Ralph Lauren Corporation

Q2 2023 Earnings Conference Call

11/10/2022

spk05: Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter Fiscal Year 2023 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 the conference over to our host, Ms. Karina Van Der Gans, please go ahead.
spk07: Good morning, and thank you for joining Ralph Lauren's second quarter fiscal 2023 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. With that, I'll turn the call over to Patrice.
spk03: Thank you, Cori. Good morning, everyone, and thank you for joining today's call. It was great to see so many of you at our Investor Day in September, where we laid out our ambition to be the world's leading luxury lifestyle company. We also outlined our company's next phase of growth, powered by multiple engines, which we are calling our next great chapter, Accelerate Plan. We are off to a strong early start with our second quarter performance, which exceeded our expectations on both the top and bottom line, demonstrating the consistency and momentum of our business around the world. At the same time, we continue to drive a culture of operating excellence as ongoing productivity is an important driver to fuel our near and long-term growth. This resulted in another quarter of double-digit AUR growth and sales exceeding our plan, even as the broader marketplace became more promotional into the fall as anticipated. Also, as we had expected from the start of this fiscal year, the global operating environment has remained choppy across many of our key markets. Our solid performance amidst this backdrop is a credit to our team's agility and execution as we focus on delivering what we can control. And while we expect this choppiness to continue in the near term, we're encouraged that our core consumer remains generally resilient despite the macro headlines, reflecting increasing desirability for our brand and the attractive value proposition of our products. As we navigate the broader macro headwinds, we're focused on driving our three strategic pillars of long-term growth. These include, first, elevate and energize our lifestyle brand. Second, drive the core and expand for more. And third, win in key cities with our consumer ecosystem. And spanning everything we do is our commitment to deliver positive impact in the world across citizenship, and sustainability. Let me take you through a few of our second quarter highlights across our plan. First, on our efforts to elevate and energize our lifestyle brand. As we continue to build our business for the long term, we remain focused on investing in our brand to deliver a differentiated, elevated message to our target consumers. Consumers' perception of Ralph Lauren as a luxury brand remain high at 78%. and their perception of our brand's value for money continue to expand both sequentially and versus last year in the second quarter. This is enabling us to both strengthen our existing relationships and recruit new, younger, high-value consumers around the world, with the growth in our highest-value consumers significantly outpacing our total business. We are leveraging our core brand values and ROI-driven marketing strategy in order to connect authentically with consumers and continue to gain market share. This was evident in the second quarter, where we continued to focus our investments on driving brand desirability across a diverse range of activities. First, we celebrated the energy and optimism of sport through our annual sponsorship of the U.S. Open Tennis Championships. which were particularly thrilling this year with record attendance levels and a 50% increase in viewership. It was hard to miss polo on the court and in the audience, from our official ball person uniforms made with recycled plastic to our timeless spectator style showcased by celebrities like Anne Hathaway, Diplo, Angus Cloud, and Jamie Foxx. We were also proud to outfit Serena Williams in Vogue's September issue, where the tennis legend announced her retirement from the sport. Our 360-degree campaign for back-to-school drove strong conversion in our polo kids' business this fall. Our Class of RL video in August, followed by our Women's Polo ID Handbag video in September, were our top-viewed Instagram reels on our polo handle of all time. We continue to capture key brand moments that resonate with fashion lovers around the world. 2022 was the year of weddings. And we were front and center, dressing Hollywood royalty like Jennifer Lopez and Ben Affleck, along with NBA superstar Kevin Love's wedding to Kate Bach. A few weeks ago, we hosted our first ever fashion show on the West Coast at the Huntington Library in L.A., Celebrities and friends of the brand like Lily Collins, John Legend, Ashton Kutcher and Mila Kunis, Jessica Chastain, Diane Keaton, and newlyweds J-Lo and Ben Affleck joined us in celebrating the optimism and joy of California Dreaming. Featuring our full luxury lifestyle brand ranging from double RL to polo men's, women's, kids' and homes. And as we continue driving our brand leadership deeper into the metaverse, we launched our first collaboration with Fortnite last week in time for holiday. The popular online game has more than 400 million registered accounts with a strong following among 18 to 24-year-olds. The partnership includes a special collection of digital outfits and two special drops of physical product available in our DTC channels and select specialty retailers around the world. Together, these activations are attracting younger, full-price consumers to our business. We exceeded 50 million social media followers globally this quarter, a high single-digit increase to last year, led by Instagram. In our DTC businesses, we added 1.3 million new consumers, similar to recent trends, and our online search trends grew low double digits to last year in Q2, significantly outpacing our peers across our top markets globally, led by polo shirts and fall apparel such as sweaters and fleece. Moving to our second key initiative, Drive the Core and Expand for More. As we work toward becoming the leading luxury lifestyle company, our products all come back to the idea of inviting consumers to step into the world of Ralph Lauren. Ralph and our design teams are capturing the breadth of styles and end uses consumers are looking for today, from a more sophisticated take on casual comfort to their modern hybrid approach to where to work and social gatherings. Starting with our core product, which grew mid-teens in the second quarter, supported by all key categories led by sweaters, seasonal core knits, sweatshirts, and chinos. As we discussed at Investor Day, our core product comprises about 70% of our assortment and is a key competitive advantage in the marketplace. In times of uncertainty, consumers continue to invest in brands and products they know and trust. Our core also establishes the credentials for driving our high potential categories, which include women's, outerwear, and our emerging home business. Together, these high potential categories grew high teens in the quarter. Women's represents our single largest long-term opportunity for market share gains and category growth as a company. We are trading her into the brand including the successful launch of our Polo ID handbag collection this year. We are trading her across by building an offering of essentials like sweaters, sophisticated coats, dresses, and denim that will form the foundation of her wardrobe and expand her lifetime value. And we are trading her up to more elevated product through our hybrid styling as only Ralph can. with women's AUR up 20% in the second quarter. Within outerwear, another high potential category which now represents about 10% of sales, we are establishing our brand as a go-to player for the category. Second quarter highlights included our quilted Beaton and Harper jackets, cotton twill city windbreaker, and Terra packable vest. Our kids' outerwear business was led by the launch of our P-layer outerwear system a versatile collection of functional outer shells and liners constructed of all recycled materials. Other product highlights and special releases this quarter included our U.S. Open collection, which drove our highest sales ever for the event. We also introduced our first U.S. Open sneaker, which sold out in our stores. Our NOLA collection for women, inspired by the culture, climate, and beauty of New Orleans. and our Polo Active Club collection, tailored to next-generation consumers, the digital campaign was brought to life with skateboarder filmmaker Mikey Alfred and his skate crew. From our Polo Bear sweaters to a return of tailored dressing, our teams are consistently delivering the styles consumers are craving in this new normal. Switching to our third key initiative, Win in Key Cities with our consumer ecosystem. We continue to drive our long-term strategy of investing in our key city ecosystems around the world in the second quarter, with a focus on elevating and connecting all our consumer touchpoints across every channel. Each of our ecosystems is led by a digital-first mindset, representing the best expression of our brand through innovative storytelling, dedicated shop-in-shops, and virtual selling experiences. Second quarter sales for our total Ralph Lauren digital ecosystem, including our directly operated sites, departmentstore.com, pure players and social commerce, accelerated to mid-teens growth in constant currency. Our Asia digital ecosystem once again drove the fastest growth globally over a smaller base, up more than 60% in constant currency to last year. Within our own digital sites, Sales grew mid-single digits in the second quarter and more than 40% on a two-year stack. We continued to drive an increased penetration of full-price selling through elevated products and investments in AI-powered targeting and high-quality new consumer acquisition. Growth was also supported by the continued launch of new sites, including the recent additions of Korea and Australia. Our digital capabilities also provide true endless-isle connectivity to our physical channels. Indeed, our stores remain a critical component of our ecosystems to build our brand and consumer engagement around the world. We opened 29 new stores and concessions in top cities globally this quarter, with the vast majority in Asia, particularly the Chinese mainland. Our brand momentum and opportunities in China remain strong, with sales up more than 30%. Performance was balanced across Hong Kong, Taiwan, and the mainland, despite mandatory closures in the period. As you heard at Investor Day, China provides not only the successful blueprint for our elevated ecosystem strategy globally, it also represents one of several geographic long-term opportunities for our brands. with strong brand momentum, a highest AUR in the world, and significant runway for strategic store openings to strengthen our relationship with the Chinese consumer. Looking ahead, the strength we are also seeing across markets like Korea and Australia are just two examples of the diversity of growth drivers that we have around the world. As you heard in September, We remain bullish on our long-term growth opportunities and ability to strategically drive lifetime value across all of our regions. And finally, touching briefly on our enablers. In addition to our strategic priorities, our business continued to be supported by our five business enablers, which we highlighted in September. These include our people and culture, one of our key competitive advantages, best in class digital technology and analytics, superior operational capabilities, a powerful balance sheet, and leadership in citizenship and sustainability. I won't go through all of these in detail again, but in the second quarter, we were particularly proud to be named one of the world's best employers by Forbes. Our people are at the heart of everything we do. They inspire us to be better and to do better. Just a few weeks ago, our teams around the world came together for our first in-person pink pony walk since COVID. We celebrated the Ralph Lauren Foundation's $25 million grant to fund five cancer centers in the U.S. this year. But it was also a moment for us to reflect on our purpose and what we've been through over the past few years as humans, as an organization, and the important role we play in our communities. In closing, we are highly aware of the macro challenges across each of our geographies. Ralph and I are exceptionally proud of the creativity, agility, and execution our teams continue to demonstrate as we effectively navigate these dynamic times. And while we expect the environment to remain choppy in the near term, what gives us confidence to deliver on our commitments are our powerful, authentic brand, Ralph built a brand that stands not just for one product, but a lifestyle, a dream to aspire to. Our multi-pronged strategy with diversified growth vectors across regions, consumer groups, categories, and channels, and our Fortress Foundation. With that, I'll hand it over to Jane to discuss our financial results, and I'll join her at the end to answer your questions.
spk06: Thank you, Patrice, and good morning, everyone. Our second quarter results demonstrate solid progress on our NGC Accelerate plan, exemplifying our team's execution strength across our multiple strategic drivers and superior operational capabilities in the face of further macro challenges and disruptions around the world. Our top-line growth continued with Q2 revenues up 5% on a reported basis and 13% in constant currency. ahead of our outlook. This quarter's performance was once again supported by positive growth in constant currency across all three regions. Operating margin also slightly exceeded our expectations, even with inflationary cost pressures and a more normalized cadence of investments versus last year. We believe our elevated brand, focused strategy, and targeted investments when combined with our culture of operating discipline and fortress foundation enablers, put us in a position of strength to continue to drive long-term value creation through uncertain times. Let me take you through our second quarter financial highlights. Total company revenues increased 13% in constant currency above our outlook, led by double-digit growth in both Asia and Europe. Ralph Lauren digital ecosystem sales continue to outpace our total company rate, up mid-teens in constant currency, on top of a strong compare of nearly 50% last year. This includes mid-single-digit growth within our owned Ralph Lauren digital sites, on top of more than 30% growth last year. We continue to invest in enhanced digital content and storytelling. and to expand the breadth of our offering, including the addition of a home shop in the past year. We are also driving further improvements in the quality of sales, with a meaningful increase in full-price sales penetration and digital margins still strongly accretive to our overall profitability in the quarter. Total company adjusted gross margin was 64.6%, down 270 basis points to last year on a reported basis and 80 basis points in constant currency, in line with our outlook. Second quarter AUR was up 18% on top of 15% growth last year. Continued AUR momentum was more than offset by channel mix pressure from stronger-than-expected wholesale performance and higher product costs, including freight. However, the higher freight spend enabled our improved fall on-time delivery rates and full-price selling to deliver revenue outperformance in the quarter. Compared to fiscal 20 pre-pandemic levels, gross margin was 310 basis points higher in the second quarter. Adjusted operating margin was 13.4% on a reported basis and 16% in constant currency, representing a 110 basis point decline in constant currency as we normalized spending versus unusually low levels last year during COVID. This was ahead of our outlook driven by strong operating expense discipline and productivity measures. Adjusted operating expenses increased 7% to 51.2% of sales, including marketing expense growth of 18% over last year's lower spend. Marketing was 6.8% of sales, in line with our guidance of 6% to 7% for the full year. While we have built increased flexibility across our operating expense structure, we remain committed to investing in our brand, which is driving both near-term top-line momentum as well as longer-term brand equity. Moving to segment performance, starting with North America. The region's pivot to growth continues with second quarter revenues up 3%. In North America retail, comps were flat on top of a strong 31% COVID reopening compare last year. While we were encouraged by positive comp growth in our full-price stores, this was offset by softer performance in our outlets, as anticipated in our guidance. Our outlet AUR up mid-teens reflects our ongoing brand elevation efforts in the channel. However, we continue to see softness in our value-oriented consumers, a sub-segment of the channel. In the current environment, we are focused on communicating our strong value proposition to the consumer, which, as Patrice mentioned, continued to strengthen in Q2. This is supported by our targeted personalized communications. We are managing this channel carefully given ongoing macro headwinds and have assumed increased caution in our fiscal 23 outlook. North America's store traffic trends remain below pre-pandemic levels, consistent with the broader industry, although our foreign tourist sales continue to show improvements to last year. Comps in our owned RalphLauren.com site were down slightly, but increased more than 30% on a two-year stack. While we were encouraged by our increased penetration of full price sales online, this was offset by higher seasonal clearance to keep inventory clean ahead of holiday. In North America wholesale, revenues increased 8% to last year, accelerating sequentially from first quarter trends driven by full price channels. Our strong continued performance reflects our improved brand positioning in the channel, with further market share gains in men's, women's, and kids' versus pre-pandemic levels in key partners. Our sellout grew high single digits to last year on better-than-expected fall fill rates and enhanced marketing. Our AUR at wholesale also grew high single digits to last year as we elevated product, pulled back promotions, and increased targeted communications. Inventories remain well positioned in the channel versus demand, and we have not experienced cancellations to date for either holiday or spring 23. We still expect the channel to be up modestly in the second half of fiscal 23, despite challenging compares from last year and our more cautious approach to spring 23 inventory buys. Off-price sales declined double digits to last year and more than 60% to pre-pandemic levels as we realigned this channel to be an excess clearance vehicle. Moving on to Europe, second quarter revenue was flat on a reported basis and increased 15% in constant currency. Retail comps increased 3% on top of a 27% compare last year. Brick-and-mortar store comps were flat over last year's strong 28% compare, which benefited from the reopening of all markets post-COVID. Total digital ecosystem grew mid-teens in the quarter, including a mid-teen comp in owned digital commerce. While the first-half trends were robust, supported by improved receipt performance, We remain cautious in the second half of fiscal 23 into fiscal 24, given dynamic macro conditions across the region. Europe wholesale grew 9% on a reported basis and 24% in constant currency, driven by stronger fall receipts and fill rates. Our outlook continues to embed a notable deceleration in the second half based on strong compares and macro headwinds broadly across the region. Turning to Asia, revenue increased 17% on a reported basis and 33% in constant currency. Asia retail comps were up 25% with strong growth in digital commerce along with brick and mortar stores over the last year's easier compares due to store closures. By market, every country delivered double-digit growth or higher in the second quarter. This was led by strong continued momentum in Korea, up 26% in constant currency, and sales in Japan, which increased 16% as we lapped COVID restrictions in the prior year period. Following last quarter's heavy COVID restrictions in Shanghai, China returned to robust growth. increasing more than 30% in Q2, despite COVID-related closures in about 35% of our mainland stores. Nearly all of China's stores were reopened by the end of the quarter. Southeast Asia and Australia both grew triple digits in the period in constant currency, lapping pandemic lockdowns in the prior year. Across our regions, Our Q2 performance continued to exemplify the diversity of our growth drivers, not just by geography, but across product categories and channels. Moving on to the balance sheet. Our balance sheet continues to be a cornerstone of our Fortress Foundation, enabling us to balance strategic investments in our brand and business with returning cash to shareholders, even through dynamic times. During the second quarter, we returned approximately $220 million to shareholders in the form of our dividend and share repurchases. We ended the period with $1.4 billion in cash and short-term investments and $1.1 billion in total debt. Net inventory increased 36% to last year, moderating from first quarter trends but strategically higher to support continued demand for our brand and products, earlier receipts and higher goods in transit to mitigate global supply chain delays, increased product costs including freight and cotton, which we will start to overlap in the second half of fiscal 23, and continued elevation of our product mix. We are managing inventories carefully in this dynamic environment. While we still expect inventory growth to remain at similar levels through the holiday, this should become more closely aligned to sales by the end of the fiscal year. We believe our inventories are well positioned, with 70% of our business comprised of core and replenishment product, as Patrice mentioned. This drives greater consistency in our growth, as well as better supply chain planning and visibility, and shorter lead times. Looking ahead, our outlook is based on the evolving macro environment, including inflationary pressures, disruptions in the global supply chain, COVID-19, foreign currency volatility, and the war in Ukraine. We continue to plan across a range of scenarios, and this guidance represents our best assessment of market conditions and resulting consumer impacts. For fiscal 23, we are maintaining our full-year outlook in constant currency, with revenues expected to increase high single digits or about 8% on a 52-week comparable basis. While the first-half revenues outperformed our expectations, this incorporates our more cautious view on second-half revenues given the challenging consumer backdrop in Europe and North America. We now expect foreign currency to negatively impact revenues by approximately 730 basis points, driven by the strengthening US dollar. As a reminder, we still expect fiscal 23 growth to also be negatively impacted by about 100 basis points due to the absence of last year's 53rd week. We now expect operating margins at the low end of our previous range of 14 to 14.5% in constant currency. This reflects a more challenging global macro environment, including our more cautious outlook on second-half revenues. Geographic mix, with a higher sales contribution from Asia this year. And channel mix, including the impact of a U.S. customs delay on select wholesale shipments in Q3, expected to be resolved in the next few months. Foreign currency is now expected to negatively impact operating margins by about 200 basis points. This compares the operating margin of 13.1% on a 52-week basis and 13.4% on a 53-week basis last year, both on a reported basis. Gross margin is still expected to increase 30 to 50 basis points on a constant currency basis. We plan to continue driving stronger AUR and favorable product mix more than offsetting increased freight and material costs. Foreign currency is now expected to negatively impact gross margins by about 170 basis points in fiscal 23. While we still expect input costs to remain structurally higher in the near term, we expect gross margin expansion in the second half of the year as we start to lap higher cost increases. For the third quarter, we expect constant currency revenues to grow in the low to mid single digit range. Foreign currency is expected to negatively impact revenue growth by approximately 780 basis points. We expect third quarter operating margin in a range of 17.3 to 17.8% in constant currency. At the midpoint, this represents a roughly 160 basis point increase to last year, driven by gross margin expansion as we start to lap higher air freight costs from last year. Foreign currency is expected to negatively impact operating margin by about 180 basis points and gross margin by about 170 basis points in the quarter. We still expect our tax rate in the range of 25 to 26% for the full year and also for the third quarter. And we moderated our CapEx outlook to about $250 to $275 million based on the timing of projects. In closing, we are proud of our team's execution agility and progress on our next great chapter accelerate plan this quarter, even as we navigate a highly dynamic global operating environment. Ralph created an iconic brand that inspires people around the world to dream. These qualities hold as true today as they did 50 years ago. With our brand as our touchstone, we will continue to focus on what we can control and leverage our multiple engines of growth across geographies, product categories, and channels. And with that, let's open up the call for your questions.
spk05: Ladies and gentlemen, If you wish to ask a question, please press star then one on your touchtone phone. You will hear a tone indicating you have been placed into queue. You may remove yourself at the queue from the queue anytime by pressing star two. If you're using a speakerphone, please pick up the handset before pressing the numbers. We ask that you limit yourself to one question per caller. Once again, if you have a question, please press star one at this time. One moment please for the first question. The first question comes from Michael Bonetti with Credit Suisse Securities.
spk08: One for each, I guess. Patrice, you outlined the diversified growth engines at the investor day in September. You spoke to them again today. Just given the current macro that you talked to a bit today, which of these drivers are still the most relevant in your view? And then Jane, so North America operating margin compressed quite a bit relative to pre-COVID levels. Can you speak to where you saw the most pressure how much is transitory in your opinion, and how you're planning that North America margin and holiday in the rest of the year. Thank you, and good morning, Michael.
spk03: So clearly the macro pressures are out there, right? Inflation, currency, geopolitical concerns, and so on. And you all know them as well as I do, and they're, of course, top of mind for us. That said, we have a clear game plan, and as you mentioned, multiple diversified engines of growth. What I think is really unique for us is the breadth and depth of these growth drivers. It enables agility. So, you know, in other words, we have this unique ability to lean harder on some areas of the strategy if others are more challenged. And Q2 was actually a good illustration of that, you know, taking it across the different growth drivers. If you could look at it from the regional side, we were proud that all of our regions grew top line in constant currency. and we delivered disproportionate growth, as you heard, in Asia, where we're seeing the strength of the brand across just about every single individual country, whether that's outsized growth in Korea, Japan, Australia, Southeast Asia, and we're particularly proud of the continued growth in China, even with a number of our stores closed, with China up 30% this last quarter. If you look at this through the channel lens, we're encouraged that the strength in our full price businesses is more than offsetting the softness that we're seeing from our value-oriented consumer sub-segment, which is more prevalent in our outlet business. And on the product side, we can flex the breadth of our portfolio, and I think we've demonstrated our ability to dial categories up or down for the consumers as their needs, desires change. For instance, in this quarter, think more sports coats and dresses and less hoodies. So our ability to be agile in this way is a real competitive advantage in a volatile environment, which already served us quite well during COVID. And to this end, we really believe that this is the time to continue to be on offense, recruit new consumers, and continue to take market share. Jane, over to you on North America.
spk06: Okay. So good morning, Michael, and thank you for the question. So in Q2, our margins in North America were negatively impacted by a more normalized level of marketing investments versus last year. We were more cautious last year given some of the pressures in store and coming out of COVID. And so this year really represents a normalization of that spend. So as that spend normalizes in the second half, we would expect that pressure or that leverage pressure from marketing to abate. We also saw more elevated freight expenses in the quarter as we moved to make sure that we could offset receipt delays from global supply chain challenges and have inventory ready for full price selling. We think that that was the right decision. You certainly saw it come through in our AUR this quarter. We're also overlapping some higher labor costs. in the year and expect that to abate as well in the second half. So longer term, we see real opportunities in North America, both on the wholesale side and on the DPC side. We're in the earlier phases of our journey in wholesale, so that's encouraging, as well as some of the earlier phases in outlet where we see opportunities in the margin between full price and our outlet. So we're optimistic and expect that to start to play out in the second half.
spk07: Great. Thank you. Next question, please.
spk05: Thank you. The next question comes from Matthew Boss with J.P. Morgan.
spk01: Great. Thanks, and congrats on a nice quarter. Thank you, Matt. So, Patrice, on current positioning of the Polo brand, what do you see as the global market share opportunity? What have you seen more recently? And what have you seen from recent selling trends, maybe a direct-to-consumer, any change in wholesale orders at all? And then just for Jane, what is your level of visibility on outlets in Europe as we think about the moderation that you've embedded in the guide today?
spk03: So, Matt, what's exciting about this business, candidly, is how fragmented the market is. All right, so our market shares, while we have a sizable business in polo, men's, women's, and kids', in relative terms, is still very small. So we have incredibly long runway when it comes to market share growth across all three businesses. You will have seen in the more recent share reads that we're continuing to grow share on men's. We're continuing to grow share on women's. We're continuing to grow share on kids, particularly strong performance last quarter on kids' share growth. And I think as we look around the world at what Polo stands for, that the type of products that we have within our lifestyle portfolio and what the consumer is looking for right now, we actually feel that we're really in the sweet spot of consumer demand with the breadth of our range and with the overall positioning across men's, women's, and children's. And I think this is as true in North America as it is across Asia, as you heard me refer to performance earlier. as well as in Europe. So I think we're very nicely positioned on Polo. We're going to continue to invest, to bring in more consumers, continue to elevate the positioning across that portfolio. When it comes to your question on wholesale orders, and Jane and I will tag team on that in the second part, there are a few things I would say about our wholesale partnerships right now. First of all, I am really pleased to see how aligned we are strategically with our key wholesale partners. both in North America and around the world. And that's really enabling us to look at things through a similar lens when it comes to growth and value creation. We have seen strong progress this past quarter. You saw North America up 8%, strong results in Europe and Asia as well. We are not seeing any pullback on orders or any cancellation of orders around the world with our key wholesale partners.
spk06: So, I would say, Matt, as we said in the guidance, we are not seeing cancellations at this point, but we are more cautious and we took a more cautious stance on our spring buys given the macro pressures that we're seeing. So, while we're very happy with our position in sales, especially in the second quarter. We wanted to be well positioned for the holiday season, overlapping a challenging previous quarter. We are embedded in the guidance a softer outlook for spring based on those macro pressures. And as we look at, in the second part of your question, the visibility that we have in outlet in Europe, We have seen softer trends, and we've incorporated those softer trends into our guidance for EMEA. It's not a one country, one region story. I do think that there is variability in the marketplace. This quarter, Germany performed quite well. We saw some more pressures in the UK, as you might expect, given some of the inflation pressures coupled with some political uncertainties. Given the fuel pressures and the outlook, we have, we've taken a more moderate view across Europe, but especially in some of the countries like Germany where we expect gas rationing and fuel prices to be an explicit pressure.
spk07: Next question, please.
spk05: Thank you. The next question comes from Gabby Carbone with Deutsche Bank.
spk00: Hi, good morning. Congrats on the nice quarter. So my question is on the promotional environment. It is getting more challenging out there given the high inventory levels across the marketplace. What do you believe is working in Ralph Lauren's favor as you continue to deliver higher AURs? And then just wondering if you could dig into category performance and where within the business you're seeing the strongest demand. Thank you.
spk06: Of course. Thanks, Gabby. So what we're seeing across the competitive environment, we are seeing an increasingly promotional environment as was expected. You can see the results as well as we do. There's excess inventory out there, and many are looking to liquidate. But our long-term strategy, despite the promotional environment, has not changed. We're trying to stay agile and mindful of the competitive environment. But we really have multiple vectors of growth across AUR. I think that that is really serving us well. We saw that show up in our AUR at plus 18% this quarter. And we're really encouraged underneath the covers that despite our higher AUR, within a more promotional context, that we've seen our value ratings from our consumers continue to increase, both versus pre-pandemic levels and sequentially again this quarter. So for us that's a key indicator and gives us a lot of confidence. Now that being said, as we have in the past, we build a strategy that is fully aligned with our long-term strategy, but have some flexibility in it. We are not gonna overly react to the promotional environment, but we are gonna be strategic about it and know that we need to stay competitive. We feel good about that. We feel good about into the second quarter, we've embedded in our guidance the confidence that we'll be able to offset inflation with pricing. And you can see that in our implicit gross margin guide. So feeling good. and feeling good about the consumer, especially because it's really based on our multi-year elevation work that we've done, as well as the reset work we've done that's really put us on a healthier base.
spk03: Yeah, increasing desirability, increasing value equation, those are things that we're driving and we're really pleased to see because that will drive sustained performance. On the product front, Gabby, probably three things I would call out. One is our core is actually doing quite well. It was mid-teens this past quarter. And as we talked at investor day, our core is 70% of the company. It's actually not surprising that it's doing well because I think at times where consumers are more discerning on where they spend their money, obviously they're going to gravitate towards a brand they know and trust and they're going to gravitate towards products they know and trust. So strengthen the core. We've seen really nice performance in our high potential categories. which are up high teams this past quarter in constant currency. Probably the best performer was, again, AutoWear, where we saw a very strong performance. We're also very excited to see the progress we're making on women's across collection, polo women's, and Lauren. And then the last thing I would highlight is the tailored business continues to strengthen and improve. So to my earlier response to Michael's question, we're seeing... More sports coats and less hoodies.
spk07: Next question, please.
spk05: Thank you. The next question comes from Omar Saad with Evercore ISI.
spk10: Thanks for taking my question. Great execution this quarter. I wanted to ask you about some of the new consumers. I mean, the many new consumers who joined the Ralph Lauren franchise during COVID, I think many of them younger. How are those consumers performing today? in this kind of post-COVID era, are they still kind of behaving with not much price resistance to the brand? I'd also love a quick update on the wholesale channel. Just give us a quick reminder on how you and your wholesale partners are managing inventory planning differently today versus in the past as we're seeing some other retailers and brands out there seeing some pockets of blowups in inventory that you're seeming to be able to avoid. Thanks.
spk03: Good morning, Omar. So listen, we're going to tag team with Jane on this one. On the consumer front, so up again 1.3 million this past quarter. Really pleased with actually the makeup of that new consumer cohort. Younger, exactly to your point. Higher value. Less sensitive to promotional activity. More diverse. When it comes to response to our product and AUR, we're seeing pretty consistent positive response to our AUR increases across the different products. And again, it really traces back to what Jane mentioned earlier, which is the progress we're making on brand desirability and value equation. And our value perception scores are consistent across the different segments, and that is relevant for those younger consumers we're bringing in. I expect with the Fortnite partnership that some of you may have seen that we will continue to bring in to these younger consumers as we're able to really connect with them where they play, no pun intended, and where they want to engage with brands. So feel good about that. One data point that we're particularly pleased with is retention. Because it's a wonderful thing to bring in new consumers, but you want them to stay within the franchise so we can drive this concept of lifetime consumer value. And we've seen our retention scores actually strengthen this last quarter across the board, which I think bodes well for for the future?
spk06: So, Omar, I would just call out a few key differences in terms of our inventory planning with our wholesale partners. I think throughout our reset, as Patrice called out, we've had an incredibly productive and transparent dialogue with our wholesale partners and have really approached them with this spirit of partnership. But the focus has really been on sellout performance as the key driver to receipts and expected sellout in the coming seasons. That's been our focus, it's been our mutual focus, and that is a strategy that's really winning for us. In addition for that, we've really tried to pivot the conversations away from VA negotiations towards natural margin sales. accretion for both our wholesale partners and for us. So it's still an emphasis on profitability. It's total system profitability and it's focused on natural margin, which plays nicely in to the AUR and elevation that we're driving in wholesale. And we're doing that together, of course. And then from an inventory position level, we've made a commitment to be in our wholesale partners with inventory in time for the full spectrum of full-price selling. You saw us take some air freight for that, but we're doing it in the spirit of partnership. And I think if you look at this quarter, again, strong sellout, strong AUR performance. That strategy and that partnership of working with them to make sure they have the inventory that the consumer needs has been very productive. We're in good position for holiday. Our inventories are clean. They're fresh. We are above last year's second quarter level because, as you'll recall, we were at an artificially low level given supply chain challenges. But we're still about 20% below pre-pandemic levels in this same quarter versus FY20. We think that's the right level given our strategy, so we feel good about it. Thanks, Omar. Next question, please.
spk05: Thank you. The next question comes from J. Sol with UBS.
spk09: Great. Thank you so much. I have a two-part question. One, Patrice, could you elaborate a little bit on the momentum in China that you've seen? Has it continued so far in this quarter, you know, and given singles days upon us, you know, is that going to be important for the brand? And just maybe just talk about what some of the key drivers have been in China. And then secondly, it seems like the trend in buying back stock has accelerated a little bit from where it was last year. You know, do you expect the trend to continue through the rest of the year? Thank you.
spk03: Good morning, Jay. Listen, we're really proud of the team's execution in China, actually across the entire APAC region. We continue to see near and long-term brand opportunities in China. What's really working well right now, but has been for a while, right? This is not just a one-quarter story, is the fact that the teams are weaving the brand into the fabric of the local culture and translating our core values, our core propositions in a way that's resonating with that younger Chinese consumer both men and women. And they're taking both global programs that they're translating in the market and then also complementing that with local activities, partnerships with influencers and others. The second piece is the product offering and the curating that the team is doing there to really make sure that within the broad range of products that we have, we have items that really resonate with that specific consumer. And I think you know this, Jay, but our highest AUR is actually in China. All right, so that's where we're focusing some of our most elevated products, and we're seeing very good response from the consumer. The last point is around connected retail. And I think China, to some extent, is our poster child on connected retail and bringing all of that together, digital brick and mortar, in a way that is seamless, in a way that really meets consumers' expectations. So those have been the drivers this past quarter, have been the prior quarter, will continue to be moving forward with really a team that's in touch with that local consumer, understands that local consumer, and ensures that we're showing up in a way that's incredibly relevant there. As far as Singles Day is concerned, so Singles Day for us is really more of a brand-building opportunity than it is an opportunity to sell a whole bunch of volume. So our game is not high promotional activity. We're not interested in doing that, and over time I think that strategy has worked for us. It's really about brand exposure, brand awareness, brand desirability, and we're in the middle of it, so we'll see how ultimately all this has played out. But what we've seen in key events leading up to Singles Day is we've actually seen outperformance consistently, so are encouraged with how China is going. But I put it in the context of the broader growth drivers for the company. Of course, momentum in China, but we have many geographical opportunities in addition to what's happening in China.
spk06: On the repurchase side, Jay, you have seen us be more aggressive. Our guidance applies about 450 to 500 million in buybacks a year. In the first half, we've repurchased about $390 million in shares. We tend to be fairly ratable, but opportunistic as well, and given the price where it was, you know, often below $90, we felt that was an outstanding time to buy back our shares, and so you saw us lean into that. Again, I think we're comfortable with our annual guidance. We might be on the high side of that and remain opportunistic, but it's about the right range for us from a buyback standpoint.
spk07: Thank you. Next question, please.
spk05: Thank you. The next question comes from Chris Nardone with Bank of America.
spk11: Good morning. Thanks for taking my question. Can you elaborate a little bit on your guidance for gross margin expansion in 3Q? Is there any way to provide guardrails around the magnitude on a reported basis? And then also tied to that, can you just discuss how your expectations for markdown activity in your DTC channel has changed compared to when we last spoke at your Investor Day? Thanks.
spk06: So our guidance does imply an improvement in gross margin through the second half, notably in the fourth quarter. In the second half, we'll start to lap higher air freight and product cost increases from last year. And while we expect those inflationary factors to still be with us, will be able to move into higher gross margin as we overlap some of the more significant increases last year. And as you look at it from a, roughly a reported basis, I would expect, as we called out in the third quarter, that FX would impact us by about 170 basis points. and we're calling that it'll be about similar for the full year. So FX is a meaningful headwind as we move through this year, but you'll start to see us get actual gross margin improvement in the second half, both on a reported and a constant currency basis. And then the second part of your question
spk03: Markdown. Thank you.
spk06: So, you know, as we look at a more promotional environment, again, our strategy is not changing. We're on an elevation journey. Our long-term pricing strategy is to match our pricing with inflation. As we've guided before, we expect inflation headwinds to be meaningful in the second half, but we're also confident that we'll be able to offset those. those inflation factors. Now that being said, we, while we won't follow the competition down in any way, we will, we have built flexibility in our plan to make sure that we continue to offer a compelling value to consumers and be competitive on a total value basis in the marketplace. Thank you. Last question please.
spk05: Thank you. Our final question comes from John Kernan with Cowen.
spk02: Excellent. Thanks for squeezing me in. Congrats on all the momentum. Jane, how do we think about the implied operating margin expansion for the fourth quarter and then the timing and sequencing of operating margin expansion as we get out of fiscal 23 as some of the one-time headwinds roll off and freight and maybe FX get a little easier? Thank you.
spk06: As we look at operating margin expansion in the second half, it's really predicated on that improved gross margin that I just talked about. That will be the primary driver. You will also see that coupled with SG&A leverage, Now we have taken some revenue caution into the second half, but we will still get SG&A leverage in the second half to drive a combination of operating margin expansion through gross margin expansion and SG&A leverage into the second half. So while some of that revenue due leverage has moved us towards about the 14% constant currency OI margin, we're still very comfortable in our three-year outlook of getting to that mid-teens OI margin. Next year, I'm not a prognosticator on FX, it's been a meaningful headwind, but next year we feel confident in continuing our elevation journey. on some of the margin-rich categories that Patrice called out in terms of outerwear and our core performing well. We're well-positioned with inventory, so we're encouraged by that. Next year, as we think about inflation, in Q1, we'll renegotiate our freight contract. You're seeing that spot market come down. That'll be a tailwind into next year. We'll also have a more normalized cadence of marketing through the year, so you won't see that first half, second half story play out. And we're also seeing a better cotton environment. So some of those material cost headwinds that we're facing now will start to phase out. And remember, we long buy cotton, so I expect that to be in the second half of fiscal 24, but we've got nice layers of cost Reasons for cost optimism, should I say, throughout the year.
spk03: Jane, all right. Well, listen, thank you, everyone, for joining us today. And we look forward to reconnecting in February to share our third quarter fiscal 23 results. And until then, take care and have a great day.
spk05: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q2RL 2023

-

-