RL - NYSE

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Good morning, and thank you for joining Ralph Lauren's First Quarter Fiscal 2026 Conference Call. With me today are Patrice Louvet, the company's President and Chief Executive Officer; and Justin Picicci, Chief Financial Officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to one per caller. During today's call, our financial performance will be discussed on a constant currency adjusted basis. Our reported results, including foreign currency, can be found in this morning's press release. We will also be making some forward-looking statements within the meaning of the federal securities laws, including our financial outlook. Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties. Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release and to our SEC filings that can be found on our Investor Relations website. With that, I will turn the call over to Patrice.

Thank you, Corey. Good morning, everyone, and thank you for joining today's call. We are encouraged by our strong start to the fiscal year with first quarter results that exceeded our expectations across the top and bottom line. In the midst of a highly dynamic global operating environment, our growing brand desirability, diversified drivers of growth and muscles of organizational agility and executional excellence are standouts as we continue to deliver on our long-term strategic priorities. This quarter's performance underscores the power of our iconic brand, with a unique ability to reach across geographies, cultures, genders and generations of consumers, the breadth and appeal of our lifestyle portfolio of products with timelessness, value and quality more relevant than ever, and our proven key city ecosystem model as we continue to expand and elevate across every consumer touch point to be even more personal, more engaging and more digitally connected. Our strong first quarter results were once again broad-based, driven by every geography and channel. We delivered double-digit top line growth in both Asia and Europe, and high single-digit growth in North America with global comps up 13%. This exceeded the expectations we laid out in May, even as we chose to reinvest back into our marketing, digital and ecosystem initiatives and return cash to our shareholders. This strong early performance gives us confidence to take up our full year guidance even as we remain cautious on the second half of the year due to potential tariff-related pressures on broader consumer behavior. Despite macro headwinds, we remain well positioned, and we are on offense based on our continued commitment to invest behind our brands and market share gains, our strong and growing geographical presence largely concentrated in our key cities in each region, and our relentless focus on improving technology, AI and analytics to better serve our consumers and drive greater efficiencies in our business; all underscored by our balance sheet and operating discipline. Let me review a few highlights from the quarter where we drove continued progress across our three long-term strategic pillars. As a reminder, these include: first, elevate and energize our lifestyle brand; second, drive the core and expand for more; and third, win in key cities with our consumer ecosystem. Starting with our efforts to elevate and energize our lifestyle brand. The Ralph Lauren brand remains one of our most powerful assets sitting at the epicenter of culture and inspiring people all over the world to step into their dreams. And this dream of a better life remains as relevant to consumers today as it was when Ralph started this company nearly 60 years ago. As we expand our business across geographies, categories and channels, our teams are tapping into the power of our brand across a diversity of marketing platforms to reach our target consumers across generations. Some highlights from the first quarter included: first, we continue to enforce our luxury lifestyle positioning through major activations focused on our top cities. In April, we hosted our first-ever fashion presentation in China with our Shanghai Re-See event, which translated our Spring '25 Hamptons Fashion Show to an all-Asian cast and star-studded event. This was coupled with an innovative live shopping event on Douyin, and 360-degree takeover across our stores, outdoor and digital media. In addition to delivering a new record high for our China Q1 sales, the campaign drove over 64 billion impressions with strong customer acquisition. This was followed by our Fall '25 Modern Romantics Women's Collection Fashion Show here in New York City, showcasing the easy elegance of relaxed tailoring with meticulous attention to detail and materials. And in June, we hosted our Spring '26 Men's Purple Label show in Milan, marrying timeless craftsmanship and sophistication with the spirit of adventure. Beyond the runway, we delivered iconic celebrity moments, from dressing Beyonce on her Cowboy Carter World Tour to Usher and Tyson Beckford wearing custom Purple Label looks at the Met Gala. And most recently, we reinforced our leadership in the world of sports, with another successful Wimbledon sponsorship, where we drove the highest media value across all brands present and 43 billion global PR impressions, a more than 40% increase to last year. These activities are driving strong, sustainable growth in new customer acquisition and engagement. In the first quarter, we added 1.4 million new customers to our DTC businesses, a mid-single-digit increase to last year, driven by digital and full-price store customers, and continuing to skew more toward women, luxury and next-generation younger cohorts. And we increased our social media followers by high single digits to nearly 66 million, led by Instagram, LINE, Douyin and TikTok. Moving to our second key initiative, drive the core and expand for more. Ralph and our design teams continue to create beautiful products that serve our customers' modern lifestyles, all while staying true to what we stand for: authenticity, quality, and sophisticated timeless style. This is more important than ever as consumers look to brands and styles that they know and trust that will last and deliver a compelling value proposition. Our growing value perception, together with our strong pricing power, gives us confidence in our ability to continue on our elevation journey. This begins with our core products which represent more than 70% of our business. Our core remains an important differentiator in an industry that is typically more reliant on fluctuating fashion trends. Core product sales grew mid-teens this quarter, driven by strength in seasonal sweater polos, cotton cable-knit and merino sweaters, lightweight outerwear, including our Beaton Quilted Jacket in our Bi-Swing and Bayport windbreakers, our newer linen offerings and caps. Our special capsules this quarter centered on our sporting lifestyle, including our Candy Shop Yankees Baseball Collection for opening day and another elegant installment of Wimbledon pieces. Our high-potential categories, including women's apparel, outerwear and handbags, continue to be accelerators for our business. Together, these categories increased strong double digits outpacing total company growth in the quarter. Women's apparel continued to be driven by our foundational core along with a strong response to our seasonal styles. Highlights included our cable-knit jersey and Polo Bear sweaters, linen shirts, dresses, our cotton canvas city jacket and our newest foundational handbag collection, Polo Play, which launched earlier this spring. Within our complementary lifestyle categories, we unveiled our latest home collection Canyon Road at Salone del Mobile in Milan this spring. Inspired by the raw natural beauty of the American West, the collection reinforces our position in luxury living. Turning to our third key initiative, winning key cities with our consumer ecosystem. We continue to expand and invest disproportionately in our key city ecosystems delivering a cohesive, elevated brand experience across each of our consumer channels around the world. Within DTC, which comprises the majority of our business, we delivered another quarter of strong comp growth across regions. Comps increased 13%. This was above our expectations with double-digit growth in both digital and brick-and-mortar stores. Globally, we opened 24 new owned and partner stores this quarter, including our first Ralph Lauren store in Vancouver, now our second location in Canada following our Toronto launch in 2023, a Purple Label and Double RL shop in Shinsegae Centum City department store, marking the debut of our luxury brands in the Korean market, and our newest candy shop concept in the luxury resort destination of Marbella, reinforcing our presence in the Spanish market. All three regions outperformed our expectations again in the first quarter, led by international. Asia was particularly strong, accelerating to high teens growth driven by both China and Japan. China grew more than 30% in the quarter, outpacing our competitive set with a strong consumer response to our brand-building initiatives including our April fashion show in Shanghai. And North America maintained healthy trends, up high single digits with strength across DTC channels and stabilization in wholesale as planned. And finally, touching on our enablers. Our business continued to be supported by our five key enablers. Some highlights include: first, as part of our focus on delivering best-in-class digital technology and analytics and following our successful predictive buying pilot over the past year in Asia and Europe, we will continue to expand this AI-driven program to additional core styles in fiscal '26, enabling better chase and in-stock availability on sizing and best-selling products to drive both sales and inventory efficiencies. Second, as part of our multiyear next-generation transformation project, we were excited to launch automation in our European distribution center this quarter. We will roll out new automation capabilities to our other regions over the course of this fiscal year, enabling greater supply chain efficiency and savings, and ultimately better demand fulfillment for our consumers as we get product to the right place at the right time. We were also proud to be recently named one of America's best employers for women by Forbes. And finally, this June, Ralph received the Fragrance Foundation's 2025 Hall of Fame Award, recognizing his enduring impact on the fragrance industry as well as his creative influence on modern culture. In addition, our Polo 67 fragrance featuring Yankees Captain Aaron Judge won the 2025 Fragrance of the Year Award Men's Prestige. Congrats to Ralph and our fragrance team. In closing, Ralph and I are encouraged by the strong start to this fiscal year. Our teams are navigating an uncertain operating environment with dedication and agility to continue driving our strategic priorities. These priorities will continue to focus on harnessing the power of our iconic brand to drive desirability and recruit new consumers across generations, creating timeless products with a strong value proposition that consumers love and trust and investing in brand experiences that inspire our consumers and immerse them in the world of Ralph Lauren. With all of this underpinned by our strong balance sheet, culture of operating discipline and growing ability to utilize advanced AI and technology to drive sustainable long-term growth and value creation. We hope you'll tune into our Investor Day this September to hear more from our talented leadership team about the next leg of our next great chapter journey. And with that, I'll hand it over to Justin, and I'll join him at the end to answer your questions.

Thanks, Patrice, and good morning, everyone. We delivered a strong start to fiscal '26 with continued progress on our long-term strategic priorities and first quarter results exceeding the expectations we laid out in May. Revenues were ahead of our outlook, led by international, underscoring our growing brand desirability and ability to connect authentically with consumers around the world. We reported positive comp growth in every region and channel this quarter, and we achieved this while further advancing our continuous elevation journey with improved quality of sales. Our stronger full price selling and lower discounting resulted in higher-than-expected gross and operating margins. This performance was a testament to the incredible passion and dedication of our teams who are executing with excellence amid what continues to be a highly dynamic global operating environment. The strength of our balance sheet and our agile diversified supply chain, which we built to both mitigate global disruptions and support our long-term growth and the diversity of our strategic growth drivers across geographies, channels, lifestyle categories and consumer demographics. This quarter's solid performance and our continued momentum give us confidence to raise our full year outlook, even as we remain cautious on the broader macroeconomic backdrop primarily in the second half of the fiscal year. But first, let me walk you through our financial highlights from the first quarter which, as a reminder, are provided on a constant currency basis. Total company first quarter revenue growth of 11% was above our high single-digit outlook, led by strong performance in our direct-to-consumer channels. This year's later Easter shifted less than 1 point of sales growth into the quarter from the fourth quarter of fiscal '25 as expected. By region, Asia led our performance with sales increasing 19% followed by Europe up 10% and North America up 8%. Total company retail comps increased 13%, driven by an acceleration in our own digital business and ongoing momentum in our brick-and-mortar channels. Total digital ecosystem sales, including our own sites and wholesale digital accounts, grew mid-teens, led by North America and Asia. Total company adjusted gross margin expanded 160 basis points to 72.1%. The increase was driven by AUR growth, favorable mix shift towards our full price in international businesses and lower cotton costs, which more than offset higher labor and non-cotton material cost. AUR increased 14% in the first quarter, exceeding our high single-digit outlook and supported by strong full price selling trends, reduced discounting and favorable channel and geographic mix. We currently expect high single-digit AUR growth for the second quarter of fiscal '26. This reflects our ongoing brand elevation strategy, which includes selective pricing actions in North America and Asia for fall of '25. In addition to AUR growth, we expect continued unit growth in targeted markets, channels and categories. Adjusted operating expenses declined 70 basis points to 55.5% of sales, up 10% to last year. The increase was primarily driven by higher marketing and variable selling expenses. First quarter marketing investments increased to 7.5% of sales from 6.7% last year, supporting our always-on cadence of activations in each region, as Patrice discussed. We still expect marketing as a percentage of sales to be approximately 7.3% in fiscal '26. First quarter adjusted operating margin expanded 230 basis points to 16.6%, with operating profit increasing 29%, both ahead of guidance. Moving to segment performance and starting with North America. First quarter revenue increased 8%, above our expectations due to strong performance in our direct-to-consumer business. In North America retail, first quarter comps increased 12%, led once again by our Ralph Lauren stores. Digital comps increased 19% on strong brand momentum as we advance our investments in site enhancements and optimize our merchandising and marketing. In North America wholesale, revenue increased 2% as we continue to take market share in what remains a broadly volatile channel. Full price sellout was ahead of sell-in this quarter, supported by solid core replenishment trends. Our digital wholesale business continues to perform well with sellout up double digits. While we are encouraged by our stabilized trend in the channel over the past year, we are maintaining our cautious outlook for fiscal '26 given the potential macro pressures across the broader North America market. We plan to exit another 90 to 100 wholesale doors in fiscal '26 with approximately half of these related to Hudson's Bay. Moving to Europe. First quarter revenue increased 10%. This was ahead of our expectations, driven by balanced growth across our retail and wholesale channels. The majority of our key markets delivered growth in the quarter, led by Germany, France, Italy and Spain reflecting strong brand and product momentum. Europe retail comps increased 10% to last year with balanced growth across our stores and digital channels. Our Europe digital ecosystem grew mid-single digits on top of a solid comparing the previous year. Europe wholesale also increased 10% driven by continued momentum across both our spring seasonal offering and reorders of core product. We continue to expect full year revenue growth for Europe to be at the high end of mid-single digits and meaningfully weighted to the first half of the year. We continue to anticipate significant deceleration in the second half based on: first, a plan shift in wholesale receipts this year from chase-reorders to preorder bookings to service full-price demand more effectively; and second, a lapping of last year's timing shifts related to the Red Sea disruption. Turning to Asia. First quarter revenue increased 19%, exceeding expectations with every key market contributing to growth. Retail comps were up 18%, with digital and brick-and-mortar store comps both accelerating from the prior quarter, powered by our marketing activations across the region. China led our performance, with sales up more than 30% to last year on continued comp growth, strong new customer recruitment and impactful marketing moments, notably our activations in Shanghai. Sales in Japan, our largest market in the region increased high teens to last year, driven by strong full price selling and reduced discounting, along with continued tailwinds from foreign tourism. Moving to the balance sheet. Our strong balance sheet and cash flow generation have been key enablers of our Fortress Foundation, supporting investments in our strategic growth drivers while maintaining our commitments to shareholders. We ended the quarter with $2.3 billion in cash and short-term investments and $1.6 billion in total debt. Net inventory increased 18% to last year, reflecting strong global demand for our products, strategic receipt pull forwards, including to mitigate the impact of tariffs in North America and foreign currency headwinds. Excluding tariff-related actions, inventory growth for the quarter would have been approximately in line with revenue growth. We expect inventories to moderate progressively as we move through the year and to end fiscal '26 roughly in line with revenue growth. Looking ahead, our outlook remains based on our best assessment of the current operating environment, geopolitical backdrop and macroeconomic trends. This includes tariffs and other inflationary pressures, supply chain disruptions and foreign currency fluctuations, among other considerations. Given the high level of volatility in the current context, our outlook continues to be subject to change as trade dynamics and other macro factors continue to evolve. For fiscal '26, we now expect constant currency revenues to increase low to mid-single digits, up from low single digits previously, led by growth in our Asia and Europe businesses. We continue to expect this year's performance to be heavily weighted to the first half with first half revenues now assumed up roughly high single to low double digits in constant currency. Foreign currency is currently expected to benefit revenue growth by about 150 to 200 basis points this year based on the weaker U.S. dollar, notably versus the euro and Japanese yen. While our consumer trends remain consistent with recent quarters, we continue to take a more cautious view on the second half of the year. This is largely based on the potential impact of tariffs and related industry-wide price increases in the U.S. We now expect operating margin to expand approximately 40 basis points to 60 basis points in constant currency compared to our prior guidance of a modest increase. We continue to expect operating margin expansion to be primarily driven by operating expense leverage. Based on our strong Q1 performance and latest view of the tariff landscape, we now expect gross margins to be up slightly to last year, with AUR growth, discount reductions and favorable geographic and channel mix offsetting negative impacts from tariffs and noncotton material costs. While the U.S. tariff landscape remains fluid, the assumptions embedded in our original fiscal '26 outlook remain broadly consistent with the announced rates as of August 1, based on our current understanding of their application. And we will continue to leverage our proven tool kit to actively manage cost inflation headwinds as they emerge. This includes our significantly diversified supply chain and ability to flex across production countries, while maintaining our high- quality standards, partnering with our suppliers to drive efficiencies in our cost of goods and broader supply chain operations, and taking selective pricing actions and strategic discount reductions, acutely focused on continuing to deliver a compelling value proposition for our customers. Foreign currency is now expected to benefit gross and operating margins by about 10 basis points and 40 basis points, respectively, in fiscal '26. For the second quarter, we expect constant currency revenues to increase approximately high single digits. Foreign currency is expected to benefit revenues by approximately 100 basis points to 150 basis points. We expect second quarter operating margin to expand approximately 120 basis points to 160 basis points in constant currency, largely driven by operating expense leverage and reflecting a more normalized level of marketing investment following last year's Olympics. Foreign currency is expected to benefit gross and operating margins by about 10 basis points and 20 basis points, respectively, in the second quarter. We expect our second quarter tax rate to be in the range of 15% to 17% with the lower end of that range, reflecting certain potential discrete tax benefits. We now expect a full year fiscal '26 tax rate of approximately 19% to 20%. And in addition to increasing our annual dividend by about 10% at the start of this year, we repurchased $250 million in shares in the first quarter. In closing, our teams are successfully executing on both our near- and long-term strategic priorities as we start this new fiscal year. Inspired by Ralph's enduring vision, consumers everywhere are engaging with our brand in more meaningful ways than ever before, all while we remain true to the values that define us. Values like optimism, authenticity, quality and togetherness that resonate not only here in New York, but with customers across the world. As we navigate a highly dynamic macro environment, we continue to focus on mitigating industry disruptions through our operating discipline, strong balance sheet and organizational agility. At the same time, we are leaning into opportunities and staying on offense, investing in our brand, our products, our experiences and our capabilities to better serve and create lasting connections with our customers. With that, let's open up the call for your questions.

[Operator Instructions] The first question comes from Matt Boss with JPMorgan.

Congrats on another great quarter. So Patrice, with your Investor Day on tab this fall, I'm sure you'll talk more at that time about the long-term strategy. But with the recent strength of the business, what have been the largest drivers of upside? How much of this do you see as sustainable? And what would you need to see to turn more positive on your consumer outlook for the second half of the year? And then, Justin, how best to think about the drivers of back half gross margin maybe relative to the expansion levers that you saw in the front half of the year?

Matt, thanks for your question. So starting with the consumer outlook. First, as you know, we've been shifting our business towards a more elevated full-price consumer base. And this has served us well as our core consumer around the world remains resilient. And that's true both in Asia, across Europe and here in North America. Second, while we are encouraged by our momentum, as far as our back half is concerned, I'd say that we're continuing to proceed with caution, right? We need to really see how consumers respond to the start of the fall holiday season in what will be an uncertain potentially inflationary environment. Now regardless, we're staying on offense. We're focusing on what we can control. We have the benefit of our diverse drivers of growth that have helped and enabled us to perform through many different environments. Now to the first part of your question on durability of the drivers, put simply, these drivers are durable, right? First, the strength of our brand desirability and value proposition, along with the continued high-quality recruiting of customers. You saw, again, 1.4 million new customers this past quarter, younger, higher-value customers. Two is the breadth of our lifestyle product portfolio, combining our core categories with our three high potential growth opportunities. And again, you've seen strong performance this past quarter across those, and we expect that to continue. And then three is our expanding presence across key city ecosystems around the world, and there are so many white space opportunities still ahead of us as we stay focused on building these really robust ecosystems. When you pair these durable drivers with our operational discipline, our agility and how we're enabling the business with capabilities like data, tech and AI, we're in a position of strength to deliver for our customers moving forward. So we're going to save the rest for Investor Day, but I would say we're just getting started with a lot of white space still to cover across all of our diversified growth drivers.

And then on the question on the gross margins on the back half of the year. So as you saw, we've taken up our gross margin guide for the full year from flat previously to slightly up versus LY, driven by some really strong year-to-date performance. So we're now expecting a bit of expansion. What that updated outlook continues to imply is the first half is strong, second half a bit lower due to really the tariffs and the cost inflation pressure. Our tailwinds remain durable, right? AUR growth, continued promo pullback, targeted pricing as we talk proactively planned for fall, favorable product mix elevation, channel and geo mix tailwinds. And then we have the cotton cost favorability as well. The most meaningful offset is really the incremental cost inflation from the tariffs. The big unknown sitting here today is the price sensitivity and how the consumer reacts to the broader pricing environment and how sensitive that consumer is. And that's what we're watching very closely as we head into the second half.

The next question comes from Jay Sole with UBS.

I have a two-part question. First, Justin, you updated your guidance a little earlier in the fiscal year than we've seen in the past. Can you walk us through your updated guidance assumptions? What changed to drive the increase? And does this include any changes in expected tariff impacts? And Patrice, just wondering if you can dig in a little bit to the handbag business, what you've seen over the last 90 days, your conviction that the company can continue to grow strongly in handbags going forward?

Yes, sure. Thanks, Jay. So overall, we started the year in a somewhat unusual macro backdrop with a meaningful level of uncertainty, I would say, across markets and policy when we introduced that prelim guide back in May. Now it's still early in the fiscal year here. And as you mentioned, we typically wait to see how the fall holiday season starts to play out before we revisit guidance. But our performance so far has pretty clearly beat the expectations we shared in May, and that gave us the confidence to take up our guide. So a few related points to call out here. First, I would say our updated guide reflects our overdelivery on Q1 as well as our latest view on Q2. Both are better than we expected back in May and really driven by all three of our regions and based on that continuation of our solid performance trends. And on a reported basis, foreign currency also becomes a bit of a benefit based on how we're seeing the spot rates play out today. Second, I would say our latest expected tariff outlook specifically based on the recent announcements through this week is broadly in line with our May guidance. So we continue to actively manage the related pressures, leveraging our proven toolkit that we've talked. And we were actually able, as I mentioned, to take up our gross margin outlook slightly based on performance to date. Lastly, I would say, our view on demand for the back half of the year really remains unchanged at this point. You heard from our prepared remarks, we're still assuming a cautious outlook for the second half based on a number of drivers from interest rates to consumer confidence and reaction to price inflation, as I just talked. I'd say there's generally still less visibility on the macros as we go into the back half of the year. Now if this second half scenario doesn't materialize and we see our current momentum continue, we know we've got the supply chain in place to chase into demand across all of our regions. You saw us do in the prior years and more recently, in the quarter we just wrapped. And our plan, as we've been talking, is to continue to update the Street as the environment that we're operating evolves, just given how dynamic things are right now. Our focus, as Patrice mentioned earlier, staying agile, staying on offense and through times like these of uncertainty and disruption, lean into what we can control and take advantage of opportunities.

So handbags, very exciting category for us. As you know, one of our three high potential categories, and we'll talk more at Investor Day, but the size of the opportunity is very meaningful for us, and we're in the very early stages of development. We have a pretty unique portfolio with a three-brand offering between Polo, Lauren and Collection. We have been able to build some foundational propositions across all three that are really delivering very nice results, including over the past 90 days to your question. And we're coupling that with innovation, including the Polo Play launch that came out recently, which is seeing a very strong initial response, and we're excited to see that it's actually coming as designed incremental to Polo ID, including Collection, the Ralph bag, which is also getting a very strong response. So foundational businesses, innovation that's really kicking in nicely. And you can expect that we will continue to iterate on these platforms as we build these strong long-term pillars. The third thing I would say is I think what's resonating with consumers with these propositions is, one, they complement the overall lifestyle for the women that we are engaging with. And at the end of the day, we are a lifestyle brand. Second is the value proposition is really well positioned within the current market. And I think we're seeing both across Lauren, particularly on Polo and Collection, a positioning that's really resonating from a pricing and positioning and AUR standpoint with consumers. And then, listen, we're still in early stages in terms of building capability for this category. We have a great design team. We have a new strengthened merchandising team on this business. We're continuing to build muscle on how to engage consumers, how to tell stories, how to integrate that across everything that we do. So early innings, strong momentum and very promising future for this category.

The next question comes from Michael Binetti with Evercore ISI.

Let me add my congrats on a nice quarter. I guess, jump ball, but second quarter guidance, a lot better than we had expected. Glad to see it. I know there's a little bit of FX helping out. But if we just zero in on where we're seeing some of the better momentum in the brand by geos or categories than what you were thinking 90 days ago, I think it would help. And then I'm just curious how you're looking at Europe. It's been such a nice contributor to the upside over the last year. I guess a little bit slower here, and it sounds like, Justin, you said the guidance this year is heavily weighted to the first half. Can you just talk us through kind of the go-forward thinking on the growth rates in Europe and why the expectation is to slow down?

Sure. Thanks for the question, Michael. When it comes to guidance, so solid Q1 results. And I think the momentum that we saw in Q4 really carried into Q1. When you think about that sort of what we've seen play out, it's really been DTC leading the charge, acceleration in digital, wholesale growth continuing and the growth has been pretty broad-based. Think about that Q2 guide of up high single digits, really expect DTC to continue to lead the growth and our international momentum to continue. From a wholesale perspective, continue to expect sell-in to roughly align to sell-out, although we are cautious on that channel in North America given the broader macros. But I would say from an international perspective, continued momentum into Q2. From a North America perspective, I think as we move through the quarter, one of the things that we're going to see is that broader pricing environment play out in the U.S., and we'll get a read on that consumer elasticity to the price increases. So we do -- it does include some increased pressure from cost inflation and pricing as we move through the quarter and into fall selling for North America specifically, though we do still expect North America to grow in Q2. I would say on the EMEA front, so we're really seeing some pretty broad-based balanced strength in EMEA. So our Q1 results, double-digit growth in constant dollar and that really above our expectations across retail and wholesale. From a market perspective, we had growth in Italy and France and Spain and Germany. All of our key markets substantially were growing, strong double-digit retail comps and balanced. So brick-and-mortar and digital, both contributing really strong quality of sales as well. So did discount rate pull back solid AUR growth and wholesale continues to be strong. Now we did see a bit of a benefit due to the prior year Red Sea timing shift, but still a really strong underlying trend there in that wholesale business, and we're seeing strong both spring seasonal shipments and also reorders. So we're elevated in our brand positioning in Europe. We're seeing strong performance really across markets and channels. And as we think about the outlook as we move forward, we expect that momentum to continue into the second quarter. And as we get more fulsome into the year, we do expect some pressure and a deceleration based on those timing shifts that I mentioned in my prepared remarks.

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

So nice to see the progress. When you think about the regions a little bit, just expanding further, in North America, what did you see from full price and the outlet channel trends? Was there a difference in performance? And how is the AUR at wholesale? And then the acceleration in China is notable. Anything to call out there? And just lastly, as you mentioned second half, how are you thinking about pricing actions and supply chain diversification?

Great. Thanks very much for the question. So in the first quarter for North America, we saw strength really across both our full-price stores and our outlet stores. So strong comps across both, really the momentum we saw in Q4 really continued into Q1. Our full-price stores continue to lead our performance. And again, a couple of things to call out there. We saw really strong quality of sales, AUR leading the growth story, promotional discounts declining meaningfully to last year. And so you see that our elevation strategy really, really cutting through in that channel. I think from a -- when we think about traffic and other retail KPIs, higher basket size. I mentioned higher AUR. I would say stable traffic trends on the full price side. I think we saw some traffic pickups. And we're seeing both -- we're seeing our core consumer, which was really a full-price consumer in both of those channels, continue to be resilient and to choose Ralph Lauren. And then I think when you think about just the other piece to the North American story is digital, which we did see a nice acceleration in the quarter, and that's due to some of the interventions we've made on ralphlauren.com, our U.S. site, which have picked up traction and drove a really strong comp sales growth.

On the China front, as you know, China is one of our key white space expansion priorities moving forward. This past quarter, China represented -- Greater China represented 9% of total company. So we're encouraged by how we're making progress. A few years back, you'll recall, we were closer to 3% to 4%. So good momentum there, continue to have major opportunities moving forward. When you look at what drove the plus 30% this past quarter, it's really the implementation of our strategy across the three pillars. And the team on the ground is doing an outstanding job bringing these choices to life. First, I would call out on the brand building side, you heard us talk earlier about the Re-See Hamptons Fashion Show, which generated a lot of energy and momentum in China. We had a really strong 6/18 activation that was really focused on brand building, customer engagement, not on sales and volume. And then the team is also leveraging very nicely the Douyin direct selling, live shopping capabilities. So we're continuing to recruit a large number of new customers, younger customers diverse from a gender standpoint. On the product front, listen, our higher value items continue to resonate, both the core and our fashion items, but particularly the core. And then to Jay's earlier question on handbags, we are seeing very strong response on our Polo women's handbags and particularly Polo Play with the recent launch and very encouraged by that. So our product strategy, which is a global strategy is really resonating well in China. And then as you know, we've got these six key city clusters in China that we focus on. We stay very deliberate on that. We've got continued store expansion there. We have very strong ralphlauren.cn activation, and we're working very well with our pure players. So the combination of these three factors is delivering this continued strong performance in an environment that continues to be challenged for consumers, right, in general in China and give us confidence moving forward that there's still a lot of growth and value creation to be had from this important market.

And on the pricing piece, just around your last question. I would just say Q1, we saw strong AUR growth really driven by product elevation and discount rate reduction. So there wasn't a meaningful tariff/pricing impact in there. Our Q2 AUR guide of up high single does reflect the start of our targeted pricing for fall that we announced proactively before the recent tariff announcements in North America and in Asia. So you'll start to see that come through. But the majority of that Q2 high single-digit growth is expected to continue to come from product elevation and promotional pullback discount rate reductions as well as favorable geo and channel mix. And as we think about going forward and heading into the fall season, we're walking away the cost inflation landscape is shaking out. And we'll continue to refine our pricing and promotional plans as we move forward. But where continuing to be laser-focused on is really providing that compelling value proposition to our consumers. Our AUR growth over the last 8-plus years of 100-plus percent, it came along with growth in value perception, growth in luxury perception. So we're not going to take our eye off the ball and make sure that consumers feel like they're getting more for more in our total value proposition.

The next question comes from Paul Kearney with Barclays Capital.

On inventory, can you comment on how much of the increase in inventory was driven in response to tariffs? And is there any color you can provide on inventory by region? And what are your expectations through the remainder of the year for those levels to align with sales?

Thanks very much for the question. So we feel good about our inventory levels as we head into the fall season. So we ended Q1, as you know, with inventories up 18% versus Q1 of last year. So just to kind of dimensionalize that foreign currency was a 5-point headwind. So you see the benefit of the weaker dollar on our top line growth in reported, but it's also a pressure on inventory. So that takes us from plus 18% to plus 13%. The remainder of the delta between that 13% and if you think about sort of our Q2 revenue guide of up high single digits, relates to the strategic acceleration of largely core inventory receipts into the U.S. in Q1 during the tariff pause period. These are no regrets pull-ups of product that extends beyond season that we're comfortable managing through. So if you back out that tariff-related strategic pull up, our inventory growth is actually a little behind our double-digit top line growth for Q1 and right in line with our expected high single-digit top line growth for next quarter, Q2. And to your point on expectations for the year to go, we expect inventories to moderate as we move throughout the fiscal year, and we plan on ending fiscal '26 with levels generally in line with demand. So yes, we feel our inventories continue to be well positioned where we want to be as we look to Q2 and the balance of the year.

The next question comes from John Kernan with TD Cowen.

Congrats on another outstanding quarter. Justin, can you quantify the tariff impact on gross margin this year, net of the pricing? And how we should think about North American segment profitability as we get into the back half of the year?

Sure. Thanks, John. So when I think about the gross margin equation for this fiscal year and you think about sort of the biggest tailwinds are your AUR growth, your promo pullback in the targeted pricing, your product elevation, your channel and geo favorable mix, your cost reduction, those are on the tailwind side. And I would say on the headwind side, the biggest headwind is indeed the tariffs. And our initial guide had gross margin at flat year-over-year. Based upon our Q1 outperformance and our latest view on Q2, we felt confident taking up that guide to slightly up year-over-year. So while tariff remains our biggest pressure point for the fiscal year, we're confident that we can more than offset that headwind and deliver year-over-year gross profit expansion. It is a first half, second half story because the tariff pressure does ramp up in the second half. In terms of pressuring profitability, I mean, one thing in last fiscal year, you saw us expand profitability across each of our regions. Certainly, that is our general expectation. If you think about this year, we know that the cost inflation pressure will disproportionately impact North America. That's something that obviously we're managing through, but I think the dynamics of our by region profitability contribution will shift a bit towards international when you think about the 40 bps to 60 bps of expansion that we're calling for this fiscal year.

The next question comes from Blake Anderson on behalf of Ashley Helgans with Jefferies.

I wanted to ask about SG&A. So if you could talk about your key investment areas for the rest of the year. And as we get into the second half, I think perhaps does the guidance imply we should see deleverage in the second half as it stands? And if we were to see upside in revenue in the context of what is variable on the SG&A side, at what revenue growth level could we see some SG&A leverage as you've seen so far this year?

Great. Thank you for the question. So our long-term philosophy remains unchanged as it relates to SG&A. It's really the balanced reinvestment in long-term growth with delivering on or exceeding our operating margin commitments. So you saw in the first quarter, we delivered SG&A leverage, and it really reflects better-than-expected sales and that drove some fixed expense leverage in some of our larger cost areas like compensation, like rent. We've been making investments in our key city ecosystems, in new stores, in talent for a number of -- in digital for a number of years. And you're starting to see those investments scale. And even as we drove that leverage in Q1, we invested behind our brand and our business, right? We invested in marketing. You saw our Q1 marketing rate up 80 bps at 7.5% of sales, which is a little ahead of our long-term target, supporting our always-on cadence of activations across our regions. So we continue to balance flowing through profitability with investing behind our brand and our business for longer-term sustainable growth. We have built up the cost optimization expense leverage muscle as we were moving through the course of the last few years, specifically last year, where while we didn't show a big leverage number at the end of the year, it was really a choice because we overdelivered in our gross profit due to increased quality of sales, and we made a choice to balance that out with purposeful reinvestments back into our brand and our business. So the areas that we're going to be focusing on are pretty consistent with what we've been focusing on. And I mentioned a few of them already, it's marketing, it's our key city ecos, it's new stores. We opened up over 20 new stores in the first quarter focused on key cities, right? It's our digital capabilities, our next-generation transformation project and those focus areas. When we think about our first half, second half cadence, certainly, the caution we're calling for in the second half, specifically related to North America is a pressure point on leverage, but we've shown that we can flex expenses. It's one of the muscles that we've built, this productivity muscle and culture of cost optimization to be able to, when things get tough, lean on the variability we have in our cost structure. A good example is our retail stores. As we're opening up retail stores, mostly in international markets, they've got more variable cost structures in general, thinking our concessions, which are pretty prevalent in Asia. And historically, we've shown the ability to flex expenses in challenging times, and we'll continue to have that philosophy and pull that lever as we need to as we move through the fiscal year.

Our final question comes from Rick Patel with Raymond James.

Congrats on the progress here. Just a big picture question on the key city approach. So can you update us on where you are? You've made some really great progress in the cities that you focused on already. So just curious about the runway you have to do better there. And then how do you think about the opportunity to move on to new key cities over the next few years?

Well, you're going to have to come mid-September to Investor Day to hear the full story, Rick. But just to give you some perspective today. So we've called out top 30 cities, and we continue to see opportunities across these and very meaningful opportunities. London being our most recent example, where as we kind of mapped out the different segments of the London core and neighborhoods, we identified further opportunities to expand our footprint. So I think you can expect that we will continue to lean into these top 30 ecosystems for many years to come. And then we'll talk about when we get together in September, how we think about the next tranche and how we want to approach that. So we'll see you in mid- September. All right. With that, thank you, everyone, for joining us today. We look forward to seeing you at our Investor Day in New York City. And until then, take care, and have a great day.