雷夫·羅倫馬球 (RL) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ralph Lauren first-quarter 2014 earnings call.

At this time, participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

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

(Operator Instructions).

As reminder, this conference is being recorded.

I would out like to turn the conference over to our host, Mr. James Hurley.

Please go ahead.

Good morning and thank you for joining us on Ralph Lauren's first-quarter fiscal 2014 conference call.

The agenda for this morning's call includes Roger Farah, our President and Chief Operating Officer, who will provide an overview of the quarter.

Chris Peterson, our Chief Financial Officer, will provide operational and financial perspective on the first quarter in addition to reviewing our outlook for the balance of fiscal 2014.

And Jacki Nemerov, our Executive Vice President, will provide merchandising highlights and comments on some broader strategic initiatives.

After the Company's prepared remarks, we will open the call for questions which we ask that you limit to one per caller.

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

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

Our expectations contain many risks and uncertainties.

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

Now I would like to turn the call over to Roger.

Thank you, Jim, and good morning, everyone.

The first-quarter results that we are reporting today continue to demonstrate the resilience of our diversified operating model.

Despite an uneven global operating environment, we planned the business prudently and continued to make significant investments in our long-term growth objectives and in the infrastructure to support them.

Ralph and I are proud of our team's accomplishments, especially since we made important progress on several of our key initiatives during the quarter.

We expect our recent investments in new stores, e-commerce operations and international expansion to continue to accelerate sales and profit momentum in the second half of the year.

And we are confident that the investments we are making today can support profitable, sustained growth for us over the long-term.

Now, I would like to turn the call over to Chris who will provide some operational and financial perspectives on the first quarter.

Thank you, Roger, and good morning, everyone.

The first-quarter sales and profits we are reporting today are slightly better than we expected, and I would like to start with a recap of the financial results.

Consolidated sales grew 4% in the first quarter.

Excluding the impacts of discontinued businesses and unfavorable foreign currency translations, revenues were 6% higher than the prior-year period.

This was slightly better than the single-digit growth we anticipated due to better than expected wholesale revenues in North America and Europe.

The cold and late start to spring resulted in sales trends that were somewhat choppy throughout the period with business strengthening when weather conditions were more seasonably appropriate.

While traffic to brick-and-mortar stores was challenging, growth in e-commerce continued to be very strong for both our Retail and Wholesale segments.

Gross profit for the first quarter of fiscal 2014 increased 1% to $1 billion.

Gross profit margin of 60.7% was 160 basis points below the prior-year period due to the integration of the Chaps men's sportswear operations and unfavorable foreign currency dynamics.

Operating expenses of $728 million in the first quarter were 4% greater than the prior year period.

The higher operating expenses primarily reflect overall business expansion, costs associated with newly transitioned operations, and continued investment in the Company's strategic growth initiatives and infrastructure, all of which was partially offset by discipline operational management.

We also had a $60 million gain on the acquisition of the Chaps men's sportswear license.

This one-time gain was included in the first-quarter and full-year outlook we provide in May and will mostly be amortized in subsequent quarters.

Operating expense rate of 44% was 10 basis points above the first quarter of fiscal 2013.

Operating income of $276 million was 5% below the prior year due to higher operating expenses related to the timing of investments in the Company's strategic growth objectives, the Chaps integration, and negative FX impacts.

Operating margin was 16.7%, 160 basis points below the first quarter of fiscal 2013.

The operating margin results were better than the 200 to 250 basis point contraction we anticipated back in May due to stronger than expected productivity gains in certain areas of the organization.

Net income for the fourth quarter of fiscal 2014 was $181 million, 7% below the $193 million achieved in the comparable period of fiscal 2013.

And net income per diluted share declined 4% to $1.94.

EPS of $1.94 was better than we anticipated due to higher revenue and stronger profit flow-through, a testament to the operational excellence of our teams who were still contending with the relatively challenging global retail landscape during the quarter.

Moving on to segment level details, Wholesale sales grew 6% to $735 million in the first quarter, primarily a result of the contribution from the newly transitioned Chaps men's sportswear operations and continued growth in core North American merchandise categories which continue to gain market share.

Product-wise, womenswear and accessories were the most important contributors to Wholesale revenue growth in the quarter.

A planned reduction in shipments to certain European customers and the transition of certain Japanese wholesale distribution to directly operated concession shops partially mitigated WHOLESALE revenue growth during the quarter.

Wholesale operating income of $154 million was in line with the prior-year period as improved profitability in North America was more than offset by lower international profits and Chaps transition costs.

Retail segment sales rose 3% to $879 million in the first quarter, reflecting the incremental contribution from new stores and strong growth for e-commerce operations.

Excluding the impacts of discontinued businesses and foreign currency, Retail sales increased 6% from the prior year.

Consolidated comparable store sales declined 1% on a reported basis and were up 1% in constant currency during the first quarter on top of relatively challenging multi-year comparisons.

We estimate that the earlier timing of Easter this year negatively impacted our comp growth by approximately 2%.

With the exception of e-commerce, customer traffic trends were soft across most Retail formats during the quarter.

However, strategic marketing efforts along with the investments we have made in in-store technology and customer service enabled us to mitigate lower traffic levels with improved conversion and UPTs at most of our Retail formats worldwide.

Comp store sales were stronger at directly-owned Ralph Lauren factory and e-commerce operations and weaker at concession shops in Asia.

Retail operating income of $160 million was 11% below the prior-year period as costs associated with the Company's global store and e-commerce development efforts and foreign currency effects were only partially offset by disciplined operational management.

Licensing revenues of $39 million were 8% below the prior-year period as lower Chaps related licensing revenues offset higher apparel and fragrance royalties for Ralph Lauren products.

Licensing operating income of $29 million was in line with the prior-year period.

Consolidated inventory was up 9% at the end of the quarter, largely due to the newly acquired Chaps business and new store openings.

We spent approximately $66 million on capital expenditures to support new retail stores, shop installations and infrastructure investments.

Free cash flow of $229 million in the first quarter was 11% greater than the prior-year period.

The Company repurchased about 850,000 shares of its common stock during the first quarter for an average cost of approximately $176 utilizing $150 million of authorized share repurchase programs.

At the end of the quarter, the Company had $427 million available under previously authorized share repurchase programs for future buybacks.

And we ended the quarter with $1.4 billion in cash and investments.

We made important progress on several initiatives during the first quarter.

We completed the pilot conversion wave of SAP.

This included global product procurement and North American Wholesale operations for a group of pilot brands and involved transferring millions of pieces of data, including inventory, purchase orders, sales orders, and accounts receivable from legacy systems to SAP.

The pilot implementation went very well with data conversion rates between 99% and 100%, and we are now fully on to SAP for the pilot brands.

Based on the pilot's success, we are proceeding with the next wave of implementation later this quarter which transitions a more meaningful portion of the Company's brands and merchandise categories.

As we articulated last quarter, we are taking a staggered approach to systems conversion in order to proactively manage the risk profile of the project.

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

The integration of the formerly licensed Chaps men's sportswear operations has also gone smoothly.

We have worked on an accelerated basis over the last few months to take this business in-house since it is an important component of the overall Chaps brand.

In a short period of time, we have successfully onboarded about 50 new employees and established dedicated warehousing and distribution capabilities to support the business.

We are now at a point where we are migrating from a costly transition services agreement to a wholly integrated and directly managed model.

At the beginning of July, we assumed direct control of Ralph Lauren operations in Australia and New Zealand from our former licensee.

As a result of the license take-back, we have integrated approximately 300 new employees, 13 stores, and 20 shop-in-shops across the two countries.

Although we have already incurred some upfront costs associated with the transition, the full financial impact of managing Australia and New Zealand will be reflected in our results beginning in the second quarter of fiscal 2014.

It has clearly been a productive start to the year.

Before I review our outlook for the balance of 2014, I would like to turn the call over to Jackie.

Thank you, Chris, and good morning, everyone.

Our first-quarter results demonstrate that despite the formidable challenge of a cold and late start to spring around the world, we had a good spring-summer season and were able to exceed our sales and profit plans for the quarter.

The balance and diversity of our merchandise assortment as well as the lifestyle positioning of our brand, which tends to emphasize the total sensibility over a single item, allowed us to offset softness in certain seasonal classifications such as knits and sandals with strong performance in other categories such as dresses and denim.

In addition to strong performance for the Ralph Lauren brand, the Chaps brand also had a fantastic quarter across a wide range of merchandise categories.

As Chris mentioned, the integration of the Chaps men's sportswear business into our organization went smoothly and is in fact one of the fastest transitions we have ever executed.

Chaps is a $1 billion brand at retail with representation in over 40 merchandise categories, and we are excited about the growth it represents for the future.

With direct control of the largest and most strategically important merchandise categories, we believe that we can further enhance the clarity and consistency of the brand to drive even stronger productivity gains and achieve merchandising and marketing synergies with our customers.

The success of Chaps in North America over the last several years is a clear demonstration of the enduring value of trusted brands that deliver consistent quality and great value.

In order to more fully leverage the power of this brand, we are building a plan to expand the distribution of Chaps around the world.

I am pleased to share with you that we have an agreement with a distribution partner in Mexico to launch Chaps in that market in both retail and wholesale locations next spring.

This is the first step in an exciting new journey for Chaps and we have received tremendous interest from other potential partners around the world, so there will be more to come on future calls.

Now, I would like to spend some time on exciting developments on two of our strategic initiatives, the first being the evolution of our omni channel approach to servicing the customer, and the second being an update on some of our non-apparel merchandise categories.

With regard to be omni channel, we already know that developing our worldwide direct-to-consumer presence is one of the most important long-term strategic growth objectives.

We have invested substantial amounts of capital and operating expense to build both retail stores and online shopping experiences that are unique to our brand and distinctive to the consumer.

During the quarter, we open two high-profile Ralph Lauren retail locations in China, a spectacular 10,000 square-foot men's flagship store in central Hong Kong with an impactful six-story facade and a 5800 square-foot men's and women's store at L'Avenue in Shanghai, which is a new first-class retail and office complex.

Both stores will showcase our luxury apparel and accessories in a powerful way.

China is one of the Company's largest and most compelling long-term growth opportunities.

And the foundation of our strategy is a retail expansion that will require significant investment in both stores and e-commerce capabilities in order for us to be properly positioned in the market.

As you know from our approach in the US and Europe, our stores, both physical and virtual, are critical expressions of our brand, so the decisions we make in China are extremely important to the future of our luxury business.

Last quarter, we spoke briefly about a retail strategy for our Polo brand that would allow us to more fully represent that aesthetic across men's, women's, and children's merchandise.

We believe that a dedicated retail expression for the full breadth of the Polo brand will allow us to better serve a diverse customer base.

Our existing luxury retail stores offer a smaller assortment of Polo and only for men, and those locations attract a customer who is really drawn to our Black Label and Purple Label products.

The creation of dedicated Polo stores will provide the right environment in which to represent the sensibility of this powerful brand with a full product line across not only men's, but also women's and children's.

Given the broad appeal of the Polo brand, we believe that there is potential for these stores in many locations around the world.

We opened the first dedicated Polo store in East Hampton during the first quarter and it is off to a great start.

As we embark on the first phase of a multi-year plan to enrich the tremendous global demand for our Polo brand, several more retail projects are planned around the world, including a 35,000 square-foot flagship on Fifth Avenue in New York.

We are also excited about the continued global development of our Denim & Supply brand.

We opened two Denim & Supply stores in the United States during the quarter, one on University Place in New York City and the other on Newbury Street in Boston.

They joined a fleet of 15 other Denim & Supply retail stores, eight in Europe and seven in Asia, and complement and our worldwide wholesale distribution.

Denim & Supply is a relatively new brand that resonates with the twenty-something millennial audience.

The product is fresh and distinctive, but grounded in the quality and the authenticity of Ralph Lauren.

As far as the brand has come in its first two years, we believe there is considerable room for additional stores.

In another aspect of our plan to fortify our omni channel approach, we are on track to launch e-commerce in South Korea later this fall, which will represent the 14th country in which we are e-commerce enabled.

We have invested in e-commerce capable distribution centers in Italy, Hong Kong, Tokyo, and Seoul to support additional ship-to markets throughout Europe and Asia.

We will also be opening our greatly expanded distribution center supporting our North American e-commerce operations this fall.

Over the last year, we have invested about $75 million in capital to build a facility that can support the doubling of that business.

Because we view our retail stores and e-commerce sites as not only important commercial ventures, but also valuable branding vehicles for us, we believe it is imperative that both merchandising and marketing messages be aligned.

To ensure this, we have invested in the technology and the distribution and logistics capabilities that allow us to integrate and leverage the unique power of our product distribution, our inventory, and our brand's messages.

Today, a customer in one of our stores works with well-trained sales associate who uses an iPad to easily and quickly offer additional options that he or she knows are available on line, but that the customer is not seeing right there in that particular store.

That additional option could be as simple as a size or color or it could be a style or a label not sold in that location.

The combination of sales associates who are knowledgeable across the entire portfolio for our product and technology that enables easy access to a single pool of shared inventory is a winning formula.

The customer's experience is richer and more dynamic and our productivity and profit margins are stronger.

And of course, as technology and distribution capabilities have evolved, so too has the customer -- the consumer behavior and we know the customer explores, browses, and shops our brand across these channels and that their expectation is one of alignment and seamlessness.

We are very focused on servicing and delighting our customers wherever they choose to shop for Ralph Lauren.

To that end, the investment we are making in our customer intelligence platform is focused on realizing a holistic view of our customers so we can service them in a brand-centric channel-agnostic manner in real time.

Our omni channel store process extends beyond our directly operated retail business.

Over the past several years, we have architected and executed a highly successful application of this omni channel view with our wholesale partners and it has been an important driver of our growth and success together.

As you are well aware, our largest wholesale partners are focused on integrating their physical stores with their e-commerce operations.

We have partnered with them to support those endeavors with fully-integrated merchandising and marketing strategies that reinforce our brand's leadership position, both within their stores and on their sites.

Now, turning to our merchandise categories beyond apparel -- handbags, footwear, watches, jewelry, eyewear and fragrance -- I want to update you on our continued development and investment.

You have heard us talk about handbags, small leather goods and footwear because they have been among our fastest-growing categories and represented approximately 8% of our consolidated sales in fiscal 2013.

We are pleased with the credibility the Ralph Lauren brand has established in a relatively short period of time in the highest tier of the luxury leather goods market and are also focused on building a strong platform for sustainable long-term success.

This fall, you will see a lot of activity around our most iconic handbag, the Ricky.

Launching in the next few weeks is a complete World of Ricky story built around a greatly expanded range of handbags and small leather goods products inspired by this signature bag.

A high-impact, multichannel global advertising marketing and public relations program featuring the recently introduced soft Ricky style will be impossible to miss.

The introduction of the soft Ricky has already been a great success worldwide, and we are building upon its appeal with this introduction of a broader range of sizes, colors, and related items for the fall and holiday season.

Beyond luxury handbags, there's also momentum for other accessory categories.

Building upon the World of Ricky platform in leather goods, we are leveraging some of our most iconic brand themes to develop new watches, eyewear and fragrances.

This spring, we had a great success with two of our new watches, the Safari chronometer and the Steel Link Stirrup.

The high level of consumer interest in these new styles has increased exposure for our entire watch collection and had a beneficial impact on the business.

The Safari aesthetic was also the inspiration for our latest eyewear collection where both optical and sun styles were introduced into the line and were well received by the consumer.

Ralph's passion for the design of fine automobiles was the inspiration for our newest men's fragrance Polo Red.

The fragrance and its messaging has been huge hits with consumers and the early success of Polo Red will be supported this fall with substantial television and magazine advertising.

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

Thanks, Jacki.

We are pleased to be starting fiscal 2014 with strong progress on several long-term objectives and sales and profits that are trending slightly better than planned.

As you will recall, fiscal 2014 was planned with increased investments in the business to support long-term shareholder value creation.

Key areas of investment this year include accelerated retail store and e-commerce development worldwide, the transition of formally licensed products and regions to directly control operations, and upgrades to our management information system to support our long-term growth objectives.

Based on the timing of our specific projects, we continue to expect fiscal 2014 to evolve as a tale of two halves with the first part of the year characterized by a sales growth and outsized investment spending related to the integrations of Chaps and Australia-New Zealand and by preopening cost for new stores.

We expect accelerated revenue and profit growth in the second half of the year with the benefit of revenues from new store openings, the launch of our South Korean website, expanding the number of countries we can ship to from our European e-commerce operations, and the transition of Australia-New Zealand as a directly operated region.

As we articulated in May, the combined year-over-year impact of the incremental investments we are making in new stores and e-commerce platforms and in systems upgrades on our operating profits is approximately $75 million for the full-year period.

While this step-up in spending will weigh on our near-term operating profits, we continue to expect each of these investments to deliver a rate of return that is well in excess of our cost of capital.

For the full-year fiscal 2014 period, we continue to expect consolidated revenues to increase by 4% to 7%, which includes a 150 basis point negative impact from foreign currency effects and a roughly 100 basis point additional headwind from discontinued operations.

Our full-year fiscal 2014 operating margin is still expected to be 25 to 75 basis points below fiscal 2013's record level.

The year-over-year contraction in the operating margin outlook is primarily due to the integration of newly assumed operations, accelerated investment in our various strategic growth initiatives, and FX impacts.

Excluding the impacts of the incremental investment in the Company's growth initiatives and foreign exchange, underlying operating income growth will be up low double digits for the year.

Continue to expect the fiscal 2014 tax rate to be 31%.

For the second quarter of fiscal 2014, we expect consolidated revenues to increase at a low single-digit rate with Retail segment sales growing at a mid single-digit rate and relatively flat Wholesale revenues due to a shift in the timing of certain Wholesale shipments out of the second quarter and into the third quarter due to the SAP implementation.

Foreign-currency is estimated to negatively affect revenue growth by approximately 100 basis points in the second quarter and will continue to have more of an impact on our Retail segment given its geographic business mix.

Discontinued businesses are estimated to mitigate second-quarter sales growth by an additional 100 basis points.

Operating margin for the second quarter is expected to be approximately 300 to 350 basis points below the prior-year period due to higher operating expenses related to the timing of investments to support the Company's long-term strategic objectives, the integration of formally licensed regions and product categories, and the foreign exchange impact.

The second-quarter tax rate is estimated at 31.5%.

We have established aggressive goals for the year, laying critical groundwork for the future.

Our global teams continue to demonstrate strong operational discipline as they not only manage the day-to-day, but also support the important progress we are making on key long-term initiatives, particularly our global omni channel efforts and infrastructure upgrades.

With that, we would like to open the call for your questions.

Operator, can you assist us with that?

(Operator Instructions).

Omar Saad, ISI Group.

Thanks.

Good morning.

Hoping you can comment on -- looking at the topline overall for the Company, it has been a little bit soft for the last couple of quarters and you've obviously got all these great kind of global long-term growth opportunities.

It seems like there was also a little bit of discrepancy Wholesale topline versus Retail.

What gives you confidence in kind of this reacceleration you are going to see in the back half?

Are there certain elements either within the segmentation of different brands, regions, channels?

Just give us an update on your overall view on this topline reacceleration that's coming.

Thanks.

So, I will try that and then Jacki and Chris can chime in if they want to add.

I think you are right.

In the last couple of quarters, for various discrete reasons, we have had the results as you commented.

While we delivered the plan for the first quarter, I would say that spring-summer was a bit choppy in terms of overall trends in the apparel market.

On a regional basis, it was interesting because it was pretty good in the US, actually better than expected in Europe, with Asia being down.

And that was really a combination of strong results in the early days of China and Southeast Asia, but weaker results in Japan and Korea, some of that being FX, some of that really being the shop-in-shop businesses that dominate both Korea and Japan.

And I think those two markets and the department store distribution network in them experienced contractions.

And so really it was a series of different results around the globe.

As we head into fall and holiday, we feel good about the product.

Early reads -- and I know it is early for fall -- have been good.

We are seeing the strengthening of key markets in Europe.

We have had some good wholesale pre- books in Europe beginning to flatten out and grow the forward bookings after several seasons of contractions there.

And we have got some strong product initiatives, as Jacki articulated.

And so we are feeling like the go-forward business will have less of the one-offs that we have experienced.

Plus the addition of Chaps for men's, plus the addition of Australia, plus the launching of some of these e-commerce sites where we have been carrying the expenses and haven't gotten the revenues.

Lastly, and this is true for most people with businesses here in the US, we are going against the affects of Sandy which did impact part of the fall season last year.

So for lots of reasons, the underlying trends of the last quarter with the Easter shift, which is sort of unique to us because of the way it splits between March and April and some of the FX, we delivered the plan perhaps not as much as we had hoped, but I think we are encouraged about fall and beyond.

The only thing I would add is that this next wave of SAP which we are implementing toward the end of the quarter is causing us to shift a little bit of our revenue, particularly in the Wholesale business, out of the second quarter and into the third quarter.

So we are going to shift some shipments out of the last week of September and into the first week of October, and that is having a little bit of a split impact between the second- and the third-quarter revenue guidance.

Kate McShane, Citigroup.

Thank you.

Good morning.

Roger, this was somewhat answered in the first question, but I wondered if there could be more, a little bit more detail.

I know, last year around the time of the second quarter, you had decided to pull back some products from Europe because of the state of the world there at the time.

Are those sales returning in that region?

Okay, Kate, you know I love detail, so I am glad you asked.

I would start by just giving you a sense of the trends in Europe.

We have talked in the past about a general strength in the north and a little bit softer in the south.

While that continues sort of as a headline, we actually have seen, this season, France get a little softer than it has been in the past, but strength in Germany and the UK and the Scandinavian markets and other markets have actually encouraged us.

We proactively pull back really on two levels, one the countries that are dominated by specialty store distribution like Italy where the specialty stores were struggling and we were very cautious about putting product into them that quite frankly we might not have gotten paid for.

So, we really work to proactively reduce that.

We worked with our better specialty store customers, but that was a decision to balance inflow of product and the risk of not getting paid.

And quite frankly, we have managed that beautifully.

In the department store channels, countries that are dominated mostly by department store distribution, which is Spain and Germany, parts of France and the UK, as their business has been soft, excluding Chinese tourists, we've worked hard to get the inventory turns and that supply and demand in alignment.

But as I briefly said in the beginning of my comments, we are beginning to see that turn.

The go-forward bookings in Europe are encouraging in the places we are choosing to sell.

So after several quarters or a year of contraction that was strategically applied to the Wholesale channel, we are beginning to see that reverse in the go-forward product categories, countries, and regions.

So I think that is good news.

Michael Binetti, UBS.

Good morning.

Two questions.

First, Chris, the 100 basis points you called out of headwind from discontinued operations, the headwind to revenues, it sounds like it is incremental just because I didn't see it when I looked back at the fourth quarter.

Is that new?

Maybe you could tell us a little bit about what that was.

Was that in the original 4% to 7% guidance you gave last quarter?

And then, secondly, on the transitioning of Chaps, I'm wondering if there were any adjustments you made to inventories that perhaps you weren't expecting that was — the gross margin impact may be a little more than you thought in the quarter related to some inventory you had to clean up.

If you could just help me with that.

Thanks.

Sure.

Yes, I think, on the first question, the discontinued businesses are really primarily Rugby, which we had called out previously.

I think we felt like we wanted to provide a little bit more specificity in the guidance on how much that discontinuation of Rugby was impacting the guidance.

So it is not new news.

It is just an additional sort of perspective that we wanted to share with the Street.

So that is the primary piece of that.

On the gross margin impact and Chaps impact, it kind of came out as we expected.

So, you saw in the release that we had a $16 million gain.

Part of the way the accounting works is because we terminated the agreement early because of the PVH and Warnaco merger, we had to take a step up in the inventory along with a number of other items that resulted in a gain.

The inventory that we shipped out in the April-May-June period, we been recorded higher cost of goods.

So part of that gain wasn't really incremental.

It was a shift out of the cost of goods into the gain number.

But that $16 million gain wasn't all incremental.

And we knew about that because we had negotiated the contract with PVH prior to our May release, and so that was included in our guidance.

But there is an underlying gross margin impact that is about what we expected because of that step-up in inventory.

And then you ship out and incur higher cost of goods than what the going cost of goods level would be.

Liz Dunn, Macquarie.

Thanks for taking my question.

Just questions around Retail.

It looks like a lot of the Rugby stores were sort of repurposed for some of your other growth initiatives.

Is that -- first, is that correct?

How many were there?

And what do you think about unit growth for this year?

What should we be looking for?

And then it also looks like there are quite a number of licensed stores opening under Club Monaco and some under Ralph Lauren, but to the extent that you have licensed stores opening, how do we sort of avoid some of the missteps that licensed partners have made in the past in terms of opening appropriate locations or not being appropriately positioned?

How are you working with these guys to make sure that they get it?

Thanks.

Okay, let me try that.

We repurposed probably half of the Rugby stores, and those stores, some of which became Polo, for instance East Hampton and Short Hills later this fall, some of which became Denim & Supply like Newbury Street or University Place downtown, and about half we closed.

The bigger news there is that while it is certainly early days, and Jacki touched on this in her opening remarks, we are feeling very bullish about the opportunity for Polo as standalone retail.

We have had Polo for men's in our own Ralph Lauren stores, albeit smaller as we have expanded our luxury presentations.

But standalone men's and complement it with women's Polo which will be part of our fall strategy, is a very exciting concept for the customer.

That will be displayed at its pinnacle on Fifth Avenue next fall.

So we have 25 stores in the pipeline for this year to open worldwide, but the probes into Polo stores and Denim & Supply give us a very good feeling about the commercial viability of high store count growth in the future, which is different than looking for luxury locations.

Within our current performance this spring and heading in, the United States and really Europe had pretty strong retail results.

It was really offset by the shop-in-shop concession numbers in Japan and Korea which we include in our Retail comps that really drag the business down in total.

So, when you put aside some of the moving parts with FX and Easter, the low single-digit positive comps were really stronger in the US, stronger in Europe and a little bit down in total in Asia, obviously supported by very strong e-commerce growth.

So, there are levels of detail underneath the headline numbers that I think give us some confidence we are on the right path.

Christian Buss, Credit Suisse.

Could you provide some color on the marketing plans for the China business and some color on how the stores have performed in their initial ramp phase?

Yes, we have opened a number of stores over at the last year, year and a half, obviously a lot more to come.

China is running about 18% ahead, so southeast Asia is also running mid double-digit, mid-teen double-digit increases.

So, we are encouraged by the early reaction there.

That includes stores in Vietnam and Malaysia and some other markets.

While it is still early days, we did open what we call a flagship in Hong Kong in the Princess Building, which is a dramatic statement about our menswear.

We had a soft opening in June.

We will have a bigger push in the fall, and that has had tremendous early reaction from the customers and, surprising to us, strong sales in clothing and furnishings.

I think most of you know that the China customer today and the male customer is the dominant customer is more casual in dress, but we have had very good early success in clothing.

So we expect to begin to ramp up the marketing plans, print as well as store activities, starting in the fall but really coming out more strongly in calendar 2014.

That is when we are planning a series of large store openings in the fall of 2014 in Shanghai and in Hong Kong.

And it really will represent a more complete coming-out party for us.

David Glick, Buckingham Research.

Yes, a couple of quick questions.

Just a follow-up, Chris.

If you could quantify the net impact on the gross margin from Chaps.

I know you mentioned two moving parts there.

Then secondly, Roger, you called out women's as one of the stronger businesses, women's and accessories, accessories not a surprise.

Women's sounds like it is getting stronger.

I was wondering if you can comment on what you are seeing in the women's business.

And was men's not called out because it was weaker or just it wasn't as strong as women's?

Yes, I will take the Chaps.

The total impact to the gross margin on Chaps was about 120 basis points in the quarter.

I am going to ask Jacki to maybe touch on some of the product initiatives that you asked about, David, and then we'll go from there.

David, we have seen a strengthening across our entire women's business starting with our collection in Black Label business where they are starting off with quite a good fall at this point year-over-year.

Our Lauren business had a very, very strong season, up high single digits off of a very substantial base.

As you know, we are the number one brand in the department stores and continue to grow in that position and in that floor space.

Our accessory business I commented on in the script as our luxury accessory business with the centerpiece as the Ricky -- of the Ricky, which has done extremely well for spring and we pretty much had sell-outs.

We are redelivery now all of our fall colors.

And I don't know if you noticed, in the Sunday Times, but we had a fabulous soft Ricky add this Sunday.

And that is now just the beginning of what we expect to see around that product.

For the fall right through the holiday season, we are putting a heavy emphasis on our accessory opportunity.

Our Lauren accessory business had a very, very strong spring season, and it looks like a good lead-in to fall.

And because of that, we are seeing additional store roll-outs and as I said, real nice double-digit increases in our Lauren brand as well.

For anyone who wants a real treat, take a trip down to Macy's Herald Square to see our new men's Polo shop which was just opened on Friday.

And it is a 10,000 square-foot shop opened off of the new Seventh Avenue men's store coming up into the shop on the second floor, escalator right into the men's shop.

Dramatic presentation of all (technical difficulty) styles that we see in our Polo customer and from the most casual to clothing and dress furnishings and a new accessory area that we installed in this Polo shop.

And I think that speaks to how we feel about the opportunity, the continued opportunity, in our men's business.

We had a very nice season off of our obviously very large based business and in most stores ran a mid to high single digit comp over prior year.

Erinn Murphy, Piper Jaffray.

Great, thank you.

Good morning.

I wanted to follow up from an investment perspective as it relates to SAP.

In recognizing the staged approach you are taking, are there more front-end loading of the investment, particularly in Q2, than maybe were previously implied?

And then from the remaining investment as we think about it for the balance of the year, how should we think of that progressing as we get through the next two quarters in the back half?

And then just a second question on some of the longer-term growth opportunities, particularly in Denim & Supply.

As this brand has gone more into retail and as that continues to grow, can you speak a little bit more about what you are learning about that consumer in particular?

Thank you.

Sure.

I will take the SAP question.

So, the year-over-year spending on SAP is a significantly higher spending that is in fiscal 2014 versus what we did in fiscal 2013.

I think we have said the combination of the investment in SAP, the new stores, and the e-commerce platform is a $75 million increase versus last year from those things combined.

And SAP is a significant portion of that $75 million.

If you look at the SAP spending, the SAP spending is a little bit more front-half loaded in the fiscal year than back-half loaded because of the timing of the waves that were going through implementation.

This wave that we are going to do at the end of September is really the largest wave that we have got remaining for this scope of the project that we are looking at.

And so it will be spread out throughout the quarters but it will be a little bit more front-half loaded.

On the Denim & Supply consumer, what we are really seeing is that the department store customer, our customers, are focused on really driving this millennial customer into their stores.

What we're seeing is a very strong and early reaction.

For instance, in Macy's in Denim & Supply, we are in the impulse department, which is the focus on that millennial customer.

In men's, we are in the young men's area sitting next to Levi.

Both of those businesses have been tracking very, very strongly, men's and women's, in the department stores.

We opened two locations in this quarter, one in Boston and one in New York for Denim & Supply, and off to a very good start and we believe that there will be many stores following that.

We have stores that have opened in Europe and in Asia also performing very well.

So, what we are seeing is that certainly within the Ralph Lauren brand in the Denim & Supply aesthetic, we have really been able to engage with this customer.

And as I said, the sell-throughs, the product mix, the nature of and the exciting look of that product is clearly engaging that customer.

We have a very interesting marketing campaign with the D.J. Avicii, who is of very hot D.J. in that market.

And what is happening is we actually just launched this amazing video that has gotten millions and millions of consumer reactions to it, and it is extremely well done.

And Avicii will be part of our fall campaign with special appearances and a special concert.

So, we are putting a tremendous amount of focus on the opportunity that we see with this millennial customer.

Faye Landes, Cowen and Company.

A couple of things.

Can you -- first of all, you mentioned the impact of FX on gross margin.

I am just trying to figure out what are the exact numbers.

And also more -- and perhaps more crucially, can you define when you expect to return to higher core topline growth rates post the anniversarying of China American Living, et cetera, and what it is going to take to get there?

Sure.

So let me start with gross margin.

So gross margin -- foreign-exchange had about a 50 basis point approximate impact on gross margin.

So if you looked at the gross margin -- you know we talked about the Chaps impact and the FX impact.

If you looked at the gross margin excluding those two impacts, we would have been flat to slightly up in the gross margin on the core business in the quarter.

I think, Faye, in terms of the topline growth, you know all the macro economic factors going on in the world today, so I am not going to rattle those off.

Our focus is on a very underdeveloped Asia business for us.

We have talked consistently for years about seeing Asia as potentially a third of our business in the future with Europe being a third and the United States being a third.

So it's 63% US.

We have got a long way to go in the international markets, whether that is emerging markets like Brazil or other parts of Europe or really the more scalable opportunities in China.

So, we will continue to look at the distribution strategies, the brand strategies, the marketing strategies that will drive an acceleration in the international growth rates.

Within product categories, which is the other focus for us, Jacki touched on several of them.

They have the luxury businesses.

They have the accessory businesses.

And we feel very bullish about the size and opportunity of Polo for women's as well as the Denim business.

So we have product category opportunities as well as geographic opportunities.

And the last leg of that stool is really the ongoing opportunity in e-commerce on a global basis.

We are running significant increases in Europe in e-commerce in our second year.

We will be breakeven or profitable.

We are making big investments in Asia, first in Japan, Korea, but after that China.

We think we have a compelling product.

We have the brand integrity and the product integrity that allows customers to comfortably buy our products online with low return rates.

So, these are very profitable ways to reach customers, particularly in new markets.

It is a much more efficient way to talk to customers than trying to build a very big network of retail-only brick-and-mortar stores in these countries.

So those are the headlines of growth.

We are very committed to them.

We've talked about the investments necessary to make.

We think we are being prudent about balancing that and delivering ongoing shareholder value.

But at this point, those opportunities remain unchanged and unshakable in our mind in terms of where we want to put our management time, energy, and our money.

We will take our last question.

Barbara Wyckoff, CLSA.

Can you talk about the number -- the points of sale that you have in greater China now versus last year?

Could you break out how many concessions you have versus owned retail?

Are we likely to see Polo stores increasing in China versus concessions in the future?

And then thoughts on flagships.

After these flagships open next spring, is that going to be pretty much it for China and then you will focus on other stores like the Blue Label?

Okay, Barbara, let me see if I can summarize, and this will be more directional than absolute specifics.

We took back the licensed distribution in China which was heavily focused on department stores and partners, multiple partners in multiple cities around China.

And when we made the decision to shut that down, it wasn't because they weren't doing business or there wasn't an appetite for the product or it wasn't making money.

We just thought it did not lay the foundation for the kind of brand we wanted to build long-term.

So, as we have said, about 95 points of sale were closed in China over the last five quarters.

Some of that dribbled into the first quarter of this year when Chris talked about discontinued ops, but it wasn't meaningful.

So in essence, we shut the network.

We have been rebuilding really at this point with standalone stores, mall or street locations.

And I think, at this point, we have something in the low teens.

But the flagship we just opened in Hong Kong, men's only, and the flagships we are opening next fall is part of a strategy to have key important flagships in Shanghai, Beijing, and Hong Kong.

We are not, at this point, looking to go into second or third tier cities in any meaningful way until we establish the full complement of the brand in those flagship locations.

Once we have done that and we begin to raise the brand visibility and knowledge, which today only 7% of the population really knows us there, which is in stark contrast to our recognition in the United States or Europe, but we will begin to cascade strategies, distribution points, and brands in those markets.

We also are looking to overlay that with a thoughtful e-commerce strategy which will give broader access to the product than we can reach in a reasonable timeframe with brick-and-mortar.

So with that, I would like to thank you all for listing.

We continue to remain very committed to our long-term growth initiatives and think we have managed the short term as a team very well.

Look for to talking to you in November.

Ladies and gentlemen, that does conclude the conference for today.

Thank you for your participation.

You may now disconnect.