Justin Picicci
Chief Financial Office at Ralph Lauren
Thanks, Patrice, and good morning, everyone. It's a privilege for me to step into the CFO role. And I am grateful for the support that Ralph, Patrice, Shin, and the Board have all showed me throughout this transition. I know I speak for the entire Ralph Lauren team when I say we remain firmly committed to delivering on our strategic and financial objectives, leveraging the power of our timeless brand, and strong momentum around the world.
We had a solid start to fiscal '25 with first quarter top and bottom line results ahead of our expectations. This quarter's performance underscores the continued momentum and growing desirability of our brand as well as our multiple drivers of growth, which enabled us to deliver on our commitments even in a highly dynamic global operating environment.
Our progress in Q1 also gives us confidence in reiterating the full-year outlook we introduced in May. Let's talk through our financial highlights. Which as a reminder, are provided on a constant currency basis. Total company first quarter revenue growth of 3% exceeded our guidance, led once again by our direct-to-consumer channels and international businesses. Total company retail comps grew 5% with balance growth across our brick-and-mortar and digital channels.
Total digital ecosystem sales including our own sites and wholesale digital accounts, increased high single-digits. Total company adjusted gross margin expanded 210 basis points to 70.9%. This strong performance was driven by favorable mix shifts towards our full price and international businesses, AUR growth, and lower cotton costs. AUR increased 6% in the first quarter, in line with our expectations, and on top of a 15% increase last year. Our AUR growth continues to be driven by favorable product, category, channel, and geographic mix, along with reduced discounting, with minimal like-for-like pricing on moderating cost inflation.
Adjusted operating expenses grew 4% to 56.1% of sales, up 60 basis points to last year. The increase was entirely driven by the planned timing of marketing investments, which represented 6.7% of sales, up 100 basis points to last year, supporting our New York City Fashion Show, Milan presentations, Polo Spring campaign, and other key activations globally. Excluding marketing, adjusted operating expense rate declined approximately 30 basis points to last year. We continue to expect full-year marketing at approximately 7% of sales. And our adjusted operating margin expanded 140 basis points to 14.8%.
Moving to segment performance, and starting with North America, first quarter revenue declined 4%, as continued momentum in retail was more than offset by planned declines in the wholesale channel. In North America retail, first quarter comps grew 1% in line with our expectations and including a negative impact of roughly 120 basis points from Easter shifting into Q4.
Brick-and-mortar channel comps were up 3% led by our full price stores while digital comps declined 4%. We remain focused on improving the trajectory of our North America digital business as we move through fiscal '25, notably enhancing site experience and improving availability of top-selling core product.
In North America wholesale, revenues decreased 13% as expected, reflecting significantly reduced sales of excess product into the off-price channel and receipt timing shifts previously discussed. Excluding the shifts, our full price sales declined roughly low single-digits, in line with our spring season-to-date sellout trends. Our AUR at wholesale increased modestly, consistent with recent trends, on well-positioned inventories in the channel.
Looking ahead, we continue to expect North America wholesale declines to moderate through the remainder of fiscal '25, with sellout more closely aligning to sell-in, maintaining our ability to chase replenishment on stronger performing core product. Our outlook also includes the planned exit of approximately 45 department store doors this fiscal year, as we continue to proactively evaluate and refine our brand presence on a door-by-door basis.
Moving to Europe, first quarter revenue increased 7%. This was ahead of our expectations, with both wholesale and retail sales outperforming our plan. All key markets delivered growth in the quarter, with the exception of the U.K., where retail growth was offset by continued softness in wholesale. Performance in Europe was led by retail, with comps up 8% to last year, including own digital commerce up low double-digits.
AUR continued to grow strongly on top of last year's double-digit percentage increase driven by our brand elevation, with discount rates down significantly to last year, despite a competitive promotional environment. Europe wholesale increased 5% driven by strong reorder rates, notably at our digital partners following last year's channel reset.
We continue to expect Europe wholesale channel growth in the low single-digit range for fiscal '25, with Q3 below the full-year trend due to the planned timing of shipments, as previously discussed. We remain encouraged by our brand's rising consumer perceptions in Europe, as well as our team's strong execution, especially given the ongoing dynamic operating environment across the region.
Turning to Asia, revenue increased 9% with growth across all markets. Retail comps were also up 9%, on top of a 13% increase last year with strong growth in both digital and brick-and-mortar stores. China sales increased low double-digits on top of an especially strong reopening compare of up more than 50% last year. While our 618 holiday sales significantly outperformed the market, we continue to experience normalizing consumer trends post pandemic, as reflected in our reaffirmed outlook of low teens China growth this year. Sales in Japan, our largest market in the region, increased high single-digits supported by key marketing campaigns and a rebound in tourist spending which returned to pre-pandemic levels this quarter.
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 $1.8 billion in cash and short-term investments and $1.1 billion in total debt. We generated about $245 million in free cash, enabling returns of approximately $225 million in the form of dividends and share repurchases this quarter, even as we continue to make important long-term investments in our brand, technology, and ecosystems.
Net inventory decreased 13% to last year, slightly better than our plan. Our inventory levels continue to be well positioned relative to our outlook for each region and heading into the important fall holiday season, with weeks of supply improving versus last year despite incremental shipment delays related to the Red Sea.
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 continue to expect constant currency revenues to increase low single-digits, centering on about 2% to 3%. Our outlook continues to include stronger growth in DTC and caution around the North America wholesale channel where demand is improving but still challenged.
Foreign currency is now expected to negatively impact revenue growth by about 150 basis points driven primarily by Asian FX. Given the structural headwinds we've seen in the Japanese yen over the past few years, we'll be taking select like-for-like price increases in Japan this fiscal year.
With regards to this year's revenue cadence, we still expect the first and third quarters to trend below our full-year outlook, largely based on the planned timing of wholesale receipts. The third quarter is also impacted by additional factors specific to this year, notably a shorter holiday selling window between Thanksgiving and Christmas compared to last year and volatility around the U.S. presidential election and potential related impacts on consumer behavior.
We continue to expect operating margin to expand about 100 to 120 basis points to a 13.5% to 13.7% range. In constant currency, relative to our fiscal '22 Investor Day base period, this keeps us on track to deliver our 15% operating margin target this year. We still expect gross margin to expand 50 to 100 basis points, driven by favorable mix shift towards our international and full price DTC businesses, continued growth in AUR, more than offsetting headwinds from incremental labor and other non-cotton raw material costs, and favorable cotton costs.
We successfully renegotiated our annual freight contracts in the first quarter, encompassing the majority of our ocean freight requirements. Based on this visibility, our outlook continues to include minimal impact from freight in the first-half of fiscal '25, followed by incremental headwinds from higher spot rates, non-cotton material costs, and labor in the second-half of the year, as we called out in May.
In addition, we are closely watching the risk of potential additional China tariffs along with the rest of the industry. We are well-positioned following several years of proactive diversification into other supply markets and development of near-shoring capabilities.
Currently, China represents a high single-digit percentage of our finished goods coming into the U.S. And for Fiscal '25, foreign currency is expected to negatively impact our gross and operating margins by about 40 basis points. For the second quarter, we expect revenues to be up low to mid single-digits in constant currency centered around 3% to 4%, led by our DTC channels. Wholesale is expected to improve sequentially from Q1 as North America sell-in more closely aligns to sell-out trends. Digital trends in Europe are expected to be pressured by the timing of an end-of-season sales shift into Q1. Foreign currency is expected to negatively impact revenues by approximately 160 basis points.
We expect second quarter operating margin to expand approximately 80 to 120 basis points in constant currency, with roughly 110 to 130 basis points of gross margin expansion more than offsetting higher operating expenses due to the timing of key marketing campaigns this quarter, including the Summer Olympics and our September Fashion Show. We still expect marketing investments to grow at a faster rate in the first-half of the year, and decline in the second-half. Excluding marketing, we continue to expect second quarter operating expense to leverage slightly, similar to our Q1 trend. And foreign currency is expected to negatively impact gross margin by roughly 40 basis points and operating margin by 50 basis points in the second quarter.
Based on favorable tax credits realized in the first quarter, we now expect our fiscal '25 tax rate to be in the range of 22% to 23% for the full-year, while the second quarter is expected to be in the range of 21% to 22%.
In closing, Ralph's vision of inspiring the dream of a better life is as relevant today as it was over 50 years ago, resonating with our consumers around the world as well as our teams who proudly and passionately carry this vision forward, and continue to execute with agility and dedication. While we are mindful of ongoing volatility and challenges in the broader operating environment, our business continues to be supported by our powerful iconic brand and our multiple drivers of growth across geographies, categories, and channels. And importantly, we remain committed to delivering on year-three of our Next Great Chapter: Accelerate plan, while at the same time investing in our strategic priorities to create long-term value for our stakeholders.
With that, let's open up the call for your questions.
