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Ralph Lauren Q2: Denim, Home Trends & Supply Chain Flexibility

Ralph Lauren Corp. swung back to the black for the second quarter.

In a Nutshell:  All geographies exceeding the apparel company’s long-term target of low- to mid-single digit annual average unit retail (AUR) growth. Better sales and distribution drove a 23 percent increase in North America.

Casual bottoms, sweaters and fleece drove encouraging trends in high-potential underdeveloped categories, particularly denim, accessories and home. Sales in Europe also were strong, while strength in China and Korea offset the impact from Japan’s Covid-19 restrictions. Momentum continued in Mainland China despite Covid-19 lockdowns, with second quarter sales rising more than 25 percent to last year and more than 70 percent when compared to Fiscal 2020.

“We continue to grow and evolve in ways I never imagined, all while holding true to the spirit of timelessness that defines who we are,” Ralph Lauren, executive chairman and chief creative officer, said. “As we enter the holiday season with a greater sense of hope in the world, I am proud of how our teams are coming together to inspire optimism and love in everything we create—from our iconic products to our expanding digital, hospitality and store experiences all over the world.”

“We delivered another quarter of strong progress on our Fiscal 2022 plan, with second quarter results exceeding our expectations across all key financial, operating and consumer health metrics,” added CEO Patrice Louvet.

During the conference call to Wall Street analysts Tuesday morning, Louvet said the work the company has 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.”

Ralph Lauren’t diversified supply chain enables speed and agility.

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“We’ve created a strategic supplier program whereby we prioritize our partners with a presence across multiple markets, enabling the shift to happen even more seamless,” Louvet said, adding that “we have proven pricing power, elevating our AUR across every channel and geography over the last four-and-a-half years so that we have 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 in volatile, global operating environments.”

In driving digital momentum and customer acquisition, Ralph Lauren worked with Zepeto to create a social 3D virtual space, or “metaverse,” where users can use avatars to socialize and create content.

“This partnership represents the latest frontier in digital engagement, in which users can purchase exclusive digital whiteboard apparel, for their 3D avatars for the first time ever. Early engagement has outpaced our expectations, with 100,000 items already sold in just a few weeks. In all, we added 1.4 million new consumers to our direct-to-consumer channels alone this quarter in a 19 percent increase to last year,” Louvet said.

Ralph Lauren is focused on planting its flag in key cities, opening 35 new stores and concessions in more than 13 locations. Most were in Asia, particularly Mainland China, which Louvet described as a “significant long-term growth opportunity for our brand.”

Louvet believes the company has a “large runway ahead in the back half.” The clothing giant has attracted younger consumers by marketing on platforms including TikTok and Snapchat, as well as engaging in gaming and the new “metaverse” virtual-reality environment, which garners strong engagement, he said.

Net Sales: For the three months ended Sept. 25, net revenues rose 26 percent to $1.50 billion from $1.19 billion. Global digital revenues grew 45 percent in the second quarter, even as traffic began to normalize at stores.

North American revenue rose 30 percent to $703 million. Wholesale revenue rose 23 percent. In retail, comparable store sales were up 31 percent, with a sales gain of 31 percent in brick-and mortar stores and a 32 percent increase in digital commerce.

Revenue in Europe rose 38 percent to $496 million. Wholesale revenue rose 44 percent. In retail, comparable store sales were up 27 percent, with a 28 percent rise in sales at brick-and-mortar stores and a 24 percent increase in digital sales.

Revenue in Asia rose 14 percent to $270 million. Comparable store sales rose 7 percent, with a 4 percent increase at brick-and-mortar stores and a 69 percent gain in digital commerce.

Louvet said men’s saw strength in bottoms, including denim active style and shorts, as well as sweaters and performance categories. In women’s, sweaters, sweatshirts and bottoms were favorites in the quarter, along with transitional quilted jackets and denim jackets.

An adjusted gross margin expansion of 80 basis points exceeded company expectations, fueled by better pricing and promotions that included 18 consecutive quarters of AUR growth and elevated product mix that more than offset the planned freight cost increases in the quarter.

For the six months, net revenues rose 71 percent to $2.88 billion from $1.68 billion.

Earnings: The company reported net income of $193.3 million, or $2.57 a diluted share, against a net loss of $39.1 million, or 53 cents, in the year-ago quarter. On an adjusted basis, earnings per share (EPS) was $2.62.

Wall Street expected adjusted EPS of $1.99 on revenue of $1.47 billion.

For the third quarter, the company expects a 14 to 16 percent revenue increase in constant currency to last year.

“While our teams are still actively focused on managing through global supply chain disruptions, we remain confident in our ability to deliver the right product at an appropriate level consumer demand over the holiday selling period We expect operating margin of about 13 percent to 13.5 percent in the third quarter,” CFO Jane Nielsen said.

For Fiscal 2022, the company raised revenue guidance to up 34 to 36 percent on a constant currency basis from last year, along with gross margin gains at the high end of prior guidance of 50 to 70 basis points due to stronger AUR growth and favorable product mix that more than offset increased freight headwinds. Nielsen said the guidance reflects the revenue reset during the pandemic that includes department store exits, off-price reductions, and the sale of Club Monaco as well as the shift of the Chaps business to a licensed model.

For the six months, net income was $358.0 million, or $4.75 a diluted share, against a net loss of $166.8 million, or $2.27, in the year-ago period.

CEO’s Take: “Ralph Lauren remains on offense—our market share is growing and we are increasing our investments to deliver on further opportunities for growth. Even as we continue to navigate a volatile global environment, we are confident in our ability to sustain our momentum,” Louvet said.