Ralph Lauren Corporation
Q3 2021 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third Quarter Fiscal 2021 Earnings Call. . As a reminder, this conference is being recorded. I'd now like to turn over the conference to our host, Ms. Corinna Van Ghinst. Please go ahead.

[Corinna Van Ghinst:]

Good morning, and thank you for joining Ralph Lauren's Third 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 1 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.

[Patrice Louvet:]

Thank you, Cory. Good morning, everyone, and thank you for joining today's call. Our third quarter performance reflected strong underlying progress on our path to quality, sustainable long-term growth. Overall, revenues improved sequentially and were in line with our expectations. Stronger-than-expected recovery in Asia was offset by the impact of continued COVID-19 resurgences across Europe, while North America was roughly in line with our expectations, even with additional COVID pressures. Meanwhile, our focus on brand elevation, improved quality of sales and cost discipline drove better-than-expected gross and operating margin expansion in the quarter with double-digit AUR growth and digital profitability, exceeding our expectations. And while COVID is likely to remain a near-term headwind, there is reason to be hopeful as we start the new year and vaccines begin to roll out. Ralph and I are incredibly proud of the dedication, resilience and agility our teams have shown in not only managing through the pandemic, but also positioning the company to emerge stronger than we came into it. As part of this, we balanced reset activities with an acceleration of our core strategies, including strengthening our brand and bolstering our marketing and new customer acquisition, expanding key categories in international markets, scaling our connected retail offerings globally, continuing to prune non-elevating distribution and further realigning our cost structure. These actions are consistent with the 5 strategic priorities that we laid out as part of our long-term plan prior to COVID. These include

[Jane Nielsen:]

Thank you, Patrice, and good morning, everyone. Our third quarter results demonstrate solid execution of our strategy through this holiday season in the midst of a still challenging operating environment. We continue to focus on what we can control in this dynamic context and on positioning the company to accelerate value creation as we emerge from the pandemic. This includes investing in our powerful lifestyle brands, our digital transformation and maintaining a strong balance sheet. While also realigning and streamlining our operational and expense structures. As Patrice mentioned, today, we announced the second round of actions related to our fiscal '21 strategic realignment plan. This stage focuses on realigning our real estate footprint to our future strategic priorities. This includes

[Operator:]

. Our first question comes from Alexandra Walvis with Goldman Sachs.

[Alexandra Walvis:]

So my first question is on the strength of the brand. We're year into the pandemic now and you've clearly expanded digital capabilities, you've taken meaningful steps to reset distribution cost structure. But if we look at your most important asset, the Ralph Lauren brand, can you talk to what gives you confidence in your brand health now? And is this where you want it to be in order to support strong growth coming out of the pandemic? And then my second question, relatedly is on how confident you are that we should see AUR growth in F '22 off the higher AUR base in a backdrop that may well be a little more promotional than during the pandemic?

[Patrice Louvet:]

Well, thank you for your question. I'll take the first part, and then Jane will cover your AUR question. So elevating our brand and attracting high-quality new consumers across all three regions, particularly in the U.S. Our top priorities, and listen, will continue to be top priorities as we come out of COVID. The general message is we're making strong progress. A few points to kind of support that. First, our data shows that our brand has strengthened through the pandemic. Specifically, if you look at brand awareness and purchase intent, they're both up versus a year ago and continuing to progress quarter-on-quarter, with particularly encouraging progress among next-gen consumers and women. The second point is that we are acquiring more customers on our digital sites. We've seen 38% growth in North America, 79% growth in Europe and more than tenfold growth in Asia in terms of new customers on our sites year-to-date. This is clearly on the back of the deliberate targeted marketing plans that we've put in place across the regions. And it's also worth noting that we're not just driving higher traffic to our digital businesses, but we're also seeing -- and I think you heard it in Jane's remarks, an increase in our full-price sales. So we're bringing in new consumers that are higher ticket and higher margin. And I think that bodes well for the future for us. The third point is really around our social media presence, which continues to deepen and grow around the world, our followers reached a record high 45 million this quarter, and we're especially encouraged by our progress on key platforms like Instagram and TikTok, YouTube, Kakao On-Line in Asia, where, as you've likely seen, we've developed some pretty unique partnership, including our recent Bitmoji Snapchat partnership. We're also driving brand heat through product as you may have seen our recent street work collaboration with Clot, which is a brand founded by Edison Chen and Kevin Poon, based out of Hong Kong. There's a lot of excitement around these products. They virtually vaporized as we put them up for access to consumers within a few seconds, they were sold out. And now you can add them at multiples of the retail price on types like StockX. So we've been happy with the response we've seen and the contribution to overall brand heat. All this, importantly, is enabled by our strong balance sheet. Jane just touched on that, which has allowed us to continue driving our strategic priorities, like brand elevation, like investing in marketing, and also reinstate our dividend in the coming quarters. So together, if you put all these elements together, this gives us confidence that we're investing in the right places to elevate our brand and drive interest and heat particularly with the next-generation that we're specifically focused on. And then on your AUR question, I'll let Jane answer that.

[Jane Nielsen:]

Sure. So Alex, just we are confident in our AUR growth. Certainly, because it's led by brand elevation and that brand elevation is something that we focused on this year. And are committed to continuing. And just as I look in the near term, even into Q4, we're expecting AUR growth about comparable to what you saw in Q3. But even as we come out of the pandemic and looking forward into fiscal '22, while we're not guiding, we do expect to comp the underlying AUR growth. Now we know that there have been unusual mix benefits during COVID. With many of our stores and outlet doors closed during the cove period that lifted AUR. We've tried to be clear about calling that out and the impacts of COVID to our best estimates were that in Q1, underlying AUR growth was about high single digits. And in Q2 and Q3, it was in the low to mid-teens. So that is what -- that's the basis on which we expect to comp. And what we really feel good about is the long-term guidance for AUR as we move forward, which is in the low to mid-single-digit range. Because our long-term drivers are still intact. As I said, elevating our product, our marketing and shopping experiences, which we've been talking about this year, all focused on elevating our brand. That we have the capabilities and an increasing number of tools that have proved out as we drive personalization in terms of managing promotional levels, better promotional levels, more personalization, more targeted promotions that have been very favorable in terms of driving AUR. Strategic price increases. It's a muscle that I think we started in F-- in over a year ago, starting in our factory channel, and you can see that carries through today where we've seen sort of a mid-teens price increases in our outlet channels. As we elevate that product, put more quality in, and that's been -- we feel that we have more to go on that journey. And then, of course, there will be post-COVID continued mix benefits. As structurally, our international businesses grow faster as we move to be a more DTC oriented company that will also drive overall AUR. And certainly, the work that we've done in digital on AUR will continue to pay dividends into the future. So we feel really good about our trajectory. Understanding there will be some optics coming out of COVID. But I think we've been clear on the base and where we go in the future.

[Operator:]

The next question comes from Michael Binetti with Crédit Suisse.

[Michael Binetti:]

Jane, if you could just clarify. Jane, could you clarify, you mentioned shifting to offense and starting to build inventory a little to be preparing to fill demand as stores start to refill here. But you did comment on continuing to elevate the brands and your AUR commentary reflects as well. You mentioned focusing on starting '22 strong. And since that's just a few weeks away for you. Can you speak to where we'll see the most important inflections in the recent P&L trends, as you transition through into the early part of 2022? And then we're starting to hear some commentary around the sector from management team's thoughts on when they think they can approach pre-pandemic metrics. And as we look at consensus for your company, the general assumption is that the combination of all the work you've done on quality of sales to boost margins, well over $2 of net EPS, you've added from the SG&A work you've done. Consensus still has that combination landing at earnings below 2019 levels in the second half of this calendar year, so September and December quarters. I'd love to hear your thoughts on that if you have visibility. So just help us a little bit because of the fiscal year-end that you have here in March?

[Jane Nielsen:]

Sure. So let's peel that apart. So starting with inventory. As we do look at while we're very clear that there is some near term disruption, which likely could last into our fiscal '22 from COVID. Our long-term optimism and especially in the second half of our fiscal year is high. And so as I think about what we're going to be overlapping, we expect that store comps will be meaningfully better as we move through the year. And certainly, as we move through the fiscal year into the second half. And that's really contingent on the vaccine and some of the abatement in the virus, which we believe in. And so we do believe that store comp will continue to be a positive factor as we move through fiscal '22. Certainly, our wholesale businesses have not been immune to the factors of COVID. And I think that as we emerge from the crisis, you'll also see we've been very tight on our sell-in. And sell-in has been under sell-out. And so there are good inventory replenishment needs. In the wholesale channel, especially as like our own channels, they come out of COVID. We feel -- our inventories were down 30% in North American wholesale. They have been sequentially down in Europe. So we feel good about our position. They're ready for fresh product, which we feel will be able to fulfill and expect momentum coming out of there. And of course, the investments that we're making in digital, as we look across our total digital business, we expect acceleration global with our total digital business in Q4. And certainly, as we finish the cleanup in North America, and you can see that domestic consumer up high teens this quarter, will be done with a lot of the daigou cleanup, and you'll start to see that acceleration coming into fiscal '22. Those are the key drivers that give us optimism in '22. We do feel comfortable about our savings estimate of 100 -- the majority of $180 million to $200 million that we announced in the first realignment plan flowing through to be an EPS driver. And with that, our additional savings that we announced today will be used to accelerate and restart all those drivers that I talked about on sales to make sure that we have the investment funds to continue our digital expansion, elevate our brand, focus on marketing, which you've seen us approach with optimism in the fourth quarter, the marketing be up 50%. Those are the drivers. The question is timing, but we do feel confident about, certainly in the back half of '22.

[Operator:]

The next question comes from Matthew Boss with JPMorgan.

[Matthew Boss:]

Great. On North America, Patrice, maybe what inning would you peg your strategic quality of sales actions in today? And then, Jane, on SG&A, how should we think about incremental cost savings going forward relative to today's announcement, should we think about incremental cost savings from here reinvested back into the business? And if so, how would you rank more offensive investments to drive top line from here?

[Patrice Louvet:]

Jane loves your baseball analogies. So listen, I think there are 2 streams to think about when we look at North America. The first stream of work is the hard resets that we are doing on off-price penetration, shutting down over 230 wholesale doors and the daigou customer on ralphlauren.com North America that Jane referred to. On that one, assuming the game ends in 9 innings and doesn't go over time, we're likely at inning #7 on those. So we expect -- we probably need a quarter -- one more quarter, Q4, maybe a bit of Q1 to have that completed across these 3 areas. And then on the second stream, I'll be honest with you, I don't think the game ever ends on brand elevation in North America. I think we want to continuously elevate our product, elevate how we show up in marketing, elevate how we're distributed. And I think that's been part of the success of this brand historically, and that's something we will continue to drive. So I probably have us on the first inning with a never-ending game for that work stream.

[Jane Nielsen:]

Just on the SG&A, Matt, what we feel good about is that our realignment plan is on track. We feel confident about the savings from the org restructure that will flow through fiscal '22, as we've said. And then as you think about real estate, as we called out in the announcement today, the benefits of real estate will start to be realized as we move through fiscal '22. So all of those benefits won't be realized in fiscal '22, but we'll start to realize them in fiscal '22. And that -- and we will use those savings to drive important investments in our business. Like digital, like the work that we've been doing in personalization, which you've seen drive tremendous growth in Europe and is starting to bear fruit in our domestic business in North America. Certainly, investment in China, where this year alone, we've opened 85 stores. We intend to grow stores -- new stores. We intend to continue that journey as we move forward. We believe we have distribution opportunities in Asia and also more targeted distribution opportunities in Europe and North America, and we will use the savings for that as well as increased marketing. We know that our brand and the elevation of the brand is so much of what is pulling the whole ecosystem up. So continuation of increased marketing across our brand.

[Operator:]

The next question comes from Paul Lejuez with Citi.

[Paul Lejuez:]

Just how you're thinking about the range of top line outcomes in F '22, maybe relative to the pre pandemic period? And what sort of flexibility do you have in the P&L if top line is slower to recover just as I hear you talk about some of these expense initiatives. Just wondering how much you can flex those if need be as you think about F '22? And then just curious if you can share anything about what you see in the European digital business when stores close relative to how that digital business performs when stores are open?

[Jane Nielsen:]

Sure. So Paul, you -- what we have seen -- let me start with the second part of your question, and then I will go to flexibility and inflection in FY '22. So what we have seen in our Europe business specifically is that when the stores close, we do see an inflection in our digital business. Although it's not a one-for-one offset. So you can just see by this quarter with the shutdowns in our store in Europe in November and then into December, that suppress the total -- the total Europe growth, but we did see an acceleration in digital and high-quality digital growth. So we were very pleased with our reduction of discount rate in Europe and the very strong growth that we reported in digital in Europe. As I think about the volatility as we move into fiscal '22, I think you're right, it's predicated on COVID and the rollout of the vaccine. And I think what you've seen us in the past is moving with agility. And as we look at our expense structure, we've been able to reinvest in the business as we are in the fourth quarter. Elevate marketing, but do so on a timed basis and investing into high ROIC categories. And I think that, that gives us protection on the downside and protects our profitability as we are very focused on the return of that marketing. We will also have more pricing flexibility as we move forward, should there be volatility in the top line. And those are the primary factors that we'll look at as we move forward and understand the variability and volatility. Also, just a shout out to our supply chain who, given the high variability of demand and inventory planning has been able to replenish and shift by category across our broad range of categories, and that's given us the capability to meet demand even though it's been highly variable based on COVID. So that gives us a lot of confidence as well.

[Patrice Louvet:]

And Paul, the one element I would add on the European digital commerce performance, to Jane's point, is the fantastic work our teams in the markets have done relative to connected retail capabilities. I think pretty soon, we won't be talking about digital and brick-and-mortar separately because they're now so intertwined. But as you look at these new ways of selling in the context of connected retail, we're expecting that to be an accelerator for our digital performance. And so a lot of that's been pioneered in Europe. A lot of that is what you see in these very strong numbers this quarter, where we're up 60 -- I believe 68% digital commerce in Europe. And I think that is a sustainable set of capabilities that will help us continue to accelerate progress on that front.

[Operator:]

The next question comes from Ike Boruchow with Wells Fargo.

[Irwin Boruchow:]

I guess, Jane, a question for you, similar to Matthew's question on kind of where the earnings base shakes out over time. I guess I wanted to focus really on the U.S. wholesale channel. So I believe pre-COVID, you were kind of doing $1.5 billion of U.S. wholesale. You've got initiatives in place to shrink the door count and does it rationalize some of the lower margin revenue streams you had there? I guess when all is said and done, and we're on the other side of this, how much of a smaller wholesale business do you expect to be managing, if at all? And then how does that kind of translate into operating margins? Are you planning a smaller, more profitable channel? Are you kind of trying to get back to where you were? Just kind of curious at a high level how you think about it?

[Jane Nielsen:]

Yes. So just Ike, as we step back, I really believe that we should look at wholesale in 3 buckets. Obviously, this year, we announced a significant cleanup in North America wholesale, where we exited about 230 doors in North America, wholesale, will be through that. So good foundation, clean foundation. And moving from there, we know and we see we have share opportunities in the doors we are in. And so continued momentum from share. Even this quarter, we saw share gains in Men's, in Kids and Home in the wholesale channel. So with that reset base, there's no reason that we -- and we are focused on comp growth in North America wholesale. And the Wholesale Dot Com is an area of wholesale that we're very optimistic about. And so we expect to grow wholesale in their digital -- in the digital business. And then we've been clear that off-price, and especially this quarter, off-price was down meaningfully. Our full-price wholesale on a sell-in basis and sell-out basis were -- in a sell-in basis was much better than what we reported in aggregate for North America wholesale. I expect the off-price cleanout as we exit Q4, to be about done, and it will be repositioned to what it should be, which is a channel that we can liquidate excess in. And so that pressure that you're seeing from off-price will abate in fiscal '22. So we feel good about the foundation of where we'll be in wholesale. It will be a smaller channel. As you know, we announced the change of Chaps to licensing. Chaps is almost a completely wholesale business in North America. And so you'll see that part shrink the wholesale base. But we feel confident about the value creation of that change. And we feel good about the positions that we're in and how we move forward and focus on growing share in that channel and maximizing pure plays in digital.

[Operator:]

Our final question comes from Simeon Siegel with BMO Capital Markets.

[Simeon Siegel:]

Jane, sorry if I missed it, could you drill down on the 900 basis points of own digital operating margin improvement? I mean, that's really impressive for a generally variable expense business. So maybe how much of that is gross margin, AUR or just how should we think about where the improvement came from and where we go from here?

[Jane Nielsen:]

Yes. Sure. So the primary driver of our digital margin reset was our pricing and product mix strategy. So we are elevating the mix, our product mix on our digital sites. We are pulling away from -- especially in North America from those daigou discount-oriented customers. We're recruiting new customers at a higher gross margin, a bigger basket. And so that's driving a great deal of our margin expansion as well. It's primarily coming from those resets, pricing, quality consumer recruitment. And we are getting some leverage on our fixed cost base, which is well built out. And is ready to be leveraged from a growth standpoint. So we feel good about, it has multiple drivers across all the vectors. And the most work has been on the North America site. That's where we've seen the biggest ladder up in this quarter in terms of digital margins, but tremendous progress in Europe over the past over the past six quarters. And Asia, with the reboot of Asia, started off with quite healthy margins and continues to grow those margins largely on scale.

[Patrice Louvet:]

And Simeon, I would add from a key deliverable for us this past year, we really were very focused on step changing profitability of digital. Because there's no interest in driving digital, or frankly, if it's going to be completely dilutive to your overall business. And we know it is the channel of the future. So as a team, we really focused on not just improving by 10 basis points, but the step change that you saw here, which is not a one-timer, this is sustainable because we're now getting to a point where our own digital operations are accretive to our overall company margins. And therefore, we have every incentive to follow the consumer who wants to actually shop on that channel. So excited about the progress and expect this to be sustained for us moving forward.

[Jane Nielsen:]

I love the new consumer metrics and the new consumers that we're recruiting. We're really excited about that as an investment opportunity for us. And just to -- I know I mentioned it on the script, but we're really proud that full price billing on our site up over 130%.

[Patrice Louvet:]

Good. So that's a good place to mark and close. Thank you, Simeon. So thanks, everyone, for joining us today. We look forward to sharing our fourth quarter and full year fiscal '21 results with you in May. And in the meantime, please stay safe, and have a great day.

[Operator:]

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.