Ralph Lauren Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren fourth quarter and full year 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 stars and zero. As a reminder, this conference is being recorded. I will now turn the conference over to our host, Ms. Karina Vandekens, please go ahead.

Good morning, and thank you for joining Ralph Lauren's fourth quarter and full year 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, Cori. Good morning, everyone, and thank you for joining today's call. The spread of COVID-19 around the world has been devastating, and our thoughts are with the many impacted by the virus. The pandemic has not only affected our organization and recent financial performance, but it has had unprecedented consequences on the communities we operate in around the world. Under these extraordinary circumstances, our teams have responded to the call with agility and resilience, working tirelessly from their living rooms and kitchen tables across time zones. Raf and I want to recognize and thank them for their dedication and commitment. Our objective is to emerge from this period stronger than we came into it. And before we review our recent financial performance, I want to spend some time on the actions we are taking to ensure we not only endure through this crisis, but are positioned to thrive long-term. From the start of the outbreak, we moved quickly to protect the safety and well-being of our employees, consumers, and communities. This included widespread store and office closures, led by Asia in late January, followed by Europe and North America in March. Like many of you, we are working in new ways across the company, including working from home, and we have implemented new health and safety measures where that is not possible. We also took proactive steps to ensure the long-term financial health of our business, including expense reductions, further strengthening our balance sheet and liquidity, and pivoting our supply chain, to adjust inventories to changing demand. Meanwhile, we accelerated efforts to drive sales to our digital ecosystem as consumers stayed home. On the expense side, we've been addressing our most significant fixed costs around the world. This includes ongoing work with our landlords to negotiate rent relief and pausing all new store build-outs. We reduced corporate expenses including a freeze on all global travel and hiring during the crisis. And in April, we announced pay cuts for our executives, board, and me, along with furloughing or flexing down a significant number of our employees across the company. Ross is foregoing his bonus for fiscal 20 and his entire salary for fiscal 21. We have also focused on delivering on our purpose in the communities in which we operate, For example, in March, we donated $10 million toward emergency COVID relief to our Roth Lauren Corporate Foundation. These funds will support the COVID-19 Solidarity Response Fund, our longstanding partners in cancer care, our Employee Relief Fund to support Roth Lauren employees in need, and the CFDA Vogue Fashion Fund for COVID-19 relief. We also mobilized our teams and supply chain to deliver 250,000 masks and 50,000 isolation gowns to support medical staff. And we are providing 1.5 million units of comfort apparel, hundreds of meals, and even Ralph's coffee for frontline workers across many of our key markets. Next, I want to share some perspective on our experience managing through COVID in mainland China over the past few months. As we prepare to reopen markets around the world, we're applying learnings and strategies from China, where the recent recovery gives us confidence that we are making the right decisions now to position our company for long-term, sustainable growth and value creation. We started the quarter with strong, continued momentum in mainland China, our fastest growing market, with sales up more than 35% in January, driven by all of our direct-to-consumer channels. By early February, we closed nearly all of our stores in the market due to COVID. We took early strategic actions across marketing and distribution in China, which we have applied in our other markets as the pandemic continued to spread. First, we quickly shifted our marketing to focus on optimistic messages around family, togetherness, and giving, values that have always been an authentic part of who we are. We partnered with celebrities like JJ Lin, Jem, and Wang Lihong to amplify our messaging. This content resonated well with our consumers across Asia, driving over 124 million video views and a 33% increase in positive brand mentions on social media in Q4 versus Q3. Second, we accelerated our digital and omnichannel capabilities in China in the fourth quarter, to better serve our consumers during the store closures and beyond. We were excited to launch digital clienteling with virtual appointments and customized filing recommendations based on Shopper's previous purchases. This program helped to mitigate traffic declines and leverage store inventories while consumers stayed home. We expanded our buy online, ship from store program to provide greater convenience and limit face-to-face interactions as stores reopen. These initiatives, combined with our digital marketing, drove a 76% increase in China digital sales in the fourth quarter, significantly outperforming the broader apparel industry in February and March. These programs are being tested and rolled out in North America and Europe. And over the coming weeks, we're exploring other contactless options like curbside pickup and self-checkout in many locations. As our China stores reopen in early March, we implemented new safety measures across our stores, offices, and distribution centers to protect both our employees and consumers. Store measures include frequent deep cleanings, providing masks for employees and strongly encouraging them for shoppers, and limiting capacity inside our stores to ensure social distancing. While our digital business led the recovery in mainland China with a return to pre-COVID growth rates in March, we were encouraged by the recovery in our brick-and-mortar stores resulting from these omnichannel and in-store programs. We saw steady improvement in mainland sales from high double-digit declines in February at the peak of our closures, ramping back to positive growth in early May. we expect mainland China to return to pre-COVID growth trends by Q2. Although we expect the shape and timing of recovery curves to look different in each market, our experience and lessons from China are informing our actions across the rest of Asia, Europe, and North America. Despite challenging conditions around the world, I strongly believe this crisis is creating opportunities for our business to emerge leaner, more agile, and ultimately take market share. All of this is enabled by the strength of our balance sheet and our brands, coupled with the ingenuity and commitment of our diverse global teams. Turning now to fourth quarter and fiscal 20 results. While COVID-19 was clearly the biggest headwind we faced this year, we were encouraged by our underlying progress on our next great chapter plan prior to the pandemic. with our business on track to exceed top and bottom line targets. Our brand elevation work, inclusive of product, marketing, and distribution, came together to deliver positive AUR growth across all three regions for both the quarter and the year. And while the future remains relatively uncertain, we are confident that the key strategic pillars of our next great chapter plan still hold true. Let me touch briefly on a few of these areas. First, in our efforts to win over a new generation, we have created unique and lasting connections with consumers over the first two years of our plan. And we believe that now more than ever is the time to build on this momentum and solidify our iconic brand leadership. Globally, Ralph Lauren brand consideration accelerated through the fourth quarter and into April. outperforming our benchmark peers in each region. Our total social media followers surpassed 43 million in the fourth quarter, a double-digit increase to last year. This was led by very strong increases on TikTok, one of the fastest growing social media platforms for Gen Z. While we only launched TikTok last summer, we're encouraged that we've already established ourselves as one of the top three luxury brands on the platform. Going forward, as markets reopen, we will continue to focus on the type of values-based messaging that is resonating with consumers across geographies. This work will be underpinned by the targeted, personalized marketing that we started earlier this year to drive higher quality of sales. Our brands are defined by values like optimism, quality, and togetherness. which are especially relevant in the current context. We will continue to tap into these authentic values to drive momentum across digital and social channels in fiscal 21. Second, we continue to energize our core products and accelerate our high potential underdeveloped categories this year, led by outerwear and denim. Starting with Roth's original vision, it has never been just about one category or one item. but rather it's about a lifestyle, which means we can credibly flex across our breadth of products and categories as consumer behaviors change. And with the emergence of COVID, we have seen consumers gravitate toward the simple and true luxuries in life, family, togetherness, the outdoors. Within our assortments, this has translated to stronger sales of comfort categories, such as loungewear, athleisure, and home, In addition, the competitive advantage of our well-established core is becoming even more evident. Over the course of this year, we had rebalanced our assortments towards core products, which have faster lead times and less markdown risk versus seasonal fashion items that only live for one season. As the industry grapples with excess spring inventory due to COVID, our increased penetration of core gives us more strategic flexibility to work through our inventories and drive AUR growth. With regards to our third key initiative, targeted expansion, we continue to build out our ecosystem approach of a cohesive brand elevating Ralph Lauren experience across retail, wholesale and digital commerce around the world in fiscal 20. Prior to COVID, we opened 25 net new stores and concessions globally. This included 18 net openings in China, our fastest growing market. While we are carefully evaluating our footprint across direct-to-consumer and wholesale channels in this rapidly evolving environment, we continue to see significant long-term opportunities for our brands in underpenetrated markets led by China and parts of Europe. Our fourth key initiative is Lead with Digital. Earlier, I talked about how we accelerated digital and omnichannel initiatives in China this quarter, which are now being implemented in other parts of the world. In addition, we continue to expand our global digital commerce presence across new platforms and partnerships, including our April launch on Instagram Checkout, our first social commerce platform in North America. and we are launching our digital commerce site soon in Japan. We're also making meaningful strides in digitizing how we work, which is an important part of our journey to drive faster lead times, minimize physical waste, and reduce costs. In fiscal 20, we launched our digital library and 3D design studio. This represents a major milestone for our company, as it will eventually enable us to digitize our entire end-to-end process from product development all the way to how we communicate with our consumers. We started this process by digitizing all of our polo core styles, raw materials, and trims onto a digital library. Starting in fiscal 21, we will create 3D prototypes for all of our core polo products, replacing traditional physical samples. We've already created thousands of 3D prototypes in fiscal 20, and it's only the beginning, especially as our teams learn to work in new ways from home. And lastly, touching on our initiative of operating with discipline to fuel growth. A key element of our long-term plan has been to balance growth with productivity, which includes driving a culture of cost discipline across our organization. This has come into even greater focus in the context of COVID as we drive deeper near-term expense reductions and align our cost structure and inventories to a shifting retail landscape. The pandemic has also highlighted the importance of continuing our journey to integrate citizenship and sustainability into our business. We started this fiscal year by launching our design the change strategy, outlining our commitments to create more sustainable products, reduce our overall environmental footprint across our operations, and support and empower our teams and partners around the world. Some key achievements this year included reaching 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. The launch of our Earth polo shirt made entirely from recycled plastic bottles. a new commitment to power all of our globally owned and operated offices, distribution centers, and stores with 100% renewable electricity by 2025. And building upon that, we are now in the process of setting science-based greenhouse gas reduction targets, which we will detail in this June's annual design to change report. In addition, As suppliers around the world struggle with large-scale order cancellations in response to COVID, we reaffirmed our commitment to pay for all finished goods and goods already in production this spring. We are working with our partners to develop new sources of support and long-term job security for factory workers as we look to strengthen our supply chain partnerships, not just for the upcoming season, but for years to come. In closing, Over the course of more than 50 years, our company has endured many challenging times, and the current crisis will certainly not be the last. Our purpose of inspiring the dream of a better life through authenticity and timeless style rings as true today as it did when Ralph started this business. And it will continue to guide us in these moments as we make tough decisions in the short term to protect the integrity and health of our brands, so that we emerge from this challenging period in a position of strength. The foundational work that we have done to put the consumer at the center of everything we do, elevate our brands, and balance growth and productivity, all while maintaining a strong balance sheet, have positioned us well to manage through the current environment. And we are privileged to have one of the greatest assets of all, the strength of our timeless global brand. With that, I'll turn it over to Jane, and I'll join her at the end to answer your questions.