Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- First quarter results exceeded expectations, driven by strong international performance and positive retail comps across all regions.
- Ralph Lauren Corp (RL, Financial) added 1.3 million new consumers to its direct-to-consumer (DTC) businesses, with higher value and younger cohorts leading the growth.
- The company saw significant growth in its social media following, surpassing 60 million followers, led by platforms like Instagram, Threads, and TikTok.
- High-potential categories such as women's apparel, outerwear, and handbags showed strong growth, outpacing the company's overall growth rate.
- Ralph Lauren Corp (RL) maintained a strong balance sheet with $1.8 billion in cash and short-term investments, and generated $245 million in free cash flow in the first quarter.
Negative Points
- North America wholesale revenues declined by 13%, reflecting reduced sales of excess product into the off-price channel.
- The company is cautious about the macroeconomic environment, including inflationary pressures, supply chain disruptions, and foreign currency volatility.
- North America digital comps declined by 4%, indicating challenges in the digital business within the region.
- The company plans to close approximately 45 department store doors this fiscal year, which may impact overall revenue.
- Foreign currency is expected to negatively impact revenue growth by about 150 basis points, driven primarily by Asian FX.
Q & A Highlights
Q: With the amount of volatility we're seeing in the marketplace, especially from some of your peers, why do you think your consumer base is holding up relatively better? Are these trends sustainable as you look ahead?
A: Patrice Louvet, President and CEO: Our strong performance is driven by our powerful brand, diversified growth engines, and consistent execution by our teams. Our lifestyle portfolio of timeless products continues to resonate with consumers who are investing in quality and authenticity. Our elevated go-to-market strategy across key cities, particularly in China and Europe, is also a significant factor. While we are aware of broader macro pressures, our core consumers are responding positively to our marketing activations and product offerings.
Q: Can you elaborate on the drivers of SG&A leverage in the back half of the year? Is there a multiyear opportunity to drive SG&A leverage?
A: Justin Picicci, CFO: Our fiscal 25 guide implies about 20 basis points of SG&A leverage, primarily due to the timing of marketing investments. We expect marketing expenses to be higher in the first half due to key events like fashion shows and the Olympics, but this will normalize in the second half. We also anticipate scaling some of our recent investments in talent and services. Looking ahead, we expect a balanced contribution to profitability from both gross profit expansion and SG&A leverage.
Q: Can you talk about the outlook for North America wholesale for 2Q and the full year on a year-over-year basis?
A: Justin Picicci, CFO: We expect North America wholesale to stabilize, with sell-in more closely aligning with sell-out trends, which are down low single digits. This stabilization will start in the second quarter. We are also focused on maintaining clean and well-positioned inventories, allowing us to chase demand, especially for core products. We continue to prune lower-tier doors and focus on top-performing ones.
Q: How are you seeing the performance of high-potential categories like women's apparel, outerwear, and handbags?
A: Patrice Louvet, President and CEO: We are excited about the progress in these categories. Women's apparel saw double-digit growth, driven by foundational pieces like sweaters and polo shirts. Outerwear continues to perform strongly across all channels, and handbags, particularly the Polo ID collection, are gaining traction. These categories are expected to consistently outperform the total company trend, given their significant market potential.
Q: Are you seeing any signs of increased price sensitivity among your customers, especially in North America? How are you planning for the holiday season?
A: Justin Picicci, CFO: Our core customer remains resilient, with strong performance in full-price channels. While there is some pressure on value-oriented consumers, we have a targeted playbook to convert this segment through compelling price-value propositions and personalized communications. We are monitoring the macro environment closely and will adjust our strategies as needed to maintain brand elevation.
Q: Can you provide additional color on the outlook for DTC, particularly digital versus brick-and-mortar?
A: Justin Picicci, CFO: We expect balanced growth between our stores and digital channels. International markets are leading this growth, with strong performance in Europe and Asia. In North America, we are focused on improving digital performance through investments in site speed, product availability, and personalized communications. We expect North America digital performance to improve notably in the second half of the fiscal year.
Q: How is the outlet store performance compared to full-price stores? What is the potential for smaller footprint stores?
A: Justin Picicci, CFO: Full-price Ralph Lauren stores are performing strongly, driven by traffic and domestic consumer momentum. Outlet store comps were stable, with AUR growth and consistent conversion trends. We are also exploring smaller footprint stores to expand our reach while maintaining brand elevation.
Q: Can you discuss the impact of lower cotton prices on gross margin and how long this benefit will continue?
A: Justin Picicci, CFO: We expect to recapture about 175 basis points of benefit from lower cotton costs over the next two years, with half of this benefit realized in fiscal 25. This will be back-weighted towards the second half of the year. This benefit is reflected in our gross margin guidance of 50 to 100 basis points expansion for the year.
Q: How are you managing the consolidation of U.S. wholesale, particularly with the closure of additional stores?
A: Patrice Louvet, President and CEO: We are focused on elevating our wholesale presence by pruning lower-tier doors and concentrating on top-performing ones. This year, we plan to close 45 lower-tier doors, following the closure of 20 doors last year. This strategy helps us showcase the brand better and drive elevation. We are also seeing strong growth in higher-tier wholesale and digital channels.
Q: Can you provide more details on the progress and outlook for high-potential categories like women's apparel, outerwear, and handbags?
A: Patrice Louvet, President and CEO: Women's apparel continues to show strong momentum with double-digit growth, driven by foundational pieces. Outerwear is performing well across all channels, and handbags, particularly the Polo ID collection, are gaining traction. These categories are expected to consistently outperform the total company trend, given their significant market potential.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
