Jane Nielsen
Chief Operating Officer and Chief Financial Officer at Ralph Lauren
Thank you, Patrice, and good morning, everyone. We entered this holiday season with a clear game plan. We invested in brand momentum around the world, expanded giftable core and seasonal products to delight our consumers and drove key operational improvements and flexibility to mitigate near-term macro headwinds. This quarter's strong performance was a testament to the agility of our teams and the resilience of our next great chapter accelerate plan, coupled with the power and global reach of our iconic brand.
We reported third quarter revenue, adjusted operating profit and double-digit EPS growth above our outlook. And we achieved this while continuing to strengthen our brand proposition around the world and investing in our key strategic priorities to enable sustainable growth into the future. Top line exceeded our guidance, driven by comp acceleration in DTC with momentum in all retail channels globally. Operating margin expansion was also ahead of our outlook despite our strategic investments and ongoing cotton headwinds as we focus on operating with discipline in an evolving global environment. And we returned approximately $425 million to shareholders in the form of dividends and share repurchases this fiscal year-to-date, in line with our long-term guidance.
Let me take you through our third quarter financial highlights, which, as a reminder, are provided on a constant currency basis. Our accelerating brand momentum and investments in key holiday campaigns resulted in 5% total revenue growth. This was above our outlook led by strong double-digit growth in Asia and holiday outperformance in Europe. Revenue in North America was approximately flat to last year, in line with our expectations. Each of our DTC channels contributed to top line growth in the period, with total DTC penetration expanding approximately 400 basis points to last year. Adding stability and resiliency to our business, consistent with our NGC strategy.
Total company comp increased 9%, accelerating sequentially across all three regions. Ralph Lauren stores continued to lead our global performance. Our positive outlet comps continued to improve following investments in service and expanded core product assortments, driving solid traffic, AUR, and basket size growth in every region. Comps in our owned Ralph Lauren digital sites increased 8%, on top of 11% growth last year, as we prioritize ongoing investments to expand our footprint and improve the customer experience online. Total digital ecosystem sales were also up high single digits, including a strong recovery in Europe as our largest pure-play account returned to growth. Total company adjusted gross margin expanded 130 basis points to 66.5%, reflecting our long-term elevation work. This was consistent with our outlook, driven by lower freight expense, favorable channel and geographic mix and 9% AUR growth.
These more than offset ongoing cotton cost headwinds and targeted promotions to drive conversion during key holiday sale periods. Cotton costs will start to abate at the end of our Q4, beginning with our spring 24 collections. As previously indicated, we are planning a moderation in AUR growth based on a reduced need to pass like-for-like cost inflation onto the consumer. Nevertheless, we plan to continue driving positive AUR increases, as a result of our growing brand desirability, ongoing product mix elevation and favorable geographic and channel mix.
Adjusted operating expenses increased 7% to 50.2% of sales a 100 basis point increase to last year. The increase as a percent of sales was driven largely by channel and geographic mix shifts in the quarter. With our DTC and international businesses contributing a significantly higher share of sales in the period versus last year.
This quarter's strategic investments focused on our key city ecosystems, marketing investments and enhancing the consumer experience and service levels across our DTC channels. Variable selling expenses also rose as a result of stronger retail sales growth. Marketing was 7.5% of sales, up slightly from last year to support our high-impact holiday activations, delivering improvement across our consumer metrics, including brand consideration, Net Promoter Scores and purchase intent. We still expect full year marketing at around 7% of sales.
Moving on to segment performance, starting with North America. Third quarter revenue was approximately flat to last year, in line with our expectations as stronger growth in retail was offset by our reduced sell-in to the wholesale channel. In North America Retail, third quarter comps increased 5%, led by a double-digit increase in our Ralph Lauren stores. Our outlet performance continued to improve with positive comps driven by our product elevation and our recent interventions to improve the selling experience and retail environments.
Despite taking targeted promotions during the key holiday periods, our outlet AUR increased strongly and discount rates declined versus last year. Comps in our owned ralphlauren.com site were up 4% on top of 9% growth last year. In addition to a strong response to our Black Friday event, recent site enhancements such as upgraded search and navigation drove higher conversion in the quarter.
We also launched our Canadian digital site in the quarter. In North America Wholesale, revenues decreased 15%, in line with our expectations as we proactively focus on aligning inventory with softer demand trends. We continue to evaluate our brand presence in each store and exited approximately 20 department store doors this year. While we plan to manage this channel carefully into calendar '24, we were encouraged by our improving sellout trends, which meaningfully outperformed our sell-in this quarter. Our AUR in the channel was also up on a year-over-year basis.
Moving on to Europe. Revenue increased 6%, with performance led by our DTC channels. This was above our expectations as strong growth across the continent more than offset continued consumer and macro headwinds in the U.K. results included roughly 5 points of negative impact from the earlier timing of wholesale deliveries and lapping last year's favorable post-COVID wholesale allowances. Retail comps increased 11% on top of a strong 11% compare last year with similar performance in our brick-and-mortar and digital sites.
We drove strong momentum across brands and categories in Europe, with growth led by gifting, seasonal sweaters and outerwear, which are AUR accretive. Europe wholesale was approximately flat to last year, but included about 11 points of net headwinds from unusual impacts of wholesale allowances and earlier receipts. Strong underlying growth was supported by wholesale reorders, which returned to more normalized trends in the quarter, following recent destocking at digital wholesale accounts.
While our Europe business has performed better than expected through the first three quarters of the year we remain cautious on the fourth quarter and into fiscal '25, given highly dynamic geopolitical and macro conditions in the region.
Turning to Asia. Revenue increased 17%, with double-digit growth across our largest markets of Japan, China and Korea. Asia retail comps were up 14% with strong growth in both digital commerce and brick-and-mortar stores. China sales increased more than 30% on continued brand momentum, including successful Singles Day events as we lapped last year's COVID impact. Third quarter sales in Japan were up low double digits. Overall inbound tourism recovered to pre-pandemic levels. Although Chinese travelers to Japan are still down 70%. Sales in Korea also rebounded to low double-digit growth, benefiting from our recent marketing activations and a shift in the timing of the Chuseok holiday from Q2 last year.
Moving on to the balance sheet. Our strong balance sheet and cash flows are key enablers of our Fortress foundation and allow us to make strategic growth investments in our business while returning cash to shareholders. We ended the third quarter with $1.9 billion in cash and short-term investments and $1.1 billion in total debt. Net inventory decreased 15%, below our revenue growth trend with units also down double digits. The decline was driven by stronger-than-expected Q3 sales and our continued efforts to ensure healthy wholesale inventories.
As we transition into spring, we believe overall inventory levels are well positioned relative to our outlook for each region. We still expect to end fiscal '24 with healthy inventories below prior year levels with an improved ability to chase into potential demand as a result of our predictive buying model.
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, potential supply chain disruption and foreign currency volatility among others.
For fiscal '24, we still expect constant currency revenues to increase low single digits, now centering on about 2% compared to our previous outlook of 1% to 2%. Our outlook continues to embed caution around the wholesale channel where year-to-date demand has been softer than prior year. Foreign currency is now expected to benefit revenue growth by about 10 basis points. We continue to anticipate operating margin expansion of approximately 30 to 50 basis points in constant currency to 12.3% to 12.5%. Foreign currency is now expected to have a roughly neutral impact on full year operating margin.
We now expect gross margin expansion in the range of 140 to 180 basis points in constant currency, up slightly from 120 to 170 basis points previously. This is driven by favorable freight costs, further mix shift toward international and DTC and continued growth in AUR, more than offsetting full year cotton inflation.
Gross margin expansion is anticipated to more than offset expense deleverage due to mix shift and key strategic investments. For the fourth quarter, we expect revenues to increase in a range centered around 2% in constant currency, with stronger trends in retail versus continued caution in wholesale in both North America and Europe. Foreign currency is expected to negatively impact revenues by roughly 160 basis points.
While we remain cautious on North America, we expect modest sequential improvement in Q4 with stronger trends in DTC offsetting continued softness in wholesale. In Europe, fourth quarter sales are still expected to be negatively impacted by the earlier timing of wholesale shipments. Excluding this impact, we expect underlying trends in Europe to increase slightly in Q4. And in Asia, we anticipate growth will be closer to our full year guide for the region of up low double digits. As we lap a more normalized compare following the easy COVID compares in Q1 and Q3.
We expect fourth quarter operating margin to expand approximately 350 to 400 basis points in constant currency. Largely driven by gross margin expansion with about 40 and 50 basis points of negative foreign currency impact on our operating and gross margin, respectively. We now expect our tax rate to be in the range of 19% to 20% for the full year due to discrete tax benefits recognized in Q3 and roughly 22% to 23% for the fourth quarter. And capital expenditures are now expected in the range of $200 million to $225 million.
In closing, Ralph's vision has always been about inspiring people to step into the dream of a better life. And this holiday quarter was no exception. We are proud of our team's strong execution on our next great chapter Accelerate plan, through what continues to be a highly dynamic operating environment. We are focused on what we can control, shifting to GTC [Phonetic], harnessing big data and AI and of course, operating and balance sheet discipline. This puts us in a position of strength as we continue to deliver our commitments and drive long-term value creation.
And with that, let's open up the call for your questions.
