Ralph Lauren Corporation (NYSE:RL) Q2 2024 Earnings Call Transcript

Ralph Lauren Corporation (NYSE:RL) Q2 2024 Earnings Call Transcript November 8, 2023

Ralph Lauren Corporation beats earnings expectations. Reported EPS is $2.1, expectations were $1.92.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter Fiscal Year 2024 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I’d now like to turn over the conference to our host, Ms. Corinna Van der Ghinst. Please go ahead.

Corinna Van der Ghinst: Good morning, and thank you for joining Ralph Lauren’s second quarter fiscal 2024 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, our financial performance will be discussed on a constant currency basis. Our reported results, including foreign currency, can be found in this morning’s press release. We will also be making some forward-looking statements within the meaning of the federal securities laws, including our financial outlook. Forward-looking statements are not guaranteed, and our actual results may differ materially from those expressed or implied in the forward-looking statements.

Our expectations contain many risks and uncertainties and 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 will turn the call over to Patrice.

Patrice Louvet : Thank you, Corey. Good morning, everyone, and thank you for joining today’s call. We continue to deliver solid progress on our Next Great Chapter Accelerate plan in the second quarter. Through an uncertain global macro environment, our iconic brand and timeless products continue to resonate with consumers all around the world. And our multiple engines of growth across categories and regions, enable our teams to deliver against our strategic and financial commitments even in a choppier backdrop. Second quarter results exceeded our expectations on the top and bottom line. We were particularly encouraged by an acceleration in our retail performance with positive comps across every region and channel in the period.

The strength and growing desirability of our brand is underpinned by our continued pricing power, with AUR up another 10% on top of 18% growth last year. In addition, consistent with our plan, we continue to focus on balance sheet and expense discipline. This is fueling our investments in high-impact brand moments spanning geographies and demographics, all while delivering profitability ahead of our expectations. Looking ahead, as the important holiday season gets underway, we are executing on our long-term game plan and keenly focused on what we can control. We are elevating our brands and positioning in the marketplace while staying grounded in the realities of the macro environment. With more than six consecutive years of AUR growth, a cumulative increase of over 70%, we are confident in our pricing power in the market.

Now it’s important to remember that AUR growth is an output of our overall elevation work that has included evolving our product categories, product mix, and shopping experiences in addition to promotional pullback. This fundamental reset in our pricing architecture gives us the flexibility to continue driving our long-term brand elevation while also reacting with agility to near-term inflationary pressures. Turning to the second quarter. Our performance was guided by our three strategic pillars to drive long-term growth and value creation. These are: 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. Let me take you through a few highlights across each of these strategic pillars.

First, on our efforts to elevate and energize our lifestyle brand. We continue to invest in our most powerful asset, our timeless iconic lifestyle brand. The Ralph Lauren brand resonates across geographies and demographics, powerfully cutting through a wide range of cultural moments, across fashion, music, gaming, sports, and more. Some highlights from the quarter included: first, September marked our return to New York Fashion Week with a rustic romantic show at the Brooklyn Navy Yard where Ralph and our design teams presented a women’s show highlighting our brand’s quintessential easy elegance and relaxed refinement. Supported by our activations across 25 key markets and influential guests from JLo and Cara Delevingne to Li Bingbing and Sofia Richie Grange, we drove 24 billion impressions globally with outsized growth in our luxury perception ratings in North America.

Next, we reinforced our brand leadership in the world of sports with our sponsorship of the U.S. Open, Wimbledon and Ryder Cup. Our brands showed up powerfully on the courts and green and on celebrities and influencers, enjoying sport in our iconic spectator style. We also continue to innovate in the world of gaming to engage new and younger consumers, launching our latest partnership with Fortnite. Race to Greatness immerses players in a unique experience, blending luxury fashion, gaming and exploration. Engagement exceeded our expectations with over 0.5 million unique visitors to the experience and the live stream activation reaching 2 million total views. In China, we celebrated the 30th anniversary of our cult classic Double RL brand with an immersive two-day event with VIP celebrity and influencer attendees featured in a motorcycle tour around Chengdu City, horseback riding, and vintage collection storytelling.

Other celebrity highlights from the quarter included dressing Beyoncé in her Renaissance World Tour; and Taylor Swift and Jennifer Lawrence both spotted in effortless Polo looks on the streets of New York. Together, these activations are both re-engaging existing customers while also attracting new high-value consumers to our business. We added 1.3 million new consumers to our DTC businesses in the second quarter, consistent with recent trends. And this continues to skew increasingly towards next-generation under 35 consumers. We reached 55.9 million social media followers globally, a low double-digit increase to last year with unique activations across line, TikTok, and our recent launch [indiscernible] driving engagement. And our online search trends continue to significantly outpace our peers globally.

Moving next to our second key initiative, drive the core and expand for more. In uncertain times, consumers continue to turn to brands they know and trust and styles that have longevity beyond one season. timeless classics have always been our core proposition. And Ralph and our design teams continue to deliver with an unwavering focus on the quality and quiet luxury that are central to our way of living. Our iconic core products, representing about 70% of our business, grew high single digits in the second quarter, ahead of total company growth, and core penetration to sales increased by roughly 500 basis points, underscoring the importance and resilience of our icons through choppy times. Strong performance in our core was led by our iconic cable knit sweaters in cotton and cashmere, jackets and vests, heritage tie blazer, and unconstructed sports coats.

Our kid’s business improved sequentially this quarter, led by girls with strength across seasonal fall sweaters, dresses, outerwear, and baby gifts. Our core also establishes the foundation and credibility to grow our high-potential categories. These include women’s, outerwear, and our emerging home business. Together, these high-potential categories increased low double digits in the quarter. We continue to drive strong growth in women’s, our most significant long-term opportunity on an elevated assortment with AUR up mid-teens. Similar to men’s, performance was supported by our core icons this fall, including sweaters, garden die shirts, versatile mid- and full-length skirts taking her from day to night, and our iconic blazers and heritage tweed and modern knit fabrications.

In the second quarter, we also launched our most comprehensive women’s handbag campaign to date with the introduction of our newest icon, the RL 888 With a 360-degree launch across key cities, we are establishing the category in a way that is authentic to our brand with a focus on quality Italian craftsmanship and leathers expressed in Ralph Lauren’s elegant aesthetic. Other special releases this quarter included our sports sponsorship collections with U.S. Open and Wimbledon sales significantly outperforming our expectations. Our limited-edition P-Wing Fortnite Sneaker-Boot, which is now reselling to collectors for up to four times the retail price, and in September, together with Rizzoli, we launched a Way of Living, a stunning hardcover book celebrating Ralph Lauren’s signature home collections over 40 years.

Looking ahead, we will continue to leverage the breadth of our brand and assortments to create excitement and desirability in addition to driving customer loyalty. On to our third key initiative, win in key cities with our consumer ecosystem. Our key city ecosystems around the world drive elevation and connection through all of our consumer channels and touchpoints. Each of these ecosystems is anchored by direct-to-consumer channels, which already represent about two-third of company sales. Our strong retail comps this quarter were supported by continued momentum across both core Polo products and luxury collections. In our precision engagement with consumers who have the potential for long-term loyalty and outsized lifetime value. While comps in our Ralph Lauren stores and own digital sites were strong around the world, we were particularly encouraged by improved performance in our outlet business.

also positive in every region. Key outlet actions we implemented in the first half of the year from assortment changes to optimize staffing and highly targeted promotions appealing to our more value-oriented consumers, position us well as we head into holiday. In addition to our existing fleet, we opened a select number of iconic Ralph Lauren stores in the quarter, including Marina Bay Sand in Singapore, and renovated experiences in Brussels and Stockholm. And in North America, we’re excited to build our first ever key city ecosystem in Canada, starting with Toronto, where we opened our first Ralph Lauren store at Yorkdale Center this quarter. And just a few weeks ago, we launched our Canadian digital commerce site, ralphLauren.ca, helping us deliver connected retail experiences to our consumers across the market.

Globally, we opened a total of 16 new stores and concessions focused on our top cities this quarter with the majority again in Asia, particularly in China. Our performance in China remains a standout with sales up more than 20% this quarter. This was ahead of our expectations, driven by strong brand momentum and high-quality new consumer recruitment. Looking ahead, we still see significant opportunities to drive our business with global Chinese consumers. And finally, touching on our enablers. In addition to our strategic priorities, our business continued to be supported by our five key enablers. I’ll share a few highlights from the quarter. Within our best-in-class digital technology and analytics capabilities, we enhanced our RalphLauren.com digital flagship and app this quarter.

This included new search capabilities and improved navigation which helped deliver a more personalized experience and drive conversion. We also continued our early testing of generative AI. For example, leveraging the technology to create select product descriptions on our digital site. As we continue to integrate citizenship and sustainability into our business, we’re excited to share that we signed a collective power purchase agreement to scale our purchasing of solar power in Europe. This initiative created by the fashion pack brings us one step closer to reaching our goal to power our direct operations with 100% renewable electricity by 2025. And just a few weeks ago, the Ralph Lauren Corporate Foundation announced our newest Ralph Lauren Center for Cancer Prevention at USC’s Norris Cancer Center Hospital.

This center will represent our third center in the U.S. and our first one on the West Coast. As we continue our efforts to improve access to high-quality cancer screening services and treatment for underserved communities. In closing, Ralph and I are proud of our team’s progress creativity, and dedication while navigating a dynamic environment. As we enter the holiday and the second half of the year, we remain focused on what we can control as we deliver on our multiple levers for growth across regions and categories. Our strengthening brand desirability, sustainable pricing power, and consistency of execution continue to differentiate Ralph Lauren through challenging times, and underpinning all of our growth opportunities is the enduring power of our iconic lifestyle brand, which continues to inspire people all over the world to step into their dreams.

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.

Jane Nielsen : Thank you, Patrice, and good morning, everyone. We drove second quarter results ahead of our expectations while making strategic growth investments that will continue to support our business in the second half and in the long term. Second quarter revenue growth exceeded our guidance driven by better-than-expected performance in our DTC channels in North America and Europe, along with continued momentum in Asia, led by China. Gross and operating margins were also above our outlook despite ongoing cost headwinds and high levels of strategic investments in the quarter as planned. Our continued brand elevation, favorable channel, and geographic mix shifts, coupled with our focus on cost savings and productivity fueled our investments in sustainable long-term growth.

Leveraging our strong cash flow, we delivered approximately $275 million to shareholders in the form of dividends and share repurchases this fiscal year-to-date. We are on pace with our long-term shareholder return commitments while maintaining our fortress balance sheet one of our key enablers that serves us well through times of uncertainty. With this discipline, we entered the holiday season with clean and healthy inventories. With our elevated brand clear strategy and targeted investments, we are proud of the progress we are making on our multiyear Next Great Chapter Accelerate plan. We remain committed to both our fiscal ’24 outlook outlined back in May and our three-year targets, while recognizing that we are still operating in a highly volatile environment.

Let me take you through our second quarter financial highlights, which, as a reminder, are provided on a constant currency basis. Total company revenues in the second quarter increased 2% led by double-digit growth in Asia. Revenue in North America and Europe declined slightly to last year, with Europe impacted by timing shifts as noted on our last call. Total company comp increased 6%, with all three regions delivering positive comp growth in the period, led by our Ralph Lauren stores and digital Notably, our outlet comps improved with both stronger traffic and stabilizing conversion trends. Total company adjusted gross margin expanded 80 basis points to 65.4%. This was better than our outlook as strong AUR growth, lower freight expenses, and favorable channel and geographic mix more than offset ongoing pressure from higher cotton costs.

We continue to expect stronger gross margin expansion in the second half of the year as cotton headwinds start to moderate and inventories remain clean and well-positioned. AUR increased 10% on top of 18% growth last year with balanced growth across all regions and channels, driven by our long-term strategy of brand and product elevation. This more than offset targeted promotional activity in the quarter focused on driving conversion with our value-sensitive consumers. Adjusted operating expense increased 10% to 55.5% of sales, driven by this year’s cadence of higher marketing, talent to support our strategic growth areas, and long-term investments in our key city ecosystems, notably in-store customer service, new digital site launches and search engine upgrades.

Marketing was 8% of sales compared to 7% last year. We continue to expect full-year marketing at around 7% of sales, consistent with our long-term guidance, including a more normalized growth in the second half. Moving on to segment performance, starting with North America. Second quarter revenue declined 1% ahead of our expectations with stronger growth in our retail business offset by expected wholesale declines in a softer environment for the channel. In North America Retail, second quarter comps increased 4%, representing a meaningful improvement over our first quarter trends. Comps were positive in every channel, including outlet, which started to benefit from our recent interventions to strengthen the customer experience and selective promotions to drive conversion with value-oriented consumers.

Comps in our owned RalphLauren.com site grew 4%, a 12-point improvement from Q1 and as we continue to drive personalization and targeted marketing activations. All DTC channels delivered at least mid-single-digit AUR growth alongside these comp improvements. In North America Wholesale, revenues declined 7% to last year, in line with our expectations as we carefully manage sell-in to the channel to align with softer consumer demand. While this channel is also experiencing some challenges related to macro inflation pressures, we are encouraged that our top 100 doors are significantly outperforming the rest of the fleet, following our targeted investments in renovations and service levels. In addition, our wholesale AUR continued to grow, up mid-single digits on product mix elevation and controlled inventory levels.

Looking ahead, we are maintaining a cautious outlook on the channel and remain focused on aligning inventory levels to demand. Moving on to Europe. Revenue declined slightly in the second quarter, ahead of our expectations. Results included five points of negative impact from the earlier timing of fall ’23 wholesale deliveries into the prior quarter and lapping last year’s favorable post-COVID wholesale allowances. Retail comps increased 6% with owned digital commerce up 14% and brick-and-mortar comps up 5% on similar performance in Ralph Lauren and outlet stores. Europe AUR increased high single digits in the quarter. Digital comps were higher than our expected full-year run rate as new sites accelerated growth. Similar to North America, we added targeted incremental seasonal promotions to drive conversion, which meaningfully benefited Q2.

We Conversely, we expect Q3 digital comps to be negatively impacted by a calendar shift in Boxing Day sales to Q4. We Europe wholesale declined 7% to last year, in line with expectations, including approximately nine points of headwinds from the items noted previously. Looking ahead, these drivers are expected to negatively impact our Q3 and Q4 growth by about 12 point and four points, respectively. Turning to Asia. Revenues increased 13%, with growth led again by China. China sales increased more than 20% on top of a strong compare of more than 30% last year on continued brand momentum. Second quarter sales in Japan were up low double digits. We expect continued momentum in Asia in the second half of the year, with growth in China outpacing the rest of the region.

Within our other nonreportable segments, licensing revenue declined high single digits, in line with our plan. The transition out of our Lauren men’s suiting license as a part of our long-term elevation journey drove the entire decline and will continue to impact segment results for the remainder of fiscal ’24. Moving on to the balance sheet. Our strong balance sheet and healthy cash flows are key enablers of our Fortress foundation and allow us to make strategic growth investments in our business while returning cash to shareholders even through dynamic times. We ended the second quarter with $1.5 billion in cash and short-term investments and $1.1 billion in total debt. Net inventories declined 5%, aligned with our expectations and below our revenue growth trend with units down high teens.

Inventories decreased double digit in North America, on a more normalized timing of receipts and cautious top-line outlook for the region. Inventories in Europe also declined in constant currency, while Asia levels reflected our strong expected growth rates. We still expect to end fiscal ’24 with inventory below prior-year levels. Looking ahead, our outlook remains based on our best assessment of the current geopolitical backdrop as well as the macroeconomic environment. This includes inflationary pressures, and other consumer spending-related headwinds, and foreign currency volatility, among others. For fiscal ’24, we still expect constant currency revenues to increase low single digits, centering on a range of 1% to 2%. Our outlook embeds slightly increased caution around the wholesale channel, where year-to-date demand has been soft.

Foreign currency is now expected to negatively impact reported revenues by about 50 basis points due to unfavorable shifts in both Asian and European exchange rates versus our prior outlook. We continue to expect top-line growth to be led by Asia, followed by low single-digit growth in Europe. And we still expect a low single-digit decline in North America based on softer spring trends in the first half and wholesale timing shifts in Q1. We continue to anticipate operating margin expansion of approximately 30 basis points to 50 basis points in constant currency to 12.3% to 12.5%. Foreign currency is expected to have roughly 10 basis points negative impact on full-year operating margin. We expect gross margin expansion in the range of 120 basis points to 170 basis points in constant currency, up from about 100 basis points previously.

This is driven by more favorable freight costs, mix shifts towards international and DTC and continued growth in AUR, more than offsetting full-year cotton inflation. Gross margin expansion is anticipated to more than offset higher operating expenses as we invest in key strategic initiatives, particularly around digital, Key City ecosystem expansion, marketing, and sustainability. Relative to our Investor Day base period, guidance still implies about 80 basis points to 100 basis points of operating margin expansion when compared to fiscal ’22, holding currency constant on track with our long-term targets. For the third quarter, we expect revenues to increase 1% to 2% in constant currency, led again by Asia. Foreign currency is expected to negatively impact revenues by roughly 30 basis points.

We remain cautious on North America and expect similar trends to Q2 with softness in wholesale offsetting stronger trends in DTC. In Europe, third quarter sales are still expected to be negatively impacted by the timing of earlier fall shipments and from lapping last year’s favorable post-COVID wholesale allowances. Excluding these unusual impacts, we expect underlying trends in Europe to be more in line with our full-year outlook for the region of low single-digit growth. We expect third quarter operating margin to be roughly flat in constant currency with about 10 basis points of foreign currency benefit. We expect constant currency gross margin expansion of 100 basis points to 150 basis points, largely offset by a higher proportion of marketing and ecosystem investments planned in the second quarter and third quarter of the fiscal year.

We now expect our tax rate to be in the range of 22% to 23% for the full-year and roughly 23% to 24% for the third quarter and capital expenditures are expected to be around $250 million. In closing, our year-to-date performance demonstrates the agility of our teams to deliver continued strong execution, along with progress on our Next Great Chapter Accelerate plan, led by Ralph’s enduring vision our teams around the world are consistently driving brand desirability with products and experiences that resonate across generations, geographies, and lifestyles. Even as we navigate near-term challenges, our multiple engines of growth, along with our Fortress foundation, put us in a position of strength to continue to deliver our commitments and drive long-term value creation.

With that, let’s open up the call for your questions.

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Q&A Session

Operator: [Operator Instructions]. The first question comes from Michael Binetti with Evercore ISI.

Michael Binetti : Maybe two quick ones here. Patrice, you guys maintained the outlook for the year, you referred to, obviously, the macro uncertainty in the prepared remarks. What do you think about as the factors in your control that enabled you to maintain the back half commitments and beyond, especially if the environment deteriorates further from here? And then I guess, maybe a jump all for both of you, but how do we think a little bit beyond this year on the wholesale side, particularly in North America, you made some comments on your thoughts on the channel now. Do you feel like the channel is under-inventoried at this point? And how do you think about the opportunity to fill in wholesale next year as we look a little bit beyond the calendar year?

Patrice Louvet: All right. Well, Michael, welcome back. Thanks for your question. Our teams continue to execute really well in a tough environment. And while we’re planning for things to remain choppy for the foreseeable future, I think this quarter showed once again that we can deliver on our commitments. There are a few reasons for that, and I just want to call out the top three. First one is our brand is our most powerful asset, and we’re driving momentum and desirability. As we cut through culture and appeal across generations through a variety of platforms, I actually think we have probably one of the most diversified broadest marketing programs in our space, ranging from the fashion show we did recently at New York Fashion Week, to two sports partnerships, Wimbledon and Ryder Cup U.S. Open just this last quarter through dressing celebrities like Beyoncé, you heard that in the prepared remarks to actually influencers wearing us spontaneously to gaming with Fortnite.

So, a broad range of activities. We continue to invest in our brands for the long term, and we’re seeing consumers respond to that. The second point, which is actually quite important during challenging periods like this for consumers is our iconic core products anchor us think beautifully made casual wear sweaters, maybe blazers, tweet jackets, Oxford shirts, really the foundations of a wardrobe. And these timeless products deliver through cycles and when things get more challenging, we know consumers tend to gravitate back to core products, products, and brands they know and trust. And in addition to that, we continue to have significant growth opportunities in women’s and in outerwear. And then the third point, and you heard this in our prepared remarks, is our DTC channels are really where we can best control the consumer experience — these channels today represent two-thirds of our business.

So, DTC is two-thirds of our flooring business, different picture than a few years ago. And as you saw, actually, our performance in that channel is accelerating with positive comps across every channel, brick-and-mortar and digital across every region. So, in addition to this, I think we’ve also built over the past few years an agility muscle that’s integrated into our operating model. And I think you saw this in this past quarter. For example, we made fast product assortment changes, leaning even further into our core products in order to improve traffic and conversion in DTC, and you saw that play out in the numbers. We delivered enhanced staffing in our retail stores to improve the customer experience. And online, we also made a number of changes relative to surge and more personalized pages, which also drove to an acceleration, both from a traffic conversion and AVT standpoint in those important channels.

And while we continue to elevate our brand, this wouldn’t be a Ralph Lauren call if I didn’t talk about AUR. You see this play out in increased AUR again this quarter, up 10% in an environment that’s relatively intense from a promotional standpoint. And we are able to grow AUR double digits while having limited targeted promotional actions for our more value-oriented consumers to close the deal and drive conversion. So, listen, we’re operating in a very uncertain world, but I think that’s become the norm. We know how to navigate this, and our iconic brand, our multiple growth drivers, and our agility muscle really help us to stay on offense. And importantly, we have the operational discipline and the balance sheet to enable continued investment in growth.

So, I think when you look across the marketplace, these are all very important differentiators and we’re going to continue to focus on what we can control to win and create value in the marketplace. When it comes to wholesale since it’s a jump bulging at the ball. Over to you.

Jane Nielsen : Even though I can’t jump very high. Let me just frame the thinking that we have on wholesale longer term and to date. Wholesale is an important environment for us, for consumer discovery. We know from our consumer work that when a consumer buys and experiences Ralph Lauren quality, we can hook them. And so, it’s an important and profitable channel for that important consumer discovery. Just from what we’ve done for many years, our focus on managing matching sell-in to demand and tight inventory management is something that we’re doing today. Our inventories are well controlled and something that as we think about the future is something that we have to continue to lean into, along with leveraging our core, which resonates well with that consumer being able to chase into variable demand allows us to meet those consumer needs, and I think will serve us well into the long term, working with our partners to personalize our marketing with loyal consumers that we have across the channels.