Ralph Lauren Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third Quarter Fiscal 2019 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. If you should require assistance during the call, please press star, then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Karina VanderGinst, Please go ahead.

Good morning, and thank you for joining Ralph Lauren's third quarter fiscal 2019 conference call. With me today are Patrice Louvet, the company's president and chief executive officer, and Jane Nielsen, chief financial officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to one 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 Patrice.

Thank you, Cori. Good morning, everyone, and thank you for joining today's call. We're pleased to report better than expected third quarter results during the important holiday season as we continue to execute on our strategic priorities. As we discussed at our investor day last spring, our teams are focused on delivering long-term, sustainable growth and value creation. In the third quarter, we outperformed our expectations on both the top and the bottom line with double-digit EPS growth. Our results were driven by double-digit revenue growth in Asia and Europe and strong sequential progress in North America with better than expected AUR growth globally. During the third quarter, We continue to drive our execution and performance against the five strategic priorities that we laid out as part of our five-year next great chapter plan. These include, first, win over a new generation of consumers. Second, energize core products and accelerate underdeveloped categories. Third, drive targeted expansion in our regions and channels. Fourth, Lead with digital across all activities. And fifth, operate with discipline to fuel growth. As we look to close out the fiscal year, we remain on track to achieve our plans for the full year. Let me now highlight some key progress points, starting with win over a new generation of consumers. In the third quarter, we increased marketing investments by 18% to last year. we continue to shift our spend to channels that matter most to consumers today, namely digital and social. Our key marketing initiatives this quarter centered around our limited edition collections and holiday campaigns. On our last call, we announced an exciting new collaboration with UK-based streetwear brand Palace. Launched in November, the capsule collection consisted of menswear pieces inspired by iconic polo styles that the Palace creators Lev and Gareth have worn throughout their lives. The product sold exclusively on our Polo mobile app in the U.S., our digital flagship in Europe, and across Palace's retail network. We approached the collaboration as an opportunity to reach new and younger consumers with a fresh take on product that still remained true to the DNA of the Polo brand. The collaboration generated over 2 billion impressions globally, exceeding our expectations. The Palace Collection sold out in under an hour online. We were encouraged that roughly 75% of the people who purchased it globally were completely new to Ralph Lauren. The collaboration was particularly effective in engaging millennial and Gen Z consumers, with those purchasing the collection 10 years younger on average than the typical Polo men's consumer. We are now a little more than a year into our approach to drive energy and excitement around our brand with limited edition releases, and we continue to be encouraged by the traction these drops are gaining. In December, we launched our Winter Stadium collection, which was available on our Polo mobile app in the US and in key flagship stores globally. We also partnered with influential specialty retailers including opening ceremony, end clothing, Hypebeast e-commerce site HPX, and Selfridges. Winter Stadium generated over 1 billion impressions globally and achieved nearly 100% sell-through on our Polo app in the first day. In addition to attracting new consumers to our franchise, we're excited to see a new fan base developing for our drops. Over half of the Winter Stadium shoppers were repeat customers who had already purchased from at least one of our limited editions previously. We also continued our 50th anniversary celebrations in the third quarter with our holiday gifts campaign, hashtag RL50gifts, which we amplified through social media influencers and celebrities like Emmy Rosam, Rachel Zoe, Cameron Dallas, and Olivia Palermo. About one-third of the consumers who shopped the products highlighted in our holiday campaign were new to Ralph Lauren, and a meaningful portion of these new consumers were under the age of 35. In addition to our holiday gifting campaign, we continued to leverage the use of celebrities and influencers across different areas of pop culture and sports. In the third quarter, Nicole Kidman, Hugh Jackman, Alex Rodriguez, Gigi Hadid, and Chance the Rapper were among the stars featured in our brand. We kicked off awards season dressing with actors Chris Pine, Lady Gaga, and Lupita Nyong'o. You also may have seen Ralph's incredible custom designs for the wedding of actress Priyanka Chopra to music superstar Nick Jonas in India in December. It was the first wedding dress that Ralph has designed for a bride outside of his own family. The wedding was a global event that transcended cultures, and dominated social media platforms. Moving on to our second key initiative, energize core products and accelerate underdeveloped categories. Our strong top line performance this quarter was driven by our core products as Ralph and the design teams continue to drive excitement in the marketplace. This is consistent with our year-to-date trends and expectation that iconic and updated core styles will be a more meaningful near-term driver while we continue to develop our high potential under-penetrated categories for the longer term. Top performing core products in the third quarter included Oxford shirts, half-zip sweaters, woolen cashmere sweaters, and mesh polos. In addition, we continue to build upon our customization programs this quarter with monogramming services and expanded customization offerings in the European market. Customization continues to represent an important long-term opportunity for direct-to-consumer channels, driving AURs that are higher than our overall digital commerce AURs, higher gross margins, and low returns. Moving to our underdeveloped categories that have significant growth potential across our brands. These include denim, outerwear, wear-to-work, footwear, and accessories. Our sell-out trends in denim and outerwear, which are the furthest developed of the five categories, accelerated in the quarter, with an improved merchandising and distribution focus, indicating a positive consumer response to our new initiatives. Out-of-wear performance accelerated this winter as we've continued to focus on our core nylon and down jackets, while also injecting the category with new fabrications, innovation like our RL heat launch this month, and focus on end uses like active, weekend, and weekday dressings. In fragrance, we launched a new campaign in January around our Ralph Lauren Romance Fragrance for Women, bringing a fresh take and new packaging to this iconic scent just in time for Valentine's Day. The spring campaign features supermodel Taylor Hill as the new face of the fragrance, along with her boyfriend, actor Michael Stephen Chang. Moving on to our third key initiative, drive targeted expansion in our regions and channels. We are focused on building a compelling and competitive Ralph Lauren ecosystem in key cities globally. This includes digital distribution as well as new and renovated stores to drive growth. During the third quarter, we opened 39 new stores and concessions globally and closed 12 locations. This included 24 openings in Asia, with nine in China, our fastest-growing market. Our China openings this quarter were focused on our key city clusters of Shanghai, Shenzhen, Beijing, and Chengdu. We continued to drive strong growth in China in the third quarter. Greater China revenue was up 19% to last year in constant currency, including nearly 40% growth in mainland China, driven by comp growth and new stores. We are taking a disciplined approach to our new store openings in China and closely monitoring macro trends. However, we are pleased with the performance of our new doors thus far as they are delivering above average productivity and profitability. Our digital business in China continues to expand following the launch of our directly operated digital commerce site last September. We also continue to see strong momentum in our distribution with pure play partners including Tmall, JD.com, and WeChat during the quarter, with very positive brands exposure over Singles Day. In Europe, we opened two new full-price stores and two net new factory stores in the third quarter. The new full-price stores in Leeds and Marseille are part of our broader ecosystem strategy in those markets. Similar to China, we're actively monitoring the macro environment in Europe, including the UK, and we'll continue to take a cautious approach the store rollout in the region, as we test and learn from each new opening. However, we're still significantly under-penetrated at brick-and-mortar retail, with only 23 full-price stores across Europe. And we continue to see a meaningful, long-term opportunity to build out our ecosystem strategy in the region. Our expansion plans include two more openings in the fourth quarter of this fiscal year. Moving on to our fourth key initiative, Lead with Digital. Our global digital business, including our directly operated sites, departmentstore.com, pureplayers, and social commerce was up 20% to last year in the third quarter in constant currency, with strong performance across all regions. Our directly operated North America digital flagship continued on a positive growth trajectory as planned and delivered a 21% comp increase as we lapped last year's transition to a cloud-based platform. Our focus on strong brand building and enhanced consumer experience and higher quality of sales all contributed to improved performance as we continue to reposition the site as our most important flagship. Our directly operated European digital commerce sites also showed strong improvement following the move to our new platform earlier this fiscal year. This business returned to growth in the third quarter as planned with a 13% comp. Enhancements to our European sites this quarter included the launch of shift from store across Europe, enabling us to leverage our in-store inventories to service demand, customization services, and our first fully localized Spanish digital commerce site. Looking ahead, we expect to see more normalized positive growth in this channel as a result of the improved brand building, consumer experience, and functionality. We also continue to drive strong performance on pure play accounts across all regions in the third quarter. In the US, we expanded our presence on Stitch Fix with women's polo and men's footwear and added 15 new digital pure play partners in Asia and Europe. Finally, let me touch on our fifth key initiative, operate with discipline to fuel growth. In the third quarter, we continue to challenge every cost and improve our efficiencies. This enabled us to continue ramping up our marketing investment and expand our global retail presence while increasing operating profit and expanding operating margin above our guidance. Adjusted operating expenses excluding marketing were slightly below top line growth in the quarter. Jay will provide more details on how we're continuing to drive productivity. So in closing, while we are mindful of ongoing market volatility, We are energized by our continued progress this quarter on our next great chapter plan. Ralph and I, along with our talented and committed teams around the world, remain focused on staying true to the timeless vision of our brand while evolving to meet the needs of consumers globally. While we are proud of the progress we're making, we will continue to relentlessly focus on excellent execution as we deliver on the commitments that we have made across every aspect of our business. With that, I'll turn it over to Jane, and I'll join her at the end to answer your questions.