Ralph Lauren Corporation (RL) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Fourth Quarter and Full-Year 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. [Operator Instructions] 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.

Thank you for joining Ralph Lauren fourth quarter and full-year 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.

Thank you, Evren. Good morning, everyone, and thank you for joining today’s call. We’re pleased to report fourth quarter and full-year fiscal 2018 results that delivered on our commitments. Revenue was ahead of our expectations, driven by a solid fourth quarter and operating margin was at the high-end of our plan for both the quarter and the year. We’re on a journey to establish a healthy foundation to get the company back to sustainable long-term growth and value creation. In fiscal 2018, we made strong progress on this journey, as we executed on our key strategic initiatives and closed the year with a clear game plan, a strong balance sheet and an engaged team focused on executing with excellence. We look forward to sharing our long-term growth and value-creation strategy and financial outlook at our Investor Day on June 7. Before we review our recent progress, Ralph and I would like to welcome our new Board members: Mike George, who joined the Board last week; and Angela Ahrendts, who has agreed to join us in August. We’re excited about the new capabilities and experiences they will each bring to our Board. Angela needs little introduction. From her time successfully leading Burberry as CEO to the work she is doing transforming Apple’s retail arm, she will bring invaluable perspective and experience to bear as we move through our own transformation. Mike, who is CEO of Qurate, the parent company of QVC, HSN, zulily and others, brings deep experience in driving growth and value creation through very unique and evolving retail channels globally. Now let me take you through the progress we’ve made in fiscal 2018 across our four key initiatives, which include: first, elevating our brand by improving quality of sales, distribution and product; second, evolving our product, marketing and shopping experience to increase our reach and appeal with new consumers; third, expanding our digital and international presence; and fourth, working in new ways to drive productivity and agility. I will focus most of my commentary on full-year fiscal 2018 results and Jane will cover more of the fourth quarter performance. So starting with the first initiative, elevating our brand by improving quality of sales, distribution and product. In fiscal 2018, we drove growth in our average unit retail through discount rate reductions and sales mix. AUR was up 4% across our direct-to-consumer network with growth in every quarter and in every region. We improved the quality of our distribution by continuing to close lower productivity and off-equity doors in both retail and wholesale. In fiscal 2018, we closed approximately 25% of our U.S. department store points of distribution and 31 directly operated retail stores. While these closures are largely complete, we will continue to progressively reduce our penetration in the off-price channel. However, the negative impacts from the off-price reduction to our sales performance will not be as significant going forward as it was in fiscal 2018. At the same time, we’re expanding our store network, especially in international markets, where we are underpenetrated with new small-format stores that are highly productive. Combined, these actions are repositioning our overall store base to deliver high-quality future sales growth. All of these actions led to strong adjusted gross margin improvement of 290 basis points for the year with solid increases every quarter. Moving on to our second key initiative, evolving our product, marketing and shopping experience to increase our reach and appeal with new consumers. In each of these areas, we’re focused on combining Ralph’s and our creative team’s iconic brand vision with deep insight and understanding of consumers around the world. Starting with products. We continue to drive assortment discipline with improvements in the clarity of our product message and SKU productivity. For fiscal 2018, revenue per SKU increased 16% and gross profit per SKU was up 22% to last year. Our spring season-to-date performance continued the improvement in trends we experienced during fall and holiday. We saw product successes in our core items, where we brought newness and excitement through the addition of novelty, like embroidery and printing, as well as refreshed fabrics and increased functionality. Polo led our brand sales performance. Our best sellers included a modernized version of our men’s Polo sweatshirt featuring a technology-infused double-knit fabric. We also had good sell-through with our updated take on our Classic Oxford shirt with a garment died fabrication, representing a fresh interpretation. Outerwear was another positive area, where lighter weight and functional fabrics in both casual weekend and Wear To Work styles drove growth. In addition, our new read and react graphic T-shirt program was effective with a quick turnaround from consumer test to shop floor. In women’s Polo, details like souvenir embroidery on our iconic military jacket added interest. And in Lauren, our sweater jackets, where we added multiple silhouettes and button options, were bestsellers. We also built on our limited edition successes in the fourth quarter with the launch of our Snow Beach collection in January, which draws on our deep and authentic heritage. The original Snow Beach collection was introduced in 1993, and many pieces became iconic collector’s items. Similar to our successful Stadium launch last September, Snow Beach sold out within hours and helped to drive excitement around our brand. Lastly, in product, we also continued to make progress on building out underdeveloped categories that have significant growth potential across our brands. Last quarter, we talked about denim as one of these categories, where our consumer research showed that we have a clear basis to win. Our sales in denim were up 9% for the year and 13% for the fourth quarter, driven by updated fits, washes and lighter-weight fabrications. So, as you can see, we’re making encouraging progress across multiple fronts on product and we’re pleased with the improving consumer response that we are seeing. Moving on to marketing. In fiscal 2018, we significantly increased our marketing investment in campaigns and assets with strong potential to better align our spend with the industry norm. Marketing spend was up 10% for the full fiscal year to $241 million. This growth was driven by increases in digital and social media, as we shift marketing investment to the channels that matter most to our consumers today. One of the key elements of our marketing strategy is adopting a more consumer-centric approach. We recently completed a major global consumer research study that provided important insights that we’ll share with you at Investor Day in a couple of weeks. These learnings will enable us to be much more precise about how we engage specific consumer groups in order to make our marketing investments more effective and efficient. We had several major marketing events in the fourth quarter that drove significant consumer engagements for the brand. Starting with our sponsorship of the Winter Olympics. We generated 6 billion media impressions from extensive social media presence with key American athletes and outfitting the U.S. Olympic Team with the high-tech heated jacket. Our February fashion show was a successful media event with 3.2 million global live views. We built anticipation and amplification on social with 3.3 billion global media impressions. The Snow Beach limited edition in January successfully leveraged social media through a robust campaign on Instagram and key influencers such as Chance the Rapper and Zayn. And lastly, our spring Polo campaign featuring our iconic white Polo shirt was integrated across various touchpoints, from Instagram, Facebook and Snapchat to ralphlauren.com and our stores. We’ll be able to share more perspective on this campaign on our next earnings call. We also continued to build our influencer and celebrity coverage, spanning various parts of culture from artists to movie stars to athletes. Awards season dressing included Shailene Woodley at the Golden Globes, Emma Watson and Eiza Gonzales at the Academy Awards, Jay-Z at the Grammy Awards Pre-Party and Mandy Moore and Yara Shahidi at the Screen Actors Guild Awards. In sports, Polo ambassador and current number 1 golfer in the world, Justin Thomas, and Olympic athletes, including the Shibutani siblings represented our brand in the athletic arena. Internationally, we continued to partner with celebrities and other key social media influencers, including Gloria Tang and Wenwen Han in China, Jessica Jung in Korea and Akira in Japan in the fourth quarter. This diverse group of influencers represents different aspects of our brand and engages different consumer segments. Finally, in terms of upgrading our shopping experience, both in stores and online, we invested in our store environments around the world. For example, in North America, we refreshed over 80 of our top department store shops in fiscal 2018 through improved fixturing, lightning, visual merchandising, product presentation and layout. The new environment is updated with a fresh, lighter aesthetic with improved product presentation focused on our core items, as well as growth categories like denim. The refreshed shops also enable easier navigation for consumers and provide a more coherent brand experience. This has driven improved sales and margin versus control doors and pretest trends. We plan to accelerate and broaden these activities in fiscal 2019 across all channels globally. Moving on to our third key initiative, expanding our digital and international presence. On the last two earnings calls, I spoke in detail about our growth opportunity in Asia, specifically in China, as well our expansion in digital commerce. Let me give you an update on both of those areas. China had a great year in fiscal 2018, posting 25% sales growth on the mainland. Our new small format stores, a key component of our omni-channel growth strategy in the region are performing well. We ended the year with 111 directly operated stores and concessions in Greater China, representing a net increase of 28 versus prior year. This is complemented by our strong digital expansion in China on Tmall, JD.com and WeChat. We remain on track to reach our goal of $0.5 billion of revenue in five years in Greater China, especially as we continue to raise our brand awareness and perception. Moving on to digital, which is a critical piece of our global growth strategy. In fiscal 2018, our global digital ecosystem sales were approximately $1 billion at retail value, including both our partners and our directly operated businesses. In fiscal 2019 and beyond, we expect our digital growth to accelerate as the major pullback in our directly operated North America e-commerce business is largely complete. We’re improving our site’s functionality and increasing marketing to return to revenue growth in this important channel. In the first quarter, we will be upgrading the technology platform for our directly operated European e-commerce business, similar to what we implemented in North America last fall. We expect this transition will significantly improve the shopping experience on our site with enhanced functionality, including better search, navigation and checkout process. Our digital wholesale business continues to grow. In fiscal 2018, we drove market share gains in this channel at our key retailers and in our key categories. We are collaborating closely with our key partners on targeted product and marketing initiatives on both department store websites and pure play customers. As an example, our collaboration with ASOS in Europe with the different ways to wear the polo shirt campaign was highly effective, as we tailored the message specifically for the consumer on that platform. Finally, let me touch on our fourth key initiative, working in new ways to drive productivity and agility. In fiscal 2018, we made significant progress across many areas. Let me start with our major end-to-end initiative, designed to drive productivity across the business, including inventory efficiencies and faster lead times. Our work in this area has resulted in a 30% reduction in inventory over the past couple of years and we achieved our goal of having 90% of our products on a nine-month lead time at the end of fiscal 2018. This is enabling us to make product decisions much closer to consumer demand. We plan to drive further improvements in fiscal 2019 towards six-month and three-month lead times for a certain portion of our products. We’ll talk about that and more of our important initiatives in this area at our upcoming Investor Day. So in closing, over the last fiscal year, we have made strong progress as we continue to execute our key initiatives to position the company to get back to sustainable long-term growth and value creation. Ralph and I are proud of the work our teams around the world have done this year. We’re encouraged by the way our teams are coming together to focus on the consumer, prioritize what matters most and move with urgency to get us back to winning. I look forward to discussing our more detailed strategic plan with you in a couple of weeks. With that, I’ll turn it over to Jane, and I’ll join her at the end to answer your questions.

Thank you, Patrice, and good morning, everyone. Our fourth quarter and full-year results were ahead of our expectations and showed continued progress on resetting the business to a healthier base. Our four key initiatives are delivering higher AURs, lower discounts, expanded gross margins, higher inventory turns and significant growth in free cash flow. Fourth quarter revenues declined 2% on a reported basis and 7% in constant currency. This was above our guidance, driven largely by a strong Easter holiday in retail. With the holiday momentum, we returned to comp growth in North American stores. During this quarter and throughout this fiscal year, our teams have focused on strengthening the brand and driving strong execution. I’m so proud of the progress we’ve made and the work they continue to do. In the quarter, we saw higher sell-throughs on spring and improved product profitability, notably in our Polo brand. Adjusted gross margin expanded 440 basis points in the fourth quarter and 350 basis points in constant currency, benefiting from the reduced discount rates and favorable geographic and channel mix. Lower product costs and product mix also provided a tailwind to gross margin in the fourth quarter. While quality of sales initiatives will continue to drive overall gross margin expansion in fiscal 2019, product cost will become more challenging in the coming year. Adjusted operating margin in the fourth quarter was 5.6%, down 110 basis points to last year on a reported basis and down 240 basis points in constant currency, at the top-end of our guidance. In the fourth quarter, we stepped up our marketing significantly off a low base last year. Planned investment in marketing was up more than 50% in the fourth quarter and up 10% for the year and contributed to the improvement we saw in our sales trend. Moving forward, our goal is to progressively increase marketing investment to accelerate our top line growth. However, our objective is to fund the majority of the increases through productivity gains to achieve operating margin expansion. Moving on to our segment performance. Starting with North America, revenue was down 14% in the fourth quarter and comps were flat in constant currency. Adjusted operating margin was flat to last year as gross margin improvement was offset by increased marketing investment. Importantly, all channels contributed to gross margin improvements in the fourth quarter. Let me review the North America results across channels, first, our stores; second, our directly operated e-commerce business; and third, our wholesale business. Our stores were a highlight with a 6% positive comp in the quarter, driven by improved AUR and traffic trends ahead of our expectations. The earlier timing of Easter contributed 3.5 points to North America comp in the fourth quarter and 1.5 points to total company global comp. Our retail improvements demonstrate some of the progress we have made across product, marketing and operational initiatives, such as monthly product newness and timing of floor sets that were better aligned with customers wear now shopping preferences. At a more macro level, we also saw growth in foreign tourist sales in the fourth quarter, following 15 consecutive quarters of declines. E-commerce comps in North America were down 18% in the fourth quarter in line with our expectations. E-commerce results continue to be pressured by our deliberate quality of sales initiatives, including significant reductions and deep markdowns. This quarter, we continued the work to lower discount rates and promotion frequency. Additionally, new arrivals and most of our iconic items were excluded from promotions. We expect to return to growth in North America e-commerce in fiscal 2019. This will be driven by three factors. First, the significant pullback in deep markdown sales is substantially complete and fiscal 2019 quality of sales efforts will be more moderated. Second, we are elevating our assortment and adding conversion-driving functionality to the site, such as customer reviews and live chat, all accompanied by better story-telling and creative. Third, in fiscal 2018, full price sales, which were not impacted by our promotional pull back, were up 3% with continued strengthening in the fourth quarter. This momentum gives us confidence that we can return to growth as the impact of the pullback diminishes. Moving on to North America wholesale. The fourth quarter revenue decline of 22% reflects strategic actions, timing shifts and negative, but improving sellout. Two-thirds of the decline is a continuation of our quality of sales initiatives, reductions at Bon-Ton and off-price timing shifts. Similar to prior quarters, closures of lower productivity points-of-sale in department stores, brand exits and reduced discounts negatively impacted revenue. Reduced shipments to Bon-Ton stores of approximately $10 million versus last year also created pressure. Finally, a shift in timing of off-price shipments negatively impacted the trend. Off-price revenue was down 29% in the fourth quarter versus an 18% decline in the third quarter. Some Q4 shipments that typically occur late in the quarter shifted into Q1. The remaining one-third was related to our underlying trends. While we are seeing improvements in our apparel categories, some of our progress was offset by weakness in non-apparel categories. As you know, our wholesale shipments reflect department store orders from almost a year ago. These orders followed a challenging spring 2017 collection sell-out that was down mid-teens. Since that time, sell-out has shown an improved trajectory. The fall holiday season was down low double digits and our current sell-out trend at department stores is down mid single digits. Clearly, we still have work to do, but the improved sell-out trends should be reflected in our orders and then on our P&L over the next several quarters. Looking out to fiscal 2019, we expect to see an improvement in our North America wholesale trend. While we expect revenue to decline, it should be at a smaller magnitude than in fiscal 2018. Some of the dynamics we see at play as we enter FY 2019 are, on a positive side, continued sell-out trend improvement, which will increasingly have the benefit of the refresh of our wholesale shop environments and evolved product and marketing; and growth in our digital wholesale business, which now represents a mid to high teens percent of our total wholesale revenue. While some pressures from FY 2018 remained, we expect them to lessen in magnitude. In off-price, we will continue to reduce shipments, but at a more moderate rate, as we restore balance to the channel as a vehicle for excess sales. The impact from our FY 2018 point-of-sale to closures will lessen as we anniversary those closures in FY 2019. Finally, the Bon-Ton bankruptcy, which represents about $25 million in fiscal 2018, represents about a 1.5 point of headwind to North America wholesale growth in fiscal 2019. In this channel, our focus remains to build high-quality growth with our partners in the North America wholesale channel. Moving on to Europe. Revenue increased 13% on a reported basis and declined 1% in constant currency in the fourth quarter. Adjusted operating margins were up 20 basis points, but were down 220 basis points in constant currency as gross margin improvements were offset by increased marketing investments. Wholesale revenue in Europe increased 1% in constant currency in the fourth quarter in line with the underlying trend of the business. Digital wholesale in Europe continued to post double-digit growth and expand market share. In the retail channel, European comps were down 6% in constant currency, with growth in e-commerce more than offset by declines in our stores. Comps in Europe continue to be pressured by our ongoing quality of sales initiatives, assortment and inventory challenges in outlet and challenging traffic, notably in some of our outlet stores. We are implementing a number of changes in our product assortments and promotion structures to improve the traffic and conversion trends in our European stores. We expect these initiatives will start impacting the business in the second-half of fiscal 2019. Also, as Patrice mentioned, we will be upgrading the technology platform for our digitally-operated European e-commerce business at the end of the first quarter of fiscal 2019, and we expect this transition will negatively impact second quarter e-commerce comps in Europe. We will manage these impacts carefully to minimize disruption, similar to what we did in North America when we transitioned last fall. Despite challenging trends in our brick-and-mortar stores, progress in our KPIs continued. In the fourth quarter in Europe, average unit retails were up 3%, discount rates were down and gross margin was up 270 basis points on a reported basis and 40 basis points in constant currency. Turning to Asia. Revenue was up 17% on a reported basis and 11% in constant currency in the fourth quarter. We saw strong performance across every market in Asia, including 6% growth in Japan, 34% growth in mainland China and 22% growth in Greater China, all in constant currency. Our product and marketing initiatives are resonating well in the region and we are continuing to increase our digital efforts and engagement with local influencers and celebrities. Comps in Asia increased 4% in constant currency in the fourth quarter, continuing the positive comp trend from the first three quarters of the year. We expect further comp growth in Asia as we continue to upgrade our distribution network and marketing initiatives to amplify and elevate the brand. We also continued to drive quality of sales in Asia. In the fourth quarter, average unit retails were up 3%, discount rates were down and gross margin was up significantly. Adjusted operating margin was up 210 basis points to last year in the fourth quarter in Asia and up 80 basis points in constant currency, driven by gross margin improvement. With our quality of sales actions largely completed in Asia, we expect more modest operating margin expansion going forward, as we focus on driving top line growth and leveraging our investments. Turning to our store fleet. We continue to improve our retail network through the closure of underperforming locations and opening new stores with improved adjacencies. For the full-year, we opened 37 standalone stores and 77 concessions. We closed 31 standalone stores and 65 concessions, ending the year with 472 standalone stores and 632 concessions on a global basis. Moving on to the balance sheet. In this quarter and throughout this year, we continued to strengthen our balance sheet, reflecting the operational progress we are making. We ended the year with $2.1 billion in cash and investments, up from $1.4 billion at the end of last year. Total debt at the end of the quarter was $596 million, compared with $588 million last year. Inventory declined 7% in constant currency and 4% on a reported basis to $761 million at the end of the fiscal year. We will continue to focus on inventory productivity and matching inventory flows with demand. Capital expenditures in fiscal 2018 were $162 million, below our original plan, as we shifted certain capital investments from fiscal 2018 into 2019. We generated $814 million of free cash flow for the year, up from $669 million in the prior year period. Now I’d like to turn to guidance for the full-year and first quarter of fiscal 2019. We will provide our long-term financial outlook, including our capital allocation strategy at our Investor Day on June 7. As a reminder, this guidance excludes restructuring and related charges. For the full fiscal year 2019, we expect revenues to be down low single digits in constant currency, representing a sequential improvement in our journey to return to growth. Foreign currency is expected to have minimal impact on revenue growth in fiscal 2019. We expect growth in our international business to be offset by a decline in North America, reflecting the timing of the Easter holidays, which will negatively impact both the first quarter and the fourth quarter, as well as the North America wholesale dynamics I outlined earlier. We expect operating margin for fiscal 2019 to be up slightly in constant currency. This will be driven by an estimated 50 to 75 basis points of gross margin expansion, as we continue to reduce promotions and shift towards higher-margin channels and regions. Foreign currency is expected to have a minimal impact on operating margin in fiscal 2019. This guidance reflects a balance between continued quality of sales initiatives to elevate the brand and investments in products, marketing and store concepts that demonstrate high potential for growth and returns. For the first quarter of fiscal 2019, we expect revenue to be flat to down slightly in constant currency. Foreign currency is expected to benefit revenue growth by approximately 150 to 200 basis points in the quarter. We expect global comp store sales in the first quarter to be negatively impacted by approximately 1.5 points, while North America comps to be negatively impacted by roughly 3 points from the timing of Easter, which favorably impacted the fourth quarter of fiscal 2018. We expect gross margin to expand 50 to 75 basis points in the first quarter in line with our expectations for full-year fiscal 2019. Operating margin for the first quarter of fiscal 2019 is expected to be up slightly in constant currency. Foreign currency is estimated to benefit operating margin by 20 to 40 basis points in the quarter. We expect capital expenditures of approximately $275 million in fiscal 2019, focused on consumer-facing initiatives that have demonstrated a proof-of-concept and healthy rates of return, including stores, digital and marketing. We expect our effective tax rate for fiscal 2019 to be approximately 22%, below our fiscal 2018 adjusted rate of 24%, primarily due to the lower U.S. federal income tax rate as a result of tax reform. First quarter of fiscal 2019 tax rate is estimated at approximately 18%. In closing, we continue to make strong progress in building the right foundation to grow our business. Ralph’s enduring vision inspires our teams around the world and they are delivering on operational efficiencies and building our growth initiatives. We are seeing early signs of momentum. As one team, we are focused on delivering quality, sustainable growth and value creation for the long term. With that, let’s open up the call for your questions.

[Operator Instructions] One moment please for the first question. Our first question comes from Michael Binetti from Credit Suisse. Your line is now open.

Hey, guys, thanks very much for taking our question. Congrats on – I know you guys have been working hard on this.

Thank you.

Thanks, Michael.

Yes, thanks. So can I just ask – in fiscal 2019, a lot of puts and takes there and, Jane, thanks for all the detail. Do you expect the revenue trend to improve as the year progresses, if we exclude a bunch of calendar shifts you pointed out, some puts and takes like Bon-Ton and the off-price reduction? And if I can just ask one follow-up in a bigger picture, Jane, you went through a lot of the distribution, you pulled back a really big amount. You hinted that sell-through is starting to improve. But on your last call, I think, you made a hint that your retailers are starting to see the margins on Ralph Lauren product improve on a year-over-year basis. I’m guessing that’s the first increase in years. Are you starting to see green shoots on the order book in any of the meaningful accounts at this point? Are they starting to increase orders, or is it better to characterize retail partners as still digesting a lot of the big changes over the last few years and you need to check a few boxes yet before we start new growth?

All right. Good morning, Michael. So I’ll take the first part of your question and then Jane will cover your – the second part.

Thanks.

Short answer is yes. We expect to see an improvement in our underlying business trend as we move through fiscal year 2019. However, on the face of the reported numbers, you’re not going to really see a smooth sequential quarterly flow. And there are really three reasons that are going to make the quarterly flow a little choppy, if I can use that terminology. First one is the cadence of our wholesale shipments, right? Our strategic reduction in our off-price shipment this year are going to be more concentrated in the second-half of the fiscal year, so that’s going to obviously pressure revenue in the back-half. And in addition, Q1 is actually benefiting from a shift in European wholesale as we normalize our shipment cadence after adjustments we made last year in that region. So that’s the first one. The second one is the timing of Easter that we referred to in our remarks, right? The fourth quarter and the first quarter of fiscal 2019 are going to be negatively impacted by this Easter shift. And then the final one is foreign currency. So based on what we can assume today, we assume that FX will have a bigger benefit to reported revenue in the front-half of the fiscal year. Yes, but if you exclude the impact of the Easter shift, our strategic off-price reductions, you will see a meaningful improvement in our underlying business trends as we go through the year.

Yes, Michael, just on the second part of your question, I have two reasons to believe that our wholesale results are going to improve. One you called out is improved sell-out trends. So if I look a year ago to spring 2017, our sell-out was down mid-teens. As we move through holidays, we saw low double digits. And now in – our current sell-out is down in the mid-single-digit range, so strong progress there. Our overall full – natural margins at wholesalers have progressed to increase quarter-by-quarter, so we made great progress this year. On retailer profitability, as you can see, our profitability, as was reflected in the segment, has also improved, so it’s been a win-win situation. And based on those sell-outs, the order books are going to be stronger as we move into 2019. So it takes a while, especially in wholesale, because you’ve got to earn your way through. But I think, they’re seeing the sell-out improvements. We’ve gotten good feedback on the showrooms that we’re showing. And importantly, we’re both winning with following – coming out of our reset.

Next question, please.

Thank you. The next question comes from Brian Tunick with Royal Bank of Canada.

Great. Thanks, and I will add my congrats as well on the progress.

Thanks, Brian.

Thank you.

I guess, my question may be for Jane. The gross margins here, I believe at an all-time high for the company. So maybe can you share with us, Jane or Patrice, your views on maybe where AURs can go from here as it seems like the worst of the inventory rationalization is behind us? And then maybe, Jane, give us some comfort on where our gross margins may be between different channels or geographies. As those grow faster, how do those differ versus the maybe North America business, so we can think about gross margins expanding even more? Thank you very much.

Sure. Let me try to take your question in pieces. First, on AUR. So where do I see AURs going? AURs are going to go higher and that’s based on a number of dynamics, product elevation that we’ve been working through this year and continue to work on, differentiated assortments by channels that allow for pricing harmonization and for us to provide value in different channels, as well as price harmony. We are assorting into higher price points, notably in international. The international consumer has a very strong view of the Ralph Lauren brand and we’re going to take that opportunity to assort into higher price points. As we mix into international markets where our AURs are higher, notably in Asia, you will see some benefit also to the AUR as we get that mix. And of course, that’s all balanced on a foundation of less promotions and less discounting as we move through the year. So that’s the expectation that I see on AURs. As I look – step back from gross margin – to gross margins, we do see gross margin’s expansion into the coming year. And that’s driven largely on the back of what I just talked about higher AURs, less discounts and less promotions. That’s been, as you look across these four quarters, the largest driver of our gross margin progression and that will continue to be the driver as we move forward. There is a benefit, as we – as I mentioned, as we move into international. That benefit on the gross margin line because of the higher AURs and the higher gross margins in international will be a net benefit as we move into next year. As you look between wholesale and retail globally, we have – we are at the highest retail gross margin as a company that we’ve seen. But we believe we have progress to move further, especially as we build out these smaller-format doors that carry a nice – very nice gross margins across Asia, but across all of our markets, so that’s a net benefit. And then wholesale, we made a lot of good progress and we’re at our highest total wholesale gross margins that we’ve been at in five years. But with the progress we’re making with assortment and differentiated assortment and the pullback in off-price, we see more room there as well. I think that we are comfortable that gross margin will expand, not at the pace that you’ve seen it in this last year, but as a durable benefit as we move forward.

Okay. Next question, please.

Our next question comes from Ike Boruchow with Wells Fargo.

Hi. Good morning, everyone, and let me add my congrats.

Thank you, Ike.

Good morning, Ike.

I guess – so I guess, Jane, I wanted to dig into the North America e-comm channel a little bit. It sounds like you expect North America e-comm, if I heard right, to grow next fiscal year. I guess, my question is should that growth begin immediately starting in Q1? Is that more of a 2H inflection? And then just a quick follow-up to that, now that you’ve kind of rebased that channel, can you just remind us what percent of sales, I think you used to say, we’re on discount, I think it was 78% like two years ago, where that got down to today, now that you feel it’s kind of rebased, just out of curiosity.

Sure. So first of all, on digital, and I’m sure you’re tired of hearing me say this, we’re going to make, like all things, nothing happens when you turn the page of a calendar or a fiscal year. But we are going to make sequential progress on our digital business and we’re encouraged by the early signs that we’re seeing on digital. So it’s not a flip, but it will be a sequential progress story as we look into FY 2019. And where we’re really pleased in our digital business in terms of the amount of products sold on promotion is that, overall, what we’ve done is, we’d really pull down the highest markdowns of 50% off or greater. We’ve seen that penetrate far less in our assortment and we’ve seen full price selling, most importantly, that wasn’t affected by any promotion be up 3% this year and move strongly through the year. So that we ended the fourth quarter with full price selling up over double digits.

Next question, please.

Thank you. The next question comes from Rick Patel with Needham & Co.

Thank you. Good morning, and congrats on the progress. There’s a lot of moving parts here, so good execution.

Thank you.

You had a nice return to positive comps in North America stores. I’m hoping you can give us a little more detail in terms of products and categories where you had the strongest performance, and your thoughts on the sustainability of that positive momentum in the New Year? And if I tie that into your comment about sequential improvement in e-commerce, should we expect to see retail comps turn positive this year?

Let’s tag team, Jane and I, on this one. First, looking at the progress that drove – the drivers behind the progress in our comp. It’s really the game plan that we’ve laid out starting to deliver. So the elevation of the brand that we are doing through product, through quality of sales. And then as you look at the work we’re doing on marketing and on specific product categories, whether that’s denim, you heard earlier examples of outerwear in our prepared remarks, the combination of those high-growth categories and our stronger penetration of those has been key drivers behind the improvement of the comp performance that we’re seeing. And we expect to continue the effort, both in terms of elevating the brand and evolving the product and the marketing. I also – although it’s very hard to trace it to every – to a single activity, I think, the shift that we’re making from a marketing standpoint towards more digital, towards more social and the numbers really continue to bear this out is having an impact on traffic, is having an impact on the brand perception, and this is therefore, driving this improvement that we’re seeing.

Yes. Rick, as I look at the components, really the two drivers of North America comp were strong AUR growth, which you’d expect given our quality of sales initiatives and improved traffic trends across all our channels. Now what we are seeing in contrast to Europe is, we saw a meaningful pickup in foreign tourist traffic. So it was up 7% this quarter and it was down about 7% last quarter. So a meaningful shift in traffic. We try to be clear, this was a holiday quarter. So, in North America, about 3.5 points with a benefit to North America comp, comp positive despite the holidays, so that’s very encouraging. It will sit on Q1 and the holiday will sit on Q4. But as we move forward, we expect to be sort of flat to down low single digits comp in FY 2019.

Next question, please.

Thank you. The next question comes from Omar Saad with Evercore ISI.

Hey, thanks, It’s great to see the continued progress, congrats on that.

Thanks, Omar.

Can you talk about – your inventory levels, quality of sales initiatives obviously have been having an impact on the P&L. Can you talk a little bit more about how you are managing inventory differently as more of your business has moved online across channels? Are you being able to develop kind of internal tech, IT systems that allow you to do more with less on the inventory side? Is that something we should think about as a medium and longer-term driver as well, or was it really just a matter of planning the right amount of inventory, reducing the promotions, and we’ve kind of done most of the work around inventory already? Thanks.

Thanks, Omar. So I guess, a couple of things on this one. One, there is just continued good old basic discipline that we will – we have in place that we’re going to continue to drive to make sure that we are as efficient as possible. During Investor Day, which I’m sure you’ll attend, we’ll give you some more perspective on some of the shifts we’re making in terms of managing inventory, particularly across channels, where it was historically been relatively siloed in the way we’ve managed inventory. And I think we’ve got some exciting projects to leverage that more smartly across channels. So you’ll see us continue to make progress on this area.

Yes, and we’ll talk about it more at Investor Day. I would say that the work that our supply chain leader, Halide Alagöz and Valérie Hermann, have done to have a very strong and integrated planning process from sketch to shelf has been a huge benefit to our inventory management. Good old-fashioned SKU cutting that were of unproductive SKUs was also a benefit and now we’re evolving more into differentiated SKUs to support our overall AURs. And we are using technology like our RFID technology in the factory store, as well as shared inventory across channel to improve our inventory work. I would expect longer-term that our objective is to have the improved turns more moderately than we have with the inventory reset that we did to return to improved turns. But really, you’ll see inventory match our sales outlook.

Next question, please.

Thank you. Our next question comes from Bob Drbul with Guggenheim. Your line is now open.

Hi, good morning. I just had a question on the North American wholesale business where you talked about refreshing 80 of the top department stores. Can you talk about the performance of those 80? Are there more that you are doing? And are you recapturing any square footage space in any of those top department stores? Can you give us an update on that? Thank you.

Sure. So let’s break down the different elements here. The first 80, we’re really focusing on improving the environment, right? Some of these doors have not been touched for many, many years, some more than a decade. So it’s about creating a more inviting, more engaging, more modern environment for consumers. This ranges from the lighting, ranges from fixturing that we have and also allocating the product categories in a way that really is more consistent with the way the consumers approach our business and want to shop us. We have seen strong lifts beyond, I mean, in these 80 doors relative to pretest period or – and/or benchmark doors. So view this as just the beginning for us, right? Ultimately, our goal over the next few years is really to impact the vast majority of our presence. So we will continue to do that and not just in wholesale, but really, our approach is to make sure we’re transforming the shopping experience across every single channel that is relevant for a consumer target. And so that’s true online, that’s true in our own stores, that’s true in our factory stores and that also continues in wholesale, both in North America and globally. As far as – second part of the question was?

Can you remind us, Bob, the second part?

Just around like the square footage…

There is more space. Square footage

Yes.

So that’s – honestly, that’s not the focus for us at this point. We want to be a lot more efficient with the space that we have. And so this is really about productivity per square foot as opposed to just adding more space. What we’re finding actually, in some areas, we potentially have excess space relative to what we need to present the brand appropriately. So we’re really focusing on the productivity of the space we have and making that work much harder for us. And we’re actually seeing significant benefits, both in wholesale and in the stores that we’ve renovated behind that approach.

Yes. Bob, I would just add that one of the benefits of that we’re seeing in wholesale channel following the closure of the unproductive point-of-sales, as well as refurbishments that we are seeing our GMROI and our sales per square foot in wholesale increase nicely even in the face of overall shipment declines. So the GMROI of our strategy is working for us and it’s working for our retailers. And in some cases, the resets actually have gone through a period of pullback, it helps you stake your claim to the space that you want and assort it more productively and that’s certainly what we’re doing.

Okay. Next question, please.

Thank you. The next question comes from Eric Tracy with Buckingham Research.

Hi. Good morning, everyone, and I’ll add my congrats on great execution.

Thanks, Eric.

Good morning, Eric.

I’ve got a two-parter here. It’s a little bit distinct. But just first, maybe speak to continued marketing spend and demand creation levels that we should anticipate as we move into – throughout 2019. I think, Jane, you set up 10% this year. Maybe just again, sort of both quantify and give a level of assessment where that spend will go? And then secondly, Jane, you mentioned product costs in terms of gross margin not being as beneficial this year. Clearly, we’ve got some inflationary pressures. Maybe just talk through that dynamic and the potential impact as well?

Sure. Maybe I’ll start with the marketing spend, Eric. So right now, our spend is around 4% of sales, right? The industry norm is closer to 5%. So over time, our goal is to get to minimum, the industry norm, because we believe in branding, we have an amazing brand, we need to invest behind it. We’ve made good progress over the back-half of this past fiscal year, as we want to continue to drive that. And I think you can expect that we will increase similar growth rate in fiscal 2019 relative to the overall increase in fiscal year 2018. With a deliberate focus again on digital and social commerce, that’s where the vast – and social media, that’s where the vast majority of our marketing increases will go.

So as I look at product cost, Eric, the pressure points are, I’d say, twofold. One is in actual garment, cost of polyester, cotton and even labor wage rates. And then the other factor that we’re looking at is obviously freight cost and trucking capacity. As I aggregate those factors, I think that it’s about 30 to 50 basis points of pressure on gross margin. Now as I contrast that to what happened in FY 2018, it was about 50 basis points of benefit. So we obviously are looking at cost management – cost initiative, renegotiating some deals and leveraging scale with our supply partners and managing duty costs. Those are all parts of our ongoing productivity initiatives to manage this cost to that 30 to 50 basis points. We’ll also – a part of our AUR journey is to make sure that we cover structural cost increases with pricing increases. So I think we have a handle on it. It is a factor and it’s one of the factors that will make gross margin expansion next year, but at a less significant rate than we saw in FY 2018.

Next question, please.

Thank you. The next question comes from Simeon Siegel with Nomura Instinet.

Thanks. Good morning, guys, and congrats on the progress.

Good morning, Simeon.

Jane, sorry if I missed it. The CapEx has been coming down nicely and below plan in the past couple of years. I think, it looks like you’re planning it back up this year. So any thoughts on what that should look like go forward? I don’t know if there was anything timing-wise in there? And then just to your comment about the meaningful decline in off-price shipments in the control there, could you just remind us what the current off-price penetration is and where you’d expect that to go?

Sure, Simeon. Let me give you some context on capital. Obviously, FY 2018, we spent less than we thought we would at $162 million. But I really view this as a test-and-learn year. So we put a lot of test into the marketplace, but we have a stringent guideline for the ROI that we need to see from investments that we put in the marketplace. That caused us to delay some initiatives into 2019, and so you’re seeing that, in our CapEx guidance, it’s closer to about 4.5% of sales as we move forward. Over the long-term, we think that 4.5% to 5%, 4% to 5% is the right level of CapEx for our business. As I look at CapEx, especially this year, if you contrast it to the last several years, like many others, significant CapEx investments in IT have moved into SG&A as we take advantage of more variable platforms like Demandware or Salesforce eCommerce Cloud, backup services that you don’t have to invest capital in, but you pay as a service and stay technologically upgraded. So that’s a factor for CapEx as we move forward. But I think, we feel good that we have really inculcated a strong ROI culture. We know where we need to go and we’ll talk about it much more at Investor Day. Then, obviously, on off-price, we don’t disclose the percentage of that business to our total. As you know, we would disclose it if it was more than 10% as a very high watermark. But our objective is to increase this channel’s penetration into our wholesale channel, so it will be decreasing...

Increasing, increasing.

I’m sorry. Oh, gosh.

We are increasing instead of – don’t let anyone else hear that. We are decreasing its penetration to the wholesale channel. So it is a point of pressure to growth obviously in 2018 and into the future, not as dramatic as you saw in 2018, but at decreasing penetration. It’s a pressure point in growth, because we’ve got to get this channel back to where it should be strategically for us, which is in a point of excess sale for excess that we generate as a retailer.

Okay. We’ll take one last question, please.

Thank you. Our final question comes from John Kernan with Cowen. Your line is open.

Good morning. Thanks for squeezing me in. Congrats on the progress and looking forward….

John, good morning.

Looking forward to the Investor Day. Jane, just wondering if you could touch on what’s implied within the guidance for Europe and Asia this year on a revenue perspective? And then you’ve obviously done a lot to elevate and enhance the brand, not just in North America, but globally. Can you talk about the potential you see in Europe and Asia? I think you talked about $500 million in China. Give us a little more detail now about what – where you see those businesses going in the future. Thank you.

Yes. And I can tell you, John, we’re going to talk a lot more about this at Investor Day, and you can hear it directly from our leaders, Jeff Kuster and Howard Smith, who will give you perspective. In general, next year, I expect that international will grow and North America will decline less – in less magnitude than we saw this year, reflecting the work that we’ve done, but that’s our expectation. As I look across the international business, we know we are underpenetrated in China. Our store presence has a lot of opportunity. The Chinese consumer in the research that we’ve done has an elevated perception of the brand. And we’ve got a lot of room to grow into their perception, both in our assortments and in our stores, building out our stores. Across Europe, again, we have 19 full-price stores in Europe. We have a great opportunity to grow there. Notably, we’re underpenetrated in Germany and Italy as opportunity areas, where we have a strong consumer perceptions and relatively limited build-out of our store fleet, but those are the opportunity areas.

Yes. I think we’re excited about the growth opportunities we have in international and we will share those in more detail in a couple of weeks. So listen, we’re going to close it here. Thank you for joining the call. We look forward to seeing all of you June 7 on the Investor Day and have a great day. Thank you. Bye-bye.

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