Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal Year 2017 Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions on how to ask a question will be given at that time.
As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Evin Kopelman. Please go ahead.
Good morning, and thank you for joining Ralph Lauren's Q1 fiscal 2017 conference call. With me today are Stephan Larson, the company's President and Chief Executive Officer and Bob Mador, Senior Vice President and Chief Financial Officer. After prepared remarks, we will open up the call for questions, which we ask that you limit to 1 per caller. During today's call, we will 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. And now, I will turn the call over to Stefan.
Thank you, Evan, and good morning, everyone. We last spoke at our Investor Day in early June, where we shared with you the details of our WayForward plan. The WayForward plan is our multiyear plan to build on the unique brand strength we have, go back to the core of what made us iconic, evolve from that core and build the business back to sustainable profitable growth. Today, I will share my key takeaways from the Q1 and then provide a brief update on what we have achieved and learned so far in starting to drive the execution of our WayForward plan. Then I will turn it over to Bob to review the company's quarterly financial performance in more detail.
Beginning with the quarter, performance was mostly in line with our expectations with some minor puts and takes as we would expect at this early stage of the execution of our WayForward plan. On the revenue side, the domestic business as expected continued to be challenged while the international business delivered a strong quarter, posting 10% revenue growth year over year. The main drivers to the decline in North America are what we shared in detail during the Investor Day, a combination of not having evolved our consumer offering enough in product, marketing, shopping experience and having had an operating model that has generated too much excess inventory. Having these self induced challenges are hurting us when we, like everyone else, are facing difficult retail traffic trends and a highly promotional environment. In our international markets, even though we have a much smaller presence there than in North America and we globally have much improvement work to do ahead of us, there were valuable learnings in the quarter that we will use in building back strength in our domestic business.
Let me give you a few examples. In Asia, over the last 6 months, we have acted aggressively to drive quality of sales up. Our team there proactively closed 43 brand weakening locations, reduced the length of the sale period by an average of 30% and significantly decreased the depth of markdown rates. We have seen some very encouraging results. Our average unit retail prices and our gross profit dollars were both up significantly.
Simultaneously, the team has continued to drive high quality expansion. In Europe, as expected, this quarter benefited from a shift in timing of wholesale shipments. However, the underlying business was also solid and our team has driven several successful quality of sale initiatives. They have been able to reduce buys for this year in a way that has protected full price selling, increased the stock turnover and if the current trend continues, will significantly reduce excess inventory at the end of the season. As a part of executing the WayForward plan, you will see us increasingly focused on proactively driving quality of sales up.
These initiatives will include pulling back on inventory receipts, cutting lead times, strengthening our assortment and store closures. These will be some of the most important drivers in getting us back to sustainable profitable growth. Speaking of profitability, in the Q1, operating margin was better than our guidance. However, this was driven by one time benefits that Bob will take you through in detail. Excluding this impact, the quarter was in line with our expectations.
Now let me give you an update on our progress on the execution of the WayForward plan. As you recall from Investor Day, the WayForward plan is built up of a consumer facing part where we're going to refocus on and evolve from the core in product, marketing and the shopping experience. And the second part that is about evolving the operating model where we are developing 4 business engines, a systematic repeatable way of building a stronger assortment, a demand driven supply chain, a best in class sourcing and a multichannel global expansion strategy. Underlying both of these two parts is the foundation of strengthening the leadership, team and culture as well as developing a strong economic model. Let me start by sharing how we have strengthened the foundation, starting with the leadership team.
Jane Nielsen, our new Chief Financial Officer, will be starting right after Labor Day. I can't tell you how excited I am to soon have Jane here on the ground working next to me. Jane has the knowledge and experience to support us with driving a very strong execution. Jeff Kuster, our new Group President for the Americas, has been on the ground for a month. He has already met several of our biggest customers and started the work together with his team to build a value creating plan that will get us back to high performance in North America.
Holiday Alagoss, our new Head of Global Sourcing, who started in early June, has already had a positive effect on the sourcing decisions we are making. She's working very closely with her team to build the best in class sourcing capability. Bill Campbell, our new Head of Global Supply Chain, Inventory Management will be leaving Amazon shortly and joining us in early October. Finally, Frederic Jarmers, our Head of Global Expansion, started in June and has begun the work with his team to build out a global multi brand and multi channel expansion plan. Moving to the progress we have made in strengthening the organization.
We already completed the planned rightsizing of our headcount by decreasing it with 8% and reduced layers from an average of 9% to 6%, increasing each leader span of control. The biggest positive effect of this is that we have become leaner, faster, will empower the doers and reclaim the entrepreneurial culture. In addition, it drives an SG and A saving of approximately $115,000,000 on an annualized basis already this year. Completing the planned rightsizing of the organization has given us a good start in fixing the overall cost structure and developing a disciplined financial model. We're also underway with closing the underperforming stores we identified as part of the WayForward plan.
In the Q1, we closed 8 of the 50 plus total stores under consideration. We're also on track to getting the other targeted SG and A cost savings out during the remainder of the year. Let me now move to the consumer facing part of the WayForward plan and share some highlights that we are driving there. For the last few months, Valerie Hermann and the other brand presidents have been intensely centered on refocusing our core product offering and evolving from that core. And in doing that, we have not only been able to improve our classic iconic styles, but we have also been able to start cutting the long tail of unproductive styles.
So far, we have been able to partially impact what we bought for spring 2017 with a double digit percentage reduction in the number of SKUs across our biggest brands. The bigger impact in both evolving the product core and cutting more of the long tail will be seen for fall 2017, when we will be able to not just reduce what we buy, but also what we develop. As we discussed in June, a big value driver that is connected to evolving our products and assortment is developing best in class sourcing. Just a few weeks after holiday started as our Head of Sourcing, she and I held a very important meeting in Asia with our key strategic suppliers, where we solicited their support in driving increased quality, decreased cost and increased flexibility and speed in our sourcing. We received a very strong response from many of our suppliers and together with them, we have already started to make measurable improvements in driving quality up, cost down on comparable products and decreasing our time to market.
We're also full speed ahead with shortening our lead times from 15 to 9 months. And even though the full effect will not be seen for a few seasons, we will be 50% there already by the end of this year. Next year, we should be 90% of the way there. Almost equally important to cutting the overall lead times down is the work we are doing in building an 8 week test and rapid response pipeline. For this year, we're just starting and by next fall, we will have the capability that will enable testing on most of the new product ideas before introduction.
The work of developing a demand driven supply chain has just started. Even though Bill Campbell is not starting until October, we have already adjusted our inventory levels down to better match demand and decreased excess inventory that drove excess markdowns and cannibalization. Overall inventory levels are projected to go down for the remainder of the year. In parallel to driving the execution of the WayForward plan, there were several important examples recently that demonstrated how we are building strength in the business from a position of unique and iconic brand strength. One of those proud moments was our presence at Wimbledon earlier this summer and another was the Olympic ceremony this last Friday, where we could see Team USA walk into the stadium demonstrating the strength of American iconic style.
We are so proud to be able to partner up with and support the U. S. Olympic team. In conclusion, even though it's early days in the execution of our WayForward plan, this is a multiyear journey and we are now 1 quarter in, just in the beginning of the execution phase, I'm very pleased with the progress we are making. We have guided this year as a reset and stabilized year and that is what we are delivering on.
We will continue to balance meeting our near term commitments with staying on track to execute our long term way forward plan. As I noted, we have made progress in a number of areas from strengthening the leadership team to starting to improve the product and assortment building, starting to cut the lead times and improving our sourcing to the execution in the regions and the cost initiatives. I'm excited to see our teams taking on the challenges head on and we believe the company is again moving in the right direction. And with that, I would like to turn the call over to Bob.
Thank you, Stefan, and good morning, everyone. 1st quarter net revenues of $1,600,000,000 were down 4% compared to the prior year period on both the reported and constant currency basis. This is in line with the guidance we provided this past June of a mid single digit revenue decline. Foreign currency translation did not have a material impact on revenue growth in the Q1. On an adjusted basis, gross profit margin was 61.1 percent in the Q1, excluding non cash inventory related charges of $54,000,000 associated with our restructuring activities.
This was 130 basis points above the prior year period, primarily reflecting favorable sales mix shifts, lower product costs and an improvement in Asia driven by initiatives to improve quality sale metrics. Operating expenses on an adjusted basis were $821,000,000 excluding $105,000,000 in restructuring and other related charges. These expenses were down only 1% to last year as our headcount reduction in other expense initiatives under the WayForward plan had limited benefit in the Q1 due to the timing of these activities. Adjusted operating margin in the Q1 was 8.2%, excluding $159,000,000 in restructuring and other related charges. This was 60 basis points below last year due to fixed expense deleverage on lower net revenues and partially offset by higher gross margin.
The adjusted operating margin performance was better than the outlook we provided in June of a 110 basis point to 160 basis point decline driven by more favorable impact of our inventory management initiatives, specifically lower inventory reserves due to restructuring related inventory charges as well as product mix. The product mix shift was significant in Europe and was driven by a higher level of summer product within the wholesale shipments and a higher level of made for factory product in factory stores due to less excess inventory. Adjusted net income for the Q1 of fiscal 2017 was $90,000,000 or $1.06 per diluted share, excluding restructuring and other related charges. On a reported basis, net loss in the Q1 was 22,000,000 dollars or a loss of $0.27 per diluted share. The effective tax rate was 29% in the Q1 on an adjusted basis compared to an effective tax rate of 30% in the prior year period.
Moving on to segment performance. Wholesale revenues decreased 5% in both reported and constant currency in the Q1 to $607,000,000 The decrease was primarily due to a decline in North America as the U. S. Department store channel continued to experience challenging traffic trends. This was partially offset by wholesale revenue growth in Europe, primarily driven by a benefit from timing of shipments relative to last year in addition to proactive measures taken to clear inventory.
Adjusted wholesale operating margin in the Q1 was 23.7 percent excluding restructuring and other related charges. This was 190 basis points above the prior year period driven by a higher gross margin. Retail segment sales decreased 3% in both reported in constant currency in the Q1 to $907,000,000 The sales decline was driven by a comparable store sales decline that was partially offset by non comparable store sales growth. Consolidated comparable store sales decreased 7% in constant currency and 6% as reported during the Q1, primarily driven by lower traffic trends during the quarter and a challenging macro environment in most regions. Global e commerce revenues declined 6% during the quarter on a reported basis, primarily due to the company's pricing harmonization and other quality of sale initiatives.
At the end of the Q1 of fiscal 2017, we had 4 85 directly operated standalone stores and 5 98 concessions globally. Compared to the Q1 of fiscal 2016, the company had 18 net new directly operated stores and 40 net new concession shops at the end of the Q1 of fiscal 2017. In addition, our international licensing partners operated 96 Ralph Lauren stores and 17 dedicated shops as well as 60 Club Monaco stores and 74 Club Monaco concession shops at the end of the Q1 of fiscal 2017. Retail operating margin in the Q1, excluding restructuring and other related charges, was 13.8%, which was 120 basis points above the prior year period due to a higher gross margin. Licensing revenues decreased 8% in both reported and constant currency impacted by timing of shipments during the quarter.
Licensing segment operating income was down 7% in the Q1 compared with the prior year period. Now I'd like to provide some color on performance by geography in the Q1. In the Americas, net revenue declined 11% as we continue to see pressure in the U. S. Department store channel.
Same store sales were down high single digits in North America in the Q1 driven by traffic challenges. In Europe, net revenues increased 14% on a reported basis and grew 15% in constant currency. This growth was mostly driven by a benefit from timing of shipments relative to last year. Excluding this shift, the underlying trend was solid in the quarter. Going forward, we note that the potential impact of Brexit on consumer spending and geopolitical volatility in the region are increasing uncertainty in this market.
In Asia, net revenues increased 3% on a reported basis and were flat with the prior year period in constant currency. We experienced continuing growth in Japan and Australia. Same store sales growth was negatively impacted by our ongoing strategy to improve our quality of sale metrics in the region. We continue to experience gross margin improvement and average unit retails were up significantly, while markdown rates were down significantly. Now let me provide you with an update on our restructuring activities related to the WayForward plan.
The company continues to expect restructuring activities to result in approximately $180,000,000 to $220,000,000 of annualized expense savings related to its initiatives to streamline the organizational structure and rightsize its cost structure and real estate portfolio. We continue to expect restructuring charges of up to $400,000,000 as a result of the fiscal 2017 restructuring activities and up to $150,000,000 inventory charge associated with the company's WayForward plan. These charges are expected to be substantially realized by the end of fiscal 2017. In the Q1 of fiscal 2017, the company recorded $104,000,000 in restructuring and related impairment charges and $50,000,000 in inventory charges. Now moving on to the balance sheet.
Consolidated inventory was $1,200,000,000 at the end of the Q1, down 2% year over year. The company expects inventory quality to continue to improve on the balance sheet as inventory clearance activities continue. Moving to capital expenditures. We spent $78,000,000 in the Q1 of fiscal 2017 compared to $68,000,000 in the prior year period, mostly to support our retail store network, concession shops and infrastructure projects. During the Q1, the company paid approximately $100,000,000 related to repurchase of its Class A common stock.
At the end of the quarter, approximately $200,000,000 remained available for future share repurchases. We ended the year with approximately $1,200,000,000 in cash and investments on the balance sheet and $692,000,000 of total debt. Now I'd like to turn to guidance for fiscal 2017. As a reminder, this guidance excludes restructuring, impairment and inventory related charges in connection with the company's WayForward plan. For fiscal 2017, company continues to expect consolidated net revenues to decrease at a low double digit rate due to a proactive pullback in inventory receipts, store closures, pricing harmonization and other quality of sales initiatives combined with the weak retail traffic and a highly promotional environment in the U.
S. Based on current exchange rates, foreign currency will have minimal impact on revenue growth in fiscal 2017. The company continues to expect operating margin for fiscal 2017 to be approximately 10% as cost savings are expected to be offset by growth in new store expenses, unfavorable foreign currency impacts, infrastructure investments and fixed expense deleverage. The fiscal 2017 tax rate is estimated to be approximately 29%. For the Q2 of fiscal 2017, the company expects consolidated net revenues to be down mid to high single digits on a reported basis.
Based on current exchange rates, foreign currency will have minimal impact on revenue growth in the Q2. Operating margin for the Q2 of fiscal 2017 is expected to be 200 basis points to 2.50 basis points below the comparable prior year period. Initiatives under the WayForward plan are expected to have a greater impact in the second half of the fiscal year than the Q2. 2nd quarter tax rate is estimated at 29%. With that, we'll open up the call for your questions.
The first question comes from Omar Saad with Evercore ISI.
Good morning. Thanks for the update. I guess my question I want to ask maybe for a little bit more information and insight on what you learned in Asia as you kind of improve the quality of sales there. It's a different market in terms of its lot more own retail or concession model. You don't have that kind of big wholesale piece.
I'm trying to understand I also think the brand maybe is a little bit the architecture is a little bit simpler in Asia. Maybe help us understand what's the difference between the Asian market, what you're learning there and maybe what we can expect in North America, which is because of the omnichannel wholesale brand architecture might be a different path towards elevating the quality of
sales? Yes. Thank you, Omar. The biggest changes that we've made to support and strengthen the quality of sale that we're seeing in Asia is to really significantly cut back on our promotional stance, 2 different ways: 1, significantly shortening the length of promotion and 2, just the depth of the discounting and the markdown. And what we've seen is, overall, from a quality of sale perspective, whether it's looking at discount rate, which has decreased significantly, we've seen a very significant increase in average unit retail.
And although we've seen a more moderate decrease in UPTs, overall, it's driving a stronger average transaction value for us. That's been the biggest change and the biggest benefit that we've seen from that.
When it comes to Jeff Kuster, who just started, he is, as I mentioned in my opening remark, he is starting with the assessment of the challenge in North America and diagnosing that in detail. So we get a fact based view on what we are up against, and then we are pivoting to building a plan to increase quality of sales in North America. So differences there, Omar, coming back to your question, there are definitely differences in Asia and North America based on channel differences as being one big difference. But it comes back to how we plan the inventory, how we buy the inventory to demand, how our promotional strategy, our promotional execution and how that plays across channels. That's why the fact based diagnosis is so important.
Jeff just started 3, 4 weeks ago, and he is underway with the team and will work with the different channels. And that's where we're going to add the most value in this analysis and coming back. That's what gives me the most confidence when it comes to a plan to increase quality of sales that we are doing this for the first time cross channel, and we're going to do it together with our biggest customers as well. So we are looking forward to come back and provide our insights when we get them.
I mean one other thing, Omar, related to the Asia quality of sale improvement, We've also done an in-depth analysis of points of distribution, and we reduced approximately 48 points of distribution in Asia this quarter that we felt really didn't properly represent the brand. But at the same time, we also identified a number of additional points of distribution. So for example, in our wholesale channel, which is a relatively small business in Asia, but we saw in the quarter a 48% increase in the number of shops in our wholesale channel too. So it's both cutting back on promotions, whether it's depth, length, but then also making sure that we're in the correct points of distribution for the brands.
Next question, please.
Thank you. The next question comes from Kate McShane with Citi Research.
Hi, good morning. Thanks for taking my question. Thanks for the update on the supply chain efforts. I just wondered if you could maybe walk through some of the mechanics of how you're reducing the supply chain lead time, especially in light of your commentary today about the 50% reduction in lead time this year and 90% by next year?
Let's see. Yes, it's not a 50% 90% reduction of lead time. It's we are moving it's a 50% we're going to be 50% on a 9 month lead time by the end of this year, and we're going to be 90% on a 9 month lead time by next year. As I mentioned on the Investor Day, the biggest change here is a cultural change and it's a change of how we work as a team. So instead of working in a sequential way where you hand over function by function and by that you build in slack in the lead times and you extend the lead times, we are working together across functionally.
So one thing that has really excited me over the first couple of months digging into the way forward execution with the team is to break down the silos, to have design, merchandising, sourcing, sales, distribution channel at the table from the first design idea all the way in to selling the actual product. And just by that, we cut a lot of time from the lead times. And then it's about going and mapping through and Holiday Allagoss is leading that work. She's mapping every single component of the current lead times and looking at is how is every component and every day and hour spent adding value to driving brand strength and profitable sales growth and driving a stronger assortment. And I can say that I'm very encouraged by the fact that we are digging up that we will be 90% on a 9 month lead time by the end of next year.
Parallel to that is going to be the 8 week test and rapid response pipeline because that's going to be a big enabler as well that in a very short period of time, we're going to be able to test any and every new big product idea before we go big. And rapid response part of that is to say when we sell something and we see a bigger demand than expected, we will be able to much faster chase back into those products.
Next question please.
Thank you. The next question is from Michael Binetti with UBS.
Nice quarter. Just one near term, I guess, modeling question to help us think about the year and then maybe just a longer term question. On the model, could you help us think about the planned cost savings split between SG and A and cost of goods sold as we look at both the second quarter and the second half. I guess I thought I guess we had them a little bit upside down in our model. I thought some of the cost reductions you had already taken would have meant more SG and A leverage this quarter and maybe not as much cost of goods.
And then longer term, as you guys laid out the plan for the next 4 years at the Analyst Day, you referred to 2018 as revenue stabilizing. And as we look at it with the guidance you gave today, we're able to do a little bit of math around the year and we see that the back half of the year looks like revenues will be down by mid to high teens. It looks like we know in the Q4 you'll have to lap an Easter shift in an extra week and that you'll be closing stores that will naturally lower. But certainly some of of the drivers on why that growth rate leaving the year will be so low will extend into the first half of next year. I'm trying to think if a little bit of time has gone by now, if you could help us think about how to maybe start quantifying what your reference to stabilizing revenues will look like in fiscal 2018 given what you know about the business today as you start walking into the plan?
Yes. So thank you, Michael. Relative to your first question on the SG and A cost savings, the majority of our restructuring activities are more heavily weighted to the second half of the year. So for instance, our organizational changes were just made in June. So you'll start to see the benefit of those in Q2, but they'll be much more heavily weighted to the second half.
Of the overall savings that we discussed and quantified at the Investors Day relative to the WayForward plan of 445,000,000 dollars that's a gross number. It doesn't represent net savings that will drop to the bottom line, and all of those savings essentially represent SG and A savings, not cost of goods savings. SG
and A savings, not cost of goods savings. So more heavily weighted to the second half related
to your question on SG and A expenses, particularly as it relates to completion of our anticipated store closures. So we communicated 50 plus closures. We're actually looking a little deeper at that number. And relative to that 50 plus, we closed 8 in Q1. So again, our store closures are more heavily weighted towards the second half of the year.
And that's purposeful because we had committed to inventory buys for a lot of those stores, and we want to be able to liquidate them through those doors. Relative to the revenue guidance for the remainder of the year, and then I'll turn the question over to Stephane to talk about the guidance for the longer term period. The high the mid high teens are really being driven by, again, timing of store closures, timing related to a number of quality of sale initiatives, whether it's pulling back significantly on inventory receipts, which will reduce sales, whether it's the impact of pricing harmonization within regions and channels, etcetera, and we also don't expect as much benefit from sales mix shifts as we've seen in Q1 in particular.
Thanks, Bob. And to build on what Bob just said, Michael, when it comes to the phasing of the WayForward Plan and the financial outlook we gave on a 4 year basis, if you look at start with the phasing, we guided top line from a phase perspective to reset and stabilize 2017 moving into 2018 and then pivot to growth. And so why Q3 and Q4? Why we should expect an increase in the sales a decrease of sales in Q3 and Q4 versus the current trend, it comes back to the work Jeff and his team is doing in North America. Given how big North America is of our overall business, the assessment that Jeff and his teams comes back with will include several additional quality of sales initiatives.
So that's why we have guided the way we have guided.
Thank you. The next question comes from Lindsay Druckerman with Goldman Sachs.
Thanks. Good morning, everyone. Just as a quick follow-up on what Jeff's team is doing, when would you think after they come back with that analysis that those implementations would be in the market? So we're talking about spring of 2017 where we might see a difference in quality of sale? Is friends and family and couponing on the table?
And then just on the supply chain, the speed dynamics, you've talked about building a speed pipeline, as you mentioned, in test and react in department stores, which is pretty new. As Holiday has done her work, I know she's early on, but I'm just curious how that dynamic will work when you're not a vertically integrated retailer, you're relying on your 3rd party retail partners to get data to test and react to. So maybe just building out a little bit on how that might work.
Okay. Thank you, Lindsay. So let's try to cover all your questions. So starting with Jeff and his team's work in North America, how soon you will see that come through. It's I can what I can say there is, it's top priority.
It's by far our top priority to assess the North American challenge. And as soon as we have clarity within the next few months, we will start to implement additional quality of sales initiatives. So we keep you posted on a more detailed schedule. But the ambition is full speed forward to assess, get the fact based and then lay out the plan and start executing it right away. So we should see an impact at the end of this year.
When it comes to friends and family and other couponing initiatives are on the table, everything is on the table. Then it's everything is on the table, and then we look at how do we drive brand strength and sustainable profitable sales growth in a responsible way from where we are to where we are heading. 8 week speed pipeline. So I mentioned a few times before that coming into this role, the wholesale relationship partnership was new to me, and I was blown away by our biggest customers and their willingness to take on the challenge together with So they are waiting for us to come back and say relating to the 8 weeks peak pipeline and another a number of other areas to say how can we partner up and create joint value out of this Because when we get into a more balanced inventory and cut most of the excess out and be able to react on 8 weeks, then we will be able to create value not only for us, but for them, and they are very clear on that. So we have an ongoing dialogue with them, and they are waiting for us to be ready to start to execute on it.
What excites me is to see by the speed, Holiday and his her team has come in to not only assessing the state, but also reaching out to the suppliers. As I mentioned, we went to Asia, Hallede and I, and met with our key suppliers. The suppliers that were there represent 70% approximately of our total volume. And we invited them in to co create this journey, to co create the sourcing part of the WayForward plan, which also it didn't surprise me because I have more experience from working closely with sourcing partners that they were more than ready to dive in. So I've seen several concrete examples of how working differently will be able to increase quality, decrease the cost and increase the flexibility and speed.
Okay. Next question.
Thank you. The next question comes from Matt Boss with JPMorgan.
Hey, thanks. So on your wholesale reset, can you just talk a little bit about the process, how you select the So on your wholesale reset, can you just talk a little bit about the process, how you select the doors to consolidate? Is it location volume? Is it retailer partner specific? And then just more multi year, what does your plan consider in terms of a potential larger scale department store closing?
Any strategies in place just to offset the potential impact if that were to transpire?
Okay. Thanks, Matt. I'll take that question, which is it comes back to Jeff's assessment that we need to do the fact based assessment first. I'm a firm believer in getting the facts crystal clear on the table, put everything on the table and then look at where we set out to go, which is one common goal for the whole team, which is in the U. S.
For wholesale, for all channels, strengthen the brand and drive profitable sales growth and then map out to pass the path to that. So I'll have to come back to you on the details.
Thanks. Next question, please.
Thank you. The next question comes from Ike Boruchow with Wells Fargo.
Hi, good morning, everyone. Just to go back to the low double digit sales decline outlook for the fiscal year, I was just wondering if you could give us some more color on the moving pieces that kind of get you there, maybe meaning, how much is negative comps from your quality of sale initiatives impacting the retail side of the business versus wholesale decline as you reduce sell in on inventory? And then maybe just specifically more detail on the North America geography within the wholesale channel for the year would be really helpful.
Yes. So it's really driven by a combination of things, some of which I've already mentioned. Store closures plays a big role in that as it relates to the retail business. We are planning retail comps at the mid- to high single digit level for the remainder of the year. In addition to that, as we said, there's a number of quality of sale initiatives that are being undertaken, whether it's pulling back inventory receipts, whether it's significantly reducing promotional cadence, both time frame and depth of those.
All of that is going to drive a pullback on the revenue side of things, but it will help strengthen the brand and improve our profitability going forward. Those are the main drivers. One other item worth noting, which is very significant, is pricing harmonization across all the regions. And we found as we did our deep assessment of the business and the challenges that that was a huge issue for us, particularly in North America across all our channels, and that's a very important initiative.
Next question please. Thank you. The next question comes from Dana Telsey with Telsey Advisory Group.
Hi, Dana.
Let's take the next one, Ray. We'll come back to Dana.
Okay. The next question comes from Erinn Murphy with Piper Jaffray.
Great. Thanks. Good morning. A couple of questions. Just first on a follow-up on Europe.
Could you just quantify the impact of the timing of the wholesale shift in the region during the quarter? And then I think you mentioned that North American comps were down high single. How did comps look in Europe? And if there was any variance by region, that would be helpful.
Yes. So the impact of the timing of the wholesale shipments in the Q1 were roughly about $20,000,000 And then relative to the comp performance, Europe had a low single digit negative comp in the first quarter.
Okay.
And we don't really we don't break that out by region or country.
And then if I could just follow-up on the e commerce, I think you mentioned it was down 6% in the quarter and I realize you've got kind of the impact of the pricing harmonization, but how should we just think about that channel going forward and what's implied in your guidance in Q2 throughout the balance of the year? Thank you so much.
Yes. You should think of that guidance as mid- to high single digit decrease. Really again driven particularly in North America by the pricing harmonization and the other quality of sale initiatives. We are clearly looking to be much less promotional within that channel.
Okay. So e commerce and brick and mortar will be down to the similar level?
Yes.
Okay. Thank you very much.
Next question please.
Thank you. The next question is from Dana Telsey with Telsey Advisory Group. Good morning, everyone. As you think about the go forward the way forward plan, Stefan, how are you seeing the product evolution evolve? What should we see as we go through the next few quarters or to the next year, how you want to see the product resonate with the 3 brands that you're focusing on?
And do price points change?
Okay. Thank you, Dana. So when it comes to the product part of the WayForward plan, it's all going to be about going back to the core of what made us iconic and the core of what drives the business and the core of what the consumer already loves. So the core for us is what we have been known for, which is classic iconic style and how you will see that refocus and evolving the core, the work that we're doing, how you will see that is that you will gradually see it in spring 2017. And then gradually, season by season, you will see the core being focused on in terms of we will make sure that we have an updated classic iconic style that has an effortless twist that makes it current today.
So it's about you will see that the core from everything from placement to presentation to marketing, it will cut through and it will be one message, and it will be a with
Buckingham Research Group. Thank you. Good morning. I think with Buckingham Research Group.
Thank you. Good morning. Stefan, I just had a question on this lead time reduction. I just wondered what are the trade offs that you have to make as you go down that path? Obviously, having shorter lead times, there's a potential of having to have higher product costs, perhaps not.
But I'm interested if that's part of the trade off. Obviously, you're trying to save markdowns by being 6 months smarter about what you're committing to. But I was just wondering if you can kind of walk us through that.
Okay. Thank you, David. So when it comes to trade offs, what's been very encouraging to see is that coming back to the work behind and the drivers behind moving from 15 to 9 to start with and adding the 8 week test pipeline, it comes very much back to the disciplined approach of working cross functionally from design idea all the way into the store and reading the sales and responding to that. So working with Holiday and her team and putting sourcing at the table upfront, together with design and merchandising, has led to that we have been able to move towards the 9 month lead time, have an 8 week speed, increase the quality at the same time as we see costs on comparable products go down. So Halle has, like everyone else, working on the WayForward plan.
She has started she and her team has started focusing on the core. And that is what will make the biggest difference from a consumer perspective and from a business perspective. And very encouraging to see that we were able to cut the lead times, increase the quality, decrease the price at the same time, decrease the cost price.
Next question please.
Thank you. The next question comes from Jay Sole with Morgan Stanley.
Great. Thank you. My question is about the store closures. Can you talk to us about what types of stores you're closing, where they are, what criteria you're using to determine which stores will close? And Bob mentioned taking a deeper look at store closures.
Does that mean that you're considering closing possibly more than 50 stores? Thank you.
Yes. Thank you, Jay. So the criteria with which we selected stores for closure was really twofold. One was, is the store strategic in strengthening the brand? And then secondly, the overall level of profitability were the major drivers and the major criteria that we looked at.
Yes, we are looking at possibly closing more than 50 stores. There were some stores that went through our initial evaluation using those criteria that we may have felt were strategic and that we could turn the productivity around in the stores, and we're going back and just validating that and questioning that.
Thank you. The next question comes from John Kernan with Cowen and Company.
Good morning everyone. Thanks for taking my question. It seems like the WayForward plan is definitely gaining some momentum. Your gross margin ex restructuring charges was up pretty significantly in the Q1. And Bob, you talked about lower inventory reserves on the balance sheet.
So can you help us understand what we should expect for gross margin that's embedded in your guidance for the remainder of the year? Thank you.
Yes. So the Q1 was benefited from a few things that we consider to be kind of one time in nature, right? So one was the significant favorable sales mix shifts that we experienced from product geography and a channel perspective. We don't see that magnitude of favorability on the go forward. With respect to the impact on inventory reserves, that's really a commentary relative to the guidance that we gave that as we were working through and executing on our inventory initiatives, whether they're restructuring or other initiatives, what we found is that we did not have to record the level of inventory reserves that we had initially estimated when we gave our guidance.
So it's just a function of refinement of our restructuring and inventory management activities that were going to be one time in nature relative to the visibility we had when we gave guidance versus how we're seeing things play out as we look at the plans materializing relative to the forecast going forward.
Okay. And we'll take one final question, please.
Thank you. Our final question comes from Robbie Alms with Bank of America Merrill Lynch.
Hey, thanks for taking my question. Just a quick one. I was hoping you could remind us or maybe tell us how e commerce performed for you guys in the quarter. And maybe Stefan remind us where dotcombusinessfits into the WayForward plan globally and sort of what the initiatives are underway there right now? Thanks.
Yes. So e commerce comps were down mid single digits. We had better performance in Europe than we experienced in North America. In North America, our top line revenue was impacted by 2 things primarily. 1, again, was the pricing harmonization that we talked about, and then also cutting back on our promotions.
We cut back significantly on the length of the promotions, the number of promotions and the discount rate depth relative to how we've historically operated. That's really what drove the North American performance.
And longer term, John, in terms of the e commerce role in the way forward, it's going to have a really important part. We have mentioned a number of times before that we're going to follow the consumer where the consumer is going. The consumer is clearly going to e commerce and mobile first. We are developing an e commerce platform. Since a while back, we are on target to deliver that.
That's going to enable us to not only build a flagship online that's highly aspirational and stands for everything that's Ralph's original vision about a life in style and be very focused on core product strategy, the icon strategy, and it's going to be very shoppable at the same time. So when it comes to its role short term here and now over the next 6 months, it's going to be a part of Jeff's strategy that he is developing for North America because that's multichannel, and e commerce is going to play an important role. Okay. That was the final question. I look at Evren here, and she smiles and nods.
So before we close, I just want to say on behalf of Ralph, myself and the Board, I would like to thank Bob for all his contributions to the company over the last 12 years. It's going to be your final quarterly call. Thank you from all of us. And to all of you, thanks for joining on the call today. Look forward to speaking again next quarter.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.