Earnings Call Transcript - RL Q3 2024

Operator, Operator

Ladies and gentlemen, thank you for being here. Welcome to the Ralph Lauren Third Quarter Fiscal Year 2024 Earnings Call. At this moment, all participants are in a listen-only mode. This conference is being recorded. I will now hand it over to our host, Ms. Corinna Van der Ghinst. Please proceed.

Corinna Van der Ghinst, Host

Good morning and thank you for joining Ralph Lauren's third quarter fiscal 2024 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, our financial performance will be discussed on a constant currency basis. Our reported results, including foreign currency can be found in this morning's press release. We will also 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. With that, 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. This holiday quarter, our campaigns around the world celebrated a season of giving, marked by warmth, reflection, and comfort that inspires people to dream of the best things in life and share them with those they love. Immersing people in our world of easy elegance and sophistication has epitomized Ralph Lauren over 57 years. And we continue to deliver this quarter after quarter to an ever-expanding audience as part of our Next Great Chapter Accelerate plan. This combination of magic and logic translated to strong financial performance in the third quarter, our biggest quarter of the year, with top and bottom line results that exceeded our expectations, along with significant EPS growth. As we continue to navigate a dynamic global operating environment, our teams remain focused on what we can control. This starts with our timeless and highly desirable brand, which is resonating with consumers all around the world and enabling continued pricing power in the market. Our ability to leverage a powerful portfolio of core products allows us to flex with evolving consumer needs. Our continued deliberate shift toward our direct-to-consumer channels, where we can best deliver our elevated and connected consumer experiences, led growth in the quarter. All of this is underpinned by the agility and operational discipline we have built into our business, allowing us to continue fueling our strategic growth initiatives for the long term. As we outlined at our last Investor Day, we are strongly encouraged that we have built a sustainable and resilient model with multiple diversified drivers for long-term growth and value creation. Our third quarter performance was a clear example of how we're driving progress across our three strategic pillars. These include, first, elevate and energize our lifestyle brand; second, drive the core and expand for more; and third, win in key cities with our consumer ecosystem. Let me take you through a few highlights across each of these areas. First, on our efforts to elevate and energize our lifestyle brand. We continue to harness the power of our iconic brand as we expand across geographies and demographics, cutting through culture across fashion, celebrity, sports, gaming, and music moments. During the third quarter, key campaigns included, first, our holiday season for dreaming activations in every region, generating nearly 8 billion global impressions. These included immersive holiday gifting content, unique key city takeovers across New York, Shanghai, London, and Berlin, and our Singles Day stream in China. Second, our Polo Ralph Lauren Artist in Residence campaign featuring Navajo Designer, Naiomi Glasses, which is the first in a series of groundbreaking partnerships focused on empowering and celebrating artisans within the communities that have historically inspired our designs. This campaign was not just a galvanizing cultural moment for our organization, but also resonated strongly with consumers, driving more than 3 billion impressions and our highest engagements ever on TikTok. We also outfitted remarkable women including America Ferreira, Jodie Foster, Greta Lee, and JLo at the L Women in Hollywood event. Janelle Monae and Kate Bock were at Art Basel in Miami, and Gauravi Kumari, Princess of Jaipur, attended a high-profile fundraiser at the dazzling City Palace in Jaipur, India. And how could we forget Taylor Swift, who chose an all-American Ralph Lauren look for the cover of Time Magazine as their 2023 Person of the Year. These activations helped to fuel our strongest quarter of new consumer acquisition and brand affinity since the pandemic. We added 1.7 million new consumers to our DTC businesses, up high single digits from last year, driven by all regions. Our Net Promoter Scores accelerated along with positive momentum in brand consideration and purchase intent. We grew our followers on social media by low double digits from last year, led by TikTok, Instagram, WeChat, and Douyin. Moving next to our second key initiative, drive the core and expand for more. Consumers continue to turn to brands they know and trust and styles that endure beyond one season. This holiday was no exception. As Ralph and our design teams seamlessly married sophisticated casual with styles exuding the luxury and glamour of the season. Our iconic core products, representing about 70% of our business, grew low double digits in the quarter, ahead of total company growth. From our Mesh Polos and Oxford Shirts to our luxuriously soft Cashmere Sweaters and versatile Blazers, we have established a broad and highly recognizable portfolio of icons that drive our business through both choppy and more stable times alike. We are incredibly proud of the work Ralph and our creative teams are doing to drive newness and excitement behind these styles so they appeal to both our most loyal and new consumers alike. Performance in core was led by our cable knit sweaters in cotton, wool, and cashmere, quilted jackets, down jackets, and sports coats in a range of tweed, tartan plaid, stretch corduroy, and party-ready velvets. As we continue to build on the long-term foundation of our core, we also delivered strong growth in our high potential categories, including women's, outerwear, and home. Together, these high potential categories increased low double digits from last year, led again by women, our most significant long-term growth opportunity. Driven by an elevated assortment with AUR up mid-teens, performance was supported by our cashmere, flag and polo bear sweaters, sophisticated wool and cashmere coats, blazers and heritage tweed, modern knit tools, and cocktail and evening dresses. Other special releases this quarter included our Polo Country and Element Skateboards Capsule, a limited-edition collection of unisex Polo Country styles and Element Skateboards celebrating the great outdoors. We sold over 2,000 skateboards, highlighting the lifestyle reach of our brand and its appeal to younger consumers. Our limited edition Polo ID handbag collaboration with Mr. Bags in China sold out within one minute on WeChat. Our innovative love of the land collaboration with Navajo Designer, Naomi Glasses, Ralph Lauren's first artist in residence, and the annual and much-loved Ralph Lauren Pink Pony collection supporting Ralph's 30-year commitment to cancer care and research. Looking ahead, we will continue to drive our core icons while leveraging the breadth of our brand and assortments to fuel excitement and desirability. Turning to our third key initiative, win in key cities with our consumer ecosystem. Our key city ecosystems drive elevation and deliver consistency through all of our consumer channels and touch points. Each of these ecosystems is anchored by direct-to-consumer channels, including our stores and digital commerce sites, which combined represent about two-thirds of company sales. During the quarter, we drove accelerated comp growth while also expanding our connected ecosystems across key markets. Globally, we opened a total of 17 new stores and concessions focused on our top cities, with the majority again in Asia. Comps in our Ralph Lauren stores and own digital sites were strong worldwide, particularly in the outlet trends. The key outlet actions we implemented in the first half of the year—from optimized staffing to assortment enhancements and emphasis on quality and value—served us well through the holiday and will continue to be drivers as we look ahead. In addition to our existing fleet, we opened a select number of iconic Ralph Lauren stores in the quarter, including our new store at Singapore's Marina Bay Sands, the first door offering our luxury collections in Southeast Asia; our first Ralph Lauren store in the Czech Republic, in Prague's historic old town; as well as in Charlotte, North Carolina; and our first Ralph's coffee shops in Paris and the UAE. We also launched our Ralph Lauren digital flagship site in Canada following our Toronto store opening last quarter. Combined with our elevated wholesale presence, these are helping us introduce a cohesive connected retail experience to our consumers across the Canadian market. By region, growth was again led by Asia, with particularly strong performance in China, where sales increased more than 30% this quarter on both comp and new store growth. This was ahead of our expectations, even with last year's easier comparisons due to the surge in COVID cases. We are still in the earlier stages of brand building in China with meaningful outperformance versus peers in the quarter on consumer KPIs, including brand awareness, consideration, and Net Promoter Scores. Our team delivered another successful Singles Day focused on brand building with ralphlauren.cn sales up 25% on lower discounting and higher AURs compared to last year. Our early performance on Douyin has also been very encouraging following our limited launch last fall, with an expanded rollout this spring. Finally, touching on our enablers. In addition to our strategic priorities, our business continued to be supported by our five key enablers. I'll share a few highlights from the quarter. As we drive towards best-in-class digital technology and analytics, we tested our predictive buying model in our European and Asian stores this quarter. With our initial rollout limited to select sweaters, knit tops, and caps, this artificial intelligence-driven model enables better in-stock availability on sizing and best-selling products to drive incremental sales and improved conversion. Based on this early success, we plan to continue scaling its use to an expanded range of categories and markets over time. As we continue to integrate citizenship and sustainability to future-proof our business, we are also proud to be named once again one of Forbes World's Best Employers in 2023. In closing, Ralph and I are energized by our team's excellent execution through this important holiday season. This quarter's performance reinforces how the power of our iconic brand, together with our multi-lever strategy delivers. We are firing on multiple cylinders while not dependent on a single geography, channel, or category for growth. This model, combined with our unique agility and the remarkable dedication of our teams, is what will continue to differentiate Ralph Lauren through these dynamic times. With that, I'll hand 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. We entered this holiday season with a clear game plan. We invested in brand momentum around the world, expanded giftable core and seasonal products to delight our consumers, and drove key operational improvements and flexibility to mitigate near-term macro headwinds. This quarter's strong performance was a testament to the agility of our teams and the resilience of our Next Great Chapter Accelerate plan, coupled with the power and global reach of our iconic brand. We reported third quarter revenue, adjusted operating profit, and double-digit EPS growth above our outlook. We achieved this while continuing to strengthen our brand proposition around the world and investing in our key strategic priorities to enable sustainable growth into the future. Top line exceeded our guidance, driven by comp acceleration in DTC with momentum in all retail channels globally. Operating margin expansion was also ahead of our outlook despite our strategic investments and ongoing cotton headwinds, as we focus on operating with discipline in an evolving global environment. We returned approximately $425 million to shareholders in the form of dividends and share repurchases this fiscal year to date, in line with our long-term guidance. Let me take you through our third quarter financial highlights, which, as a reminder, are provided on a constant currency basis. Our accelerating brand momentum and investments in key holiday campaigns resulted in 5% total revenue growth. This was above our outlook, led by strong double-digit growth in Asia and holiday outperformance in Europe. Revenue in North America was approximately flat to last year, in line with our expectations. Each of our DTC channels contributed to top line growth in the period, with total DTC penetration expanding approximately 400 basis points from last year, adding stability and resiliency to our business, consistent with our NGC strategy. Total company comp increased 9%, accelerating sequentially across all three regions. Ralph Lauren stores continued to lead our global performance. Our positive outlet comps continued to improve following investments in service and expanded core product assortments, driving solid traffic, AUR, and basket size growth in every region. Comps in our owned ralphlauren.com site increased 8% on top of 11% growth last year, as we prioritize ongoing investments to expand our footprint and improve the customer experience online. Total digital ecosystem sales were also up high single digits, including a strong recovery in Europe as our largest pure-play account returned to growth. Total company adjusted gross margin expanded 130 basis points to 66.5%, reflecting our long-term elevation work. This was consistent with our outlook, driven by lower freight expense, favorable channel and geographic mix, and 9% AUR growth. These more than offset ongoing cotton cost headwinds and targeted promotions to drive conversion during key holiday sale periods. Cotton costs will start to abate at the end of our Q4, beginning with our spring 24 collections. As previously indicated, we are planning a moderation in AUR growth based on a reduced need to pass like-for-like cost inflation onto the consumer. Nevertheless, we plan to continue driving positive AUR increases as a result of our growing brand desirability, ongoing product mix elevation, and favorable geographic and channel mix. Adjusted operating expenses increased 7% to 50.2% of sales, a 100-basis point increase from last year. The increase as a percent of sales was driven largely by channel and geographic mix shifts in the quarter. With our DTC and international businesses contributing a significantly higher share of sales in the period versus last year. This quarter's strategic investments focused on our key city ecosystems, marketing investments, and enhancing the consumer experience and service levels across our DTC channels. Variable selling expenses also rose as a result of stronger retail sales growth. Marketing was 7.5% of sales, up slightly from last year to support our high-impact holiday activations, delivering improvement across our consumer metrics, including brand consideration, Net Promoter Scores, and purchase intent. We still expect full-year marketing at around 7% of sales. Moving on to segment performance, starting with North America. Third quarter revenue was approximately flat to last year, in line with our expectations as stronger growth in retail was offset by our reduced sell-in to the wholesale channel. In North America Retail, third quarter comps increased 5%, led by a double-digit increase in our Ralph Lauren stores. Outlet performance continued to improve with positive comps driven by our product elevation and our recent interventions to improve the selling experience and retail environments. Despite taking targeted promotions during key holiday periods, our outlet AUR increased strongly, and discount rates declined versus last year. Comps in our owned ralphlauren.com site were up 4% on top of 9% growth last year. In addition to a strong response to our Black Friday event, recent site enhancements such as upgraded search and navigation drove higher conversion in the quarter. We also launched our Canadian digital site in the quarter. In North America wholesale, revenues decreased 15%, in line with our expectations as we proactively focused on aligning inventory with softer demand trends. We continue to evaluate our brand presence in each store and exited approximately 20 department store doors this year. While we plan to manage this channel carefully into calendar '24, we were encouraged by our improving sellout trends, which meaningfully outperformed our sell-in this quarter. Our AUR in the channel was also up on a year-over-year basis. Moving on to Europe. Revenue increased 6%, with performance led by our DTC channels. This was above our expectations as strong growth across the continent more than offset continued consumer and macro headwinds in the U.K. Results included roughly 5 points of negative impact from the earlier timing of wholesale deliveries and lapping last year's favorable post-COVID wholesale allowances. Retail comps increased 11% on top of a strong 11% comparison last year, with similar performance in our brick-and-mortar and digital sites. We drove strong momentum across brands and categories in Europe, with growth led by gifting, seasonal sweaters, and outerwear, which are AUR accretive. Europe wholesale was approximately flat to last year, but included about 11 points of net headwinds from unusual impacts of wholesale allowances and earlier receipts. Strong underlying growth was supported by wholesale reorders, which returned to more normalized trends in the quarter, following recent destocking at digital wholesale accounts. While our European business has performed better than expected through the first three quarters of the year, we remain cautious on the fourth quarter and into fiscal '25, given highly dynamic geopolitical and macro conditions in the region. Turning to Asia. Revenue increased 17%, with double-digit growth across our largest markets of Japan, China, and Korea. Asia retail comps were up 14%, with strong growth in both digital commerce and brick-and-mortar stores. China sales increased more than 30% on continued brand momentum, including successful Singles Day events as we lapped last year's COVID impact. Third quarter sales in Japan were up low double digits. Overall inbound tourism recovered to pre-pandemic levels, although Chinese travelers to Japan are still down 70%. Sales in Korea also rebounded to low double-digit growth, benefiting from our recent marketing activations and a shift in the timing of the Chuseok holiday from Q2 last year. Moving on to the balance sheet. Our strong balance sheet and cash flows are key enablers of our Fortress foundation and allow us to make strategic growth investments in our business while returning cash to shareholders. We ended the third quarter with $1.9 billion in cash and short-term investments and $1.1 billion in total debt. Net inventory decreased 15%, below our revenue growth trend with units also down double digits. The decline was driven by stronger-than-expected Q3 sales and our continued efforts to ensure healthy wholesale inventories. As we transition into spring, we believe overall inventory levels are well positioned relative to our outlook for each region. We still expect to end fiscal '24 with healthy inventories below prior year levels with an improved ability to chase into potential demand as a result of our predictive buying model. Looking ahead, our outlook remains based on our best assessment of the current geopolitical backdrop as well as the macroeconomic environment. This includes inflationary pressures and other consumer spending-related headwinds, potential supply chain disruption, and foreign currency volatility among others. For fiscal '24, we still expect constant currency revenues to increase low single digits, centering on about 2% compared to our previous outlook of 1% to 2%. Our outlook continues to embed caution around the wholesale channel where year-to-date demand has been softer than the prior year. Foreign currency is now expected to benefit revenue growth by about 10 basis points. We continue to anticipate operating margin expansion of approximately 30 to 50 basis points in constant currency to 12.3% to 12.5%. Foreign currency is now expected to have a roughly neutral impact on full year operating margin. We now expect gross margin expansion in the range of 140 to 180 basis points in constant currency, up slightly from 120 to 170 basis points previously. This is driven by favorable freight costs, further mix shift toward international and DTC, and continued growth in AUR, more than offsetting full-year cotton inflation. Gross margin expansion is anticipated to more than offset expense deleverage due to mix shift and key strategic investments. For the fourth quarter, we expect revenues to increase in a range centered around 2% in constant currency, with stronger trends in retail versus continued caution in wholesale in both North America and Europe. Foreign currency is expected to negatively impact revenues by roughly 160 basis points. While we remain cautious on North America, we expect modest sequential improvement in Q4, with stronger trends in DTC offsetting continued softness in wholesale. In Europe, fourth quarter sales are still expected to be negatively impacted by the earlier timing of wholesale shipments. Excluding this impact, we expect underlying trends in Europe to increase slightly in Q4. In Asia, we anticipate growth will be closer to our full year guide for the region of up low double digits, as we lap a more normalized comparison following the easy COVID comparisons in Q1 and Q3. We expect fourth quarter operating margin to expand approximately 350 to 400 basis points in constant currency, largely driven by gross margin expansion with about 40 to 50 basis points of negative foreign currency impact on our operating and gross margin, respectively. We now expect our tax rate to be in the range of 19% to 20% for the full year due to discrete tax benefits recognized in Q3 and roughly 22% to 23% for the fourth quarter. Capital expenditures are now expected in the range of $200 million to $225 million. In closing, Ralph's vision has always been about inspiring people to step into the dream of a better life, and this holiday quarter was no exception. We are proud of our team's strong execution on our Next Great Chapter Accelerate plan through what continues to be a highly dynamic operating environment. We are focused on what we can control, shifting to GTC, harnessing big data and AI, and of course, operating and balance sheet discipline. This puts us in a position of strength as we continue to deliver our commitments and drive long-term value creation. And with that, let's open up the call for your questions.

Operator, Operator

First question comes from Matt Boss with JPMorgan.

Matt Boss, Analyst

Thanks and congrats on a great quarter.

Patrice Louvet, CEO

Thank you, Matt.

Jane Nielsen, CFO

Thanks, Matt.

Matt Boss, Analyst

So Patrice, relative to mixed results across retail, Ralph Lauren clearly stands out as a winner over the holiday period here. What gives you confidence that you can maintain this momentum in a volatile backdrop? And then, Jane, any constraints to achieving the mid-teens constant currency operating margin target as we think about next year? And maybe as we think multiyear, do you see this as a ceiling for the business, or how best to think about longer-term operating margin opportunity?

Patrice Louvet, CEO

Good morning, Matt. Thank you for your question. What I would say is resilience is built into every facet of our approach so we can stay on offense as we pursue sustainable long-term growth. What gives us confidence? A few things to call out. First, we continue to invest in our brand and our way of living so that we can continue to deliver cut-through cultural moments and drive desirability across regions and demographics. Listen, our focus on high-impact Q2 and Q3 marketing really enabled us to hit the ground running coming into this holiday season, helping to accelerate consumer metrics, top-line outperformance, and the continued elevation in what I think we can all say was a pretty promotional environment. The second point is really around our products and our broad portfolio of iconic core products that transcend trends, focused on style and elegance, allowing us to flex as consumer needs evolve. The third area regards our go-to-market model and our DTC channels, which now represent about two-thirds of the company. So a majority of the business is DTC for Ralph Lauren. The DTC channels are where the world of Ralph Lauren comes to life most powerfully, where we engage most directly with the consumer and have the most ability to impact the consumer experience. That’s where we've invested the most and we delivered healthy comp growth across all of our direct-to-consumer channels this quarter, including our Ralph Lauren stores, our digital sites, and outlets in Asia, Europe, and North America. Our plan is supported by multiple growth drivers—it's not based on a single area, but diverse opportunities across categories, channels, and key cities in every region. That became evident in Q3 with double-digit growth in China, up 30%. I am proud of the team for achieving that, but also proud of the work our teams are doing in Japan, Korea, and Germany, which saw double-digit growth as well. North America also had positive comp results across our DTC channels this quarter. Our core product is resonating, which represents about 70% of the company. Women's and high-potential categories are also performing well. This is underpinned by our agility and operational discipline, built over time. You'll see them in action during this last quarter with inventory management and a diversified global supply chain helping us navigate volatility. We expect this to continue to serve us nicely moving forward, knowing that volatility is our new normal. So, Matt, our model is resilient and differentiated—we've created a sustainable approach for long-term growth and value creation in these dynamic times. I'll let Jane provide perspective on margin.

Jane Nielsen, CFO

Yes, Matt. So we are still firmly committed to our 15% constant currency operating margin. We think it's the right goal for our businesses. To your question about constraints, while we are operating in a volatile environment, what gives me confidence is our organization's agility to address those changes and navigate them effectively while leaning into our multiple growth engines—different geographies, products, and channels, as we effectively drove DTC this quarter. I don’t view 15% as a ceiling at all. That’s why we've identified these high-potential categories, including women’s handbags and home that can scale long-term and provide new engines for growth and profitability.

Operator, Operator

Next question comes from Michael Binetti with Evercore ISI.

Michael Binetti, Analyst

HI guys. Great quarter. Thanks for taking our questions here. I guess a couple of tactical ones. North America, 15% wholesale decline in the quarter. Nice to see you guys controlling it where you can in the DTC business. On that number, though, I think you said POS in wholesale was well ahead of sell-in on wholesale. It sounds like AURs are increasing in the channel and you're maintaining a cautious posture there still. Is there a point on the horizon where you see those two numbers can start to converge, Jane a little bit? And also, I guess, Europe as a standout here. I want to make sure I understood the 11% growth rate would have been 5 points higher in the quarter that comes out of the fourth quarter. But even with that, it looks like you're planning for a deceleration in Europe in the fourth quarter. I know you've been planning that market very cautiously for a long time. It's nice to see you coming in above your guidance. But is maybe a little bit more context on what you think the underlying growth rate is in Europe in the fourth quarter and how we should think about that market for '24? Are you seeing any less pressure on the wholesale side there? Maybe just a little bit of color, please?

Jane Nielsen, CFO

Sure. Let me start with your first question on wholesale. So, we did see our sell-in down 15% in North America. What's encouraging is that our sellout was down about mid-single digits in the quarter. We had low single-digit increases in AUR. Now, Michael, what's underscoring that is we wanted to be competitive, and we didn't intend to go backward in that channel through the holiday season. We were intentional about our sell-in, especially given softer spring and fall, ensuring receipts reflected a more cautious view of seasonal inventory, and we were able to backfill into stronger core and replenishment items. So looking into the future, particularly in the fourth quarter, I see more balance between sellout and sell-in. I believe the expectation we saw in sellout this quarter is a good indicator of what we will see in Q4. Now on Europe, we were really pleased with our performance this quarter. Overall, our business performed above our expectations. We had strong growth in every market with some softness in the U.K., attributed to inflation and consumer pressures we faced there; however, we saw strong continued digital pure-play growth along with good wholesale strength coupled with accelerating DTC trends. Some investments that we talked about in North America also paid dividends in Europe, as we reinvested in service and saw marketing momentum with our new consumers. As I think about Q4, we remain cautious, given the inflation-pressured environment. The situations in the Middle East and Ukraine also weigh on Europe. I see some pressures in Europe, specifically in Spain with inflation. However, I believe that as we pass through the quarter, the underlying growth in wholesale is fairly stable. Thus, we will experience some ups and downs, timing shifts, and expect Europe to perform in the low single-digit range for the year. I recognize there's quarter-to-quarter volatility based on timing shifts.

Patrice Louvet, CEO

And maybe I'll just add one data point on your first perspective, which is on North America wholesale. We need to be cautious moving forward. We are encouraged by our digital wholesale performance this past quarter, which was up mid-single digits. So the challenge really is driving traffic in the stores, managing conversion in the stores, and working closely with our wholesale partners to activate this.

Operator, Operator

Your next question comes from Jay Sole with UBS.

Jay Sole, Analyst

Great. Thank you so much. So maybe, Patrice, just to follow up on those last comments. Can you just talk about your enthusiasm for your direct consumer business, particularly opening stores, given the comments you made in the opening remarks? Can you compare how you feel about it now versus, say, 90 days ago?

Patrice Louvet, CEO

I am still enthusiastic, Jay. If I step back a little bit, just think about our go-to-market model, focused on the top 30 cities around the world, building an ecosystem led by DTC, but incorporating quality wholesale. We know we have opportunities to expand our full-price store presence, particularly in North America, Europe, and China. You’ve seen us actively do this, particularly in China, but more recently in Europe and North America. As we consider the model going forward, we will continue to focus on the top 30 cities and build this ecosystem while leaning into DTC. DTC is about two-thirds of the company and we expect that percentage to increase over time, as this is where we can better engage with the consumer and provide a complete experience. Quality wholesale will continue to play a role in the mix as well. We've committed to a number of store openings during Investor Day, and we still stand by that; this year, it's about 80 stores.

Jane Nielsen, CFO

We're still on track for about 250 new doors over the 3-year time horizon.

Operator, Operator

The next question comes from Brooke Roach with Goldman Sachs.

Brooke Roach, Analyst

Good morning and thank you for taking our question. Healthy improvement in the outlet channel again this quarter. I know a lot of ground has been covered on DTC, but I was hoping you could elaborate on the changes that are working best and your plans for further actions to drive continued accelerated improvement from here in both North America and Europe outlets. Thank you.

Jane Nielsen, CFO

So, Brooke, we were really pleased with the outlet channel performance. The investments we've made in our brand are paying off across the channels, especially in the outlet channels, where we've seen solid growth in traffic across all three regions. Additionally, targeted promotion activities during the peak holiday selling period were very effective in the outlet channel. We’ve achieved this while still increasing AUR across all regions. The investments in service continue to be critical; enhanced service in our stores has yielded improved conversion. Brand investments and service enhancements are long-lasting improvements over time. As we said, we'll be led by our consumers on our elevation journey and address our value-oriented consumers over time.

Operator, Operator

Next question comes from Laurent Vasilescu with BNP Paribas.

Laurent Vasilescu, Analyst

Good morning. Thank you for taking my question. Jane, you mentioned for the fourth quarter that the operating margin on a constant currency basis will be up 350 to 400, largely driven by gross margins. If I recall correctly, that change in commodities into tailwind doesn't happen until the last month of the quarter. I'm curious to know what the drivers are for that gross margin for the fourth quarter? And if possible, could you quantify how much cotton was a headwind over the last few years? Is it fair to assume that it was about 300 basis points cumulatively? If so, how should we think about that as it turns into a tailwind? Thank you.

Jane Nielsen, CFO

Good morning, Laurent, and thank you for the question. You are right: we've guided 350 to 400 basis points largely driven by gross margin. SG&A becomes a neutral factor as we still will have over 100 points of tailwind from freight. This is a durable factor for us as we exit this year, benefitting from channel and geographic mix, similar to what you saw this quarter. Two significant changes are: the big change is that cotton becomes a tailwind at the very end of the quarter. It's been a headwind over the course of the year of about 110 basis points. As it turns into a tailwind, the pressure from cotton has significantly reduced. AUR growth also becomes a more powerful driver in gross margin. Our expected AUR trajectory should be about the same, but we expect heightened efficiency, especially in our promotion lever. During the holiday quarter, our focus was strong. As we transition into the fourth quarter, we will be less focused, and we have less inventory to sell at end-of-season sales. So that generates a gross margin benefit. Cotton will remain a slight headwind but will become vastly reduced. For cotton over the past few years, while it hasn't returned to the pre-COVID levels, it is important to note that, today, cotton is about 25% above those levels. We expect that with the best visibility we have, that to be a stable point for cotton. However, we can say that it’s been about a little less than 300 basis points; rather, about 110 basis points this last year, and a little over 100 to 150 basis points in the preceding year.

Operator, Operator

Next question comes from Chris Nardone with Bank of America.

Chris Nardone, Analyst

Great. Thanks, guys. Good morning. I wanted to know how to think about the impact on your operating margin next year in a scenario where wholesale sell-in starts to improve globally. I heard you loud and clear on reiterating the 15% constant currency target for operating margins next year. Could you provide an update on where we are in your cost savings program outlined at your Investor Day and your ability to pull that lever if sales and macro volatility continues this year? Thank you very much.

Jane Nielsen, CFO

Yes. So, Chris, what we see is as we talk about a more balanced focus between sell-in and sell-out, next year, it will be a favorable dynamic for OI margin expansion, especially with the momentum we're seeing in our DTC channel, so we view that as positive. Although in aggregate, we remain cautious about the channel as we enter into fiscal '25, we don't expect to see the level of sell-in decline that we experienced, particularly in North America this quarter. From our $400 million gross savings plan, we are on track for delivering that. We delivered about a third of it in fiscal '23. We will deliver another third in fiscal '24. The difference between '23 and '24 will be a little more balanced in our COGS versus the SG&A line. We feel we are on track to deliver the full $400 million by the end of the year. And we will remain very disciplined about resource allocation moving forward. We've made significant investments this quarter and year, and we expect those investments to scale for growth and profitability as we go into fiscal '25.

Operator, Operator

Next question comes from John Kernan with TD Cowen.

John Kernan, Analyst

Excellent. Congrats on the results, the 9% comps and another strong quarter. Patrice, you talked about women’s, home, accessories, and handbags in particular, as incremental growth categories. Can you remind us where we are as a percent of the mix with some of those categories and how those have trended since you put out the targets for the Next Great Chapter plan in 2022?

Patrice Louvet, CEO

John, we haven't guided specifically about the percentages. We did say that the women's opportunity is quite meaningful—56% of our customers, walking into our stores or shopping online, are women, yet women's has represented less than 25% of the company's business. You can expect that percentage to rise, but we haven't guided specific breakouts. We have a lot of confidence in the potential of these categories. We're pleased with the customer response across our women's portfolio. Women's really led the dance this quarter and resonated strongly. Outerwear is a category we're leaning in on, and while temperatures were a little milder than anyone would have liked, outerwear outperformed for us again this quarter, with strong product development. For the future, we see significant runway, especially in women's outerwear. Additionally, we've seen strong performance with handbags, having launched the RL888 and the ongoing success of the Polo ID bag and the partnership with Mr. Bags in China. We’re also making good progress on home with new capabilities from our licensing partner on furnishing. All these categories are AUR accretive. When looking ahead for accelerators in top line and margin, we look forward to continuing our momentum in these spaces.

Operator, Operator

Your next question comes from Dana Telsey with Telsey Advisory Group.

Dana Telsey, Analyst

Hi. Good morning, everyone, and nice to see the strong results. As you think about your growth channels, it seems DTC is so much more important than wholesale. The interesting thing on wholesale is the stronger results you’ve observed in Europe this quarter with the reorder trends. Anything we should be thinking about regarding the wholesale business and reorder trends in Europe and what that could mean for North America? Is there anything to parse apart on North America? Lastly, on the whole digital side of the business, what are you seeing in terms of the mix? Is it AUR growth? Is it new customer activation? Is it more from existing customers and how do you see that growing as a percent of sales? Thank you.

Jane Nielsen, CFO

Regarding Europe in wholesale, we were pleased overall, especially looking at growth on an underlying basis that was even stronger. The differentiator in Europe is that the wholesale channel itself is more elevated, along with an elevated Ralph Lauren consumer. That doesn't mean we don't have learnings to apply in North America. As we look at assortment composition and marketing opportunities with our wholesale partners, Europe presents great best practices while we can cross-pollinate these lessons.

Patrice Louvet, CEO

On the digital front, let's start with North America. Our North America comps were up 4% digitally, driven mostly by traffic. We saw improvements in conversion and basket size. This is exciting, especially as we're attracting higher-value younger consumers; we've added 1.7 million new consumers this past quarter. In Europe, digital was up 12%, also driven by very robust traffic during the holiday events. New capabilities implemented have been effective there. Finally, in Asia, which is a smaller base and more recent initiatives, digital saw strong momentum, up 25% from last year, highlighting new customers, higher-value consumers, and improved conversion. We still see significant growth potential in this channel, which is currently less than 30% of our total company. We had previously guided digital for continued acceleration as we roll out new capabilities, such as our new search engine in the U.S., which maps our product presentations. We feel positive about the results achieved by the teams across all three regions, and there’s more to come.

Operator, Operator

Our final question comes from Rick Patel with Raymond James.

Rick Patel, Analyst

Good morning, Jane. I will add my congrats as well. How should we think about the flow-through of outperformance as we go forward? It looks like you raised guidance for gross margins, but less so on operating margins. Curiously, which areas might be getting incremental spend here? Secondly, which areas of the business will you focus on for investments moving forward as we think about sustaining strong momentum?

Jane Nielsen, CFO

Rick, as we look at flow-through on outperformance, it’s really about the cadence of our investments and ongoing focus on our productivity metrics. On gross margin, while we've been able to lean into DTC during wholesale softness, it is our strategy, but gross margin must cover the higher level of SG&A. We've been able to balance that with agility. Looking ahead, we will maintain a balance between outperformance flow-through and making key investments in our business. We're optimistic about the investments made in digital. That's an important part of our future and we will continue investing in that. We aim to develop our ecosystem, with plans for 250 new stores over the 3-year horizon. We believe that stores play an essential role in our brand portrayal and customer experience. Finally, we are proud of the brand momentum and underlying health with our consumer—NPS was higher, as well as purchase intent and value perception scores. We'll continue to invest in our brand, expecting this to yield dividends in both the short and long term.

Patrice Louvet, CEO

All right. This concludes our call. Thank you, everyone, for joining us today. We look forward to sharing our fourth quarter and year-end results with you in May. Until then, take care 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.