Ralph Lauren Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second 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'd now like to turn over the conference to our host, Ms. Karina Vandekens, Please go ahead.

Good morning, and thank you for joining Ralph Lauren's second quarter fiscal 2020 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.

Patrice Pagano- Thank you, Cori. Good morning, everyone, and thank you for joining today's call. We delivered second quarter results slightly ahead of our overall expectations, including better than expected revenues, expanded operating margin, and double-digit EPS growth. Our performance this quarter was driven by ongoing momentum in our international markets both Europe and Asia, and balance gross margin expansion and expense management. Meanwhile, we continue to invest in brand elevation and execute key initiatives to stabilize our North America business against a more volatile backdrop. As we indicated at the start of this fiscal year, we are monitoring the global retail environment closely, particularly around trade and macro conditions. our teams remain intensely focused on managing through volatile industry dynamics and executing on our strategic plan to deliver long-term sustainable growth and value creation. As I've shared before, 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 second quarter, we continue to drive our performance across 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, we continue to invest in media channels that matter most to consumers today, namely digital and social, and are on track toward our long-term marketing investment target of 5% of sales. In the second quarter, marketing declined 10% to last year due to timing of investments as we anniversaried our landmark 50th anniversary celebrations last fall. Our key marketing initiatives this quarter centered around our September fashion show experience, Wimbledon and U.S. Open tennis partnerships, as well as our Ralph Lauren and Friends collaboration. This September, we presented an exciting fall 2019 collection to a one-of-a-kind immersive experience of fashion, hospitality, and live entertainment we called Ralph's Clubs. Our Jazz Age-inspired nightclub seamlessly integrated guests into the show itself as the multi-talented Janelle Monáe inspired us with a performance for the ages. Influencers and celebrities from around the world, from Taylor Hill to Cate Blanchett, Mandy Moore to A$AP Ferg, Henry Golding, J.J. Lin and Luan Dang Wang joined in the evening. It was our most viewed live stream to date as we continued to leverage our global digital reach with more than 10 billion total media impressions around the event. In Asia alone, we generated over 32 million live and video views of the show. Moving on to our sports engagements. We closed out our summer sports program with our official sponsorship of the US Open Tennis Championships here in New York. The US Open, combined with our high-visibility Wimbledon partnership earlier in the summer, drove over 17 billion media impressions globally. Building on the April release of our Earth polo shirt, made entirely from recycled plastic bottles, the official ball people were outfitted in uniforms using the same innovation. The tennis ball cans collected from the tournament this year will be used to produce next year's uniforms. This is a great example of our design the change sustainability strategy coming to life across our products. To further amplify our sponsorship, we partnered with TikTok, the social media platform beloved by Gen Z, becoming the first luxury brand to drive a digital commerce campaign on the platform. Our campaign leveraged influencers, and custom content to drive more than half a million views and significant click-through to RalphLauren.com. And lastly, we finished out the quarter with our Ralph Lauren and Friends 25th Anniversary Capsule Collection in September, a playful ode to lead character Jennifer Aniston's fictional work experience at Ralph Lauren. Featured exclusively at Bloomingdale's and on RalphLauren.com, the campaign generated over 1 billion media impressions alone. Finally, as you may have seen, we recently celebrated the upcoming HBO release of Very Ralph, directed by the award-winning Susan Lacey. The documentary follows Ralph's journey from his childhood in the Bronx to building an iconic lifestyle business and becoming an emblem of American style around the world. I hope you will all watch it live on HBO on November 12th. Moving on to our second key initiative, energize core products and accelerate high potential underdeveloped categories. In the second quarter, Ralph and our design team continued to drive excitement in core product categories while also leveraging the halo of limited edition releases and expanding into high potential underdeveloped categories. Top selling categories for fall 2019 to date have included lightweight down jackets, windbreakers, fleece, and casual woven shirts, including Oxford shirts. We continue to work to consistently get the balance of core, seasonal core, and fashion right across each brand and distinct channels. This quarter, we released a limited edition drop, Indigo Stadium, in September. Inspired by our original 1992 polo stadium collection, pieces included signature silhouettes such as our popover jacket, windbreaker, tearaway track pants, and fleece, updated with indigo dye treatments. The release was available exclusively on our polo app, influential specialty accounts like Opening Ceremony, Fred Siegel, HBX, and Bodega, as well as select Ralph Lauren stores and retailers internationally. Other exciting projects this quarter included an exclusive youth-oriented capsule collaboration with ASOS, available globally online, and a special collection celebrating our 35th anniversary of Polo Ralph Lauren in Korea. We continue to make solid progress this quarter on our five underdeveloped categories as well. These include denim, outerwear, where to work, footwear, and accessories. Denim sell-out outperformed our total top-line trends in the second quarter. And as we approach the upcoming winter season, outerwear sell-ins are strongly outpacing our overall sales trend. Meanwhile, our Ralph Lauren and Friends collection leveraged our expanding where-to-work initiative with modern pieces for both men and women rooted in the Ralph Lauren aesthetic. In fragrance, we launched the latest iterations of Romance for Women and Polo Red for Men. Focused on reaching a new generation of consumers, the campaigns featured our Ralph Lauren Ambassadors, Taylor Hill for Beyond Romance, and Ansel Elgort for Polo Red Remix. Moving on to our third key initiative, drive targeted expansion in our regions and channels. Our long-term expansion strategy remains focused on building a cohesive, brand elevating Ralph Lauren experience across our retail, wholesale, and digital commerce presence in key cities around the world. During the second quarter, we opened 20 new stores and concessions globally and closed 21 locations. This included 15 openings in Asia. We also completed door refreshes in key markets around the world, including our Place de la Madeleine flagship store in Paris, and factory door renovations in North America and China, where we continue to elevate our fleet across every touchpoint. Our consumer-centric ecosystem approach drove strong results in the quarter, with China mainland sales up more than 20% in constant currency, driven by comp growth and new stores. Total China sales were up modestly to last year in constant currency, including Hong Kong headwinds, which Jane will discuss in her remarks. In Europe, we opened four owned and partnered full-price stores. While we are making good progress, we still have significant expansion opportunities with only 40 full-price stores across Europe, with all of this complemented by our successful digital commerce expansion. Which brings me to our fourth key initiative, Lead with Digital. Our global digital ecosystem, including our directly operated flagship sites, departmentstore.com, pure players, and social commerce increased low teens in the second quarter in constant currency. The strong performance was driven by more than 30% growth in international. While this was tempered by more modest growth in North America, our North America digital sales were positive and ahead of expectations, improving sequentially from first quarter trends. Starting with Europe, digital sales were up double digits in the quarter, with strong performance across each channel. We added 17 new wholesale digital partners, including La Redoute, one of the largest digital peer players in France. Our directly operated digital sites in Europe also saw continued momentum, delivering 13% comp growth this quarter. Recent enhancements included optimizations to our mobile site and checkout process, and a new digital commerce flagship for Ireland, as we continue to drive our localization efforts by market. We also recently launched Instagram Shopping in Europe. In Asia, digital ecosystem sales were also solid, led by China. We added five exciting new digital partners in the second quarter, including Seekoo, a luxury e-commerce platform in China, GS Shop, the number one multimedia retailer in Korea, and Marui, a leading omnichannel retailer targeting younger consumers in Japan. We also continued to elevate our presence with key digital peer players like Tmall during the quarter. Turning to North America, second quarter comps on RalphLauren.com were up 2% and better than expected. Similar to the first quarter, we continued to experience declines from international consumers on our U.S. site due to FX headwinds and increased import regulations in key Asian markets. However, sales to domestic shoppers were up single digits and slightly better than first quarter trends as we started to improve our mobile user experience and drive more targeted email marketing. Under our new global merchandising effort, we're also rebalancing our buys to emphasize stronger selling core and seasonal core products going forward. Our digital performance should start to reflect these initiatives, along with further improvement in mobile and personalization to drive conversion, more in the back half of fiscal 20. Lastly, we continue to build partnerships with new digital platforms in North America, which are extending our reach to new and younger consumers. In the second quarter, we launched men's polo sportswear on revolve.com and its sister site, Forward. We also launched Lauren ready-to-wear and dresses on Nuuly, the new subscription service from Urban Outfitters, targeting our next generation consumer. Touching on our fifth key initiative, operate with discipline to fuel growth. In the second quarter, we continued to challenge every cost and improve our efficiencies. Adjusted operating margin expansion of 100 basis points exceeded our expectations, driven by gross margin expansion, disciplined expense management, and lower marketing spend in the quarter. This cost discipline enabled continued expansion of our global retail presence while increasing operating profit and operating margin. Looking at our supply chain, year-to-date, we've continued to increase its flexibility and efficiency. With the enactment of List 4 tariffs from China in the quarter, we've continued our multi-pronged effort to mitigate the cost impact. This includes, first, working with our existing partners within China to drive increased productivity. Second, further diversifying our supply chain outside of China. Over the past few years, we've reduced our U.S. exposure to China from over 40% to about 22% by the end of this fiscal year, and moving to approximately mid-teens for fiscal 21. And third, While we are focused on driving the first two strategies to mitigate as much of the tariff headwind as possible and minimize the direct impact to the consumer, we are also planning targeted global price increases. As previously discussed, a central part of our next great chapter strategy is raising AUR to elevate the brand globally and create value. We began phasing in strategic ticket price increases in our North American outlet channel in late September. our North America full-price wholesale and direct-to-consumer doors will reflect targeted price increases starting with our Spring 20 assortments. Leveraging the success we've had implementing this strategy in Asia and Europe, these ticket increases reflect our competitive benchmarking analysis and our focus on the value proposition for our consumers. Jane will provide further detail on AUR and the expected financial impact of tariffs in her prepared remarks. In closing, in the context of a more volatile environment, we continue to deliver solid progress on our next great chapter plan. Ralph and I are proud of our team's execution this quarter as they delivered across each of our strategic pillars with passion and excellence. Together, we remain focused on driving each of these areas to deliver long-term, sustainable growth and value creation for all of our stakeholders. With that, I'll turn it over to Jane, and I'll join her at the end to answer your questions.