Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren second quarter fiscal 2020 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 second quarter fiscal 2020 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. We delivered second quarter results slightly ahead of our overall expectations including better than expected revenue, expanded operating margin and double-digit EPS growth. Our performance this quarter was driven by ongoing momentum in our international markets both Europe and Asia and balanced gross margin expansion and expense management. Meanwhile, we continue to invest in brand elevation and execute key initiatives to stabilize our North America business against a more volatile backdrop. As we indicated at the start of this fiscal year, we are monitoring the global retail environment closely, particularly around trade and macro conditions. Our teams remain intensely focused on managing through volatile industry dynamics and executing on our strategic plan to deliver long term sustainable growth and value creation. As I have shared before, the three principles underlying this work include putting the consumer at the center of everything we do, elevating the brand and balancing growth and productivity. During the second quarter, we continued to drive our performance across the five strategic priorities that we laid out as part of our five-year plan. These include first, win over 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. Starting with win over a new generation of consumers. We continue to invest in media channels that matter most to consumers today, namely digital and social and are on track toward our long term marketing investment target of 5% of sales. In the second quarter, marketing declined 10% to last year due to timing of investments as we anniversaried our landmark 50th anniversary celebrations last fall. Our key…

Thank you Patrice and good morning everyone. Our teams delivered solid top and bottomline results in the second quarter with expansion in both gross and operating margin driving operating profit growth and double digit EPS growth. Globally, we also continue to make progress against our key strategic initiatives in the quarter with encouraging early signs of progress in our direct to consumer business in North America, our largest market. These included positive brick-and-mortar and digital comps in North America as well as Europe and Asia, sequential AURs improvement on top of difficult compares and inventory more closely aligned to our topline growth. Second quarter revenues increased 1% on a reported basis and 2% in constant currency. Our international business, which represents about 45% of our sales, delivered 7% topline growth in constant currency while North America was down 1%. Total company retail comps grew 2% in the quarter. Adjusted gross margin was up 60 basis points in the second quarter on a reported basis and up 80 basis points in constant currency. Gross margins benefited from AUR growth of 2% with favorable channel and geographic mix, coupled with pricing, promotion management and product assortment. All three regions delivered positive AUR growth. Looking ahead, we expect second half AUR to be incrementally stronger than the first half of the year, driving our full year expectation of low single digit AUR growth for fiscal 2020. This will be driven by, one, targeted price increases in select channels and categories based on competitive benchmarking and where we have a proven opportunity to play, two, accelerated product mix shifts such as an increased penetration of fleece and outerwear for fall holiday which are already resonating well with consumers and three, our ongoing strategy of pulling back promotions to improve quality of sales and elevate…

[Operator Instructions]. The first question comes from Paul Trussell with Deutsche Bank. Your line is open.

Good morning and congrats on quite solid results.

Good morning Paul.

Thank you Paul.

There are a number of notable headwinds in the marketplace, some of which have led your peers to reduce their go-forward expectations. In your view, what drove your performance in Q2? And what are you seeing in the business that enables you to maintain your earnings guidance for the full year? And on North America specifically, could you speak to your surprising positive comps and the outlook for the region? Thank you.

Hi. Good morning Paul. Thanks for your question. The first thing I really want to say is, I am really proud of the way our teams executed this quarter because, as you mentioned, we were able to exceeded expectations while dealing with a wide range of challenges from tariffs, the Hong Kong situation, the Brexit uncertainty and the further acceleration of our supply chain moves. This coupled with the organizational changes that we talked about over the past few months really gives us confidence that we should just continue to running the play through our next great chapter plan, obviously with a higher degree of agility that's required in today's context. On the specific drivers of this quarter's performance that we believe are sustainable, there is probably four I would call out. The first one is the fact that we are seeing brand momentum both with new consumers and with current consumers and we have had, I think as you have heard during our prepared remarks, a number of high impact marketing activities during the quarter. One I would highlight is the application we did on Wimbledon globally through celebrities and influencers around the world. Second driver is product, right. I think we have seen this quarter is the beginning of a better balance between core, seasonal core and fashion product, coupled with exciting growth in outerwear as we go into the holiday season. Third area is distribution. And one of our big priorities is to continue to elevate the brand presence, the shopping experience for consumers wherever they shop, be that in brick-and-mortar or in digital. And we are also continuing to expand both in Europe and Asia and have significant growth opportunities moving forward in those two regions. And the final point is, while we are investing behind all these initiatives, we are continuing to drive operating efficiencies and cost discipline. Now specifically to your question on North America. We were very pleased with the comp performance this quarter of 2%. The key thing I would highlight here is the during progress we made in our full price stores were the result of marketing and really bringing consumers into the store, the result of engagements with our VIPs and the change we made in our compensation structure to really drive a total team push in our respective stores has really played out very nicely. We are also encouraged by the progress we are making on our website, particularly with domestic consumers and also continued to see good progress in our factory outlets.

Yes. I would say, Paul, that we were really pleased with Q2 and our ability to maintain our fiscal 2020 guidance. As we look at some of the headwinds that we named, from Hong Kong to tariffs to Brexit, it's about $0.25 to $0.30 to EPS. And what we have really been able to do is to have our teams react in a very agile fashion and what we are seeing is that continued momentum on AUR, plus our brick-and-mortar conversion improvements that we are seeing in our stores, notably in North America and continued strong performance across Europe and Asia are what's enabling us to hold our overall operating margin guidance and our revenue guidance through the year. So really proud of the teams. And we see those drivers as durable throughout the rest of this year.

Next question.

Our next question comes from Michael Binetti with Credit Suisse. Your line is open.

Hi guys. Good morning. Thanks for our questions. I add my congrats on a good quarter, specially the North American comp. I know it's the best number you have seen in a while.

Thanks Michael.

Thank you.

Any initial response to those U.S. price increases would be helpful. But I did want to talk about the outlook for second half for a minute, Jane. The guidance you give us implies the operating profit growth rate to slow and even potentially turn negative on a year-over-year basis at the end of the year. The 20118 Analyst Day guidance assumes operating profit growth each year. Can you give us some high level thoughts on how to think about the lower, even negative, growth rate at the end of this year? And how you see that starting to improve into next year, in particular North America where your operating margins have been negative on year-over-year basis? I think it's really a sentiment of the ongoing declines in wholesale and you guys make very good money in that channel. So those losses are profitable. Can you speak to how you look at North America margins in the second half? Thanks.

Sure. In terms of the first part of your questions, which is U.S. price increases, we are still in early days. As you will recall, Michael, we set first tranche of prices in late September, early October. While it's too soon to call, we are encouraged by what we saw through back to school and through the early days of the work that. So that is sort of guiding our own guidance for AUR growth in the low single digit range for the full year and an increase in AUR as we move through the back half. While we anticipate some headwinds in third quarter from an OI margin perspective, we still are guiding and maintaining our guidance for OI expansion for the fiscal year, which puts us in line for continued operating margin expansion through the course of our next great chapter plan. As we laid out the guidance, we knew that some things would respond better than others. With their puts and takes we are certainly encouraged right now by our gross margin progress that we are making. And then other things would take longer to turn like North America wholesale. We are just really focused on our pressure areas, the Lauren brand, the Polo brand is performing in wholesale. Were back to investing in marketing with our wholesale partners and are really focused on sell-out in that channel. That will be the ultimate metric pf performance in that channel. And so we still feel good as we look to our five-year guidance with that mid-teens operating margin target that we laid out over a year-and-a-half ago.

Next question.

Thank you. Our next question comes from Matthew Boss with JPMorgan. Your line is open.

Thanks and congrats on a nice quarter.

Thanks Matt.

Thanks Matt.

So on the gross margin, maybe Jane, what was the break down of the 80 basis points constant currency expansion in the second quarter? How best to think about puts and takes for the back half of the year? And then as we think multiyear, I guess maybe Jane again, how would you rank the buckets of continued gross margin expansion opportunity versus any headwinds to consider as we are thinking beyond this year?

Sure. So let me lay out what happened in this quarter first because I think it provides good context to the back half of the year. As I look at pricing, promotion management and assorting in to higher AUR and gross margin overall product, that is a little over half of the benefit that we saw from gross margin expansion. We also got some benefits from channel and geographic mix. As you know, we expect those to be durable through the course of the plan with greater and lesser puts and takes. And obviously, we called out the pressure points from FX and some ongoing tariff benefits, which is small today based on the tariffs that were enacted in Q2, but we expect to be the biggest point of increasing pressure as we move through the back half of the year. Now counterbalancing that as we move into the back half, we expect that some of our pricing actions will start to kick in. And we go in with tighter inventory positions and edited but improving assortments that should improve our excess positions as we move through the back half of the year. So an encouraging start, a little ahead of where we thought we would be but a driver through the remainder of FY 2020.

Next question.

Thank you. The next question comes from Ike Boruchow with Wells Fargo. Your line is open.

Hi. Good morning everyone. Let me add my congrats. Two quick ones for Jane, I think. Could you just help us understand what's embedded in the North America wholesale plan for the back half and if there is any variability between Q3 and Q4? And then any color around off-price versus the traditional U.S. wholesale within that? And then just really quickly, you had commented I think that the Q2 digital comp had some benefit from timing from a very big partner. Should we be expecting the digital European comp to be much less robust in the back half or any specific quarter? Just trying to understand what's going on there. Thank you.

Sure. A multi-part question. All right. Let me start with the first part which is what's embedded in our back half outlook for North America wholesale. We don't guide regions and certainly not channels but I can tell you, Ike, that what we see today with our sell-out trends down mid to high single digits, we are expecting that to continue through the back half of this year. We are focused on our sell-out trends. We believe that we will be making some edits into the spring that will be better. But until we have better sell-out trends, that's our expectations for the revenue that we will report which is sell-in and so that's our expectation and that's embedded in the back half of the year. Always working to improve and we think that you will start to see that as we maintain a new leadership set but that will be closer to the start of our next fiscal. If you think about the color on overall North America off-price, this quarter off-price, especially in North America, was essentially about flattish. We had a pullback in some of our cut it business that we, in order to keep our inventories clean, had some flow of overall excess. I expect that that trend, as we use it as an excess channel, it will be a little choppy as we move through the back half of the year. And then on Q2 and back half European digital trends, we did in preparation for holiday accelerate a little bit of shipments into Q2 to one of our larger customers and that we expect that for fiscal 2020 digital comps will be at a more normalized level following last year's replatforming in the second half. But the total ecosystem will be a low double digit comp for the year.

Next question, please.

Thank you. The next question comes from Kate Fitzsimons with RBC Capital Markets. Your line is open.

Yes. Hi. Good morning, I will add my congratulations. I wanted to dig a bit more into the North American digital comp plus 2%. Can you just speak to what drove that sequential gain? It sounds like you saw some resonance with some mobile investments domestically. So just wanted to hear more about what changes were made in the quarter and what gives you confidence that business can continue to improve go forward? And I guess when you benchmark your digital and mobile experience relative to peers, where do you really see as the opportunity go forward on as we look to 2020? Thank you.

Sure. So we had a number of things that kicked in, in the quarter and we continue to see it raise the bar, right. So for me, it's a continued journey. First intervention is the mobile dimension which you touched on. So optimizing the mobile experience through both better site navigation and better search functionality. The second piece is, we launched Apple Pay, right. And we want make sure that we have all the payment approaches that our target consumers want to use. The third area is, as we looked at our email segmentation, we were more precise in our email targeting and so we are seeing some benefits from that and I expect that to actually strengthen over time. And then the last one, which is important because we want to make sure we provide great customer service, we moved to actually 24/4 customer service call support during this quarter and obviously we are going to continue to do that. And then as you look at the next phases of capability that we are building on the site, continuing to build out the mobile functionality, personalization, big focus areas for us. And then the whole connected retail piece, whether it's buy online, find in store and buy online store, pickup in store. So those have been drivers that have helped our business this past quarter. The progress was, remember last time we talked about how there is a bifurcation between our domestic consumers and our international business. So our domestic consumer progress was solid this quarter. Our international business continues to be pressured because of the foreign exchange dynamics and because of the import restrictions, particularly in China and in Korea.

Yes. I would just add that we expect that some of that international pressure will continue through the balance of this year.

Will continue, yes, right.

Next question.

Thank you. The next question comes from Dana Telsey with Telsey Advisory Group. Your line is open.

Hi. Good morning everyone. And I also want to say congratulation on the nice progress. As you think about Hong Kong and obviously the uncertainty there, how you are planning that going forward? The down 27% that you had this quarter, how do you see that progressing? And then on new channels of distribution that you mentioned, Patrice, how do you balance out new channels with wholesale? Where do you see the endgame winding up with wholesale as a percent of sales and perhaps some of these new channels? And is there a margin differential? Thank you.

Yes. Dana, why don't I start on Hong Kong and then I will turn it over to Patrice. So as we look at Hong Kong this quarter, it was about a three point pressure to overall Asia comp. As we look forward to Q3, we are expecting that pressure to accelerate and it will be about four to five points of negative impact on Asia comp as we move forward. We have seen like many others, the tourist falloff has accelerated and door closures due to protest, we don't expect to improve. And it's embedded in our guidance for Q3.

And then on the channel play. So listen, we have a very simple principle. We want to be where the consumer wants to shop us. And it's clear that there is new model that consumers are excited about where we want to play. So rental, subscription, retail, all right. So on rental, I think we have actually been on rental runway for several months. We just started on Nuuly. We are excited about that. And there are other platforms that we are looking at. Initial results are quite encouraging. So very early days, but encouraged by the progress. Subscription, whether that's Stitch Fix or Trunk Club, are also performing well for us and we want make sure we are there and we play to win there. And then we are starting on retail. We had an activity with Depop in the U.K. where results were quite encouraging. And obviously given the nature of our brand, timelessness, basically more style driven than seasonal fashion driven, more focus on quality, we think we are actually very well-positioned to play to win in that segment. Listen, your crystal ball is going to be as good as mine, Dana, on this one in terms of what share of the business it will be down the road. The consumer, I think, will tell us that based on their behaviors and the services that we can offer. But our mindset is, we want to build an ecosystem that's consumer centric and within that ecosystem wholesale still has a very important to play, both brick-and-mortar and.com. And so we want make sure we are where the consumer expects us to be. We are well set up for success in those channels where the brand can show up in the right way as well as in the developing new channels. I think the key thing from me here and I am very proud of the work that the teams are doing here, is the agility that the organization is demonstrating because typically we wouldn't necessarily be as nimble on some of these new opportunities. And I think there has been a lot of wonderful work done internally to take advantage of these opportunities and to have a bit of a first-mover advantage on some of them.

Last question, please.

Thank you. Our final question comes from Rick Patel with Needham & Co. Your line is open.

Good morning and well done managing the tough environment. I had a question on marketing. So it sounds like some of the efforts to leverage the targeted performance channels are working very well. Should we expect more of this in the back half? And does that mean that you will move away from some of the brand-building investment you have made in the past? Or should marketing grow across all channels? Thank you.

Thank you Rick. Well, listen, first of all, our end goal is one-to-one marketing, right. I mean that's where we want to go. Now that's probably a few years away still. But that's certainly the personalization journey we are on across all elements of our marketing. So you will see, no, we are not going to get down to quarter-by-quarter specifics on this, but you will see us continue to increase personalization focused both mobile, on our site and in our email activities, so that the page that you get when you sign on to our site is dramatically different than the page that I get when I sign on. That will not be done at the expense of overall brand-building activities like our shows, like our partnerships with sports, like our limited editions. But it's really about being more efficient in the way we spend our money. And I think what we will find with personalization is actually we will be able to be a lot more effective and efficient with each dollar being spent. We are still on the trajectory to get to 5% of sales expense in marketing by the end of the five-year phase. We expect marketing to continue to grow ahead of revenue this year as well, just like we had over the past two fiscal years. So think of us playing across the pallet of marketing tools, but indeed with a deliberate focus on ultimately getting to one-to-one marketing.

And expect marketing dollars to grow in the second half, Rick.

All right. Well listen, thanks to all of you for joining us today. We look forward to sharing our third quarter fiscal 2020 results with you in early February. And in the meantime, have a great day.

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