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    RALPH LAUREN (RL)

    Q3 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$147.14Last close (Feb 7, 2024)
    Post-Earnings Price$163.57Open (Feb 8, 2024)
    Price Change
    $16.43(+11.17%)
    • Significant growth potential in the under-penetrated women's category, which currently represents less than 25% of the business despite 56% of customers being women; expanding this segment is expected to drive future growth.
    • Strong momentum in direct-to-consumer (DTC) channels, now representing about two-thirds of the business, with healthy comp growth across regions and plans to open 250 new stores over three years, which is expected to enhance profitability and consumer engagement.
    • Robust digital growth with significant runway, as global digital sales are up high single digits, driven by new, younger, higher-value customers; digital currently represents less than 30% of the business, indicating opportunity for future expansion.
    • North America wholesale revenue decreased by 15% in Q3, and the company remains cautious about recovery in this channel, indicating potential continued weakness in wholesale demand.
    • Europe's outlook is cautious due to inflationary pressures and geopolitical uncertainties, including impacts from the Middle East and Ukraine, which could lead to deceleration in growth in the region.
    • Operating margin expansion may be limited by higher SG&A expenses and continued investments, despite expected gross margin improvements, potentially constraining profitability growth.
    1. Maintaining Momentum and Margin Targets
      Q: How will you maintain momentum and achieve margin targets?
      A: We are confident in maintaining our momentum due to our resilient and differentiated model, investing in our brand, iconic core products, and expanding our direct-to-consumer (DTC) channels, which now represent about two-thirds of the company. We remain firmly committed to our 15% constant currency operating margin target , with no constraints anticipated. Our diversified growth drivers across categories, channels, and regions, along with operational agility, support sustainable long-term growth.

    2. Gross Margin Drivers and Cotton Prices
      Q: What are the drivers for gross margin improvement next quarter?
      A: For the fourth quarter, we expect operating margin to be up 350 to 400 basis points, largely driven by gross margin. Key drivers include over 100 basis points tailwind from freight, favorable channel and geographic mix, and reduced pressure from cotton prices. While cotton remains a slight headwind, its impact has significantly reduced compared to the prior 110 basis points headwind this year. Average unit retail (AUR) growth also becomes a more powerful driver in gross margin.

    3. North America and Europe Wholesale Trends
      Q: Can you elaborate on wholesale trends in North America and Europe?
      A: In North America, wholesale sell-in was down 15%, but sell-out was down only mid-single digits with low single-digit increases in AUR. We expect more balance between sell-in and sell-out moving forward. In Europe, our business performed above expectations with solid growth in every market, despite some softness in the UK due to inflation. The wholesale channel in Europe is more elevated, and we see opportunities to apply best practices to North America.

    4. Direct-to-Consumer Growth and Store Openings
      Q: What are your plans for DTC growth and store openings?
      A: We remain enthusiastic about expanding our DTC business, focusing on top 30 cities globally. DTC now represents about two-thirds of the company, and we expect this percentage to increase over time. We are on track to open about 80 stores this year and 250 new doors over a three-year horizon. Investments in service and digital capabilities are enhancing customer experience and driving growth.

    5. Cost Savings Program and Margin Expansion
      Q: Can you update us on your cost savings program?
      A: We are on track with our $400 million gross savings plan. We delivered about one-third in fiscal '23 and will deliver another one-third in fiscal '24. We are disciplined in resource allocation and expect these savings to contribute to operating income margin expansion, coupled with momentum in our DTC channels.

    6. Growth in Women's and High-Potential Categories
      Q: How are your growth categories performing?
      A: We see significant potential in women's, with women representing 56% of our customers but less than 25% of our business. We are pleased with the strong customer response in women's, outerwear, handbags, and home. These categories are AUR accretive and will accelerate top-line growth and margins. Our handbag launches like the RL888 and partnerships in China are showing positive momentum.

    7. Outlet Channel Performance
      Q: What is driving improvement in the outlet channel?
      A: Our outlet channel saw healthy improvements driven by brand investments, targeted promotions, and increased store service. We experienced solid traffic growth across all three regions and increased AUR while effectively managing promotions during peak holiday periods. Investments in service are resulting in higher conversion rates.

    8. Digital Growth and Customer Acquisition
      Q: How is your digital business performing?
      A: Our digital business is performing well, with North America comps up 4%, driven by traffic, conversion, and basket size improvements. We acquired 1.7 million new consumers last quarter, attracting higher-value, younger customers. In Europe, digital grew 12%, and in Asia, it grew 25%. Digital represents less than 30% of the company, and we expect continued acceleration.

    9. Investment Priorities and Outperformance Flow-Through
      Q: How will you allocate investments amid outperformance?
      A: We will balance flowing through outperformance with making strategic investments in our business. Areas receiving incremental spend include digital initiatives, store expansions, and brand investments. We are focused on enhancing productivity metrics and ensuring our investments in digital, stores, and brand continue to drive momentum.

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