雷夫·羅倫馬球 (RL) 2013 Q3 法說會逐字稿

Good morning and thank you for calling the Ralph Lauren third-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 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 third-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 some of 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 third quarter, in addition to reviewing our expectations for fiscal 2013.

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

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

Forward-looking statements are not guarantees and our actual results to 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 different differ materially from our current expectations are detailed in our SEC filings.

And now I'll turn the call over to Roger.

Thank you, Jim, and good morning, everyone.

We're pleased to be reporting better than-expected third-quarter and year-to-date profits this morning.

Operating income rose 17%, and diluted earnings per share was up 35% -- excluding the Rugby-related charges -- on sales growth of 2% in the third quarter.

The strong profit flow-through really showcases the operational excellence of our global teams.

Proactive and prudent planning, including thoughtful pricing and merchandise strategies and disciplined expense management, enabled us to improve our profitability despite sustained microeconomic issues and several disruptive events in the three-month period.

During the quarter, revenue momentum was strongest at RalphLauren.com, Club Monaco, factory stores worldwide and (technical difficulty) core North America wholesale operations.

These topline trends were enhanced by excellent margin dynamics, a clear indication that we are gaining profitable market share in areas we are already very strong.

We also experienced better trends out of Europe, where third-quarter revenues increased 8% in constant currency, led by growth at our retail operations.

Momentum in the Americas and in Europe more than made up for the weakness in Japan and South Korea concession shops during the quarter.

Club Monaco had a strong worldwide performance, a function of strong comp growth and expanded distribution, which is now included in the wholesale channel in Europe and e-commerce in North America.

Both new and loyal customers are gravitating towards Club Monaco's compelling and unique merchandise assortments and in-store experience.

Our year-to-date results demonstrate that fiscal 2013 is actualizing as the tale of two halves we described to you at the beginning of the year.

Higher input costs and certain strategic decisions that weight on sales and profit growth in the first half have transitioned to an improving profit growth story in the second half; supported by lower input costs, continued market share gains in North America, and the incremental contribution of new stores and e-commerce platforms.

This is happening even as we continue to make important investments in our long-term strategic growth initiatives.

We've made good progress on our core initiatives, which are focused on the revenue side on extending our direct-to-customer reach, expanding our international presence, and innovating with new merchandise categories in the year-to-date period, while investing in our world-class infrastructure supported by a fortress balance sheet.

Our focus on these strategies lead us to expect more of our future growth to come from our retail operations, as we are allocating a growing portion of our capital investment to retail development.

We are funneling resources to our highest potential opportunities, particularly in e-commerce and in Asia.

We've had to make some hard choices in resource allocation; and in the process, such as closing Rugby, we believe these thoughtful decisions position us better for future growth.

During the third quarter, we expanded our global e-commerce capabilities, leveraging our existing European sites to service Italy, Greece, Spain and Portugal.

Today we are servicing customers online in 11 countries throughout Europe.

Two recent launches, Ralph Lauren in Japan and Club Monaco in North America, have gotten off to strong starts and confirm the growing importance of e-commerce.

We continue to invest in this expanding online reach, particularly in Asia.

Korea will be launched later this year, followed by China.

As this year's holiday industry sales figures attest to, the continued shift in the customer's preference to shop online is undeniable.

Industrywide, online sales expanded at double-digit rates, as brick-and-mortar stores struggled with sluggish customer traffic trends.

Sales on smartphones and tablets are growing at an even faster rate.

Traffic to ralphlauren.com from mobile devices was up 35% in the third quarter, and gained 500 basis points of sales penetration compared to the prior year.

The tremendous growth of our brand sales online is not limited to our own sites.

We have experienced excellent growth with our most important wholesale customers, and we continue to invest in deepening those partnerships as e-commerce becomes more important to them.

The incredible dynamism of e-commerce requires that we continually reinvest in upgrading the customer experience and improving customer service levels in all aspects of the business; particularly in people, technology, infrastructure and marketing.

With the continued strong growth of our North American e-commerce operations, we have made the determination to intensify our support of the business by purchasing our distribution center in North Carolina, and beginning a project to double the size and capacity of the facility to over 800,000 square feet.

We are contemplating our e-commerce efforts with the continued expansion of our brick-and-mortar store network.

Our more recent store development efforts have primarily focused on marquee locations that appropriately showcase our most elevated Purple Label and Black Label assortments worldwide.

Based on the tremendous demand of our Polo, women's Blue Label and children's merchandise, we believe there is a compelling global opportunity to open Polo Ralph Lauren stores that maximize the extraordinary appeal of these brands.

Our past experiences suggest that when we are able to present our products in customized retail environments that really communicate Ralph's lifestyle vision, the customer rediscovers the world of Ralph Lauren in impactful new ways.

So beyond the obvious benefits to our global retail development efforts, we believe a more compelling showcase of creativity and innovation supporting Polo, women's Blue Label, and children's wear would be positively received by our global customers.

The investments we've made to create the world's most fantastic shopping environments and enhance customer service experiences, both online and off-line, have supported steady retail segment profit margin expansion over the last several years.

The third quarter was no exception, with retail segment margins improving 60 basis points, excluding the Rugby charges.

Improved profitability was achieved despite lackluster customer trends during the quarter.

The 4% increase in global retail same-store sales is a testament to the success of our customer service and clienteling efforts, which ultimately delivered improved conversion and higher average dollar transaction size across most of our retail formats.

I believe our third-quarter performance, particularly the strong profit flow-through, confirms the vitality of our brand, the relevance of our strategy, and the world-class capabilities of our management team.

Our robust profit growth demonstrates the strength of our operating model in the face of a unique set of challenges, particularly in the United States, where consumers were distracted by a highly contentious presidential election and tremendous anxiety regarding the fiscal cliff; and where we experienced considerable disruption from Superstorm Sandy.

I'd like to acknowledge the extraordinary effort of our organization in dealing with Sandy, because I think the tremendous level of engagement and responsiveness really speaks to the heart and the character of our Company.

Ralph and I are proud of how our teams rallied to get the business back to normal in short order, especially during a time of significant personal disruption for many of them.

And the team's energy wasn't just focused on the business.

It was also channeled into helping out our colleagues in need in the communities in which we operate.

Hundreds of employee volunteers committed thousands of hours to assist the recovery and relief effort.

The Company donated of tens of thousands of essential garments and warm weather items.

And the Lauren family, the Polo Ralph Lauren Foundation, and our employees collectively donated over $2 million to a variety of charities dedicated to improving the lives of those affected by the storm.

The resilience, passion, and optimism that was evident in how our team managed through Sandy is an inspiring reminder of the remarkable fabric of our organization.

Chris will walk you through the outlook for the balance of the year and provide some perspective on how we are planning fiscal 2014.

But I want to underscore our commitment to investing in our key growth initiatives and our focus on monetizing those investments into strong returns for our shareholders.

As Ralph said in this morning's press release, we have a successful track record of investing for growth.

And with $1.4 billion in cash and investments on our balance sheet, we certainly have the liquidity profile to stay the course with our key initiatives.

And now I'd like to turn the call over to Jacki.

Thank you, Roger, and good morning, everyone.

As our third-quarter results attest, we had a superb holiday season.

The power of Ralph's vision and the strength of our product gave us the confidence to plan for robust growth across all distribution channels and in key regions, particularly in our core merchandise categories.

Despite the weak operating environment that Roger spoke about earlier, the loyalty our brand enjoys is unique.

And based on our third-quarter performance, I think it's fair to say that our confidence paid off.

I mentioned in November we were executing a two-pronged merchandising strategy to capture both self-purchase and gift-giving occasions.

We offered exceptional merchandise across all product categories from the most luxurious items at our Ralph Lauren stores to robust assortments in department stores worldwide; thereby effectively leveraging the powerful equity and universal desirability of our brand.

Our Holiday Bright story was extremely successful, and beautifully combined strong fashion pieces, key items for a cohesive offering that struck just the right chord with the consumer.

This approach was highly effective, particularly for our core men's, women's and children's offerings.

Across all brands tiers, the strength of the product, the clarity of our key item strategies, and the compelling value proposition clearly resonated with the customer.

As we become a more globally oriented company, our merchandising teams are achieving an increasingly stronger and more consistent product message, while still responding to important regional considerations for fabrics, weight, color and fit.

Based on our success this holiday season, I believe the greater global coordination of our merchandising teams is something we will continue to leverage.

Our product as presented to the customer is another important focus for us, since this is where Ralph's vision truly comes to life.

Our strong collaboration with both retail and wholesale partners ensured that our product and merchandising strategies were supported by best-in-class in-store and online presentations, as well as spectacular advertising and marketing that we believe contributed to excellent sell-throughs.

Beyond the Ralph Lauren brand, our Chaps brand also had a very successful holiday season.

Customers were drawn to its updated classic American appeal that was expressed through a fully coordinated merchandising strategy across multiple product categories.

Our regional merchandising tactics were particularly effective in driving great success in warm-weather markets.

Women's was especially strong, driven by trend-right fashions and colors and wear-now fabrications.

I believe the momentum of Chaps is a clear demonstration of how, perhaps, even more in times of uncertainty, customers valued trusted brands that deliver consistently high quality merchandise at an excellent value.

Important emerging merchandise categories, such as Ralph Lauren Denim & Supply and accessories, also achieved excellent growth in the quarter.

And we continue to nurture these newer opportunities on an increasingly global scale.

The excitement around Denim & Supply has grown as a result of a strong advertising and marketing that resonates with this brand's particular target audience.

We have fantastic products with a fresh and youthful spirit that has tremendous appeal to the Millennial customer worldwide.

In a relatively short period of time, we've already established credibility as a go-to denim resource in what you all know is a highly competitive space.

The strong acceptance of our washes and fits at this stage is especially encouraging, because we know those factors drive tremendous customer loyalty.

As we look to the future, we will build on this momentum by expanding distribution for Denim & Supply, adding additional wholesale doors, increasing the brand's online presence, and opening more freestanding stores in high-profile markets around the world.

Our accessories products continue to gain traction in the marketplace with increasing momentum from season to season, and benefiting from expanded global distribution.

Growth for our women's footwear, handbags and small leather goods has been especially strong, albeit on a relatively modest base.

We've had great success integrating both Polo and Ralph Lauren men's accessories into our existing point of distribution, where our apparel business is, of course, so strong.

These highly curated accessories offerings fit perfectly within our lifestyle merchandising approach, and are seen as an actual extension of the brand proposition.

Initial customer response has been better than we anticipated, and we look forward to seeing this category develop for us.

Since accessories are a critical component of our Company-wide strategic growth objectives to innovate with new products, extend our direct-to-consumer reach, and expand our international presence, we continue to reinforce our commitment to the category.

We're building a stronger platform for growth by investing in incremental design and merchandising talent, and supporting them with more sophisticated and efficient means of developing samples and prototypes.

This will allow us to more readily affect change and leverage our innovation to drive even stronger growth.

Our ability to execute critical product development and merchandising strategies is made possible by the tremendous capabilities and support of our sourcing, supply chain, and logistics teams.

Their partnership ensures that we are flowing the right product at the right time -- which is easier said than done for a business as complex as ours is -- across so many brands, merchandise categories, channels, and regions.

The extreme discipline of these teams enables us to navigate through considerable disruption in the quarter.

In addition to Superstorm Sandy, we were also contending with two dock strikes, but the teams didn't miss a beat.

Their partnership means that we were able to flow through the margin benefit of the lower input costs.

I don't think there's any better proof of the operational excellence of our organization than the 35% profit growth flow-through we achieved in the quarter.

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

Thank you, Jacki, and good morning, everyone.

As you've seen in this morning's press release, we're reporting strong third-quarter results today.

Consolidated net revenues were $1.8 billion, 2% above the prior-year period, and in line with what we anticipated back in November, despite the disruptive operating environment Roger spoke to earlier.

The growth in net revenues primarily reflects continued retail segment expansion that was partially offset by a planned contraction in wholesale shipments.

Excluding the impact of strategic decisions to discontinue American Living, and store closures associated with the Company's Greater China repositioning efforts, in addition to the net negative impact of foreign currency translation, revenues increased 5% in the third quarter.

Gross profit margin of 59.3% is a new peak level for the third quarter, and was 220 basis points greater than the prior year, which was better than our expectations.

The improvement in gross profit margin is primarily attributable to lower input cost, favorable product mix, and operational discipline.

Operating expenses of $790 million were 4% greater than the prior year, driven by overall business expansion; including higher retail segment mix, continued investment in our growth initiatives, and approximately $13 million of impairment and restructuring charges related to the discontinuation of Rugby.

Operating expense rate of 42.8% was 60 basis points greater than the prior year but was better than our initial expectations for the quarter, primarily due to disciplined expense management across the organization.

Operating expense rate also benefited from a shift in the timing of certain marketing and IT infrastructure spending out of the third quarter and into the fourth quarter.

Excluding Rugby-related charges, the third quarter's operating expense rate was approximately 10 basis points below the prior year.

Operating income of $304 million was 13% greater than the prior year period.

And operating margin improved 150 basis points, to 16.5%.

Excluding Rugby-related charges, operating income increased 17%, and operating margin expanded 220 basis points to 17.2%.

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

Net income for the third quarter was $216 million, 28% greater than the prior-year period.

And net income per diluted share increased 30% to $2.31 a share.

Excluding Rugby-related charges, net income rose 33%, and net income per diluted share grew 35%.

The substantial increases in net income and net income per diluted share were the result of higher operating income and a lower effective tax rate of 27%.

The nearly 900 basis point decline in the third quarter's effective tax rate is primarily attributable to the net favorable impact of an approximate $15 million discrete tax item in the quarter.

Tax rate was better than the outlook we provided in November, due to the geographic mix of business during the quarter.

Regarding our segment highlights for the quarter, wholesale sales of $734 million were 2% below the prior-year period as the discontinuation of American Living in fiscal 2013, a proactive reduction in shipments to certain European wholesale customers, and the net negative impact of foreign currency translation more than offset continued growth in core and emerging merchandise categories in the Americas.

Wholesale operating income of $145 million in the third quarter was 29% greater than the prior year.

And wholesale operating margin increased 470 basis points to 19.7%.

The significant improvement in wholesale operating margin was primarily due to higher gross profit margins as a result of lower input costs, favorable product mix, and overall operational discipline.

Moving onto the retail segment, third-quarter sales rose 6% to $1.1 billion, supported by a 4% increase in comparable store sales and the contribution from new stores and e-commerce operations.

Sales trends continue to be strongest online and at factory stores worldwide.

Growth was partially offset by weakness at concession shops in Japan and South Korea, and by store closures associated with the Greater China network repositioning effort.

We estimate that Hurricane Sandy had a 1% to 2% negative impact on our comparable store sales growth in the quarter, as a substantial portion of our store network was incapacitated for several days, and people in the affected areas were primarily focused on recovery and relief efforts.

Despite the challenges of the overall retail environment, 4% comp growth in the third quarter was achieved on top of difficult multi-year comparisons.

Comp growth was primarily a function of stronger conversion and higher average dollar transaction sizes.

Excluding Rugby-related charges, retail segment operating income grew 9% to $211 million in the third quarter.

And the retail operating margin increased 60 basis points to 19.8%.

The improvement in retail operating income and the expansion of operating margin are primarily due to improved profitability in the Americas and Europe.

Licensing revenues were $50 million in the third quarter, 1% greater than the prior year, as higher domestic product licensing revenues were partially offset by the transition of certain South American licensing arrangements to directly controlled operations.

Operating income for the licensing segment rose 3% to $37 million as a result of higher licensing revenues and lower net costs.

Consolidated inventory was up 10% at the end of the quarter, and we spent approximately $78 million on capital expenditures to support new retail stores, shop installations, and infrastructure investments.

The Company repurchased just under 1 million shares of its common stock during the quarter at an average cost of $154.50 a share, utilizing $150 million of our authorized share repurchase program.

In the first nine months of the fiscal year, we repurchased $450 million in stock and returned approximately $578 million to shareholders, through a combination of share repurchases and dividend payments.

We ended the quarter with approximately $1.4 billion in cash and investments.

So, a great quarter by any standard, and even moreso considering the unique environmental challenges we faced.

At this point, I'd like to review our outlook for the balance of the year.

For the fourth quarter, we expect revenue growth to accelerate and increase by a mid-single-digit percentage.

Our expectation is based on an 8% to 11% increase in retail segment sales, and wholesale sales that are about flat to the prior-year period.

Included in our consolidated net revenue growth outlook for the quarter is an approximate 300 basis point net negative impact due to strategic decisions regarding certain operations, including store closures associated with the Greater China network repositioning efforts, the discontinuation of American Living, and unfavorable foreign exchange effects.

Operating margin for the fourth quarter is expected to be approximately 125 to 150 basis points greater than the prior-year period, due to lower input costs and continued expense management.

The fourth-quarter tax rate is expected to be approximately 29%.

For the full-year fiscal 2013 period, we expect revenues to increase by 2%, which includes an approximate 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 exchange effects.

In light of our better-than-expected third-quarter results, we're raising our profit outlook for the year.

The full-year fiscal 2013 operating margin is now expected to be approximately 75 to 100 basis points greater than last year, which compares to our previous expectation of an approximate 50 basis point increase from the prior year's level.

We continue to anticipate that an improvement in gross margin will be partially offset by higher operating expense rate, due to the investments we've made in the Company's long-term strategic initiatives, and to higher retail channel mix.

We estimate of full-year tax rate at approximately 32%.

The fourth-quarter and full-year fiscal 2013 expectations that I just outlined do not include one-time charges associated with the discontinuation of our Rugby operations.

We estimate Rugby-related impairment restructuring charges to be $20 million to $25 million on a pre-tax basis, which is at the lower end of our original expectation of $20 million to $30 million from last quarter.

$13 million of these charges were incurred in the third quarter, and we expect the balance to be recognized in the fourth quarter.

We expect all operations to cease before the current fiscal year end, for Rugby.

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.

While we are still in process of refining our fiscal 2014 budget, I did want to provide some qualitative insight into how we are approaching next fiscal year.

We expect revenue growth to accelerate from fiscal 2013's level, based on the contribution from a number of the growth initiatives we've invested in this year, and a more comparable base of business as we will lap the discontinuation of American Living and the store closures associated with our Greater China network repositioning efforts at the end of this fiscal year.

Revenue growth is expected to be retail-led in fiscal 2014, with international markets and e-commerce leading the growth.

We intend to invest in a number of key initiatives as part of the fiscal 2014 plan.

These include an acceleration in retail network expansion in China, continued global e-commerce expansion, and a significant investment in IT infrastructure.

With respect to retail network expansion in China, we expect to incur higher expenses associated with pre-opening, rent, and other costs compared to fiscal 2013.

For global e-commerce, but plan to increase our investment to broaden our reach into new countries, upgrade our sites and customer experience in existing markets, and expand warehousing and distribution capacity.

Regarding IT infrastructure, we are executing a phased implementation of SAP over the next few years that will require a significant investment in operating expenses and capital.

In fiscal 2014, we expect to convert global product procurement and the order to cash process for our North American wholesale operations from legacy systems to SAP.

Over time, we believe SAP implementation will yield productivity improvements and procurement savings in addition to providing the Company with a stronger platform for future growth.

It's an exciting endeavor for the Company, and it's a process I've had a lot of experience with in my past.

While we expect the investments we're planning to make in fiscal 2014 to result in higher operating expenses in the near-term, they are all expected to generate returns that greatly exceed our cost of capital.

We will be completing the fiscal 2014 planning process over the next two months, and will provide a more detailed outlook for next year when we report our fourth-quarter earnings in May.

Finally, I wanted to touch on the status of that Chaps men's sportswear license with Warnaco, since I know many of you have an interest in learning about our plans for those operations.

As I mentioned on the last call, we have the right to terminate the existing license agreement upon a change of control, which would be triggered upon the closing of the transaction between Warnaco and PBH.

After reviewing our alternatives, we now expect that if a change of control is triggered, we will terminate the license and look to take direct control of the Chaps men's sportswear operations.

Now we'd like to open a call up to questions.

Operator, can you assist us with this?

(Operator Instructions).

Omar Saad, ISI Group.

Thanks.

Good morning, everybody.

Roger, could you talk about Europe?

It was interesting to hear you mention -- it sounds like you're seeing a reacceleration there, but it's interesting that it's happening more on the retail side than perhaps the wholesale side.

Can you talk about some of your strategies for the European market, what you're seeing across the different channels?

Obviously, it's a very complex market with many different countries and regions.

And then, some of the areas you feel like you can really improve the business there and still drive growth.

That would be very helpful.

Thanks.

Okay, Omar.

We had talked on the last call, I think, about beginning to see some signs of strengthening business trends in Europe.

And I reported the constant currency revenue increase of 8%, which is quite exciting, given the market turbulence.

Retail has led that charge, and we are excited to see that continue.

The wholesale business is actually split by region, because what we're seeing is ongoing softness in Italy, Spain, and the southern part of Europe.

It's partly why we planned for reduced shipments into that specialty distribution in Italy, both in an effort to cut back and also to make sure we could collect on shipments made.

And also because the Spanish business, which is a very large wholesale customer -- with ECI, we planned for lower shipments.

That was offset by stronger wholesale business in the northern countries, including Germany and the UK and the Scandinavian market.

Even within that headline statement, it's really a by-country conversation.

And we actually saw strong sell-throughs in the wholesale shipments for this holiday season.

While I think Europe will continue to be plagued by some uncertainty, we are adjusting our plans, our strategies, for a realistic point of view.

I think the euro has strengthened, surprisingly, in the recent past.

And I think that's a positive.

And I think Europe continues to be experiencing tremendous tourism; albeit slightly off the run rate of earlier in the year, it's still getting large numbers of tourists.

And in our case, we continue to look for growing penetration of the Chinese.

But until that comes, the Russians, the customers in the Middle East who know us; and interestingly enough, the third-largest tourist customer base in Europe is the Brazilians.

We continue to work both the domestic customer in Europe and the tourist customer.

And I think that speaks to our online strategies.

It's why we opened additional countries.

Our online site is resonating with the customers, as well as the brick-and-mortar strategies that go with it.

All in all, Europe is probably better than we expected as we started this year.

Next question.

Kate McShane, Citi.

(technical difficulty) with regard to the expense spending in fiscal year 2014, I wondered if that was incorporating the flagship investment that you're planning to make in China, and if you can update us on the timing of those three flagships you've mentioned in the past?

Yes, I think that's clearly part of our thinking.

I think that with regard to flagships in China, we're focused on trying to make sure we have the right real estate.

I don't know that we'll wind up opening all three at the same time.

I think this is more of a vision of over the next couple of years of what we'll do.

But, certainly, it's contemplated in our fiscal 2014 plan that we will be opening stores throughout China, including a flagship location.

I think, Kate, you know that to find these unique locations takes time.

We're very optimistic in the three cities we've articulated.

We do have a flagship men's store opening up, May-June of this year.

We think it's going to be the world of Ralph Lauren as the Chinese have never seen it.

But when you find the flagships, it's probably a year of dead rent and construction before you open the doors to take your first customer.

It's critical, over time, we get those.

We're stalking them; they're stalking us.

But at the end of the day, probably only one will open in fiscal 2014.

Next question.

Liz Dunn, Macquarie Capital.

Hi.

Thanks for taking my question.

Congrats on a great quarter.

I'm interested in the 2014 outlook.

It sounds as though you're saying sales growth will accelerate and SG&A investment will accelerate, but we saw some really nice earnings growth in this quarter.

Any viewpoint on whether or not that magnitude of earnings growth could continue through 2014?

Yes, I think at this point we're still in the planning stage.

So we haven't completed the budget cycle for 2014.

So I think the overall comments we made about revenue growth accelerating, but also SG&A expenses being higher because of the investments we want to make in the long-term health of the business, is what we're seeing in terms of how the budget is going to play out.

But we're not at a point yet where we can provide detailed guidance in terms of what the net impact of that is going to be.

And we certainly will plan to do that on the next call in May, once we've completed the budget process.

I think, Liz, we have demonstrated, over the years and over the quarters, that we do a pretty good job of flowing through profit on incremental sales.

And so as we communicate the May results, I would probably not expect ongoing 35% EPS growth every quarter.

We're very proud of that; we aspire to that; but that might be a tad bullish.

Next question.

Christian Buss, Credit Suisse.

Yes, hello.

I was wondering if I could get some update on the more mature markets in Asia and how they are performing, and whether the initial response in China is as expected or ahead of plan?

Okay, Chris, I will try to respond to that.

Thank you for turning off the background noise.

As you know, China is still in its infancy.

We went through a very big decision to pull down most of the network that had been put in place by a 20-year plus relationship with a licensee.

And that has played out over the last 18 months.

And, thankfully, we're lapping that as we head into the beginning of the new fiscal year.

We're on track to open 11 stores this year, plus or minus a few; 20 next year.

And I think we're beginning to lay the foundation for what, over time, will be a very successful market.

The bulk of our Asia-Pac sales at the moment are generated in Japan and South Korea.

And those are built on a network of shop-in-shops in the department stores.

So, we are really more dependent in those two key countries on footsteps generated by the department stores, and then our ability to get market share within that footstep traffic.

This third quarter, for us, both of those department store models suffered traffic erosions.

So while we think we picked up share, it was a more difficult trading environment.

And the new stores in Hong Kong or China are still small in relation to the overall scale of the Korean and Japanese markets.

So, the teams over there have worked very hard to refine assortments.

We've learned every season, more and more, about that customer and what they want.

And we're now beginning to supplement around it -- freestanding retail owned stores in Japan; remerchandising Korea; and then, obviously, the Chinese business serviced in Macau or Taiwan or the Philippines or Malaysia, is all oriented towards freestanding retail.

I think the big change that maybe you all understand is that the early-goers are primarily pure luxury.

They are Collection, Black Label, Purple Label, and we feel very good about establishing that business.

But we're also now feeling very bullish about the ability to open Polo stores, children's stores, and Denim & Supply.

So that the overall strategy of distribution in the market is balanced, allows us to attract customers within our pyramid of brands; and we're getting good feedback every day on each one of the strategies.

Next question.

David Glick, Buckingham Research.

Roger, just wanted to get a little bit more color on the accessory business.

Obviously you're getting some nice growth there.

I was wondering if you could perhaps dimensionalize the business for us in terms of the penetration -- where you are and where you're headed; and, in particular, how might you approach that business (technical difficulty) as you essentially start a new business in China, where obviously demand for accessories is very strong.

Thank you.

Yes, David, we are very committed to the growth of accessories.

And, of course, it always depends on what your definition of accessories are.

I'm going to use the term broadly to be small leather goods, handbags, footwear, eyewear, jewelry, watches, et cetera.

And as you know, it represents a smaller part of our luxury business than most other people consider it in the luxury sector.

As we are expanding our own retail footprint, we are we re-spacing our stores.

A lot of the Asian real estate will be positioned with expanded assortments available in accessories.

Clearly, the Madison Avenue stores reflect expanded assortments, and Europe will do the same.

So we're really in the early stages of giving it main-floor expanded space and we're beginning to see good traction from the customer.

At this point, it's not really a strategy loaded with a lot of wholesale expectations, although there will be some.

It's really our ability to deliver a message and a level of expertise in our own brick-and-mortar and e-commerce space.

So that is playing out as the new real estate is coming on.

And we are encouraged by not only the Ricky Bag, but some of the key merchandise categories that are going to be important to us going forward.

As you know, we're pushing very hard on that at a luxury tier.

That business is the backbone of most of our luxury competitors at high margins, high productivity.

And I think we've said before, and we'll say it again, it's very important.

We aspire to penetrations, particularly in Asia, where the customer is very oriented towards accessories; to penetrations that are five or six times what we get today in our normal stores.

Next question.

Michael Binetti, UBS.

Morning, guys.

Congrats on a good quarter there.

Roger, on Europe, I was encouraged by your comments that Europe sounds like it's showing some green shoots there.

On the wholesale business, could you give us some thoughts on what inning you think you're in, as far as the proactive reduction in shipments there when we anniversary those initial cutbacks, and how you see it going?

How do you think about restarting that business, and the growth outlook as you start to anniversary those cuts?

And then, finally, on the comment you made about the Polo brand and maybe opening some stores specifically for that brand and shining a light on that.

I think it's safe to assume that that's where the real scale benefits you enjoy as a business come from.

And I assume that comes with some gross margin tailwinds for the Company, if that comes with a bigger mix over the next few years.

Maybe you could address that.

Sure.

I'll start with the Polo brand.

As you know, we represent the most important menswear brands in the industry in every market we are in.

And the backbone of that has been Polo.

And I think with all the excitement over the years about Purple Label and Black Label and RLX and all the other initiatives, we're very cognizant that Polo is in high demand around the world.

And as we elevated assortment on a Madison Avenue or a New Bond Street, we were shrinking the assortments that Polo represented in those stores to highlight the other luxury brands.

And what we realized is that there was a tremendous appetite by our customers for what we call the Blue Label products -- men's and women's and kid's -- that we weren't satisfying in the direct-to-customer.

We certainly were excelling at the wholesale distribution, where there is credible wholesale distribution available.

But in parts of Asia and other parts of the world, where you have to depend on direct-to-customer through your own stores -- Brazil would be another example -- we really got very excited.

And Ralph has really led the charge on envisioning a more complete Polo story that we can take directly to the customer.

That could be flagship locations, or that could be smaller-sized footprints in appropriate-sized markets.

The margins on those business are higher than the total, so any incremental penetration of Polo is a positive for the overall Company margins.

In reference to your first question about -- I like the green shoots in Europe.

We think that heading into fiscal 2014, most of the recalibration of forward shipments has been done.

If you go back about five years, the largest two wholesale countries for us in Europe were Italy and Spain.

And today, they are not.

So we've already seen, over the course of several seasons and years, a shift and a development in Germany and France and England, and really the Scandinavian markets.

But, today, I think we head into spring shipping for our calendar 2014 and for fall bookings; and I think we're beginning to feel like that has leveled out.

Next question.

Erinn Murphy, Piper Jaffray.

Great.

Thank you for taking my question, and congratulations to the entire team there.

Roger, I wanted to circle back on one of the prior questions related to Europe, but really focusing more on the margin side.

It's encouraging to see some of the improved margins in the retail side in particular.

Could you maybe address some of the changes you've made throughout the year in terms of merchandise flows, mark-down rate management?

Or maybe changes that have happened in the in-store selling environment that have really driven some of this improvement.

And then as we think about that segment, from a profitability perspective, how should we think about the longer-term potential, both in Europe retail profitability as well as a global basis?

Thank you.

Okay, Erinn.

Let me see if I can condense my thoughts, because there's not a single syllable or a single sentence that talks to what has been a multi-year initiative to raise the profitability of retail.

Some of you who followed the story over the years knew that that was one of our core initiatives.

And we've come a long way.

And we continue to exhibit margin upside, even in what would be called a tough quarter from macro issues.

I think we've just learned to be professional retailers.

Our history as a Company was really in the licensing and wholesale side of the distribution network, and I think we do that superbly.

I think it's interesting -- the wholesale team teaches the recent retail team.

And we cross-pollinate best practices in terms of assortments, presentation, sales support, customer service.

And then when you overlay the e-commerce business both in wholesale and retail, I think we're really trying to approach and service a customer in any of the channels they want to shop in, on global basis, more consistently.

But we're definitely getting more professional about staffing alignments with traffic patterns.

We're definitely getting more thoughtful about conversion rates, average dollar transactions, multiple sales, fulfilling orders for customers that may come through the Internet out of the brick-and-mortar if we don't have the inventory, or vice versa.

And I think we have achieved a level of profitability on the back of extraordinary sales per square foot.

And we have driven, and continue to drive, the sales per square foot as an operating metric.

The other thing that we try to focus on, I think, to our advantage, is gross margin dollars returned per square foot.

So, it's not always margin rates or sales per square foot.

It's the ability to develop the dollars per square foot, and how you allocate space and how you focus your attention, that ultimately has dollars flowing to the bottom line.

So, there are a lot of things going on that probably would be longer than I could answer here.

But I think we've got some real professionals worldwide.

And I think we're trying to apply lessons learned in one channel or one product category or one region to the overall corporate initiatives.

Next question.

Barbara Wyckoff, Credit Agricole.

Hi, everybody.

Going back to China, looking out 3 to 5 years in China, how would you see the balance of business playing out -- umbrella of Collection, Black Label, high-end, luxury, the Blue Label type doors --crossing men's, women's, children's; and then the role of the outlets.

Okay, Barbara, I'm going to try.

And I'm not sure whether 3 to 5 years or whatever we would define as medium and long-term.

I think the subject in China is really our pyramid of brands and our hierarchy of distribution will primarily occur in retail.

And so in other markets where we have a balance of retail and wholesale, the wholesale channels tend to carry a lot of Blue Label, a lot of the businesses that are more broad in their appeal.

And then, our retail tends to focus on the more elevated luxury.

I think, given that China will be dominated by direct-to-consumer -- whether brick-and-mortar or e-commerce -- we will attempt, over time, to replicate the pyramid of products from the most elevated, most fashionable, most expensive, straight through the hierarchy, with a similar profile of real estate.

And that will partly be determined by square footage and location and will partly be determined by productivity.

And so as we continue to get better brand awareness in a country where our brands are not well-known, we have to raise brand awareness about who we are and what we do.

We also think, beyond China, that will wash out into Europe and the United States and other markets.

We just showed some statistics to our Board yesterday that showed the Chinese today have now become the number-one luxury customer in the world.

And they are 30% of the luxury buying in Europe, and they are 15% of the luxury buying in the United States.

Our initiatives in China, while substantial and real, we think we'll have an extraordinary halo over the rest of the Company in multiple locations.

And today, it's not a very big part of our total.

So our results and our achievements are absent meaningful contribution by the Chinese customer on a worldwide basis.

So with that, I'd like to thank you all for listening and participating.

We are all very excited about the results.

We are very excited about the Company's initiative around Sandy.

We think we've got a bead on operating metrics for the balance of the year and into next year.

So we look forward to updating you in May.

Thank you, sir.

That does conclude today's teleconference.

We do thank you all for your participation.