Ralph Lauren Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal 2020 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 over the conference to our host, Ms. Karina Vandegans. Please go ahead.

Good morning, and thank you for joining Ralph Lauren's first quarter fiscal 2020 conference call. With me today are Patrice Duvet, 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 Patricia.

Thank you, Corey. Good morning, everyone, and thank you for joining today's call. We delivered first quarter results in line with our overall expectations, including better than expected operating margin and double-digit EPS growth. Our performance this quarter was driven by strong, continued momentum in our international markets, both Europe and Asia, and expense discipline across the organization. At the same time, We continue to invest in elevating our brands and stabilize our North America business against a more volatile backdrop. As we indicated at the start of this fiscal year, we're monitoring the global retail environment closely, particularly around trade and macro conditions. Our teams remain intensely focused on managing through potential industry headwinds and executing on our strategic plan to deliver long-term, sustainable growth and value creation. The three principles underlying this work include putting the consumer at the center of everything we do, elevating the brand, and balancing growth and productivity. During the first quarter, we continue to drive our performance against the five strategic priorities that we laid out as part of our five-year plan. 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 fuel growth. Starting with, win over a new generation of consumers. In the first quarter, we increased marketing investments by 19% 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 Earth Polo launch, our new family campaign, and key sporting events that have cultural resonance and global appeal. In April, we launched our Earth Polo, made entirely of recycled plastic bottles and a waterless dyeing process. While the launch marked an important early step in our long-term sustainability efforts, it is only the beginning of our journey, which I'll discuss in more detail momentarily. The product generated a strong consumer response, and the campaign had a meaningful impact from a marketing perspective, with over a billion earned media impressions globally and strong social media traction. We also launched our Family is Who You Love global campaign in April. a positive and inspiring celebration of inclusion and modern families, however you define them. This, combined with our Pride campaign and capsule collection in June, also drove over a billion media impressions globally. We kicked off our summer sports program with the golf majors, including a special capsule collection with Ralph Lauren Golf Ambassador Justin Thomas. And more recently, you may have seen our high-impact activations around Wimbledon, where we are the official outfitter. We launched an integrated global campaign in July, combining Wimbledon heritage with Gen Z activations, including a YouTube series, our first gaming experience, and in-store and on-site events with influencers, celebrities, and top clients. We have more exciting initiatives still to come, including the US Open Tennis Championships next month. We continued our partnerships with celebrities and influencers globally in the quarter. You may have seen Jennifer Lopez in Ralph Lauren at the CFDA Awards this June, as she collected the Fashion Icon Award. Ralph Lauren earned the highest media impact value across all brands from the event, according to the CFDA. We also announced JLo's fiancé, Alex Rodriguez, as the new face of our Polo Blue fragrance. Other celebrity dressing this quarter included Selena Gomez at Coachella, Emma Roberts, Oprah, JJ Lin, and K-pop band BTS. And lastly, you may have seen that Ralph received honorary knighthood from Great Britain in June, in recognition of his extensive philanthropic efforts, influence on global style, and longtime love of British heritage and culture. Ralph is the first American designer to receive this honor, which garnered worldwide media attention. It was a very special moment for Ralph, his family, and all of us at Ralph Lauren. Moving on to our second key initiative, energize core products and accelerate high potential underdeveloped categories. We continue to drive our product assortment across three different areas, which for clarity, we're defining as core, seasonal core, and seasonal fashion. Core includes iconic Ralph Lauren styles like the classic mesh polo shirt, Chino pant, army jacket, cable knit sweater, or Oxford button-down shirt. Seasonal core products are iterations of our core items that are animated with fresh seasonal colorways or finishes. And seasonal fashion consists of more fashion-oriented and embellished products that center around a seasonal theme or collection. This includes our limited edition series that deliver newness and excitement. In Q1, our core and seasonal core styles resonated well across channels and continue to be a key driver of our top-line performance. We're excited about the work Ralph and the design teams have done to re-energize the hearts of the business. These styles are not only appealing to existing consumers, but also to new and younger consumers. As we discussed last quarter, we're working to get the mix right across these three product categories for each channel, better aligning to consumer demand. In Q1, we took clear actions to focus our teams on the strategic rebalancing. First, we expanded the scope of our experienced international merchant team to lead a new global merchandising effort that now includes North America. This team is now leveraging their proven track record of sharply aligning buys to consumer demand and successfully targeting a new, younger consumer to the North American market. Second, our design teams have increased our penetration of core and seasonal core versus seasonal fashion product to focus on our most productive and appealing styles, starting with our Spring 20 collections. While our penetration of seasonal product will become more balanced, we will continue to leverage these propositions along with our special projects and limited edition capsules like this quarter's Polo Sport to bring newness and excitement to the marketplace. Moving to our five high potential underdeveloped categories that have significant growth potential across our brands. These include denim, outerwear, wear-to-work, footwear, and accessories. We saw strong continued momentum this quarter in denim and outerwear, which are the furthest developed of the five categories. Sell-in and sell-out trends for both categories exceeded total company performance. Based on an encouraging launch last fall, we are rolling out an expanded presentation of outerwear at our own DTC and wholesale channels for fall-winter 2019. Touching on product pricing, which Jane will address in more detail in her prepared remarks, our total direct-to-consumer AUR was up 1% in the first quarter, on top of a strong 8% increase in the first quarter of last year. While still positive, this moderation primarily reflects the steps we are taking to reduce our disproportionate seasonal fashion inventory in North America. Moving on to our third key initiative, drive targeted expansion in our regions and channels. As we previously discussed, we are building a cohesive, brand-elevating Ralph Lauren experience across our retail, wholesale, and digital commerce presence in key cities around the world. During the first quarter, we opened 21 new stores and concessions globally and closed nine locations. This included 13 openings in Asia, with seven in Greater China, our fastest-growing market. Our ecosystem approach continued to drive strong growth in Greater China in the quarter, with sales up 12% the last year in constant currency, including nearly 30% growth in mainland China, driven by comp growth and new stores. In Europe, we opened four owned and partnered full-price stores and two factory stores. While we are making good progress, we still have significant expansion opportunities, with only 36 full-price stores across Europe. Moving on to our fourth key initiative, Lead with Digital. Our global digital ecosystem, including our directly operated sites, departmentstore.com, pure players, and social commerce, increased 1% in the first quarter in constant currency. Strong growth of nearly 10% in international was partly offset by mixed results in North America. Across international, we continued to expand our distribution, notably with digital peer players. In Asia, we added two exciting new digital partners in the first quarter. Zalora in Southeast Asia and the social commerce platform of Kakao, the largest messaging platform in Korea. In Europe, we added six new wholesale digital partners in the quarter. These included Brown's Fashion, a key specialty player that resonates with younger, trend-leading consumers, and curated luxury retailer Fenwick, both in the UK. Our directly operated digital sites in Europe also saw strong momentum, delivering 22% comp growth this quarter. Turning to North America, our overall digital ecosystem in this market performed below our expectations in the quarter. Very strong double-digit growth in digital pure players was more than offset by softer trends on Ralph Lauren and Wholesale.com. First, starting with digital pure players, we continue to see strong momentum with partners who are extending our reach to new and younger consumers. In the first quarter, we launched men's polo on Paxon.com and men's and women's polo on ASOS. We also added distribution of women's polo to Rent the Runway, joining Lauren and Club Monaco on that platform, which resonates with our target next-generation consumer. Second, comps in our own North America digital site were flat. Softness was primarily driven by a decline in sales to international consumers on our US site due to FX headwinds and increased import regulations in key Asian markets, and select underperforming products within Lauren and Men's Polo seasonal fashion styles. And lastly, NorthAmericaWholesale.com was also weaker than expected. driven primarily by the product issues we discussed on Lauren, similar to Q4 trends. North America digital commerce is clearly an area of intense focus for us as we work toward consistently delivering our long-term target of low double-digit digital growth globally. Under our new global merchandising effort, we've taken decisive action to rebalance our assortments and expect these changes to start flowing through in the back half of fiscal 20. Let me touch on our fifth key initiative, operate with discipline to fuel growth. We continued to challenge every cost and improve our efficiencies in the first quarter. Adjusted operating margin expansion of 110 basis points exceeded our expectations, driven by disciplined expense management and SG&A leverage. This cost discipline enabled us to continue expanding our marketing investment and global retail presence while increasing operating profit and operating margin. And lastly, I'd like to touch on the citizenship and sustainability strategy we launched in June, which we call Design the Change. Our strategy and accompanying report represent our commitment to create more sustainable products, reduce our overall environmental footprint across our operations, and support and empower our teams and partners around the world. we introduced 16 key citizenship and sustainability goals that touch every area of our business and drive accountability across our organization. Key targets we expect to reach by 2025 range from reducing water usage by 25% across our operations and value chain to achieving gender parity within our leadership at Ralph Lauren. As we continue to cultivate the best talent to deliver on our strategy, We are proud that Ralph Lauren achieved certified status as a great place to work in the U.S. for the second year in a row. We were also recognized in the top 50 on Forbes' annual list of America's best employers for women. In closing, we are focused on executing our strategic plan to deliver long-term, sustainable growth and value creation. Each member of our engaged and motivated global team is contributing to deliver on our plan. And I know I speak for Ralph and the entire leadership team when I say that we are inspired and energized by their dedication and excellent execution every day. With that, I'll turn it over to Jane, and I'll join her at the end to answer your questions.