Ralph Lauren Corporation
Q1 2018 Earnings Call Transcript

Published: 8 Aug 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal 2018 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mrs. Evren Kopelman. Please go ahead.

[Evren Kopelman:]

Good morning and thank you for joining Ralph Lauren's first quarter fiscal 2018 conference call. With me today are Patrice Louvet, the company's President and Chief Executive Officer; and Jane Nielsen, Chief Financial Officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to one per caller. During today's call, we will be making some forward-looking statements within the meaning of the Federal securities laws, including our financial outlook. Forward-looking statements are not guarantees. And our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties. Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings. To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release and to our SEC filings that can be found on our Investor Relations' website. And now, I will turn the call over to Patrice.

[Patrice Jean Louis Louvet:]

Thank you, Evren, Good morning, everyone, and thank you for joining today's call. It's great to be at the company and partner with Ralph and the entire team. The last few weeks have been exciting for me as I spent time in the marketplace and had the chance to meet with many of our team members as well as our consumers, wholesale partners and key industry opinion leaders. What is clear to me is that we have an iconic brand, a passionate team and a lot of opportunity ahead. Seizing our opportunity requires us to evolve how our iconic brand is experienced and expressed to win the hearts and minds of consumers globally. It's something Ralph and I are deeply committed to. As you can see in this quarter's results, we're making good progress with setting a strong foundation for future growth. The team continues to deliver on our commitments to improve quality of sales and distribution, with increased efficiency. On my first call with you, I thought it would be valuable to share what motivated me to join the company, my observations to-date and our areas of focus to get back to growth and value creation. Then, I'll turn it over to Jane to walk through the details of the quarter and our guidance. At the end, we'll take your questions together. To start, I've long admired Ralph and I am honored to partner with him. We are both committed to preserving the essence of our brand, while actively evolving it to renew long-term growth, profitability and returns. To achieve that, Ralph and I are clear on how we will partner together. Ralph is the Chief Creative Officer in charge of the creative brand aesthetic decisions. As CEO, I will lead the company's strategy, execution and business results. Ralph has already been a great partner, and I could not be more enthusiastic about our collaboration. I appreciate the confidence and latitude he has given me in leading this company forward. During this time of transformation for our industry and our business, I am confident we will accomplish a great deal together. Our opportunity is to take an iconic brand and advance it in ways that drive new growth and value in an industry that is undergoing unprecedented change. Our experiences and expertise will be a powerful and winning combination. People who know me well describe me as a builder of both brands and teams. Building up people and teams to accomplish amazing things motivates me. I believe this is one reason Ralph and I click. He was looking for somebody to come in, understand what makes this place so unique and special, and build boldly from that point. I am also committed to objectively evaluating the business and identifying both the strengths on which we can build and the areas that need focused attention and improvement. I am passionate about building brands that consumers love. To do that, we must understand the target consumer, his or her interests and motivations, clearly define what the brand stands for in today's world and then, most importantly, connect the two in a way in which the brand becomes irresistible. To say the retail industry is at an inflection point would be an understatement. Technology has transformed the way consumers shop and connect with retail brands. Retail store closures are near a 20-year high as the fundamental shift to e-commerce continues. To stand out and compete in this environment, consumers expect an omnichannel shopping experience that's unlike anything they've seen before. While not easy, I see it as our job to redefine the shopping experience of the future. All these changes are creating challenges, but they're also creating opportunity. The Ralph Lauren brand was built on a belief that we all dream of living a fulfilling life, a life that makes you feel good. I think that is a universally-aspirational ideal. It's an idea that transcends boundaries and generations. And it's as relevant today as it has ever been. Our role is to make it feel vivid and exciting today for consumers everywhere, from Boston to Barcelona to Beijing. We are starting with a great foundation. Our brand is iconic and the underlying fundamentals of our business are solid. I am focused on continuing to execute on the operational improvements that were part of the Way Forward Plan, and the team is making good progress in driving efficiencies and improving the quality of our sales by reducing excess discounts, excess inventory, supply chain lead times, unproductive distribution in SKUs, as well as aligning our creative more closely with the consumer. Further, I've been incredibly impressed by the caliber and dedication of the people here at Ralph Lauren. We have a team of talented and hardworking employees who are eager to get back to winning. And with their enthusiastic support, we will push ahead to create more value for our shareholders. It is too early to talk about the evolution of our strategy; however, as I start to work with the team, we have a strong focus on growth that creates value. We are focused on exploring our opportunities in becoming more digital and more global, as well as how we evolve and elevate the offerings and experiences we provide to consumers in order to drive growth. It is important to note that we will balance driving growth with improving efficiencies. We aim to increase our productivity by continuing to simplify and streamline our operations company-wide so we can invest in growth. With the consumer as our touchstone, we're also going to focus on how we work as an organization, so our employees are more empowered, more connected and more energized. Getting culture right is critical for us. In closing, as I shared earlier, we are eager to evolve how the brand is experienced and expressed to win the hearts and minds of consumers globally. While our transformation is in its early days, we are progressively strengthening our position to create new value and renew long-term growth. With that, I'll turn it over to Jane to walk you through the details of the quarter and I'll join her at the end to answer your questions. Thank you,

[Jane Hamilton Nielsen:]

Thank you, Patrice, and good morning, everyone. I'd like to start by saying that our entire team is thrilled to welcome Patrice to the company. He joins at a critical moment when we are executing on initiatives to strengthen the foundation of our business that will allow us to position for future growth. Our first quarter results demonstrate the strong and continued progress we are making in this area. As you know, last year, we started the important work of enhancing our operational efficiencies by improving our cost structure, evolving towards a demand-driven sell-through culture and improving our quality of sales and distribution. As we started this fiscal year, we are encouraged by the progress in the first quarter and are confident that our efforts are the right ones to lay the groundwork for our future growth initiatives. Let me take you through the key strategic and financial highlights of the first quarter. This quarter, we continued to deliver against our strategy to drive quality of sales and elevate our brand. Key areas of operational focus were

[Operator:]

The first question comes from Ike Boruchow with Wells Fargo. You may ask your question.

[Ike Boruchow:]

Hi, good morning, Jane, and welcome, Patrice.

[Jane Hamilton Nielsen:]

Morning.

[Ike Boruchow:]

Hey. Patrice, so you're inheriting the company's Way Forward Plan. I guess my question is, will you continue to implement the plan as it currently stands or maybe after taking a hard look at it, do you see any opportunities to tweak the original strategy in any way?

[Patrice Jean Louis Louvet:]

Good morning, Ike, great question. Listen, I think the Way Forward Plan is an operationally sound way to run the business. So, we remain fully committed to it and trust that we're not going to miss a beat when it comes to executing both the operations and the efficiency interventions that we've called out. I'm actually very proud of the team's progress with setting a strong foundation for future growth, whether that's the work on improving the quality of sales or distribution, whether that's the reduction in excess inventory and SKUs and also the progress that you've seen on efficiencies. Now, we also know that if we look at the future, we're going to have the balance progress on productivity with revenue growth. And so moving forward, while we'll continue to drive the operational and efficiency elements of the Way Forward Plan, we're going to put more emphasis on the revenue growth dimension of our program moving forward. And specifically here, I'd call out a few things. One is we're exploring our opportunities to become more digital. We're also looking at our opportunities to be more global, because this brand obviously has incredible relevance around the world. And then Ralph and I are very committed to make sure that we evolve how this iconic brand is expressed, how it's experienced to really win the hearts and minds of consumers around the world. So that's kind of the focus on the growth pieces, early thoughts. We will obviously continue to drive productivity, and the focus here will be on continuing to simplify and streamline our operations company-wide. And then, the focus on how we work is also important to me and to Ralph and to us as leaders of this company. So you'll also see us put more emphasis on new ways of working. Initial thoughts are going to be around making sure our teams are more connected, our teams feel more empowered and, ultimately, we increase the level of energy that we have across all 23,000 employees of the company.

[Evren Kopelman:]

Okay, next question, please.

[Operator:]

The next question comes from Michael Binetti with UBS. You may ask your question.

[Michael Binetti:]

Hey, guys. Good morning. Congrats on a nice quarter and nice to hear your voice on the first call, Patrice.

[Patrice Jean Louis Louvet:]

Thank you.

[Jane Hamilton Nielsen:]

Hi, Michael.

[Michael Binetti:]

Let me just ask, I guess, two questions. First on the guidance for the year, Jane, it looks like with the second quarter, the EBIT margins are going to be up about 80 to 100 [basis points], if we ignore currency. But then, if we just back out the second half from the year, it looks like the guidance [ph] is for the (33

[Jane Hamilton Nielsen:]

Well, certainly, I'll try to unpack your question, Michael.

[Michael Binetti:]

Thank you, Jane.

[Jane Hamilton Nielsen:]

But certainly, as I look near-in for the balance of this year, as I said, we're very comfortable with our guidance. As we look at the top-line, there's no change to the top-line. We do see gross margin as we move through the second half of the year that will have at least 100 basis points of gross margin expansion. Now, with the guidance that we've given in terms of what SG&A will be down in the second quarter, we see operating margin expansion coming out of that. As we move into the second half, we'll have that continued 100 basis points of gross margin, but we expect that our SG&A will be flattish. And with that, that brings us to our overall guidance that you will see some compression on a constant currency basis in operating margin. As we look longer-term, I think you've heard Patrice very, very clearly and passionately state, we are looking to balance efficiency with getting back to growth, but it has to be sustainable, profitable growth. And, at this time, we're not ready to call the inflection point precisely. That is the question. We do think that we're building a plan that will return us to growth, and we'll come back and give you more specifics on the timing as we move forward.

[Evren Kopelman:]

Okay, next question, please.

[Operator:]

The next question comes from Omar Saad with Evercore ISI. You may ask your question.

[Omar Saad:]

Thanks, good morning.

[Jane Hamilton Nielsen:]

Morning.

[Omar Saad:]

Good morning. I wanted to ask you about social media. I think, Jane, maybe you mentioned it in one of your prepared remarks and I'd love to get Patrice's views on the topic as well. It seems like it's a growing channel for connecting with consumers and a marketing channel, if you will. How are you guys thinking about it and other digital marketing activities? And, Jane, I also think I heard you mention, I don't know if it was accelerating growth or strong growth from the digital platforms of some of your wholesale partners. I thought that was an interesting comment, given the just general challenges of the wholesale channel. Thanks.

[Patrice Jean Louis Louvet:]

So, Omar, nice to meet you on the phone. Let me maybe just step back on how we look at e-commerce and online brand-building and, hopefully, that will address both of your questions. So first of all, the way we look at the e-commerce opportunity is really through three lenses. The first one is our own site, and I'll come back to that in a second. The second one is our retailers' sites. And then, the third one are the pure plays. So if you look at the plan on our own site, I think this has been talked in the past, but we're in the process of completely transforming our RalphLauren.com site. And we expect by the end of the fiscal year to have something that we're excited about, both in terms of brand-building and in terms of e-commerce, right. The expectation really for the team is this site needs to be our flagship. It's the kind of flagship store of the future, and it hasn't been that in the past. So there's an important pivot there. And then, obviously, we need it to be an e-commerce machine. As far as our retailers' .com operations are concerned, I've had the chance with my first couple of weeks on the business to actually meet with the CEOs of a number of our top retail partners. And it's actually been exciting to see the focus they're putting on e-commerce and some of the numbers some of them are posting, right, which is actually quite strong. So we want to make sure we're taking advantage of that momentum and working very closely with our retail partners on the way the brand shows up, both again from the brand-building standpoint, our storytelling and from a e-commerce standpoint. Then the third area is pure plays, which is obviously growing significantly. And we're starting to participate in that. We just signed with zulily a few weeks ago. And you can expect us to expand our presence among the pure players, both here in North America and around the world. And then we double-click on social media. You heard in our remarks that Ralph and I are really committed to evolving how the brand is expressed and experienced. And, obviously, social media, Omar, you're absolutely right, has got to be a key part of that. We have a new CMO, a new global CMO that came in a few months ago, who's dead-focused on understanding the landscape, getting super clear on which consumers we really go want to after and then leveraging all the social media platforms that you can think of, both here and around the world, because this is how we will further modernize the brand and really make it even more relevant to the younger populations coming into the market.

[Jane Hamilton Nielsen:]

Yeah, Omar, I just thought I'd give you some dimension on what we see across our wholesale e-commerce business, both department stores and pure plays, that it's about $0.5 billion business for us at retail value globally, about 10% of our total wholesale business in FY 2017. That's an important part of our digital ecosphere, if you will, and it's growing in the first quarter and has been growing, so very positive trend there. As we look at our own e-commerce site, I think we've been really clear about two things. One is job one this entire year is reducing the promotions on the site. You're going to see that. You saw that in the first quarter. You'll see that through the year in terms of the pressure that will have on sales growth. It's critical to deliver price coherency in the market. It's critical from a pricing architecture standpoint, so we're committed to doing that through the year. The growth is going to come as we launch, as we move out of this fiscal year and into the next year and we right-size that pricing architecture and that promotion base. And that will be enhanced by our new e-commerce platform, where we're going to have a better consumer experience and better digital assets and storytelling on the site. And you'll see that as we move through the second half of the year. So I think we are very excited about this space. We are putting resources on it for both our wholesale partners and for ourselves. But it's really going to be FY 2019 when you'll start to see that show up in the top-line numbers. You will see it show up in improved margins, as you're seeing.

[Evren Kopelman:]

Okay, next question, please.

[Operator:]

The next question comes from Dana Telsey with Telsey Advisory Group. You may ask your question.

[Dana Lauren Telsey:]

Hi, good morning, everyone, and welcome, Patrice.

[Patrice Jean Louis Louvet:]

Thank you, Dana.

[Dana Lauren Telsey:]

As you think about the business and as you evaluated it, how do you view the channels of distribution for the business over time? And how should they look maybe different or evolve from where they are today? And, Jane, the gross margin improvement opportunity going forward, how do you see that evolving, whether it's lead times, speed to market and e-commerce? Thank you.

[Patrice Jean Louis Louvet:]

So very nice to meet you, Dana. First, I would say, we're going to follow the consumer, right? We're going to be driven by where the consumer wants to shop and we will be wherever it makes sense for the brand to show up and where the consumer wants to experience it. So we have an omnichannel play, which we're going to continue to drive. And I expect all these channels will continue to play an important role moving forward, whether that's department stores. Yes, they're under pressure right now, but there's a lot of work going on to also improve the experience that consumers have there. So obviously, that continues to be an important channel for us. Our own stores, whether it's our factory stores or our full-price stores and then, obviously, e-commerce, as we were just talking in the context of Omar's question. And then, there is a role for off-price to play within our overall strategy. So I expect this to continue to drive across these channels. Obviously, the relative size of them and growth rates will vary over time and will vary by country and by region. But we're committed to making sure that we are set up to win, where the consumer wants to shop consistently moving forward.

[Jane Hamilton Nielsen:]

Dana, as I look at gross margin, that dynamic that Patrice just described, which is really that you're going to see digital be a long-term driver of growth as well as direct-to-consumer overall. And so that will play positively into what you'll see in terms of long-term gross margin expansion. Also, the international opportunity is a tailwind long-term to gross margin expansion. I expect those to be both durable and long-term. They'll play into our gross margin expansion this year and also into the long-term. What's also playing into gross margin, as we talked about the at least 100 basis points of expansion as we look at balance of year, is our AUR improvements and promotion reduction in terms of depth and frequency, and that's also a tailwind through this year of gross margin expansion. As we, long-term, pursue our strategy and execute the strategy to elevate the brand, I do see AUR also as a long-term driver to gross margin expansion.

[Evren Kopelman:]

Next question, please.

[Operator:]

The next question comes from Lindsay Drucker Mann with Goldman Sachs. You may ask your question.

[Lindsay Drucker Mann:]

Thanks. Good morning, everyone. I had two questions. Patrice, you talked about in your opening remarks a need and a desire to redefining the shopping experience for consumers. Can you give us a little more detail on what that means to you? What is a redefined shopping experience in all the key channels you talk about doing business? And then, secondly, for Jane, you talked about in your prepared remarks also that excluding certain actions in Europe, shipment timing, et cetera, European, I think you said wholesale sales, were roughly flattish. Do you have that detail for North America? In other words, excluding some of your inventory actions, et cetera, what is the trend for wholesale, for sales at retail at your wholesale partners? Thank you.

[Patrice Jean Louis Louvet:]

Good morning, Lindsay. So I'll probably be in a better position to answer your question a few months from now. But the way I'm thinking about it with the team is how do we further engage the consumer in our brand, really find a way to tell our story, going well beyond just selling items, but really telling our story and portraying the world that we offer and then closing the sale, all right, closing the sale and driving loyalty. So all these are that's the general conceptual direction, I'd reserve the right to get back to you in our next call with more granularity as we work through the plans with the team.

[Jane Hamilton Nielsen:]

So, Lindsay, just to parse your question now, in Europe, as we looked at the shipment timing, that accounted for about half of the decline in the wholesale sales this quarter. The other half was really brand exits and reduced off-price. And that, if we exclude that, that's how we get to be about flattish wholesale trend in wholesale, and really what we expect to see roughly as we move through the year. And as I look at North America, and we step back from overall wholesale, so we declined 27 points in the quarter. About 20 was really attributable to what I would say is brand exits, a pullback in receipts and door closures. Those three factors were about 20 points of the decline. So if you look at that over time, we're looking at wholesale underlying trends at about down mid to high single digits.

[Evren Kopelman:]

Next question, please.

[Operator:]

The next question comes from Laurent Vasilescu with Macquarie. You may ask your question. Laurent Vasilescu - Macquarie Capital (USA), Inc. Good morning. Thank you for taking my question. And welcome, Patrice. It's nice to see continued progress around the gross margin, but I wanted to ask about the SG&A margins. First, near-term, can you possibly quantify in dollar terms the key buckets which drove the 13% decline in this quarter? And secondly, longer-term, where do you think SG&A margins can go? As you invest in marketing and product creation, are there any SG&A buckets where synergies can be gained in order to offset these investments?

[Jane Hamilton Nielsen:]

Sure. So as I think about, in the first quarter, where did the benefit come, it really is in terms of we saw a significant reduction in payroll, reduction in occupancy expenses associated with the store closures that we completed, a reduction in depreciation and then some trimming of what you'd expect, consulting expenses, T&E, rounded out the reductions. But if I had to prioritize them, it would be in that sort of ingredient label order. As we look at longer-term efficiencies, what I think is clear is that we're committed to elevating this brand. And that implies that as we get back to growth, that marketing will grow hand-in-hand with growth. But we do believe there are opportunities for streamlining and efficiencies through our operating processes, through production processes, through streamlined and better leverage of our distribution facilities. And, of course, the ultimate lever is comp growth, which will leverage our fixed costs infrastructure. But that's where I see the longer-term opportunity.

[Evren Kopelman:]

Next question, please.

[Operator:]

The next question comes from Simeon Siegel with Nomura Securities. You may ask your question.

[Simeon Avram Siegel:]

Thanks, good morning. Congrats on the progress.

[Jane Hamilton Nielsen:]

Thank you.

[Simeon Avram Siegel:]

So, Patrice, your comments on the growing digital in the pure plays, Amazon, obviously, comes up in just a few conversations. Can you share your view there? And then, congrats on the strong gross margin. Could you just quantify what mix shifts were and then what you'd expect them to be for the rest of the year? Thanks.

[Patrice Jean Louis Louvet:]

Good morning, Simeon. So, yes, obviously, I know Amazon is top-of-mind for all of you and it is for all of us, obviously, as well. So going back to our strategy, we are looking at these three buckets

[Jane Hamilton Nielsen:]

Yes, and just as I look at drivers of gross margin expansion in the quarter, about half of it was channel and geographic mix. And the other half was really driven by what I will call pricing and promotion reductions and AUR improvements. And those dynamics, I expect them to continue through the year with about that level of contribution.

[Evren Kopelman:]

Next question, please.

[Operator:]

The next question comes from Erinn Murphy with Piper Jaffray. You may ask your question.

[Erinn E. Murphy:]

Great. Thanks, good morning and welcome, Patrice.

[Patrice Jean Louis Louvet:]

Thanks, Erinn.

[Erinn E. Murphy:]

I guess, Patrice, I had a question for you. I know you've been there just a few months. But when you take a step back and just think about the prognosis of the Ralph Lauren brand, how do you think about it as it relates to today's millennials and keeping the brand relevant? It just seems like that's a cohort of consumers that's been a little bit harder to reach in the last few years. And then, Jane, just for you, in North America, as it relates to international tourist flows, what did you see during the first quarter? Thanks.

[Patrice Jean Louis Louvet:]

Good morning, Erinn, a very good question on the millennial consumer. Well, I kind of step back, and Ralph and I have actually had a number of conversations on this that says, okay, what are the core values of the Ralph Lauren brand, all right. And we would say they're entrepreneurship, creativity, stylish living and authenticity, and all that is coupled with a very rich heritage of real storytelling. All of that is timeless, right, if you think through the values that are relevant to today's consumer, millennials would raise their hand and say that makes lot of sense to them. The second thing I would say is as we look at the millennial consumer, is that they are looking for meaning in brands. Again, they are not just buying a product. They're buying into a world. They're buying into a set of values. And they place a lot of emphasis on where do you come from, what do you stand for, what's your story, what are your values, are you giving back to the world. I think, again, the Ralph Lauren brand is incredibly well-positioned on this whole meaning space. So the challenge for us is, okay, with these strong value foundations, with this sense of meaning, how do we translate it today for that consumer group, right? And that's the work Ralph and I and the team are committed to. That's why we talk about evolving and elevating the way the brand is expressed and experienced, because we know we are going to have to make some changes in terms of how we engage the consumer, where we engage the consumer. Go back to the earlier conversation we're having on social media, back to the earlier discussion we're having on driving digital harder because we know a number of the millennial consumers are not interested in going into brick-and-mortar. But I feel very confident coming in with the foundations of this brand. And now the challenge and the task for us, and I'm very confident we can do this well, is to translate it in a way that connects with today's consumers and the millennial population coming up.

[Jane Hamilton Nielsen:]

And, Erinn, just in terms of the foreign tourist trends that we're seeing, as we normalize for some of the calendar pushes and pulls as we move through 2017, really, 2017 foreign tourist traffic, we saw down about 15%. And we're seeing some positive signs. Foreign tourist traffic is still down in the first quarter, but really in the high single-digit range. So again, some improvement as you normalize out of last year and adjust for some of the calendar shifts from down 15% to down high single-digit.

[Evren Kopelman:]

Okay, we'll take one last question.

[Operator:]

The last question comes from Christian Buss with Credit Suisse. You may ask your question. Christian Roland Buss - Credit Suisse Securities (USA) LLC Jane, could you provide an update on the design cycles and how you're feeling about the progress on speeding design cycles in speed to market?

[Jane Hamilton Nielsen:]

We feel great. We are on track to deliver what we said, which was 90% of our product in a nine month timeframe. And additionally, we are looking to have 35% of our product now on a six month timeframe. So we're very encouraged by the work that we're doing. We know it gives us greater ability to read the market and react to the market and manage our inventory flows productively, so very encouraged with that.

[Patrice Jean Louis Louvet:]

And I would second that. And I think as I've engaged with the teams, we have real energy to continuously raise the bar. So, as Jane's mentioned, we're making great progress against the original targets that we had set for ourselves. We're not going to stop there, all right. We're going to continue to raise the bar till ultimately we get into a best-in-class position across the board for lead times.

[Patrice Jean Louis Louvet:]

Good. Well, listen, this closes out our call. Thank you for joining us, and then we look forward to speaking to you again next quarter. Thanks. Have a great day.

[Operator:]

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