Ralph Lauren Earnings Call Insights: Revenue Underperformance and Cadence Expense

Ralph Lauren Corp (NYSE:RL) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Revenue Underperformance

Omar Saad – ISI Group: Good morning. I’m hoping to focus a little bit on a revenue line. In the quarter, I know you guys had guided to something like a mid-single-digit increase in the fourth quarter, obviously came in a little bit below that. I assume the analyst part of the factor there. Could you talk through some of the other factors that led to the slight revenue disappointment, is it weather-related, is it broad-based, is it focused in certain areas? And then, as you think about the guidance, the revenue guidance and the top-line kind of profile for this Company for ’14 and above, what do you think the kind of key factors are and the opportunities, or do you still see just a kind of very broad-based growth across geographies and categories and channels?

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Christopher H. Peterson – CFO: Let me start with the revenue underperformance versus our guidance. So, when we provided the guidance at the beginning of February, we were coming off a month of January, where we had a very strong revenue growth, and we were expecting February and March to the somewhat comparable conditions to the prior year. There were really two things that happened during the months of February and March that led to the revenue being slightly below our previous guidance. The first was, we had an incredible weather pattern this year with much colder conditions in both North America and Europe, as well as Northeast Asia that led to a tough February and March for seasonal spring product. The second was to your point on foreign exchange, was foreign exchange. The yen continued to devalue during the quarter and Japan for perspective is our second largest country from a revenue standpoint. So, those were really the two factors that drove the revenue versus guidance in the quarter.

Roger N. Farah – President and COO: So, Omar in terms of the go-forward, I think we would identify the following as they key growth engines that would provide the distortion. Obviously e-commerce and retail, we’ve talked about and others have customer is making a clear choice to shop online, whether that’s through our wholesale partners where we are experiencing strong growth, with our wholesale partners online and whether it’s in our own direct-to-consumer. Whether it’s Ralph Lauren or Club Monaco. We’ve seen an extraordinary response to the Club Monaco website in the first nine months it’s been open. And so on and on and on around the world the customers, indicating to us they are comfortable shopping or getting product information, buying in the stores. And a lot of that interest is shifting to mobile, so the growth in mobile, that you’re seeing in the industry in general continues for us. I would say the other headline is the Asia Pac region with all the puts and takes should provide distorted growth over the next couple of years. The bolt-on of Australia is relatively small, but completes the region for us in terms of owned territories plugged into our shared service hub network through a lot of the infrastructure. I think will be a nice positive addition. Then I think the new product categories that we danced through quickly in the script that we brought back in-house over the last three or four years. That have gone through some form of rehab are now beginning to show their future potential, whether it’s Denim & Supply which Jackie talked about or some of the accessory categories or even some of the changes we’ve made in the home business. We think those will provide future growth I think we’re viewing Europe cautiously the trends there continue with strength in the northern part of Europe and it’s softer in the southern part. I think our team did an outstanding job managing through that to deliver topline and even a better bottom line performance in the year, but I think we’re planning that a little more cautiously going forward.

Cadence Expense

Kate McShane – Citi: In your guidance you highlighted it was a tale of two halves with the operating margin. However, can you give a little bit more detail around the cadence expense of the year and how we should think about gross margins for the year as well?

Christopher H. Peterson – CFO: Yeah. So, I think, on that I would say, the investments in the strategic growth initiatives are really going to be spread relatively evenly throughout the year, but if you look at the licensed businesses that we’re taking back in Chaps in Australia and New Zealand, we’re spending a disproportionate amount of money transitioning those businesses to be wholly-owned in the first half of the year and we expect them to be significantly more profitable in the second half of the year. We also – FX is relatively evenly spread throughout the period and so I think it’s really a function of the take back of the licensed businesses that result in the operating margin improvement in the back half versus the front half.

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Roger N. Farah – President and COO: I guess the other thing I would add to what Chris said is that, there are certain subjects like the Fifth Avenue store that we’ve talked about that we’re planning to open next fall, September or October, that are very expensive and carry a lot of rents and we’ll be carrying that for over year without the benefit of any sales. So, there are some of these big projects in Asia, here in New York on Fifth Avenue that we think are extraordinary opportunities for us long-term will establish the brand. Asia will be Ralph Lauren, here will be Polo and there’s a cost of caring those for 12 months until they come online with sales. So, you know that’s feathered in. Remember this time last year, we talked about fiscal ’13 being a tale of two haves and I think there was some concern that we had anticipated more of the profile to come in the back half of the year. We’re pleased to have delivered on that and for different reasons we’re facing a similar situation as really our profit profile is being rebalanced more to a 50-50 split than what it had been for many years which was a heavier orientation on first and second quarter and a little bit lighter in the third and fourth quarter. Some of that’s also coming from the growing retail business where we get some distortion in the back half of the year versus the first half.

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