雷夫·羅倫馬球 (RL) 2013 Q2 法說會逐字稿

Good morning, and thank you for calling the Ralph Lauren second-quarter fiscal 2013 earnings conference call.

As a reminder, today's conference 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 will be given at that time.

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 Ralph Lauren's second-quarter fiscal 2013 conference call.

The agenda for this morning's 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.

Jacki Nemerov, our Executive Vice President, will provide some merchandising highlights.

And Chris Peterson, our Chief Financial Officer, will provide operational and financial details for the second quarter, in addition to reviewing our expectations for fiscal 2013.

After that we will open the call up to your questions, which we ask that you please 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 these 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.

And now I would like to turn the call over to Roger.

Thank you, Jim, and good morning everyone.

I hope that those of you who were impacted by Hurricane Sandy over the past few days got through the storm safe and sound.

As much as we wanted to report our second-quarter and first-half results, the safety of our employees was our first priority, and that required that we delayed the release until today.

As many of you have had a chance to see the results that we reported this morning, we continued to showcase the tremendous resilience of our operating model in the context of the sustained macro headwinds.

Revenues of $1.9 billion in the second quarter were modestly below the prior year, primarily due to strategic changes we decided to make in our business, including the store closures associated with our Greater China network repositioning efforts and the discontinuation of American Living.

If we exclude the impact of those decisions, in addition to the unfavorable foreign exchange effects, revenues increased approximately 3%.

It is also important to recognize that the basis of comparison were pretty formidable.

We achieved double-digit revenue growth in each of the preceding two-year periods.

Operating margins expanded 30 basis points to 18.7% in the quarter, reflecting strong improvements at both our Wholesale and Retail segments.

The improved margin structure of our business was primarily a result of a recovery in gross profit margin that was achieved by the combination of lower input costs, thoughtful pricing strategies and operational discipline.

While second-quarter operating expenses were higher than the prior year, we were able to manage this through our sustained efforts of operational excellence on a global basis.

As you'll recall, we originally characterized fiscal 2013 as the tale of two halves, with operating margin pressure in the first half of the year followed by operating margin expansion in the second half.

And while our year-to-date operating margin performance has been better than we anticipated, expanding modestly, we continue to expect stronger growth in the second half of the year.

Since I know many of you are interested in business trends by region I would like to highlight some of our key observations.

I would characterize the operating environment as mostly resilient in the Americas, where we continue to bolster our leadership position in our core men's, women's and children's merchandise categories, and where we have successfully partnered with our key customers to secure incremental distribution for emerging categories, particularly handbags, footwear, dresses and Denim & Supply.

In Europe, while our most recent experiences suggest that the trends are stabilizing, it is too soon to become more constructive with our near-term outlook in that region.

The southern countries continue to be more challenging than the northern market.

We continue to plan our businesses across all channels responsibly and we will look to chase demand as it materializes.

Over the long term we believe that there is substantial growth for the Ralph Lauren brand throughout Europe, particularly as we focus on our direct to consumer development with new stores and e-commerce growth in the region.

In Asia the operating environment has been softer than we planned for.

Customer traffic to Japanese and South Korean department stores, which is where most of our distribution is currently concentrated, is tracking below the prior-year levels.

We attribute the drop in traffic to the broader economic malaise that is weighing on consumers and business sentiment throughout the region.

Performance at our free-standing stores in Asia is holding up better than our department store location, and we believe that those stand-alone stores will become even stronger as we expand the Ralph Lauren store presence throughout the region.

We continue to make excellent progress resetting our Asia presence by upgrading shop locations and merchandising assortments to better align with our global positioning.

We opened seven stores in the region and launched e-commerce in Japan during the second quarter.

We plan to open an additional 14 stores there in the back half of the year.

As many of you know, extending our direct to customer reach is one of our core strategic growth objectives.

I think the real progress we have made with our retail operations over the last five years is a testament to the ability to continue to raise the bar and establish new levels of excellence and criteria for success.

We have grown our retail mix to 51% of our consolidated sales in the first half of fiscal 2013 from 39% at the end of fiscal 2008, and our Retail segment operating profitability has expanded to 19% from 11% in the same time period.

This progress as a result of the consistent investment along many dimensions, including capital for our new stores, concession shops, enhanced distribution and logistics capability and from launching e-commerce sites and for technology to enhance our in-store experience.

As you saw in this morning's press release, we have made the tough decision to close the Rugby brand.

As a result, we will be closing all 14 stores and rugby.com by the end of fiscal 2013.

This was not an easy decision to make considering the hard work of the Rugby team over the few years and the tremendous loyalty of the Rugby core customers.

We continue to believe that we can service the Millennium Rugby customer with brands such as Denim & Supply and Club Monaco.

And we have the opportunity to drive better returns in our vertical retail concepts by focusing our efforts on brands that have a proven global footprint.

Our year-to-date results demonstrate that we are driving improved profitability by focusing our capital and managerial resources on the most compelling long-term opportunities.

But the external factors we are contending with in managing day-to-day are real.

The macroeconomic environment is mixed at best, characterized by slowing trends in Asia, modest growth in the United States and continued uncertainty in Europe.

We expect these conditions to persist for the balance of the year.

Not withstanding the current environment, we are excited about what we believe we can achieve over the next several years.

And as Ralph said in this morning's press release, our vision and purpose are clear and we have the financial strength and the operational excellence to deliver on a global basis.

Before I turn the call over to Jacki, I just want to express how delighted we are to welcome Chris Peterson, our new CFO, to our organization and today's call.

As many of you are aware, Chris joined us after a rich 20-year tenure at Procter & Gamble in various financial and operational roles.

We believe his wide-ranging world-class skill set will be an excellent addition to our leadership team.

And I know you all will enjoy meeting him soon and working with him in the future.

Jacki.

Thank you, Roger, and good morning everyone.

In the fall season we strengthened our leadership position in our core men's, women's and children's merchandise categories and also continued the strong momentum of our newer dress and accessory businesses.

As you know, the fall season is especially associated with the aesthetic and sensibility of the Ralph Lauren brand.

Given the tremendous success of the color in the spring and summer season, we incorporated brights into the classic autumn palette, which translated beautifully on the selling floor.

Updated silhouettes and strong prints and patterns brought newness and novelty to our apparel and accessory offerings, and the consumer responded favorably.

And, of course, fall coincides with the critical back-to-school selling season where our core programs for boys and girls and our new denim fits and washes for Ralph Lauren Denim & Supply also contributed to our success.

What I think is most impressive about the strong momentum in our core business is that it was achieved on top of already robust increases over the last two years.

As you have heard me say before, our leadership and market position start with the quality of our products, beginning with unrivaled design capabilities realized through the highest quality sourcing and manufacturing and showcased for the consumer with the most compelling merchandising initiatives and exceptional in-store and online presentations.

This seamless collaboration and execution across all disciplines and departments also contributes to our gross margin performance.

As you saw in this morning's press release, we experienced a very strong increase in our gross profit margin during the second quarter.

Most of the increase was achieved as a result of lower cost of goods, primarily a decline in the price of cotton, but strategic and operational elements also contributed to the improvement.

More upfront and coordinated efforts between our design and sourcing teams allowed us to achieve more favorable leadtimes and costing to produce and ship our merchandise.

We also saw improvements in supply chain, where we more effectively leveraged our distribution centers to provide a higher level of customer service to our retail partners, while simultaneously reducing costs.

With more direct control of our worldwide distribution we believe we have the opportunity over the long term to establish larger and more global merchandising initiatives that not only support the incremental gross margin expansion, but also deliver a cohesive and impactful brand message to the consumer.

Additionally, to support the growth of our handbag and footwear businesses we have strengthened our in-house capabilities in Europe and Asia to more efficiently and effectively develop prototypes and samples.

We believe this investment will continue to fuel our innovation in these high-growth categories, and it certainly reflects our commitment to building a powerful accessories business.

Seamless execution has always been a core strength of the Ralph Lauren organization, and the excellent work of these teams continue to leverage our world-class best practices and help to support our profit expansion.

We expect additional gross profit margin improvement in the second half of fiscal 2013 as a result of lower raw material costs, more ready availability of production capacity and ongoing improvements to our global supply chain and logistics processes.

As we begin the holiday season you all know there is no better gift to give or receive them the gift of Ralph Lauren.

The power, equity and aspirational nature of our brand make the holiday selling period a historically strong one for us, but we never rest on our laurels.

This year we leverage the appeal of the brand and the breadth and depth of our product offering across our men's, women's, children's, accessories and home lines to ensure that we stand tall among the many choices before the consumer.

With our strategic partners we continue the successful approach of a focused holiday merchandising story built upon distinctive, creative capabilities that our Company holds.

Our products and marketing messages will be strong and clear across all consumer touch points in store and online.

And this approach so long associated with the Ralph Lauren brand has also been extended to the Chaps brand, where we expect it will resonate just as well.

Across all families of business we are well-prepared for a powerful selling season.

And now I would like to turn the call over to Chris.

Thank you, Jacki, and good morning everyone.

It is a pleasure to be speaking with you this morning on my first earnings call as the Company's CFO and I look forward to meeting many of you over the coming months.

As you have seen in this morning's press release, consolidated net revenues were $1.9 billion in the second quarter, 2% below the prior-year period and better than the mid-single-digit decrease we anticipated back in August.

The decline in net revenues primarily reflects a planned contraction in wholesale shipments that was offset by continued Retail segment expansion.

Excluding the impact of strategic decisions to discontinue American Living, store closures associated with the Company's Greater China repositioning efforts, and the net negative impact of foreign currency translation, revenues increased 3% in the second quarter.

Gross profit margin of 58.8% was 220 basis points greater than the prior year, which was slightly better than our expectations.

The improvement in gross profit margin is attributable to lower input cost, higher Retail segment penetration and operational discipline.

Operating expenses of $747 million were 3% greater than the prior-year period, driven by continued investment in our growth initiatives, higher retail channel mix and increased advertising and marketing expenses.

Operating expense rate of 40.1% was 190 basis points greater than the prior year, but was better than our initial expectations for the quarter, primarily due to the operational discipline of the organization.

Operating income of $348 million was 1% below the prior-year period.

Operating margin improved 30 basis points to 18.7%, a function of the gross profit and operating expense dynamics I discussed previously.

The lower-than-expected operating expense rate accounted for most of the upside to the operating margin outlook we provided in August.

Net income for the second quarter was $214 million, 8% below the prior-year period, and income per diluted share declined 7% to $2.29.

The lower net income and net income per diluted share were primarily a result of a higher effective tax rate of 38%.

The nearly 500 basis point increase in the second-quarter's effective tax rate is attributable to the net negative impact of an approximate $15 million one-time discreet tax item in the quarter.

Regarding our segment highlights for the quarter, Wholesale segment sales of $915 million were 8% below the prior-year period, as a proactive reduction in shipments to certain European specialty stores and the net negative impact of foreign currency translation more than offset continued growth in core and emerging merchandise categories in the Americas.

Comparisons with the prior year were also challenged by the discontinuation of American Living in fiscal 2013 and the global launch of Denim & Supply in the prior-year period.

Wholesale operating income of $233 million in the second quarter was 4% below the prior year.

Wholesale operating margin increased 120 basis points to 25.5%.

The improvement in wholesale operating margin was primarily due to higher gross profit margins as a result of lower input cost and overall operational discipline.

Moving on to the Retail segment, second-quarter sales rose 5% to $901 million, supported by a 3% increase in comparable store sales on a reported basis and 5% in constant currency, as well as the contribution for new stores and e-commerce operations.

Sales trends were strongest online and at factory stores worldwide, and growth was partially offset by store closures associated with our Greater China network repositioning efforts.

Our 5% constant currency comp growth in the second quarter was achieved on top of challenging multiyear comparisons.

Despite lackluster global traffic trends, particularly in the world's gateway cities, comp growth was primarily achieved as a function of stronger conversion, which is a direct reflection of our world-class customer service and clienteling efforts.

Retail segment operating income grew 8% to $157 million in the second quarter, and the retail operating margin increased 60 basis points to 17.4%.

The improvement in retail operating income and the expansion in operating margin are primarily due to comparable store sales growth and disciplined operational management that more than offset continued investment in global e-commerce and the impact from our Greater China network repositioning efforts.

Licensing revenue were $47 million in the second quarter, 3% below the prior year, due to the discontinuation of certain American Living and South American licensing arrangements.

As a result of lower licensing revenues operating income for the Licensing segment declined 2% to $35 million.

Consolidated inventory was up 7% at the end of the quarter on a reported basis.

And we spent approximately $55 million on capital expenditures to support new retail stores, shop installations and infrastructure investments.

We ended the quarter with approximately $1.1 billion in cash and investments and $832 million in net cash.

In the fiscal year-to-date period we have returned approximately $355 million to shareholders through a combination of share repurchases and dividend payments.

We are pleased with our second-quarter results and first-quarter -- and first-half results, which demonstrate the strong operational discipline of the organization in the context of challenging market conditions.

As Roger mentioned earlier, while we exceeded our sales and profit expectations for the first half of the year, we continue to expect fiscal 2013 to play out as a tale of two halves, with the second half characterized by stronger year-over-year results.

While it is too early to determine the full impact from Hurricane Sandy, we have tried to make reasonable assumptions based on what we know today.

We know that when the storm first hit on Monday 81 stores, representing about 20% of our directly operated store network, were closed.

We also saw some disruption to the e-commerce business as many customers were without electricity.

Reopenings have been staggered throughout the week, depending on safety conditions and the availability of electricity.

Approximately a dozen stores remained closed as of this morning.

I do want to acknowledge the tremendous achievements of our various corporate and retail store organizations, whose heroic efforts in the face of such adversity has enabled us to chart a course to recovery relatively quickly.

At this point we know we have lost a modest amount of revenues for the third quarter, but there are still some uncertainty with respect to the lingering impact the hurricane might have on future sales trends.

With that as backdrop, I would like to review the financial outlook we provided in this morning's press release.

For the third quarter we currently expect consolidated net revenues to increase by a low-single-digit percentage.

Our expectation is based on a mid-single-digit increase in Retail segment sales that is partially offset by a low-single-digit decline in global Wholesale sales.

Included in our consolidated net revenue growth outlook for the quarter is an approximate 400 basis point net negative impact due to strategic decisions regarding certain operations, including store closures associated with the Company's Greater China network repositioning efforts, the discontinuation of American Living, and unfavorable foreign currency effects.

Operating margin for the third quarter is expected to be approximately 25 to 75 basis points greater than the prior-year period.

The anticipated improvement in operating margin is primarily attributable to gross margin improvement that is partially offset by continued investment in the Company's long-term strategic initiatives and higher retail channel mix.

We expect the third-quarter tax rate to be approximately 29% due to the recent favorable resolution of a discrete tax item.

For the full year fiscal 2013 period we currently expect revenues to increase by 2% to 3%, which compares to our prior expectation of mid-single-digit growth, and includes an approximately 400 to 500 basis point net negative impact associated with strategic decisions regarding certain operations, including store closures associated with the Company's Greater China network repositioning efforts, the discontinuation of American Living, and unfavorable foreign currency effects.

The moderation in our full-year revenue outlook is primarily a result of weaker than anticipated store trends throughout Asia, in addition to sustained weakness in tourist travel to major gateway cities in the US and Europe.

The full-year operating margin is expected to be approximately 50 basis points greater than last year, which is an improvement relative to our prior expectation of only a modest increase from the prior-year's level.

We anticipate an improvement in gross profit margin to be partially offset by higher operating expense margin due to continued investment in the Company's long-term strategic initiatives and higher retail channel mix.

We continued to estimate the full-year tax rate at approximately 33%.

The third-quarter and full-year fiscal 2013 expectation that I just outlined do not include the estimated $20 million to $30 million in one-time pretax charges associated with the discontinuation of Rugby operations in the back half of the year when we will close the 14 existing stores and the e-commerce website.

We expect to incur approximately 75% of the charges in the third quarter with the remainder booked in the fiscal fourth quarter.

As Roger alluded to earlier, we remain committed to reinvesting in the business in order to fund the growth initiatives that have supported the Company's strong financial results over the last several years.

The ability to balance support for long-term growth initiatives with the strong execution of day-to-day core operations has been a critical part of the Company's success over the past several years, and has also been an important driver of substantial shareholder value creation.

At this point we would like to open up the call and take any questions you may have.

Operator, can you assist us?

(Operator Instructions).

Omar Saad, ISI Group.

Roger and Jacki too, I think, would you guys mind addressing this idea that we are in this -- globally we might be in this -- consumers might be in this kind of accessories boom as we think about the accessories business versus the apparel business?

Obviously, Ralph Lauren is still primarily an apparel-driven Company, but especially on the women's side, do you see that happening in your consumer base this kind of shift away from apparel or to maybe lower-priced apparel in terms of the wallet and spending towards more investment in accessories and footwear and things like that?

And is that -- do you think that is having an impact on your business?

How do you see that going forward?

Do you think it is cyclical or structural?

And your efforts around the accessories business as well, how important has that become, if that is really what is happening?

Okay, I will start and then I will let Jacki continue.

I think it is pretty common knowledge that the concept of accessories broadly defined has been an important growth category for the industry now for a while.

And whether that is accessories at luxury prices or what is called affordable luxury, or even at more moderate prices, I think the accessory category has clearly outperformed apparel, and specifically women's apparel, for a while now.

I think in defining accessories you have got to open it up to a range of products that include handbags, small leather goods, but clearly footwear has been a strong category for the last couple of years -- watches, eyewear and even more broadly I think cosmetics.

So with that I think a female customer can express herself, freshen her wardrobe and accessories has fulfilled that.

Interestingly enough it is not dissimilar to the way Europe evolved over time where a customer was more willing to buy a handful of high-quality investment pieces in apparel and then used accessories to keep them fresh.

I think the other part of accessories that you all understand is that for emerging markets with new wealth accessories, and particularly signature accessories, are a way of people showing their success and their arriving more easily than apparel.

So whether that has been the Middle East, whether that has been Russia or whether that is now Asia, specifically China, I think the customer who is finding wealth is expressing themselves through either signature or easily identifiable high-end product.

The mix of our business at Ralph Lauren I think uniquely includes all product categories.

So we are seeing business from that customer in apparel, be it men's or women's, or even the extraordinary success of our kids' business, because I think customers as they acquire spending capabilities are spending it on their children, particularly in countries that have limited birth rates.

So interesting enough you have parents and grandparents all focused on one child, that tends to drive up their willingness to spend on apparel as well.

I think our accessory businesses are in early stages.

We have taken back many of the key licenses over the last five or six years.

We have developed sourcing capabilities.

We think the Ralph Lauren aesthetic translates beautifully into accessories.

And where we have partnerships or licensing relationships with Luxottica or partnerships with Richmond or L'Oreal, I think we are with world-class, best-in-class partners.

So I am very pleased with where we stand and where we're going.

One of the interesting realities of our results to date, both the extraordinary margin in wholesale and the extraordinary margin we now operate in retail is without high penetrations of accessories, which properly executed brings with it higher profit margins.

So I think we are making good progress.

I think we're making quality progress.

I don't think we are looking to jam this business artificially in the early stages.

And my guess is over the long term it is going to be a very big part of what we do, and that will be more prevalent in Asia and some of the emerging markets than perhaps some of the more mature markets.

But I don't want to back off the apparel business.

I think we are very pleased with the way we have got our market share and our positioning in all of the key apparel categories.

Long answer, but it was a long question.

Micheal Binetti, UBS.

Congrats on a great quarter.

Just one modeling question and then I will have a follow-up.

I think -- I thought you said last quarter that the three items that you mentioned as one-timers -- the China store closures, FX and American Living -- would be a little bit higher in this quarter, about a 700 or 800 basis point drag to revenues.

It looks like you are only about 500.

I just want to see if any of that was pushed back onto the back half or if there is any other change that I might have missed.

And then, but more importantly, Roger, as you think about all the work that you have done with the Company to establish Ralph Lauren as a luxury business over the last few years, obviously, it is the more mainstream brands like the Polo brand are a huge input to the profit story for the Company globally.

Do you think there is an opportunity to, I guess, even boost the focus on that side of the business over the next year and refocus on some of those big profit drivers now that you are more -- I guess, more established as a luxury player?

On the modeling question I will address that and then turn it over to Roger.

The real difference between the three items, the 700 to 800 basis points in the guidance and what we reported was FX, which strengthened a little bit from when we gave guidance last time.

So that accounted for the difference.

FX was just better than we expected when we gave guidance previously.

Yes, the known effects of the store closures at American Living are very clear, so it is really just the movement of the FX, as Chris said.

Michael, I think your question is spot on, and I think we as a Company feel that the core brands, or the brands such as Polo, have enormous legs on a global basis.

And one of the internal discussions we are having at the very moment is how to make sure we are properly focused to capture the extraordinary appeal of some of those brands.

And while we don't want to back off the incremental luxury positioning, either in retail or product developments that Jacki has alluded to, absolutely brands such as Polo and others are bedrock for us.

And we are looking at how to accelerate their position and growth now, whether it is distribution ideas or marketing and branding ideas.

So I think you'll hear more to come in the next couple of quarters about strategies we hope to employ to focus on those.

Liz Dunn, Macquarie Capital.

Congrats on a little bit better quarter than anticipated.

My question is for Chris.

What are your initial impressions of some of the opportunities there are to evolve the CFO role?

And I was wondering if there is any change in the scope of the role or the reporting responsibilities versus what was in place previously?

I guess I will start by just giving you a little bit about why I chose to come to Ralph Lauren and my initial impressions after being here for six weeks, which are really the same.

First, I was very impressed with the iconic nature of the brand and its equity, including the ability to stretch across both price tiers and merchandise categories.

The second thing that I was impressed with was the management team.

I think the Company has a very strong senior management team and one that I am excited to be joining.

And then, third, I would say is I think the Company has significant growth opportunities, both in terms of international penetration as well as new merchandising categories such as accessories and footwear.

In terms of the specific question on the role, the scope of the role is very similar to the scope previously that Tracey had.

And the reporting relationship remains the same, I report to Roger.

Liz, are you implying you want Chris to report to somebody else?

No, I was asking about any changes in reporting up to the CFO.

I am sorry.

So there are no changes with regard to who reports up to the CFO.

Yes, I think I would add to that, you know, Chris has been very impressive in six weeks and I don't want to put pressure on him, but he is really a fast study and has made his presence felt.

We are obviously in the early stages of thinking about next year's planning process and Chris will really lead that.

He is also going to be taking a world trip starting next week that will take him from Europe through all the key points in Asia and back to the US sometime right before Thanksgiving.

So I think Chris is going to be a very active participant with the business units, with the corporate finance people.

And his impact, I believe, as a business partner to the IT function, which is critical to the future of the next part of our growth, will be felt very quickly.

So no pressure, Chris, but he is off to a good start.

David Glick, Buckingham Research Group.

Chris, just a quick modeling question and then a follow-up with Roger.

What is the comp assumption embedded in that mid-single-digit increase in Q3?

And then, Roger, can you update us on what is going on in the pace of store openings in China?

I believe you said you were going to open 15 stores in the second half of this fiscal year.

If you could give us a sense if that is still on track and how you anticipate that rolling out over the next couple of years.

And, also, kind of the size of the stores that you're anticipating so we can try to put some rough numbers around what these stores can produce.

I guess on the modeling question, I think we want to stay from a guidance standpoint on an all-in basis.

So I think we're not going to go to providing the comp guidance at the Retail segment.

We expect mid-single-digit growth in overall revenues for the Retail segment, as we reported in the press release.

I think one of the things to keep in mind is that we will be winding down against the China repositioning in the third and fourth quarter when the bulk of the stores were closed.

And clearly the wind-down of Rugby over the balance of this year will be sales drags, but we are actually seeing the business opportunity in the back half of the year against softer comps as more robust.

The pace of opening in Asia is -- our original annual target was 20 stores.

We have opened seven to date, so we have 13 in the back half.

That may move around by one or two depending on a variety of situations.

Our strategy there is not dissimilar from Europe or the United States.

We are looking for key flagship hubs in the major markets, and then we will network around them with smaller footprints from 5,000 to 9,000 feet that will primarily be located in malls, because the markets in China are really evolving into mall-based shopping experiences.

The flagship opportunities are harder to come by.

We have a couple in discussion.

So the bulk of the 20 stores at the moment for this year are primarily in the 5,000 to 10,000 foot range, a combination of men's and women's luxury stores, as well as a few children's stores, and a couple men's only and a couple women's only.

So we should have a good read on how that first 20 stores is being reacted to by the customer by the middle of the spring.

And I think that will be a good time for us to get sufficient customer feedback to make sure we are on the right path.

Erinn Murphy, Piper Jaffray.

Great, congratulations on a very strong quarter.

And welcome to Chris to the team.

I was just hoping, both Roger and Jacki, maybe you could just elaborate a little bit more on some of the prepared remarks you e made on the global merchandising initiatives.

Can you just speak more about what that process is, what the benefit may be?

And then how are you thinking about global SKU density in that context?

And then a quick clarification, Roger, for you.

You mentioned at the very beginning of the script talking about things -- some stabilization in Europe.

Could you maybe just parse that a little bit more by region kind of what you are seeing there?

That would be very helpful.

Thank you.

So, Erinn, what we are really focused on is transitioning our Company from a more US-centric company to a global company.

And what we recognize certainly is that all of our critical regional components have very important voices as to how we succeed in the future as a global company.

In order to accomplish that we have reestablished our merchandising divisions to support those global roles with key personnel involved from every regional area.

So as we make our decisions we are making them as worldwide decisions rather than US-centric decisions that have bolted on European or Asian influences.

And what we are finding is that the world is primarily 80% the same, but those 20% variations are very important to capture the voice of our international customer.

We certainly know that customer is traveling around the world.

We want our footprint to look the same, but yet there are regional nuances that we believe are very important to state in each market, and that is our approach.

In doing that we have also seen some efficiencies that have come out of that structure and -- regarding SKU efficiencies and being able to have more impressive quantities behind each style decision.

So all in all, while we are in this for approximately a year at this point, we still believe we are in early stages, but we are very encouraged with what we see as the outcome.

Let me try the Europe question.

Second quarter for us was a little better than first quarter in Europe, although the general statement I made, which is the northern markets are better than the southern markets, continue.

In our definition of Europe we also include the Middle East and Russia.

So those two markets have continued to be strong, have continued to perform well, whether in their home markets or whether those customers are traveling to Europe, so that is a particular bright spot.

And almost like a heat map from the Scandinavian markets moving down, the strength of the business there are has continued.

I think what has occurred in some of the southern markets is there is less panic perhaps over Italy and Spain.

And I am discounting the disruption in Greece, because it is a relatively minor part of our business.

But I think there is a sense that those markets, while difficult, there is a pathway for recovery.

And so while those markets continue to be softer than others, I think we're beginning to see the customer breathing again and being willing to function.

They are very different markets.

Italy is almost entirely specialty store-driven and Spain is dominated by big department stores.

So the specialty store market in Italy is still being run by small mom-and-pops and is more cautious in their forward purchasing.

They don't really want to buy new product until they have sold the existing product.

And so we have been cautious about what we are willing to sell into that market in an effort to be responsive to their situation, also to be mindful that we want to get paid.

So with that we continue to operate cautiously, but we are seeing a bit of a comfort with the customer as financial decisions are being made that gives some backstop to the consequences of the euro.

So we will see.

I think the holiday season will be particularly important.

We still don't have large penetrations of Chinese tourists as other brands do.

And in their reporting much of their either growth or results are underpinned by 25%, 30% or 40% Chinese tourists.

Our Chinese tourist penetration in Europe is still less than 2%, and I don't think it will get larger until we are better represented in China.

So they know our brand, they understand our brand, and then when they travel they will look for our brands in capital cities.

So that is still to come in the years ahead.

John Kernan, Cowen.

So I wanted to ask a little bit longer-term thematic type question.

And the theme of you guys taking direct control of your brand and the profitability impact that has, the retail operating margin has obviously been on a tremendous upward trajectory essentially since 2010.

And with all the emerging category expansion, the e-commerce growth and the eventual China expansion can the profitability of this business reach similar levels to what the wholesale side of the business generates now, you know, looking multiyears out?

And then keeping on that directly controlled theme of your brand, the Chaps license, what your plans are for potentially directly operating that business too.

Thanks.

All right, I am going to start with the thematic question and I'm going to let Chris answer the specific one.

We have extraordinary wholesale margins that.

There aren't any people I know about who are primarily apparel-driven that run margins in the 25% range.

And I think that it is unrealistic to believe that we will get there in retail without a meaningful mix of accessories which should come with higher margins over time.

So the real sign of that possibility will be determined by our ability to create store layouts that are productive with high allocations to accessories, while still giving quality representation to our apparel.

I think the kind of high-teens margins we are running in retail now primarily in luxury apparel is pretty astronomical.

So I think it is going to be driven off a mix change and regional development, because as I have said before, I believe long-term the regional opportunities for retail in Asia should be high-profit contributors.

And I think the fact that we've taken back these geographic territories or product categories and been able to manage them is embedded in why we have done so well over the last five or ten years in good times or bad.

Chris, do you want to try the Chaps question?

Yes, I will try the Chaps question.

So I think as most of you know, we have a license agreement with Warnaco for the men's sportswear business for Chaps.

That license agreement has a change of control provision in it that gives us the option to take back the business in the event of a change of control of Warnaco.

Given how recent the news is, we haven't made a decision at this point, but we are in the process of evaluating options with regard to that business, and we will provide an update in due course once we get through that process.

Barbara Wyckoff, CLSA.

Hi, everyone, good job.

My question is on Denim & Supply.

What do you see as the successes and challenges when you're in -- you know, can you talk about domestic versus international?

And then as part of this, how many doors do you have by region wholesale plus owned stores?

Well, we are very pleased with the initial response over our first year in Denim & Supply.

As you know, this is our second fall season.

And as you develop a brand, because of the cadence of purchase and sales you literally can't make any changes and tweak a brand for the first nine months or so.

So following our initial launch with what we thought were positive results and what we thought would be things that we needed to change, one of the biggest standouts to us was how positive the jeans business is, as we presented Denim & Supply as a lifestyle brand.

So we are working diligently now, having identified what those key products are, and now we are putting in BSR programs in both men's and women's in our core denim to be able to drive that opportunity to be a minimum of 30% of the business, highly successful and highly predictable.

The attitude of the brand, driven by the gritty nature and unusual presentation in our marketing context, both in print and online has been extremely successful.

We partnered with Vichy, and he has created a very interesting draw for the brand.

He is a highly successful entertainer and he has really created tremendous crowd draw to this brand and to its success.

We have had a very positive fall season, and while we continue to tweak a little more of this and a little less of that, we are very optimistic.

As you know, the brand in the US is exclusively in Macy's.

That will be rolling out to additional 100 doors starting next fall, and to Hudson Bay in Canada where we are also experiencing some very positive results.

And at this point we have confined the brand to those two key customers.

As I said, we're very optimistic on our position for the millennial customer, which is a high focus area for our department store customers, and one that we believe will be, with this Denim & Supply brand, a strong reach towards that customer and driving additional opportunities into our department stores.

We also have launched our Denim & Supply brand internationally beginning with free-standing stores in both Asia and in Europe, and those also have performed extremely well.

In that environment instead of having men's separate from women's, which is sort of the requirement of the nature of a department store, there we are able to merchandise the brand together, and with a very exciting impact where the consumer -- really it is the place to be.

So the customer is shopping with significant other in the store and it has a tremendous pulse and a great result.

And as I said, we are very pleased with where the first few stores are at this point, and I think we have plans for many stores to follow.

Robby Ohmes, Bank of America Merrill Lynch.

Actually I have two very quick questions.

Roger, I wanted to ask you actually on Rugby as a follow-up.

You mentioned, I think, in your comments that it was a tough decision.

Is there anything you can tell us -- was there a strategic decision behind that or what pushed you over the edge?

And is it a commentary on how you see smaller brands out there or brands that are too US-centric?

Maybe just your thoughts on that.

And then just a quick follow-up for Jacki would be, could you maybe give us a little more detail on the approach in North America for holiday this year versus last year in terms of where you see -- you know, pushing by channel and inventory investment versus last year?

Thanks.

It was a tough decision because we put a lot of time, energy and money into this brand over a number of years, and I think that comes with a lot of heart and a lot of personal effort by a lot of people in the Company.

Our decision at this point was really based on our desire to focus on opportunities that we have in front of us.

And I think Michael talked about this a little earlier in terms of Polo and some of the other brands.

I think our conclusion was to take our energies and our resources and apply them against existing brands that have a global footprint, as opposed to the ongoing efforts to build something from scratch.

I think to build a brand from scratch organically in a brick-and-mortar retail environment takes a lot of time and money and energy, and I think the Company's decision really just reflects the numerous choices we have to expand some of our other initiatives, one of which Jacki talked about, Denim & Supply or Polo or children's or even at RRL.

And I think in the past many of you have talked to us about focus and are we focusing on the right issues.

And I think in our decision-making it was relative weights of opportunities and the expected returns we anticipate getting.

So that was all part of our decision.

The second part of your question, I think, is directed to Jacki?

Yes, on our approach to holiday.

So in our retail stores where our thoughts start, we had a very crisp approach to a very strong and bright statement in our holiday accessory business.

It is what do you want to buy for yourself and what do you want to buy as a gift?

So that starts off our first question to ourselves, and I think we have put together a very exciting presentation of product that begins to roll out into the stores this -- between November and of course early December -- that speaks to that.

That is -- that story is really supported by a fabulous holiday mailer, which speaks directly to our VIP clientele for our Ralph Lauren stores.

Our holiday approach in department stores is a very crisp and very direct approach to what we want that customer to buy.

So we are crystal clear when we determine what we want to set it up -- set up -- how many colors we want to set up, where does it sit on the floor?

How do we speak to the customer with that specific item?

We try to create a lot of ease of shopping and at the same time a lot of excitement as to what we are presenting.

We back that up with all of our strategic partners with critical marketing that speaks both in-store and online to those special items and those key purchases for the holiday season.

And I think we have put together an extremely appealing assortment as we enter into this critical holiday period.

We are armed and dangerous.

Okay, with that I would just like to again reinforce my thanks for the hard work that everybody within our Corporation has extended to those affected by this unfortunate hurricane.

I would also like to again welcome Chris, and know that as he and Jim plan the next couple of months of a listening tour, I think you will all get to know him and enjoy him as much as we have already.

And with that I hope you and your families are safe and warm and dry.

So thank you very much.

I appreciate your attention.

That does conclude today's conference.

We thank you for your participation.