Ralph Lauren Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal 2021 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'll 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 first quarter fiscal 2021 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 with that, I'll turn the call over to Patrice.

Thank you, Cori. Good morning, everyone, and thank you for joining today's call. The past few months have marked a period of extraordinary challenge, but also resilience, agility, and hope. Our financial performance this quarter reflects an unprecedented three months of COVID-19-related impact around the world. We're taking the opportunity to leverage this period of disruption to accelerate our core strategic focus areas, drive new areas of growth, and realign our resources accordingly. Building on the strong foundational work our teams had done prior to COVID, over the past three months, they have executed with incredible agility and speed to strengthen our connected retail capabilities, further rationalize our North America brick-and-mortar wholesale presence, and continue to build our brand through personalized consumer engagement and more values-based messaging, all while pursuing our brand elevation journey as evidenced by our strong AUR and gross margin progress. Since Ralph started our company more than 50 years ago, his focus on the long-term, on the spirit of timelessness, has enabled us to not only survive times of uncertainty, but drive lasting, authentic connections with our consumers. To that end, we have a responsibility that goes well beyond the products we sell. And I first want to take a moment to address the persistent systemic racial injustice in the U.S. and around the world. We've been listening to our teams, and a few of the many actions we've taken over the past couple months include, one, We committed to elevate more black and African American talent into our leadership ranks. We will interview two underrepresented candidates for every open leadership role. And we are committing to ensure that people of color represent at least 20% of our global leadership team by 2023. Two, we're examining how we portray the American dream in the stories we tell, the creators we champion, and the faces we elevate. And we've also undertaken a review of our marketing and media partners to ensure that these channels operate in a way that aligns with our values. And three, we're instituting a set of diversity expectations for our partners and vendors to hold our network accountable as well. This is only the beginning. And on behalf of our entire leadership team, Raf and I want to be clear. To our Black and African American colleagues and people of color, both in our company and in our communities, we hear you, we stand with you, and we commit to do better by you. Moving to COVID, we experienced our first full quarter of impact from the pandemic in Q1, with widespread store closures across all three regions. In this difficult environment, our teams launched several new digital initiatives, accelerated new customer acquisition, and delivered compelling engagement and product categories that resonate with consumers today, all while meaningfully reducing our expenses. As I've said before, our objective is to emerge from this period stronger than we came into it. We are constantly learning and taking action to ensure we not only endure through this crisis, but our position to thrive long term. I'll start with an update on our path to recovery in each region. Following our store closures late in the fourth quarter of fiscal 20, our doors were closed an additional eight to 10 weeks across many of our largest markets in Q1. This drove a 57% comp decline in the first quarter, slightly better than our expectations. By region, the largest declines were in North America and Europe, where stores were closed the longest on average with brick and mortar comps down more than 70% in each region. Asia comps were down 33%. Earlier recovery in Korea and mainland China was more than offset by closures in Japan, our largest market in Asia, where the government drove shutdowns in early April. By channel, the path to recovery in each region has been led by our digital businesses, where we resumed targeted consumer marketing and accelerated our online capabilities while stores were closed. Owned digital comps were positive in all regions this quarter, led by 68% growth in Asia and 44% growth in Europe. North America also returned to positive digital comps. Global momentum in our digital channels was followed by our store reopenings across geographies. As of today, we are pleased to report that nearly all of our stores are open in Asia, Europe, and North America. But we are watching resurgences closely, and our priority remains the health and safety of our teams and our consumers. As stores reopened, we experienced significant traffic and comp declines initially, but strong growth in conversion rates and average basket size. In the weeks that followed, We saw sequential improvement in brick and mortar traffic in comps, although both metrics were still negative as we exited the quarter. Our Europe and North America comp declines in June were roughly half the rate we experienced in April. And Asia comps improved from more than 50% declines in April to a single-digit decline in June. While we remain cautious on the pace of recovery as COVID continues to develop around the world, We are encouraged by our progress this quarter on our long-term journey of brand elevation. Enabled by our inventory discipline pre-COVID and early actions taken since the start of the pandemic, we generated double-digit AUR growth and significantly lowered discount rates in our own retail channels in Q1. We also drove lower markdown allowances at wholesale, which brings me to our wholesale performance through COVID. We have experienced a similar trajectory to our own stores, with our wholesale brick-and-mortar partners closed for a comparable period in the quarter. On a sellout basis, we've seen encouraging sequential improvement led again by strong growth in digital. At brick-and-mortar wholesale, our sellout declines have moderated on a month-by-month basis, though we're still down double digits in June. As we noted on our last call, we're taking a number of key actions to ensure that this channel is well positioned as we emerge from the crisis. First, on a sell-in basis, we stopped shipping spring-summer products to nearly all wholesale accounts in March. This enabled our partners to continue selling through products received prior to closures while preventing the buildup of excess inventories in the channel. Secondly, we also proactively reduced our fall holiday orders by two-thirds at the start of COVID in order to reintegrate existing product into upcoming collections. While we continue to diligently manage our inventories through the pandemic, we've selectively filled in key programs to ensure appropriate seasonal assortments. And as of June, we resumed shipping of very limited quantities of replenishment product and are working with our partners to take a carefully monitored approach to fall holiday. While these reductions are driving significant declines in our first half sell into wholesale, they are a critical step to realign our inventories to expected demand and continue enabling our strategy of brand elevation. And third, we're utilizing this period to accelerate shifts in our wholesale distribution, particularly in North America brick and mortar. Working with our partners, we exited more than 200 lower-performing wholesale doors this spring in order to focus on our most productive locations. While these closures represent less than 5% of our sales to the channel, we are working to not only recapture these sales, but also grow share in our remaining businesses. This is a two-pronged approach focused on increasing productivity in the brick-and-mortar doors we are moving forward with and deliberately shifting sales towards digital. To this end, we're activating highly targeted marketing aimed at relevant wholesale consumers, a program we successfully tested prior to COVID. That takes us to my next update, leading with digital. Through the pandemic, we have accelerated the rollout of connected retail programs and leveraged high impact digital marketing as we shift toward a true omnichannel model. New connected retail capabilities in the quarter included fine-in-store, virtual selling appointments, livestream selling, digital catalogs, and expanded buy-online, ship-from-store. Consumer response to these initiatives has been encouraging so far. In North America factory stores, for example, virtual appointments have driven double the spend versus our average consumer transaction. We also continue to roll out targeted personalized consumer engagement, including tailored marketing and promotional offers. This will enable us to drive more effective marketing along with a lower level of overall promotions and better product recommendations over time. While I'm energized by these successful rollouts in the midst of COVID, there remains a lot of opportunity to deepen and expand our digital connectivity and omnichannel capabilities. We will also continue to digitize how we work. This includes the adoption of virtual showrooms, which we successfully rolled out for Men's Purple Label last month, and continuing to expand our digital product creation. Turning now to our marketing and brand elevation journey through COVID. Since the start of our next great chapter plan in fiscal 19, we've added an average of more than 5 million new consumers per year to our brands, to our direct-to-consumer channels alone. This is consistent with our plan to win over a new generation, and we believe we have an opportunity to take share in this environment. In the first quarter, we resumed marketing activities. These included targeted email campaigns with predictive AI and high-reach paid social media aimed at acquiring new consumers, driving traffic and conversion to our channels. And through our campaigns like RL at Home and Pride, we continue to tap into our authentic values like optimism, quality, and togetherness, which are especially relevant in the current context. These initiatives have resonated well with consumers. Globally, our brand awareness and purchase intent have accelerated since the start of the pandemic. And our total social media followers reached nearly 44 million in the first quarter, a 9% increase to last year, led by double-digit growth on Instagram and TikTok. Critically, we have also continued our work to both elevate and protect the health and integrity of our brands through the current crisis, consistent with our long-term strategy. These actions include, one, reducing our total penetration in off-price and bottom wholesale brick and mortar doors, while driving faster growth in our direct-to-consumer and wholesale.com businesses. Two, staying disciplined on inventories to reduce the need for discounting and heavy promotions. And three, we've continued improving our product offering and resetting our price-value proposition across each channel in the marketplace. We were encouraged that underlying AUR growth outperformed our expectations this quarter. reflecting our continued brand elevation efforts, reductions in promotional activity, and strategic price increases. Moving on to our initiative to operate 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 and working in new ways across our organization. Since the start of the pandemic, we have made hard choices to reduce near-term expenses so we can emerge from this crisis stronger than we came into it and pivot quickly back to growth. We're also in the process of reassessing our long-term operating structure to align our resourcing and investments to our strategic priorities and the shifting retail landscape, while also building more flexibility into our cost structure. Jane will discuss this in more detail in a moment. And lastly, I want to highlight the continued importance of our journey to integrate citizenship and sustainability across our business. We were proud that Parity.org recently named us among the best companies for women to advance. And I hope you've all had a chance to check out our annual Design the Change report published this June. The report delineates clear target dates around our commitments. new science-based greenhouse gas reduction targets, and our new commitments to reducing water consumption across our value chain in partnership with the World Wildlife Fund. In closing, Ralph and I are proud of and grateful for the dedication, commitment, and agility our teams are demonstrating as we navigate through highly challenging conditions around the world. I've said this before. but I still strongly believe this crisis is creating opportunities for our business to emerge leaner, more nimble, and ultimately take market share. We're using this time to proactively deliver the products, channels, and authentic brand connections that consumers crave in this rapidly evolving environment. And while the effects of the pandemic appear to be far from over, We have strong foundations in place to manage through the continued uncertainty, including remote and flexible working, new connected retailing capabilities, a strong digital marketing proposition, and a clear inventory management strategy. And we are privileged to have one of the greatest assets of all, the strength of our timeless global brand, which we will steadfastly protect and build through this period and beyond. And before I hand it off to Jane, I'd like to extend a warm welcome to Darren Walker, who joined our board of directors last week. Currently the president and CEO of the Ford Foundation, we believe Darren's experience in philanthropy and business will not only complement our board's existing expertise, but will bring important new perspectives. I'd also like to thank the parting directors, Joyce Brown and Robert Wright, for their leadership and valued contributions to the company over many years. With that, I'll turn it over to Jane to discuss our financial results, and I'll join her at the end to answer your questions.