雷夫·羅倫馬球 (RL) 2011 Q2 法說會逐字稿

Good morning and thank you for calling the Polo Ralph Lauren Q2 Fiscal 2010 earnings conference call.

(Operator Instructions) Now for opening remarks and introductions I will turn the conference over to Mr.

James Hurley.

Please go ahead, sir.

Good morning.

And thank you for joining us on Polo Ralph Lauren's second quarter fiscal 2010 conference call.

The agenda for the call includes Roger Farah, our President and Chief Operating Officer, who will give you an overview of the quarter and comment on our broader strategic initiatives and then Tracey Travis our Chief Financial Officer will provide operational and financial highlights from the second quarter, in addition to reviewing our expectations for fiscal 2011.

After that, we will open the call up for your questions which we ask that you limit to one per caller.

During today's call we will be making some forward-looking statements within the meaning of the federal securities laws including our financial outlook.

Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements.

Our expectations contain many risks and uncertainties.

The principle risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.

Now I'd like to turn the call over to Roger.

Thank you, Jim.

And good morning everyone.

We are pleased to be reporting excellent second quarter results today.

Consolidated sales rose 11%, and operating profits increased 25%, delivering record operating profit margins of 20.1%.

The results were substantially better than we had planned for.

They reflect the exceptional appeal of our brands, our products, which drove strong retail sell-throughs.

Around the globe, our teams are leveraging the strength of our product with compelling merchandise strategies and effective and innovative marketing efforts and world class customer service.

As a result, our momentum was broad-based across regions, channels, and products.

We achieved some important milestones over the last several months.

We opened our spectacular new global flagships on Madison Avenue in New York.

Where the historic Rhinelander Mansion has been dedicated to our men's products and we built a new store for our women's and home collection merchandise that is adjacent to our existing kids stores.

Simply put, the Madison Avenue flagships are the most spectacular retail environments in the world.

For the first time, customers are able to experience each of our labels in an environment that was custom designed to showcase their unique lifestyle sensibilities.

The clarity of the presentations that these stores offer speak not only to their tremendous growth potential we have across brands and products, but also to the financial, creative and managerial strengths of this organization.

In fact, they are microcosm of the strategic work we've done over the last decade on many dimensions.

They reflect our success with elevating the brand, taking more direct control of our strategies, and high growth product categories as well as innovating with new labels and lifestyle opportunities.

They also showcase product with key partners such as eyeware, watches and fine jewelry.

Ralph's vision is supported and executed by talent in design, production, distribution, visual merchandising, creative services and marketing and advertising.

The competitive advantage we have by controlling all these aspects of our business is tremendous and you can see it all coming together in the flagships.

The new Madison Avenue stores follow the opening of our Paris flagship in the first quarter and the reopening of our renovated Milan flagship this quarter.

Together, these stores showcase the world of Ralph Lauren for the 21st century.

You'll notice that all feature bold accessory statements across a wide array of categories, from dedicated handbag areas and footwear and watch salons to more comprehensive assortments of small leather goods, eyewear, scarves and belts.

While stores like these tend to have a favorable impact on our local business trends across channel and we are experiencing that dynamic with each of the flagships now, there is no doubt the halo effect is much broader.

These stores are tourist destinations that resonate on a global level.

This is particularly true for our Asian tourists, who still do not have easy access to many of our brands and products in their local markets and who are really only beginning to get acquainted with the world of Ralph Lauren.

Another recent milestone was the launching of our first collection of Lauren handbags in 150 North American department stores and on Ralphlauren.com.

We are encouraging by the early results which demonstrated broad acceptance of the products across styles and price points.

Customers are responding to the quality of the make, and the iconic detail that have supported the Lauren status as the leading women's apparel brand in the United States department stores.

We intend to add incremental distribution over the next several seasons with exciting holiday assortments featuring new silhouettes and vibrant color choices which will be in the stores soon.

We are particularly excited about our giftable small leather goods merchandise for this holiday and beyond recognizing the importance of small leather goods as a pillar of our broader accessory efforts.

If the growth of our Lauren footwear is any indication, handbags and small leather goods are poised to become meaningful contributors to our sales and product expansion over the next several years.

Ralphlauren.com, 21% sales growth during the second quarter is not only a testimony to our brand strength and effective marketing strategies, but a clear indicator that consumers are increasingly interested in shopping online.

With our broader portfolio of products and lifestyle options, from the pinnacle of luxury with Ralph Lauren's Purple Label to the modern attitude of Black Label to the classic appeal of Polo, RLX for activewear and plenty of gifts for kids and home, we believe we are uniquely able to satisfy growing customer interest in shopping online.

The success and learnings of Ralphlauren.com in the United States provided us with a powerful platform to leverage global growth.

In mid-October, we successfully launched our UK e-commerce site.

The site features bold new looks and enhanced technology that is delivering an enriched customer shopping experience.

The UK site is really a stepping stone to a much larger international roll-out strategy which will include France and Germany in the next year, followed by other parts of Europe and eventually parts of Asia.

Club Monaco is currently enjoying success online at shop bop and we intend to launch a dedicated Club Monaco e-commerce site in August of 2011.

As an aside, today is a very special day for Ralphlauren.com and at 8PM local time tonight in London and 8PM in New York we'll be presenting a sensational 4D light installation to commemorate the launch of ralphlauren.com in the UK and the 10th anniversary of ralphlauren.com in the United States.

For those of you in London please stop by our One New Bond Street flagship and if you're in New York please come visit our 72nd Street and Madison Avenue store to see the world of Ralph Lauren brought to life on the store's facade via video mapping technology, an innovative combination of art, fashion and music.

In case you're wondering what the fourth dimensions is, it's smell.

As our new Big Pony fragrance will be integrated into this ground-breaking experience.

This is another example of leadership and breakthrough thinking by our advertising and marketing group.

We're also actively preparing for the transition of our current license in South Korea over the next two months.

Fresh off the successful transition of other Asian countries earlier this year, our Hong Kong based management team is engaged with nearly 200 employees dedicated to the existing South Korea operations.

We expect many of these employees to be joining the Polo Ralph Lauren family as part of the transition in January.

As a result, we will assume control of the region with a strong knowledgeable team already in place.

But as we have done with other international territories in the near term, we intend to take time to learn more about the customers' taste and preferences in order to build a strong platform for future growth.

Our year-to-date results are a culmination of several years of consistent execution against our long-term objectives.

We elevated the brand and consumer experiences across channels globally, bolstered our authority as a destination resource for luxury and aspiring consumers worldwide.

Our teams have effectively leveraged these investments to drive robust sell-throughs and deliver excellent profit margins that are yielding incremental market share opportunities for us worldwide.

This momentum supports our improved sales and profit outlooks for fiscal 2011 which Tracey will outline later.

But the operating environment is not without its challenges.

Customers have demonstrated a greater willingness to spend, they remain extremely selective and traffic trends are inconsistent.

Macroeconomics and geopolitical uncertainties remain high.

We will also be up against intense pressure from higher sourcing costs and negative exchange rate impact in the back half of the year.

However, these external variables ultimately play out, we are confident that we are focused on executing the right strategies to deliver enhanced shareholder value over the long term.

And with that, I'll turn the call over to Tracey.

Thank you, Roger and good morning everyone.

For the second quarter, consolidated net revenues were $1.5 billion, 11% greater than the prior year period.

The growth in net revenues reflects double-digit constant currency gains for our wholesale and retail segments.

It also reflects the incremental sales from our newly acquired Asia region.

Revenue growth exceeded our expectations, primarily due to stronger wholesale shipments in the US and in Europe, as well as higher sales in our factory stores worldwide.

The net negative impact of currency translation on our total reported revenue growth for the second quarter was approximately 100 basis points, as the lower Euro dollar exchange rate was mitigated by a stronger yen.

The second quarter's gross profit rate of 58% was 90 basis points greater than the prior year period.

Continued strength in full priced selling, primarily in our retail segment, drove most of the upside to last year.

Operating expenses in the second quarter were approximately 8% greater than the prior year period, and we achieved 130 basis points of operating expense leverage.

Our strong sales growth combined with continued expense discipline in our core businesses did offset the impact of the incremental costs associated with the newly transitioned Asian operations, and continued investment in our strategic growth initiatives such as new store openings, the European e-commerce launch, South Korea transition costs and infrastructure support.

Our ability to leverage operating expenses on the stronger sales performance despite our initiative investment was another important driver of our outperformance relative to our expectations.

We achieved $307 million in operating income in the second quarter which was 25% above the prior year period.

Our operating margin also showed considerable improvement, expanding 220 basis points to a record level of 20.1%.

The growth in operating income and expansion in the operating margin rate reflect the gross margin expansion and expense leverage I just discussed.

They also reflect improved profitability across all of our channels of distribution.

Net income for the second quarter of fiscal 2011 increased 16% to $205 million, and net income per diluted share rose 19% to $2.09, compared to the prior year period.

The growth in net income and net income per diluted share principally relate to higher operating income, that was partially offset by a higher effective tax rate of 33% this year, compared to 27% in the second quarter of fiscal 2010.

And as a reminder, the prior year's tax rate benefited primarily from the favorable resolution of discrete tax items in last fiscal year.

Moving on to segment highlights for the quarter.

Our wholesale segment sales rose 8%, to $827 million.

The increase was supported by double-digit shipment growth in both the US and in constant currency in Europe.

And that was partially offset by mid teens decline in Japanese wholesale revenues.

From a product perspective, shipments of our footwear in the United States and men's and women's apparel merchandise globally were particularly strong in the quarter.

In Europe, shipments were higher in the United Kingdom, France and Germany and were slightly offset by continued softness in Italy and Spain.

Our second quarter wholesale operating income increased 9% to $238 million, and the wholesale operating margin expanded 30 basis points to 28.8%, surpassing the prior peak margin achieved in last year's second quarter.

Higher shipments volumes, favorable product mix and disciplined operational management were the primary drivers of the improvement in the wholesale operating income and the margin rate.

For our retail group, second quarter revenue rose 17% to $659 million, reflecting incremental sales from our newly assumed stores, and concession shops in the Asia region, solid comparable store sales growth and the contribution from newly opened stores.

Overall comp store sales increased 8%, reflecting 1% growth at Ralph Lauren stores, which does include the impact of lower Japanese concession shop sales, an 8% increase at our global factory stores, and 10% growth at Club Monaco stores.

Generally speaking, increased full priced selling and improved conversion drove comp sales gains and domestic traffic remains challenging.

For Ralph Lauren stores, urban markets and stores in key tourist destinations continue to outperform the average comp trends.

Regarding Club Monaco, compelling women's assortments did drive increased traffic into the stores during the quarter for this format.

21% sales growth was also supported by higher traffic to the site.

During the second quarter, we opened eight directly operated free-standing stores including five in the Asia-Pacific region, ending the quarter with 363 Company-operated stores.

We also operated 301 concession shop locations throughout Asia at the end of the second quarter.

Retail segment operating income grew 59% to $105 million in the second quarter and the retail operating margin increased 420 basis points to 16%.

The substantial improvement in retail operating income and the expansion in margin rate come as a result of broad-based profit improvement across most retail concepts worldwide.

Sales growth and reduced.

Which was partially offset by incremental expenses related to our newly assumed Asian operations and start-up costs for our international e-commerce efforts.

Second quarter licensing royalties of $47 million were essentially equivalent to the prior year period, as lower international licensing royalties from the transition of formerly licensed Asian operations and lower home licensing royalties were mostly offset by higher domestic product licensing royalties and an improvement in fragrance royalties due to the success of our new Big Pony fragrances.

Operating income for our licensing segment increased 17% to $27 million as a result of lower net costs associated with the transition of formerly licensed Asian operations.

We did end the quarter with approximately $1 billion in cash and investments and $712 million in net cash.

Consolidated inventories were up 20% at the end of the quarter from the prior year period and this includes the incremental inventory to support over 100 Asian concession stops and stores, and the 17 net new stores we have added over the last 12 months.

Excluding the incremental Asian inventory, consolidated inventory was up 14% at the end of the second quarter of fiscal 2011, versus the comparable period last year.

The early receipt of merchandise at the end of the quarter to support sales growth accounts for much of the increase from the prior year period.

Based on our year-to-date sales momentum and third quarter revenue expectations, we are very comfortable with the currency of our inventory.

For the last 12 months, our return on equity was 18% and our return on investment was 38%.

We spent approximately $55 million on CapEx during the second quarter to support new retail stores, shop installations and infrastructure investments.

We also repurchased 1.2 million shares of stock, utilizing $100 million of our current authorization.

At the end of the second quarter we had approximately $469 million remaining under our authorized share repurchase program.

So as Roger said we are very pleased with our accomplishments to date as we focus on the second half of the year, we are obviously comparing against a recovery in business trends in the second half of 2010 and as we have outlined for you in previous quarters, we do expect to experience increasing challenges relative to last year, including unfavorable foreign currency rate comparisons, dilution related to the transition of our south Korean operations, and assuming cost of goods inflation related to rising labor, raw material and transportation costs for most of our products.

The anticipated cost of goods inflation will begin to impact our gross profit margin in the third quarter and most prominently in the fourth quarter.

As a result, we are currently forecasting a decline in gross profit in both third and fourth quarters.

Since we believe much of this pressure is a function of near term supply demand imbalances, it does not alter our commitment to investing in our strategic growth initiatives.

With that in mind let's move on the to our financial outlook for the remainder of the year.

We've experienced continued momentum across channels and regions in the third quarter to date period.

As outlined in this morning's press release, we currently expect consolidated net revenues to increase at a high teens percent rate in the third quarter of fiscal 2011.

Our expectations are based on a mid-teen increase in global wholesale sales, which reflects continued growth in the United States and in constant currency in Europe.

The cadence of our expected spring, summer shipment schedule is accentuating wholesale revenue growth in the third quarter which will ultimately result in flatter growth in fourth quarter shipments.

As a result, we think it is more representative to consider growth trends for the two quarters in aggregate.

And on that basis, we expect a continuation of the year-to-date momentum we have experienced with our wholesale shipments.

For our retail segment, we are forecasting mid single digit comps in the third quarter.

Our operating margin for the third quarter is expected to be down approximately 100 basis points from the prior year period.

This decline is primarily a function of gross profit margin pressure due to cost of goods inflation and an unfavorable foreign exchange impact.

We will also be incurring incremental expenses associated with our various Asian investment initiatives including costs to prepare for the transition of the south Korean operations.

However, in aggregate, we expect modest operating expense leverage to partially offset some of the expected gross profit margin decline in the third quarter.

For the full year, fiscal 2011 period, we now expect consolidated revenues to increase at a low double digits rate.

Growth is still expected to be led by our retail segment, with a single digit decline in licensing revenues which primarily reflects the impact of our assuming more direct control over certain geographies.

And as a reminder our outlook for fiscal 2011 is for a 52 week period and compares with fiscal 2010's 53 week period.

The fourth quarter extra week of sales and profit which just happened to be Easter for us will not be anniversaried this year.

We expect our full year operating margin to be approximately 50 basis points below fiscal 2010's level.

Our outlook is a function of strong year-to-date results which we expect will be mitigated in the back half of the year as a result of the external and noncomparable dynamics I just outlined.

This implies a meaningful decline in our operating profit margin for the fourth quarter.

Most of that is a function of the inflationary cost of goods and exchange rate pressures but there are other variables I'd like to highlight.

Expense deleveraging that we expect as a result of flatter fourth quarter wholesale shipments which is a result of the anticipated shift in wholesale shipments between the third and fourth quarters on what are predominantly fixed cost operations in our wholesale business.

In South Korea we will be assuming control of the distribution network with leaner clearance inventory which will impact normal sales levels similar to what we experienced when we transitioned our southeast Asia license last year.

We are maintaining our fiscal 2011 tax rate of 34%, primarily due to anticipated geographic earnings mix.

Again, we are proud of our second quarter and year-to-date performance which demonstrates our ability to grow profits even as we make significant investments in long-term growth initiatives.

Around the world, our strategic merchandising initiatives are driving improved productivity and profitability and are helping to establish a stronger foundation for us to grow from over the long term.

And our teams are executing masterfully.

And while we face increasing profit margin pressure in the second half of the year, and our sales and margin, profit margin comparisons with the prior year period become more challenging; particularly in the fourth quarter, the current momentum in our core operations is very encouraging.

Our teams continue to raise the bar in executing with excellence and we will manage our business with the same operational disciplines that have supported our profitable growth over the last several years.

And with that I'll conclude the Company's remarks and open the call up for questions.

Operator will you assist us with that please?

(Operator Instructions)

We'll the take our first question from Christine Chen with Needham & Company.

Thank you.

Congratulations on another fabulous quarter.

Thank you, Christine.

Roger, I was wondering if you could talk about regional performance in Europe, where you've been seeing strengths, where the weaknesses have been and then also if you are still expecting $0.08 to $0.10 of dilution from South Korea or if that's changed at all for the year.

Yes to South Korea.

It's a combination of one-time costs plus the January, February, March operating quarter where I think Tracey touched on, not inconsistent with other licenses.

They tend to run the inventory down to the end of the license which in this case is December 31 to maximize their cash out, which leaves us a little lean in the first three or four months, even though we're flowing product and staging it for delivery on January 1.

It does create some transitional.

So that dilution number is real.

Back to your earlier questions, the business in Europe has actually been incredibly strong and the regional strength has come out of really central and Northern Europe, France has been incredibly strong, particularly with the halo from the store.

The business in England, the business in the Scandinavian countries, Germany, all have been strong.

We saw strengthening in Spain towards the end of spring, summer and into fall, and really the weakest market at the moment is Italy, which is mostly specialty stores and I think they've struggled a bit more in this economic environment than other parts of Europe.

So overall Europe is quite strong.

There are slight pockets of disruption based on the striking and the protesting in and around France.

But overall, even with a negative exchange rate, we're very pleased with what's going on in Europe.

We go next to Omar Saad with Credit Suisse.

Thanks.

Good morning.

Roger and Tracey, if you could elaborate a little bit on some of the cost pressure comments that you made during the call.

I know there's a number of different factors that are affecting you and everybody else in the industry.

I also know that you guys kind of saw this coming.

I feel like a few quarters ago and perhaps talk to how your supply chain is set up, regionally and tactically, and what you might do on the pricing side to offset some of that, how you view pricing in this climate, also I guess regionally.

Maybe just to dive a little bit deeper in that to help us understand the dynamic and how Ralph Lauren is positioned.

Okay.

Omar, so we lasted one question on the second quarter and the first half and we're now into the cost pressures, which is as you correctly point out, we called out at the beginning of the year when I think others were silent.

Let me try to put this in a sequential way that may help everybody understand how we're thinking about it and I think every company is doing their own analysis and thought.

The cost of goods for us is really four pieces.

One is clearly raw materials.

Two is the actual manufacturing cost.

Three is the cost of moving it, for us somewhere in the world.

And four is really the design and product development, which for us is a very meaningful part of our success because it gives us that unique positioning in the market.

So from two pieces of that, one is design and development, while for us we invest a lot in it, that is not feeling obviously the inflationary pressure.

The second piece which earlier on had some anxious moments which is transportation, we just spent a lot of time with our really terrific team who believe that the worldwide supply and demand, which was driving an imbalance of about 11% differential, is now down to 1%.

And that will balance out by 2011, which will cause rates to perhaps come in line or even soften, some of the seasonal peak surcharges are beginning to disappear and we're beginning to see that come in line.

So what you're really left with is then the cost of goods and/or the manufacturing.

The one truism that I would also say is we're not going to take something out of the product or shortchange the customer.

That has not been our philosophy and we're going to stick with it.

So we're seeing the same cotton or cashmere or silk spiking that you all have.

Some of that's supply and demand.

Some of that's bouncing off a low base.

And some of that is probably driven by speculation, which I think over time will level out.

So the pressure points on raw materials starting in the back half of the year as Tracey articulated and then into next year are real.

I think it's a question of how you're going to manage through that, how you're going to merchandise around it, how you're going to price around it and I think every brand, every channel of distribution and every product category will be analyzing that very carefully as we look forward.

Our third and fourth quarters, which for us were placed a year ago, we're in the chute.

So our pricing decisions and our ability to deal with those variables have already been made and we balanced out the price changes and/or market share and value equations I think very well.

So we're really now looking at fall calendar '11, where the biggest impact of raw materials is going to be felt.

And we're still thinking that through and won't make our final decisions until market weeks open up, really in January and February.

So it's a complicated story that we've been on top of and every day I wake up thankful that we own our own manufacturing and sourcing group.

We have a global logistics team with control towers in Hong Kong.

I think we talked about this before, we had 17 points along the way to make decisions.

That experience and know how I think will serve us well during these unpredictable times.

I didn't mean to ramble on but I know many of you may want to ask about it and hopefully a more complete answer will allow us to get through this and into other questions as well.

We'll go next to Bob Drbul with Barclays Capital.

Good morning.

I guess the question that I would have following it is essentially when you look at mix versus pricing across the regions, how is the mix shifting in terms of more Purple Label in US, Europe and does that provide you flexibility to more selectively price throughout regions?

Yes, I think the pricing issue is a combination of regional distribution as well as product category and brand and channel.

So it starts with the strength of the brand and does the brand have pricing power based on its appeal, its distribution, and we believe all of our brands have that.

We've been very thoughtful about our pricing on a worldwide basis.

We don't price the same in every market.

So excluding back taxes, we still have and believe in regional pricing.

We think there's opportunities in the Asia-Pac region and as we look at our pricing from Europe to the United States to Asia, we make those decisions carefully.

Obviously, the higher priced labels and the higher quality goods I think can command prices and then there are labels and channels of distribution where pricing is critical factor in a customer's buying and we're going to be very careful in those channels.

So worldwide, it's a network of decisions that will ultimately have us responding to the cost of goods pressures.

Next question, please.

Yes, sir.

We go next to Adrianne Shapira, Goldman Sachs.

Thank you.

Good morning.

Roger, when you've given us guidance for this quarter you guided operating margins down 100 to 150 basis points.

You obviously wildly beat that plan.

We saw 220 basis points expansion in the operating margin.

If you could first give us a sense where relative to your plan, where the biggest variances were there, considering what you thought you were going to deliver versus what you were able to deliver.

And then the follow-up, as we think about your guidance for the third quarter, you're similarly looking for operating margins down 100 basis points, recognizing there's some pressure points but given the strong momentum heading into this quarter, could we see some opportunity in the third quarter much like we saw in the second?

Thanks.

I think it's a good question.

And first, I would say thank you for the nice note on the mansion.

We appreciate your supportive comments and hope to see you at the light show tonight.

What caused the over-achievement in the second quarter, and may or may not affect the third quarter, was not our misforecasting of the cost of goods.

It really came through in the extraordinarily sell-through of the products.

So whether it was the retail sell-through was the extraordinary comps or whether it was the terrific wholesale performance, the margin that has been delivered in the second quarter and really the first half of the year is more a reflection of full priced selling improvement, the merchandise strategies that have the right products in the right place, than it is the cost of goods was different than we anticipated.

Because the cost of goods is known to us well in advance so the margin uptick against expectation in Q2 and if we can beat Q3, in my opinion it's going to come out of better sell-throughs than we've currently got forecasted.

You can see the sales were also better than expected, Q2, and Tracey told you we're expecting strong Q3 results with October continuing the trend we've been running.

We're feeling positive about the holiday shopping experience, although the bulk of the holiday season is really in the next six, seven weeks.

So it's a sell-through improvement to expectation, not a difference on cost of goods that drove the margin.

We go next to Michael Binetti with UBS investment research.

Hello, guys.

Good morning and congrats on another great quarter from us as well.

Thank you, Michael.

So I want to zero in -- I know you've got a few questions.

First of all, thanks for all the wealth of information here.

I want to zero in on pricing here a little bit more if we can as we look ahead to the calendar year.

I probably consider you guys to have one of the few brands that could easily pass through pricing if need be.

And I'm wondering maybe if we just focus on some of the more mid tier or the main stream products away from the luxury, have you guys tested the consumer for the ability to absorb pricing at this point?

How should we think about elasticity or maybe how we should think about the flow through to earnings for a point of price increase versus a point of volume?

If I could, I'd like to ask a follow-up.

Yes, well I would say that if nothing else, we've demonstrated in the first six months of the year what incremental sales we've been able to flow through to the bottom line.

I think one of the great successes of Q2 is an 11% sales increase but a 30%, plus operating increase.

So we have managed to not only flow the incremental sales very profitably, which means we're not doing it promotionally, and second, we've been able to do it at the same time we've been incrementally investing in a lot of start-up.

Lauren accessories is a start-up.

Europe.com was a start-up.

What's going on in Asia is a start-up.

So we are flowing through incremental sales to the bottom line, even with investments made into strategies we think will pay off.

So for us, at our margin rates, incremental sales, whether the margin rate is up 100 basis points or down 100 basis points, is very accretive.

So as we look at this subject and study it and try to merchandise our answers worldwide, we are clear that incremental sales at the kind of margin rates we have will be accretive.

So I think others have to come to their own conclusions, based on their strategies, their brand strength, their margin flow-throughs, but I think our business model has allowed us to carefully look at market share and fairly priced product and incremental flow-through while we're investing.

So as we head into the back half of next year, we'll have to make those decisions on a worldwide basis as well.

Next question, Matt.

We'll go next to Kate McShane with Citi.

Hi, good morning.

Thank you.

In regards to inventory, have you found that you had to bring any inventory over sooner than expected because of lack of space on the shipping containers and can you talk about the inventory position that you have built for southeast Asia and what it means for your expectations for sales in the region for the back half of the year?

Yes, I think the question I'd respond to this way.

We are building inventory for the launch of Korea on January 1.

We really can't move that inventory into the stores until January 1.

So we'll have a mad dash from distribution center to multiple selling points as quickly as we can, within a day or two.

The second piece of Asia is that we are today in China and in the other parts of Asia, we are lapping, we didn't have the business in our control this time last year.

So we were doing the staging and preparation for the January cutover at this time last year for Asia, and now we'll be moving in a more seamless way.

Tracey touched on the third part of inventory that makes this quarter look higher, which is because of the 52, 53 week, the cutover quarter was one week different than last year, so we ended up holding one week of shipping in our inventory versus having it shipped out, which is just a timing issue.

And lastly, with inventories being so effectively managed, we're feeding what we think is a high teens sales forecast for fourth -- for our third quarter.

And that's strong comps as well as wholesale and online thinking on our part.

One of the misleading things about our comps is the flat or 1% Ralph Lauren store number which is really a composite of a 9% comp in the US stores, offset by a 9% comp in the concessions in Japan, which are now rolled into one.

Those concession comps in Japan are a combination of economic trend and our decision to ship less into those channels and not end up taking it back at the end of the season in the quantities we've traditionally had.

We think soaking up some of that is a good strategy.

So our 20% inventory increase is a combination of all of those things.

And the only thing I would add to what Roger said in response to your question, just to keep in mind that of our 11% growth this year, that does include Asia sales that we didn't have last year.

It was still a licensed business.

Of that 11%, about 3% is related to Asia sales that from a comparable standpoint we didn't have last year.

So just as our inventories are higher with the incremental Asia inventory, our sales are also higher.

And our final question will come from Brian McGough with Hedgeye Risk Management.

Yes, great.

I appreciate you taking my call.

I very rarely if ever tell a management team that they did a great job in a given quarter just because it's your job, same way it's my job.

I'm going to break my cardinal rule this quarter.

This is a really, really good number.

Thank you, Brian.

I hate to see you break your golden rule.

We actually try to tell people around here when they have a great job, well done, it makes them work harder.

Well, I have something to learn then.

So I have a couple of questions for you, Roger.

One, just really, really big picture.

Like if we dial the clock back, really, really long time ago to when you were trying to drill down the strategy as to what the Company was going to look like with the senior management team and it was largely a US business and you're mapping out, okay, Europe, and then Asia, we get to a third, a third, a third with our businesses and it made perfect sense and still makes sense because that's where you're going.

And it's now actually not a pipe dream anymore.

All of us see it.

And it's in your results.

When you sit down in your war room now, could you give us a little bit of a sense as to what thoughts are starting to come out now as it relates to the next stage of what Ralph Lauren will look like?

Yes, it's an interesting question because Tracey and I came out of the Board meeting yesterday with Ralph and we had lots of thoughtful discussion about the current strategies and the results and then the near term and then the long-term.

And I think we've tried to be clear publicly about what our agenda is and how you could follow and some of the ups and downs, not everything has worked perfectly but directionally I think we've been clear.

We are very committed to what we've articulated as headline issues.

So for us, the international expansion of Ralph Lauren at an elevated level has come true in Europe and we continue to invest there, but we will distort time energy and money in Asia.

And we actually announced last night a new head of Asia that will be transitioning in over the next three or four months.

We're very excited about that and Jackie and I will be traveling to Asia on Saturday to introduce him.

We are very clear about our direct to consumer strategies, that's both brick and mortar as exemplified by the various flagships or smaller neighborhood stores but more importantly, we're very aware and we're ten years invested in direct to consumer through e-commerce.

While not in the quarter, the UK launch has gone very well.

And that's both from a reaction from the customer as well as our ability to handle and service that customer.

So we think e-commerce overlaid on a global map is going to be an important strategy and will be a dominant theme in our direct to customer strategies.

And lastly we've said that new product development and new product categories with accessories in the lead role will be critical to our success both wholesale and direct to customer.

And we're doing that and we wrap it all around with a commitment to world class infrastructure.

Tracey and team are leading a very complicated and thoughtful commitment over many years to bring our technology up to world class.

I said earlier and I believe it, our manufacturing and supply chain people are second to none.

And our creative teams, which we've invested significantly in, are really the ones who bring this magic to life.

So our ability to develop the infrastructure and the talent I think is our ultimate secret weapon and we'll stay focused on those three legs of the stool and work hard on the pieces and parts that need it to support it.

And I think with some zigging and zagging and some issues over currency exchange and other subjects which are real, I'm very committed and the team is very committed and competitive about getting to where we think we can arrive on a global basis.

So with that, I think we'll thank everybody for their interest.

It's been an amazing six months.

We're very excited about Christmas and all the other initiatives going on.

Please come by the stores if you're here in New York or in London, look at the show tonight.

I think it's going to be jaw-dropping and it's just a taste of the kind of innovation that I think we're going to continue to provide in the years to come.

Thank you.

And again, that does concludes today's call.

We thank you for your participation.

Have a good day.