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Ralph Lauren’s Q1 Focus? Outerwear, Denim, Footwear and Home

Intensifying its marketing focus helped Ralph Lauren Corp. beat Wall Street’s estimate for first-quarter adjusted earnings per share by $1.43.

In a Nutshell: Accelerated marketing investments drove first-quarter spend up nearly 40 percent, more than double last year’s comparison. Marketing this year marked 6 percent of revenue, versus 4.5 percent two years ago. The company’s brand elevation strategy focused on product and improving wholesale in North America and other regions also propelled average unit retail to 17 percent in Q1, on top of last year’s 25 percent growth.

“Increased investments focused on supporting new customer acquisition, digitally-amplified brand campaigns and resumption of local in-store activations as markets reopened around the world,” the company said. It leveraged icons and its lifestyle-oriented brand to balance core and seasonal new products as the world begins to emerge from Covid-19 pandemic, though the Delta variant remains a concern. The company also continued to develop high-potential categories in the quarter, led by outerwear, denim, footwear and home.

“Quality, a sense of timelessness and a feeling of optimism inspire everything we create,” Ralph Lauren, executive chairman and chief creative officer, said. “I cannot think of a time when these values have felt more essential or relevant as the world looks forward to a future marked by hope and possibility.”

CEO Patrice Louvet told Wall Street analysts during a Tuesday morning conference call that the apparel empire is on track to emerge out of Covid a “fundamentally stronger company than when we came into it.”

The company has been working with a diverse group of athletes, celebrities and influencers that helped it generate over 8 billion global impressions in the quarter. More sports campaigns are on the agenda with the 2021 Ryder Cup and the U.S. Open Tennis Championships. That helped the company add more than 1  million new customers to its direct-to-consumer channels during the quarter.

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As for product highlights, Louvet said consumers are shifting back to many key categories that drove the company’s business prior to the pandemic. “While casual styles are still resonating, we’re also seeing a progressive return to sophisticated casual, given the breadth of our assortment,” Louvet said, adding that the company has been responding to the shift in consumer appetites by reintegrating its more elevated styles into its assortment while scaling back stay-at-home items.

“On the men’s side, we’re seeing a resurgence in polo shirts, sports coats, and trousers. Denim, footwear and accessories were our core brands, and [in] women we’re seeing improvement across dresses, elevated sweaters, novelty fleece, jackets and handbags. We’re also driving better performance in bottoms, including new fashion silhouettes, like wide-leg, as well as new fabrications, like silk and linen. We are rebuilding the penetration of these categories into Fall ’21 and beyond,” he said. 

With most of its key markets now fully reopened, Louvet said the company is “back on offense this year with the build-out of our brand, elevating key city ecosystems around the world. This ecosystem approach ensures a consistently elevated experience across our digital, social, and physical channels, both in our direct-to-consumer and wholesale networks.”

The company opened 18 new stores and concessions in priority locations, mostly in Asia, while closing 11China continues to be a significant long term growth opportunity for the company.

“We are opening new ‘Emblematic’ store experiences this year in Beijing, and Shanghai, with a smaller footprint than our existing flagships around the world. This new format offers consumers an elevated immersive brand experience at a significantly lower investment than our traditional flagships,” Louvet said. Beijing’s Emblematic store debuted in April, representing the first of the new formats focused on a digital-forward retail strategy.

The smaller stores feature a Ralph’s Coffee, and integrate “innovative, smart retail and digital activations throughout the store in partnership with Tencent,” Louvet said. Consumers can participate in in-store treasure hunts using QR codes and or sample customization stations using the company’s WeChat program to order personalized products from their smartphones.

Louvet said the new format hassignificantly outperformed our initial expectations,” as the company prepares to open its “Emblematic” Shanghai location in the coming weeks.

Asked whether the legacy markdown support vendor model is on the decline, or is less relevant going forward, Louvet said the company is focused on a “win-win mindset so that we can expand our margins” while vendors sustainably expand theirs as well.

Chief financial officer Jane Nielsen emphasized that the company’s “relevant full price selling takes vendor allowances off the table. And when I look at our progress this quarter, our full price sell-out was up 100, almost 150, percent.” The company’s brand power, she said, “eliminates the need for vendor allowances. It’s the power of our brand, and that’s what we’re committed to delivering.”

The company completed the sale of Club Monaco to Regent at the end of the quarter. Its Chaps business is still slated to transition to a licensed operation in the second quarter of Fiscal 2022. In addition, the company has committed to achieving net zero greenhouse gas emissions by 2040. It also has established new targets around circularity and diversity and inclusion.

Net Sales: Total revenues nearly tripled to $1.38 billion from $487.5 million in the year-ago quarter, and global digital ecosystem revenues rose to more than 80 percent growth in the period as consumers returned to stores. Both digital and wholesale accounts saw growth that was led by North America. Louvet said the company was down 66 percent in its wholesale doors, compared with prior years, which is giving the firm the benefit of a healthier brick-and-mortar base.

All regions saw first quarter gains, with North America rising four-fold to $662.1 million from $165.1 million as comparable store sales rose 176 percent, which included a 278 percent increase in brick-and-mortar stores and a 51 percent uptick in digital commerce. North America wholesale sales rose to $250 million versus $23 million in the prior year period.

In Europe, the revenue gain was nearly three-fold to $354.9 million from $120.7 million as comparable store sales rose 98 percent, which included a 154 percent rise in brick-and-mortar stores and a 23 percent gain in digital commerce. Wholesale sales for the region rose 344 percent on a reported basis.

Revenues in Asia rose 68 percent in the quarter to $288.2 million from $171.9 million as comparable store sales gained 43 percent, which included a 43 percent rise in brick-and-mortar sales and a 42 percent gain in digital commerce. Other non-reportable segments of the overall business more than doubled to $71.1 million from $29.8 million.

The company said gross profit for the quarter was $968 million, while the gross margin was 70.3 percent. Compared with last year, when Covid-19 saw the impact from temporary store closures, the adjusted margin was 69.8 percent, or 200 basis points below last year’s reported basis. However, when viewing gross margin from a two-year basis, the adjusted gross margin grew 530 basis points on a reported basis, based on strong average unit retail growth, when compared with the first quarter of fiscal 2020.

Executives on the call also noted the company’s targeted focus in its promotional activity, as well as strategic price increases where the firm believes it can offer competitive value relative to the marketplace.

Earnings: Net income swung to the black with profits of $164.7 million, or $2.18 a diluted share, from a net loss of $127.7 million, or $1.75, in the year-ago first quarter. On an adjusted basis, net income was $172 million, or $2.29 a diluted share.

Wall Street was expecting adjusted diluted earnings per share of 86 cents on revenue of $1.21 billion.

For the second quarter of fiscal 2022, the company expects revenues to rise 20 percent to 22 percent on a constant currency basis. Gross margin is expected to be flat to up 20 basis points to last year. The projection is based on average unit retail growth and favorable product mix partly offset by challenging comparisons, such as store closures, from the prior year.

For full year fiscal 2022, the company expects revenues to rise 25 percent to 30 percent versus year ago figures, taking into account a 53-week reporting period and continuing uncertainty around the Covid-19 pandemic and related disruptions. Gross margin for the year is expected to increase 50 to 70 basis points, up from the previous outlook of a 40 to 60 basis point decline, based on stronger average unit retail growth and a favorable product mix more than offsetting increased freight headwinds.

CEO’s Take: “Against the backdrop of stronger than expected re-openings across North America and Europe, our teams delivered exceptional performance this quarter,” Louvet said. “Our timeless brand is resonating strongly with consumers around the world, and the breadth of our lifestyle portfolio is enabling us to deliver products that meet evolving consumer tastes and demand as we progressively emerge from the pandemic. Even as we continued to manage through Covid-related challenges in select markets and in our global supply chain, we are back on offense and excited about our future growth opportunities.”