雷夫·羅倫馬球 (RL) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for calling the Ralph Lauren's second-quarter fiscal 2012 earnings conference.

Just a reminder, today's call is being recorded.

All lines will be in a listen-only function during the presentation today.

At the end of the presentation, we will conduct a question-and-answer session.

Instructions on how to ask a question will be given at that time.

Now for opening remarks and introductions, I would like to turn the conference over to Mr.

James Hurley.

Please go ahead, sir.

Good morning, and thank you for joining us on Ralph Lauren's second-quarter fiscal 2012 conference call.

The agenda for the call today includes Roger Farah, our President and Chief Operating Officer, who will comment on our broader strategic initiatives; Jacki Nemerov, our Executive Vice President, will provide some product commentary; and Tracey Travis, our Chief Financial Officer, will provide operational and financial highlights from the second quarter, in addition to reviewing our expectations for fiscal 2012.

After that, we will open the call up for your questions, that we please ask you to 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 principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.

Now, I'll turn the call over to Roger.

Thank you, Jim, and good morning, everyone.

I'm going to keep my remarks relatively brief this morning since I've really got a cold and I'm losing my voice.

There's no question that we're reporting better than expected second-quarter results today.

Double-digit revenue growth in each of our major geographies contributed to consolidated sales that were 24% better than prior-year.

The 18% increase in second-quarter earnings per share reflects strong profit flowthrough, even as we're managing through substantial cost of goods inflation and continued investment in our long-term growth initiatives, including the integration of the strategically important regions and products now as directly controlled operations.

The double-digit sales and profit growth come on top of double-digit gains in the prior-year period, a clear demonstration of the growing desirability of Ralph Lauren brands across an expanding range of merchandise categories and on an increasingly global platform.

The high-teens domestic revenue we achieved in the quarter is extraordinary, considering the existing scale of our business.

It's also well-balanced across distribution channels, supported by fantastic growth in our men's business, kid's, dresses, and the successful launch of Denim & Supply.

Our international revenues grew twice as fast as our domestic sales and represented approximately 38% of our consolidated revenues.

In Europe, we are capturing share with our core merchandise offerings through a combination of productivity gains and incremental distribution, including the expansion of existing shops to accommodate the growing bandwidth of each of our brands.

As we've discussed in the past, we don't have distribution for all of our brands in Europe yet, so we are rolling out new merchandise categories, including Lauren Footwear and Club Monaco, which is yielding incremental distribution and expanding our reach through the continent.

There's been a lot of concern about the European business trends, given the sovereign debt crisis that has gripped headlines over the last six months.

Having been in Europe last week, it is a key topic of conversation.

However, there is clearly a long-term opportunity for us to continue to expand there.

Much of our focus in Europe over the next several years will be the introduction of new product categories and additional direct-to-customer efforts, which include Mono brand stores, eCommerce or shop-in-shops.

As you know, Asia is a high-growth region for us, and the appetite for the Ralph Lauren brand continues to expand across all major territories.

Greater China represents the biggest single long-term growth opportunity in the region.

Today, Greater China represents only 3% of our consolidated revenues.

That is unlikely to change very much in the near-term since we are closing important points of our legacy distribution this year.

After resetting our local market presence, we intend to pursue measured, thoughtful growth in the region.

We are confident with our brand and the luxury product acceptance in Greater China.

The response to our most elevated products, including apparel and accessories, have been tremendous in the new locations that we sell.

We need to raise the understanding and awareness of the Ralph Lauren Lifestyle brands.

Establishing flagship presence in the region is critical.

We've identified the need for flagship presence in Hong Kong, Shanghai, and Beijing, and are actively working to secure locations in each city.

We are also looking for the right opportunities to go directly to our customers on a broader scale.

While new stores are an important component of our expanding direct-to-customer reach, eCommerce is another major area of focus for us.

In the United States, ralphlauren.com continues to grow at a mid-20's% rate.

It is an increasingly important vehicle to educate customers about the scope of the world of Ralph Lauren.

It's been a useful platform to showcase new and emerging merchandise categories, particularly those with more limited distribution in our stores.

As a result we find that the children's wear, accessories, and home products enjoy a higher sales penetration online than we experience at our brick-and-mortar stores, and the ready acceptance of Denim & Supply on RalphLauren.com is also very encouraging.

We're expanding our online reach in Europe by going live in France and several other French-speaking countries, and we did that during the second quarter.

We also recently launched Germany on October 14.

We continue to execute against the broad global eCommerce strategy, one that we believe will include parts of Asia over the next one to two years.

We are proud of the excellent results we've achieved across the Company in the first half of the year, both in terms of financial performance and really progress on all of our key growth initiatives.

There is no doubt that our long-standing commitment to invest in design and to innovate with new merchandising, that is made to the highest quality standards and presented in a unique, aspirational shopping environment, has supported our performance.

The customer has been most excited to spend on new fashion products, so we're comfortable with our decisions that we made to deal with the higher cost, particularly since the customer continues to vote for Ralph Lauren brands across merchandise categories.

Over the last two months, we've seen extreme stock market movement and negative economic news, which resulted in more volatile sales and traffic at Ralph Lauren stores in the United States and Europe, particularly with local customers.

Our past experiences suggest that the volatility in traffic has more to do with sentiment than it does with our ability -- the customer's ability to spend.

Having said that, the near-term outlook for the global economy historically has been a good indicator of discretionary sales trends, but has slowed; and while we were raising our sales and profit outlook for the year, it's important to remember in the context of geopolitical uncertainty, the critical holiday selling period is still ahead of us.

We believe we are well-positioned for holiday, and that we have invested in the right merchandise strategies to leverage our brand strength as a go-to resource for gifts and self-purchase.

Macroeconomic dynamics are clearly out of our control, but we are an agile organization and we believe we are prepared to navigate through them, as we've successfully done in the past.

We are armed with the strongest, most desirable brand in the world, one that has managed to outperform in good times and bad.

And we have been thoughtful to invest in high return strategic initiatives that allow us to deliver both near-term and long-term results.

Our sustained focus on our growth initiatives is validated by the resilience and consistency of our performance over the last several years.

So despite the near-term headwinds, we believe we are well-positioned to generate substantial shareholder value over the long-term, and we continue to believe the best is yet to come.

Now I'll ask Jacki to comment on the product and merchandising highlights for the quarter.

Thank you, Roger, and good morning, everyone.

The second quarter was yet another period of strong global expansion for us, as evidenced by our multi-channel revenue growth.

Our products are certainly an important driver of our success, as are the thoughtful planning and merchandising strategies that are both supporting market share gains and helping to mitigate the impact of cost of goods inflation.

As Ralph commented in this morning's press release, we continue to pursue exciting new avenues of growth by leveraging the desirability of our brand across the growing range of merchandise categories.

Our unwavering commitment to product innovation is supporting the momentum in both core and emerging classifications.

This morning, I'd like to take you through some key second-quarter product highlights, as well as update you on milestones for our denim and accessories initiatives.

First and foremost, the growth in our men's business worldwide continues to be spectacular.

Season after season, Ralph and the design teams create distinctive new products that further distinguish us in the marketplace and drive incremental market share gains.

The iconic vernacular of the Ralph Lauren brand enables us to address the more traditional aesthetic with Purple Label and Polo, and a more contemporary one with Black Label and RLX.

We are now addressing a younger and more casual and more eclectic male customer with our Denim & Supply line, but more on that exciting introduction in a moment.

The momentum in Children's Wear is a similar story to Men's, and Children's Wear merchandise was an important driver of our revenue growth across channels and regions during the second quarter.

The investment we've made in developing our assortments from layette and babies to boys and girls has fueled the appetite for our product worldwide.

We are uniquely positioned to address the child's complete wardrobe requirements, from school and play to special occasions.

We continue to enjoy preference as the go-to brand for gifting, which is a testament to the quality of the product and the prestige of the brand.

Innovative marketing initiatives such as the RL Gang Interactive and shoppable Digital Storybook, and the first-ever online fashion show for girls 7 to 14, solidify our position as the leader in premium Children's Wear.

We believe there is much more category growth for us, especially in international markets, and Children's Wear is expected to be an important part of our overall Asian growth strategy.

For the critical holiday season, we continue to leverage the gift-giving appeal of the Ralph Lauren brand across every product category.

We know that the aspirational nature of our brand and the quality of our products are a powerful combination when the consumer is selecting the right gifts for everyone on the list.

Where appropriate, we carry a design theme and product story across multiple categories to create a more unified world of Ralph Lauren presentation at this time of year.

Our in-store, digital and print marketing emphasize the timeless appeal of a gift from Ralph Lauren.

In terms of newer initiatives, one of the most exciting milestones of the second quarter was the global launch of our newest brand, Ralph Lauren Denim & Supply.

Consumer interest and acceptance has been very encouraging across both men's and women's, particularly for more fashion-oriented novelty pieces that are unique to our portfolio.

The combination of the brand's positioning, the product content, and the in-store and online presentation is resonating with the consumer.

The sensibility of the Denim & Supply product and the power of the Ralph Lauren brand allowed us to secure significant incremental floorspace to present this newest offering to the consumer.

Our investment in the wholesale shop environment is a powerful demonstration of our long-term commitment to the category, and reinforces our belief in the ability of the unique and strongly branded in-store environment to both attract attention on the selling floor and bring the merchandise to light.

Our online marketing and social media efforts were extremely effective at creating awareness for the Denim & Supply brand, and we'll continue to invest in that messaging to drive awareness.

We believe that our lifestyle approach to this category makes Denim & Supply both distinctive in the marketplace and represents a meaningful global opportunity for us.

As you've heard in previous calls, developing a large, dynamic accessories offering has been one of our key strategic initiatives.

And while it's still a new business for us, we are experiencing great acceptance of our accessory merchandise.

In September, we hosted 300 fashion editors and buyers from around the world for a special preview of the Spring 2012 Ralph Lauren Accessories Collection at our women's flagship store, 888 Madison.

The reaction was spectacular.

We effectively communicated the substantial evolution of the breadth of our handbags, footwear, belt and scarf offerings, and the importance of these categories was underscored by their positioning in the store.

Editors and buyers alike were particularly impressed by our new shapes, materials, colors, and the range of price points for our handbags.

We are confident that with the additional distribution, we will grow Ralph Lauren Accessories into a large-scale, international business.

Our Lauren handbags and small leather goods have also gained momentum.

With the benefit of reading the first couple of seasons of market response, we've been able to calibrate our assortments to have the right balance of core offering and seasonal fashions.

Our dual focus on design and function, combined with the extraordinary relevant consumer confidence in the Lauren brand, will support additional distribution of Lauren accessories over the next several years.

The opportunity in Men's is also evolving nicely for both the Ralph Lauren and Polo brands, and we'll look to expand distribution of Men's accessories over the next few seasons.

In order to grow awareness of our presence in the category and to showcase the product in the most aspirational way, we've continued to emphasize accessories in our global advertising campaign.

We believe that the power of the Ralph Lauren brand and our unique lifestyle approach to design will be as successful for our accessories business as it has been for apparel, and we see tremendous long-term opportunity.

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

Thank you, Jacki, and good morning, everyone.

As you've seen in this morning's press release, we reported excellent second-quarter operating results.

Consolidated net revenues were $1.9 billion, 24% greater than the prior-year period, and better than the high-teens to low-20% growth expectation we outlined for you in August.

The increase in net revenues reflect double-digit gains at our wholesale and retail segments, with higher sales of our core apparel products, particularly men's and children's wear, supporting our top-line momentum across all channels worldwide.

The combination of both the incremental revenues from the South Korea license transition and the favorable impact of foreign currency translation affected our total reported revenue growth by approximately 6%.

The second-quarter gross profit margin of 56.6% was 140 basis points below the prior-year period, and was in line with our expectations as we experienced the full impact of higher cost of goods inflation, which outweighed the combined offsetting effects of our selective price increases, a higher retail segment penetration, and the beneficial margin impact of international sales growth penetration.

Operating expenses of $728 million were 25% greater than the prior-year period.

We deleveraged operating expenses by 30 basis points, which was considerably below the approximately 150 basis points of deleverage we anticipated in the quarter.

The upside to our expectations was mostly due to our ability to leverage expenses on the higher sales level we achieved.

The modest deleverage reflects a higher retail channel mix, including the transition of our formally licensed South Korea operations, which is entirely retail distribution.

Our operating income of $351 million was 14% greater than the prior year period, and our operating margin was 18.4%, which was 170 basis points below the record 20.1% level achieved in the prior-year period.

The decline in our operating margin was primarily a function of the gross margin impact of the unprecedented cost of goods inflation we experienced during the quarter, in addition to shifts in our overall channel mix.

The growth in operating income drove the 14% increase in second-quarter net income to $233 million, and net income per diluted share rose 18% to $2.46.

Regarding our segment highlights for the quarter, our wholesale segment sales increased 20% to $996 million, and constant dollars sales increased 17%.

Global sales of our core merchandise, particularly men's and children's wear, in addition to new merchandise categories such as Denim & Supply in the US, and the expansion of footwear distribution in Europe, all contributed to our growth.

In the US, we continue to see broad-based strength across multiple men's labels in both department stores as well as specialty stores.

Polo Sportswear trends have been particularly good, especially for novelty and exclusive items.

And men's Black Label continues to gain momentum as its merchandise offering expands.

Women's sportswear trends remain challenging in the US, although our dresses and accessories benefited from expanded assortments and incremental distribution.

In Europe, Menswear sales to department stores were strong, as we continued to improve productivity and capture additional floorspace for existing and new merchandise categories.

European wholesale shipments also benefited from expanded distribution for Lauren Sportswear and the introduction of Polo Footwear.

However, shipments to independent specialty stores throughout Europe, and in Italy, in particular, were more challenging, as they have been for us and many others over the last several quarters.

Wholesale operating income for the second quarter rose 4% to $247 million, although the wholesale operating margin declined 400 basis points to 24.8%.

The decline in wholesale operating margin was primarily due to cost of goods inflation and incremental expenses associated with the investment in new product expansions, such as home textiles, Denim & Supply, and Club Monaco in Europe.

Our continued success in expanding our direct-to-consumer reach is evidenced in the 31% growth in retail segment sales to $861 million during the quarter.

We achieved comparable store sales growth across most retail concepts, and the contribution from newly-opened stores and incremental sales from newly-assumed South Korean operations, were other important drivers of growth.

Overall comp store sales increased 13%, reflecting 5% growth at Ralph Lauren stores; a 14% increase at factory stores; and 24% growth at Club Monaco stores.

Ralphlauren.com sales continued to expand at a double-digit rate, increasing comp sales 25% in the second quarter.

Overall comp gains were primarily a combined result of those transaction growth and an increase in average dollar sales per transaction, with the latter mostly due to higher average unit retail prices resulting from the price increases taken, due to the cost of goods inflation.

However, traffic trends were mixed across our global retail formats during the quarter.

At our Ralph Lauren stores, we did experience lower traffic in the US and Europe during the extreme stock market volatility in August and September, although generally speaking, our flagship stores globally continue to outperform in the quarter.

Sales trends at our stores and concessions shops throughout Asia were very strong in the quarter, and the recovery in Japan remains on track.

Momentum in our factory stores worldwide continue to be exceptional in the quarter.

In addition to increased traffic to our factory stores, the strength of our brand, combined with our compelling assortment this season across men's, women's, and children's wear, is driving a higher conversion.

Online, men's, children's wear and accessories were particularly strong during the quarter, as was the introduction of our new Denim & Supply lines.

Club Monaco's robust sales gains are continuing to be driven primarily by trend-right women's merchandise.

We opened 12 directly-operated freestanding stores and closed 9 stores during the second quarter, 5 of which were in the Greater China region.

In conjunction with our Greater China repositioning efforts, we also closed 23 shop locations and 5 franchise stores during the quarter.

We ended the period with 374 company-operated stores and 522 concession shop locations globally.

Retail operating income grew 39% to $146 million in the second quarter, and the retail operating margin increased 100 basis points to 17%.

The improvement in retail operating income in the expansion and margin rate are primarily due to comparable store sales growth and improved profit trends in Asia, both in Greater China as well as in Japan.

These improvements offset the substantial pressure we had from cost of goods inflation, expenses related to the transition of the South Korea operations, and continued investment in international eCommerce development.

Licensing royalties were $48 million in the second quarter, 3% greater than the prior-year period, primarily due to increased domestic apparel product royalties.

Growth was partially offset by lower fragrance and international licensing royalties, as we were anniversarying both last year's Big Pony Fragrance launch, and the transition of formerly licensed South Korea operations.

Operating income for our licensing segment also rose 8% to $30 million, a result of higher royalty revenue and lower net costs.

We ended the quarter with $979 million in cash and investments, and $606 million in net cash.

Consolidated inventory was up 35% at the end of the second quarter on a reported basis.

The components of the 35% increase are as follows -- non-comp items included in our inventory this year are new merchandise categories, like Denim & Supply and Home Textiles; newly transitioned operations, such as South Korea; and new channels of distribution, such as our international eCommerce sites and new retail stores.

These all combine to represent 14% of the 35% total growth.

Another 14% of the increase is to support the comp anticipated sales growth and changes in shipment cadence across previously existing product categories, geographies, and channels.

The remaining 7% of the 35% increase is primarily attributable to cost of goods inflation and foreign currency impacts.

We continue to expect inventory growth to become progressively more aligned with sales trends throughout fiscal 2012, as we cycle through changes in year-over-year shipment cadence, and anniversary the transition of formerly licensed operations.

We spent approximately $53 million on CapEx during the second quarter to support new retail stores, shop installations, and infrastructure investments.

We also repurchased 773,000 shares of stock, utilizing $92 million of our current authorization.

And we had approximately $579 million remaining under our authorized share repurchase programs at the end of the second quarter.

We are very pleased with our second quarter and first half results, which demonstrates continued momentum in our core and emerging businesses around the world.

We've once again achieved double-digit profit expansion in the quarter, even as we continue to make important incremental investments in each of our key growth initiatives, in order to support continued future growth of our business.

As you are all acutely aware, the extraordinary volatility in global equity and credit markets that began in early August has intensified in the last two months.

Political and macroeconomic uncertainties are weighing on business and consumer confidence, and we have seen increased weekly sales volatility in our US and European stores.

And so while we are raising our sales and profit outlook for the year on the strength of our first-half performance, we do continue to monitor trends across all channels and regions, in order to proactively address any material changes that could affect our plans and outlook, which I'd like to review with you now.

For the third quarter, we currently expect consolidated net revenues to increase at a low-teens rates.

Our expectations are based on a mid-single digit increase in global wholesale sales, and a high-teens increase in retail segment sales, including high-single-digit comparable store sales growth.

In addition to a more challenging environment, particularly in Europe, wholesale revenue growth in the second half of fiscal 2012 is expected to be additionally suppressed by the continued channel shift in Japan, where we have transitioned certain wholesale distribution to directly operated concessions shops, and the closure of some of our shops in Greater China as part of our repositioning efforts.

For our retail segment, we will anniversary the acquisition of the South Korea license in the fourth quarter of this year, so incremental non-comp revenue growth we have experienced from South Korea in the first half of this year will be reduced in the second half.

Our retail segment sales and profit in the second half of the year will also begin to reflect a more pronounced impact from our Greater China repositioning efforts, many of which were planned to transition at the end of the second quarter, as I mentioned earlier, and during the fourth quarter.

Our operating margin for the third quarter is expected to be approximately 300 basis points below that achieved in the comparable prior year, with the decline split evenly between gross margin pressure and expense deleverage.

Indeed, we expect, as we have experienced gross margin to also be down for the balance of fiscal 2012, including for our spring shipments, as costing remains above the prior-year levels.

Operating expenses are also expected to continue to deleverage compared to last year, due to the higher retail channel mix shift this year, driven primarily by both South Korea and new stores, and the investment in infrastructure related international Ecommerce distribution.

We have also incurred additional investment for the launch of new product categories in the US and Europe.

For the full fiscal 2012 period, we now expect revenues to increase at a high-teens to low-20% rate, which compares to our prior expectation of mid- to high-teens growth.

Our full-year operating margin outlook is now expected to be down 50 basis points from the prior-year period, which is an improvement relative to our prior expectation of a 50 to 100 basis point decline.

We have also revised our expectations of the restructuring charges associated with our Greater China shop network repositioning program, to approximately $5 million for the full year, $4 million of which is expected to come in the second half of the year and mostly concentrated in the fourth quarter.

As a reminder, these costs have consistently been segregated and excluded from our operating margin guidance.

The substantial reduction in anticipated restructuring costs from our original $10 million to $20 million estimate reflects our active management to successfully repurpose or transfer leases, and redeploy staff to other parts of the Company.

Our organization is focused on navigating through global economic uncertainty, while continuing to prudently invest in our long-term strategies of international expansion, direct-to-consumer expansion, and merchandise innovation.

We are extremely proud of our year-to-date accomplishments, and barring any significant economic jolts in the US or Europe, we are comfortable in our ability to once again deliver double-digit profit growth, resulting from our strategies, as reflected in our full-year guidance.

And at this point, we'd like to open up the call and take any questions that you may have.

Operator, can you assist us with that?

(Operator Instructions).

Omar Saad, ISI Group.

Roger, your tone on the macro seems to have softened just a little bit from last quarter, but at the same time, the Company keeps generating really incredible sales results and raising the kind of revenue guidance.

Help us put this into context -- what's really changed about this Company?

I don't think it -- I can't remember these kind of revenue results since the Company was much, much smaller.

Are we at an inflection point?

Or is this sustainable, especially in the context of the macro?

Thank you.

Okay.

Maybe my tone has something to do with I'm sick.

But discounting that for a moment, as we push out around the world, and as you've been a regular follower following the story, I think we just continue to see the global acceptance for Ralph Lauren product, as we've pushed out in Europe or as we're about to make a bigger push in Asia.

And I think all of that we've framed in the past, and we've framed in terms of aspirations about what we thought we could do.

And quite frankly, we're doing that and then some.

One of the real surprises in the revenue story is the very strong domestic growth.

A lot of prior conversations that we've modeled with all of you have talked about our ambition to do one-third of our business in Europe, and one-third in Asia and one-third in the United States.

And that was somewhat predicated on a slow-growth US scenario, given the scale of what we did, the distribution we had, and our belief that the international markets would grow faster.

But lo and behold, as we just reported, the US in this quarter had a high-teens growth rate.

And yes, Europe was double that.

But given the scale of the US business, that's made a meaningful difference to our top-line performance.

And as you know, sometimes size can fight against strong revenue growth without meaningful acquisition.

And that's not our story.

So as we look to continue to push out around the world, I don't think it dims any of our enthusiasm for the upside there.

I think we've just surprised ourselves on the -- both domestic and wholesale fronts, as well as the direct-to-customer fronts here in the United States.

Kate McShane, Citi Investment Research.

Thank you for the detail on the operating margin pressure that you expect on Q3.

I was wondering if you could help me understand some of the dynamics that are happening between Q2 and Q3 -- why you're able to post a much better than expected operating margin in Q2 despite the guidance of 300 basis points of pressure?

And why you're so confident that there's going to be a higher level of operating margin pressure coming -- upcoming in Q3?

Well, I think there are a couple of reasons for it, Kate.

If you just start with the gross profit decline that we experienced in Q2, we expect that that will continue in Q3 and Q4.

So when I gave the 300 basis points of operating margin decline, I had mentioned that half of it was due to gross profit.

The other half is due to SG&A expenses.

And we are continuing to make investments to grow the business in the future, while obviously delivering double-digit growth in the current quarters.

Our growth does slow in the third quarter, some of it related to some of the door network closure in the Asian region that we spoke about, the Greater China region, so -- and we did close a fair number of doors in the second quarter -- and some of it related to some slowing of our business here in the US.

So those two combined lead to greater operating margin decline.

Adrianne Shapira, Goldman Sachs.

Perhaps just a follow-on question there in terms of the margin.

As you had said, Tracey, that you did expect the second quarter sort of evenly split between gross margin and expenses.

And obviously, it sounds like you hit your plan on the gross margin expenses a little bit better.

Maybe share with us, given that this past quarter was the first quarter you saw the full effect of pricing, share with us what you learned in terms of elasticity of demand, as you basically hit your margin targets.

And then a follow-on to that, given some near-term volatility in terms of traffic and sales, and since you've been leveraging better because of those better sales in the second quarter, how should we think about maybe anything you're thinking about contingency plans, as it relates to expenses, if, in fact, sales continue to be this volatile?

Thanks.

I think that was two questions, Adrienne, but we're going to let --

Does our answer have to be as long as your question?

(laughter) Let's talk about the cost of goods and the way it sort of is playing out through the movie here.

We knew from the beginning that during the course of late summer into fall, and then through the back half of this season, costs were rising really in their most spectacular fashion, with this holiday season being sort of the apex of that.

A lot of the suppliers in the early part of price escalation were still blending the prices with inventory on-hand that had not experienced quite as big ramp-up.

That inventory was depleted, and you were now bearing the full brunt of the extraordinary run-up in prices; that's really a big part of what's pressuring the third quarter cost of goods in a greater degree than other quarters.

Of course, as that begins to come back in line, as it plays out over the next nine months, they'll take that high cost of raw materials and they'll begin to blend it in with lower-cost materials, and then it should begin to plane down towards next fall.

So there's definitely sort of a peak of the cost of goods that we'll be experiencing through the next three or four months.

We chose to pass along -- in many cases, but not all cases -- the full impact of the cost of goods.

And that was a decision that was made by merchandise category and by region.

The combination of that for us was a thought process about margin rate as well as sales opportunity.

And I think to Omar's question, part of our distorted sales results through the first six months I think reflect the proper balance we struck between margin rate and sales dollar.

And we'll continue to do that as we work our way through this volatile cost of goods period.

The customer, which I think is embedded in one of your questions, actually has responded very well in most cases to fashion-first.

So if it's new product and they're excited, they buy it, and the relative pricing of that is immaterial.

I think when it's something that catches their attention, that's new and different, that's been a non-issue.

In terms of products that are more perennial or basics, I think there was some deceleration in unit sales for a period, and then that's been climbing back.

The actual results are difficult to draw a final conclusion, given that you're seeing the results of our July/August/September, which are extraordinary; October was a bit of a softer month.

And then the business has come back stronger in November to date.

So I think we're going to need to get through the back end of the holiday selling season to get a final read on customer reaction to all this volatility.

And on your question regarding SG&A, clearly, as we have in the past, if we see a significant slowdown in business, we will look at discretionary expenditures and make determinations on how much of that we can pull back on, whether it's more purely discretionary expenditures or even some of our investment initiatives that we're pursuing.

One of the things I would just remind you of is, as we shift our business more and more into retail, that mixed impact does have a fairly significant impact on both our SG&A rate -- because retail obviously comes with higher SG&A expenses -- as well as our inventory levels.

So versus -- the more we shift mix from wholesale to retail, clearly, higher gross profit margins, higher SG&A, and higher inventory levels.

Michael Binetti, UBS.

So, I just wanted to clarify one thing and then I had a question.

Were there any China closure costs in the quarter?

I think Tracey gave some comments there.

And then I guess my bigger question is, in this quarter, when we look at the margins on the wholesale side, was all the product that shipped in the quarter shipped at the higher prices this quarter?

Or was it -- those prices kick in at some point in the middle of the quarter?

I just wanted to make sure that there's not a calendar benefit to be thinking about in the December quarter here.

And then, finally, any comments you have on how we should think about the new jeans business.

You guys sound like you're getting pretty encouraged by what you're seeing.

And I'd love to know any -- how you look at the size of the global opportunity of that business as you're starting to get into it.

Thanks a lot.

Okay.

I think that was multiple questions as well, but I'll answer.

In terms of the closure costs, we had approximately $1 million of restructuring costs in the second quarter.

The cost of goods really hit us dead center in this quarter, in terms of the true change of the increased costs were fully impacted in this quarter.

Denim & Supply?

Yes.

And in terms of the jeans opportunity, we are off to what we believe is a wonderful start.

I don't know if you had an opportunity to see it in the stores, but the presentation, the product, the sensibility of the product for this brand-new customer for us is pretty exciting.

As you know, with Denim & Supply, we went after a very elevated assortment.

It's a great fashion story for both men's and women's, and we have very high hopes for a very significant denim business worldwide.

We begin here in the United States where, at one point, we had a Polo Jeans Co.

business, which was much more commoditized and very different than what we're presenting in Denim & Supply.

We felt that this content of products would play extremely well worldwide.

So in the US, in Europe, where we have converted from Polo Jeans to Denim & Supply, which is exactly what we've done in Asia as well, has played out very well at this point worldwide.

And we believe that we're in the beginnings of something very exciting.

Bob Drbul, Barclays Capital.

My question is on the retail segment, particularly the full line of Ralph Lauren stores -- [should have been] a sequential slowdown in comps.

I think your guidance for the next quarter calls for another slowdown on the blended comp.

Can you provide some more perspective on the trends there?

And is there a noticeable variation between the US RL stores and the European stores?

Sure, Bob.

The headline I would identify in terms of the performance is really not distinguished by geography; but it's probably distinguished by markets that have important tourist components, whether they're in the United States, or in Europe, or even in Asia, are the ones that outperformed any of the total numbers.

So there is still a meaningful tourist component to gateway cities or tourist cities in Europe, the United States, or Asia.

Quite frankly, South Korea is a tourist destination for Chinese.

So you really have to know that holistically.

I would say the second piece of it is the local domestic customer, whether that's Europe or the United States, was actually slower.

So, footfalls, shopping patterns, in markets that are not considered gateway cities or supplemented by tourists, was softer than average.

So it's been a combination of those two factors really worldwide that make up the mix.

And so as we look out over the holiday shopping period, really over the next six weeks, one of the interesting things is despite the macroeconomic issues and all the other issues we could rattle off together, one thing that retailers don't like to talk about but is true is the weather.

And as the weather has cooled off in Europe and the United States, we've actually seen pretty healthy returns of shopping patterns.

So I don't think it's as much Europe versus the United States or Asia; I think it's more sort of global headline issues.

Evren Kopelman, Wells Fargo.

I wanted to ask about the women's sportswear business, some of the challenges you mentioned in the US.

I mean, it's pretty impressive, your US sales growth, given some of that.

So how much do you think is company-specific or industry-wide weakness in women's sportswear?

And why do you think some of that weakness is, if there are no fashion trends?

If you could comment on that, that would be great.

Okay.

Well, I'll start and then I'll let our fashion guru, Jacki, give you the real facts.

I think women's actually has been, from a sportswear perspective, one of the slower growing categories in the industry.

I think somewhat misleading, though, has been the strength of dresses; has been the strength of accessories; been the strength of footwear.

But I think some of this is, you can't get it in all categories at the same time.

And if I go back several years ago to when sportswear was booming, it was tough dress markets; footwear was not as strong.

So I think women are spending money perhaps slightly differently but not less of it.

Within the Sportswear category, we are the lead resource, both domestically and in Europe.

I was in 5 cities in Europe yesterday.

Our presentations of Lauren, Blue Label, Black Label looked spectacular.

So then I think within the category, it gets into fashion and product specifics.

Jeff Klinefelter, Piper Jaffray.

Jeff Klinefelter Roger, I wondered if there's just a little bit more detail you could provide on Europe, I mean, given the very strong top-line growth trends, I think essentially double the US.

Maybe a little more color on how much of that growth was driven by the new distribution that you've referenced versus sort of organic growth?

And then any color on North versus South --- I mean, outside of the obvious challenges in Italy, any other color there would be helpful.

Thank you.

Okay.

Well, I'll start with the North versus South, where I'll probably say what a lot of others have said.

The North is stronger, so our performance in England or France or Germany or the Scandinavian markets is quite strong.

The southern part of Europe -- and we don't have that much distribution in Greece, but certainly Italy or Spain have been more difficult.

I think it's also for us, it's a particularly difficult quarter, fall, where we're delivering a lot of heavyweight products.

So whether it's the economic realities of southern Europe compounded by this particular quarter is always more difficult for us.

Those markets have underperformed and Northern markets have overperformed.

The other thing that, I guess, we could debate whether it's Europe or not, but our business in territories like the Middle East or territories like Russia have been very strong through this period.

So while we can call them for us emerging markets, we can call them anything we want, the fact is our product and our elevated product in those markets is quite strong.

I think the other subject that Tracey touched on was the more challenging specialty store, multi-brand specialty store business, has been difficult in the southern parts of Europe for several seasons now.

So our business and the strength of our business is really coming out of model brand stores, whether they're owned or joint ventured or licensed, and/or our department store business.

So kind of a country issue and it's also a channel issue.

In terms of new product categories relative to the total growth of Europe, I think what's been surprising to us -- and this somewhat comes back to Omar's question -- when we went into this year, we went in with an investment point of view about new markets, new brands, new product distribution.

And those are all playing out.

The strength of the year-to-date has actually been the core products and core distribution outperforming.

So the bulk of Europe's growth is not in the new businesses yet.

I think those are flags or seeds we're planting for the future that will ultimately give us a lot of growth in the years to come.

It's the core businesses that continue to outperform that are driving the top-line.

Next question.

Joseph Parkhill, Morgan Stanley.

I was wondering if you could talk a little bit more about your South Korea transition progress so far, if that's been progressing up to expectations, both from a sales and margin perspective?

Sure.

The South Korea business came back at the beginning of the year, January 1.

We were fortunate to have a talented management team that was in place, that we kept in place.

But we had less of the start-from-scratch build-a-management-team that we had in other transitions.

We are now beginning to impact the buys, the assortments, the presentations, more directly.

A lot of what was in place was assumptions we made about buys last spring and summer for this year.

The customer has reacted very nice to fashion, to some of the merchandising initiatives.

And we're working carefully with key department stores in terms of future brand position, locations, adjacencies, and the kind of issues you would expect us to do that we've done so well in the US and Europe.

It is a business that should be a big profit contributor to us.

And we are seeing some of that now, but we think there's more to come.

And our final question today comes from John Kernan, Cowen.

Thanks for taking my question.

I just wanted to follow-up on pricing.

How do you see that evolving as the sourcing environment improves a little bit into next year, at least in terms of cotton?

Do you see yourselves keeping pricing on -- the pricing actions you've taken this fall?

Or do you see some maybe pulling back on some of that?

Well, John, the good news is that pricing of cotton is coming back down.

So whatever were the reasons it spiked are now receding.

And so we are looking at reduced cotton prices for next fall.

Just to keep in mind, there are offsets to that, in that cashmere and wool and synthetics actually are rising.

So, while cotton is the dominant part of our raw materials and it's that returning to more normalized levels is really a big deal, there are some other commodities going the other way.

Having said that, by the time we get around to pricing next fall's products, and we look at all the factors that go into that, including make and manufacturing costs, transportation costs, we'll have to develop a point of view about overall costs, not just the impact of the cotton.

If, in fact, as we get through the rest of this fall and holiday selling into spring, if the prices we have today are well received, I don't envision us going back.

So I thank you all for listening.

I apologize for my somewhat scratchy voice.

It's been an extraordinary six months, and we're all mindful of the world we're trading in.

But I think we have had reasons to be pleased with how we've performed during the first six months, and we're kind of excited about seeing what happens for Christmas.

So thank you all, and you can follow-up with Jim and Tracey later.

And ladies and gentlemen, that does conclude today's conference.

We would like to thank you all for your participation.