Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren First Quarter Fiscal Year 2022 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 over the conference to our host, Ms. Corinna Van Der Ghinst. Please go ahead.

Good morning, and thank you for joining Ralph Lauren's fourth quarter and full year fiscal 2021 [ph] 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, Cory. Good morning, everyone, and thank you for joining today's call. As we close out this fiscal year, Ralph and I are proud and inspired by the way our teams have navigated through the pandemic. They have demonstrated their resilience, agility and ongoing passion for our brands and our consumers in a year unlike any other. Their commitment and execution shine through in our better-than-expected fourth quarter results. Against the volatile backdrop of the past year, we took action that has enabled us to emerge from this period a fundamentally stronger company than when we came into it. This includes; first, across all three regions, we accelerated our work to elevate our brands while also strengthening and simplifying our brand portfolio; we're also engaging more meaningfully with consumers and driving increased marketing to deliver higher brand awareness and purchase intent coupled with higher AURs; second, we repositioned each of our channels and reduced our exposure to secularly challenged areas of distribution, particularly in North America. Within wholesale, we focused our brick-and-mortar presence on our healthier stores and significantly reduced our off-price penetration. Within direct-to-consumer, we accelerated our shift to digital, step-changing profitability by over 1,000 basis points as we added new connected retail capabilities and drove quality of sales.

Please stand by. [Technical Difficulty]

Okay, you may begin.

Good morning, and thank you for joining Ralph Lauren's First Quarter Fiscal 2022 Conference Call. With me today are Patrice Louvet, the company 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 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, Cory. Hey, if there's one thing we've learned over the past 18 months, it's agility and the importance of agility. So apologies for the false start. And now we're ready to go into our prepared remarks. So good morning, everyone, and thank you for joining today's call. Our teams delivered exceptional first quarter performance on both our top and bottom line results and across every geography. Our brand is resonating with consumers around the world as we lean into the breadth of our offering to deliver the products they are craving in this new normal. And all of our regions are in a healthier, more profitable growth trajectory. Even as we continue to execute through COVID-related challenges, it is clear that Ralph Lauren is back on offense. A few highlights to note. First, building on our consistent brand elevation work in direct-to-consumer business. We are now seeing accelerated demand and increased AUR in our wholesale channel. Second, our digital growth is accelerating following our pricing and promotional reset work last year, and our digital margins continue to be accretive across every region. And third, we continue to make strong progress toward our long-term target of mid-teens operating margins. We delivered the highest Q1 company operating margin since fiscal 2014, even as we more than doubled our marketing investment and continue to reinvest in key areas of growth like digital, key city ecosystem expansion and our consumer targeting and personalization. Our performance demonstrates consistent execution against the five strategic pillars that we outlined at the start of our Next Great Chapter plan. Let me share a few highlights from the quarter. First, on our efforts to win over a new generation, as we continue to invest in marketing, we are focused on new consumer acquisition and retention and both…

Thank you, Patrice, and good morning, everyone. Our first quarter performance exceeded our expectations as our teams navigated challenges with agility, our brands connected with consumers, and our strategy drove high-quality growth. Upside performance this quarter was driven by faster recovery in both North America and Europe led by our wholesale channels, strong performance across Asia, despite extended COVID headwinds in Japan, accelerated digital growth with further digital margin expansion, and continued brand elevation with high teens AUR growth. And we continue to drive expense discipline across our business while investing in high ROI initiatives to drive operating margins significantly above our expectations. First quarter revenues increased 182% to last year on a reported basis and 176% in constant currency. Growth was positive in every region, led by North America. Compared to first quarter fiscal 2020 or revenues declined 4%. However, this includes approximately seven points of negative impact from last year's strategic reset to our distribution and to our Chaps business, which transitions to a license model this month. Total digital ecosystem sales accelerated to more than 80% growth in constant currency, both to last year and LLY, including 50% growth in our own digital business. Our performance improved sequentially in every region, reflecting our strong assortments, expanded connected retail capabilities and high-impact marketing. North America delivered the strongest sequential improvement with digital ecosystem sales increasing more than 50%, up from low double digits last year. Digital margins also continue to strengthen and we're strongly accretive to every region's profitability. Total company adjusted gross margin was 69.8% in the first quarter, down 200 basis points to last year on a reported basis and down 260 basis points in constant currency. This was significantly better than expected as we lapped last year's unusual COVID mix benefits driven by better pricing…

[Operator Instructions] The first question comes from Brooke Roach at Goldman Sachs.

Good morning and thank you for taking our question. Can you please elaborate on what drove the outperformance in Q1? And perhaps where you see the most upside or downside risk to your updated fiscal 2022 guidance from here? And Jane, as a follow-up, with the 12% to 12.5% operating margin outlook in your sites for the year, how are you thinking about the levers to achieve your mid-teen longer-term operating margin target? Thank you.

Hey good morning Brooke. Thanks for your question to kick us off. So, first off, I actually really want to take a moment to acknowledge the tremendous execution and agility of our teams in the first quarter as we got back on offense as a company. I'd say the key drivers of this quarter's outperformance were, first, the stronger-than-expected recovery in North America and Europe, especially in wholesale, which, as you know, is accretive to overall margins. Just a couple of data points to illustrate that, our North America wholesale AUR was up more than 20%. Our sell-out – full price sellout was up in the high teens and our wholesale.com business was up more than 75% to LLY. All 3 of these numbers are versus LLY, which we think is the more relevant benchmark period. The reset work that we did to create a healthier foundation in wholesale over the past few quarters is really starting to play out nicely and in a brand-enhancing way. The second point, I would call out is the fact that we drove the right elevated product and brand messaging with consumers. Ralph and our design team have done a great job of creating assortments that are resonating with consumers. We've been really pleased with our ability to win in casual, while at the same time, winning in more sophisticated casual as the consumer pivots back into that direction. And the third point I'd call out is our pivot to digital and connected retail, which is really driving accelerated growth and margin accretion across our digital channels. So therefore, I'd say we are feeling confident in the sustainability of our growth going forward, driven by a structurally healthier base, an important pivot in North America wholesale and digital and investments back into our business.

And Brooke, I would just add that many of the risk factors that we highlighted at the start of the year did not materialize in this quarter. And there were not as much of a headwind as we originally anticipated. And on the second part of your question, based on the strong Q1 beat, we felt comfortable raising our full year guidance on strength in digital and improved gross margin outlook with higher AURs and our ability to flow through top line outperformance to operating margin. That being said, the global environment remains volatile and our guidance continues to incorporate a number of factors. First, it's clear that COVID isn't over, and we are watching the impact across our markets from both a demand recovery as well as from a supply chain perspective. And second, we expect to have increased inflationary pressures whether it's from freight, raw materials or labor to be a headwind as we move through the year. And lastly, while we're focused on strong growth trajectory in fiscal '22, we're very focused on long-term growth and sustainable value creation. And as Patrice mentioned, we're going to continue to invest in profitable growth. And as we look towards a mid-teens operating margin, which we still think is the right long-term outlook for our business. We would say that we will continue – we get to mid-teens margins based on continued revenue recovery, although lower than our original expectation of a $7 billion revenue mark in our original investment day, thanks to the foundational work that we did through COVID. But it will continue to be a story of expanded gross margin and SG&A expense leverage to the top line. And we can do this based on a -- the expectation of a low single-digit comp growth, we've noticed -- as we've noted earlier in prior quarters. We still feel confident about that. That's still our long-term goal, and we feel great about the progress we've made in this year in getting closer to that goal.

Next question, please.

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

Great. Thanks and congrats on a really nice quarter again, guys.

Thank you.

Thank you, Matt.

So Patrice, 17% AUR growth is on top of 25% a year ago. Maybe by region or by category, where are you seeing the greatest upside relative to plan as maybe you had laid it out, as it relates to pricing power? And then, as we think moving forward, where do you see the greatest opportunity remaining as you continue down the brand elevation path?

So you're right. It's 17% this quarter. And just to frame it for everyone on the call, this is our 17th quarter of AUR growth, okay? Now we know our AUR growth over the past 12 to 18 months has been outsized and our long-term guidance on that is more low to mid-single digits. But we're really pleased with the progress that the team has made on continuing to elevate the brand and drive AUR growth concurrently. Matt, the biggest areas of progression. The one thing I would really call out is actually the progress on North America wholesale. Because we haven't grown AUR in wholesale in North America in the long, long time, years. And I think through the great partnership that we have with our wholesale players here in the market, as well as the brand elevation work, the work on products, the work on marketing, the work on presenting the brand in a more engaging way, it's translating into meaningful AUR growth. You think we quoted a number up over 20% versus LLY North America wholesale. And listen, this is not a one quarter pop. We are confident in our trajectory moving forward, working closely with our partners to continue to drive AUR in wholesale. The other area I would call out is actually North America, our own website, where we saw, again, very meaningful progression on AUR this quarter, I think, up north of 40%. So quite healthy. Again, we're not pricing. We're not elevating AUR in a vacuum. This is the outcome of brand elevation work. Again, elevating the product, elevating our marketing, elevating our presentation. And as a result, we have the ability to drive AUR through the four vectors that we've been talking historically together. One is, being much more targeted and surgical in our promotional activity. Two is, strategic price increases where we believe we can offer competitive value relative to our peer set. Three is, continuing to invest in product mix, and you see us invest in outerwear, in home, now and those products obviously carry much greater AUR levels. And then finally, channel and country mix. So that's some specificity. But all-in-all, Matt, we've actually grown AUR really nicely across the board, and we're really pleased with our performance across regions, across channels, which indicates again that the brand elevation work that we are doing is sticking and that the consumers see the value in what we have to offer.

Yes. And Matt, I would just add that, we are really at the start of this journey in North America and we see significant upside. As Patrice mentioned, the wholesale pricing is very encouraging. You saw strong AUR growth in North America. And I think we're really encouraged by the team's ability to add levers of pricing as we move forward. Notably, our new consumer acquisition with those new consumers transacting at higher AURs and bigger basket sizes is a really nice additional lever that we feel confident in and confident that we've proved out the ROI of investing in that new consumer acquisition. So we feel like there is more upside as we move forward. I think North America is encouraging, but also we're encouraged by the pricing that we put up in our more developed markets like Asia, which has led in terms of AUR levels, but continues to grow nicely as we continue our brand elevation journey.

Thank you. Next question, please.

The next question comes from Michael Binetti with Credit Suisse.

Hey, guys. Thanks for all the details. First, I'll offer my congrats. I know you guys did a lot of hard work to clean up the business last year. We can see the results of it here. A couple for me. Jane, similar to Matt's question on the AUR. How do you think about the sustainability of gross margins here? It's above – the run rate is above what you thought about at the Analyst Day, a couple of years back. It's been just such a source of upside to both our numbers and your plan for so many quarters. And it doesn't sound like the underlying drivers are slowing down at all. So I'd love your thoughts there. And then I guess in the quarter, as you started to refill the North America wholesale channel and Patrice, I heard in your voice, you're very happy with that. The growth rate improved by about 100 basis points sequentially compared to fourth quarter. So good numbers by any standards. And I don't mean to tempt or sound greedy, but as we've watched some of the peers report here lately, I wonder if Ralph Lauren would have seen wholesale up even more. And the only reason I ask that is because you've been very measured about the pace of restocking that channel. And I wonder if you could try to dimensionalize for us, how you think about the September quarter and North America wholesale channel trend, the gap between selling and sell-through. Do you feel like you've held it back and that can continue to normalize, or how should we think about the continuation of the refill the wholesale channel in North America?

Sure, Michael. That's a -- you've got a power packed question there. But let me start on gross margin because I think we really step back from our gross margin journey, which we didn't start during COVID. It started four years ago. It's really been a couple of big things. It's the power of our brand, our belief in it and our investment in it and the belief that we should be elevating all touch points to the consumer. That's what's given us the durability of our pricing journey, and that's what's really allowed us to continue to expand gross margin. We still believe in that journey. Both this – we also see that we have stronger products than ever before at what our breadth of categories and our strength of both opening price points, which we've maintained during this pricing journey and elevated price points, which our consumers are telling us that they have a strong and strong demand for has been an important part of our product mix journey and gives us confidence in our ability to continue to drive gross margin. We also see the durability of our tailwinds. Longer-term, we should continue to see geographic benefits and channel benefits as we lean into direct-to-consumer and lean into digital. Those are the things that underneath the covers are really driving our long-term gross margin journey, which we believe is durable for the next several years, maybe not at the pace that we've seen during COVID, certainly, but gross margin expansion. And you continue to see that in us taking up our guidance to now expanded margins for the balance of the year. And just a couple of comments on the wholesale channel. We're very pleased with what we saw in the wholesale trajectory this year. We've often -- we've said throughout COVID that our sell-out and sell-in would start to normalize, while sell-out exceeded sell-in this quarter, we expect that to normalize and be strong as we move through with our partners in recovery. We're very encouraged by the comp performance in our North America wholesale business, which was up double-digits. And we're very pleased by the strong pace of growth that we saw in our digital wholesale business. I think we're working more collaboratively and in greater partnership with our wholesale partners than ever before.

Yes. I'm sorry, I would just double down on that. I think we've been really pleased with the partnership with our partners here. Just a data point to give you the context of the reset work that we've done on wholesale brick-and-mortar North America over the past few years. We're down 66% in terms of wholesale doors over the past 4 years, right? So, we're seeing the benefit of that healthier brick-and-mortar base. And then we're also seeing the benefit of amazing partnership we have on the digital front where you saw significant acceleration of our Wholesale.com performance, and we expect that momentum to continue. And I think we are on the very same page when it comes to looking at assortment and continuing to elevate our assortment.

Thank you. Next question.

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

Great. Thanks. Good morning.

Good morning Erinn.

A couple for me. First, I was hoping you could share a little bit more about the category outperformance. You named a number of categories, including Polo shirt for men, kind of tailored bottom, wide leg bottoms for women. And just going back to your Investor Day, you talked about non-core categories as being $0.5 billion of incremental growth. Just with what you've seen on consumer behavior, has the complexion of the categories in the non-core area change? Just curious on how you're thinking about the growth there. And then I've got 1 follow-up.

Sure. So, I'll take that one. I'm sure your follow-up is for Jane. So, on men's, it's indeed a pivot towards newness and a pivot towards more elevated products. And so sports jackets, sports coats, polo shirts, trousers, denim, and footwear are the areas where we have over-delivered over the past quarter. On women's, we're seeing the same shift towards newness and more sophisticated elevated casual, dresses, novelty sweaters, jackets, and bottoms are the key areas, Erinn, for women's. And as far as our, we like to call in high potential categories as opposed to non-core, but because over time, they will become core for us. So, these areas that we called out like outerwear, denim footwear accessories, and we're adding home to that, we still believe in the potential of those categories. If anything on outerwear, I think the opportunity is probably bigger than we initially estimated three or four years back. And we're going to continue to invest in that heavily. You will see that in our fall assortment as an illustration of that. And then across these different categories, I think we feel good about the capabilities we're building, the development of the product, how we're activating from a marketing standpoint and really rethinking the way the product needs to show up from a distribution point. The most recent addition to that group is home. It's very early days on that journey, but we're very bullish on the opportunity and encouraged by the initial momentum we have on those.

Great. And then my follow-up is just on the tourist level, I think you talked about it being down 70% versus LLY. Can you just share kind of your outlook over the next 12 to 18 months? Are there any signs of life as Europe reopening there or even here in North America and just kind of how we should think about the rebound as we look forward? Thank you.

Sure. Well, we -- Aaron, while we saw tourist sales improved slightly in North America, they're still down 69% to LLY, but we did see some improvement on a sequential basis, but international travel remain limited to most regions. Our assumption in fiscal 2022 is that we've assumed continued headwinds from tourist sales as we expect foreign travel to be under pressure through the fiscal year. Foreign tourism intends to be lagging indicator. But fortunately, we are focused on capturing more domestic travel opportunities coming out of the pandemic. And know we've noted our Sanlitun store, which is outperforming in tourist market like Beijing and local domestic travel to some of our flagships is that we're also leaning into. And we have a limited presence in travel retail and have anticipated that that will be slower to recovery as we move forward. And we're very focused on building our business with the Chinese consumer within China. And you've seen our Mainland China growth, continued strong store build-outs and really increased marketing, which we doubled this quarter to engage with that consumer before they start on their travel as the markets start to recover. But our expectation is that will happen after fiscal 2022.

Next question please.

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

Thanks very much for taking my question. Another great quarter. I wanted to ask a quick follow-up on all the discussions around your wholesale partners and the improved more collaborative relationships you're having there. Do you have any thoughts on whether the legacy markdown support vendor model -- vendor markdown support model maybe on the decline and less relevant going forward? And then I also wanted to get you guys talk a little bit more about the e-comm acceleration with the younger consumers, update with those consumers, what role do they play in the new pricing, new found pricing power in the brand? Thanks.

Certainly, as we look at our global wholesale footprint, we want to drive greater focus on more on just natural margin, right? And that's certainly where we're headed, and as we're seeing our improved AUR performance in North America, less reliance on promotional activity. I think that's the direction of travel. So that's certainly the intent and that's what we're working towards. With our partners in a win-win mindset so that we can expand our margins, and they can also expand theirs in a sustainable win. When it comes to recruiting new consumers on our e-commerce sites, if I understood your question correctly, Omar, I mean, actually, we're quite energized by the progress we're making in terms of new younger consumer recruiting on our site. It's the result of a combination of factors, right? One, our marketing investments are up significantly. Just as a reminder, marketing this year, 6% of revenue, two years ago, 4.5% of revenue, so a significant lift in marketing. And then we're playing a much broader palette of marketing activities, ranging from these above the line big brand campaigns around the polo shirt to our activities on sports, Olympics, Wimbledon, gaming, right? You saw that we signed a partnership with G2 and in particular, with the Rekkles, they're one of their superstars there because that's where the consumer is. And that we want to -- we're going to appeal to that younger consumer where he or she consumes media, where he or she engages and we're seeing gaming as an important component of that. And then we're continuing to inject product newness and surprise in our program. So Major League Baseball program, frankly, exceeded our expectations significantly what we've seen in Asia, and particularly in China, with the partnership that we did with Edison Chen and the Clot brand, also significant excitement and very strong reaction from consumers. So, we are going to continue to appeal to a new generation, right? That's 1 of our 5 core strategic pillars. We think through our increased marketing and our more targeted approach, we have the ability to do that, and I think the numbers would bear that out. To Jane's earlier point, what we like about the consumer beyond the fact that it's a new generation is higher basket size, more -- full price and therefore, a more profitable consumer for us. And then we also put a lot of attention and focus on retention, right? Because obviously, the name of the game is interested to bring them in is to make sure they stay in the family. And here, our ability to target them with much more personalized messaging through digital is proving to be a very effective tool for us. So a journey to be continued, but we're excited and encouraged by the momentum we have with that next-generation consumer.

Omar, I just wanted to add just on your comment about vendor allowance and the relevance. Full price selling takes vendor allowances off the table. And when I look at our progress this quarter, our full price sell out was up almost 150%. And it was up almost 20% on a LLY basis. That's the power that eliminates the need for vendor allowances. It's the power of our brand, and that's what we're committed to delivery.

Next question?

Thank you. The next question comes from Lauren Bales with Exane BNP Paribas.

Good morning. Congrats on great results. I just wanted to ask about the operating margin, Jane and Patrice. You just delivered nearly a 17% operating margin in 1Q. You're guiding for a 13% to 14% operating margin, which would imply 2H operating margins would be single digits. Jane, any considerations on the gross margin SG&A front? And then secondly, I think, Jane, I think you mentioned North America was down 8%, but on a 2-year stack, but then there were 18 points of headwind due to the strategic actions which suggest that North America on a core basis really did grow. Is that the right way to think about it? And if so, how do we think about North America growth on a 2-year stack basis for FY '22?

Well, we will have the headwinds of the reset that we did. So you're exactly right. North America was down 8%. If you consider the 3%. Yes.

Up 10%.

Up 10%. Is that right?

Yes, whole company up 3.5% without the resets, North Tercas specifically up 10%?

I apologize. So North America would be up 10 if you take out all of the resets in Q1, even though on a LLY basis, it was down 8%. We're guiding now to 12% to 12.5% operating margin. That's puts us 200 basis points ahead of pre-COVID levels on a lower revenue base. So we're feeling very good about our progress towards our mid-teens operating margin. We do note, as we move through the year that we had some exceptional replenishment opportunities in wholesale, both digitally, digital pure players and our wholesale partners, which comes through at a high incremental margin. And don't anticipate that level of replenishment as we move forward. And we note that some of the freight pressures and some of the raw material pressures will continue be a headwind in the balance of the year. You'll recall, Laurent, that we buy on long-term contracts, and so some of that long-term pricing starts to fade out as we move into higher price layers as we move through the year. And we've incorporated this into our guidance, but we've taken up our freight impact from 100 basis points to 120 basis points for the year. The key lever for the balance of the year is really top line momentum. Now we're watching a number of factors, COVID, the delta variant and the supply chain very carefully, but we're very encouraged. It's still early in the year. We feel confident. We feel like we're back on offense and -- but we have a clear-eyed view of where the risk is and the opportunities across channels and the opportunities across our brand.

Thank you. We’ll take the last question please.

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

Hey thanks for squeezing me in. Congrats Patrice, Jane. Great job. I guess maybe, Jane, a question on margins. The digital commentary you guys are giving, you're not only seeing pretty meaningful revenue acceleration in that channel, especially in North America, but the profitability metrics are pretty impressive. But I think you talked about 1,400 basis points of margin improvement on a two-year basis. And I think you said that it's now accretive to the total company operating margin, which is implying its mid-teens or better. How does that change the algorithm to get you to the mid-teens margin, maybe even quicker than what you would have thought prior at the Analyst Day when you think about how digital is mixing and the margin drivers within that channel?

Yeah. So the digital reset is a key and powerful driver for us to get to our operating margin expansion even on a lower revenue base. So I just want to clarify, not only is it accretive to total company, right, but it's accretive to every region. And when you look at the operating margins of the region, they are meaningfully ahead because they don't have the overhead charges of our total company margin. So to have it be accretive in every region is even a higher bar than accretive to total company, and it's accretive in every region. We're very proud of that. That can be a lever that we can now lean into and have it be margin accretive. It's a critical strategic reset for us. And I think we'll only -- is only securing and building our confidence in our ability to get to mid-teens margins. So we are very encouraged by our continued expansion in digital margins this quarter.

All right. Thank you, everyone, for joining us today. We look forward to sharing our second quarter fiscal 2022 results with you in November 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.