Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second 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. . 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 2022 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, Corrie. Good morning, everyone. And thank you for joining today's call. We were delivering strong progress on our fiscal '22 plan with second quarter performance exceeding our expectations across all key financial and consumer engagement metrics. Our brand elevation strategy, which cuts across our product, marketing and distribution channels, is resonating with consumers in every region. We're driving these results despite greater-than-expected disruptions in the global supply chain and extended COVID restrictions in key markets like Japan. And while we continue to face a volatile environment, the work we have done to build a resilient supply chain over the last several years, as well as our significant AUR elevation, will continue to be competitive advantages as we navigate emerging challenges, and mitigate risks. To give you some context and color our supply chain is intentionally diversified across multiple markets. A key initiative we started over four years ago. This allows us to quickly shift production when certain markets are affected by COVID or other issues. We've created a strategic supplier program, whereby we prioritize our partners with a presence across multiple markets, and maintaining these shifts to happen even more seamlessly. And we have proven pricing power. Elevating our AUR across every channel and geography over the last 4.5 years. So that we have room to absorb near-term pressures we've seen in our business, such as tariffs or current inflationary headwinds. This built-in agility gives us confidence as we continue to navigate a volatile global operating environment ahead, but I want to be clear that this is not just about our ability to play defense. Even as macro challenges arise or subside, Ralph Lauren is firmly driving often to position the Company for long-term sustainable growth. We are leveraging our strong momentum to further accelerate investments across brand-building,…

Thank you, Patrice. And good morning, everyone. Our second quarter results outperformed our expectations with progress across each of our key strategic initiatives. Even in the midst of continued COVID, and supply chain headwinds around the world. Performance this quarter was driven by, strong top-line growth led by our full-price wholesale channels globally, and broad-based outperformance in Europe. Continued digital momentum across owned and third-party channels. Further gross margin expansion on top of last year's COVID mix benefits, with double-digit AUR growth and elevated product mix more than offsetting higher freight. And higher-than-expected operating margins, including cost savings benefits, improved wholesale margins, and favorable channel mix shift from wholesale and digital. Second quarter revenues increased 26% to last year with positive growth in every region, led by Europe and North America. Compared to second quarter fiscal 20 or double LY, revenues declined 12%. However, this included approximately 8 points of negative impact from last year's strategic reset of our distribution and our caps business, which moved to a licensed model. Total digital ecosystem sales grew approximately 45% in constant currency to last year and 50% to double LY, including 35% growth in our own digital business. Momentum continued across every region, reflecting our strong assortments, expanded connected retail capabilities, and high impact marketing. Digital margins were also strongly accretive to our second quarter profitability, consistent with last year and about 1,300 basis points higher than double LY. Total Company adjusted gross margin was 67.3% in the second quarter, up 80 basis points to last year on a reported basis and 50 basis points in constant currency. Despite increased freight headwinds of approximately a 150 basis points. Gross margins were better than expected despite lapping last year's unusual COVID mix benefits driven by better pricing and promotion along with favorable product…

One moment please for the first question. First question comes from Dana Telsey, Telsey Advisory Group.

Good morning, everyone. And congratulations on the continued progress and performance. I wanted to ask -- thank you. You discussed some of the drivers of your recent out performance, just a few moments ago on the call. What elements do you consider sustainable moving forward given the shifting environment? And where do you see the biggest risk to your strong performance looking ahead? And then if you could just touch on the accretion of the digital margins and where you see that going? That would be helpful. Thank you.

Good morning. Thank you for your question. Listen, we're certainly encouraged by the strong first half we've had this fiscal year, and what's really important to note from a mindset standpoint is we still have massive runway ahead of us. To a large extent, our brand continues to be much bigger than our business. So our performance so far has given us proof point and the confidence to continue investing in the multiple that we had ahead of us. There are four that I would call out Dana, the first one, which is really our lifeblood, is customers. New customer acquisition. And you've seen the numbers this past quarter up 19% versus last year, we're bringing in a younger consumer. We're bringing in a higher value consumer, a more profitable consumer, a less promotion sensitive consumer. We're very excited about that momentum. And we're going to continue to invest in this space to expand our footprint and also of course, drive retention. And we've seen very good progress on retention for customers that we've brought over the past few quarters. Second area is around product and the breadth of our product portfolio and which we've talked in prior forms, really sets us apart from many other brands in this space. We have a lifestyle portfolio that ranges from tuxedos and evening gowns all the way to sweatshirts. And as you see consumers progressively reinvest into more elevated casual, we're incredibly well-positioned to meet that demand. And that's part of what's driven the success in Q2, is this ability to meet this hybrid customer expectation. Both more elevated products and also continued interest in athleisure. We've been able to balance both well, on top of that, we've talked a lot about our high potential underdeveloped categories. And we've seen really nice…

Thank you. The next question comes from Jay Sole with UBS.

Great. Thank you so much. I have a 2-part question. My first question is, can we talk a little more about the current cost inflation environment? How are you expecting increased cost impact your ability to drive long-term AUR and operating margin from here. And my second question is -- a smart question is just can you talk about the pace of share buybacks? Would you expect to use all of the authorization they have available in the current fiscal year? Thanks so much.

Sure, good morning, Jay. Let me take your first question in two parts. First on the AUR trajectory, we are very confident in our ability to continue our elevation journey from here. We expect to continue driving both positive AUR and gross margin expansion in the back half of fiscal 22, and through our long-term plan. Over the last 18 consecutive quarters of AUR growth, we've developed a proven multileveled approach to pricing with a focus on creating value for the consumer and it's working. So while we're still comfortable with our overall long-term guidance of low to mid-single-digit AUR growth, it's fair to expect that our AUR rates will be on the higher end over the next year as we work through higher costs, and we work those into our broader financial algorithm. On your operating margin question, we're still well on track towards the goal of mid-teens operating margin. Our full year fiscal '22 guidance puts us firmly on a path with around 200 basis points of expansion to pre -COVID OY levels. And we're planning to achieve this on a lower reset base of revenues. And with OY dollars substantially higher than pre -COVID levels as well. And embedded within our guide, our gross margins are expanding in spite of cost inflation and we're reinvesting back in the business because we have momentum. As Patrice mentioned, we firmly believe that now is the right time to invest in the long term. We've reset to a more profitable base and we're seeing strong momentum in our brands. And we have the right tools in place to drive expanded AURs and gross margin. Now on your question about the pace of share buybacks. So we have, as you've noted, 580 remaining in our authorization, I would expect that over the -- historically we've done about $500 million over the course of a fiscal year. I would expect us to do at least that pace as we close out the year, but of course, we'll be looking at the value creation potential of the share buybacks looking at the market. But I think you can expect us to go at least as fast as we have historically in terms of about$ 500 billion over four quarters. Thank you. Next question, please.

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

Thanks for taking our question. So Jane maybe -- just a couple of quick ones here. Maybe you can help us just aggregate how much -- North America slowed a little bit in both channels, maybe you can help us just aggregate how much the business transition line items impacted both the channels in North America in the quarter. And then I'd be curious if you might be able to help us think about how much supply chain may have held back North America in 2Q, just so we get an idea of what the magnitude of what's going on there is. And then, I guess, Patrice, you've got the wholesale AURs up now for a couple of quarters in a row. We've heard good news on that in the retail side for a long time. So now that we've got a couple of quarters of AURs going up in that channel, as we look back as a 2018 Analyst Day, which I know is ancient history at this point. But you thought this business could do mid '60s gross margins at that time. And as we're looking at it now, you've got AURs, I think in a much better place than what you imagined at that time. We'd be curious to hear what you think the potential for this business is going forward. And then Jane, just one last one, fourth-quarter operating margin as guided sub 4% is that -- maybe just help us think about how much conservatism is baked in there versus actual cost that you're planning rising in the business.

Sure. Why don't I take the first part of your question in terms of the disaggregating North America growth? So if you think about North America growth, we have as we move into this second quarter, we are really encouraged by the strong -- overall strong performance in North America. We have a much stronger foundation for growth. Solid momentum in the business where we had to do most of the reset work in digital and in wholesale. And our Q2 guidance did assume a sequential LLY slowdown ex-resets, as we weren't expecting the same level of upside that we saw in Q1 based on some of the inventory restocking that we did in Q1. But overall, Q2 was still in line or better than our expectations. I think that the other aspect in North America was we did see some traffic softness in the outlet centers as the Delta variant started to rise, sort of mid to late summer, which impacted traffic overall, but we certainly saw that impact. Now, encouragingly, we do see our conversion and our comp outpace the traffic in our web, but that was also part of the -- a bit of slowdown that we saw through the summer. Do I think this supply chain is impacting -- impacted some of that? Yes. I know that we had less airfreight coming in during that mid-summer level, so we were a little slow to get fall on the floor and make that transition. So I do expect that that impacted North America. When we started to airfreight in and we became more aggressive in airfreight as we closed out September, we saw a rise in comps in our outlet doors and we're very encouraged by that. So I do think it had an impact. There's a lot of dynamics going on, but I do think it had an impact and we were encouraged by the acceleration that we saw in September.

And then on wholesale AUR and gross margin expectations. So first of all, we're actually really pleased with the progress that's happening in wholesale on AUR and it's really to use a baseball analogy really -- early innings on this one, right? Probably first inning. You saw the number in the release AUR, U.S. wholesale of 30% versus LLY. With strong momentum there. And what I really like about the progress there is, it's multiple leavers. It's getting smarter on promotions when, how, where to implement them. It's like-for-like pricing. It's investing into higher-value items. So all these leavers that we've seen play out in DTC were also seeing play out in wholesale and we're working very closely with our partners, and actually are very aligned in the approach that we want to drive moving forward. So I think long runway on AUR growth and expansion in wholesale and fundamentally help your businesses as a results of it. When it comes to gross margins guidance, Michael, we're not going to change our guidance long-term at this point. We're still, as Jane mentioned, very committed to our mid-teens operating margin and very confident in our ability to get there. I think at this point, mid-60s for gross margin expectation in the near-term is consistent with what we said, and consistent with how to think about it. And then once we have the option to guide for the next phase of growth, then we can re-look at that together. But the general message is consistency of expectations with the focus, especially on the ability to deliver mid-teens operating margins for this Company.

And on your question regarding Q4 implied up margin, it is our smallest quarter and it's certainly our -- traditionally our smallest quarter from an -- on an OY basis. We are making substantial investments that Patrice noted, largely on new consumer acquisition and new digital sites, and digital investments, all of which will pay dividends into the future. It's not a one and done kind of return on investments. These will be a long-term investments and we're committed to making them. Where could be upside come? Really if we see revenues strengthen beyond our expectations into the fourth quarter, supply chain resolved, or especially the logistics aspect of supply chain resolves quicker than we expected. You could see some flows through there. The pressures are twofold other than the small quarter, we're moving into some of the higher costs that we're seeing on a product basis. And you saw that we've taken up some of our estimate on freight now moving to 130 to 150 basis points. Obviously given -- freight was 60 basis points in the first quarter, 150 in the second quarter, the back half to get to our range is more substantial than that. So you see that pressure in the back-half.

Thank you. Next question, please.

Thank you. The next question comes from Matthew Boss with JP Morgan.

Great, thanks. Patrice, maybe on the products side, could you help walk through key changes, maybe by category or collection that you've made to increase relevance with younger consumers as we exit the pandemic. Curious what you're most excited about into holiday. And then last, how do you see the brand positioned in a world potentially of greater overall casualization.

So Matt, I'm going to broaden your point, because the way we appeal to that younger consumer is also through how we present some of our core products, right? How to make our white polo shirt relevant for that younger consumer. And I think through the pivots we've made on marketing, going on the platforms that resonate the most with that younger consumer, whether that's TikTok or Snap, participating in those activities that are most relevant for them, like gaming, like engaging in the Metaverse, like what we've done recently with the Zepeto where we've seen very high level of engagement. So the shift in our marketing has really helped broaden the appeal to the younger consumer, we see it in our data. As I mentioned, upfront on Dana's question, we are seeing a younger consumer coming into the franchise. As a result of the marketing content and targeting on the product front, we have, of course, also leveraged categories that resonate the most with the younger consumer Polo sports, which we've re-energized. And I think there's a really clear positioning now, is resonating very nicely. Elevated athleisure and fleece is also connecting nicely with that consumer. And then, some of our core, products are sweaters, or chinos, our denim. Some of our more elevated outerwear is also resonated -- quite resonating quite nicely with that younger consumer. So as I look at the broad categories that have been successful in the past quarter, and as we look ahead in terms of where we've invested, we feel very nicely positioned broadly, and in particular, for that younger consumer, whether that's again denim, investments in sneakers, driving more elevated casual that is resonating with that group both on the men's side and on the women's side. And I'm actually very encouraged that the progression we're making in terms of attracting that younger and higher-value customer is not a one-quarter phenomenon. We've now seen this for a number of quarters and is the direct results of interventions -- targeted interventions we're making across product, across marketing, and across product brand distribution.

The next question, please.

Thank you. The next question comes from Brooke Roach with Goldman Sachs.

Thank you. Good morning and thanks so much for taking our question. Patrice and Jane, in your remarks, you called out marketing and other multiyear strategic investments to support long-term growth as a driver of SG&A investment into the second half. I was wondering if you could talk a little bit more about the most important spend initiatives within SG&A, this year. You're into the back-half. What is within your control and accretive to long-term brand health? And are there any other components of SG&A that are rising, whether that's rising labor or given the well or -- other types of aspects of an inflation? Where do you see that opportunity into calendar '22? Thank you.

So maybe Jane will tag team on this one. In terms of Rob buckets broke into -- where we're focusing our investments moving forward that we expect to drive long-term growth, or one new customer acquisition, younger customer, higher-value customer. And we now have the tools with the consumer intelligence group that we have in place, with our ability to target and tailor the messaging to really be providing very high ROI on these types of investments. So we've seen the success behind them. We're going to dial that up across the region. The second is continued to fuel our digital momentum, right? And that's combination of functionality on our own sites, elements of connected retail, work that we're doing with our wholesale partners, and you will see we have a number of exciting things coming online over the next couple of quarters when it comes to our digital capabilities. In addition to localizing sites, so expanding our footprint into new markets with localized propositions from the RalphLauren.com standpoint. And then the third one is continuing to invest in building our store footprint in the context of our key city ecosystem. And we had two good examples recently with Shanghai and Beijing and there's more to come there. So these are investments that will not just generate an impact over the next one or two quarters, but there will have long-lasting effect. We really look at lifetime value of customers that we bring in to the franchise and we're actually really pleased with the profiles we're bringing in. We're really pleased with our retention performance. So these three areas will have a long runway in terms of contributions to growth and value creation.

Yes in fact as you think about some of the components of SG&A, we've talked about marketing being at least 6% obviously, with some of the shift we did, the $25 million that came out in the first half and went into the second half. You'll see heavier marketing spend into the second half because we're able to sort of post COVID and restrictions and shutdown, we're able to activate things like the Australian Open. And we have the events coming up, the Fashion Show, Fashion Week coming up. Those things will be activated and that's a portion of the spend that shifted. You will see this back half be closer to 7% to 8% of sales relative to our run rate, which is about 5.8% of sales into this quarter for the first half. Now, outside of SGNA versus -- outside of marketing, I'm sorry, versus last year, SMB is normalizing. Last year we had furloughs, and we had government subsidies during the height of the pandemic. We're obviously open across all our stores now. And we are seeing some wage rate pressure. It's been most notable in our distribution centers with temporary and hourly workforce, and in our retail stores. I'm pleased to say that we are well staffed right now. But there is some inflation in wages that we saw, and of course we're committing this year to opening new doors, as a part of our drive towards direct-to-consumer, we're going to open 90 new doors this year, and there is some investment and expenses associated with that. Now, if you -- as you ask in terms of what do we have control of? Overall, we're committed to making these investments. We do have some control over marketing, as you saw us exercise in the first half to make sure we are in tune with local markets and the operating dynamics that we're working with today, we do feel now is the right time, just with the holiday and what we're seeing in terms of opening around the country. Now is the right time to invest. And as Patrice mentioned, we're also investing in local e-commerce sites to have a very strong ROI and payback after the first 10 months.

And the last question, please, Angela.

Thank you. Our final question comes from John Kernan with Cowen.

Excellent. Thanks for squeezing me in.

Good morning, John.

Good morning. Good thanks. Going back to North America, the $700 million in revenue that we're taken out of the business globally. I think a lot of that is from North America. Just curious, how should we -- we should think about wholesale and retail within North America? And what a sustainable growth rate in North America might look like as we exit the pandemic.

So let me just start with the $700 million of pressure, which you're exactly right, is predominantly in North America. And what's going to manifest itself through Wholesale, though significantly is the pressure from the Chaps moving to a licensed model. So that's a little more than 10 points of pressure in the second half to our Wholesale business. I think it's absolutely the right strategic moves underlying except reset, we expect continued momentum outside of Chaps in our wholesale business and higher levels of profitability, as Patrice mentioned. In retail, obviously, Club Monaco will be excluded from our overall corporate results. But in retail, we expect as the situation of COVID normalizes that we'll see better traffic back to the store. We've got strong conversion rates, strong AUR growth plan that we've already put up and planned for balance of year that will help us drive overall retail. We're planning for some store openings in North America and continuing comp growth. On a long-term basis, we haven't yet guided the region, but we do expect North America is on a healthy base and is positioned from -- for growth from here out. You see the digital momentum, you see it's gaining share in wholesale. And we're very encouraged by what our existing store base can do and our new store base could do.

Yeah. I think if you in did you're going to step back and say, okay, where are the drivers of North America are going to be moving forward? And you heard me say last quarter -- I think it was last quarter and there have been this confidence in our ability to win in North America since I started and that comment and confidence completely holds true as we speak together today. As Jane mentioned, if you look at the key vectors of growth moving forward, digital, right? We now have, after a painful reset, dealing with Daigou, dealing with the site that was over promotional that didn't have the right product offering. We've now showed very good about our ralphlauren.com site in the U.S. both in terms of how the brand has presented, are engaging with consumers. The connected retail capabilities that come with it and of course, the profitability. So that's the first element. Second element, as you mentioned, is our retail footprints, right? Both productivity in our outlet and expanding our own full-price store footprint, so more to come in this space. But we know that there’s an opportunity for us to increase our presence -- physical presence from a DTC standpoint in a number of key cities in the U.S. and that work is well underway with a format that we're excited about, and a brand sensation that we're excited about. And then the final point is now Wholesale, which used to be a drag in a bit of an albatross candidly around our necks, is now reset, is now on a healthy base both the brick-and-mortar side, where week flows as reminder, 65% of all our locations over the past 3 - 4 years. And the digital front, you saw the digital numbers. This --…

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