and North America wholesale channel trend, the gap between selling and sell-through. Do you feel like you've held it back and that can continue to normalize, or how should we think about the continuation of the refill in the wholesale channel in North America?
Jane Nielsen, CFO
Sure, Michael. You’ve raised an important question. Let me start with gross margin. When we look at our gross margin journey, it began four years ago, not during COVID. There are two major factors: the strength of our brand and our commitment to invest in it, as well as our belief in enhancing all consumer touch points. This has enabled us to maintain our pricing journey and expand gross margin. We are confident in this ongoing journey. We have developed stronger products than before across various categories, maintaining both our lower and elevated price points. Our consumers are showing strong demand for these elevated offerings, which supports our product mix and reinforces our ability to drive gross margin. We also see lasting benefits from our tailwinds. Moving forward, we expect to gain geographic and channel advantages as we focus on direct-to-consumer and digital strategies. These elements are fundamentally driving our long-term gross margin plans, which we believe will remain sustainable for the next several years. While the rate of growth may not match what we experienced during COVID, we anticipate continued gross margin expansion. You’ll notice this in our updated guidance for increased margins for the remainder of the year. Regarding the wholesale channel, we are encouraged by its performance this year. Throughout COVID, we mentioned that our sell-out and sell-in would start to normalize. This quarter, sell-out surpassed sell-in, and we expect that to normalize strongly as we work with our partners in their recovery. We are particularly pleased with the double-digit growth in our North America wholesale business and the strong pace of growth in our digital wholesale segment. We are collaborating more effectively with our wholesale partners than ever before.
Patrice Louvet, CEO
Yes. I'm sorry, I would just double down on that. I think we've been really pleased with the partnership with our partners here. Just a data point to give you the context of the reset work that we've done on wholesale brick-and-mortar North America over the past few years. We're down 66% in terms of wholesale doors over the past four years. So, we're seeing the benefit of that healthier brick-and-mortar base. We're also seeing the benefit of the amazing partnership we have on the digital front, where you saw significant acceleration of our wholesale.com performance, and we expect that momentum to continue. I think we are on the very same page when it comes to looking at assortment and continuing to elevate our assortment.
Corinna Van Der Ghinst, Host
Thank you. Next question.
Operator, Operator
Thank you. The next question comes from Erinn Murphy with Piper Sandler.
Erinn Murphy, Analyst
Great. Thanks. Good morning.
Patrice Louvet, CEO
Good morning, Erinn.
Erinn Murphy, Analyst
A couple for me. First, I was hoping you could share a little bit more about the category outperformance. You named a number of categories, including Polo shirts for men, tailored bottoms, wide leg bottoms for women. Just going back to your Investor Day, you talked about non-core categories as being $0.5 billion of incremental growth. Just with what you've seen on consumer behavior, has the complexion of the categories in the non-core area changed? Just curious about how you're thinking about the growth there. And then I've got one follow-up.
Patrice Louvet, CEO
Sure, I'll address that. For men's, we are indeed focusing on introducing new and more elevated products. We've seen strong performance in sports jackets, coats, polo shirts, trousers, denim, and footwear over the past quarter. Similarly, in women's, there is a noticeable shift towards newness and a more sophisticated casual style, with dresses, novelty sweaters, jackets, and bottoms being the key areas of focus. We like to refer to our high potential categories instead of non-core, as we believe they will eventually become core for us. Categories such as outerwear, denim, footwear, accessories, and now home, all hold significant potential. In particular, the opportunity in outerwear seems larger than we anticipated three or four years ago, and we plan to invest heavily in that area. You'll see evidence of this in our fall collection. Overall, we are optimistic about the capabilities we are developing, the product evolution, our marketing activation, and the way we are rethinking product distribution. The home category is a recent addition and although we're in the early stages, we are very positive about the potential and encouraged by the initial traction we are experiencing.
Erinn Murphy, Analyst
Great. And then my follow-up is just on the tourist level, I think you talked about it being down 70% versus last year. Can you just share kind of your outlook over the next 12 to 18 months? Are there any signs of life as Europe reopening there or even here in North America and just kind of how we should think about the rebound as we look forward? Thank you.
Jane Nielsen, CFO
Sure. Well, Erinn, while we saw tourist sales improve slightly in North America, they're still down 69% compared to last year, but we did see some improvement on a sequential basis, but international travel remains limited in most regions. Our assumption in fiscal 2022 is that we've assumed continued headwinds from tourist sales as we expect foreign travel to be under pressure through the fiscal year. Foreign tourism tends to be a lagging indicator. Fortunately, we are focused on capturing more domestic travel opportunities coming out of the pandemic. We’ve noted our Sanlitun store, which is outperforming in the tourist market like Beijing, and local domestic travel to some of our flagships is what we're also leaning into. We have a limited presence in travel retail and have anticipated that that will be slower to recover as we move forward. We are very focused on building our business with the Chinese consumer within China. You've seen our Mainland China growth, continued strong store build-outs, and increased marketing, which we doubled this quarter to engage with that consumer before they start on their travels as the markets start to recover. But our expectation is that will happen after fiscal 2022.
Corinna Van Der Ghinst, Host
Next question please.
Operator, Operator
Thank you. The next question comes from Omar Saad with Evercore ISI.
Omar Saad, Analyst
Thank you for taking my question. Another great quarter. I wanted to ask a quick follow-up regarding your wholesale partners and the more collaborative relationships you're developing. Do you think that the legacy markdown support vendor model may be declining and becoming less relevant moving forward? Additionally, could you elaborate on the e-commerce acceleration with younger consumers and how they influence the new pricing strategies and newfound pricing power of the brand? Thank you.
Patrice Louvet, CEO
Certainly, as we look at our global wholesale footprint, we want to drive greater focus on more natural margin, right? And that's certainly where we're headed, and as we're seeing our improved average unit retail performance in North America, less reliance on promotional activity. I think that's the direction of travel. That’s certainly our intent, and that's what we're working towards. With our partners in a win-win mindset so that we can expand our margins, and they can also expand theirs in a sustainable win. When it comes to recruiting new consumers on our e-commerce sites, if I understood your question correctly, Omar, I mean, actually, we're quite energized by the progress we're making in terms of new younger consumer recruiting on our site. It's the result of a combination of factors, right? One, our marketing investments are up significantly. Just as a reminder, marketing this year is 6% of revenue, whereas two years ago it was 4.5% of revenue. So, a significant lift in marketing. And then we're playing a much broader palette of marketing activities, ranging from these above-the-line big brand campaigns like the polo shirt to our activities on sports, Olympics, Wimbledon, and gaming. You saw that we signed a partnership with G2 with Rekkles, one of their superstars there because that's where the consumer is. We want to appeal to that younger consumer where he or she consumes media and engages. We're seeing gaming as an important component of that. We're continuing to inject product newness and surprise in our program. The Major League Baseball program has exceeded our expectations significantly, and what we've seen in Asia, particularly in China, with the partnership that we did with Edison Chen and the Clot brand, has also shown significant excitement and strong reactions from consumers. We are going to continue to appeal to a new generation, right? That's one of our five core strategic pillars. We think through our increased marketing and our more targeted approach, we have the ability to do that, and I think the numbers would bear that out. To Jane's earlier point, what we like about the consumer beyond the fact that it's a new generation is higher basket sizes and more full-price, therefore a more profitable consumer for us. We also put a lot of attention and focus on retention, because obviously, the name of the game is to bring them in and make sure they stay in the family. Our ability to target them with much more personalized messaging through digital is proving to be a very effective tool for us. So, it's a journey to be continued, but we're excited and encouraged by the momentum we have with that next-generation consumer.
Jane Nielsen, CFO
Omar, I just wanted to add just on your comment about vendor allowance and the relevance. Full price selling takes vendor allowances off the table. When I look at our progress this quarter, our full price sell-out was up almost 150%. And it was up almost 20% on a last-year basis. That's the power that eliminates the need for vendor allowances. It's the power of our brand, and that's what we're committed to delivering.
Corinna Van Der Ghinst, Host
Next question?
Operator, Operator
Thank you. The next question comes from Lauren Bales with Exane BNP Paribas.
Lauren Bales, Analyst
Good morning. Congrats on great results. I just wanted to ask about the operating margin, Jane and Patrice. You just delivered nearly a 17% operating margin in Q1. You're guiding for a 13% to 14% operating margin, which would imply second half operating margins would be single digits. Jane, any considerations on the gross margin SG&A front? And then secondly, I think, Jane, you mentioned North America was down 8%, but on a two-year stack, but then there were 18 points of headwind due to the strategic actions which suggest that North America on a core basis really did grow. Is that the right way to think about it? If so, how do we think about North America growth on a two-year stack basis for fiscal '22?
Jane Nielsen, CFO
Well, we will have the headwinds of the reset that we did. So you're exactly right. North America was down 8%. If you consider the 3%... Yes.
Patrice Louvet, CEO
Up 10%.
Jane Nielsen, CFO
Up 10%. Is that right?
Patrice Louvet, CEO
Yes, the whole company is up 3.5% without the resets, North America specifically up 10%.
Jane Nielsen, CFO
I apologize. So North America would be up 10 if you take out all of the resets in Q1, even though on a last-year basis, it was down 8%. We're guiding now to 12% to 12.5% operating margin. That puts us 200 basis points ahead of pre-COVID levels on a lower revenue base. So we're feeling very good about our progress towards our mid-teens operating margin. We do note, as we move through the year, that we had some exceptional replenishment opportunities in wholesale, both digitally, digital pure players and our wholesale partners, which comes through at a high incremental margin. We don't anticipate that level of replenishment as we move forward. We note that some of the freight pressures and some of the raw material pressures will continue to be a headwind in the balance of the year. You'll recall, Laurent, that we buy on long-term contracts, and so some of that long-term pricing starts to fade out as we move into higher price layers as we move through the year. We've incorporated this into our guidance, but we've taken up our freight impact from 100 basis points to 120 basis points for the year. The key lever for the balance of the year is really top line momentum. Now we're watching a number of factors – COVID, the delta variant, the supply chain very carefully, but we're very encouraged. It's still early in the year. We feel confident. We feel like we're back on offense and have a clear-eyed view of where the risk is and the opportunities across channels and the opportunities across our brand.
Corinna Van Der Ghinst, Host
Thank you. We’ll take the last question please.
Operator, Operator
Thank you. The last question comes from Ike Boruchow with Wells Fargo.
Ike Boruchow, Analyst
Hey thanks for squeezing me in. Congrats Patrice, Jane. Great job. I guess maybe, Jane, a question on margins. The digital commentary you guys are giving, you're not only seeing pretty meaningful revenue acceleration in that channel, especially in North America, but the profitability metrics are pretty impressive. But I think you talked about 1,400 basis points of margin improvement on a two-year basis. I think you said that it's now accretive to the total company operating margin, which is implying its mid-teens or better. How does that change the algorithm to get you to the mid-teens margin, maybe even quicker than what you would have thought prior at the Analyst Day when you think about how digital is mixing and the margin drivers within that channel?
Jane Nielsen, CFO
The digital reset is a crucial and powerful factor for us to improve our operating margin even with lower revenue. I want to emphasize that it's beneficial not just for the overall company, but for every region as well. When examining the operating margins of each region, they are significantly higher because they do not carry the overhead costs associated with the total company margin. Achieving benefits in every region sets a higher standard compared to just benefiting the overall company, and we are pleased that this is the case. This presents a lever for us to utilize to enhance our margins, making it a vital strategic shift for us. I believe this will further strengthen our confidence in reaching mid-teens margins. We are very optimistic about the ongoing growth in digital margins this quarter.
Patrice Louvet, CEO
All right. Thank you, everyone, for joining us today. We look forward to sharing our second quarter fiscal 2022 results with you in November, and in the meantime, stay safe, and have a great day.
Operator, Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.