Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter Fiscal Year 2023 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'll now like to turn the conference over to our host, Ms. Corinna Van Ghinst. Please go ahead.

Good morning and thank you for joining Ralph Lauren's second quarter fiscal 2023 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. With that, I'll turn the call over to Patrice.

Thank you, Corinna. Good morning, everyone and thank you for joining today's call. It was great to see so many of you at our Investor Day in September where we laid out our ambition to be the world's leading luxury lifestyle company. We also outlined our company's next phase of growth powered by multiple engines, which we are calling our Next Great Chapter Accelerate plan. We are off to a strong early start with our second quarter performance, which exceeded our expectations on both the top and bottom line, demonstrating the consistency and momentum of our business around the world. At the same time, we continue to drive a culture of operating excellence as ongoing productivity is an important driver to fuel our near and long term growth. This resulted in another quarter of double digit AUR growth and sales exceeding our plan, even as the broader marketplace became more promotional into the fall as anticipated. Also, as we had expected from the start of this fiscal year, the global operating environment has remained choppy across many of our key markets. Our solid performance amidst this backdrop is a credit to our team's agility and execution as we focus on delivering what we can control. And while we expect this choppiness to continue in the near term, we're encouraged that our core consumer remains generally resilient despite the macro headlines, reflecting increasing desirability for our brand and the attractive value proposition of our products. As we navigate the broader macro headwinds, we're focused on driving our three strategic pillars of long-term growth. These include first, elevate and energize our lifestyle brand. Second, drive the core and expand for more, and third, win in key cities. With our consumer ecosystem and spanning everything we do is our commitment to deliver positive…

Thank you, Patrice, and good morning, everyone. Our second quarter results demonstrate solid progress on our NGC accelerate plan, exemplifying our team's execution strength across our multiple strategic drivers and superior operational capabilities in the face of further macro challenges and disruptions around the world. Our top line growth continued with Q2 revenues up 5% on a reported basis and 13% in constant currency ahead of our outlook. This quarter's was once again supported by positive growth in constant currency across all three regions. Operating margin also slightly exceeded our expectations, even with inflationary cost pressures and a more normalized cadence of investments versus last year. We believe our elevated brand focus strategy and targeted investments when combined with our culture of operating discipline and Fortress Foundation enablers put us in a position of strength to continue to drive long-term value creation through uncertain times. Let me take you through our second quarter financial highlights. Total company revenues increased 13% in constant currency above our outlook led by double digit growth in both Asia and Europe. Ralph Lauren digital ecosystem sales continued to outpace our total company rate up mid-teens in constant currency on top of a strong compare of nearly 50% last year. This includes mid-single digit growth within our owned Ralph Lauren and digital sites on top of more than 30% growth last year. We continue to invest in enhanced digital content and storytelling and to expand the breadth of our offering, including the addition of a home shop. In the past year, we are also driving further improvements in the quality of sales with a meaningful increase in full price sales penetration and digital margins still strongly accretive to our overall profitability in the quarter. Total company adjusted gross margin was 64.6% down 270 basis points to…

[Operator instructions] The first question comes from Michael Binetti with Crédit Suisse Securities.

One for each. I guess Patrice, you outlined the diversified growth engines that the investor day in September. You spoke to them again today. Just given the current macro that you talked to about today, which of these drivers are still the most relevant in your view? And then Jane, so North America operating margin compressed quite a bit relative to pre-COVID levels. Can you speak to where you saw the most pressure? How much is transitory in your opinion and how you're planning that North America margin and holiday in the rest of the year?

Thank you and good morning, Michael. So clearly the macro pressures are out there, right? Inflation currency, geopolitical concerns and so on, and you all know them as well as I do, and they're of course top of mind for us. That said, we have a clear game plan and as you mentioned, multiple diversified engines of growth. What I think is really unique for us is the breadth and depth of these growth drivers. It enables agility, so in other words, we have this unique ability to lean harder on some areas of the strategy if others are more challenged, and Q2 is actually a good illustration of that, taking it across the different growth drivers. If you could look at it from the regional side, we were proud that all of our regions grew top line in constant currency and we delivered disproportionate growth, as you heard in Asia where we're seeing the strength of the brand across just about every single individual country, whether that's, out size growth in Korea, Japan, Australia, Southeast Asia, and we're particularly proud of the continued growth in China. Even with a number of our stores closed with China up 30% this last quarter. If you look at this through the channel lens, we're encouraged that the strength in our full price businesses is more than offsetting the softness that we're seeing from our value oriented consumer subsegment, which is more prevalent in our outlet business. And on the product side, we can flex the breadth of our portfolio and I think we've demonstrated our ability to dial categories up or down for the consumers as their needs desires change. For instance, in this quarter think more sports coats and dresses and less hoodies. So our ability to be agile in this way is a real competitive advantage in a volatile environment, which already served us quite well during COVID. And to this end we really believe that this is the time to continue to be on offense, recruit new consumers and continue to take market share. Jane, over to you on North America.

Okay. So good morning, Michael, and thank you for the question. So in Q2, our margins in North America were negatively impacted by a more normalized level of marketing investments versus last year we were more cautious last year given some of the pressures in store and coming out of COVID and so this year really represents a normalization of that spend. So as that spend normalizes in the second half, we would expect that pressure or that leverage pressure from marketing to abate. We also saw more elevated freight expenses in the quarter as we move to make sure that we could offset receipt delays from global supply chain challenges and have inventory ready for full price selling. We think that that was the right decision. You certainly saw it come through in our AUR this quarter. We're also overlapping some higher labor costs in the year and expect that to abate as well in the second half. So longer term, we the real opportunities in North America, both on the wholesale side and on the DTC side. We're in the earlier phases of our journey in wholesale, so that's encouraging as well as some of the earlier phases in outlet where we see opportunities in the margin between full price in our outlet. So we're optimistic and expect that to start to play out in the second half. Great, thank you. Next question please.

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

Great, thanks and congrats on a nice quarter. Thank you. So Patrice, on current positioning of the Polo brand. What do you see as the global market share opportunity? What have you seen more recently and what have you seen from recent selling trends, maybe a direct to consumer, any change in wholesale orders at all? And then just for Jane, what is your level of visibility on outlet in Europe as we think about the moderation that you've embedded in the guide today?

So Matt, what's exciting about this business candidly is how fragmented the market is, right? So our market share is while we have a sizable business in Polo, Men's, Women's and Kids. In relative terms, it’s still very small. So we have incredibly long runway when it comes to market share growth across all three businesses. You will have seen in the more recent share reads that we're continuing to grow share on Men's, were continuing to grow share on Women's Continuing to grow share on Kids, particularly strong performance last quarter on kids' share growth. And I think as we look around the world at what Polo stands for, that the type of products that we have within our lifestyle portfolio and what the consumer is looking for right now, we actually feel that we're really in the sweet spot of consumer demand with the breadth of our range and with the overall positioning across Men's, Women's, and Children's. And I think this is as true in North America as it is across Asia, as you heard me, referred to performance earlier as well as in Europe. So I think we're very nicely positioned on Polo and we're going to continue to invest to bring in more consumers, continue to elevate the positioning across that portfolio. When it comes to your question on wholesale orders and Jane and I will tag team on that in the second part listen, there are a few things I would say about our wholesale partnerships right now. First of all, I am really pleased to see how aligned we are strategically with our key wholesale partners, both in North America and around the world. And that's really enabling us to look at things through a similar lens when it comes to, to growth…

Next question, please.

Thank you. The next question comes from Gabby Carbone with Deutsche Bank.

Hi, good morning. Congrats on the nice quarter. So my question is on the promotional environment, it is getting, more challenging out there, giving the high inventory levels across the marketplace. What do you believe is working in Ralph Lauren's favor as you continue to deliver higher AURs? And then just as wondering if you could dig into category performance and where within the business you're seeing the strongest demand. Thank you.

Of course. Thanks, Gaby. So what we're seeing across the competitive environment, we are seeing an increasingly promotional environment, as was expected, there you can see the results as well as we do. There's excess inventory out there and many are looking to liquidate. But our long term strategy, despite the cure the promotional environment has not changed. We're trying to stay agile and mindful of the competitive environment, but we really have multiple vectors of growth across AUR. And I think that that is really serving us well. Saw that show up in our AUR at plus 18% this quarter. And we're really encouraged underneath the covers that despite our higher AUR, within a more promotional context that we've seen, our value ratings from our consumers continue to increase, increase both versus pre pandemic levels and sequentially again this quarter. So for us, that's a key IOR indicator and gives us a lot of confidence. Now that being said, as we have in the past, we build a strategy that has, that is fully aligned with our long term strategy, but has some flexibility in it. We don't, we are not going to overly react to the promotional environment, but we are going to be strategic about it and know that we need to stay competitive. We feel good about that. We feel good about into the second quarter. We've embedded in our guidance, the confidence that we'll be able to offset inflation with pricing. And you can see that in our implicit gross margin guide. So feeling good and feeling good about the consumer, and especially because it's really based on our multi-year elevation work that we've done as well as the reset work we've done. That's really put us on a healthier base. Yeah, increasing desirability, increasing value equation. Those are things that we're driving and we're really pleased to see because that will drive sustained performance. On the product front, Gaby, probably three things I would call out. One is our core is actually doing quite well. It was mid-teens this past quarter, and as we talked that investor, our core is 70% of the company, It's actually not surprising that it's doing well because I think at times where consumers are more discerning on where they spend their money, obviously they're going to gravitate towards brand they know and trust and learn to gravitate towards products they know and trust. So strengthen the core. We've seen really nice performance in our high potential categories, which were up high teens this past quarter in constant currency. The probably the best performer was again, Outerwear where we saw a very strong performance, where we're also very excited to see the progress we're making on Women's across collection Polo Women's and Lauren. And then the last thing I would highlight is the tailored business continues to, to strengthen and improve. So to my prepared or earlier response to Michael's question, we're seeing more sports coats and less hoodies.

The next question comes from Omar Saad with Evercore ISI.

Thanks for taking my question. Great execution this quarter. I wanted to ask you about some of the new consumers the many new consumers you who joined the Ralph Lauren franchise during COVID I think many of them younger. How, are those consumers performing in this kind of post-COVID era? Are they still kind of behaving with not much price resistance to the brand? I'd also love a quick update on the wholesale channel. Just give us a quick reminder on how you and the wholesale, your wholesale partners are managing inventory planning differently today versus in the past as we're seeing some other retailers and brands out there going to get seeing some pockets of blow-ups and inventory that you're seeing seeming to be able to avoid. Thanks.

Good morning, Omar. So listen, we're going to talk team with Jane on this one on the consumer front. So up again, 1.3 million this past quarter. I’m really pleased with actually the makeup of that new consumer cohort, younger, exactly, to your point, higher value, less sensitive to promotional activity more, more diverse. When it comes to response to our product and AUR -- we're seeing pretty consistent positive response to our AUR increases across the different products. And again, it really traces back to what Jane mentioned earlier, which is the progress we're making on brand desirability and value equation and our value perception scores are consistent across the different segments, and that is relevant for those younger consumers we're bringing in. I expect with the partnership that some of you may have seen, that we will continue to bring in some of these younger consumers as we're able to really connect with them where they, where they play, no pun intended and, where they want to engage with brands. So feel good about that one. Data point that we're particularly pleased with is retention, right because it's a wonderful thing to bring in new consumers, but you want them to stay within the franchise. So we can drive this concept of lifetime consumer value. And we've seen our retention scores actually strengthen this last quarter across the board, which I think bodes well for, for the future. So Omar, I would just call out a few key differences in terms of our inventory planning with our wholesale partners. I think throughout our reset as Patrice called out, we've had an incredibly productive and transparent dialogues with our wholesale partners and have really approached them with the spirit of partnership. But the focus has really been on sell…

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

Great, thank you so much. I have a two part question. Patrice, could you elaborate a little bit on the momentum in China that you've seen? Has it continued so far in this quarter and given Singles Day is upon us, is that going to be important for the brand? And just maybe just talk about what some of the key drivers have been in China, and then secondly it seems like the trend in buying back stock has accelerated a little bit from where it was last year, do you expect the trend to continue through the rest of the year? Thank you.

Very good morning, Jay. Listen, we're really proud of the team's execution in China, actually across the entire APAC region, and we continue to see near and long term brand opportunities in China. What's really working well right now, but has been for a while, right? This is not just a one quarter story, is the fact that the teams are weaving the brand into the fabric of the local culture and translating our core values, our core propositions in a way that's resonating with that younger Chinese consumer, both men and women. And they're taking both global programs that they're translating in the market, and then also complementing that with, with local activities, partnerships with influencers and others. The second piece is the product offering and, and the curating that the team is doing there to really make sure that within the broad range of products that we have, we have items that really resonate with that specific consumer. And I think this Jay, but our highest AUR is actually in China, right? So that's where we're focusing some of our most elevated products and we're seeing very good response from the consumer. The last point is around connected retail, and I think China to some extent is our poster child on connected retail and bringing all of that together digital brick and mortar in a way that is seamless in a way that really meets consumers’ expectations. So those have been the drivers this past quarter have been the prior quarter -- will continue to be moving forward with really a team that's in touch with that, that local consumer understands that local consumers and ensures that we're showing up in a way that's, that's incredibly relevant there. So our Singles’ Day is concerned. So Singles’ Day for…

Thank you. The next question comes from Chris Nardone with Bank of America.

Good morning, Thanks for taking my question. Can you elaborate a little bit on your guidance for gross margin expansion in 3Q? Is there any way to provide guardrails around the magnitude on a reported basis? And then also tied to that, can you just discuss how your expectations for markdown activity in your DTC channel has changed compared to when we last spoke at your investor day? Thanks.

So, our guidance does imply a an improvement in in gross margin through the second half. Notably in the fourth quarter, you'll in the second half we'll start to lap higher air freight and product cost increases from last year. And while there's, while we expect those inflationary factor to still be with us, we'll be able to move into higher gross margin as we overlap some of the more significant increases last year. And as you look at it from a roughly a reported basis, I would expect as we called out in the third quarter, that growth that FX would impact us by about 170 basis points. And we're calling that it'll be about similar for the full year. So FX is a meaningful headwind as we as we move through this year. But you'll start to see us get actual gross margin improvement in the second half, both on a reported and a constant currency basis. And then the second part of your questions.

Markdowns?

So as we look at a more promotional environment again, our strategy is not changing. We're on an elevation journey. Our long-term pricing strategy is to match our pricing with inflation as we guided before. We expect inflation headwinds to be meaningful in the second half, but we're also confident that we'll be able to offset those inflation factors. Now that being said, we while we won't follow the competition down in any way, we will, we have built flexibility in our plan to make sure that we continue to offer a compelling value to consumers and be competitive on a total value basis in the marketplace.

Last question, please.

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

Excellent. Thanks for squeezing me in. Congrats on all the momentum. Jane, how do we think about the implied operating margin expansion for the fourth quarter and then the timing and sequencing of operating margin expansion as we get out of fiscal '23, as some of the, the onetime headwinds roll off and freight maybe FX get a little easier? Thank you.

Yes. So as we look at operating margin expansion in the second half, it's really predicated on that improved gross margin that I just talked about. That'll be the primary driver. You will also see that couple with SG&A leverage. Now we have taken some revenue caution into the second half, but we will still get SG&A leverage in the second half to drive a combination of operating margin expansion through gross margin expansion and SG&A leverage into the second half. So while some of that revenue deleverage has moved us towards, about the 14% constant currency OI margin, we're still very comfortable in our three year outlook of getting to that mid-teens OI margin. Next year I'm not a prognosticator on FX, it's been a meaningful headwind. But next year we feel confident in continuing our elevation journey on some of the margin rich categories that Patrice called out in terms of Outerwear and our Core performing well, we're well positioned with inventory. So we're encouraged by that. Next year as we think about inflation in Q1, we'll renegotiate our freight contract. You're seeing that spot market come down, that'll be a tailwind into next year. We'll also have a more normalized cadence of marketing through the year. So you won't see that first half, second half story play out. And we're also seeing a better cotton environment. So some of those material cost headwinds that we're facing now, we'll start to phase out. And remember, we long buy cotton, so I expect that to be in the second half of fiscal '24. But we've got nice layers of cost -- reasons for cost optimism, should I say, throughout the year,

Jane. All right. Well listen, thank you everyone for joining us today, and we look forward to reconnecting in February to share our third quarter fiscal '23 results and until then, take care and have a great day.

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