Categories Earnings Call Transcripts, Other Industries

Ralph Lauren Corporation (RL) Q4 2022 Earnings Call Transcript

RL Earnings Call - Final Transcript

Ralph Lauren Corporation  (NYSE: RL) Q4 2022 earnings call dated May. 24, 2022

Corporate Participants:

Corinna Van der Ghinst — Head of Investor Relations

Patrice Louvet — President and Chief Executive Officer

Jane Nielsen — Chief Operating Officer and Chief Financial Officer


Matthew Boss — J.P. Morgan — Analyst

Michael Binetti — Credit Suisse — Analyst

Omar Saad — Evercore ISI — Analyst

Laurent Vasilescu — BNP Paribas Exane — Analyst

Bob Drbul — Guggenheim — Analyst

Jay Sole — UBS — Analyst

Chris Nardone — Bank of America — Analyst



Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Fourth Quarter and Full Year Fiscal 2022 Earnings Call. [Operator Instructions]

I would now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Corinna Van der Ghinst — Head of Investor Relations

Good morning, and thank you for joining Ralph Lauren’s fourth quarter and full year fiscal 2022 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 — President and Chief Executive Officer

Thank you, Cory. Good morning, everyone, and thank you for joining today’s call. We are pleased to report strong fourth quarter and full year results that exceeded our expectations on both the top and bottom line. This year’s performance underscores the strength of our business and desirability of our brand around the world, with both strong loyalty among our existing consumer base and enabling new high-value consumer recruitment. Ralph and I are inspired everyday by our team’s engagement, agility, and execution, which is driving this progress.

As we enter fiscal ’23, our consumer remains healthy and motivated to invest in the timeless quality products we have always stood for. While we consistently adapt to ever-changing macro developments, our strong brand momentum will continue to be supported by multiple engines of growth. These include, first, continuing to drive brand heat and desirability with increased marketing investment and a combination of iconic lifestyle campaigns and precision marketing. Second, leveraging our unique, multi-category lifestyle proposition to drive the mix of sophisticated and casual dressing consumers crave. As we look ahead, there remain significant opportunities for category expansion and continued product elevation; and third, rolling out key city ecosystem strategy which integrates a brand-elevating, cohesive consumer experience across our touch points.

Originally developed in Asia, we’re still in the early innings of scaling this model across each of our regions, including North America. Within this ecosystem, we lead with digital commerce, which continues to represent a significant growth opportunity while already solidly accretive to every region’s profitability. Woven into all of these engines of growth is our focus on delivering positive impact in the world, across citizenship, and sustainability. Our fourth quarter performance was a great example of the continued progress we’re making across these priorities as we pivot to growth while maintaining our culture of productivity.

Despite macro headwinds from COVID, the devastating war in Ukraine, and significant inflationary pressures, we expanded operating margin and each of our regions reported strong double-digit topline growth fueled by digital. Let me take you through a few of our fourth quarter and fiscal ’22 highlights across the strategic pillars of our Next Great Chapter plan. First, on our efforts to win over a new generation, from our iconic brand moments at the summer and Winter Olympics, to our launches in gaming and the metaverse, consumers around the world are connecting more than ever to our brand positioning and product portfolio. We’re also strengthening our relationships with higher-income consumers across both our new and existing consumer base.

This was particularly evident in the fourth quarter where we shifted a significant portion of this year’s investments to drive brand desirability across a diverse range of activities. First, this March marked our celebratory return to the runway at New York’s Museum of Modern Art, where our men’s and women’s fashion show immersed viewers in the world of Ralph Lauren, as only Ralph can. On stage and in the audience were faces familiar to the brand, including Janelle Monae, Gigi and Bella Hadid, Emily in Paris’ Lily Collins, New York City mayor, Eric Adams, and our newest fragrance ambassador, Angus Cloud from the hit show Euphoria.

As we continue to amplify our events globally, we delivered our most successful TikTok campaign ever around the show, with our largest growth in new followers on the platform this year. You may have seen our exciting partnership with Morehouse and Spelman Colleges this quarter, honoring the legacy of HBCUs and their contribution to the culture of American fashion. Inspired by the rich heritage and esteemed traditions of these two schools, this creative collaboration is just one example of our commitment to evolve how we portray the American dream in the stories we tell and the faces and creators we champion. The collection, conversation, and press surrounding this collection sparked strong consumer engagement and traffic to our North American digital flagship in the quarter.

And we continued to strengthen our leadership in the world of sports through our high-visibility sponsorships of the Australian Open and Team USA at the Winter Olympics. This year’s events were particularly thrilling as we celebrated the spirit of optimism and aspiration that these sports represent consistent with our brand values. These activations not only drove another quarter of strong topline growth, but also helped recruit younger, full-price consumers to the brand, particularly on our digital channels. New consumers on our digital sites grew more than 70% to LLY, including an increased penetration of under-35 higher value consumers. Our online search trends also grew double digits to last year in Q4, significantly outperforming peers globally.

Looking to fiscal ’23, we will continue to drive this momentum and desirability with iconic brand moments in sports and culture across our portfolio, all of which you will see amplified across our global campaigns. Touching on our second key initiatives, energize core products and accelerate high potential underdeveloped categories. Ralph Lauren is one of the few brands in the marketplace with the authenticity, quality [Phonetic] and credibility to deliver products across a range of lifestyle categories. As Ralph likes to say, the brand is not about chasing fast trends, but rather about living. And I can’t think of a moment where this has been more relevant as consumers come together again with a return to pre-pandemic activities.

Our design team is leveraging the breadth of our portfolio to create products that our consumers can live in and feel confident in regardless of what the new normal looks like for them. In the fourth quarter, consumers gravitated back to more sophisticated, luxury, and formalwear looks, while we also continued to drive a mix of elevated but comfortable casual styles. As we continue to drive brand heat and new consumer acquisition, special collections this quarter included the Polo Color Shop, our pre-spring ode to the easy, luxurious style of the Cote d’Azur, our Morehouse and Spelman Colleges Collection, which sold out almost immediately, our Team USA Olympic styles featuring Intelligent Insulation technology, and inspiring our next generation of outerwear, and our Lunar New Year gifting celebrating the year of the Tiger.

We were also proud to open our first iconic World of Ralph Lauren home shop at Harrods this quarter, with more to come as we build on this high-potential category. And in April, we launched our first unisex fragrance, POLO EARTH, with consciously designed vegan fragrance featuring sustainably sourced ingredients and recycled packaging. Shifting gears to our third key initiative; drive targeted expansion in our regions and channels. We continued our long-term strategy of investing in our key city ecosystems around the world in fiscal ’22, with a focus on elevating our touch points with the consumer across every channel. During the year, we opened 122 new stores and concessions in top cities globally.

This fiscal year marked our first emblematic concept stores in China, in Beijing and Shanghai, our first European flagship opening, since 2010, in Milan, and our first slate of full-priced North America store openings since 2016. The vast majority of our store openings continue to be in Asia, and particularly the Chinese Mainland, where our brand momentum remained strong despite recurring COVID lockdowns. Our fourth quarter Mainland sales were still up more than 25% to last year in constant currency. And our Lunar New Year performance across the market significantly outpaced the competition as we continue to build our brand for a local audience. We further expanded our successful key city ecosystem model to other markets around the world this quarter.

In North America, we just opened one new full-price store in Century City, Los Angeles, and relocated one store in Bal Harbour, Miami, for a total of eight new full-price openings this fiscal year. Overall, coming out of fiscal ’22, we are strongly encouraged that North America’s turnaround is well underway as we fire on all cylinders following our final phase of major distribution resets over the past year.

Moving to our priority of leading with digital, sales for our total Ralph Lauren digital ecosystem, including our directly operated sites,, pure players, and social commerce grew low double digits in the fourth quarter, a more than 80% to LLY in constant currency. For the full year, digital grew more than 40% to last year, and 65% to LLY, reaching 26% of total revenue. This is consistent with our penetration levels during the heights of COVID, when store were closed. Within our own Ralph Lauren digital sites, sales grew 18% in the fourth quarter, and more than 70% to LLY. We continue to drive strong full-price selling as we deliver the right mix of product and invest in AI-powered targeting and new full price consumer acquisition. We also launched new localized digital commerce sites to support our ecosystem expansion globally. This includes our first digital flagship in Australia and the Middle East as well as 15 new ship-to destination largely across broader Europe.

During the year, we expanded on the connected retail capabilities we launched during the pandemic, from virtual selling appointments to endless aisle product availability. Looking ahead, we will focus on scaling these capabilities along with our full catalog mobile app launched this past holiday to provide our consumers with a seamless elevated brand experience across every touch point and our entire portfolio.

Moving to our work to operate with discipline to fuel growth, our teams have operated with incredible agility to mitigate emerging macro challenges, delivering both gross and operating margin expansion again in the fourth quarter despite increased cost headwind. In addition to implementing a culture of operating discipline across our Company, over the last 24 months we have driven further efficiencies in how we operate. From the launch of digital product design and virtual showrooms to digitizing our supply chain in order to enable real-time visibility and planning, we also continue to make significant strides across our global citizenship and sustainability commitment over the past quarter and fiscal year.

Let me highlight a few high impact initiatives, meaningfully progressing towards our target of at least 20% under represented race and ethnic groups on our global leadership team by 2023. Delivering $2 million donation in scholarship for students at historically black colleges and universities through their Ralph Lauren Foundation, launching the US Regenerative Cotton Fund to support long-term sustainable cotton production in the US, unveiling color on demand, the world’s first scalable zero wastewater cotton dyeing system, and bringing to market CLARUS, a first-to-market patented technology and critical step in scaling our use of recycled cotton. And recall that in fiscal ’22, we incorporated key ESG metric into our executive compensation plan for the first time. In closing, this year has been an exciting chapter on our journey to elevate our brands and pivot to offense. Ralph and I are proud of and encouraged by the passion, collaboration, and execution of our team. Together we have fundamentally repositioned our business and are already starting to yield positive results across our multiple engines of growth.

Looking ahead, we have strong confidence in this growth model. And we’ll continue to invest behind this year’s momentum to deliver long-term value creation. We remain keenly focused on what we can control while continuing to navigate in uncertain global environment. We look forward to sharing more with you at our Investor Day on September 19. And with that, I’ll turn it over to Jane to discuss our financial results.

And, I will join her at the end to answer your questions.

Jane Nielsen — Chief Operating Officer and Chief Financial Officer

Thank you, Patrice, and good morning, everyone. We closed our fiscal ’22 with strong fourth quarter and full year results that demonstrated meaningful progress toward our next great chapter goal along with execution excellence by our teams and broad-based performance across our business. All three regions are back to topline growth. Our revenues are now slightly ahead of pre-pandemic level. And our operating profit dollars are also 30% higher all while ramping up investments and marketing, digital, new stores, and people.

Compared to two years ago, our businesses are over 25% bigger in Asia, nearly 10% bigger in Europe, and North America is reset and delivering growth on a much healthier foundation. At the same time, our balance sheet enabled us to return significant excess cash to shareholder in line with our capital allocation principle. And we resumed our quarterly dividend and share repurchases this year. With the reset behind us, we are driving multiple growth engines across our brands, channels, and geographies that will not only deliver more sustainable growth but also help to mitigate ongoing macro challenges.

Let me take you through our fourth quarter financial highlights. Total Company revenues increased 18% to last year on a reported basis, and 22% in constant currency, with double-digit growth in every region. This includes roughly five points of negative impact from our deliberate North America resets last year. Revenues exceeded both our fiscal ’19 and ’20 pre-pandemic results despite the resets.

Ralph Lauren digital ecosystem sales grew low double-digits in constant currency on top of the challenging compare of more than 60% growth last year. Our owned Ralph Lauren digital sites grew 18%, reflecting our strong product assortments, new consumer acquisition, expanded connected retail capabilities, and high-impact marketing. Digital margins remain strongly accretive to our profitability again this quarter.

Total Company adjusted gross margin was 63.3%, up 40 basis points to last year on a reported basis and 120 basis points in constant currency as we continue to successfully mitigate a dynamic inflationary environment. Fourth quarter AUR was up 13% on top of 31% growth last year, with growth across every region. This strong AUR growth along with favorable channel and geographic mix, more than offset higher than expected ocean freight costs with steep increases in oil prices following the evasion of Ukraine.

We expect higher freight raw material and labor costs to remain elevated into fiscal ’23. Particularly in the first-half until we start to lap higher cost increases in the second-half of the year. We plan to leverage our multi-pronged elevation strategy to continue driving AUR significantly above our long-term targets in order to mitigate mid-to-high single-digit product cost inflation in fiscal ’23. Adjusted operating margin of 3.6% expanded 20 basis points to last year on a reported basis and 140 basis points in constant currency driven by continued operating discipline. Adjusted operating expenses increased 19% to 59.8% of sales, up 30 basis points on a reported basis, but down 20 basis points in constant currency.

Marketing grew 48% to 9.5% of sales in the fourth quarter. We shifted a significant portion of our marketing investment from the first-half to the second-half of the year, as planned to accelerate our brand momentum and direct-to-consumer expansion coming out of the pandemic. Full year marketing was 7.3% of sales, in line with our guidance. For fiscal ’23, we still expect marketing of about 6% to 7% of sales. As we continue to support our new digital site, mobile apps, content creation, new consumer acquisition, and key brand moments, also drive desirability and purchase intent.

Moving to segment performance, starting with North America. The region’s turnaround continues with fourth quarter revenues, up 19%. These results included a 13-point headwind from our strategic distribution reset and license of chaps implying strong underlying growth. In North America retail, comps increased 21% to last year. Growth was driven by improved traffic, transactions and 19% AUR growth on top of 30% last year, reflecting our continued elevation around product mix, marketing and more targeted pricing and promotions.

Brick and mortar comps grew 19% driven by double-digit growth in AUR, basket sizes, traffic, and conversion. Performance was strong in both our full price and factory stores on growing domestic demand, even as foreign tourism remains muted. We drove further momentum in our own digital commerce business this quarter with comps up 27% on top of 25% growth last year. Our continued focus on high-value, new consumer acquisition helped deliver growth in AUR and basket sizes, while further reducing our discount rates. In North America, wholesale revenues increased 1% to last year, slightly above our expectations.

These results included 25 points of negative impact from our deliberate reset and chaps. Underlying growth and quality of sales continued to exceed our expectations. This was led by our full price businesses with sell out growth of more than 20% to last year, and 45% to LLY. We drove continued market share gains in Men’s and kids in our key partners along with three consecutive quarters of gains in women’s ready to wear. Our wholesale AUR was also up more than 25% to last year, as we elevated our assortments and pulled back on seasonal promotions. As we close out fiscal ’22, we are very encouraged by our strong foundation and broad based momentum across North America, setting the path for long-term future growth.

Moving on to Europe, fourth quarter revenue increased 26% on a reported basis and 34% in constant currency, retail comps increased 77% led by triple digit comps in brick-and-mortar stores. While we experienced Omicron related disruptions in the first few weeks of the quarter, it was a significant improvement from the prior-year period, when roughly 50% of our physical stores were closed due to COVID.

Digital commerce comps declined slightly on top of an outsized 79% comp last year, when the widespread store closures shifted a disproportionate share of business online. We expect growth in both owned and wholesale digital in fiscal ’23 driven by further site expansion and our healthy partnerships, despite strong compares. Europe wholesale exceeded our expectations again this quarter up 5% on a reported basis, and 12% in constant currency on top of a 41% reported growth last year, driven by stronger sell out and reorder trends.

In the fourth quarter, we suspended our wholesale shipments to Russia and also paused operations in Ukraine given the devastating events unfolding there. Combined, these markets represented less than 1% of Company sales prior to the war. We’re not assuming any sales to these countries in our fiscal ’23 outlook. While Europe remains our most dynamic market heading into fiscal ’23, due to macro pressures and the war, our business remains fundamentally healthy, our consumers are resilient, and our teams continue to execute with agility.

Turning to Asia, full year fiscal ’22 represents our highest ever revenue and operating profit for the region. Combined with five consecutive years of AUR growth, and the highest AURs in the Company, Asia gives us strong confidence in the brand elevating ecosystem model we implemented over four years ago. These results in the midst of ongoing COVID impacts are especially strong and are testament to the outstanding work of our teams.

For the fourth quarter, revenue increased 20% on a reported basis and 26% in constant currency. Asia retail comps grew 12% with digital commerce increasing 46% and brick-and-mortar stores up 10%. We maintain strong momentum across our total digital ecosystem in the region, with more than 50% growth this quarter. This was supported by gains across our own sites and wholesale digital businesses.

All of our key markets in Asia increased double-digits in constant currency this quarter, led by 45% growth in Korea. And despite COVID related disruptions, our Chinese Mainland sales grew 27% while Japan sales increased 17% to last year. Both markets accelerated sequentially despite stricter containment measures across our top cities, roughly 40% of our own stores in China experienced some form of closure or operating restrictions late in this quarter.

Overall, we continue to see meaningful near and long-term growth opportunities for our business in China, where our brands are resonating with consumers and the underlying health of our business remain strong. While we are still navigating COVID disruptions, particularly in China, continued momentum across Japan, Korea and Australia are helping to offset these near-term headwinds.

Moving on to the balance sheet, our strong balance sheet continues to be a competitive advantage, that gives us the flexibility to balance strategic investments with returning cash to shareholders, and opportunistic M&A, even through these dynamic times. This year, we returned approximately $600 million in dividends and share repurchases and ended the year with $2.6 billion in cash and short-term investments and $1.6 billion in total debt. This compares to $2.8 billion in cash and short-term investments, and $1.6 billion in total debt last year.

Net inventory increased 29% to support continued strong demand coming out of the pandemic, a deliberate increase in goods and transit, as we take inventory earlier to help mitigate supply chain delays, particularly in wholesale, increased product costs including freight and cotton, which we will start to lap in the second-half of fiscal ’23 and continued elevation of our product mix. We are managing inventory carefully in this dynamic environment in order to satisfy growing consumer demand and to maintain our long-term growth and quality of sales trajectory.

Looking ahead, our outlook is based on our best assessment of the current macro environment, including disruptions from inflationary pressures, the global supply chain, COVID-19, foreign currency volatility and the war in Ukraine. For fiscal ’23, we expect constant currency revenues to increase high single-digits with our current outlook at about 8% versus fiscal ’22 on a 52-week comparable basis.

Based on current spot rates, foreign currency is expected to negatively impact revenue growth by approximately 400 basis points. Last year’s 53rd week negatively impacts fiscal ’23 growth by about 100 basis points in constant currency in addition to the headwind from foreign currency impact. We currently expect all three regions to drive positive revenue growth this year, with the largest dollar contribution from North America and highest growth rate in Asia. Our topline outlook also includes significant foreign currency headwinds primarily related to the Euro and the Japanese Yen, especially in the first-half of the year, potentially softer consumer sentiment in Europe from inflationary headwinds and the war with no sales to Russia or Ukraine assumed this year.

COVID impacts notably in China, where we expect key city lockdowns to continue through the first quarter of fiscal ’23 and a limited contribution from foreign tourist sales. We expect operating margin in the range of 14% to 14.5% in constant currency. Foreign currency is expected to negatively impact operating margin by approximately 130 basis points. This compares to operating margin of 13.1% on a 52-week basis, and 13.4% on a 53-week basis last year, both on a reported basis. Gross margin is expected to increase 30 to 50 basis points on a constant currency 52-week basis in line with our long-term plan. We plan to continue driving stronger AUR and favorable product and channel mix more than offsetting increased freight and material costs.

Foreign currency is expected to negatively impact gross margins by approximately 110 basis points in fiscal ’23. We expect first-half gross margins to be lower with the highest freight pressures in Q2 followed by gross margin expansion in the second-half of the year as we start to lap the significant increases in freight and raw material costs.

For the first quarter, we expect revenue growth in a range centered around 8% in constant currency, foreign currency is expected to negatively impact revenue growth by approximately 480 to 500 basis points. Our first quarter outlook reflects known COVID related restrictions, notably in China. We expect first quarter operating margin in a range centered around 13.5% in constant currency, reflecting increased headwinds from higher freight and marketing expense, which are expected to normalize in the second-half of the year as we start to lap cost increases from the prior-year. Foreign currency is expected to negatively impact operating margin by about 130 basis points in the quarter. First quarter gross margin is expected to contract slightly to last year in constant currency with strong AUR growth more than offset by increased freight and product costs along with more normalized channel mix compared to last year store closures.

Foreign currency is expected to negatively impact gross margins by about 100 basis points in the first quarter. We expect our tax rates in the range of 25% to 26% for the full year, and 24% to 25% for the first quarter. Lastly, our capital allocation priorities remain largely unchanged, with a focus on reinvesting behind our key strategic initiatives and returning excess cash flow to shareholders in the form of our dividend and share repurchases. We completed approximately $150 million in share buybacks in the fourth quarter, with $1.6 billion remaining on our current authorization and we recently raised our dividend for fiscal ’23 by 9% to $3 per share.

We’re planning fiscal ’23 capital expenditures of approximately $290 million to $310 million, or around 4% to 5% of sales. In closing, our teams around the world continue to execute with agility to drive brand desirability, and deliver growth across multiple levers all while navigating a still volatile global environment. Our strong performance this year underscores the timelessness of Ralph’s creative vision, our strengthening consumer base and the power of our brand. As we accelerate our topline momentum, we remain strongly committed to balancing our pivot to offense with long-term profitability, leveraging our culture of operating discipline that has been embedded across our organization over the last four years.

With that, let’s open up the call for your questions.

Questions and Answers:


[Operator Instructions] The first question comes from Matthew Boss with J.P. Morgan.

Matthew Boss — J.P. Morgan — Analyst

Thanks, and congrats on a nice quarter.

Patrice Louvet — President and Chief Executive Officer

Thanks, Matt.

Matthew Boss — J.P. Morgan — Analyst

So, Patrice, with the macro backdrop having changed across many of your key markets, since the February call, I guess what gives you confidence entering FY’23 to continue your pivot to offense despite the tougher backdrop, maybe what structural changes support your pricing structure? And can you touch on the total addressable market for refined casual exiting the pandemic, and how you see the Polo brand position?

Patrice Louvet — President and Chief Executive Officer

Sure. Well, good morning, Matt. Few things I would call out here, first of all, I think as all of you know, we significantly repositioned our Company over the past couple of years, right? And we’re coming into this new fiscal year with strong momentum. We now have multiple engines of growth, and we’re delivering growth across every brand, every channel, every region, with opportunities for continued acceleration across each of them. So, our game plan is working. And I believe our deep brand strength, our demonstrated pricing power, and more diversified growth strategy becomes even more important during these turbulent times. There are few things I would call out. One, our consumer remains strong around the world, all right. And as we recruit new consumers, you saw this past quarter, we recruited 1 million new consumers, 5 million over the past fiscal year. We’ve been fundamentally pivoting our base towards higher-value full-price consumers who are less promotion/price sensitive.

Second, as we’ve talked in prior calls, our designers and our merchants have been spot-on with this post-pandemic style of dressing and our products are driving desirability as they leverage the full breadth of our lifestyle portfolio. Third, our supply chain is built to be flexible and resilient. There’s been a lot of work that’s gone on over the past two, three years to get us there. And we now have proven our agility over the past couple years, and I think I have a lot of confidence going into the continued turbulent environment. And then lastly, we’ve built a culture of cost discipline in the Company, and we continue to drive value through productivity as well.

So, listen, of course, we’re grounded in reality and we’re tracking, closely, consumer sentiment, bigger cost headwinds including FX as well as COVID trends, particularly what we’re seeing in Asia right now. We’re not immune to any of these, but in this context we are in the strongest position we could be in terms of what we can control moving forward. Now, specifically on the space that we play in, and you know we’ve been on the brand elevation journey now for multiple years, we’re like working to get closer to the luxury groups. And then, so as we look at the consumer in that space right now, and this is both a reflection of what we’re seeing in North America, but also in Europe and in Asia; that consumer is strong, that consumer is engaged in our category.

And we’re actually seeing some really interesting things in terms of purchasing pattern. We’re seeing a combination of reinvesting in the core — core wardrobe, so think of sweaters, think of denim. And then we’re also seeing the consumer pivot towards newness and sophistication, examples for us would be cashmere hoodie or a novelty fleece. And then, and I think this characterizes the broader population, consumers starting to go out during the day, so there’s a need for a sports coat, there is a need for outerwear, there’s a need for dresses, and then the return to social activities in the evening or on the weekends. So Matt, that whole space for us continues to be healthy, continues to grow. And if anything, we’re actually very energized by the diversity of the opportunities that we have as consumers pivot their apparel needs in this kind of new normal.

Polo within that, which is at the heart of our Company, is actually really in a sweet spot when it comes to serving these needs nicely and competitively. And that’s both the combination of our very strong core products, right, that’s really a foundation for this Company is our core propositions. And obviously, as I mentioned earlier, that taps into consumers reinvesting in their core. And then also, we’re seeing some really nice elevation and innovation across a number of different categories within the Polo brand, whether that’s Polo women’s, with all the wonderful work that the team is doing on dresses, for example, or broader propositions, and all the work that our Polo men’s and our Polo kids teams are also doing to serve this more elevated, more sophisticated consumer need right now.

So, we actually think, well, the Polo brand is really well-positioned within this total addressable market and from everything we’re seeing so far in market, consumer healthy and strong in that space.

Corinna Van der Ghinst — Head of Investor Relations

Next question, please.


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

Michael Binetti — Credit Suisse — Analyst

Hey, guys, thanks for all the detail here. Want to ask you two quick ones. I guess you seem to be against the trend here with your guidance of constant currency expansion for both gross and operating margins this year. Given the macro backdrop, what gives you confidence in your current margins and their sustainability? And then as a follow-up, on the North America wholesale business, I know you said that it was a plan of 1% including the 53rd week. I know you’ve done a lot of work there. It does seem like that channel is still holding back the model a little bit relative to the other channels growing a lot faster. And Jane, I thought it was interesting that it was up 1%.

You said POS was up 20%. I think North America wholesale was up 21% on a two-year basis, and POS was up 45%. So, there’s just a big gap that keeps rolling forward with North America wholesale. How do we think about that growth rate in ’23, is it mid single-digit to sustain the 8% constant currency revenue growth, maybe some thoughts there to help us understand how North America is positioned for the year?

Jane Nielsen — Chief Operating Officer and Chief Financial Officer

Sure, thanks for the question, Michael. Let me start with the first, about our guidance. We are comfortable with our fiscal ’23 guidance at this point. Our momentum and our track record of expanding both our gross margins and our operating margins through our Next Great Chapter plan are really a strong foundation for our fiscal ’23 guidance. And as you saw, our business trends are good. Now, clearly, we’re watching the macro headwinds very carefully. So, as we thought about our guidance, particularly in gross margins and in operating margins, we really tried to take a balanced approach, balancing both risks and opportunities that we saw. And we tried to do this across our guidance.

We are encouraged as we look ahead. And let me give you a few reasons why. First, our customers are resilient. They’re at the higher end of income demographics, and they’ve proven, through COVID, that their desire for the brand has increased, and that they’ve come back repeatedly. Second, our value perception, our quality score, and our purchase intent have strengthened through the pandemic, even with the backdrop of us taking pricing up 50% over the last two years. So, quality, value, and purchase intent all up in the face of that kind of pricing; that gives us tremendous confidence. And third, we are maintaining new consumer acquisition momentum of younger and higher quality consumers through this journey, and we intend to continue that and investing in that.

And that’s a very important part of our gross margin journey. And then finally, our team, obviously, they’ve managed through disruptions and headwinds, and have done so with great agility. And we have confidence in our ability to navigate the macro headwinds doing that. We’re confident in these drivers to expand our gross margins this year and beyond, and feel that we’re on a very solid ground to achieve our mid-teens operating margin, that’s our longer-term goal. And feel that this year will put us a step closer to getting to that goal.

Now, on North America wholesale, what you’ve seen, in up 1% in terms of overall, there is about 20 points of headwind from Chaps in that number. So you will recall, Michael, that we took Chaps out of our owned and operating model and we moved it to a license model, that impact is sitting on North American wholesale growth. Without that impact, we would have been up mid-20%. Now, that is going to continue. We lap out of that transition in August, and there is about $17 million of revenue in the first-half of fiscal ’23. So, you will see that continue, but we expect the underlying growth in wholesale to be quite healthy, and we’re very encouraged by the progress that we’re making there, but you will see that in the first-half of fiscal ’23.

Patrice Louvet — President and Chief Executive Officer

Yeah, you look — you see, Michael, through our share performance, I think, a truer reflection of how we’re doing in that channel. And actually, we’re really pleased with, one, the partnerships that we’ve built with our key wholesale partners and, two, the momentum that we have from a consumer voting standpoint, which is really what share measure is all about. And we’re growing share in men’s meaningfully, we’re growing share in kids, we’re growing share in home. We’re now growing share in women’s ready-to-wear, three quarters in a row of share growth in women’s ready-to-wear, excited about the progress both on Polo women’s and on Lauren, in particular. So, fundamentally, to your point on where does this stack up relative to our growth drivers in North America, we think wholesale is actually very nicely positioned, now that it’s been reset, and we’re certainly seeing the consumers vote very clearly in favor of our brands.

Corinna Van der Ghinst — Head of Investor Relations

Thank you. Next question, please.


Thank you. The next question comes from Omar Saad with Evercore ISI.

Omar Saad — Evercore ISI — Analyst

Thanks for taking my question. Good morning.

Patrice Louvet — President and Chief Executive Officer


Omar Saad — Evercore ISI — Analyst

Great numbers on the digital side, you have a lot of momentum in that channel. Maybe you could elaborate on that integrated market digital strategy that you talked about earlier on, developed with China, rolling it out to other markets. Maybe you could talk about how it operates? Why it’s so effective? And where you think the biggest opportunities are in that owned digital channel? Thanks.

Patrice Louvet — President and Chief Executive Officer

Sure. So, our go-to-market approach is really characterized by the ecosystem lens. And we focus on our top 30 [Phonetic] cities, and there we work hard to make sure we have the right brick and mortar and digital representation. And exactly to your point, we want the consumer to have a completely seamless experience, whether they’re shopping online, on our app on our sites, or whether they’re actually in our stores. What we have seen, and to some extent, COVID has been an enabler for that, the COVID crisis has been enabled for that, there’s an acceleration of our connected retail capabilities, and there are ranges from digital clienteling, which is now ingrained in the way our teams work.

So, the seamless connection between the store and the Web site for example, we have Boris, you’re familiar with BOPIS, which is Buy Online Pick-up In Store, now we also have buy online return in-store. So, that’s very seamless experience for the consumer. We’ve introduced the app a few months ago, which is also nicely connected to consumers purchase history. So, we’re able to tell for those who are comfortable sharing that data, what’s in your closet, and therefore we can use that data for really targeted one-to-one marketing to serve you in the way that fits best your shopping patterns. And then, we’ve recently introduced something I’m very excited about, which are endless aisle, actually screens in our brick and mortar stores, where even from a 1,000 square foot store you can now shop every element of the Ralph Lauren line.

And we started to experiment with that in North America, and in several stores we’re seeing very positive results. And it further gets to your point, Omar, of no longer really segmenting, this is brick and mortar, and this is digital, but for it to be a completely connected experience. Certainly our experience in Beijing and Sanlitun with the work that we’ve done with Tencent has also reinforce that leveraging, you know, the local kind of WeChat mini programs as a way to connect the consumer to our brick and mortar operations. But I think what you’ll continue to see from us is a ramp up of these capabilities. And then, there’s — we stay in touch with what the consumer is looking for and we adjust our offerings and our experiences accordingly, but I feel very good about the momentum we have in digital across the Company. And I think our penetration right now is about 26% of total revenue is digital. We’ve seen that hold up nicely as the stores have reopened. So, feel good about the sustainability of that, and our ambition is to make that over 30%. But again, the consumer should have absolutely seamless experience, and more and more a personalized experience.

Jane Nielsen — Chief Operating Officer and Chief Financial Officer

And Omar, on your question about local sites, we opened up 20 local sites this quarter. They tend to be smaller markets. We opened North Africa, the Middle East, some larger markets; Australia, and Korea were also local sites that we opened this quarter. It was one of our key investments as we exited the second-half of this year and will continue as we move into next year. So, we’re very pleased with our ability to reach digitally new markets in local language and local shift to addresses and we think that’s going to be a very positive driver as we move forward.

Corinna Van der Ghinst — Head of Investor Relations

Thanks. Next question, please.


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

Laurent Vasilescu — BNP Paribas Exane — Analyst

Good morning. Thank you very much for taking my question. Patrice and Jane, I appreciate you guided for all three regions to drive positive revenue growth for FY’23. Jane, I think you mentioned that the largest dollar contribution should be from North America and the highest growth rate should come from Asia. Is it fair to assume that North America should grow about mid single-digit rate, Asia should grow low double-digit rate? And if that’s the case, what is embedded in your Asia assumption for China growth this year.

Jane Nielsen — Chief Operating Officer and Chief Financial Officer

So, we don’t guide our regions explicitly, but we think that North America is positioned for strong growth as we move forward. We are very pleased about North America becoming an engine of growth. We expect Asia to be driven by the reopening of Japan, which would have significant market shutdowns through this year. And also China, while we contemplated the shutdowns in Shanghai and some of the key cities for Q1, which are material, Shanghai alone is 40% of our China business. We still expect strong double-digit growth as we exit the year, this year for China.

We’ve seen China being very resilient through COVID. Our consumer scores there are some of the highest we have around the world, and we have seen very strong continued digital momentum even store comps have come back. So, we are very bullish about our China business. You saw it very sequentially strengthened this quarter. We are realistic about the impact of the shutdowns, but we have contemplated that for Q1, and still expect strong double-digit growth in China.

Corinna Van der Ghinst — Head of Investor Relations

Thank you. Next question?


Thank you. The next question comes from Bob Drbul with Guggenheim.

Bob Drbul — Guggenheim — Analyst

Hi, good morning. I was just wondering if you could spend a little more time on the inventories either by region or how much in terms of in-transit is impacting it. Just curious in terms of like how you are planning mainly the European market with the orders on a wholesale basis. And I guess the second question would be around that same topic. But from the perspective of like late shipments to wholesale, I think you said supply chain was really impacting all your wholesale inventory. Has there been any change in your retail partners’ willingness to take product whenever it comes even if it is late or miss shipping windows?

Jane Nielsen — Chief Operating Officer and Chief Financial Officer

Sure. Thanks for the question, Bob. You saw our inventory increase in the fourth quarter. That was two factors. One, over the past three quarters, our sales numbers has significantly exceeded our inventory growth numbers. And so, this quarter we move to reset some of our inventory level. In addition and as I think as we’ve talked about, we made a move to take inventory earlier, especially for our wholesale account. And so, to address the challenge that you said, we want to maximize full price selling in our wholesalers. And so, you’ve seen us take inventories earlier. And hold it longer due to some of the supply chain delays that we are still experiencing and expect to experience through the first few quarters of this year. We have seen great partnership with our retailers. They are appreciative of our moves to secure their inventory and supply. And we feel great about our wholesale inventories. While they were up 16% this quarter, our sell out was up almost mid 20%, so, very healthy inventory, and no resistance at all in terms of taking our assortments and truly great partners in terms of our move to secure inventory for them.

Corinna Van der Ghinst — Head of Investor Relations

Great. Next question please.


Thank you. The next question comes from Jay Sole with UBS.

Jay Sole — UBS — Analyst

Great. Thanks so much. Just wondering if you can elaborate a little bit more on your plans for the balance sheet for this upcoming year. And what your plans are for the free cash flow after you invest within the business? Thank you.

Jane Nielsen — Chief Operating Officer and Chief Financial Officer

Sure. Thanks for the question, Jay. As we look at our capital allocation priority, it really hasn’t change. So, number 1 is to invest in our business. And you saw — take our capex up largely for growth-oriented initiatives, new stores. We are planning to open 200 new stores this year, which is a big step up from this year. We opened about 122. Digital infrastructure is an area of investment. And we feel great about digitizing our supply chain which is an important productive initiative. So, we are investing in our business and that’s our first priority.

From a balance sheet capital allocation perspective, first take up our dividend 9%, and we are committed to returning excess free cash flow to shareholders. We repurchased about $450 million of shares last year. We still have 1.6 remaining on our authorization. And expect to be able to continue — returning excess cash to shareholders through this year about the same level you saw us do last year. So, we are encouraged by the health of our balance sheet. And we are encourage by our opportunity to invest in our business.

Corinna Van der Ghinst — Head of Investor Relations

Let’s go to the last question please, Angela.


Thank you. Our final question comes from Chris Nardone with Bank of America.

Chris Nardone — Bank of America — Analyst

Hey, good morning, guys. Thanks for taking my question. Can you just talk a little bit more about the outlook for underlying sales growth in Europe ex-FX? In particular, are you seeing any cracks in consumer sentiment or any spending patterns in Western Europe markets?

Jane Nielsen — Chief Operating Officer and Chief Financial Officer

Yeah. So, we are encouraged by the underlying growth of our Europe business as we moved forward. The biggest impact that we see is FX. While we did see some pullback in Q4 with the war in the Ukraine, we are seeing consumers subsequently respond well and see nice traffic into our stores. So, we are encouraged by the European consumer. The underlying growth we expect to be consistent with our long-term guidance which was in the mid single digit range. And we expect Europe to be in that range this year — mid to high single digit range this year. And we’ve fully contemplated some of the impact of the Ukraine war and impact to European sentiment in their guidance. It was about 1% off sale when we stopped shipment to Russia and Ukraine, and probably another percent in terms of overall overhang of the war to consumer sentiment.

Patrice Louvet — President and Chief Executive Officer

And we are seeing this growth actually to be broad-based, right, so, 34% constant currency up in Q4 for total Europe. Both particularly driven by the UK, by Germany, by Italy where we recently invested in our ecosystems in Milan. So pretty well diversified growth, and for our earlier conversation, I think at this point we are feeling that the consumers that we appeal to is in a good place in Europe.

All right, thank you for your question, Chris.

Well, listen, thank you everyone for joining us today. We look forward to sharing our first quarter fiscal ’22 results with you in August. In the meantime, stay safe and have a great day.


[Operator Closing Remarks]


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