Jane Nielsen
Chief Operating Officer and Chief Financial Officer at Ralph Lauren
Thank you, Patrice, and good morning, everyone. Our second quarter results outperformed our expectations with progress across each of our key strategic initiatives, even in the midst of continued COVID and supply chain headwinds around the world. Performance this quarter was driven by strong top line growth led by our full-price wholesale channels globally and broad-based outperformance in Europe, continued digital momentum across owned and third-party channels, further gross margin expansion on top of last year's COVID mix benefits with double-digit AUR growth and elevated product mix more than offsetting higher freight. And higher-than-expected operating margins, including cost-savings benefits, improved wholesale margins and favorable channel mix shifts from wholesale and digital. Second quarter revenues increased 26% to last year with positive growth in every region, led by Europe and North America. Compared to second quarter fiscal '20 or LLY, revenues declined 12%.
However, this included approximately eight points of negative impact from last year's strategic reset of our distribution and our Chaps business, which moved to a licensed model. Total digital ecosystem sales grew approximately 45% in constant currency to last year and 50% to LLY, including 35% growth in our own digital business. Momentum continued across every region, reflecting our strong assortments, expanded connected retail capabilities and high-impact marketing. Digital margins were also strongly accretive to our second quarter profitability, consistent with last year and about 1,300 basis points higher than LLY. Total company adjusted gross margin was 67.3% in the second quarter, up 80 basis points to last year on a reported basis and 50 basis points in constant currency despite increased freight headwinds of approximately 150 basis points.
Gross margins were better than expected despite lapping last year's unusual COVID mix benefits, driven by better pricing and promotion, along with favorable product mix and last year's supply chain organization streamlining. Adjusted gross margins increased 580 basis points to LLY. Second quarter AUR grew 14% on top of 26% growth last year, with increases across every region. This represents our 18th consecutive quarter of AUR gains as we continue on our brand elevation journey, and it gives us strong confidence in our sustained pricing power as we mitigate mid to high single-digit product cost inflation starting in the second half of the year. Adjusted operating expenses increased 17% to last year to $755 million and declined 5% compared to LLY, reflecting our restructuring savings. The increase to last year was driven by higher marketing and compensation as we lapped last year's furloughs and store closures due to COVID. Marketing increased 83% to 6.1% of sales in the quarter with a focus on new customer acquisition and long-term brand-building initiatives. Operating expenses were below our initial plan as we shifted about $25 million of investment into the second half of the year based on COVID disruptions.
In the second half, we will increase marketing and talent investments to support growth this holiday and in customer acquisition to drive longer-term growth. Adjusted operating margin for the second quarter was 17.1%, up 450 basis points to last year and 220 basis points to LLY. This was above our guidance of 13% to 14% margin, largely driven by improvements in Europe and North America wholesale. Excluding the timing shift, operating margin was still well ahead of our plan, above 15%. Moving to segment performance, starting with North America. Second quarter revenue increased 30% to last year, supported by strong product assortments, new customer acquisition and market share gains. Compared to LLY, North America revenues declined 20%, but included a 15-point headwind from our strategic distribution reset and Chaps similar to Q1. In North America retail, revenues grew 34% to last year. Comps increased on improved traffic and 23% AUR growth, reflecting our continued elevation around product, marketing and more targeted pricing and promotions.
Brick-and-mortar comps increased 31%, driven by double-digit growth in AUR, basket sizes and traffic. Although foreign tourist sales improved significantly to last year, they were still down more than 80% to LLY due to continued softness in international travel. Comps in our owned digital commerce business grew 32% this quarter. This was driven by a strong product offering, along with high-quality new consumer acquisition and retention of last year's new consumers, resulting in higher full-priced sales. New consumers increased 12% to last year and more than 50% to LLY. And retention of the new consumers acquired last year improved meaningfully as we become increasingly effective at targeting and personalization. In North America wholesale, revenues increased to 23% to last year. This was ahead of our expectations as the foundational work we completed through COVID to reset our inventories, elevate our product mix, exit lower-tier wholesale doors and significantly reduced off-price penetration is delivering improved top line growth and quality of sales.
Total sellout was up low double digits in the second quarter to LLY led by continued market share gains in men's, kids and home. Lauren women's continued to stabilize sequentially, including share gains in women's ready-to-wear. Overall, wholesale AUR growth continues to accelerate, up 30% to LLY as we elevated our assortments and pulled back on seasonal promotions in the channel. And our momentum on Wholesale Dot Com drove digital sellout growth of more than 45% to both last year and LLY. All of this is enabled by our healthier brand positioning in wholesale, and we see more to come as we are still in the early stages of driving our brand elevation strategy in this channel. Moving on to Europe. Second quarter revenue increased 38% on a reported basis and 36% in constant currency, above our expectations. Revenue inflected to positive growth on a LLY basis this quarter, with all key markets performing better than planned, led by Germany and France. The U.K., our largest market in the region and earliest to reopen this spring, also continued to perform better than planned on strong demand.
Europe comps increased 27% in the quarter. Bricks-and-mortar comps were up 28%, driven by improved traffic, AUR and basket sizes. Digital commerce comps increased 24% on top of a 26% comp last year when COVID-related closures shifted more business online. Europe wholesale exceeded our expectations again this quarter, driven by stronger sellout and reorders at both digital wholesale as well as traditional wholesale accounts. Turning to Asia. Revenue increased 14% on a reported basis and 13% in constant currency. Our Asia retail comps increased 7% with 69% growth in digital commerce and 4% growth in bricks-and-mortar stores. Continued strong momentum in China and Korea this quarter more than offset extended COVID restrictions in Japan, our largest market in the region as well as Australia, Malaysia and Singapore. In total, COVID-related closures and operating restrictions negatively impacted Asia sales by about 3.5% in the quarter. And while the Chinese Mainland still grew more than 25% this quarter, our performance was also tempered by COVID lockdowns from late July through August.
On a positive note, Mainland comps rebounded quickly in September once stores reopened. Japan comps also started to improve towards the end of the quarter with the government lifting all states of emergency following the end of our fiscal Q2. Our digital ecosystem continued to accelerate in Asia. In Q2, this was supported by our successful Chuseok thanksgiving holiday campaign in Korea, Qixi Valentine's Day in China and an overall momentum in our newer digital flagships in China, Japan and Hong Kong. Moving on to the balance sheet. We ended the quarter with $3.1 billion in cash and investments and $1.6 billion in total debt, which compares to $2.4 billion in cash and investments and $1.6 billion in total debt last year. Net inventory increased 5%, modestly below our plan due to global supply chain delays. While we expect continued variability of inventory flows, from quarter-to-quarter, we believe our inventories are well positioned across key categories and channels to meet demand for the upcoming holiday and spring '22 seasons. Overall, we expect to improve our inventory positions as supply chain headwinds subside and plan to end the year with inventories better aligned to sales growth.
As we move into the second half of this fiscal year, we are recommitting to our long-term capital allocation priorities outlined prior to COVID. This includes, first, reinvesting in our strategic growth priorities, including brand marketing and elevation, digital and expansion of our key city ecosystems to drive long-term sustainable growth. Second, with peak pandemic closures likely behind us, we are focused on returning 100% of our free cash flow to shareholders in the form of dividends and share repurchases. We reinstated our dividend in the first quarter, and we expect this to grow in line with durable net income growth. And we expect to resume our share repurchase program starting in the second half of this fiscal year, with about $580 million remaining under our current share authorization. Looking ahead, our outlook is based on our best assessment of the current macro environment, including global supply chain challenges and COVID-related disruptions. We expect the quarterly cadence this year to remain volatile given dynamic conditions across our markets.
For fiscal '22, we are raising our revenue growth to 34% to 36% growth to last year in constant currency on a 53-week basis, excluding approximately $700 million in annualized revenue we reset during the pandemic. This includes department store exits, off-price and daigou reductions and the licensing and sale of Chaps and Club Monaco. This implies revenues up high single digits to fiscal '20. Foreign currency is expected to negatively impact full year revenues by about 20 basis points. We expect gross margins to expand at the high end of our prior range of 50 to 70 basis points or roughly 450 basis point increase to LLY. Our outlook improved on more favorable pricing and product mix this year despite increased freight costs, which we now expect to be in the range of 130 to 150 basis points due to our plans to use more air freight to fulfill strong demand in the back half. As a reminder, we renegotiated our ocean freight rates for the year in Q1. Raw materials, notably cotton, were purchased roughly a year in advance, resulting in slightly favorable product costs through the first half of fiscal '22.
This is followed by mid to high single-digit estimated cost increases in our second half ending March and through calendar 2022, which we expect to more than offset with continued AUR growth and productivity improvements. We raised our AUR outlook to high single-digit growth this year, above our long-term annual guidance of low to mid-single digits as we continue our elevation work. We still expect operating margins of 12% to 12.5%, which compares to 4.8% operating margin last year and 10.3% in fiscal '20. We continue to expect operating margin rates for the back half of the year to moderate from first half levels based on increased second half marketing investments of approximately 7% to 8% of sales reaching our full year target of at least 6% of sales this year, increased air freight expense in the back half of the year and our assumption of more normalized channel mix compared to last year's COVID disruptions. For the full year, our increased revenue outlook implies high-teens operating profit dollar growth compared to LLY pre-COVID levels. For the third quarter, we expect constant currency revenues to increase approximately 14% to 16%.
Foreign currency is expected to negatively impact revenues by about 140 basis points. While our teams are still actively focused on managing through global supply chain disruptions, we remain confident in our ability to deliver the right product at appropriate levels to meet consumer demand over the holiday selling period. We expect operating margins of about 13% to 13.5% in the third quarter, roughly in line with last year. This has seen modest gross margin expansion, largely offset by the timing shift in strategic investments, input cost inflation and mixed headwinds I noted a moment ago. We now expect the full year tax rate to be about 21% to 22% with a third quarter tax rate of around 22% to 23%. In closing, our strong first half performance underscores the timelessness of Ralph's creative vision, the power of our brand and our strengthening consumer base. With these as our foundation, we will leverage our momentum and invest in the key strategic initiatives that will support our long-term growth. And within a highly dynamic global environment, our teams around the world are executing with agility and playing offense to deliver long-term value creation for all our stakeholders.
With that, let's open up the call for your questions.
