雷夫·羅倫馬球 (RL) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ralph Lauren second-quarter FY16 earnings call.

(Operator Instructions)

I would now like to turn the conference over to our host, Mrs.

Evren Kopelman.

Please go ahead.

Good morning, and thank you for joining Ralph Lauren's second-quarter FY16 conference call.

The agenda for this morning's call includes opening remarks from Stefan Larsson, the Company's new Chief Executive Officer; an overview of the quarter and an update on key strategic initiatives from Chris Peterson, President of Global Brands; followed by financial perspective on the second quarter as well as expectations for FY16 from Bob Madore, Chief Financial Officer.

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

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

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

Our expectations contain many risks and uncertainties.

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

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

Thank you, Evren.

Good morning, everyone.

It's a true pleasure to be on the call this morning.

I want to start by thanking Ralph and the Board for the trust that they have put in me to become the CEO, work by Ralph's side to grow this great Company into the future.

Also want to take the opportunity and thank Chris and the whole Ralph Lauren team for the great work they have done in creating a very strong foundation to build on.

This is a really, really great Company.

Ralph's dreams and vision about a better life, about style, about great quality, about specialness, storytelling have built the brand into one of the most beloved brands in the world.

It started with an idea about a different tie and it grew to become one of the most iconic brands in the world.

This is my first week at the Company.

I have a lot to learn.

The first week started with a Board meeting and an analyst call; I'm excited by that.

I will spend my next few months in the role getting to know our teams, our customers, and our investors.

For those of you who don't know me, I set the bar for performance really high.

For 15 years, I was a part of the team that grew H&M from $3 billion to $17 billion.

Most recently, I led Old Navy, where we drove three consecutive years of high performance and we added $1 billion in sales.

Ralph and I share the same focus on striving for greatness.

We never settle.

And we love winning.

And my job is to make sure we deliver on Ralph's creative vision and drive performance on the highest of levels from both a brand, customer, and shareholder perspective.

I joined because I believe in Ralph.

I believe in his vision.

I believe it's more relevant than any time before.

I believe in the brands.

I believe in the teams.

And together with Ralph and the team, I look forward to continue to grow this unique Company over many years to come.

So with that, over to you, Chris.

Thanks, Stefan, and good morning, everyone.

We are pleased to be reporting better-than-expected second-quarter results this morning.

On a constant-currency basis, revenues were up 4% and diluted earnings per share was up 13% versus year ago, excluding one-time charges.

Profits were significantly better than our expectations entering the quarter, driven by stronger-than-expected operating margins.

This was driven by both gross margin and SG&A improvement.

On gross margins, we are beginning to benefit from the initial phases of the SKU and style rationalization, lower negotiated source income cost, increased full-price sell-throughs, and mix benefit.

SG&A was also significantly better than forecast due to earlier-than-expected cost savings from the global brand reorganization and disciplined expense management.

We are pleased to see margin benefits from these initiatives already, and expect to see top-line benefits as well, as the new global line-planning process is implemented.

Now let me provide an overview of the quarter.

We continued to see the impact of currency movements on foreign tourist traffic around the world.

The stronger US dollar reduced foreign tourist traffic in the US, while the weaker euro and Japanese yen had the opposite effect in those markets.

In Europe, our revenue was up double digits in constant currency, similar to the first quarter.

Growth was driven by increased sales to both local customers and tourists.

Wholesale demand was particularly strong, with robust sell-throughs that drove strong reorders.

All brands across the portfolio performed well, and by region, northern and central Europe performed the best.

In Asia, second-quarter revenue was up 7% in constant currency, with double-digit growth in Japan, China, Southeast Asia, and Australia.

We are successfully elevating our brand in these markets through targeted merchandising strategies and marketing initiatives.

Full-price selling is up year over year, driving better sales and margins.

We are achieving market-share gains through success with local customers, as well as increased tourist traffic.

Korea, Hong Kong, and Macau all were negatively impacted by reduced tourist traffic, and Korea trends started to improve as the lingering effects of the MERS outbreak diminished.

In the Americas, net revenue was up 2% in constant currency.

Sales trends were impacted by the continued decline of traffic to both our retail stores and department stores, driven by lower foreign tourist traffic and an unseasonably warm start to the fall season.

Within our retail store network, we were able to partially offset the traffic declines by driving increased conversion through successful merchandising strategies and marketing initiatives.

Our global e-commerce sales were up 10% in the second quarter, driven by our international business.

In North America e-commerce, we saw improved trends compared to the first quarter.

We made several enhancements in our omni-channel capabilities, including the launch of buy online/ship from store and hold online/pickup in store, and a new feature where customers can be added to a wait list if we are sold out of a size or color.

We also added product videos that are driving a higher average order value.

Within the global factory outlet channel, results were mixed.

Europe saw increased traffic and conversion rates, leading to strong comp-store sales growth.

The US continued to see traffic declines due to fewer foreign tourists.

Importantly, in the US, in locations where domestic customers represent more of the traffic, we achieved positive comps, driven by improved conversion rates that were the result of successful marketing and in-store initiatives.

As we plan the second half of FY16, we are taking a prudent approach, given the slow start to fall in the US, fueled by unseasonably warm weather, and continued declines in foreign tourist traffic.

We believe inventory in the North America department store channel is elevated, and as a result, despite our Q2 beat, we are maintaining our guidance for the full year.

Bob will share more details on our second-half guidance.

Now, let me provide an update on our key strategic initiatives, starting with the transition to our new global brand-management structure.

We made excellent progress in the quarter, with all six brand presidents and their leadership teams now in place; our new global line-planning process well underway; and the clarification of decision rights across brands, regions, and channels.

The global line-planning process is one of the most important elements of the new operating model, as it impacts the way we design, merchandise, and plan our assortments.

The men's Polo brand successfully piloted this new process, as the team planned for the fall 2016 season.

The team began with input from the regions and channels, and a view of the successes and opportunities of the prior season.

This led into category and classification strategies to start the design process.

When the new line was completed several weeks ago, the positive impact of the process was evident, yielding significant product innovation, greater global brand consistency, and style and SKU reductions.

For example, for fall 2016, Polo will feature lighter-weight fabrics and a more wear-now sensibility for warm-weather stores and early deliveries in northern climate stores.

There will also be more elevated product, including more sport coats and dress furnishings, as these elements have seen strong sales in our retail stores.

We expect a double-digit reduction in SKUs compared to the same season last year, and this is on top of the reduction we achieved in fall 2015.

So we are very encouraged by this progress.

We will be rolling out the global line-planning process to other brands over the coming weeks as we kick off the design and development process for the spring 2017 season, and we believe there will be tremendous benefit across our portfolio.

The success of the men's Polo pilot has led to enthusiasm and confidence among the brand teams as to the benefits this new way of working will have on the strength of our assortments and the efficiency of our operation.

We continue to expect a significant reduction in SKUs, and sample and design costs, which will lead to better inventory turns, higher gross margins, and meaningful SG&A cost savings across the brand portfolio over the next 18 to 24 months.

We've also initiated a new global brand strategic-planning process that will be completed over the next few months.

This will be the first time we will have a holistic, strategic view by brand across all geographies and channels of distribution.

We are raising our estimate for annual expense savings associated with the restructure to $110 million from $100 million, given the progress we have made in the global brand restructuring effort, as well as incremental store closures we have identified.

As a result, we expect a higher restructuring charge of $120 million to $150 million versus our previous estimate of $70 million to $100 million.

This increase also includes the impact of recent Management changes and one-time charges primarily related to litigation settlements.

Turning to our direct-to-consumer growth strategy, we are expanding our reach through new store openings and elevating our presentation through renovation activity in our existing fleet.

In the second quarter, we renovated our Ralph Lauren store in South Coast Plaza, which will reopen shortly, and we will be starting renovations at our Beverly Hills flagship store.

These activities will reinforce our luxury presence and elevate our positioning in the Los Angeles market.

For Polo, we opened five new directly operated stores in the quarter, including two in the US and three in Asia.

We also made progress with repositioning select stores to either Ralph Lauren Luxury or the Polo concept in North America.

We expect this effort to drive better alignment and clarity by brand, as well as improved store productivity and efficiency.

Across all brands and concepts, we opened 14 directly operated stores in the second quarter, as well as several licensed locations and concessions.

This brings us to a total of 20 new directly operated stores for the first half of the year, and we are on track to open 40 to 50 new stores for FY16, which will provide mid-single digit square-footage growth, taking into account planned store closings.

Let me turn to some product highlights for the quarter.

We previously announced the clarification of our luxury product offering through the merging of women's and men's Black Label into Ralph Lauren Collection and Purple Label.

The first season of the merged line is delivering now, and the reception is very positive.

We are already seeing the efficiencies of this strategy through a reduction in product development and sample costs, and we expect a strong selling season.

In our accessories business, we continue to gain momentum with our iconic Ricky collection in both existing and new silhouettes and styles.

We also saw double-digit comp growth in scarves, jewelry, and belts, and are continuing to focus on these categories for disproportionate growth.

Now let me turn to Polo Sport, which launched in our retail stores and select department stores worldwide in August, and was followed in October by a launch in 75 top Dick's Sporting Goods stores and on Dickssportinggoods.com.

We kicked off the launch with the introduction of the PoloTech shirt at the US Open tennis tournament.

The shirt, which features industry-leading advancements in wearable technology, has already generated more than 3.1 billion media impressions and continues to receive strong editorial attention.

This was followed by powerful video content leveraged across all distribution channels.

The early read on Polo Sport is positive, and we have already incorporated initial learning from this first season into go-forward development.

We believe Polo Sport will be a significant business for us, as consumers' growing desire for performance and athleisure product fits perfectly with the DNA of the Polo brand.

Overall, we are pleased with the progress we have made this year and we are confident in the Company's potential for future growth.

We believe that the new global brand-management operating model will allow us to more fully leverage the power of our brands, and we continue to make thoughtful, strategic decisions to minimize the impact of near-term market realities and maximize shareholder returns over time.

Before I turn the call over to Bob, let me say that we are all excited to have Stefan joining as our new CEO.

And on behalf of Ralph, myself, and the entire Senior Management Team, we would like to recognize and thank Jacki Nemerov for all of her contributions over the past 11 years.

With that, I'll turn the call over to Bob.

Thank you, Chris, and good morning, everyone.

I'd like to begin with a brief recap of the quarter.

Second-quarter net revenues were up 4% to the prior year on a constant-currency basis, driven by double-digit revenue growth internationally, as well as the contribution of new stores and strong global e-commerce growth.

This is in line with the guidance we provided of 3% to 5% constant-currency growth in August.

The negative FX impact to revenue growth was approximately 500 basis points, largely in line with the expectations.

On a reported basis, net revenues declined 1%, to $2 billion, in the second quarter.

Gross profit margin was 56.5% in the second quarter.

This was 30 basis points below the prior-year period.

The decline in gross profit margin was due to unfavorable foreign currency effects.

On a constant-currency basis, gross margin was up 90 basis points compared to the prior year, due to lower negotiated sourcing costs, benefit from the initial phases of SKU and style rationalization, increased full-price selling, and mix benefits.

Operating margin in the second quarter was 13.5%, excluding one-time charges, 90 basis points below the prior year.

This is significantly better than the outlook we provided of a 275- to 325-basis-point decline in August.

The operating margin was favorable to our guidance due to better-than-expected gross margin, cost savings from the global brand organization plan, and disciplined expense management.

The lower operating margin to the prior year was attributable to negative foreign-currency effects and incremental investments in infrastructure.

Net income for the second quarter was $184 million, or $2.13 per diluted share, excluding one-time charges.

Earnings per share grew 13% to the prior-year period, excluding foreign currency impacts and one-time charges.

On a reported basis, net income was $160 million, or $1.86 per diluted share, in the second quarter.

The effective tax rate of 29% in the second quarter on an adjusted basis was slightly below our guidance of 30% due to discrete tax items and compared to an effective tax rate of 28% in the prior-year period.

Moving on to segment performance, Wholesale revenues increased 3% in constant currency in the second quarter.

Wholesale revenue was supported by double-digit constant currency growth in Europe, with strength across all brands.

On a reported basis, wholesale revenues of $927 million were 2% below the prior-year period.

Wholesale operating margin in the second quarter was 26.8%, excluding one-time charges.

This was 60 basis points above the prior-year period, driven by gross margin improvement and disciplined expense management.

Retail sales increased 5% in constant currency, to $996 million in the second quarter.

Growth was driven by incremental contribution from new stores and strong global e-commerce growth.

Comparable-store sales declined 1% in constant currency and declined 6% on a reported basis.

International same-store sales were positive, with particular strength in Europe, Japan, China, and Australia, but comps declined in North America, as traffic was pressured by the strong US dollar and the overall retail environment.

Our e-commerce trend improved somewhat from last quarter but was offset by our brick-and-mortar comp, which was down 2% to 3%, similar to last quarter.

Within e-commerce, our international business continued to post strong double-digit gains.

Excluding one-time charges, retail operating margin in the second quarter was 12.8%, which was 80 basis points below the prior-year period, reflecting fixed expense deleverage and negative foreign currency effects.

Licensing revenues increased 7% in constant currency in the second quarter, and Licensing operating income was in line with the prior-year period.

Moving on to the balance sheet, consolidated inventory was $1.4 billion at the end of the second quarter, up 7% year over year.

This growth reflects investments to support new store openings and increased shipments of Polo Sport and Polo women's.

At the end of the second quarter, we had 32 more directly operated stores and 82 more concessions in the chain than a year ago, which is contributing to the growth.

We feel comfortable with our inventory levels and the quality of our inventory.

Moving on to capital expenditures, we spent $134 million in the second quarter, compared to $91 million in the prior-year period.

The Company also repurchased 1.1 million shares of its common stock during the second quarter, at a cost of $130 million.

This brought year-to-date repurchases to $280 million.

At the end of the second quarter, approximately $300 million remained available for future share repurchases.

We ended the quarter with approximately $1.1 billion in cash and investments on the balance sheet and $727 million of total debt.

This reflects the new $300 million senior note offering we completed in August.

Now I'd like to turn to guidance for FY16.

As Chris mentioned, we are taking a prudent approach to planning the balance of the fiscal year.

As a result, despite our Q2 beat, we are maintaining our guidance for the full year.

We continue to expect reported revenues to be approximately flat for the year, driven by a 3% to 5% constant-currency revenue growth and 400 basis points of negative impact from foreign currency, based on current exchange rates.

The constant-currency growth will be supported by significant contributions from the strategic initiatives which we have invested in over the last several years, as well as the actions we are taking to mitigate negative currency impacts, including raising pricing for the spring 2016 season in Europe, Japan, Canada, and Australia.

Retail segment revenues are expected to grow faster than Wholesale.

As a reminder, we have a 53rd week in FY16.

Moving on to operating income, on a reported basis, we continue to expect our full-year FY16 operating margin to be approximately 100 to 230 basis points(sic-see press release �180 to 230 basis points�) below FY15's levels due to unfavorable currency impacts.

This guidance excludes one-time charges that are primarily related to restructuring activities associated with our global brand reorganization.

We expect these one-time charges to approximately $120 million to $150 million for FY16, of which $38 million was recognized in the second quarter and $83 million in the first half of FY16.

This is higher than the estimate we shared previously of $70 million to $100 million, due to inclusion of additional charges associated with the recently announced Management changes and additional restructuring activities.

Our FY16 tax rate is expected to be 30%.

We are planning approximately $400 million to $500 million in capital expenditures in FY16 to support our global direct-to-consumer and infrastructure investments.

For the third quarter of FY16, we expect net revenues to grow 0% to 2% on a reported basis.

We estimate the negative currency impact on sales growth in the third quarter to be 250 basis points.

Our operating margin for the third quarter is expected to be 200 to 250 basis points below the prior-year period due to negative foreign-currency effects and infrastructure investments.

The third-quarter tax rate is estimated at 31%.

Overall, we are pleased with the better-than-expected second-quarter results.

Disciplined planning and rigorous attention to the day-to-day execution enabled us to offset meaningful FX and environmental headwinds, in addition to driving our strategic initiatives forward.

With that, we will open the call up for your questions.

Operator, can you assist us with that?

(Operator Instructions)

Omar Saad, Evercore ISI.

Thank you.

Good morning, nice quarter, guys.

Stefan, I know it's your first week, so I'm not going to ask you many detailed questions on the Company, but would love to get your view on the global apparel fashion landscape, how you see evolving, especially given your experiences at H&M and Old Navy, which are two very different brands than Ralph Lauren.

And then accordingly, how does that shape your view of what the biggest opportunities are at Ralph Lauren?

Thank you.

Thank you, Omar.

And start with I hear it as two questions, one being my view on the global landscape.

So I believe that independently of where you are in the market today, in fashion apparel, you have to be special, you to be unique, you have to be exciting, you have to stand for something, you have to be consistent, you have to focus on quality, you have to focus on the experience, and you have to deliver something great.

So that's very much what attracted me when I had that first dinner with Ralph.

I realized that this is his vision, this is how he has built this great Company.

And that's why said in my opening remarks that I believe it's -- that vision is more relevant than ever before, given what I see happening out there.

Coming to the biggest opportunists, that connects to me, to the biggest opportunities.

I believe that Ralph's vision that started with ties in a drawer at the Empire State Building and has built into where we stand right now is just the beginning.

I believe that there are really good days ahead of us.

Michael Binetti, UBS.

Hey, good morning, guys.

Congratulations on a great quarter in a tough environment.

Just two questions, and I apologize if they're a little wordy.

So I was a little surprised by the magnitude of the gross margin improvement from the SKU improvement you guys made this early, considering you told us the rollout of the global SKU program would really be only in place for one brand, Polo I think by fall of 2016.

It sounds like you went through a smaller manual process today and it translated to a lot of improvement.

Can you give us any quantitative metrics to help us think about how much you lowered SKUs by this quarter, and how that may -- what the magnitude of that is relative to what we're going to see next year in the fall as you roll it out?

And then as a follow-up, we've -- you've had us focused on some investment buckets for the past few years.

You've comment on e-commerce and SAP's been peaking this year.

I think you'll have less intensity in flagship openings next year, so maybe the retail investment isn't quite as intense.

But maybe if we start adding up those buckets again, can you give us your early thoughts based on the components as you see them today for the ability to leverage margins in FY17?

Thank you.

Sure, so let me take the first part of that first.

I think the results obviously came in significantly better than we expected this quarter when we gave guidance on the quarter.

And really about -- we beat the operating margin expectation that we had by about 200 basis points.

And if you look at that beat, about half of it was due to gross margin and half of it was due to SG&A, and it was really a function of a number of items.

On the gross margin side, we did see benefits from the SKU and style rationalization.

And you're right that we tackled that when we started the global merchandising group about a year or two ago in a manual way.

We're just scratching the surface of that, I would say at this point, because the systemic approach to the style and SKU rationalization is really what's coming in the global line-planning process, which was going to kick in 12 to 18 months from now.

So I would say if you looked at Men's Polo for fall of 2015, we might have been down a low double-digit percentage of styles and SKUs.

And then when you look at fall of 2016, we are expecting, again, even versus that lower base, another improvement of equal magnitude.

And I think on many of the other brands, we've had an initial little bit of a progress, but I think there's more progress ahead of us going forward, as we move into the line-planning process.

We also, on the gross margin side, though, benefited from the lower negotiated sourcing cost.

If you recall, when we took the big foreign exchange hurt back earlier this calendar year, we commissioned our manufacturing and sourcing group to go back to our sourcing and supply chain base.

And that sourcing discussion and cost discussion has resulted in average unit cost reductions that came a little bit bigger than we expected and faster.

Then we also benefited from improved full-price sell-throughs during the quarter.

So all of that went in the positive direction, which led to the gross margin improvement.

Relative to next fiscal year, I think we are just about to kick off the budgeting process, so it's premature to give guidance on next fiscal year.

We'll provide qualitative perspective at our next call.

But your comment is accurate in that certainly from an infrastructure standpoint, we expect the e-commerce replatforming spend to be higher next year as we ramp up the work on moving to the new e-commerce platform.

But we do expect the SAP spending to moderate, so I expect infrastructure in total to not be a significant year-over-year driver.

The retail investment also I don't expect to be a year-over-year driver, because we are at about the rate of new store openings that we anticipate going forward.

I do think that we're going to see foreign-exchange impact next year continuing, primarily on the transactional side.

Because the hedging program that we had in place this year will roll off over the next 9 to 12 months, so we'll see a transactional head, although the translational impact should be small to nonexistent at current rates.

But then we're going to start to see some of the benefits from all of the restructuring work that we've done, both from the global brand restructuring, from the line planning, and from the pricing actions that we've put in place that should start to roll in over the next 12 months.

So we'll provide more specifics on how all of that nets against each other on next call, but that's where we stand at the moment

Bob Drbul, Nomura Securities.

Good morning.

You mentioned that the inventory levels at retail and in department stores were elevated a bit.

When you look at the forecast that you've laid out for the rest of this fiscal year, can you just walk us through some of the mark-down assumptions that you will see necessary, and how you're thinking about the mark-down support to department stores versus your own retail operations?

Yes.

I think we feel very good about the currency of our inventory.

So when we look at our inventory, the currency of our inventory is very well-positioned from a current season and future season basis versus a prior-season inventory.

The inventory growth that we've had in our inventory versus year ago is really to support new store activity and new product introductions like Polo Sport around the world.

When we look at the US department store channel, I think that's the place where we see a little bit of elevated inventory across the channel that is not just in our business, but in, broadly defined, in many of the competitors.

And I think it's a function of the foreign tourist traffic being down in the US, as well as the unseasonably warm start to the fall season.

And so as we approach the holiday selling period, which is obviously the biggest selling period of the year for our industry, we felt like it was the right thing to take a prudent approach to that, given where we're headed.

We've got a long history of navigating through this in a very strong way, and we've got real expertise within the Company to help us do this.

And what we're trying to do is keep our inventory fresh and current, exit the season in a positive way as we transition to the next season, but do that in a way that protects the brand equity in the consumer's eyes.

So that's what we are going to be doing, as we've done for many years.

Kate McShane, Citigroup.

Hi, thank you.

Good morning.

Just on the outlook for the back half of the year, why don't you think some of your expense management and lower sourcing cost impacting the back half more?

Are there any expenses that shifted out of this quarter into the next quarter?

And is the caution on the back half of the year more from that cancellations or the potential for cancellations or more from anticipated mark downs at your wholesale partners?

Yes, so I think that we didn't -- we haven't seen expense shifts that have gone from the second quarter to the third quarter.

So I think we're being prudent, given the environment that we see as we head through the back half of the year.

So the guidance for the back half of the year is really more a function of that.

We have not seen cancellations in orders.

And in fact, if you look broadly across the business, it's really a mixed environment.

In Europe, our reorder rate is stronger than it's ever been.

And so we're seeing real strength in the wholesale channel in Europe, and we are chasing to catch up with the reorder rate there.

In the US, I think we're being cautious given the environment that we're facing.

We're wanting to manage the mark-down allowances in a prudent manner that, as I mentioned on the previous question, positions us well as we exit the fall season and transition into the spring season.

David Glick, Buckingham Research.

Yes, good morning.

Thank you.

Just a question on your Polo retail strategy.

Obviously, it's one of your key growth pillars.

The men's business is a, obviously a very well established business at wholesale and retail.

WoMen's Polo is a newer business, I presume to attract a younger consumer.

San you share with us your learning so far, and what, if any, repositioning you have to do from an assortment perspective, maybe from casual to dressier?

How are you feeling about the Polo women's business, and is this still just an important growth initiative, as it was positioned certainly over the last year?

Thank you

Yes, you're exactly right.

We feel very good about the Polo Men's business, which is historically one of the strongest businesses in the Company.

The Polo Women's business we launched about a year ago, and we've seen what I would say as good results to date.

The business has been stronger internationally than it has in the US as we've started off.

In the international markets in Europe and in Asia, we largely replaced the Blue Label business that was discontinued, and we took many of the locations that were Blue Label locations and converted them to WoMen's Polo locations.

In that business, the WoMen's Polo business is now not only surpassed the size of the Blue Label business, but at price points that are below where Blue Label was.

So the unit velocity of the Blue Label -- of the Polo Women's business internationally is more than double the unit velocity rate of the Blue Label business.

And we see significant expansion opportunities for distribution of WoMen's Polo around the world.

In the US, where we didn't have a very well-developed Blue Label business, we launched WoMen's Polo in incremental spaces into the marketplace.

I think we are off to a good start in that business.

We see it as a critical element of the Company's future growth strategy, and we're working to take learnings from the initial seasons and develop them into the line as part of the line-planning process that we're kicking off for WoMen's Polo as we go forward.

So I think we are encouraged by the start that we've had, but there's more to do and certainly a lot more opportunity ahead of us.

Because as you know, the women's fashion and apparel business is bigger than men's and with the strength of the Polo brand, and the strength of Polo Men's, we continue to see a big opportunity in Polo Women's.

Christian Buss, Credit Suisse.

I was wondering if you could talk a little bit about the line-planning process and what kind of changes you are making there.

If you could talk about how far into the 2016 design season you are now, and where the real opportunities are for improvement of the design process and the cleaning up of the design process

Sure, as I mentioned a little bit in the prepared remarks, we started with a pilot of the line-planning process on the Men's Polo line, which is our biggest line, for fall of 2016.

And we've now largely completed that pilot process.

And it's interesting because the way that we did the pilot process is we started with a hindsighting approach of looking at prior seasons.

We also then engaged all of the region and channel leaders around the world to bring in consumer input and feedback into develop -- which we used to develop category and classification strategies and develop specific targets for price points, margins, SKUs by category and classification, which then led to an architecture that we handed off to the design community.

And I have to say, the design community did an outstanding job of using that feedback and designing a line that is very compelling.

So that line that was designed is now been shared back with the regions and the channel teams, and the response from the region and channel teams has been terrific to the design community's progress in terms of product innovation.

I'm not going to talk about all the product innovation at this point, because I don't want to give away too much of our secrets.

But I referenced a couple of the items that you're going to see as we move into the fall 2016 Men's Polo line.

You are going to see us having lighter weight fabrics, a more wear-now sensibility.

About half of the Polo distribution is in warm weather climate locations, and we felt like we had a big opportunity to design into that so that both for the early part of the fall season in the northern climate stores and the majority of the fall season in the warm climate stores we had product that was more compelling, more innovative, and more attractive for those target locations, and I think we've delivered on that.

And there's a series of themes like that, that you're going to see as we go through that.

So that's where we are really for the fall process on the line-planning process.

We're really kicking off the line-planning process for the spring 2017 season for the majority of the balance of the brands and categories.

And so, I expect that we'll see similar results for the spring 2017 season as we get through those the process on the other brands.

Rick Patel, Stephens.

Good morning.

Nice quarter, and Stefan, great to have you on the call.

I have a question on e-commerce.

So it seems like you did quite well globally, but if I recall correctly, there were significant competitor promotions in the last quarter.

I'm curious if they continued and perhaps limited the upside for this channel.

And then secondly, just a question on e-commerce margins, because it's managed by partners right now but as you go live with your own websites in the coming years, what kind of margin uptick should we expect from bringing it in-house?

Thank you.

Sure.

The global e-commerce revenue was up 10% in the second quarter, and this compared to the 2% increase we had in the first quarter.

So we were encouraged by the acceleration of revenue growth in the e-commerce channel.

I think that we continued to stay true to our promotional cadence, where, as I mentioned on the last call, we decided to pull back a little bit in terms of the amount of business that we were doing on sale.

But what we had this quarter were some omni-channel initiatives, like buy online, ship from store; hold online, pickup in store; the new wait-list functionality; and product videos that drove higher average order value.

And the combination of those new omni-channel initiatives I think is what drove the return to stronger growth.

And that was true both internationally, but also true in the North America e-commerce business.

Relative to the profitability, today we pay eBay enterprises, or the formally GSI, a percent of revenue for the service that they're providing on -- that's a percent of e-commerce revenue.

In addition to that, we're incurring charges associated with insourcing the platform.

Once we convert off of the GSI platform to our in-sourced platform, that GSI fee will go to zero.

And so we're effectively double paying, if you will, today for both in-house and outsourced capability.

We expect to convert off of the eBay GSI platform over the next 12 to 18 months.

But I think you'll see us double paying for a 12- to 18-month period, and then you'll see us start to generate the benefit after that.

The other point I would make is we expect the in-sourced capability and cost to be lower than the GSI fee that we are paying, so it's not just that we're getting more capability, but we're getting more capability at a lower going cost structure.

Lindsey Drucker Mann, Goldman Sachs.

Thank you, good morning, everyone.

I wanted to ask two quick ones.

First, you've talked about price increases that you took -- high single-digit price increases that you took on products sold overseas, and I know that that product doesn't really hit the shelves until the spring season.

But I was curious if you had any read -- I know your customers have generally accepted the price increases, if there's any read that gives you more or less confidence that consumers will also accept them.

And then second, Chris, if you could just touch on now that you're actually seeing some of the benefits from the work you've been doing over the last several quarters and improving efficiencies, line-planning SKU reduction, all that sort of stuff, whether you have fresh perspective on what the margin recovery opportunity is for the business over the longer term, as all of these things that you sound so encouraged by and all the long-term opportunity to improve efficiency really comes through?

Thank you.

Sure, let me start with the price increase question.

So I think it's a little bit early to talk about the consumer reaction to the price increase, but I'll give you a little bit of what we're seeing.

And it's encouraging, because we did see, and as you know, we took mid to high single-digit price increases in the -- to respond to the currency devaluation in Europe, in Canada, in Japan, and in Australia, which were the markets that were the most affected by devaluation.

In Europe, which is the largest market that we've taken price increases in, we still haven't got the product on the floor in front of consumers, but we have gone through a wholesale market with the higher prices.

And what we've seen from that market from wholesale orders is that the wholesale orders have been actually in line with our previous growth rate in terms of unit volume.

And so the pricing has come on top of the unit volume, and so we're encouraged by that from a sell-in perspective where we're seeing that the pricing isn't a barrier to strong sell-in in the wholesale channel.

We're also hearing that many of the competitors are taking pricing in the market as well, but we don't yet have the consumer read of what is the consumer reaction when that product shows up on the retail and wholesale floors.

I expect that we'll get some early indication of that over the next three months or so.

And then on the question on longer-term margin, certainly, we are very encouraged by the line-planning work that we've done, the SKU reduction opportunity, the global brand reorganization from a cost savings and from a efficiency of operation.

I think it's a little bit too soon to say what that means for longer-term margins, but certainly we believe all of these things can contribute to a margin improvement story over the next three to five years.

And so we are very much shooting for an operating margin improvement story over that time period, as many of these initiatives begin to take hold.

Matthew Boss, JPMorgan.

Congratulations on the nice quarter.

So as we think about the go-forward constant currency revenues, aside from the mid-single-digit square-footage growth, which should continue, what's the best way to think about steady state North America and Europe wholesale growth versus retail comps, again, in more of a steady-state environment, if we ever see one?

Yes.

I think that we would like to return to a steady-state environment, but we are not counting on it, on returning to a steady-state environment.

So I think we're trying to manage the business in a volatile and a period where we are seeing significant moves and tourist traffic around the world.

I do think if you look at Europe and the US combined, from a wholesale perspective, I think our view is that that channel is going to grow at a low single-digit rate.

We continue to believe that we can grow market share in that channel by entering new product categories and innovating on our product line.

So we think we might be able to grow 2 points faster than the channels, as we gain market share, which we've pretty consistently done over the last 5 to 10 years.

And then I think our direct-to-consumer strategy of e-commerce and retail expansion is likely to remain a disproportionate growth driver for us going forward.

Jay Sole, Morgan Stanley.

Hi, good morning.

Stefan, I want to ask you a little bit more about your answer to the first question.

At Old Navy, you talk a lot about how aspirational is becoming an aspirational, and the democratization of fashion was a big reason that Old Navy was becoming more successful.

Can you talk about how the Ralph Lauren and Polo brands can navigate through that environment, and how -- what your vision is to keep the brand special and continue to perform well?

Okay, thank you, Jay.

I'll start with saying that I have a lot to learn.

I'm -- what I already know though, is that there are things happening out there, bigger changes in the environment than ever before over the last 50 years in fashion apparel.

And one change that I see is that the customer wants something special, and it has to be unique and there has to be a story.

And you hear a lot of brands speaking about storytelling.

And then you can look back at what Ralph and the team has done.

It's been years before anybody else in telling real stories, inviting customers into a movie, sharing a dream of a better life.

So I believe that there is a real strength in that going forward, as well.

And then I have to come back to you when it comes to outright learned more about the brands, the consumer, the market and started to work with the team here on crafting and out-refining the growth strategy that we already have.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone.

Can you hear me okay?

Yes.

Just, speed is a competitive advantage that certainly both of you have addressed.

And Chris, just wanted to know how far along do you feel the business is currently in your speed initiative?

And Stefan, what competencies of speed in your former jobs do think could be brought over to Ralph Lauren over time?

And Chris, how do you see this as a margin enhancer also?

Thank you.

I'll start, and then I'll let Stefan finished.

I think that part of what we're doing by moving to the global brand structure is about speed of decision-making and speed of execution in the market.

Because when you have a centralized point of view by brand that, with all the functional groups represented as part of the brand team, it allows us to move in a faster way.

I will say that we are not yet there from a moving -- and as fast as I think we could in some areas, and a lot of that's because we're just at the beginning of the global brand structure.

The global brand teams have been in place now for only a couple of months, and so I think they're both getting up to speed on the business, implementing line plans for the first time, developing brand strategies.

We're starting to get brand financial reporting up to enable those teams to really manage the business on a more real-time basis.

And so I think we're making progress, but there's more work to do.

Yes, and to build on what Chris said, and hi Dana.

I believe speed is important.

I've received questions throughout my career on speed.

I believe it has to be grounded in an original idea.

When I look at what Ralph and the team has done to build the Company to where it stands right now, it's based on an authentic idea.

And so it's about being authentic and it's about being current at the same time.

And that's part of the changes I see in the market, and that is part of why I'm very excited to be here.

Because Ralph has created something original.

And being very authentic to that and working with the team to being more and more and more and more authentic, but at the same time making sure that we are current.

So it's finding those two components, and that will deliver something that the consumer will be excited about and that will drive growth over time.

Okay, thank you very much for joining this morning, and we will look forward to following up with you for additional questions as always, as appropriate.

Thank you very much.

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

Thank you for your participation.

You may now disconnect.