Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal 2019 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.

Good morning and thank you for joining Ralph Lauren first quarter fiscal 2019 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 Web site. 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 first quarter fiscal 2019 results that reflect progress on our next great chapter's strategic growth plan that we shared with you at our investor day, in June. We're encouraged by this start to the new fiscal year, as first quarter results showed improvement in both the top and bottom line. A few of our team's key achievements this quarter included high single-digit growth in our average unit retail globally, double-digit growth in Asia, our key growth region, and digital commerce up high single digits. This solid start enables us to modestly improve our outlook for the year. Our long-term plan is based on our three guiding principles, first to put the consumer at the center of everything we do. Second, to elevate and energize our brands, and third, to balance growth and productivity. With these principles in mind we are focused on executing our five key strategies. First, win over a new generation of consumers. Second, energize core products and accelerate high-value underdeveloped categories. Third, drive targeted expansion in all regions and channels. Fourth, lead with digital across all activities. And fifth, operate with discipline to fuel growth. Let me take you through the progress we've made in the first quarter across these initiatives, starting with the first one, win over a new generation of consumers. Our goal is to recruit millions of new consumers into our brand each year. To achieve that we're continuing to increase our marketing investment and shift our spend to digital channels that matter most to consumers today. In the first quarter, we increased our marketing spend by about 20% to last year. Our primary communication was our Spring Polo campaign featuring our iconic white Polo shirt. We…

Thank you, Patrice, and good morning everyone. Our first quarter results were strong and showed continued progress on strengthening the brand and driving execution. Our key initiatives are delivering strong AUR growth, lower discount, higher gross margin, and operating profit growth. First quarter revenue increased 3% on a reported basis and 1% in constant currency. This was above our guidance driven by strong performance in Asia and the benefit of wholesale shipment timing in both Europe and North America. Asia revenue grew 16% in constant currency in the quarter. Our initiatives across product, marketing and shopping experience are resonating strongly in this region. And give us increased confidence in our strategy for Asia and our other region. In the quarter, we saw higher sale through on spring summer product lead by mid single-digit growth in the Polo brand. Adjusted Gross margin expanded a 120 basis points in the first quarter and a 110 basis points in constant currency benefiting from reduced discount rate and favorable product mix. Adjusted operating margin in the first quarter was 11.1% up 90 basis points to last year on a reported basis and 70 basis points in constant currency. In the first quarter, we stepped up our marketing significantly off to a low base last year. Planned investment in marketing was up over 20%. For the full-year, we are planning marketing to grow high single to low double-digit with incremental growth in the second quarter to support the global amplification of our 50 anniversary fashion show. We are progressively increasing marketing investment towards our long-term goal of approximately 5% of sale. We plan to fund the majority of the increase to productivity to achieve our operating margin expansion goals. Moving on to our segment performance, starting with North America, revenue was down 2% in the…

[Operator Instructions] The first question comes from Laurent Vasilescu with Macquarie Capital. You may ask your question.

Good morning, and thanks for taking my question. Your digital commerce results showed improvement in Q1. Can you talk about the drivers and what you expect for growth in FY '19? And separately, Jane, another gross margin beat. Can you parse out the gross margin drivers for the quarter, and how should we think about the gross margin cadence for the next few quarters?

Sure.

Hey, good morning, Laurent. Well, first of all, I appreciate the fact that the first question is on digital, and it's one of our core strategy is to lead with digital. And so a couple of things, one is we did make good progress this quarter on digital commerce with sales up 7% versus last year. Particularly strong growth in international, right, we were up 24% in international. And we had slight growth in North America. As we talked at the investor day, the way we look at digital commerce is really through kind of four lenses. First one is our own sites or ralphlauren.com, the second one is departmentstore.com, which is a significant channel, third are pure players, and then fourth is social commerce. So let me just give you a quick perspective on each one. So starting with our own site and think of this -- this is roughly half of our digital commerce business. Our own site, around the world, the growth was up slightly in Q1. And what we're particularly proud of is the acceleration in the North American site. Last year we reported significant declines throughout the entire year. We're still down Q1, but only down 2%. And we look forward to next quarter when we'll be able to, I think, to report actually growth on this site, which I think we've all been really hard for to achieve, so good progress there. We improved functionality and brand presentation on our U.S. site, and we will continue to drive that. As far as U.S. is concerned, I think you've heard in our prepared remarks, we upgraded our platform, basically replicating what we did in the U.S. a few months ago. And we're also quite hopeful that we'll see much stronger consumer engagement moving forward in…

Yes. Good morning, Laurent. On gross margin, Q1 was strong. It was ahead of our expectations. We went into this quarter, June is a highly promotional quarter. And we were able to pull back on our promotion levels and discounts. That was the number one driver of our 120 basis point growth margin expansion. The other driver was some favorable product mix that we saw across the business. And so those were very encouraging. I think you saw it in our AUR increase of 8%, that it really was a strong quarter in terms of being driven by promotional pullback and quality of sales initiative. As I look forward to FY'19, we are expecting to be in about the 75 basis points of gross margin expansion. That will be driven -- continue to be driven by the pullback in promotions and discount levels. But there are two factors that we expect to become increasing pressures. One is increasing product costs. We expect that to become a headwind of about 30 basis points as we move through the quarter, it was about a 20 basis point benefit in Q1. And we continue to expect that FX switches from a tailwind to a headwind in the back half. FX was about 10 points of benefit in Q1, but should be a headwind by the time we get to Q4. So as I think about the cadence of gross margin as we move through the year I think it'll remain -- we were slightly out ahead in Q1. It should be about consistent in two and three with our guidance range. And then the most challenging quarter in terms of gross margin is Q4 when we face FX headwinds and some increased product cost pressure. Next question, please.

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

Hey guys. Good morning, and congrats on a nice quarter. Let me just ask you about AUR for a second. That continues to be up pretty nicely, you've mentioned it a few times. And that's even though you had some pretty meaningful off-price shipments added in the North America side, I guess, or at least a shifting of some of those shipments.

Yes.

I know you mentioned June was a highly promotional quarter, so maybe that impact is less through the year. But how much of the AUR increase that we're seeing at this point, this late in the quality of sales game is from initial price points versus the ongoing reductions in promotionality or off price? And then if I could just add a second, maybe some context around that sequential acceleration in the North America wholesale business, it's not lost on us. You gave us a nice new table to look at by channel there. But that was, I think, about a 20 percentage point increase quarter-to-quarter. I know you had some timing shifts with off-price, but also we see some new distribution in places like Amazon and Urban Outfitters for the Chaps brand. So, maybe you could help us isolate a couple of the drivers or maybe just size a few of those drivers so we can understand that big acceleration?

Yes, so why don't I start with AUR, and then we'll move on to sort of the wholesale timing and cadence. AUR progress was really broad-based, and really is an indication of the work that we're doing to improve both our promotional stance, but also the work that we're doing on merchandizing and product. As we're seeing the largest driver is still our pullback from promotion, but we are seeing benefit of assorting into higher price points. We saw that come through both in North America and the international business, in retail, and in our digital business. And so really across the board strong AUR growth, really a bit out ahead of where we expected the business to be, but we expect AUR growth is a part of our strategy, as I called out during investor day. And so we continue to expect that we'll see AUR expansion. But largely, Michael, to your point specifically it's mostly our quality of sales work. As we look at our overall wholesale business, we really have a dynamic going on here that in the first half of the year we, especially in this quarter, we moved some of our off-price shipments to out of Q4 last year, into Q1 and Q2 this year. And so that is that sum of the acceleration that you're seeing in overall wholesale, we think the underlying trend in our North America wholesale business is down mid single-digit. We, while we got some benefit from shipment timing the pressures still remain in terms of challenging traffic trends, some of our quality of sales work that we continue to do, some door closures and bond time, I expect that you'll start to see -- we'll call out the underlying trend. We expect our full-priced wholesale business will improve sequentially as we move through the year. Again, there's some choppiness that'll go on, but the underlying trend will improve. And then as you look in Europe there's some shipment timing going around. We expect that that businesses' underlying trend is up low to mid single-digit. And as we come into the second half you'll start to see those underlying trends normalize because we'll be through some of the shipment timing. Next question, please.

The next question comes from Matthew Boss with JP Morgan Chase. You may ask your question.

Hi, good morning. This is Grace Smalley on for Matt Boss, thank you for taking my question. Just on the North America same-store sales, I think in brick-and-mortar trends may have decelerated very slightly relative to last quarter, even once you ship out the Easter shift. Is that fair? And if they were out can we think about what drove that? Thank you.

Good morning, Grace. Yes, that is correct. Our North America brick-and-mortar comp slowed from Q4. So down three reported, if you exclude the Easter impact it's actually basically flat versus last year. A couple dynamics, one if you look at actually the base period we were working against a much tougher comp. Q1 last year was down four, whereas Q4 was down 12. The second piece is we did see a shift in tourist business. While our tourists' sales were up 7% in Q4, they were flat in Q1. And we see that as being driven by some of the currency fluctuations that we have all observed. But what you can expect from this business is actually continued improvement on the overall comp trends. If you look at it over time, we are progressively strengthening from a comp standpoint, and that's generally what we expect for the balance of the fiscal year as our new product and new marketing activities kick in.

Next question, please.

The next question comes from Heather Balsky [ph] with Bank of America Merrill Lynch. You may ask your question. Q – Unidentified Analyst: Hi, good morning. Thank you for taking my questions.

Heather, good morning.

Good morning. I was hoping first, you guys seem pretty confident in ecommerce turning in the second quarter. Could you speak to quarter-to-date trends? And then with regards to Europe and the turnaround there, can you just elaborate a little bit on the changes you're making in terms of the merchandizing? Thanks.

So, listen, we can't give you quarter-to-date perspective. I can give you some perspective on what drove the improvement in Q1 in North America being a little more granular than the earlier question from Laurent. One, we stabilized the new platform, right. We launched the new platform last fall, during the holiday period. We had to work out some kinks as we worked the transition. We've now done the majority of that. Two, is we've really strengthened the functionality of the site. Being very consumer-centric, understanding what the consumer expects from the site. And so that ranges from delivery timings, to ratings and reviews, to 360 video on the product and so on which we know is resonating well with the consumer. Three, is the brand presentation as a whole is better, right. And we want this to be our global flagship. And we know we still have work to do to elevate the brand presentation, but we made progress in Q1. And obviously we've also lapped some significant discount rate reductions. And so we're getting to a more normalized situation. We will continue to improve our quality of sales on the site. There's still work to be done, but our AUR growth was healthy, I think it was 5%. Our discount rate is down 300 basis points, so we're also making progress on the quality of sales front. And so you can expect all that to continue. We are cautiously optimistic. We obviously need to execute. But I think a lot of the interventions we're making both from an operational and consumer-facing standpoint is resonating with the consumer.

Yes, Heather, I would just add that we also really encourage with the full price growth that we see on our e-commerce site and that was up 5% this quarter, which is -- they're encouraging.

Next question please.

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

Great, thanks, good morning. I guess I had a question on Europe. I would love to hear kind of what you're seeing broadly in that market in particular it sounds like you guys are still working through a few assortment challenges, so specific on that and then secondly as it relates to the broad promotional environment in Western Europe, have you seen any changes as you've moved through the middle of the year now? Thank you.

Yes, so what we're seeing in Europe on our side is the environment is a little bit more challenged. We saw some pressure in the foreign tourists sales overall in Europe. This quarter what we saw was that for interest activity was down about 15%. While we look at that relative to last year we're down about 6% that is a pressure overall in Europe as we look at our business specifically we have seen some challenge in our European outlet business. While we believe that foreign tourists are an impact there we also believe that our own assortment had gotten to basic. And that we need to get back into stock on seasonal newness and innovation newness that's part of our inventory build of this quarter and we expect in the second-half, that you'll start to see improved trends in our own business. We've done a lot of work this quarter and will continue to do a lot of work in quality of sales, so we step back from promotional levels. We do see that environment to be somewhat promotional as we move through this quarter.

And I think as we're talking earlier if you look at the various channels, so you've covered that the factory outlet situation obviously on the .com side we are in the middle of implementing our new platform, so we see encouraging signs, work to do but encouraging signs so we expect that to actually accelerate and as far as wholesale is concern while as you mentioned generally are we did have timing impacts with Q1. The overall health of our wholesale business in Europe is actually good and the team is doing some really good work there, so our key opportunity and challenged to work on really is the quality of sales force that we're doing for factory. Erinn we missed, we didn't hear your second question or we didn't hear it clearly?

Well, the second part was just on the promotional environment. I think Jane had that just kind of broadly it sounded like it would be picking up a little bit in the back half of the quarter but that was my second part of the question.

Okay, thank you.

Thank you. Next question please.

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

Thank you. Good morning nice to see the lot of the defense initiatives you guys putting in really playing out in terms of the margin in the AURs, wanted to ask maybe for an update on the product side, what you're excited about where you think you are in terms of getting the product where you want to be across different channels and the different sub brands and opportunities you're excited about on the product side coming up, I don't know if [indiscernible]. Thank you.

In general, we are right where we expect it to be from a product evolutions standpoint. We're feeling good about number of categories. If you look at our results in this past quarter we actually saw growth both in men's and women's with the focus on Polo and across most of our apparel categories, so this is pretty broad-based in terms of improvements what we're seeing is our focus on icons is really paying off, so let's obviously job one for all of us continue to drive our icons. The second element is the renewal of our core is beginning to run to resonate with consumers a combination of both adding novelty, right things like embroidery things like printing is resonating well and also we freshen our fabrics pushing a greater focus on functionality again being consumer-centric and being clear on what the consumer is expecting from us, so stretching our C notes we mentioned that in our prepared remarks is resonating well with the consumer. Our denim products are actually also doing well. We had good momentum last fiscal year, we are building on that momentum this first quarter with mid single-digit growth or outerwear business, which is another focus category for us. It was a high single-digit, so where we focus and we are being really disciplined in terms of what we want to drive our activity on, we are seeing positive response from the consumer. To your question on brands where we are seeing the greatest progress at this point is Polo. But we are also seeing improvements on Lauren, so encouraged by that. So I say listen, the game plan is kind of on track but we know still have work to do and we are really focused on making sure we are bringing the vision to life and being true to who we are while connecting clearly with what the consumer expects from us across the markets, right? And Jane touched on this earlier. Some of our products, what's resonating maybe different in China than it is in wholesale North America and we are making sure we are adapting to the local needs and expectations of the consumers we are targeting.

Next question, please?

The next question comes from Alex Wallace with Goldman Sachs. You may ask your question.

Good morning. Thank you for the question. I wonder if you could help us with an update on your strategic initiatives in the U.S. market. In particular an update on the strategy and LA and now that you are few months into region refresh. And also the refresh of some of the department stores in the market, I was wondering if you've seen a material discrepancy between those stores, it could be refreshed and the control group. My second quarter was product cost, I just wanted to follow-up on a question from Smalley earlier. You gave us a hopeful color on the progression of the impact of product cost on a gross margin. I was just wondering if you could break that down a little bit in terms of the drivers of that, how much of that is in a proactive quality improvement, how much of it is commodity industry headwinds and so on? Thank you.

Sure. Good morning, Alex. I think Jane and I will talk to you on this one. As far as LA is concerned, so really elevating the entire LA ecosystem is really the strategy there. We started in May indeed, yeah it's very early there as far as, so I'm always cautious to draw any conclusions a weeks and but if you push me I would say early indicators are encouraging, we are seeing growth in LA market that's slightly ahead of what we are experiencing across the country. We are also seeing from a consumer standpoint that we are attracting a new younger consumer, so we are quite encouraged by those early signs. And then, we actually saw also an acceleration of our digital commerce business in the region. So the headline thought on this is so far so good. Frankly, I wouldn't take any of this to the bank yet, I think we are in very early stages of implementation but we are seeing encouraging signs including with our new small format store in Beverly Center as you know, as we look ahead we really want to expand our brick-and-mortar footprint through small format stores, more productive, more dynamic, more flexible, better connected and few weeks in to the opening of that store we are actually also seeing encouraging response from consumers. Then on the improvement of wholesale refreshers, so we are continuing to do that. We are continuing to see benefits from doing that. We have a great partnership with our lead wholesale partner who is focused on upgrading their top 50 doors and we are working really hand-in-hand with them on driving those top 50 doors, remember which actually are in the Los Angeles region. And I think we are also thinking to what's the next phase of upgrades as our partner looks to expand that program. So across the board continuing to drive that, seeing return on investment for those upgrades and getting a solid consumer response.

And Alex, on product cost, let me pass it into to the two buckets of your questions, what we are seeing on our elevated product is that we are able to get both AIR and AUR increases to whole market as we elevate the product, so that's the good news, it challenges and I was pointing out are really centered in key input areas like polyester, cotton gown, some wage inflation as soon as some freight cost that are manifesting themselves as you competed, tight U.S. market trucking capacity. Now we are working with our suppliers to offset some of these costs to look how we work through air freight reductions to improve our freight cost. But that's really the center pressure points that we are seeing in overall product cost.

Next question please.

The next question comes from Rick Patel with Needham & Company. You may ask your question.

Good morning everyone, and congrats on the progress early in the year.

Thanks.

I have a couple of follow-ups on Omar's product question. So the first one is you have five underpenetrated categories and it looks like you are making some pretty good progress with outerwear and denim. As we think about the other three categories ready-to-wear, footwear, accessories, do you expect to see an acceleration at some point in fiscal '19, or is that going to be an out year event? And then, my second question is really around some of these product drops. They've obviously been very successful and they draw a lot of interest in the brand. As we think about the future, can these ever become big enough to be growth drivers on their own with the right inventory investment and how frequently can you recycle some of your more successful ones like Snow Beach without hurting the brand appeal?

Great questions, Rick. So as far as the underdeveloped categories are concerned, we have good momentum on denim and outerwear, and actually Wear To Work, I didn't mention that; we are off to a nice start on Wear To Work both on men and women with much more to come, and yes, some of it will impact this fiscal year on Wear To Work. On the footwear and accessories piece, that one as we talked during Investor Day, it's going to be a slower burn, because we got work to do on building our capabilities and making sure we have right design capabilities, right merchandizing capabilities, right sourcing plan and obviously we are great teams in place doing that work now. So I don't know that you will see a lot -- a significant impact in fiscal year '19. Obviously, we are driving all five, but I think well you'll see the strongest progress is going to be denim, outerwear, and Wear to Work. As far as the drops are concerned, yes, they had worked really well for us. So we are excited about that. We are very -- I'm going to address your second point first; we are very careful on frequency, right, because the risk is you exhaust the consumer and then it loses all its interest and excitement. So we think we have the right pace, we have some exciting things coming in the fall, so that we will be announcing in I guess a couple of months, so we will be keeping that frequency, we will not accelerate it. And then, we are also thinking how do we expand to our woman's business because most of our drops are actually -- all of our drops so far have been focused on men and women deserve special drops too, although it will probably be a different, different approach to it. As far as size, I would not expect these to be big enough to drive the overall numbers from a pure sales standpoint, right, these are marketing activities first and foremost. Similar to what we do with the Olympics is not about driving sales of that specific capsule, it's about leveraging this capsule to tell the brand story, to bring Ralph's vision to life in a new fresh way. And that's how we view this. So we like the sales performance, we are obviously excited when things sellout within hours of days, but the fundamental objective is part of our storytelling for the brand and to really make sure that we are bringing newness and freshness in a different perspective on the overall brand.

All right, we will take one final question.

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

Hey, good morning everyone. Let me have my congrats; Jane just two quick ones for you on Europe, we know about the European website re-platforming and it sounds like it should be a little bit of a headwind in the near term, could you help us how to think about European e-comp comps in the second quarter, it sounds like this should be negative but just kind of want to understand that a little better. And then, you mention the tourism was down 15% in Europe this quarter. I'm just curious how that compares to what you saw three months ago.

Sure, so why don't I start with the expectations for Europe e-commerce, I do expect that e-commerce will be down sort of mid single-digit in the second quarter. And then, I expect in the second-half to be back to growth and it's really from what we are seeing from transition as we look at some of the redirects and affiliates and email setup that those will have sort of a compressive pressure in the second quarter. What we were seeing in foreign tourist sales sort of in the -- in Europe specifically in the fourth quarter was about down 20 and that was worst than we saw in the Q4 '17 and so we are looking at this down 20, down 15. The Euro did the pressure from I think foreign currency lightened a bit as we moved into the first quarter and foreign tourists tend to drag a bit as they don't follow currency trends precisely, but over time. So not unexpected, but a little bit of abatement from pressure in Europe as we as moved into the first quarter.

Thank you.

Good. Thank you. Well, listen, thanks to all of you for joining the call. As I think you can tell Ralph and I and Jane and the whole team are encouraged by the progress we are making as we implement our new strategic framework. And so now everyone is laser-focused on bringing up to life around the world, so we can get consumers excited about our brand across channels. We look forward to talking to you next quarter. Thank you, and have a great day.

Ladies and gentlemen, that does conclude the Ralph Lauren first quarter fiscal 2019 earnings conference call. Thank you for your participation. You may now disconnect.