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 Van Der Gist. Please go ahead.

Good morning, and thank you for joining Ralph Lauren's fourth quarter and full year fiscal 2019 conference call. With me today are Patrice Louvet, the company's president and chief executive officer, and Jane Nielsen, chief operating officer and 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 are pleased to report fourth quarter and full year fiscal 19 results that delivered on our commitments, with revenues, operating margin, and double-digit EPS growth all coming in ahead of our outlook for both the quarter and the year. Our fourth quarter performance was driven by double-digit revenue growth in Asia and Europe on a constant currency basis and better than expected AUR growth globally. North America also made continued progress on returning to a healthier base with ongoing elevation of our brand and a planned reduction of our off-price channel penetration, though we recognize that we still have more work to do on this multi-year journey. On balance, our company outperformed on core metrics this year, with several areas of our business delivering ahead of expectations and a few that require more work. Moving forward, we're focused on leveraging the successes while also applying the learnings from this first year of our next great chapter strategic plan. As we close out fiscal 19, Ralph and I are proud of the work our teams have done this year. We're encouraged by the strong progress we've made on our strategic plan to deliver long-term, sustainable growth and value creation. In a moment, Jane will take you through the fourth quarter and fiscal 20 outlook. But first, let me start by reviewing our fiscal 19 highlights across the five strategic priorities in our plan. As a reminder, these include First, win over a new generation of consumers. Second, energize core products and accelerate high-potential underdeveloped categories. Third, drive targeted expansion in our regions and channels. Fourth, lead with digital across all activities. And fifth, operate with discipline to show growth. Starting with win over a new generation of consumers. As we outlined at Investor Day last June, our goal is to recruit millions of new consumers into our brands each year. To achieve that, we've been elevating our brand building content and increasing our marketing investment, with a focus on channels that matter most to consumers today, namely digital and social. In fiscal 19, we increased marketing spend by 13%, on top of a 10% increase in the prior year. Highlights from the year and key learnings included two unique fashion shows that generated record levels of global engagement for Ralph Lauren. We are creating differentiated experiences with our shows where we can engage consumers in new ways and amplify our messaging globally to in-store events and digitally. Our exciting collaboration with UK-based streetwear brand Palace and limited edition launches throughout the year introduced the brand to new and younger consumers. As part of this, we activated our new Polo mobile app and partnered with influential specialty retailers around the world to reach trend-savvy consumers where they shop. We continue to leverage the power of cultural events and influencers, notably Ralph's incredible custom designs for the wedding of Priyanka Chopra and Nick Jonas in India, in our successful exhibition at Intersect, one of China's most innovative platforms for creatives from the world of art, food, fashion, and music. And lastly, our partnerships and high visibility with Wimbledon, US Open Tennis, and the U.S. team at the Ryder Cup reinforced Ralph Lauren's authentic connection to the world of sports. As a result, we saw healthy growth in our number of Instagram followers, with a 45% increase to last year to reach over 15 million followers across our brand handles. In the fourth quarter specifically, marketing highlights included... our spring 19 runway presentation, which transformed part of our Madison Avenue flagship into an immersive, Parisian-inspired Ralph's Coffee experience. We're also leveraging key categories like fragrance to recruit a new generation of consumers. In Q4, we launched a new campaign around the iconic Ralph Lauren Romance fragrance, featuring our new global ambassador, Taylor Hill. And just a few weeks ago, You may have seen our Family is Who You Love global campaign, which captures a modern take on family, however you define it. It is a positive and powerful message about inclusion that has resonated with consumers and across global press. We are gaining traction with younger consumers as we engage with them in new, relevant, and exciting ways. We are in the early stages of this journey and are focused on building momentum among both millennial and Gen Z consumers globally. Moving on to our second key initiative, energize core products and accelerate high-potential underdeveloped categories. In the fourth quarter and fiscal year, we made progress on our long-term plan to drive roughly half of our revenue targets through growth in core products and the other half through the expansion of five underdeveloped categories. Our iconic and updated core styles continue to be a key driver of our top-line performance, as Ralph and the design teams generate excitement in the marketplace. We continue to animate these core styles through the use of print, embroidery, color blocking, graphic polo logos, our polo bear, and customization offerings. moving to our underdeveloped categories that have significant growth potential across our brands. These include denim, outerwear, wear-to-work, footwear, and accessories. Our performance in denim and outerwear, which are the furthest developed of the five categories, was encouraging this year. Benefiting from an improved product, merchandising, and distribution focus, positive sales trends in these categories for both the fourth quarter and fiscal 2019 indicated a strong consumer response to our new initiatives. Notably, outerwear growth accelerated as we moved through the year, fueled by our focus on key programs such as core nylon, down, bomber, and leather jackets. We were able to apply early learnings from this past winter's performance as we launched an expanded outerwear offering and coordinated marketing campaign for Fall 2019. And while accessories are expected to play a more meaningful role later in our long-term plan, we were excited to introduce our RL50 collection handbag to the market this spring. Our newest icon merges classic Ralph Lauren style with modern sophistication and artisanal leather craftsmanship. These developments represent strong progress, but we still have work to do, particularly in product areas that are not yet performing to their potential. For example, our law and wholesale business in North America, where we need to drive a greater focus on core categories and better balance core product with fashion. And while our core polo products drove our performance, we have an opportunity to strengthen the appeal of our fashion concepts. We've already taken decisive action to address both of these areas, with a new design direction and category strategy in place for Lorin, which should start to impact spring 20 and onward, and earlier adjustments in place on our polo design concepts. Moving on to our third key initiative, drive targeted expansion in our regions and channels. We were focused on building a cohesive, brand-elevating raw floor and experience across our retail, wholesale, and digital commerce presence in key cities around the world. In fiscal 19, we opened 135 new stores and concessions globally and closed 85 locations. This included 94 openings in Asia, with 39 in China, our fastest-growing market. For the full year, Greater China revenue was up 20% to last year in constant currency, representing about 3.5% of our total company revenue. This included more than 30% growth in mainland China on top of the 25% growth we reported last year, driven by comp growth and new stores. In Europe, we opened four new full-price stores, and two new factory stores on a net basis. We are still significantly under-penetrated at brick and mortar retail, with only 23 owned full-price stores across Europe, and we continue to see a meaningful long-term opportunity to build out our ecosystem strategy in the region. Overall, in fiscal 2019, we track slightly behind our annual store openings target, as we remain highly selective on real estate locations to ensure that they elevate the brand and meet our profitability targets. 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 11% in constant currency in fiscal 19, with strong performance across all regions, led by internationals. Our directly operated North America digital flagship returned to positive growth during the year, as planned. Comps grew 10% compared to a 22% decline in fiscal 2018, as we lapped last year's transition to a cloud-based platform. Our directly operated European digital commerce sites also showed strong improvement following the move to our new platform this fiscal year. Comps were up 6% in the fourth quarter and full fiscal year, despite reduced promotional activity to elevate the brand. We also continued to drive strong performance with digital pure play partners across all regions this year. In the U.S., in the fourth quarter, we added distribution of men's polo to Essence, a leading international fashion platform known for its curated selection of luxury and streetwear brands. We also expanded our presence on Moda Apparendi with Double RL and on Zulili with Chaps. Internationally, we added 11 new wholesale digital partners in Europe in the quarter, including specialty players that resonate with younger, trend-forward consumers, like SlamJamSocialism.com in Italy and Kix.com in Germany. We also continue to expand our digital presence in Asia, including enhancements to our WeChat Shop and Shop in China and exclusive online collaborations with high-profile partners in Japan, Korea, and Hong Kong. While encouraged by our digital commerce momentum, we see opportunities to accelerate growth of our total digital ecosystem and gain share. For example, by better leveraging our experience and assets in brand building and presentation from our own digital flagships, we can apply our best practices with those of our partners to drive higher performance and productivity on Wholesale.com. Let me touch on our fifth key initiative. Operate with discipline to fuel growth. In fiscal 19, we continued to challenge every cost and improve our efficiencies as we progressed towards a mid-teens operating margin target by fiscal 23. Adjusted operating expenses, excluding marketing, grew 1.4%, below our top-line growth for the year. This cost discipline enabled us to ramp up our marketing investment and expand our global retail presence while increasing operating profit and operating margin above our guidance. Jane will provide more details on how we're continuing to drive productivity. I also wanted to give you an update on citizenship and sustainability, the topic we care deeply about. Over the last six months, we've undertaken a focused effort to evolve our strategy and further embed sustainability across our organization. In the coming months, we will share more about our approach to one, creating product, two, managing our environmental impact, and three, how we champion and support our employees, the workers across our supply chain, and our communities. One recent example of how we're bringing this to life in our products was the launch of the Earth Polo in April. The Earth Polo is made entirely of recycled plastic bottles and used as a waterless dyeing process. Early consumer reaction has been strong, and we look forward to sharing more as we progress in this journey. And lastly, we recently announced two key organizational changes to support our strategic initiatives going forward. Jane Nielsen's role was expanded to Chief Operating Officer in addition to Chief Financial Officer, and Howard Smith, who has successfully led our international groups, was elevated to the role of Chief Commercial Officer at the end of March, adding North America to his responsibilities. We expect these changes to enable faster reapplication of proven successes. Both promotions are extremely well-deserved and further highlight the strength of our leadership. In closing, this year's results demonstrate our progress on putting the consumer at the center of everything we do, elevating the brand, and balancing growth and productivity to deliver long-term, sustainable growth and value creation. Our recent global employee survey, conducted by Korn Ferry, demonstrates accelerated levels of engagement versus the prior year that now surpass the high-performing norm. It's our team's excellent execution that is moving us forward, and Ralph, the leadership team, and I are inspired and energized by them every day. With that, I'll turn it over to Jane, and I'll join her at the end to answer your questions.