Good afternoon, everyone. Thank you for joining. My name is Omar Saad. I am the Global Softlines Analyst at Evercore ISI. Thanks for joining our Annual Consumer and Retail Summit.
Virtually this year, we don't have the stores and in person meetings, but we are super appreciative of everyone participating virtually, both of investors as well as management teams, including today's guest, Jane Nielsen, CFO and COO of Ralph Lauren. I am going to turn it over to you Jane. Thank you for joining and I'm going to turn it over to you for some introductory comments before I start my Q and A.
Thank you, Omar. Thank you for hosting today. I wish that we could all be together, but I guess this is the next best thing and we're all learning new ways of working. You all saw us a few weeks ago announce our Q4 earnings, which obviously, like most of our competitors, was dominated by the impact of COVID. But I would say that underneath the covers, there were a few things that we were quite pleased with that I think really gives us reason to believe that we are on the right track from a strategic standpoint.
And that was that we saw our AUR up 8% in the quarter, following 8% in the 3rd quarter. Heading into COVID, we closed January February with double digit AUR growth in North America and low to mid single digit comps in our doors, which was quite exciting for us. We closed the year despite COVID with a gross margin at a healthy 61.9%. I think that puts us in the top quartile gross margin standpoint of our competitive set. And we're able to close with an operating margin of 10.3 percent would have been a little over 12% had we not had the impact of COVID.
So strong progression on a fundamentals basis. Obviously, COVID has put us where it has. We really moved quickly to manage this crisis. You saw us close our GCs for deep cleaning in North America and Europe as a commitment to keeping our consumers and our customers safe. We closed the majority of our doors and furloughed a number of our employees at both corporate and stores to maybe get through this crisis.
And happily now we're pivoting more towards opening back up. Across Asia right now, all our doors are open with the exception of Singapore and we expect them to open in July. 75% of our doors, actually a little more, are open in Europe as we opened up the U. K. On 15th.
And about 2 thirds of our doors are open in North America. I think that we've done a lot of good work to figure out how can we service our consumer in this new environment, curbside pickup, buy online pickup in store, buy online ship from store, digital clienteling, digital appointments, mobile POS checkout, all things that really resonate through this current environment are all live in North America. And that was really enabled by, Omar, what you saw as we went live on our e commerce backend platform in October. And we're going live right now as we speak in Europe. And so you'll see that live in Europe as well.
And now we're pivoting to playing offense. Our mindset is how do we come out of this stronger than we went into it. You saw us made a commitment to our supply chain partners to say that we would honor all of the commitments that were made pre COVID and during COVID for all the work that was in process, inclusive of fabric liabilities. I think that that has gone a long way for them giving us the flexibility to cancel 2 thirds of our fall orders, take stock of what we had, reassort into fall and then backfill based on what we need versus taking whatever was going to come and shorten those timelines. And we just had a supplier summit on Thursday where they were quite appreciative of what we've done.
And they said that they were with us in terms of getting us back into supply and fast tracking us through the holiday season, which I think is going to be valuable from a competitive standpoint because demand is variable right now. We want to meet that demand, but we only want to meet it with things that are going to have a good strong full price sell through. So you saw us tap the capital markets a little over 2 weeks ago, $1,250,000,000 in bonds, 2 10 year tenors, the 10 year at a great rate, 2.95 coupon, really good money. We immediately moved to repay the revolver. So now we have an extra cushion.
And we've got all the liquidity of our revolver. Some of you know that we have a bond maturing in August and the longer tenured bonds were really oriented toward paying that and give you this a little position. So we feel really good about where we are from a liquidity standpoint. And that gives us optionality to play offense.
Yes, it's a great update, Jane. Really, I think about a lot of the work that you and Patrice and the entire team has done over the last few years to get the organization in a more flexible and leaner shape, more proactive and reactive, those things I think will enable the company, I feel to have navigated and gotten to the point where you are today. How do you feel about the consumer side? So it sounds like your house is in order. How do you feel about the demand side of the equation?
I know it's a huge question mark. Are there things you're learning in China or Asia? Is there ahead of the curve that are relevant in Europe and U. S? You obviously also have huge businesses.
Are there major channel differences? Should we expect e comm to slow as stores reopen? Any thoughts around what you're learning on the demand side?
I think that what we're seeing from a consumer demand side is that one is from a consumer mindset standpoint that there is something about the infrastructure opening that I think opens up consumer demand. So we saw that until things started to normalize from a store opening and getting back to some sense of normalcy. That was really the pivot point for a sharp slope of uptick in e commerce. People were able to say, okay, we're going to get back to normal. And so we saw shopping, traffic and transactions on our digital really start to accelerate there.
That's certainly playing out in Europe and North America, although it's much earlier days. As the stores have come back, we do see that there is a sequential build. So you open and traffic consumers start to acknowledge that you're open. You start to see that come back in layers, if you will. We've tried a few experiments where we delay the opening to maybe come back at a higher level of traffic, which is more productive.
That really doesn't appear to be the case. The consumers want to see that you're open. They get accustomed to you're open and then they start to come back. So we've seen that play out in a couple of markets, but encouraging in terms of the sequence of comeback. And in fact, what we've seen in China gave us enough confidence to say that we think by Q2, we'll be back to our pre COVID levels of growth, which is encouraging.
We do think China has been a quite resilient market. The majority of the population was quite compliant with social distancing. And there was uniform adherence to some of the recommendations of the government of the World Health Organization. We do expect as we're looking at comebacks that there are going to be regions, maybe cities, city clusters, regions within the U. S.
Or countries in Europe that will experience some W shapes in the recovery. So you go down, you come back out, cases start to peak again, you got to go back down. We're early days on that in Beijing, but certainly Japan experienced that. And when you do experience that W, what we've seen is the 2nd ramp up is a little slower. I think the consumer confidence is a little shaken by having to go back in.
And so that causes us to look at modeling a slightly slower pace of recovery in those markets. But I don't have a crystal ball to say where is that going to happen. But as we build an aggregate scenario model, we are modeling a few of those regions. I just think it's a reasonable expectation. Happy to have it not happen, but that's part of the underpinnings of why we said maybe a little more slower, more progressive build than what we saw in China.
Every market and consumer is going to be different. Also, the economic relief provided by different governments, I think will also play out in different macro factors that will play into consumer recovery.
Got it. That's really helpful context, Jane. How do you plan and operate through such an environment? If you think about your different channels, especially wholesale, I know you pulled back on planned shipments working with your chain and like you said that you have really good relationships there. But how do you plan with spring summer it was really kind of a confusing state and adding it back to school you don't know what the you really have done a super visibility into what demand is going to look like.
How do you put the seasons together so they make sense to the consumer? It sounds really complicated, but you guys seem to be operationally on point these days.
It is complicated, but that is the work of the work. It's season by season. I can tell you what I had called out even in the call as I said that as in late March in concert with our wholesale partners, as we knew that this was coming, we stopped shipments to wholesalers. So you saw that obviously play out in our 4th quarter numbers. But as we even come back up and as they come back up, we're keeping a close eye on inventories there.
And we're I think I've described the shipments into that channel in North America is de minimis this quarter. They have enough inventory. Our best chance to keep price harmony, it's so important for this AUR journey, is to not overload them with inventory, to force markdowns. So they've got inventory. We're filling in, but I mean small shipment fill in with them.
They are paying us. So we're on a very good balance there. They are paying us, but de minimis shipments only to round out assortments that might have in that those last couple of weeks of March been broken. And then as we look at future seasons, we're looking at what they're calling demand and planning even more conservatively. And we believe we can do that because of the willingness of our supply partners to participate with us in Chase and moving into the leveraging all we've done on digitizing the supply chain and digitizing demand fabric platforming, the shorter cycle, we think that we can backfill into the demand as we see it develop rather than having to place big bets on the Board right now, where we're really managing on a scenario basis from a demand standpoint.
I mean, part of the reason we suspended financial guidance is because I've got a range of scenarios. And we're taking action where we can be confident. It's a no regrets action or it builds competitive advantage action. And the rest we're going to lean on agility to backfill demand as we see it develop.
Understood. You mentioned briefly the kind of the importance of the e comm building that upgrading the back end, the capabilities that gives you. Talk more about how you're looking at from the back end to how the consumer interfaces with your different with products in different channels, how they consume in an omnichannel way, are you looking at consumers across brands, it used to be a separate outlet consumer versus full price consumer. What do these kind of new capabilities enable the company to do that it wasn't able to do before?
Yes. I think it's our own mindset towards the Internet has so blurred channel walls. That and I think we were probably slow to adapt to that new reality. But I think what this crisis has done that's positive has made us much more channel agnostic. It is an omnichannel world.
And so how can we take a factory consumer who talks to a sales associate about what they're looking for and we know we have it maybe our full price store, enable them on an iPad to say, well, you know, I think this is what you're looking for. Would you like me to order it for you? Let me order it for you. I'll ship it to your home. Or let me order it for you and I'll ship it here and you can come and see and pick up your product here.
That kind of enablement or digitally assisted enablement where we can hold an appointment that's all digital and show our consumers the full breadth of the Ralph Lauren catalog without having to now if you want to see that, let me let you talk to an outlet associate. We want to be able to move more nimbly across channels for our consumers. And we're really trying to enable that from a shopping standpoint and from a digitally assisted sales standpoint.
While we're on this topic of technology and the greater operating capabilities and what it lets you do, where does data fit? Are you guys at the point where you have cloud based kind of AI driven data analytics that allow you to make better decisions and for whether it's consumer groups and how to market them or on the product and merchandising side. We hear more and more about this, but I'd like to hear more hear where you guys are on that.
Yes. I think that we're really excited about it's early days. So let me just say that. So yes, we have a cloud based consumer data repository. And what we are really excited about is this journey of personalization.
So how do we segment consumers using typical CRM type of space, what they look at on the line, what promotions they respond on CRM capability with an AI driven product recommendation and a price point or a discount that optimizes their elasticity. So to me, it's really the marriage of CRM, AI that helps us compile lots of look alike data and purchase behavior data. It gives us a much more robust propensity model and marry that to an elasticity model, so that when I reach out to you, Omar, what you see what you get is something that, oh, yes, I am interested in that product. That's a nice price point. What it does for our AUR is we don't have to go to the lowest common denominator.
And we're trying to get more to, I'm going to call it a segment. But the ideal is an individualized elasticity curve that is much less promotionally dependent and more recommendation and optimized. Equally, I think if you go on our site in North America, hopefully, you'll be greeted with your if you're registered and it'll now greet you with a homepage that shows you a screen that's different from the screen it will show me. And so that kind of starting on that journey, we're also excited about. It's been very productive in Europe.
It showed through even in our 4th quarter numbers. And I expect that to be a very positive side of the journey that we're playing through.
So this is really interesting. You connect that consumer data and insights it gives you through the AI and the analytics. Can you then connect it to the inventory and what we're talking about for you? Okay, we know what I want. AI tells you and the data likes customer tell you what I want.
And then you're showing it to me and connecting it to where the inventory, hey, we have it in your local store.
Yes, that's next. We haven't quite got what we'd like to show is be able to show you something online. And then if you're interested also and we're not quite there yet, but we'll get there, where is it that's close to you?
Yes. Okay, perfect.
So that's coming. All of this functionality is really exciting. And there's a lot more. We haven't I don't think we've even yet imagined some of the things it's going to unlock for us.
Yes, agreed. Can I ask you about not as fun of a topic, just talk about wholesale, bankruptcies, store closures, it's been a story in this sector for years now? Do you have any updated views and thoughts this time around? Is this the nail in the coffin? Is this going to be a really healthy purge?
What do you think?
I think that much like we're going to see across the industry that you are going to see a weeding out of the weak and the strong. Now I think some of that will come retailer by retailer. We've seen, obviously, J. C. Penney's Neiman Marcus enter into Chapter 11.
But I also think that department stores like Macy's are going to focus on their stronger accounts. Their stronger doors tend to be our stronger doors. So it's not I don't think over time it will be a bad thing. I think it will be healthy, to put them in a better position from a door positioning standpoint. I think we feel like we got out ahead of not all of it, but a majority of it when we cleaned up our own system and participation and cleaned up some points of sales 2 years ago.
So a lot of that has been done in our system. Obviously, not all, we didn't have a perfect crystal ball, but we feel pretty good from where we're positioned now.
Right, right. Can we talk about categories? I mentioned career and suiting and we also see very strong trends in athletic and activewear. Ralph has a strong history of being such an active lifestyle brand. You have a lot of high end sports, casual.
How do you see the mix evolving? You've talked about outerwear as a really important kind of opportunity as well. How do you see the category mix evolving, whether it's changes due to the pandemic or just kind of the continued evolution and the categories you're most focused on?
Yes. We continue to be really encouraged by what we're seeing in our outerwear assortments, pivoting into outerwear. There's so many it's not a one singular style or one core icon for us. It's the bomber jacket. It's the camel coat.
It's the windbreaker. We've got a lot of unlock and we'll continue to lean into that, the puffer jacket. Also, we're encouraged by what we're seeing in denim. We're seeing that our fabrications of denim that have emphasized over the last 2 years, I would say, more comfort, stretch is playing right into the lifestyles or the COVID weight gain that maybe some of us have experienced more than others, myself included, that are playing well now. Interestingly, as we look at what's come back in China, and again, it's a market that we have that's further along in this recovery, we have seen a pivot back into more typical sportswear categories.
So I appreciate that you're wearing a polo shirt today. I think that that's before I realized we were going to be on video, that's what I was wearing. And so that does play in. Polo Sport and RLX, we've seen some nice upticks in interest from a brand perspective. And certainly home is one of those categories that I think we've got runway in that's not yet been fully tapped.
Right, right. Effortless style effortless casual style, I guess, is the right.
Yes, that's right. Those are the watch words.
Right, right. Great, that's super helpful. The promotional environment is you guys have obviously been super aggressive pulling back on orders and shipments and managing your channels and not knowing where the demand curves. Does it matter where the promotional environment lands and what the industry looks like? Is it possible everyone's pulled back enough where things will be clean enough?
We could get some margin or does it really matter anyway? Is it really more about what's the margin structure of your company after this year?
Well, I never say we are immune to the promotional environment. You never want to stick your head in the sand and not be cognizant of what's happening around us. So the best way to manage for that is to build optionality into your plan. And we do that by doing what we said we were going to do, which was to take some ticket pricing. That gives you optionality to move through different cycles.
We've done a lot of work thinking about how we can make our promotions more efficient. So getting the same kind of throughput on either less promotionality from a depth standpoint or from a days on promotion standpoint. And I think we've got some good learnings that we're going to carry forward with us as well as we just see as we push product mix into the upper end of the price tier, consumers are coming with us. And I think that part of that is the repositioning of the brand. And they're willing to go up with us because they don't see such widespread on the barbells of pricing.
And so the whole thing is pivoting up and we're just getting braver into assorting into those upper ends of both the product assortment and margin rich categories where we're seeing our brand play well. So I never say we're immune. We're watching it carefully. We're positioning ourselves relatively. But it's not our strategic intent to follow the market.
And we've done a whole lot of work from a reserve standpoint and not taking shipments and pulling back and keeping inventories clean, both with our wholesale partners and in our own doors to make sure that we're making that we have the ability to make that call. Also, I think that that's where a healthy balance sheet helps us. I don't we do not need to monetize this inventory today for cash. I can take what we took, which is in a part of the sort of in springsummer packet away in our GCs, never been seen by the consumers. It'll come out in the subsequent spring 2021, but also given our designers enough time to say, hey, look, this is what we've got.
Build a line around it so that it all hangs together in a line that has both breadth and depth behind it.
Can you put your it sounds a little bit like you're talking about almost a trade up. I don't think you're talking about someone trading from Polo to Purple label. That's a big jump in price point. But there's a general curve like both ends are kind of moving up.
What I think we want to do is offer more at the upper end of Polo.
Right.
That's where we're really seeing residents and pickup from a consumer standpoint is that we're seeing that upper end of Polo move up. And quite frankly, it's our job to get the assortments in that allow people to move up. Now there is some cost. We have seen some nice growth in our luxury segment pre COVID. And so I do think we're attracting more people in there, whether they're graduating or coming into the brand new, I think it's equally balanced.
Right. Okay. That's interesting. How does it fit into your kind of some of your product assortment strategies where you're really focused on iterating your key iconic styles and big winners and key silhouettes and in slightly different ways and iterations? How does that fit in?
Is this part of that kind of overall uplift or is that do you think about that strategy separately?
Well, I think it's a great way where we can add newness and freshness and value that is really perceptible to the consumer. So that is a part continuing part of our strategy. And it resonates well. And I think it carries with it a little less risk, if you will, from an inventory standpoint. The silhouette is relatively proven, but we can still add value, luxury, newness to it without having to test something that's completely new.
There's elements of the assortment that you're always wanting to do. You never know when you're going to find your next icon. And there's a level of experimentation that you need to do to keep the consumer excited, especially your trendsetting consumers. But I think we've got a good perspective on the balance of that. That's what we saw coming out of the Q4 that we were encouraged by.
We felt like a year ago in Q4, I think we were quite transparent saying we're not happy with the balance that we had. We got over kilter. I think we've cleaned that up quickly. We moved into holiday and had a great holiday quarter because we just called the balls and the strikes. And we felt like in the Q4, we were seeing nice sell through trends because the balance was right.
But it didn't mean the assortment was dull.
Right, right. That's really interesting. Can I ask you for an update on the outlet channel? It's an important it's been an important channel, especially in North America, but outlets in Europe as well. How does that channel evolve for you?
How has it been evolving? And then does COVID change that role of the outlet?
Well, I think that what evolves is our own attitudes towards that channel. There's no COVID made us realize why don't we clientele the factory? Why don't we use some of the power of AI to do that in a more meaningful way? And so I think you'll see us lean into that, and that's an evolution for that channel. I do think that the open air environments of outlets is going to be favorable in the initial recovery periods.
I don't know that that is necessarily a secular trend. It could be. But certainly early days, we're seeing that that be an advantage. And I think we have to get better at digitally assisted sales in that channel. I think we've let it lag behind.
And there's not necessarily a reason for that, except for our own sort of, again, taking off these blinders and seeing that we can offer some of these services at scale that are out that consumer deserves and will appreciate.
Got it. Last question. You guys have been there for years. The company keeps evolving. How is the senior management team doing?
How is Ralph? How is Patrice? How is how it can kind of put it in context of the kind of the cultural evolution that the company has been going through?
Yes. I think, listen, these are tough times. Not just from a business standpoint, but there's a lot of personal challenges that this presents for our employees and our workforce. But we I think as a company, we are energized that we have the right strategy that we've been able to move through this together fairly nimbly. I think Ralph is encouraged by the progress that we're making, especially on the digital front.
He was encouraged by the balance he saw in the stores of moving towards the upper end of some of our brand offerings and thinks that that was where the brand belongs. And Patrice's is daily core leadership team calls. But increasingly, the focus of those calls is on offense. We have 3 topics: manage the crisis, prepare for the rebound, lean into the future. And we're spreading the topics across all three of those because things change.
But increasingly, he's pushing us to spend more time on lean into the future. So that's encouraging. And I think it's energizing. And the watchword for us has been it's about the safety of our employees and our consumers and our supply partners, 1st and foremost, right? And I think we've acted in accordance with that.
But it's also about we are going to be around for another 50 years. Rest assured, I'm not saying it's not without bumps and hiccups. Those are going to come, that's life, but we're going to be here for 50 more years. And that's our mindset as we move through this.
Jane, thank you so much for your time today. It was really my pleasure. Have a great day.
It's my pleasure. Thank you for inviting us and for hosting this. It really turned out well. Thank you, Omar.
Thank you, Jane. Thanks, guys.
Take care.