Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, the conference is being recorded. I'd now like to turn over the conference to our host Ms. Corinna Van Ghinst. Please go ahead.

Good morning, and thank you for joining Ralph Lauren's Second Quarter Fiscal 2021 Conference Call. With me today are Patrice Louvet, the company's President and Chief Executive Officer and Jane Nielsen, Chief Operating Officer and Chief Financial Officer. After prepared remarks, we will open up the call for your questions, which we ask that you limit to 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, Corey. Good morning, everyone, and thank you for joining today's call. Our second quarter performance reflected solid progress on our path to return to growth. Our results were overall in line with our expectations with better-than-expected earnings driven by gross and operating margin expansion. While COVID-19 is still impacting physical store traffic and consumer behavior, we continue to take proactive measures to get ahead of these shifts and position our business to emerge from this crisis stronger than we came into it. These measures include accelerating our connected retail offerings globally, delivering high-value new customer acquisition, expanding key categories and international markets and realigning our cost structure. Throughout this period, we remain steadfastly focused on elevating our brand, and we were encouraged that underlying AUR growth outperformed our expectations this quarter, which is reflective of more personalized communications, reductions in promotional activity, geographic, channel and product mix benefit and strategic pricing increases. This acceleration of core strategies in the quarter remains consistent with the five strategic priorities that we laid out as part of our long-term plan. These include: first, win over a new generation of consumers. Second, energize core products and accelerate high potential underdeveloped categories; third, drive targeted expansion in our regions and channels, fourth, lead with digital across all activities, and fifth, operate with discipline to fuel growth. I will touch on a few of these areas in a moment. But first, let me review a few highlights related to our recovery this quarter. Overall, we were encouraged that our performance improved sequentially in each of our geographies led by Asia and across our digital channels globally. Nevertheless, while we are confident in our strategy to return to growth, we remain cautious as our path to recovery may not be linear over the next few…

Thank you. Ms. Nielsen, your line is open.

Thank you, Angela. And good morning, everyone. We were encouraged by our team's execution and continued business progress in the second quarter. In the midst of a still challenging operating environment, we delivered sequential improvement across all regions, expanded our gross margins through continued AUR growth and brand elevation and reduced expenses across the company. Importantly, our balance sheet is very strong with $2.4 billion of cash and investments, enhanced by ongoing working capital efficiencies. At the same time, we continue to invest in our brands and in the channels that matter most to consumers today, notably, an increased emphasis on our digital transformation. We continue to be cautious about the pace and regional variability of COVID recovery as well as consumer behavior, especially with the rise of restrictions, with the resurgence of COVID cases, notably in Europe. We are intensely focused on what we can control in this dynamic context and on positioning the company to accelerate value creation as we emerge from the global pandemics. This includes elevating our powerful lifestyle brands and maintaining a strong balance sheet, while also realigning and streamlining our operational and expense structures. To achieve this goal, in September, we announced the first stage of our fiscal 2021 strategic realignment plan, designed to support future growth and profitability while creating a sustainable cost structure. Our full strategic review process includes the evaluation of our team organizational structures and ways of working, our real estate footprint and related costs across distribution centers, corporate offices and direct-to-consumer retail and wholesale doors and our brand portfolio. We announced actions related to the first initiative, reshaping our organization to align to our strategic growth priorities. These are estimated to result in gross annualized pretax expense savings of approximately $180 million to $200 million. We anticipate a substantial…

[Operator Instructions] Our first question comes from Omar Saad with Evercore ISI.

Good morning. Thanks for taking my question and congrats team on the strong profitability this quarter.

Thanks, Omar.

Good morning, Omar.

Good morning. Patrice, understanding that the current COVID environment is highly unpredictable. There's not a lot of visibility. But if you look beyond the near-term headwinds, can you elaborate on your comments that you plan to emerge from the crisis stronger than you came into it. And could you include a discussion also of a recently announced reorg last month and how that fits in? Thanks.

Sure. Well, thanks for your question. First and foremost, our strength comes from our teams and their incredible dedication, resilience and agility have fueled our progress in -- during these challenging times. Our team's engagement, coupled with a laser focus on strategic priorities and also proactively reducing our exposure to the most structurally challenged parts of our businesses, leads me to actually have great confidence that right now, the fundamentals of the company are actually stronger than when we came into this crisis. Let me elaborate on both areas. First, the strategic growth areas, and then I'll talk about how we're tackling the structural headwinds for the company. So, strategic growth focus area is really centered on elevating our brand, right? We have one of the best brands in the world at hector resiliency and authentic consumer connection during COVID. Our latest read on purchase intent over the past six months since the crisis started indicates actually our purchase intent, our brand consideration scores are up versus pre-crisis. Second point is accelerating digital growth and profitability, right? We've been adding connected retail functionality. We've driven a great focus on personalization in the interaction with our customers and also a strong drive on quality of sales. The third area is recruiting high-quality new consumers, bringing in consumers who buy at higher prices and are really at the sweet spot of our general targeting. And we also saw very strong consumer growth on ralphlauren.com over the past quarter versus prior year. Fourth area is driving high potential underdeveloped markets and categories, namely China, outerwear, and home. And then finally, it's realigning our organization and cost structure to support our future growth and deliver for the numbers we announced a few weeks ago, at least $180 million of savings. So, those are the…

Next question, please.

Thank you. The next question comes from Matthew Boss with JPMorgan.

Great. Thanks. So Patrice, could you speak maybe to the range of current business trends that you're seeing across the portfolio, specifically Polo versus Lauren? And then, Jane, how best to think about the progression of revenues in the back half of the year relative to the 30% decline in the second quarter? And maybe specifically, do you believe a return to consolidated growth is feasible by the fourth quarter?

Sure. Good morning, Matt. Well, on the brand performance, and we don't get into the specific by brand. But what I can tell you is the bigger parts of the company is the Polo brand, and that is the part of the company that has the strongest progression rates. On the other parts of the portfolio, some of which are work-in-progress like the work that we've been doing on Lauren over the past year. We're feeling good about the pivots that have been made on product, the pivots that have been made on marketing and encouraged by the progress that we're seeing across the channels. The same is true for our luxury labels, purple label and collection and RRL [ph].

Yes, Matt from a second half perspective, here is what we were encouraged by in the quarter. We were really encouraged by the progress we saw from Q1 to Q2. Now as we think about the future, there is a high degree of uncertainty surrounding the second wave shutdowns. In our assessment, this is the biggest potential impact to second half recovery and is why we continue to plan around a number of demand scenarios. We're, obviously, encouraged by the recovery in the Chinese Mainland, getting back to pre-COVID levels of growth, but are cautious given the announcements of what we saw in Europe, particularly in France and Germany, and it's the rising case count in North America. Given the current dynamics, we're not guiding for when we will return to pre-COVID levels. We're looking at trends in terms of the challenges in bricks-and-mortar traffic, the tourism trends that will take longer to recover. And the work that Patrice referenced, which is our proactive cleanup of North America distribution, notably in wholesale and in off-price wholesale. And from a timing perspective, obviously, we expected this point that recovery will continue to be led by Asia, followed by Europe and North America, subject to second wave. So we continue - I think our teams continue to manage agilely through this. We think it's prudent not to give guidance given what's happening in the marketplace today, but we are managing what we can control through the second half. And that's price, AUR, gross margin expense.

Next question.

Thank you. The next question comes from Ike Boruchow with Wells Fargo.

Hey, good morning everyone. I hope you're all well. Yes. So Jane, just two quick one’s for you. So I appreciate the gross margin commentary in the back half. Could you talk a little bit more specifically about the next quarter just because of how important it is? And I know it seems like you've got some good mix benefits from China and DTC, but I'm assuming we should expect gross margin expansion in both quarters. But I'm kind of curious if you could talk around the gross margin for the upcoming quarter? And then just at a higher level, maybe it's too early to go into this, but can you possibly begin to help us think about the pacing of recovery in the U.S. wholesale channel based on your conversations with your partners, when are you expecting – quote, unquote – normalized growth rate kind of return? Just any help on the pacing of recovery in that channel specifically would be great. Thanks so much.

Thanks, Ike. So we're not guiding to specific gross margins by quarter, but I can tell you that we do expect expansion in gross margin as we move through the second half. And I believe that our drivers are durable in the third and fourth quarter. And we're very much encouraged by the progress we've made, albeit, I do expect that gross margin expansion is not going to be at the pace that you saw in the first half. In terms of the pacing of wholesale, what we've said is we do expect, given what we see today in terms of the environment that spring 2021 will continue to improve from where we're at today. We know that fall 2020 was constrained by our proactive inventory management, with inventories down 40% in North America wholesale. We do expect this spring sell-in to improve sequentially, but this is going to be a paced recovery. And obviously, our wholesale partners are watching what's happening in North America as carefully as we are. So there's still a bit of uncertainty in that environment, but that's our expectation.

Next question please.

Thank you. The next question comes from Dana Telsey with Telsey Advisory Group.

Good morning. The speed model…

Good morning, Dana.

Hi. And the improvement in speed with the three month lead times is very impressive. What do you see the opportunity of that going forward? Does it differ at all by classification? And what is that benefit to the gross margin going forward? Thank you.

So speed has been the real focus area for us. I'm glad you called it out Dana. And now we're at a stage where more than 25% of our business is on less than three month lead times. Whereas last year, if you'd ask me what that number was, it would have been low single digits. So tremendous progress from our GMMs team to build capabilities with our suppliers to move a lot faster, we're really looking at three, six, nine month blocks. But what you can expect from us is a continued acceleration of the pace. We have a project that the team developed recently as part of our vote campaign that was actually achieved in a matter of days, not even months, not even weeks, but a matter of days, which gives me a lot of confidence that we're continuing to build the capabilities that will enable us to be incredibly reactive, which obviously, in this environment is critical, give us the ability to chase even further, which again is critical in this environment. So Dana, I suspect a year from now when we sit down together and look at our rate of development that we – you will continue to see very strong progress on speed for the company.

And the primary benefit of this – from a gross margin standpoint is the reduction of excess and a reduction in vendor allowances and NRV, as we're able to re-demand closer and fulfill demand and fulfill product closer to reading demand, and that should be durable as we improve our reaction times.

Thank you.

Thank you. The next question comes from Michael Binetti with Credit Suisse.

Good morning, guys. Thanks for taking our questions.

Good morning, Michael.

I have two different questions. I think he will go to Jane, but Patrice, any color helpful too. But you've got a number of projects going on with the distribution channels, the regions, the pricing structure, the store fleet and some of the costs in the investment lines here. They all have different durations, they all have different payback periods. But when you add it up, when and how do you think the prioritization of the projects as you laid them out, realistically translate to revenue growth back above the levels we saw in fiscal 2019 or fiscal 2020? And then as a follow-up, maybe you look at it a little bit of a different way through the profitability lens. Maybe a different way to ask it is what level of sales do you think you need to achieve the level of EBIT dollars that you saw in fiscal 2019? Because I know you're working hard on the margins as well.

Yes. We are working hard on the margins. As I look at the actions that we announced and the combination of work that's in progress, such as the Chaps operating model, which you will see the benefit of the org reshaping work largely in fiscal 2022. And as we called out, that will be a gross savings of $180 million to $200 million. The benefit of the Chaps, while much smaller in magnitude would occur post transition in August. And then the work that we're doing on continuing ground portfolio valuation and real estate would likely flow through in fiscal 2022, but closer to year-end in fiscal 2022. In terms of -- we are focused on margin right now. Some of these actions like moving Chaps to a wholesale model will be helpful from a profitability standpoint. But obviously, as you shift to a license model, I'm sorry, that compresses your total dollars of revenue. We factored that into our thinking and are really focused on getting our -- focusing on our operating profitability. We're not guiding to sort of a time of recovery to pre-2019 levels. There's too much uncertainty out there, but that is certainly our long-term mind set.

Next question?

Thank you. The next question comes from John Kernan with Cowen.

Yes. Hey, good morning, Patrice and Jane. Thanks for taking my question.

Good morning, John.

Congrats on all the progress in managing the business through this environment.

Thanks.

And maybe just to dovetail on that on the prior question. How should we think about the mix shift to direct and digital on your overall margin structure? Historically, the Wholesale business was a higher-margin business for the company, I think, globally, particularly in North America. So how do we think about that overall margin structure of the company when going more direct seems like an enormous initiative for the company?

That's a very good question, John. And it's very top of mind for us. That's why all the focus -- let's focus on digital, first and foremost. All our focus on ralphlauren.com is about brand elevation, but enhancing the experience and it's about step changing the profitability. Because anyone can grow dot com operations aggressively at no profit, right? But that's not the game we're in, or the game we're in is ralphlauren.com needs to be accretive to the region from a profitability standpoint. We have achieved that in Asia. We have achieved that in Europe, and we're on our way to achieving that in North America. You saw from our prepared remarks, our margin this past quarter in ralphlauren.com US is up 1,500 basis points, which is a massive growth. And our objective is to make sure that we're excited about moving consumers to that channel and recruiting consumers into that channel, because it will be accretive to the profitability of the region. So we're working on both making sure we're bringing in high-value customers and also have the right AUR, gross margin, SG&A structure to support that moving forward, because you're right that the direction of travel for this company is more direct to consumer in terms of split by channel, and we're keen to make sure that the profitability structure follows that.

And we expect to close this year achieving the goal of having digital be accretive to the region in every region that we operate in and exceeding in North America are our Wholesale margins. So that's a big accomplishment.

Thank you.

Excellent. And maybe just one more follow-up. The $180 million to $200 million gross cost savings. Can you talk about how -- when we approach our Excel models, how we should think about that from fiscal 2022 on the overall SG&A dollar base and models, how we should think about that from fiscal any potential offsets to those gross savings?

Yes. I think what we're seeing now is that in -- from our order shaping work, we're going to flow through substantial -- the majority of that through to the bottom line, understanding that we will be making in -- some investments in to accelerate into growth, but I think that as you think about your model, the majority of that will flow through.

Excellent. Thank you.

Thank you. Our next question comes from Erinn Murphy with Piper Sandler.

Great. Thanks. Good morning. My question is around the 40% traffic decline you called out for Q2. Could you just share how it looked by region? And then maybe more specifically, as we've moved into the third quarter with Europe in the second wave, you've obviously spoken to some caution. What are you seeing now? And are the retailers there, are they kind of a little bit more cautious as they order for spring/summer 2021. Thank you.

So we saw fairly similar traffic patterns in Europe and North America to our brick-and-mortar stores. China encouraging returned to pre-COVID levels of traffic and really led across Asia. And – but we're encouraged by the trajectory we're seeing at, especially by our largest market in Japan that continues to recover following the second wave.

And on your European wholesale question, I think, what we've seen is actually encouraging progress on our partners, both wholesale kind of brick and click and also pure players. And as you know, we have a very strong pure player business in Europe. The recent flare-ups happened yesterday. So I don't know that, that's been reflected in the numbers yet. And, obviously, we approach this with a good level of caution, but we were encouraged with what we – the response we were getting to our product portfolio from our European wholesale partners for spring 2021.

Thank you. And can I…

Have the last question, please, Angela.

Thank you. Our final question comes from Adrienne Yih with Barclays.

Yes. Thank you. Good morning.

Good morning.

Hey, Adrienne.

Happy to see the progress. Patrice, I guess my question for you, I liked your comment about the – attracting the new millennial customer. I was wondering if you can give us some metrics or feedback from what you're hearing from both millennial and Gen Z consumers? And then, Jane, my last question for you is your comment based on in spring 2021, you'll be in an improved inventory position. Are you seeing evidence of kind of that stabilized demand in forward bookings for spring 2021? Or is the comment more on the controllable side that you will have a better inventory position? Thank you very much.

Sure. So, Adrienne, on the consumer front, we're actually very excited about the response we're seeing from millennials/Gen Z consumers. As you know, we have very deliberate actions to appeal to that customer group, whether that's where we show up from a media standpoint, whether that's the type of activity that we have, like our pretty special Bitmoji program, or whether that's the type of influencer that we partner with. But what we have seen in terms of next-generation performance over the past two quarters, there's actually significant progress within the customer base below the age of 35, basically across all three regions. Now you would expect that in China, because a big chunk of population is there, but we're also seeing that actually in Europe and in North America. So with the tracking that we now do, we – I think we've got much greater visibility to that, encouraged by the traction. And obviously, we'll continue to fuel it. And you saw in our earnings release that we intend to increase our marketing spending in the back half, so Q3, Q4, plus 10% versus last year, a good deal of the activities that will be funded are specifically targeted at the millennial Gen Z population.

Yes. In terms of our outlook for Wholesale Spring '21. We know that our inventory positions will be better. That's what we can control. Obviously, demand is -- remains the biggest uncertainty, but we're encouraged by the conversations that we've had with our wholesale partners thus far.

Well, listen, thank you, everyone, for joining us today. We look forward to sharing our third quarter fiscal '21 results with you in February. And in the meantime, stay safe, and have a great day.

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