Q4 2020 Earnings Call

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significantly outperforming the broader apparel industry in February and March

These programs are being tested and ruled out in North America and Europe and over the coming weeks. We're exploring other contact list options like curbside pickup and self-check in many locations as our China stores reopening early March. We implemented new safety measures across our stores offices and distribution centres to press both our employees and consumers store measures include frequently cleanings providing masks for employees and strongly encouraging them for Shoppers off limiting capacity inside our stores to ensure social distancing.

While our digital business led the recovery in mainland China with a return to growth rates in March. We were encouraged by the recovery and our brick-and-mortar stores resulting from a omni-channel and install programs.

We saw steady Improvement in Mainland sales from high double-digit declines in February at the peak of our closures ramping back to positive growth in early may expect mainland China to return to pre covid growth Trends bike YouTube.

Although we expect the shape and timing of recovery curves to look different in each market our experience and lessons from China or informing your actions across the rest of Asia Europe and North America.

Despite challenging conditions around the world. I strongly believe this crisis is creating opportunities for our business to emerge meaner more agile and Altima take market share.

All of this is enabled by the strength of our balance sheet and Our Brands coupled with the Ingenuity and commitment of our diverse Global teams.

Turning out the fourth quarter and fiscal twenty results.

Well covid-19 was clearly the biggest head when we faced this year. We were encouraged by our underlying progress on our next great chapter plan prior to depend emack with odd business on track to exceed top and bottom line targets.

Our brand elevation work inclusive of product marketing and distribution came together to deliver Positive Growth across all three regions for both the quarter month and the year.

And while the future remains relatively uncertain we are confident that the key strategic pillars of our next great chapter plan still hold true. Let me touch briefly on a few of these areas.

First in our efforts to win over a new generation. We have created unique and Lasting connections with consumers over the first two years of our plan and we believe that now more than ever is the time to build on this momentum and solidify our iconic brand leadership.

Globally, Ralph Lauren brand consideration accelerated through the fourth quarter and into April outperforming our Benchmark peers in each region.

Our total social media followers surpassed forty-three million in the fourth quarter a double-digit increased to last year.

This was led by very strong increases on Tik-Tok one of the fastest growing social media platforms for Gen Z.

While the only launch Tik-Tok last summer we're encouraged that we've already established ourselves as one of the top three luxury brands on the platform.

Going forward as markets reopen. We will continue to focus on the type of values based messaging that is resonating with consumers across geographies.

This work will be underpinned by the targeted personalized marketing that we started earlier this year to drive higher quality of sales.

Our brains are defined by values, like optimism quality and togetherness which are especially relevant in the current context. We will continue to happen to these authentic values to drive momentum across digital and social channels in fiscal twenty one second. We continue to energize our core products and Excel or high potential underdeveloped categories this year led by outerwear and denim

Starting with Ross original Vision. It has never been just about one category or one item, but rather it's about a lifestyle which means we can credibly Flex across our bow the products and categories as consumer behaviors change and with the emergence of covet we have seen consumers gravitate toward the simple and true luxuries in life family togetherness the outdoors within our assortments. This has translated to Stronger sales of comfort categories such as loungewear at Leesburg and home.

In addition, the competitive advantage of our well-established core is becoming even more evident over the course of this year. We had rebalanced are short money towards core products, which have faster lead times and less marked down risk versus seasonal fashion items that only live for one season as the industry grapples with excess baggage inventory due to the increased penetration of core gives us more strategic flexibility to work through our inventories and drive Aur growth.

with regards to Arthur

the initiative targeted expansion we continue to build out our ecosystem approach of a cohesive brand elevating Ralph Lauren experience across retail wholesale and digital Commerce around the world and fiscal twenty

prior to we open 25 net new stores and concessions Global this included eighteen openings in China our fastest growing Market.

While we are carefully evaluating or footprint across direct-to-consumer and wholesale channels in this rapidly evolving environment. We continue to see significant long-term opportunities for our brand and under-penetrated markets led by China and parts of Europe.

Initiative is lead with digital.

Earlier, I talked about how we accelerated digital and omni-channel initiatives in China this quarter which are now being implemented in other parts of the world. In addition. We continue to expand our Global digital Commerce presence across new platforms and Partnerships, including our April launch on Instagram. Check out our first social commerce platform in North America and we are launching our digital Commerce site soon in Japan. We're also making meaningful strides in digitizing how we work which is an important part of our journey to drive faster lead-times minimize physical ways and reduce costs in fiscal twenty. We launched our digital library and 3D design studio. This represents a major milestone for our company as it will eventually enable us to digitize our entire end-to-end process from product development all the way to how we communicate with our consumers.

We started this process by digitizing all of our polo course tiles raw materials and trims on to a digital library starting in fiscal twenty one month. We will create 3D prototypes for all of our core Polo products replacing traditional physical samples. We've already created thousands of 3D prototypes in fiscal 2018, and it's only the beginning especially as our teams learn to work in new ways from home and lastly touching it our initiatives as operating with discipline to show growth

A key element of our long-term plan has been to balance growth with productivity which includes driving a culture of discipline across our organization. This has come in fact even greater focus in the context of covet as we drive deeper near-term expense reductions and align our cost structure and inventories to a shifting Retail Landscape dead.

Dainik has also highlighted the importance of continuing our journey to integrate citizenship and sustainability into our business hour.

We started this fiscal.

A year by launching our design the change strategy outlining our commitments to create more sustainable products reduce our overall environmental footprint across our operations and support and Empower our teams and partners around the world.

Some treatments this year included reaching our gender parity goal of equal representation in our leadership positions at the VP level and above more than three years ahead of our Target.

The launch of our Earth polo shirt made entirely from recycled plastic bottles.

A new commitment to power all of our globally owned and operated offices distribution centers and stores with one hundred percent renewable electricity by 2025.

And building upon that we are now in the process of setting science-based greenhouse gas reduction targets, which we will detail in this June's annual designed to Change Report dead.

In addition as suppliers around the world struggle with large-scale order cancellations in response to covid-19. We reaffirmed our commitment to pay off all finished goods and goods already in production this spring we are working with our partners to develop new sources of support and long-term job security for factory workers as we look to strengthen off by Chain Partnerships, not just for the upcoming season, but for years to come

In closing over the years our company has endured many challenging times and the current crisis will certainly not be the last.

Our purpose of inspiring the dream of a better life to authenticity and timeless style rings as true today as it did when Rob started this business and it will continue to guide us in these moments as we make tough decisions in the short-term to protect the integrity and health of Our Brands so that we emerge from this challenging. In a position of strength.

The foundational work that we have done to put the consumer at the Centre of everything. We do Elevate Our Brands and balanced growth and productivity all while maintaining a strong balance sheet has positioned as well to manage through the current environment and we are privileged to have one of the greatest assets of all the strength of our Timeless Global brands.

With that, I'll turn it over to Jane and I'll join her at the end to answer your questions.

Thank you for choosing and good morning. Everyone. This quarter's performance was a study in contrasts. We started the spring season with strong continued momentum on our brand Elevation Church with and margins exceeding our expectations as we delivered improved merchandising expanded digital capabilities and elevated marketing jobs in you'd the rollout of targeted pricing increases across channels. This was followed by a very sudden decline in sales as we close stores across Asia off followed by Europe and North America in accordance with guidelines from government and local Health authorities, while our teams remain committed to our long-term strategy centered around and elevation and targeted expansion. We are focused on managing through the near-term so that we can emerge from this crisis stronger than we came into it and pivot dead.

back to growth

We started by leveraging some key strengths a healthy balance sheet strong liquidity focused execution all made possible by are passionate about an agile teams. Now more than ever are strong balance sheet is a source of competitive Advantage giving us a resilience and flexibility to continue eating our plan and elevates our brand during challenging times.

We ended fiscal twenty with 2.1 billion in cash and Investments and 1.2 billion in total debt, which compares to 2 billion in cash and Investments and suck in eighty-nine million in debt at the end of last year.

Given the uncertain environment created by covid-19. We announced several measures to preserve cash and strengthen liquidity building on what Patrice shared these include first flexing our cost where possible to align to our Top Line and carefully managing ongoing expenses and Investments to a variable demand Outlook. We are currently evaluating what the right operating cost structure and distribution footprint should be across retail and wholesale as we enter a new normal.

A reduction in capital expenditures to approximately $175 to $200 million in fiscal twenty one third in order to maximize our liquidity. We have temporarily suspended share BuyBacks. We will also temporarily suspend our dividend following the April payment that was declared dead in early March. This is a proactive measure to preserve cash and our board will revisit this quarterly as we move through the pandemic and lastly, we drew down $475 million from our revolver in the quarter and are considering additional Capital measures to bolster our cash balance net inventory page at the end of fiscal twenty was down 10% to last year the decline largely reflected a significant increase in inventory reserves of about 160 million to keep our inventory.

Is aligned with demand and continue our brand elevation as we move forward. Our teams are managing and unprecedented situation, but we are confident that I'm taking the right strategic approach to work down excess spring twenty product while also positioning the company for future growth.

Similar to our previous practices. We will also take a targeted approach to clearing excess merchandise first with the majority of the traditional spring 2016 season lost closures are Merchants are taking the opportunity to better align our assortments to Consumer Behavior as stores reopen we will extend the season to focus on where now styles from June through August in order to maximize full price selling and mitigate markdown risk. This includes shifting some of this season's pass to warmer weather markets second. We plan to really sort a portion of our finished products into upcoming seasonal collections, including full price and Factory channels a key benefit of our classic Timeless aesthetic is that many of our iconic Styles resonate with consumers season after season this merch

Size is in pristine condition in our warehouses and has not.

Yet been seen by consumers while requiring us to hold some inventories longer than usual. This should drive strong Aur Xin margins. Once these products are brought to my life and enable us to drive our Aur growth trajectory as quickly as possible. Third. We will utilize the full range of our channels to clear product including tax is Mark down to a product is already on selling floors are Factory Stores and off price wholesale. We have also committed to one point five million units of product donations to support medical workers across our three regions. We anticipate this process will take longer than a broad Strokes end-of-season liquidation. However, our inventory whole process aligns our inventories to expect and demand this was evident in our Reserve actions in the fourth quarter. This process allows our teams to move strategically through age.

Tori's while protecting the health of Our Brands and lastly as we look forward our work to reduce lead times has been a benefit under the current circumstances enabling our teams to cancel a substantial portion of our shipments for The Fall season about two-thirds of our seasonal buys are shorter lead-times on a product and fast-track capability launched last holiday will enable us to get quickly back into inventories as demand returns while limiting our exposure to additional access inventory risk.

Moving on to our fourth quarter performance fourth quarter revenues declined 15% on a reported basis and 14% in constant currency prior to Thursday. Our business was on track to deliver positive revenue and comp growth for both the quarter and the full year our digital ecosystem including our directly operated Flagship sites department store, digital pure plays and social commerce increased mid single-digits in the fourth quarter and high single digits for the full year in constant currency. This was driven by strong double-digit growth in Asia and Europe for both. Meanwhile North America improved from Flat performance in the first half to Mid single-digit growth in the second half of the year as planned all despite covid-19 disruptions adjusted gross margin was fifty-nine page.

1% in the fourth quarter compared to 60.1% last year continued Improvement in pricing and promotions was more than offset by foreign currency headwinds and unfavorable Geographic mix do to lower sales in Asia and Europe Aur growth of 8% continued to exceed our expectations found 2% to last year on Lower selling expenses and marketing and a modest amount of rent relief achieved in the quarter primarily from Asia adjusted operating loss for the South Quarter was $43 million compared to operating income of $96 billion last year marketing declined 8% in constant currency as we shifted the timing of Investments money back into the Q3 holiday. And reduced Performance Marketing while stores were closed for the full year marketing growth of 3% continue to outpace our top-line wage.

as we work to

win over a new generation of consumers

moving on to segment performance with North America ma'am and bricks-and-mortar cops and a 7% decline in our own digital. Cops. Brick-and-mortar cops were impacted by significant traffic declines as foreign tourist traffic slow and we closed all stores in March prior to the outbreak. However, the full price and Factory cops were trending up mid-to-high single-digits in January and February 8th June by Aur growth and improved product assortments Aur for the quarter was upload double digits across our brick-and-mortar Fleet driven by our continued rollout of targeted ticket price increases reduced promotional Cadence and stronger product mix

Thompson or North America directly operated digital Commerce business were down 7% traffic and conversion were negatively impacted by to proactive decisions on our part first with the onset of covid-19. We suspended all promotional activity and performance-driven in marketing to our site as our employees and consumers focused on their safety and well-being second. We temporarily closed our Us distribution center in late March for deep cleaning and new safety program while our site was still technically operational delayed order fulfillment negatively impacted our conversion rates as we resumed our marketing activities and Thursday operations in April. We saw a meaningful Improvement in both digital traffic and comps

In North America wholesale fourth quarter Revenue declined 12% prior to store closures in mid-march. Our sell-out performance was improving slightly on a year-over-year basis to down mid-single digits driven by rebalance assortments and an improved product offering the additional declines were driven by order cancellations in the last few weeks of March as our customers clothes stores do to Covent.

Moving on to Europe fourth quarter Revenue declined 19% on a reported basis and 16% in constant currency Europe retail, declined 16% off driven by an 18% decrease in our brick-and-mortar stores and a 2% decrease in our own digital Commerce sites.

Across our Europe direct-to-consumer channels are ongoing effort to elevate the brand and improve product mix continued in the fourth quarter with you are up 10% This is consistent with our long-term strategy to drive higher quality of sales and price harmonization in the marketplace digital Commerce, on our own site were pressured by a temporary closure of our distribution center and a pause on product-driven marketing do to covid-19.

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Wholesale Revenue declined 18% in constant currency driven by covid-19 pressure's and bricks-and-mortar stores. These declines were partially offset by a double digit growth in our digital pure-play and wholesale businesses.

Trying to Asia Revenue declined 22% on a reported basis and 21% in constant currency in the fourth quarter Aur increased. Hi six digits as our product and marketing initiatives continue to resonate well in the region while performance varied by market. We saw the biggest percentage declines with mainland China the epicenter of the pandemic where the majority of our stores were closed for about five weeks. Brick-and-mortar sales Trends improved sequentially off from trough levels in February turning positive in early, May despite significant challenges from store closures across Asia. We were encouraged by continued momentum in our digital businesses in the quarter with our digital ecosystem up High Teens driven by strong momentum in China and Korea look dead.

Had as we navigate the current environment. We remain first and foremost committed to the safety of our employees partners and consumers due to the highest level of uncertainty and the evolving situation surrounding covid-19. We are suspending future guidance. We expect our financial results for the first quarter and full-year fiscal 21 to be significantly negatively impacted by the pandemic in the near-term. We are focused on positioning the company to get back to sustainable growth and value creation as quickly as possible. This includes preserving balance sheet strength aligning our cost base and inventories to The New Normal Life optimizing our distribution or protecting the health of Our Brands.

So the timing and passive recovery in each market presents many uncertainties. We have developed scenarios through which we plan to safely return our businesses to growth palm trees outlined China was our first Market to emerge from business closures laying out a path to normalization and we will leverage many of these key learnings as we're back open around the world in closing. We are proud of the focus agility and passion our teams have demonstrated through personally and professionally challenging times. We believe the Ralph Lauren brand has momentum. We have the right strategic priorities and the discipline to manage through this. And emerge in a position of strength now as ever we are proud to have an iconic brand and to be led by Ralph's Creative Vision. This is injured the test of time with them.

Let's open up the call for you.

for questions

Ladies and gentlemen. If you wish to ask a question, please press star then one on your touch-tone phone. You will hear a tone indicating that you have been placed into Q. You may remove any time by pressing start to if you're using a speaker phone, please pick up the handset before pressing the numbers. We ask that you limit yourself to one question per caller. Once again, if you have a question, please press * then 1 at this time. One moment, please for the first question.

Our first question comes from Dana tells with telsey Advisory Group.

Good morning, everyone.

1414 Jane but she says you think about how how are you adapting your next great chapter strategy to the new Global retail involved in the changing Behavior coming out of covid-19.

Great. Good morning, Dana. Thank you for your question. So let me start by saying that fortunately we actually entered this crisis in a position of strength and with momentum, right we have a strong position. We've been expanding our direct-to-consumer and digital presence. We've created a more flexible and diversified Global supply chain, and we have a brand that credibly flag is across categories underpinned by values that are really resonating In This Moment think timelessness optimism togetherness Trust

We've also done a lot prior to the crisis to build agility and resilience in our teams. And this is obviously now more relevant than ever. So given the solid foundation We believe We ultimately have an opportunity to gain market share as we emerge from this crisis.

With respect to our next week chapter strategy the Strategic pillars of our plan completely hold true today in the current environment, but there's a clear opportunity to accelerate some of the priorities. Let me give you three examples there are many more but the three I would highlight our first continuing to accelerate digital right we transformed our digital selling platforms over the last five new eCommerce platform new system mobile personalization and collect connected retail streams. So we have a strong infrastructure in place when it comes to digital Commerce and connect. Well, we're fast-tracking and scaling new digital capabilities, like digital clienteling and other forms of virtual selling and we're encouraged by our progress and early read so far, including understanding what we've done in China recently. The second thing I'd call out is assessing our store footprint.

So we still believe in the role of the store and we're encouraged by the early connected retail.

Like curbside pickup for example, but we're going to continue to review our store portfolio in the context of our omni-channel strategy and especially with in North America. Wholesale off. This means continuing to concentrate on our most productive brick-and-mortar doors, which are generally the top doors of our wholesale Partners. Anyhow, as we also grow select wholesale.com opportunities the third example, I would call that data is around scaling new ways of working for us and we've been able to do things in weeks and days that typically would have taken as months or years this includes, you know our ability to work remotely around the world continuing to digitize our end and value chain.

And also driving a culture of discipline, which is obviously critical in the current environment that we're in so the Strategic pillars of our strategic of our next week chapter plan still hold true in a moment. We are filming actually quite good about that, but there's a clear opportunity to accelerate some of the priorities some of which I just called out for you and then I think Daniel cover the coupon Club, you know, we're not giving guidance for q1, but let me just give you some color and shape about how we're thinking about it. You know, we expect right now that q1 would be the quarter with the most significant impact from covid-19.

Opening stores we've seen a gradual and elongated recovery. As you look across every region we expect the impact of covid-19 most pronounced. In fact, I think that's probably very clear for North America and Europe where we were closed almost the entirety of April and May with stores. Just starting to come back online today a little less than 50% of North America stores are now open and in Europe, which is a bit further ahead about two-thirds of the stores are now open, but all with operating with reduced hours reduced traffic and with new social distancing requirements.

Compared to our experience in mainland China and Korea. We do expect a more prolonged recovery with improvement over time. Obviously, this is going to vary by market in Asia, which was ahead of the curve and where were ninety percent opened. We still will see the biggest impact in my life where markets like Japan southeast Asia and Australia and even parts of China saw a large covid-19 is in the first quarter. We are encouraged by the way that the digital sales are leading as infrastructure opens and our teams are very clear that opening stores is the first step to getting back to comp growth. So we're all focused on that page and prioritizing that and just did you think about expenses in FY twenty one from a Cadence standpoint from a cost perspective as you saw on our 8K we took off.

cancel

As we closed out the fourth quarter, we furloughed about 80% of our Workforce in April and this will continue through June and as we bring it back up employees and infrastructure to support sales in late June and we'll stage you. We'll we'll stage that with as demand stabilizes wage, but our largest sg&a reductions will be in q1 add a little bit over 25% and then a moderate for the reductions of moderator there as demand stabilize wage a little bit of color on the quarter and our expectations and what we're seeing in the market for the year.

Thank you.

Thank you. The next question comes from Matthew boss with JPMorgan.

I'm at.

Maybe we'll go to the next question Angela come back. Thank you. The next question comes from Heather Bosque with Bank of America.

Hi, thank you for taking my question. Good morning. I'm calling every Wednesday in terms of my question. There's a lot of uncertainty right now. We regarding a wholesale Channel and and how your partners are responding both right now. And and as you look to the back this year and into 2021 Dodge Challenger 2021. Can you just talk about how you know, you see that channel potentially ramping, um in terms of the recovery and what you can do to manage the the additional uncertainty in terms of them closing stores and and tightly managing inventory. Thanks.

Sure. So, you know as I said back and we look at kind of our long-term plan and strategy. We expect the bulk of our growth to come from direct-to-consumer and wholesale. As far as brick-and-mortar wholesale is concerned. Our focus is really on making sure as it has been over the past couple of years actually that we are in the right locations in a way that is friend enhancing and financially attractive. Right? So the this will likely mean that as we work through the week with our partners, we will be calling some of the smaller doors working with them importantly for all of you on the call to either recent bankruptcy is from JCPenney's and Thursday is actually don't impact us. Our business is non-existent at JCPenney's and relatively small at Neiman Marcus, but I'd say Heather our our emphasis is really when it comes to the wholesale space Wholesale Club.

Which is not a nice momentum, but we're building capabilities with our partners and then making sure that we have the right foot.

Going forward in that space.

And as we as we closed out in March together in partnership with our wholesale Partners, we stopped a number to make sure that our inventory levels remained in good balance knowing that they would face closures as we did. So we feel good about where our inventories are. We are planning as we move into the fall season, but the good news is demand develops because of our Chase capabilities and our ability to refill from core we feel we should have the flexibility to meet Demand with our wholesale Partners as it evolved without needing with that while managing inventories tightly and maintaining a good full price selling invite.

All right. Thank you very much.

Thank you. The next question comes from Matthew boss with JPMorgan. Great. Thanks will try this again. So good morning, Matt. Good morning Patrice, maybe as we think about in terms of the strength of the Ralph brand as you see it today. What do you seeing in April and May Ecommerce Trends as we think about the US and Europe Jane? I think you talked about a meaningful impact. Have you seen Trends return to positive territory and then with more than half of your stores now reopen what kind of what kind of initial productivity are you seeing out at brick-and-mortar so far too to start back in the reopening process?

Good. So I guess starting at high level on brand perception. We've actually been really encouraged by how our performance on consideration has increased during this crisis the quantitative measures both in Asia Europe and North America. We're across all three regions. We've seen Brian consideration scores go up over the past few weeks. We could do that to all the work that we've done on values communication and also all the philanthropik work that we've done across the region so feeling that we've got good Tailwind, they're off as far as e-commerce is concerned. We let me start East first, I guess we you know, we feeling very good about the performance in China. I think you heard us say month of February March up 76% while the overall sector was down. So we were gaining share in that environment. We can give you some color on the specific weeks for

March and April, which Jane will will give you but I think overall with all the new capabilities that we've put in place whether that's digital client telling whether that's all the connected retail abilities. We we are encouraged by the progress we're making on, and you know, I was joking with the team last week that actually at this point given the stores are not fully open yet. We were just extended digital pure player. That's our biggest business today. Yeah. Let me give you some color on what we've seen on on a quarter to day basis across the region bought a pack is we said, you know we closed out queue for you know, very strong across Asia on on our e-commerce business and that has only Built month. So April and into May we've seen very strong and positive e-commerce Trends, you know, you know closing out in the Dead.

Sometimes you know we've seen.

Triple digit growth in in a pack. So very strong in Europe while you know, we did see some we reported down 3% on our own for me q q 4 as we've come out and especially as we closed out April and I think people saw the end of the crisis. We've been seeing a very strong Trends across Europe. So we've had you know doubled solid double-digit growth in Europe on a very high quality of sales number where we're seeing double-digit growth in a you are on our e-commerce site in Europe. So strong quality of sales and strong momentum North America wage, which is probably the furthest behind in regions in terms of store openings and Recovery, you know, we reported down 7% in the fourth quarter and it's really dead.

In May that we've started to see e-commerce back to solid and double-digit growth, but it's been building on a week over week basis. So encouraging there. So we do see as our stores open Digital leads and it starts to build over time as we've gotten, you know, we're sort of in the early days. If you will in terms of store opening productivity 50% open in North America and really very early on that Journey 2/3 open in Europe off early days on that Journey which makes our experience and anecdotal I can tell you in China as stores reopened traffic remained week off in the initial weeks, but with strong conversion, so buyers who are coming to the store, we're motivated and 80s average daily transactions average value transactions.

Strongly conversion was up strongly and has continued to be up strongly. I can give you some we're not you know, it's early days, but I can tell you is we think about you know, our trajectory in overall in Asia that it you know, how long it will be different in North America, but coming out of January we saw you know, if I think about the Asia we were up strongly in January up 40% February 8th of the biggest declines down well over 80% March we started to recover digital sales started to come back in April sales took down high single-digits and so far and they really encouraged by the improvements. Everything was turning positive in early may as Beijing chef.

and other large

To restrictions lifted and we expect to be strongly back to growth in Q2 of this year in mainland China. So encouraged by that trajectory don't expect to be a cookie cutter approach across the regions, but that's what we've seen so far. That's great to hear best of luck.

Thank you, ma'am.

Thank you. Our next question comes from Michael binetti with Credit Suisse. Hey guys, thanks for all the details. I want to ask you two things. I guess first on the inventory guy in the in the right off in the decision to exclude some some of that from the gross margin line in the quarter. I think that's a little different than how we've seen some others in the sector treating it. So maybe a little bit about how you got to the hundred sixty Million number. How does that inventory get treated on the on the p&l as you sell through it and maybe just a little bit of help with how to think about what we're going to see as you move through that in the first place order and then separately on the Aur I guess a longer-term question, but this has been the the real engine behind your revenue and gross profit dollar growth for several years and it a lot of times today now now the apparel world is about to go on a huge sale give them what we've heard around the space. I have no doubt. You'll tell me the you our story continues to be critical to the long-term.

Maybe you could just help us think about what adjustments you need to think about in the near-term given the state of inventory and the channel the level of markdowns that seem like they're coming across the space the store closures we know about in the brick-and-mortar. Thanks. That's a power-packed question. So, let me take one layer at a time. Let me step back and tell you why I decided to report both r n r v reserve and our bad debt as a as a non-gaap item. We believe that it is entirely related to the experience of covid-19.

Inventory close our commitment at suppliers on a fabric basis and then went back to our strategy and said what can we reasonably move through to continue our quality of sales Journey with our own liquidation Channels with stretching the season while moving into warm Weather Channel's Andrea sorting the line in coming seasons. And then what do we remain with? And how do we reserve?

Appropriately to protect the Aur and gross margin progress that we've done to date. So we really looked at it a complete lifecycle view that's not not a different process. We've been doing that process for well over two years the magnitude and the one-time impact was greater. So we that's why we reflect upon if our in our Reserve is too small or too great. We will take that on what we reserve we will take that also on a nav Gap basis below the life so that you and our investors can track our true progress on gross margin as we move through this covid-19 fire meant so that's our rationale will take if there is better selling than you'll see an adjustment on a non-gaap item in NRV as a good vendor. I want to remind you that we know birth.

That we have made a committee.

To pay for products that were perhaps Cuts but we did not have ownership of in q1. There will be some reflection of that in q1. The magnitude will disclose in q1 as I look at overall the your question on the Aur story, but you're exactly right. You know me. Well, we are continuing to say you are journey and that is and that was really behind some of the apps a stake in the fourth quarter. We're committed to it and so we took an inventory Reserve that protects that I think the good news is that with the long-term drivers of our growth are still intact. We're elevating our product. We're elevating our marketing and we're elevating our shopping experience.

You know, we have shown that we can take strategic price increases and have a positive consumer reaction that can you know Q3. We posted a person you are before we were able to maintain a percent Aur I'm not guiding but I expect that are Aur Journey that's consistent with our long-term guidance and FYI 21 Low single-digit to mid-single-digit will continue through this year. Be more variable perhaps, you know, but we have a clear idea of what we need to do to move through our inventory positions part of that will be that we are keeping inventory in our warehouse has to reassert it into the line that are designers are working on right now so that we have a cohesive line and spring and get full price fell through on some of that product and we're really having success dead.

In targeting promotion targeting promotions, you know more effectively and more efficiently we've been able to reduce promotion days and this personalization is proving highly effective as a lever to drive Aur North American the fourth quarter had a 10% so really significant and positive growth there. So we have every intent to continue that Journey. So we're we are excited about that know that there's some variability, but we feel our actions in Iraq and our plans for this year, you know are completely consistent with our continued Aur Journey next question, please

Thank you. Our next question comes from with Wells Fargo.

Hey, good morning, Patrice. Jane Cory. I'm glad you're all doing. Well. I guess just just just two from me. So you gave a lot of helpful color Jane on the the US reopening wage.

Maybe more enclosed malls. I don't know if you have enough of a sample size but kind of curious if you have different different results on on reopening volume there and then you talked about the price exposure kind of coming up a little bit. You guys have spoken about bringing that down for the past couple of years does the does the new world? We're in right now kind of change your thought process on that you kind of need to go back to the off-price channel in a bigger way because of what's going on in the wholesale channel in the US would love your thoughts there as well.

So let's start with your your first question on open-air malls versus kind of close malls. Yes, we have seen a difference between open air miles and close the mall opens at 5 o c rebounding faster. And so just to give you a sense of you know, our the split of our business between kind of open-air malls and open their stores vs. Closed in North America and in Europe, the vast majority of our stores are actually an open air environment think 85 to 90% So I think from that standpoint we're actually well positioned consumers are more comfortable shopping in that space and then over time they'll become more comfortable with the closed space but the vast majority of our businesses and open here and then on the last price change over to you. Yep, so I caught you in this quarter are off off price sales were down on a year-over-year basis. And so that's a combination birth.

Working with our partners and we had some excess liquidation. But as I move into next year, we see that that channel would continue to be an opportunity for excess liquidation and it will not be a part of our growth trajectory. I expect it to decline on a year-over-year basis and we worked through how we're going to work through the inventory by leaning into what we talked about in terms of restoring the life-extending wearing out season charitable charitable donations, and of course liquidating some excess through off price, but I don't expect it to be wage growth area of our business.

Thanks so much.

Thank you. Our next question comes from J soul with UBS.

Great. Thanks so much have two questions one, you know Patrice you mentioned at the top of the call focus on denim this year, you know, a lot of people have been talking about, you know, categories like denim maybe have been a little bit less popular with consumers focusing on you know things to wear at home or things to exercise in D. So maybe just a little bit more about how you think this pandemic will change consumers outlook on Denim and then secondly given that you've talked about the wholesale channel on maybe some store closures out there. How do you feel about your full price store. Store model in the US or even consider rolling out more full-price stores. Do you feel comfortable that you have a plan to do that? If you need to at this point Thank you Good morning. So let's start with the product categories.

We we are.

Tracking very closely going to Consumer interest across different categories and you're right that we've seen an acceleration in loungewear and acceleration athleisure. We've also seen an acceleration in the home business. The good news is we're Lifestyle brand, right? So we're not focused only on one category. We actually have a broad range of offerings and I think we're credible across the broad range of categories. So we will we will we had started to Pivot if she would go on our website you will see that we've pivoted to a more than facism on loungewear and athleisure. I don't think I don't think the we're going to move away from the focus on dynamic because we expect over you know, the mid to long-term that that continues to be a growth category, but I talked a lot about agility earlier and that's critical for us as we think about consumer behavior. And that's both true and how we met with consumers in terms of messaging but also where we put the emphasis from a category standpoint.

Yeah, Jay, we continue to believe that we have a significant opportunity to build stores for FY 21. We're expecting to open approximately 6 ninety to a hundred stores. We are very happy with our model in Asia. We've been working on penetration in Europe and we're still working at all on the North America model. We do believe that there's an opportunity but we know that the role of the store is changing and so we're evaluating our footprint off with two to reflect these consumer changes, but we do think that there's an opportunity for us to Pivot to teach you see and it remains an important part of our strategy Thursday.

Thank you. Our next question comes from John Kernan with Cohen.

Good morning. Patrizia. Thanks for taking my question. Nice job that's managing through a difficult environment. Take us on how we should think about the cocktail channel in North America some of your, you know, full price partners and how they're planning, you know the back half of the calendar year we've heard

You know orders down in excess of thirty forty percent. Just wondering if the environment ends up being better than what some people have planted eight people chase into that. Can you see better track? And you know, maybe some of the numbers were hearing from the wholesale Community today.

So with our wholesale Partners, we we are planning conservatively with them and aligned to what they've indicated in terms of of their fault holiday demand. So I think that we are focused on our Aur Journeys focus on keeping our inventories well controlled and healthy. So we're planning, you know conservatively but consistent with our wholesale Partners planning as they move forward. We still see Digital Life as as an opportunity for growth there and we're pursuing that we were able to cancel about two-thirds of our fall holiday orders with stock of where we were on an inventory level and then fill in to make sure that we have a full some assortments for fall holidays that are better aligned to demand so dead.

we've been working on this as

We saw the the crisis emerged but we're fully aligned with where a wholesaler partners are indicating and conservatively plan and I think on your question John relative to our ability to chase which we spent a lot of time on so we feel we feel that we're in a good place. We've done a lot of work to increase the responsiveness of our supply chain. We have the same position that I referred to earlier obviously being too keenly aware enabler to that. The other thing that I think really separates us from many of our peers is core is such an important part of our business, right and we are known for a number of core iconic excuse. Now the good news is the course use are the easier and faster excuse to chase into right and we've also platform Fabrics seems done a wonderful job tried for months and and various trims and others. So we have the ability Encore to go fast. And then finally and I don't know if you remember when I refer to this think it was like two or three quarters ago. We've developed a fan club.

But we've called The Fast Track capability internally. I think I gave you the example of this sweatshirt that we have developed with one of our wholesale Partners from idea to shipments 16 days right coming from a and I think it Ralph Lauren sometimes we're known for more, you know longer lead-time than days. Sometimes we've been talked about months rather than days this capability. We scaled up since we developed it so long this fast-track capability is is will be a fantastic platform for us to react to what we see in the market as we work with our wholesale partners.

All right helpful for joining our call today on behalf of all of us your Ralph Lauren. We wish you and your family is the best of health and safety. Take good care off and we'll talk to you in a few months. Have a great day. Thank you.

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation. You may now disconnect.