Justin Picicci
Chief Financial Officer at Ralph Lauren
Thanks, Patrice, and good morning, everyone. Our fiscal '25 is off to a strong start. We drove second quarter results ahead of our expectations across every key metric, underscoring the diversity of our strategic growth drivers, along with the continued momentum and growing desirability of our brand.
Second quarter revenue growth exceeded our plan, driven by better-than-expected performance in our direct-to-consumer channel. Gross and operating margins were also above our outlook, with upside to gross margins, enabling us to mitigate supply chain disruptions while also fueling additional investments in brand building and digital.
All 3 regions contributed to operating margin expansion, and we achieved all of this while continuing to navigate a highly uncertain global operating environment. This progress through the first half of the year gives us confidence in raising the full year outlook we introduced back in May. But before I get to guidance, let me walk you through our financial highlights from the second quarter, which, as a reminder, are provided on a constant currency basis.
Total company second quarter revenue growth of 6% exceeded our outlook, led once again by our direct-to-consumer channels. Total company retail comps grew 10% as we increased our penetration of full-price selling in each of our regions. Total digital ecosystem sales, including our own sites and wholesale digital accounts, increased high single digits.
Total company adjusted gross margin expanded 170 basis points to 67.1%. This strong performance was driven by favorable mix shifts towards our full price and international businesses, AUR growth and lower cotton costs. AUR increased 10% in the second quarter. This exceeded our mid-single-digit outlook driven by greater-than-expected reductions in discounting across every region as consumers responded positively to our full '24 offering.
Our AUR growth also continues to be supported by long-term mix benefits, channel, geographic and product. We still expect mid-single-digit AUR growth for the second half of the fiscal year as we rely less on like-for-like pricing this year.
Adjusted operating expenses grew 7% to 55.5% of sales, up 60 basis points to last year. The increase was driven by the planned timing of marketing investments, which represented 8.7% of sales this quarter as we focus on driving new customer acquisition and long-term brand desirability. Key campaigns included our Spring '25 runway show in the Hamptons, Team USA at the Olympics and our Grand Slam sponsorships.
We continue to expect full year marketing at about 7% of sales, implying lower spend in the second half of the year, notably in Q4. Excluding marketing, adjusted operating expense rate was flat to last year as increased reinvestment to drive our digital business was offset by corporate cost savings. And our adjusted operating margin expanded 120 basis points to 11.7%.
Moving to segment performance and starting with North America, second quarter revenue inflected back to growth, up 3% and exceeding our expectations. Continued momentum in retail more than offset a modest planned decline in wholesale, which normalized from Q1 trends. In North America Retail, second quarter comps accelerated to 6%. Brick-and-mortar comps were up 9%, with strong growth in both full price and outlet stores.
Digital comps declined 2%, improving sequentially as we invested in more targeted marketing, merchandising and site enhancements under new digital leadership. Our digital wholesale business remained encouraging with positive high single-digit sellout in the quarter. Total North America wholesale revenues decreased 3%, in line with our full-price sellout this quarter.
Our wholesale AUR increased mid-single digits, stronger than recent trends on well-positioned inventories in the channel. We continue to expect our wholesale sell-in to remain generally aligned with sellout through the remainder of the fiscal year. Our outlook still includes the planned exit of 45 department store doors this fiscal year. While the ongoing exits are not material to our financial results, we continue to proactively evaluate and refine our brand presence on a door-by-door basis.
Moving to Europe. Second quarter revenue increased 6%, driven by strong performance across our retail channels. All key markets delivered growth in the quarter with the exception of the U.K. where underlying trends are improving. In Europe retail, comps increased 15% to last year, well exceeding our expectations. Growth was balanced across our brick-and-mortar and digital channels. Europe AUR continued to grow strongly on top of last year's high single-digit increase, driven by our brand elevation with discount rates down significantly to last year despite a competitive promotional environment.
Within DTC, we were especially encouraged by our performance in France and Germany, which both delivered high single-digit growth this quarter. Within France, specifically, we delivered our highest ever brand consideration scores led by women's and next-gen consumers, supported by our marketing amplifications around our summer of sports, including the Olympics. Europe wholesale increased slightly and below our full year outlook of low single-digit growth, reflecting strategic reductions in excess sales to the off-price channel and shifts in receipt timing to the second half of the fiscal year related to Red Sea disruptions. Excluding these impacts, underlying growth in our Europe wholesale business would have been up approximately mid-single digits for the quarter.
Looking ahead, we still expect challenging compares in our digital pure-play accounts as we lap significant restocking that took place in the second half of last year. That said, we expect total Europe wholesale growth to improve sequentially in the second half of fiscal '25, based on solid underlying trends and the receipt shifts from Q2 into Q3 and Q4. We remain encouraged by our team's strong execution and the strengthening brand perception in Europe, especially given the ongoing dynamic operating environment across the region.
Turning to Asia. Revenue increased 10%, reflecting growth in all markets. Retail comps were up 11% on top of an 8% increase last year, with strong growth in both digital and brick-and-mortar stores. Asia results exceeded our outlook, led by strong performance in Japan and China. Japan grew low teens to last year and accelerated from first quarter trends, supported by key marketing campaigns, stronger full-price selling and continued tailwinds from inbound tourism. China also grew low teens, consistent with our outlook for the quarter and full year, driven by comp growth, high-quality new customer recruitment and expanded distribution.
Moving to the balance sheet. Our strong balance sheet and cash flows continue to be key enablers of our Fortress Foundation, allowing us to make strategic growth investments in our business while returning cash to shareholders. We ended the quarter with $1.7 billion in cash and short-term investments and $1.1 billion in total debt. We generated about $300 million in free cash this fiscal year-to-date, enabling returns of approximately $375 million in the form of dividends and share repurchases even as we continue to make important long-term investments in our brand, technology and ecosystems. Net inventory decreased 6% to last year, in line with our plan. Weeks of supply improved versus last year despite ongoing disruptions related to the Red Sea.
Our inventories are well positioned heading into the holiday season in each of our regions, including North America, despite the 3-day East Coast port strike in early October. Our teams leveraged our agile and diversified supply chain to preemptively reroute a portion of our fall holiday receipts to the West Coast, along with select use of air freight in anticipation of a potential strike. And we continue to closely monitor and protect incoming supply ahead of the next deadline for contract negotiations in mid-January. We still expect to end fiscal '25 with inventories generally aligned to revenue growth.
Looking ahead, our outlook remains based on our best assessment of the current geopolitical backdrop as well as the macroeconomic environment. This includes inflationary pressures and other consumer spending related headwinds, supply chain disruptions and foreign currency volatility among other considerations.
For fiscal '25, we now expect constant currency revenues to increase in the range of approximately 3% to 4%, up from 2% to 3% previously. Our outlook continues to include stronger growth in DTC and our international markets. Foreign currency is now expected to negatively impact revenue growth by about 40 to 60 basis points, down from 150 basis points previously driven primarily by improvements in Asian FX rates.
With regards to this year's revenue cadence, the third quarter is expected to be negatively impacted by the timing of this year's Thanksgiving and Christmas holidays, including a shorter holiday selling window and a shift in post-Christmas sale dates in our North America outlets into Q4. These headwinds are expected to be partly offset by a roughly 5-point shift of Europe digital comps into Q3 due to the earlier timing of Boxing day sales this fiscal year.
Our fiscal fourth quarter will also be negatively impacted by a late Easter, which shifts into Q1 of fiscal '26. Despite all of these moving pieces, we remain confident in our underlying trends and expect to deliver solid growth in both our Q3 and Q4 comps. We now expect operating margin to expand about 110 to 130 basis points, up slightly from our previous outlook to a range of 13.6% to 13.8%. In constant currency relative to our fiscal '22 Investor Day base period, this keeps us firmly on track to deliver our 15% operating margin target this year.
We expect gross margin to expand 80 to 120 basis points, driven by a favorable mix shift towards our international and full price DTC businesses, continued growth in AUR and lower cotton costs. These drivers are expected to more than offset incremental headwinds from labor, non-cotton raw material costs and rerouting inventories into the U.S. from the East Coast. And for fiscal '25, foreign currency is expected to negatively impact our gross and operating margins by about 20 basis points.
For the third quarter, we expect revenues to increase in a range of 3% to 4% in constant currency, led by our DTC channels. Wholesale is expected to continue improving sequentially from first half trends, as North America sell-in more closely aligns the sellout and Europe wholesale receipts shift from Q2 into the back half of the fiscal year. Foreign currency is expected to benefit revenue by approximately 10 to 50 basis points.
We expect third quarter operating margin to expand approximately 100 to 140 basis points in constant currency, driven by gross margin expansion. Marketing as a percentage of sales is expected to be roughly in line with last year in the third quarter to support our global holiday activations and lower in the fourth quarter. And foreign currency is expected to have a roughly neutral impact on both gross and operating margin in the third quarter. We still expect our fiscal '25 tax rate to be in the range of 22% to 23% for the full year, while the third quarter rate is expected to be around 22%. And lastly, our outlook includes capex in the range of $250 million to $300 million.
In closing, we are strongly encouraged by our team's execution, focus and dedication in what continues to be a highly uncertain global operating environment. All brands are not created equal, and Ralph Lauren remains one of the most powerful and authentic brands globally. This gives us the credibility to grow not only our core businesses, but also continue to expand our high-potential categories. And we are building on our momentum.
Ralph's vision of inspiring the dream of a better life continues to resonate across generations and geographies. And we remain committed to supporting the thoughtful expansion of the businesses that will bring this vision to life over the near and longer term.
With that, let's open up the call for your questions.
