Ralph Lauren Corp - Class A (RL) — Q4 2017 Earnings Call Transcript

Good morning and thank you for joining Ralph Lauren’s fourth quarter and full year fiscal 2017 conference call. With me today is 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. Principle 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. Now I will turn the call over to Jane.

Thank you, Evren, and good morning everyone. I’m looking forward to reviewing our progress for the year in detail, but let me start with one of the most important developments, which I’m sure you all saw yesterday. We have appointed a new President and Chief Executive Officer, Patrice Louvet. Patrice is a highly seasoned and successful business leader. He most recently served as the Group President of Global Beauty at Procter & Gamble and has a strong track record of leading global businesses during his 25-year plus career at P&G. He has a deep understanding of consumers and brands, a collaborative leadership style, and a passion to win in the marketplace. The team is ready to welcome him when he joins in July, and I am looking forward to partnering with him. Now let me turn to a review of our performance and future outlook. 2017 was an important year as we strengthened the foundation of the company...

Morning, thanks for taking my question.

Sure, good morning, Omar. Well you know, as you saw in the announcement yesterday, Patrice has a proven track record of leading major global consumer brands, and he’s really an operator who has had a career that’s focused on efficiency and effectiveness in the organizations he’s run. He has transformed and grown brands like Olay and Pantene with a real focus on leveraging consumer insights. He’s a global citizen and has diverse experience across distribution channels, from ecommerce to wholesalers to retail, so he really has had a breadth of experience. Probably most importantly, he really has a collaborative leadership style, who can work in partnership with Ralph and the senior team to ensure that we can move forward on the front-facing part of our plan to get demand back to our business, so we’re all excited to welcome him. I think Patrice knows well and appreciates the steps that we’ve taken over the last year as a part of the plan to improve our business, and he’s fully supportive in continuing that work to create an effective business, to continue to focus on our value creating engines and to pivot to the consumer-facing side of our business in partnership with Ralph.

Hi, good morning. It’s actually Corinna Van Der Ghinst on for Kate. Hi Jane. I was just hoping you could talk a little bit more about the quality of sales initiatives that you guys have talked about in the past. I know you’ve discussed moving away from a more promotional model. I was just wondering how you see the gross margin expectations for the year and also qualitatively where have some of your bigger challenges been in getting back to that kind of fuller price selling model.

Sure. So as I step back and look at FY17, I think one of the things that we are very proud of is the work that we’ve done on quality of sales. It’s shown up in our gross margin every quarter and it’s shown up in our results in FY17. Just looking at this quarter, about half of our gross margin improvement was a result of reduced promotions and better sell-through on higher margin product. The other half was balanced between favorable geographic and channel mix and better product costs. As we look at our efforts in quality of sales, we’ve been very effective particularly in the second half of the year of really pulling back thoughtfully in partnership with our wholesale partners on receipts to ensure that our plan and our receipt flow was designed to reflect higher margin sell-through. So we purposely planned, pulled back, and looked at the percentage of our business that was selling at a discount that we viewed as too heavy to allow for a reduced promotional cadence across the board.

Hi, this is Rosalie Frazier on behalf of Lindsay Drucker Mann. We had a question on FX impact to margins. As a follow-up on that, are you taking any pricing to offset FX headwinds?

So as we look at FX headwinds, we think about pricing specifically in market. Most of our customers internationally are local customers, so we address currency headwinds by taking pricing largely on innovation and new styles, not reactively due to FX changes. We will assess the value of our products, competitive dynamics, and then price accordingly.

Great, thanks. Good morning.

Morning Erinn.

Good morning. You talked about sales guidance throughout the year showing some steady improvement. Can you just speak a little bit more about what you see as the drivers of that improvement in the back half of your fiscal year, and then just clarifying, Jane, I think you also said in the guide half of the sales declines are from brand and distribution exits. Can you just refresh the thoughts on what percentage was from denim and supply off-price pull-back versus wholesale pull-back?

Sure. Let me step back from the components of your question. As we move through the year, I expect sequential improvement in both our wholesale business as we start to overlap some of the quality of sales initiatives that we started and move into full-price selling, so I expect that to improve pretty much sequentially through the year. I do expect the fourth quarter in our businesses, and largely in North America, to be better as we’ll benefit from Easter in the fourth quarter of FY18, and equally expect our retail comps and overall sales to become sequentially better as we move through the year. Most of our work in international, we’ve gone through the majority of our work, and I expect international to move into positive sales growth territory as we move toward the back of the year. Ecommerce, where we really did the bulk of our work in the fourth quarter and have a significant amount of quality of sales work left to do in FY18, will be a pressure point.

Good morning, and thank you very much for taking my question. I wanted to follow up on the wholesale channel. Jane, last quarter you provided some very helpful metrics to quantify the decline in wholesale revenues, particularly around the Way Forward plan and the reductions in the value channel. Can you provide those metrics for the fourth quarter 15% decline?

Certainly. So as we think about our overall wholesale business, we saw about a 20% pull-back in the sales of our off-price channel, and that is work that we will continue to do throughout FY18. Our objective is to reduce the percentage of sales that off-price wholesale represents to our total wholesale business. Regarding the new reporting segments, Europe and Asia will experience pressure in the first half but will move into growth year-over-year in sales in the second half.

Thanks very much, good morning.

Morning Brian.

Morning Jane. Curious on how we should be measuring inventory as we move through the year, particularly in the wholesale channel. Maybe just give us some idea of the metrics we should expect. Obviously inventory is down sharply right now, but how should we be thinking about that in the next couple of quarters?

Certainly. So as you think about inventory as we move through the year, we are continuing our work on overall inventory. You will see inventory in the first half declining about 20%. As we pivot into inventory orders that are more oriented to FY19 demand, you’ll see inventory down in the low double digits in Q3 and then starting to align with overall sales in Q4. You can expect our shop-in-shop remodels to focus on high traffic and high profile shops in the wholesale channel.

Good morning, everyone, and thank you for addressing my questions. Jane, I appreciate the detailed information you provided today; it was very helpful. I have two quick questions, and I apologize if I've overlooked anything. Regarding the guidance for the first quarter, I noticed you provided a clear overview of the revenues, but it appears the implied guidance suggests a significant increase in gross margins. I'm aware there may be some distractions from adjustments in the previous year.

We do expect gross margin expansion in FY18, particularly in the first quarter. While we haven’t provided specific guidance, I would expect that overall margin expansion to be similar to or slightly better than what you saw as we exited the fourth quarter.

Great. So you’re 9% to 10.5% EBIT margin guidance implies contraction at the midpoint, versus I think in the past you talked about constant currency expansion in the forecast. I guess any changes you’re seeing in the apparel backdrop larger picture?

As we look into FY18, there are a lot of factors in play. We’ve chosen to continue to work on building the foundation and right-sizing our business to a healthier base. We need to maintain a coherent pricing strategy across regions, especially in ecommerce, thereby creating some flexibility around our SG&A growth and ensuring investments that are essential for our growth. There are many variables in play as we enter FY18; this guidance reflects our decision to accelerate quality of sales initiatives while providing opportunities for showcasing high-potential products, marketing, and store concepts.

Hi, good morning. Jane, thanks for the detail. Just real quick, so the $370 million in charges, just curious how much of that is cash?

Of the $370 million of Q4 restructuring charges, approximately $120 million was cash.

Great, thank you. Jane, you talked about why Patrice is the right person for the job. Can you just talk about how the decision-making process will take place as a company going forward between Mr. Lauren, Patrice, and yourself?

First of all, I’d step back and say that we have a very capable and seasoned senior team, so it’s not just Ralph, Patrice, and I, it’s an operating committee of experienced executives. We have operating committee meetings weekly where we address the performance of the business and develop strategy in conjunction with Ralph.

Good morning Jane, Evren. Thanks for taking my questions. Jane, you talked a lot about efforts with some of the pure plays internationally - Zalando, Asos. Just wondering what your strategy is with Amazon? The brand’s distributed fairly heavily through third-party distributors right now on Amazon, just wondering if there’s an opportunity to take it more direct.

Improving operating margin and achieving a mid-teens operating margin is still our goal. Getting back to higher margins as quickly as possible is a focus for both myself and Patrice. As for Amazon and other platforms, we are actively exploring opportunities while ensuring these are strategic pursuits that align with our long-term goals.

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