Earnings Call Transcript
RALPH LAUREN CORP (RL)
Earnings Call Transcript - RL Q3 2020
Operator, Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third Quarter Fiscal 2020 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’d 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 third quarter fiscal 2020 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. We continue to make strong progress on our Next Great Chapter plan with third quarter results ahead of our overall expectations, including better-than-expected revenues, operating margin, and double-digit EPS growth. Over the important holiday season, our teams consistently executed across each of our strategic priorities, enabling us to elevate our brand and deliver for our consumers across every touch point. The solid foundations we've put into place to reposition and elevate our brands helped to drive positive comp growth across all three regions, excluding the impact of Hong Kong this quarter. We were encouraged by AUR growth of 6% as we invest in brand elevation through our products, marketing, distribution, and unique consumer experiences. At the same time, we continue to execute key initiatives to stabilize our North America business against an evolving retail landscape. As I've shared before, the three principles underlying this work include putting the consumer at the center of everything we do; elevating the brand across all consumer touch points; and balancing growth and productivity. And we are doing all of this while managing through volatile industry dynamics, including the recent coronavirus outbreak, which we are actively monitoring. Our top priorities are to keep our employees and consumers safe and to heed the advice of local and international health authorities. The situation is dynamic, and we will continue to assess the implications for our business across retail, corporate, and our supply base. Our thoughts are with the many impacted by this virus. During the third quarter, we drove our performance across the five strategic priorities that we laid out as part of our five-year plan to deliver long-term, sustainable growth and value creation. These include, first, win over a new generation of consumers; second, energize core products and accelerate high-potential underdeveloped categories; third, drive targeted expansion in our regions and channels; fourth, lead with digital across all activities; and fifth, operate with discipline to show growth. Starting with winning over a new generation of consumers. We're investing in media channels that matter most to consumers today, namely, digital and social, and remain on track towards our long-term marketing investment target of 5% of sales. In the third quarter, marketing increased 16% to last year as we shifted investments back into the key holiday selling period. We are encouraged by consumer engagement across generations through our campaigns and programs. Notably, our total social media followers surpassed 40 million in the third quarter, a double-digit increase to last year led by a 30% organic increase on Instagram. Let me touch on some of the highlights from our holiday campaigns this quarter. First, we launched a fully integrated holiday campaign across social media, television, our own stores and digital sites, and wholesale environments, which we called 'Every Moment is a Gift.' Among the exciting activations online, we drove strong engagement through our Snapchat holiday shopping filter and our first-ever global digital game, 'The Holiday Run,' where our iconic Polo bear dashed through the streets of New York City, Paris, and Tokyo to collect festive bubbles and signature Ralph Lauren products. We also launched a digitally-targeted campaign for our Lauren women's ready-to-wear business in North America this season, featuring supermodel and mom, Lily Aldridge along with her family. It was the first dedicated campaign for the brand in many years that had significant media support behind it. We were encouraged by the early consumer response as we work to get the Lauren women's business back on a positive trajectory. On our North American mobile app, we drove a successful 7Days/7Drops program, featuring limited edition releases and one-of-a-kind experiences. A highlight of the week was our 5 Horseman Rugby shirt, which sold out in just 15 minutes online. And congratulations to Ralph Lauren Golf Ambassador Justin Thomas. He captured his 12th career win at the Century Tournament of Champions last month, wearing RLX to capture the number one spot in the FedEx Cup standings. Moving on to our second key initiative, energize core products and accelerate high-potential underdeveloped categories. In the third quarter, Ralph and our design team drove excitement in core product categories while also expanding into our five high-potential underdeveloped categories. While we were pleased with the overall performance of these categories, our outerwear and fleece programs were the clear standouts this holiday, outperforming our total sales trends on both the sell-in and sell-out basis. Popular styles included heavyweight parkas, quilted car coats, light and midway down jackets, windbreakers, and sharper styles. Other successes this season included woven shirts, sweaters, and denim. In addition to the holiday drops in our mobile app, we released our limited edition Polo Sports Outdoors collection in November. The products retailed on our own digital commerce sites, North America app, and select flagship stores around the world. We also partnered with influential specialty retailers including Bodega, Fred Segal, Essence, Browns in the U.K., and Beams in Asia. Other exciting projects this quarter included an exclusive holiday capsule with Zalando, the Polo Sport collaboration with Musinsa, one of the largest fashion online retailers in Korea, and the WeChat mini program for Singles Day in China. Moving on to our third key initiative, drive targeted expansion in our regions and channels. Our long-term expansion strategy remains focused on building a cohesive, elevated Ralph Lauren experience across our retail, wholesale, and digital commerce presence in key cities around the world. During the third quarter, we opened 48 new owned and operated stores and concessions globally and closed 31 locations. This included 37 openings in Asia. We also continue to invest in door refreshes across our own stores and wholesale partners in key markets, as we work to elevate our fleet across every touch point. Our city-by-city ecosystem approach drove strong results in the quarter, with Chinese Mainland sales up more than 30% in constant currency, driven by comp growth and new stores. Total China sales were up 6% to last year in constant currency, despite headwinds in Hong Kong that we discussed last quarter. In Europe, we opened six owned and partnered full-price stores, including Polo boutiques in Covent Garden in London, Torino, Aix-en-Provence, and Lisbon. We're making good progress, but we still have significant expansion opportunities with only 46 full-price stores across Europe, with all of this complemented by our successful expansion into new specialty wholesale accounts and digital commerce growth. Which brings me to our fourth key initiative, lead with digital. Our global digital ecosystem, including our directly operated flagship sites, departmentstore.com, pure players, and social commerce, increased low double digits in the third quarter in constant currency. The strong performance exceeded our expectations across all three regions. This was driven by double-digit growth in Europe and Asia, with North America up high single digits, improving from flat performance in the first half. Starting with Europe, digital sales were up high teens in the quarter with solid performance across both owned and wholesale digital accounts, led by digital pure-play retailers. We added six new partners, including LuisaViaRoma in Italy, SockShop in the U.K., and Brown Hamburg in Germany. Our directly operated digital sites in Europe also saw further momentum, delivering 15% comp growth this quarter. Highlights included the November launch of the Polo mobile app in the U.K., our first app launch outside of North America, and the new digital commerce flagship for Switzerland, as we expand our localization efforts by market. In Asia, digital ecosystem sales were also up double digits, led by the Chinese Mainland. We launched new partnerships this quarter with Myer in Australia, as well as Tmall's luxury platform in China. Lastly, our digital growth in China accelerated on the launch of buy online, ship from store fulfillment to leverage our store inventories. These omni-channel orders contributed to roughly half of our digital growth in the quarter. Turning to North America, third quarter comps on ralphlauren.com were up 6%, largely in line with our expectations. We saw softness from international consumers due to FX and import restrictions in Asia, similar to the first half of the year. However, sales to domestic shoppers grew single digits as we started to drive improvements in mobile, tight personalization, and rebalancing our buys to emphasize stronger selling core and seasonal core products. Lastly, we continue to build partnerships with newer digital platforms in North America, which are extending our reach to new and younger consumers. In the third quarter, we launched Women's Polo on Daily Look, the premium subscription-based personal styling service; and Men's Polo on Simmons, a specialty designer boutique online. We also added kids to Rent the Runway, joining our Lauren, Women's Polo, and Club Monaco brands on the platform. Touching on our fifth key initiative, operate with discipline to show growth. In the third quarter, we focused on challenging every cost and improving our efficiencies. Adjusted operating margin expanded 10 basis points, slightly ahead of our expectations with stronger than expected top-line growth, partly offset by the planned timing of higher investments around holiday marketing and new stores. One important margin driver for us and a central part of our Next Great Chapter strategy is raising AUR to elevate the brand globally and create value. We're using multiple levers to realize AUR increases, including lower discounts, elevated product mix, geographic and channel shifts, and strategic ticket price increases. We began phasing in strategic ticket price increases in our North America factory outlet channel in late September, followed by our North America full-price wholesale and direct-to-consumer doors in spring 2020. Leveraging the success, we've had implementing this strategy in Asia and Europe, these ticket increases reflect our competitive benchmarking analysis and our focus on providing a superior value proposition for our consumers. We were encouraged by the impact of these initial price increases this fall. While traffic was still a headwind for our factory business, we were able to drive positive comps in this channel through an 8% increase in AUR in the quarter. This was on top of 8% AUR growth last year and well above our expectations. Though it is still early in this journey, we are focused on elevating our brand positioning in the North American market and globally as part of our AUR-led strategy. Lastly, I want to provide an update on our journey to further integrate citizenship and sustainability into our business. More than 50 years ago, Ralph built our company based on the idea of timelessness, creating products that are meant to be worn, loved, and passed on to the next generation. This continues to inspire everything we do as we build the business to deliver value for our shareholders and all of our stakeholders for the next 50 years. As part of this work, in December, we announced a new commitment to power all of our globally owned and operated offices, distribution centers, and stores with 100% renewable electricity by 2025. We also took the Arctic shipping pledge, committing to reroute shipping to avoid the environmentally delicate Arctic area. Driving diversity and inclusion across our business is another important piece of this work, and we are pleased to report that we have achieved our gender parity goal of equal representation in our leadership positions at the VP level and above more than three years ahead of our target. In closing, Ralph and I are energized by our team's execution over the important holiday quarter, and we are encouraged by the progress we are making on our Next Great Chapter plan across the business. While we are mindful of the challenges across our markets globally, we are intensely focused on delivering on the commitments we have made across every aspect of our business as we look to drive long-term, sustainable growth and value creation for all of our stakeholders. And before I turn it over to Jane, sadly, I want to note the recent passing of our longtime board member and friend, Arnold Aronson. On behalf of Ralph and the entire organization, I want to express our deepest gratitude for his kindness, wisdom, and service to our company over nearly two decades. Now, over to Jane, and I'll join her at the end to answer your questions.
Jane Nielsen, CFO
Thank you, Patrice, and good morning everyone. Our third quarter results demonstrate solid execution of our strategy through this holiday season and our team's agility in navigating a dynamic global geopolitical and retail environment. We delivered top and bottom-line growth and good progress across key metrics, including 6% AUR growth, double-digit growth in digital commerce, and growth in operating margin expansion, coupled with solid inventory control. Third quarter revenues increased 1% on a reported basis and 2% in constant currency. Every region posted positive revenue growth, driven by mid-single-digit constant currency growth in Europe and Asia despite the ongoing headwinds in Hong Kong, as well as slight growth in North America. Excluding the impact of Hong Kong, total company top-line grew 2.5% in constant currency and every region delivered positive comps as we work to elevate our brand across every consumer touch point, drive product quality, reduce promotional levels, and enhance our digital presence. Adjusted gross margin was up 60 basis points in the third quarter, both on a reported and constant currency basis. Gross margins benefited from AUR growth of 6% on better pricing, lower promotions, and elevated product mix, along with favorable channel and geographic mix. These more than offset investments in product elevation and sustainability and diversification of our supply chain. Looking ahead, we are encouraged by the early results of our fall pricing actions and expect our AUR strength to continue through the rest of the year, driving our full year expectation of low single digit AUR growth for fiscal 2020. Our inventory positions for both our direct-to-consumer and wholesale businesses are current and well controlled coming out of this holiday season. And we remain focused on managing our inventories with discipline and leveraging our supply chain agility and responsiveness. Adjusted operating margin in the third quarter was 14%, up 10 basis points on a reported basis and in constant currency. Adjusted operating profit dollars grew 3% to last year. Adjusted operating expenses increased to 48.2% of sales, up 50 basis points to last year on a reported basis and in constant currency. Marketing was the key driver with spending up 16% in the quarter as we shifted investments back into the key holiday selling period versus last year's focus on our 50th anniversary show and related events in the second quarter. We still expect marketing spend to grow ahead of sales for the full year fiscal 2020 as we invest behind our brands with an emphasis on digital media. Excluding marketing, our adjusted operating expenses leveraged 20 basis points to last year as our teams generated operating efficiencies across our business. Some key highlights from the third quarter include: first, we continue to drive efficiencies across our end-to-end supply chain including incremental savings across facilities, labor, airfreight, and consolidation of materials, all contributing to mitigate the impact of tariffs. This work is also delivering an improved experience for our consumers, including faster delivery speeds on digital orders. Over the peak holiday period, for example, we more than doubled our penetration of orders delivered in two days or less over the prior year. We also piloted a new fast track model in the quarter where we were able to meaningfully accelerate the development of special product concepts from design to shelf. Leveraging our investments in digital product development, we designed, produced, and delivered an exclusive fleece sweater to a key wholesale customer in just 16 days, right in time for Black Friday. While just one early example, we expect this model to be a growing part of our supply chain as we continue our progress toward our three, six, and nine-month lead-time targets. Moving on to segment performance starting with North America. Revenue increased slightly in the third quarter as strong growth in our retail business more than offset wholesale revenue declines. Adjusted operating margin was 22.3%, a 30 basis point decrease to last year with operating margin expansion in our retail businesses more than offset by SG&A deleverage in our wholesale business on lower sales. In the retail channel in North America, comps were up 4% and ahead of our expectations driven by 4% brick-and-mortar comps and 6% comps on our owned digital commerce site. Brick-and-mortar comps were driven by an 8% increase in AUR on top of 7% growth last year. This strong growth reflects our targeted price increases and a reduction in promotions along with an improved product offering, new marketing activations, and rebalanced assortments toward stronger selling core and underpenetrated categories. We also made key operational improvements such as the roll-out of RFID technology across our fleet to improve out-of-stock replenishment sales. In addition, new staffing optimization tools in our stores drove productivity and improved service in peak periods. Our factory business led our AUR increase in North America with improved conversion. While traffic continued to be a headwind in the channel, we are focused on driving better traffic trends through enhanced digital marketing and refreshed and differentiated store experiences. Comps in our North America directly operated digital commerce business were up 6%. Our investments in mobile, personalization, and site navigation drove positive growth from domestic consumers in the third quarter. Our digital business also benefited from favorable product mix towards categories like outerwear and fleece along with a timing shift into the third quarter as we saw higher sell-through in the holiday period versus clearance period in Q4. Excluding this shift, we still expect second half comps to improve incrementally compared to first half comps. Sales to international shoppers purchasing on our U.S. site and shipping to U.S. addresses remained soft in the third quarter and should remain a headwind through the rest of fiscal 2020. Moving on to North America wholesale, third quarter revenue declined 8%, in line with expectations. Excluding a decline in off-price sales, our underlying North America wholesale business was also down high single digits. However, our full price sellout improved from recent trends. In the near term, we are focused on improving the consumer experience in the wholesale channel, through in-store refreshes, expansion into under-penetrated categories, and increased marketing. Our inventories in the wholesale channel are clean and down on a year-over-year basis. We are driving a more favorable product mix, emphasizing core categories and testing targeted brand marketing for Lauren Women's. We continue to expect it will take some time for our wholesale business to start reflecting these strategic improvements, which have shown success in our direct-to-consumer channels. Moving on to Europe, third quarter revenue was up 3% on a reported basis and 5% in constant currency. Adjusted operating margin expanded 300 basis points both a reported and constant currency basis. Operating margin expansion was driven by strong gross margins and SG&A leverage. In retail channels in Europe, comps were up 3%, driven by a 15% increase in our own digital commerce sites and a 2% increase in our brick-and-mortar stores. The increase in our directly operated European digital commerce business was above our expectation, driven by strong AUR growth, solid merchandising execution, and traffic increases along with the shift in seasonal product sales, similar to our North America site. Across our Europe direct-to-consumer channels, our ongoing efforts to elevate the brand and improve product mix continued in the third quarter, with AUR up 10% on top of an 11% increase last year. This is consistent with our long-term strategy to drive higher quality of sales and price harmonization in the marketplace. Wholesale revenue in Europe was up 5% in constant currency and also ahead of our expectations. Similar to Q2, the strong performance reflected solid sell-out trends driving stronger reorders, particularly with our digital pure-play partners. Turning to Asia, revenue was up 5% on both a reported and constant currency basis in the third quarter. Excluding the impact of Hong Kong where protest-related store closures and tourism declines were an ongoing headwind, Asia revenues were up 9%. This solid performance was driven by several markets in Asia, led by Chinese Mainland sales growth of over 30% in constant currency. Our product and marketing initiatives are resonating well in this region, and we continue to drive our digital efforts, expand and elevate our store fleet, and engage with local influencers and celebrities. Comps in Asia decreased 1%, with slight AUR declines. Excluding Hong Kong, Asia comps were up 2%. Store closures and traffic decline to Hong Kong remained a challenge in the third quarter, but we were able to partially mitigate some of this impact by pulling forward a friends-and-family event in our factory stores. We continue to expect Hong Kong to remain a near-term headwind, especially with the emerging impact of the coronavirus, as Patrice mentioned. Adjusted operating margin was down 50 basis points to last year on a reported basis, and down 70 basis points in constant currency driven by SG&A deleverage in Hong Kong. Excluding Hong Kong, margins were up 130 basis points in constant currency. Moving on to the balance sheet, our balance sheet remains strong and we continue to return capital to our shareholders. We ended the quarter with about $1.9 billion in cash and investments and $694 million in total debt, which compares to $2.1 billion in cash and investments and $687 million in debt at the end of last year's third quarter. We repurchased $98 million in shares in the third quarter for a total of $498 million in repurchases year-to-date. We will continue to opportunistically buy back stock and remain on track to complete our target of about $600 million in repurchases for full fiscal 2020. Moving on to inventory, at the end of the third quarter inventory was down 1% to last year and flat in constant currency. We still expect to end the year with inventories relatively aligned to our sales outlook. Now, I'd like to turn to guidance for the full year and fourth quarter of fiscal 2020. As a reminder, this guidance excludes restructuring and related charges and reflects our best assessment of the global retail landscape in the context of increased volatility from macroeconomic and geopolitical events. Specifically, our outlook still incorporates the impact of tariffs, Brexit, and protest-related business disruption in Hong Kong. At this early stage, our guidance does not include potential impact from the coronavirus outbreak, given the dynamic nature of the situation. However, we are monitoring developments closely and will be transparent about the expected impact, providing updates if needed. For full year fiscal 2020, we still expect revenues to be in the range of 2% to 3% growth in constant currency. Based on a better than expected holiday, revenue should be slightly better than the low-end of the range we guided to last quarter. Foreign currency is expected to have about 110 to 130 basis points of negative impact on revenue growth based on currency shifts. We now expect operating margin expansion at the high-end of our previous range of 40 to 60 basis points in constant currency, driven primarily by gross margin expansion and slight SG&A leverage. Foreign currency is estimated to have about 10 basis points of negative impact on operating margin in fiscal 2020. Based on the timing of shipments, our guidance now assumes a little less than $10 million of negative tariff impact to our fiscal 2020 cost of goods. We expect the majority of this impact in our fourth quarter. However, based on our supply chain diversification out of China and recent tariff reductions, we estimate tariffs will have about $12 million to $15 million of total impact in fiscal 2021. We now expect our full year tax rate to be about 20%. For the fourth quarter of fiscal 2020, we expect revenues to be up slightly, both on a constant currency basis and on a reported basis. Foreign currency is expected to negatively impact revenue growth by about 50 basis points in the quarter. We expect protest disruptions in Hong Kong to negatively impact our Asia comp by about five points in the quarter. Operating margin for the fourth quarter is expected to be up slightly in constant currency and on a reported basis. Similar to Q3, this is primarily due to timing of SG&A investments with our highest number of new store openings weighted to the back half of the year, largely offsetting gross margin expansion in the quarter. Fourth quarter tax rate is estimated at 26%, above our full year expected rate based on our expectation of discrete one-time items. We look forward to sharing the details of our fiscal 2021 guidance when we report our fiscal year-end in May. In closing, we are proud of the focus, agility, and passion our teams around the world demonstrated this holiday quarter. Guided by Ralph's vision, our teams elevated our brand, delivering comp AUR and profit growth, all while maintaining disciplined inventories and costs. While we are navigating and watching the challenges in the broader environment closely, we are first and foremost committed to the safety of our employees, partners, and consumers. We believe we have the right strategy and team to deliver across our strategic priorities and create value for the long term. With that, let's open up the call for your questions.
Operator, Operator
The first question comes from Adrienne Yih with Barclays Capital.
Adrienne Yih, Analyst
Good morning and congratulations on continued progress in a very tough environment.
Patrice Louvet, CEO
Good morning, Adrienne. Thank you.
Adrienne Yih, Analyst
Good morning. Patrice, you provided excellent insights regarding the AUR and the factors behind the pricing increases. The acceleration in the latter half of the year compared to the first half occurred despite more challenging comparisons. You mentioned the selective price increases you are implementing. What insights have you gained about price elasticity, especially in North America? Does this give you confidence to continue raising prices over the next year? Thank you.
Patrice Louvet, CEO
Thank you for your question. Let me take a step back to give you an overview of our approach. First, brand elevation is central to our strategy, and average unit retail is a key component of that. We are focusing on four main drivers for average unit retail. The first driver is reducing promotional support, which we accomplished last quarter by lowering our promotional pressure. The second driver involves leveraging product mix; we have invested in categories with higher average unit retail such as outerwear and fleece. The third driver is about utilizing geographic and channel mix effectively. Finally, the fourth driver is targeted pricing. We have begun to implement targeted pricing as part of our broader average unit retail strategy, particularly internationally over the past 18 to 24 months, and we are pleased with the results. However, it's essential to recognize that pricing is not implemented in isolation; it stems from our efforts to elevate the brand across all aspects, including inventory, product, and distribution. We believe that we are now positioned to execute this strategy in North America. We have completed about a quarter in the factory outlet channel, which was our starting point. We are encouraged by the execution from our teams and the strong consumer response, which has led to significant average unit retail growth. However, it's important to note that average unit retail growth alone does not guarantee success; it must translate into comparable store sales, and we are pleased with the 4% comparable sales growth we achieved in North America. As we move forward with expanding this approach across the North American ecosystem, we are actively implementing pricing strategies in our full-price stores that also have wholesale, utilizing the insights we've gained from our factory outlets. We are just beginning this process, but we are optimistic about what we've observed so far. Regarding our long-term guidance for average unit retail growth, we continue to expect growth in the low to mid-single digits for the duration of our plan.
Operator, Operator
Thank you. The next question comes from Michael Binetti with Credit Suisse. Your line is open.
Michael Binetti, Analyst
Hey, guys. Let me start with congrats on a really nice quarter and what sounds like a tough holiday.
Patrice Louvet, CEO
Hi, Michael.
Jane Nielsen, CFO
Hi, Michael.
Michael Binetti, Analyst
In North America, wholesale decreased by 8%, which is a larger drop than we have observed since last year's fourth quarter, especially considering the significant off-price adjustments that occurred then, with a negative 10 to contend with. I am trying to understand how you view the North America wholesale numbers moving forward. The comparisons will become easier, and you are starting to raise prices in wholesale. Do you believe we might be at a point where North America wholesale could turn positive at some stage during fiscal 2021? Additionally, I want to know your thoughts on the margin dynamics for next year. It appears that you are pleased with the outcomes of the increased marketing efforts, which are reflected in strong top-line results. However, I am curious about your projections for gross margin next year given it has contributed positively for several years. You mentioned that AUR should continue to trend in the right direction and that you are satisfied with ticket pricing. Do you still anticipate that the gross margin and SG&A trends we have seen in the initial years of the plan will remain consistent next year?
Jane Nielsen, CFO
Yes, Michael, it's Jane. Let me address the AUR gross margin question first and then I'll discuss North America wholesale. We are quite encouraged by our performance in North America during Q3 regarding gross margins, which have benefited from AUR increases alongside comp growth. These AUR increases reflect our ongoing efforts to reduce discounts, and we're beginning to see a positive impact from an improved product mix and the elevation of our offerings. We're making better assortments and rebalancing in core areas, which we've discussed previously. Although it's still early stages, we're starting to observe these improvements this quarter. Additionally, the consumer response to our ticket increases has been very positive, which boosts my confidence in continued gross margin expansion. We have already provided guidance for Q4, and I believe that the factors we've identified as sustainable—such as reductions in promotions, targeted price increases focused on consumer value, product mix advantages, and some beneficial shifts in geography and channels—are indeed durable. We're managing some of the cost inflation and tariff impacts by leveraging these strategies. I remain optimistic that gross margin will continue to drive our results today and into the future, with clear guidance on magnitude. I'm encouraged by the progress we've made. Regarding your question about North America wholesale, I can say that off-price has decreased significantly more than our full-price business, experiencing double-digit declines last year and this year. The off-price flow relates to excess inventory, which is now clean. We're approaching that channel strategically, partnering with those who can help us liquidate excess effectively. As for the timeline for North America wholesale recovery, we understand it will require some time. However, we are encouraged by strong comp growth in DTC in North America this quarter, and while we expect some fluctuations quarter to quarter, the underlying trend looks promising. We are confident that we are taking the right actions in wholesale, focusing on rebalancing assortments and sell-out improvements, as Patrice mentioned. We're also implementing targeted marketing within this channel, which is starting to show early signs of positive trends. We are pleased with our marketing investments and their role in supporting our brand elevation and price increases, and we are optimistic about how this will influence OI margin moving forward.
Corinna Van der Ghinst, Host
Next question please.
Operator, Operator
Thank You. The next question comes from Matthew Boss with JPMorgan.
Matthew Boss, Analyst
Great, thanks and congrats on a nice quarter.
Patrice Louvet, CEO
Thanks, Matt.
Matthew Boss, Analyst
Maybe Patrice and I know this is somewhat higher level. But, as we think about differentiated versus undifferentiated retail, I guess maybe what inning overall do you see the brand today in North America? So, maybe if you could touch on wholesale distribution, how you feel about your existing department store doors, maybe the number and the quality of the doors that you're in. I know Jane just touched on off-price. And then at retail, where you see the opportunity from a footprint perspective in terms of what you have today and the opportunity that you have going forward?
Patrice Louvet, CEO
Jane is very happy that we're back to baseball analogies. So listen, on the differentiation front, I think we're in the very early innings in North America actually, right. So, if you'd ask me for a number, I'd probably say two out of nine. I think we see opportunities to actually in the context of the brand elevation strategy to increase our presence in higher-end wholesale where we see opportunities both in North America and actually around the world. We're also in kind of the current wholesale footprint you know we've reduced it significantly already, right. We're down 25% from where we were about three years ago to make sure that the brand shows up in the right place. We continue to assess the locations on a very regular basis working closely with our partners. So, this is also a dynamic process. As far as DTC is concerned, we believe we have opportunities obviously to continue to fuel our dot-com operations right, which is a very important factor of the DTC part of our business. And also similar to our thinking internationally with the introduction of Polo boutiques, we believe there is an opportunity in North America to expand our DTC footprint smaller format stores. So that won't happen tomorrow morning. But as we look at kind of the next few years and where we want to take the brand and how we want to drive interactions with consumers across the country, we do believe there are opportunities to expand the footprint so that the brand is better represented in a more dispersed way across the entire country, all guided by our brand elevation strategy, right. That's really the filter that we use to decide where we should be and then how do we ensure the differentiation is very clear by channel for the consumer both online and brick-and-mortar, so that he or she knows exactly what to get in which location and how the brand will show up differently based on the different environments.
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
Thanks. I’d add my congratulations, nice quarter guys. I appreciate all the information.
Patrice Louvet, CEO
Thanks, Omar.
Omar Saad, Analyst
I wanted to ask a follow-up on the sales guidance. You obviously a really strong quarter your comps accelerated. You came in above your number. You kind of kept the full year guidance the same. Are there any timing issues going on? Especially with all the AUR upticks, it feels like an easier comparison in the fiscal fourth quarter. It feels like there could be some opportunity for revenue upside there. Is there something I'm missing? And then, a follow-up on the coronavirus and maybe it's related. We're hearing stories of double-digit million population cities that are like ghost towns right now and some pretty significant comp declines. Wondering if you're seeing any meaningful impact in your business in real time? And is there anything on the supply chain side we should think about in terms of disruption there potentially? Thanks.
Jane Nielsen, CFO
Let me address your question regarding guidance and potential revenue upside. As we approach the fourth quarter, Hong Kong's situation will significantly influence our performance. We've observed a decline in travel bookings from the third to the fourth quarter, which is especially critical for Hong Kong during the Lunar New Year. In the third quarter, we experienced approximately a three-point impact on the Asia comp, which will lead to about a five-point impact in the fourth quarter. Additionally, we noted a strong performance in digital commerce that exceeded our expectations. In both Europe and North America, we achieved better sell-through at full price and faced less inventory clearance in the fourth quarter, indicating a positive shift in sales quality. This will reflect in our digital comps as we move ahead. Due to the shorter holiday season, we focused on meeting consumer demand to enhance the service experience, leading to a slight increase in process returns in the fourth quarter and a less promotional environment at the end of the third quarter. These factors are the primary considerations guiding our revenue outlook for the fourth quarter.
Patrice Louvet, CEO
And then regarding the coronavirus, it is clearly a highly dynamic situation. Currently in China, about half of our fleet is closed with approximately 110 stores, so around half of that is closed at this moment. We are monitoring this very closely. In terms of our business in China, while it represents a significant growth opportunity for us, it is somewhat advantageous that we are still underpenetrated. Presently, China's contribution to our overall business is less than 4%. However, we remain very optimistic about our long-term potential in that region and are excited about our opportunities there. On the supply chain side, the situation is similarly dynamic. Over the past year or two, we have been working to diversify our supply chain to reduce reliance on any single market, particularly China. This will give us a broader and more flexible operational footprint. We are currently navigating the extended Lunar New Year vacation and will need to observe how employees return to factories after the break. We are striving to be as agile as possible and will ensure we make the best out of the circumstances. The foremost priority in all this is to ensure the safety of our employees and consumers, while closely following guidance from local and global authorities regarding this health crisis.
Corinna Van der Ghinst, Host
Next question?
Operator, Operator
Thank you. The next question comes from Erinn Murphy with Piper Sandler.
Erinn Murphy, Analyst
Great, thanks, good morning. Just a couple of questions for me. I guess Patrice, just on the speed to market opportunities you gave that 16-day example. Could you just talk a little bit more about where that product was produced? And as you assess the opportunity, how repeatable is this process? And then, just a follow-up for Jane on the North American wholesale, can you talk a little bit more during the quarter of what did you see with Men's Polo versus Lauren within the full-price business? Thank you.
Patrice Louvet, CEO
So Erinn, I took note of that example, and it’s actually really good. It was a pilot exercise for us, involving a sweatshirt we developed with one of our wholesale partners. We executed it from ideas to delivery to the partner in 16 days. We’re not planning to shift our entire supply chain to 16 days. What’s important is understanding the timing needed to be well-positioned to succeed in a specific category, in a specific geography, and in a specific channel. We still have our nine, six, and three-month lead times, but there are some projects where we want the ability to react in just a few days. The specific project involving the sweatshirt was manufactured in Mainland China and is something that can be replicated, which is why we shared it as an example. It’s a pilot, but it indicates that our organization is becoming more agile and proactive in managing timelines and being more innovative. You can expect to see faster lead times from us, not just for the sake of speed, but to understand what’s necessary to succeed in the marketplace.
Jane Nielsen, CFO
We are confident in reaching our goal from Investor Day to have over 50% of our products with a six-month or shorter lead time. We are making significant progress, with nearly 80% of our quarterly products now meeting this timeline, and we're also exploring even faster options. Our supply chain is performing well in this area. Regarding your question about the Polo and Lauren brands, Polo has shown stability and is a key driver for us, particularly in North America wholesale. We're seeing some early positive signs for the Lauren brand, thanks to marketing efforts and targeted work with our wholesale partners. This indicates that there is still consumer interest in Lauren, and if we focus on the right categories, product quality, and consumer value, we expect a positive response. While it's still too soon to declare a full turnaround, these trends are encouraging.
Corinna Van der Ghinst, Host
Okay. Next question, please.
Operator, Operator
Thank you. Our final question comes from Alex Walvis with Goldman Sachs.
Alex Walvis, Analyst
Good morning. Thanks so much for taking the question.
Patrice Louvet, CEO
Good morning, Alex.
Alex Walvis, Analyst
You commented on some pretty strong performance in the outerwear segment through the quarter which was a tough category for some others. So some good progress there. I wonder if you could share some comments on the other underdeveloped categories. And you mentioned denim was strong. Any comment on where we are in the progression for accessories, wear to work and so forth?
Patrice Louvet, CEO
We are really encouraged by the growth in outerwear, and I'm becoming increasingly optimistic about the potential in that area as we enhance our in-house capabilities. There is strong momentum in outerwear, and denim has also performed well, positively impacting our men's business. The team is effectively understanding our target customers, creating resonant products, and executing in-store communications that engage consumers. We're making good strides in the wear-to-work category. Notably, we're enhancing our offerings, particularly in Polo Women's and Lauren, to better cater to wear-to-work consumers. Our goal is to transition into a brand that serves customers seven days a week, rather than just for a couple of days. I'm pleased with our progress on this front. Regarding footwear and accessories, we previously mentioned that progress in these categories would be more pronounced later in our five-year plan, which is why we're seeing earlier acceleration in outerwear and denim. However, we are making solid progress in footwear and accessories. Our first priority is to build the right capabilities, collaborating with Ralph and ensuring we have the right design talent for bags and shoes. We've recruited exceptional talent from leading figures in the industry over the past year and a half to ensure we have experts who truly understand these categories. Now we are focused on bringing these products to market, which takes some time. I anticipate that the impact will become more observable in the later years of our plan, but we are starting to see encouraging signs across different parts of our portfolio that give us confidence in our progress, and we expect to realize the benefits from footwear and accessories as well.
Corinna Van der Ghinst, Host
Last question please, Angela.
Operator, Operator
Thank you. Our final question comes from Rick Patel with Needham & Co.
Rick Patel, Analyst
Good morning guys. Thanks for squeezing me, and I'll add my congrats as well. I was hoping you could provide some more color on Europe wholesale. You reported some nice growth there despite the negative impact of some timing shifts. Is there anything to call out aside from digital wholesale accounts? And how sustainable is this growth as we think about the run rate for this segment?
Jane Nielsen, CFO
We are encouraged by the trends we're seeing in Europe wholesale, which have aligned with our long-term expectations of low to mid-single-digit growth. Our pure-play partners are driving this growth, and we are also optimistic about the performance of our traditional bricks-and-mortar partners. Their same-store sales have shown positive momentum, and we’ve noticed distribution expansion with long-standing partners in certain regions, which is very positive to us. We view this growth as sustainable and are pleased with our progress and our brand's position within the European wholesale market. The pricing benefits our overall portfolio, and our inventory levels are healthy. Overall, we are satisfied with the advancements in this segment.
Patrice Louvet, CEO
Good. So thank you everyone for joining us today. We look forward to sharing our fiscal year-end results and fiscal year 2021 guidance with you on our next call in early May. Between now and then, have a great time. Thank you. Bye.
Operator, Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.