Ralph Lauren Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third 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 our conference over to our host, Ms. Karina Van Der Gans. Please go ahead.

Good morning, and thank you for joining Ralph Lauren's third 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.

Thank you, Corey. Good morning, everyone, and thank you for joining today's call. We continue to make strong progress on our next great chapter plan. With third quarter results ahead of our overall expectations, including better than expected revenues, operating margin, and double-digit EPS growth. Over the important holiday season, our teams consistently executed across each of our strategic priorities, enabling us to elevate our brand and deliver for our consumers across every touchpoint. The solid foundations we've put into place to reposition and elevate our brands help to drive positive comp growth across all three regions excluding the impact of Hong Kong this quarter. We were also encouraged by AUR growth of 6% as we invest in brand elevation through our products, marketing, distribution, and unique consumer experiences. At the same time, we continue to execute key initiatives to stabilize our North America business against an evolving retail landscape. 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 across all consumer touchpoints, and balancing growth and productivity. And we're doing all of this while managing through volatile industry dynamics, including the recent coronavirus outbreak, which we are actively monitoring. Our top priorities are to keep our employees and consumers safe, and to heed the advice of local and international health authorities. The situation is a dynamic one, and we will continue to assess the implications for our business across retail, corporate, and our supply base. Our thoughts are with the many impacted by this virus. During the third quarter, we drove our performance across the five strategic priorities that we laid out as part of our five-year plan to deliver long-term, sustainable growth and value creation. 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're investing in media channels that matter most to consumers today, namely digital and social, and remain on track towards our long-term marketing investment target of 5% of sales. In the third quarter, marketing increased 16% to last year as we shifted investments back into the key holiday selling period. We're encouraged by consumer engagement across generations through our campaigns and programs, notably Our total social media followers surpassed 40 million in the third quarter, a double-digit increase to last year, led by a 30% organic increase on Instagram. Let me touch on some of the highlights from our holiday campaigns this quarter. First, we launched a fully integrated holiday campaign across social media, television, our own stores and digital sites, and wholesale environments, which we called Every Moment is a Gift. Among the exciting activations online, we drove strong engagement through our Snapchat holiday shopping filter and our first-ever global digital game, the Holiday Run, where our iconic Polo Bear dashed through the streets of New York City, Paris, London, and Tokyo to collect festive baubles and signature Ralph Lauren products. We also launched a digitally targeted campaign for our Lauren women's ready-to-wear business in North America this season. Featuring supermodel and mom Lily Aldridge along with her family, it was the first dedicated campaign for the brand in many years that had significant media support behind it. We were encouraged by the early consumer response as we worked to get the Lauren women's business back on a positive trajectory. On our North America mobile app, we drove a successful seven days, seven drops program featuring limited edition releases, and one-of-a-kind experiences. A highlight of the week was our Five Horsemen Rugby shirt, which sold out in just 15 minutes online. And congratulations to Ralph Lauren Golf Ambassador Justin Thomas. He captured his 12th career win at the Century Tournament of Champions last month, wearing RLX to capture the number one spot in the FedExCup standings. Moving on to our second T initiative, energize core products, and accelerate high-potential underdeveloped categories. In the third quarter, Ralph and our design team drove excitement in core product categories while also expanding into our five high-potential underdeveloped categories. While we were pleased with the overall performance of these categories, our outerwear and fleece programs were the clear standouts this holiday, outperforming our total sales trends on both a sell-in and sell-out basis. Popular styles included heavyweight parkas, quilted car coats, light and mid-weight down jackets, windbreakers, and Sherpa styles. Other successes this season included woven shirts, sweaters, and denim. In addition to the holiday drops on our mobile app, we released our limited edition Polo Sports Outdoors collection in November. The products retailed on our own digital commerce sites, North America app, and select flagship stores around the world. We also partnered with influential specialty retailers including Bodega, Fred Siegel, Essence, Browns in the UK, and Beams in Asia. Other exciting projects this quarter included an exclusive holiday capsule with Zolando, the Polo Sport collaboration with Mushinsa, one of the largest fashion online retailers in Korea, and a WeChat mini program for Singles Day in China. 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, elevated Ralph Lauren experience across our retail, wholesale, and digital commerce presence in key cities around the world. During the third quarter, we opened 48 new owned and operated stores and concessions globally and closed 31 locations. This included 37 openings in Asia. We also continue to invest in door refreshes across our own stores and wholesale partners in key markets as we work to elevate our fleet across every touchpoint. Our city-by-city ecosystem approach drove strong results in the quarter, with Chinese mainland sales up more than 30% in constant currency, driven by comp growth and new stores. Total China sales were up 6% the last year in constant currency, despite headwinds in Hong Kong that we discussed last quarter. In Europe, we opened six owned and partnered full-price stores, including Polo Boutiques in Covent Garden in London, Torino, Aix-en-Provence, and Lisbon. We're making good progress, but we still have significant expansion opportunities with only 46 full-price stores across Europe. With all of this complemented by our successful expansion into new specialty wholesale accounts and digital commerce growth. 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 double digits in the third quarter in constant currency. The strong performance exceeded our expectations across all three regions. This was driven by double digit growth in Europe and Asia, with North America up high single digits, improving from flat performance in the first half. Starting with Europe, digital sales were up high teens in the quarter, with solid performance across both owned and wholesale digital accounts, led by digital pure play retailers. We added six new partners, including Luisa Viaroma in Italy, Sock Shop in the UK, and Brown Hamburg in Germany. Our directly operated digital sites in Europe also saw further momentum, delivering 15% comp growth this quarter. Highlights included the November launch of our Polo mobile app in the UK, our first app launch outside of North America, and a new digital commerce flagship for Switzerland as we expand our localization efforts by market. In Asia, digital ecosystem sales were also up double digits, led by the Chinese mainland. We launched new partnerships this quarter with Meijer in Australia, as well as Timon's luxury-selected platform in China. Lastly, our digital growth in China accelerated on the launch of buy-online, ship-from-store fulfillment to leverage our store inventories. These omni-channel orders contributed to roughly half of our digital growth in the quarter. Turning to North America, third-quarter comps on RalphLauren.com were up 6%. largely in line with our expectations. We saw softness from international consumers due to FX and import restrictions in Asia, similar to the first half of the year. However, sales to domestic shoppers grew single digits as we started to drive improvements in mobile, site personalization, and rebalancing our buys to emphasize stronger selling core and seasonal core products. Lastly, we continued to build partnerships with newer digital platforms in North America, which are extending our reach to new and younger consumers. In the third quarter, we launched Women's Polo on Daily Look, a premium subscription-based personal styling service, and Men's Polo on Simmons, a specialty designer boutique online. We also added kids to Rent the Runway, joining our Lauren, Women's Polo, and Club Monaco brands on the platform. Touching on our fifth key initiative, operate with discipline to show growth. In the third quarter, we focused on challenging every cost and improving our efficiencies. Adjusted operating margin expanded 10 basis points, slightly ahead of our expectations, with stronger than expected top-line growth, partly offset by the planned timing of higher investments around holiday marketing and new stores. One important margin driver for us, and a central part of our next great chapter strategy, is raising AUR. to elevate the brand globally and create value. We're using multiple levers to realize AUR increases, including lower discounts, elevated product mix, geographic and channel shifts, and strategic ticket price increases. We began phasing in strategic ticket price increases in our North America factory outlet channel in late September, followed by our North America full price wholesale and direct to consumer doors in spring 20. 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 providing a superior value proposition for our consumers. We were encouraged by the impact of these initial price increases this fall. While traffic was still a headwind for our factory business, we were able to drive positive comps in this channel through an 8% increase in AUR in the quarter. This was on top of 8% AUR growth last year and well above our expectations. Though it is still early in this journey, we are focused on elevating our brand positioning in the North American market and globally as part of our AUR-led strategy. And finally, I want to provide an update on our journey to further integrate citizenship and sustainability into our business. More than 50 years ago, Ralph built our company based on the idea of timelessness, creating products that are meant to be worn, loved, and passed on to the next generation. This continues to inspire everything we do as we build a business to deliver value for our shareholders and all of our stakeholders for the next 50 years. As part of this work, in December, we announced a new commitment to power all of our globally owned and operated offices, distribution centers, and stores with 100% renewable electricity by 2025. We also took the Arctic Shipping Pledge, committing to reroute shipping to avoid the environmentally delicate Arctic area. Driving diversity and inclusion across our business is another important piece of this work. and we are pleased to report that we have achieved our gender parity goal of equal representation in our leadership positions at the VP level and above more than three years ahead of our target. In closing, Ralph and I are energized by our team's execution over the important holiday quarter, and we are encouraged by the progress we are making on our next great chapter plan across the business. While we are mindful of the challenges across our markets globally, we are intensely focused on delivering on the commitments we have made across every aspect of our business as we look to drive long-term, sustainable growth and value creation for all of our stakeholders. And before I turn it over to Jane... Sadly, I want to note the recent passing of our longtime board member and friend, Arnold Aronson. On behalf of Ralph and the entire organization, I want to express our deepest gratitude for his kindness, wisdom, and service to our company over nearly two decades. Now over to Jane, and I'll join her at the end to answer your questions.