雷夫·羅倫馬球 (RL) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ralph Lauren second-quarter fiscal year 2017 earnings call.

At this time all 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 a reminder, this conference is being recorded.

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 fiscal 2017 conference call.

With me today are Stefan Larsson, the Company's President and Chief Executive Officer, and Jane Nielsen, Chief Financial Officer.

After 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.

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

To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release and to our SEC filings that can be found on our investor relations website.

And now I will turn the call over to Stefan.

Thank you, Evren, and good morning, everyone.

Since we last spoke on our earnings call in August, the team and I have continued our intense focus on driving the execution of our Way Forward Plan.

The Way Forward Plan as a reminder is our multi-year strategy to build on the unique brand strength we have, go back to the core of what made Ralph Lauren iconic, evolve from that core and build the business back to sustainable, profitable growth.

We are two quarters into executing on the plan and my focus is leading our teams to ensure that every action we take today drives towards our long-term Way Forward goals while at the same time optimizing near-term performance.

Today I will share my key learnings from the second quarter and then provide an update on our progress in driving the execution of our Way Forward Plan.

Then I am excited about having Jane here with me and will turn it over to her to review the details of the Company's quarterly financial performance and our outlook for fiscal 2017.

In the second quarter, we continued to deliver against our expectations.

Our performance keeps us on track to achieve our full-year fiscal 2017 guidance with some changes in the quarterly flow.

In the second quarter, revenue of $1.8 billion was consistent with our plan while operating margin was ahead of our target driven by higher gross margins in our international markets, quality of sales initiatives starting to get traction and planned SG&A expenses shifting into the third quarter.

Jane will take you through these in detail.

Our revenue in the quarter declined in line with our plan, down 8% versus prior year with continued and expected larger decline in wholesale than retail.

Consistent with our Way Forward Plan, we continue to drive the quality of our sales up by moderating discount rates, tightening inventory buys and closing another seven underperforming stores in the quarter.

These initiatives successfully reduced inventories which were down 15% to last year at the end of the quarter.

North America continues to be our most challenged market where revenue declined 12% in the quarter.

As I shared on our last call, assessing our North American challenge which to a large extent is self induced and building and executing a plan to get back to winning in North America is one of our biggest priorities.

In our international markets, revenue increased 2% in the second quarter.

Our teams there continued to drive up quality of sales, right-sized the inventory and optimized the store fleets to build the foundation for profitable growth.

In Asia, we continue to see encouraging results of our proactive quality of sales actions.

Over the last nine months, our team has now closed a total of 72 points of distribution that weakened the brand and opened 159 new high-quality points of sale.

The new points of distribution have better locations, improved adjacencies and refreshed store environments relative to the locations we closed.

In addition, we continue to reduce the length of the sale periods and significantly decrease the depth of markdown rates.

We continue to see the positive impact of our initiatives on profitability.

Over the past nine months, our average unit retail prices are up 10% in constant currency and our gross profit margin continues to expand.

In Europe, growth remained solid in the second quarter and our team centered on tighter inventory management, strengthening the assortment and resulting in improved margins.

Now let me give you a few important updates on our progress on the execution of the Way Forward Plan.

As we are still early in the execution of the plan, there will often be a lag time between when we take a Way Forward action and when it shows up in the P&L.

However, I do see early indicators of success and I will use these calls to give you updates on the progress points of our execution.

The Way Forward Plan is built on two key parts.

The first is consumer facing where we are going to focus on and evolve from the core in product, marketing and the shopping experience.

The second part is about evolving the operating model where we are developing four business engines, a systematic repeatable way of building a stronger assortment, a demand driven supply chain, a best-in-class sourcing capability and a multichannel global expansion strategy.

Underlying both of these two parts is the foundation of strengthening the leadership team and culture as well as developing a strong economic model.

With the addition of Jane Nielsen from Coach and Bill Campbell from Amazon last quarter, we are now very close to having our full operations team in place.

The only outstanding role to fill is a Global Chief Marketing officer and we are underway with that search.

Delivering on our objective to increase our focus and resources on our core brands, we recently announced our decision to discontinue the Denim & Supply brand.

We will address the denim market more effectively through our Polo brand by leveraging the brand's strength of Polo.

Moving on to the work of evolving the assortment and product, I'm excited about the work that Valerie and her team are driving in cutting the product tail, really focusing our core product offering and evolving from that core.

In the second quarter, we continued to make good progress in identifying and cutting the long tail of unproductive styles, leading to a big reduction in the number of SKUs.

For fall 2016, we achieved a 10% reduction in SKUs across our apparel brands and for spring 2017, we are on track to achieve over a 20% reduction and for fall 2017, we are on the way to further SKU reductions.

The style and SKU reduction frees up time, resources and creativity to focus on and evolve our core icons leading to more productive and desirable assortments.

Our improved discipline in the assortment creation enables us to buy closer to market and reduce early commitments.

We continue to expect to be halfway to our goal of a nine-month lead time by the end of this fiscal year and 90% there by the end of the next fiscal year.

The key unlock for our shorter lead times is the fabric platforming for our core styles.

We made significant progress in this area during the quarter.

Almost all of our core fabrics will be platformed by the end of this month.

This enables us to increase the quality of our fabric, secure better prices and decrease our lead times and increase our flexibility to react to selling in season.

We can now for the first time work in partnership with our big customers and move from buying blind before their buys to buying our inventory based on their buys and therefore significantly improve matching our inventory to the real demand.

In the second quarter, we continued to drive down inventory levels across the Company to get closer to matching inventory with demand.

In addition to our inventory restructuring actions, I'm pleased with our meaningful progress to reduce inventory buys.

Although we are still in the early stages of this journey, optimizing our buys should improve sellthroughs and gross margin rates.

Now I want to share our plan to come back to high-performance in North America.

North America is our largest market and one where it is essential for us to return to profitable growth.

The plan is based on leveraging our unique brand strengths, solid market position and strong relationships with our wholesale partners.

As we mentioned on our last call, Jeff Kuster joined in July as our new Group President for the Americas.

Together with his team, Jeff has worked through a detailed fact based assessment of our North American challenges.

From that assessment, we have built a plan that will take us back to strength and strength in North America starts with our US wholesale business.

The challenges we face there are similar to our overall challenges as a Company that we shared during our investor day in June.

We have been buying too much inventory, letting that overflow to value channels, buying too much in the product tail, buying too early before the customers have bought, not created room to chase in season and distributed too much in the low-volume shops and promoted too deep and too frequently.

To start building strength back, we will work even more closely with our biggest wholesale customers, partnering together with them to build strength that will make us both drive high performance.

Together we will first, reduce our overall buys to better match demand.

This will reduce the overflow of inventory going to value channels.

Second, cut the product tail and refocus investments in the evolved core.

This will improve inventory productivity.

Third, we will cut supplier lead times.

This will allow our customers to buy much closer in and improve the flexibility to chase in season.

Fourth, we will refocus our marketing efforts in line with our Way Forward Plan to develop cut-through marketing campaigns for our main brands.

This will be targeted to drive traffic and conversion.

Our first initiatives will start with Polo in the first quarter of fiscal 2018.

Fifth and finally, working in collaboration with our partners, we will reduce and close the tail of our distribution which accounts for 20% to 25% of the total distribution points.

These shops represent a very small share of sales and profit for us as well as our partners.

Just as with assortment, we will refocus on and evolve from the core which means the top selling doors and invest in refreshing and rebuilding the store experience.

This will create an exciting shopping experience and supercharge the evolved assortment strategy.

It is worth mentioning again that we believe in a strong wholesale channel and a well-executed department store.

We believe a well-curated department store offers a convenient and exciting shopping experience that saves the consumer time while also bringing them into the brand.

Our distribution plan will follow the consumer and department stores, off and online, represent one of the largest channels the full price consumer shops today and in the near future.

Parallel to strengthening our wholesale efforts, we are also strengthening our e-commerce presence.

But even though department stores represent one of the biggest channels for our consumers, the e-commerce channel has the highest growth rate and is increasingly important.

Our assessment of our e-commerce challenges and our plan to strengthen e-commerce are also very much in line with our overall Way Forward assessment and plan.

We are reducing the overall buys, we are reducing the promotions, we are reducing the product tail, we are refocusing on and evolving our core products and we will start to present them in an evolved and refreshed way.

We have taken the first steps here and you can now see our refreshed landing pages on both our mobile as well as our desktop site.

We recently launched our redesigned mobile site which features significant improvements in functionality.

We improved the check-out process, navigation and creative execution and many more steps to follow on that.

Finally, a few words on marketing.

In September, we held our first ever see-now-buy-now runway show for the women's collection.

The show was held in a glass structure on the sidewalk outside our Madison Avenue flagship.

We even managed to close down Madison Avenue for a few hours.

It was a big success and generated more than twice the global media value compared to the previous season's show.

We also recently launched a Ralph Lauren Icons campaign in our women's luxury business.

It is built on our Way Forward goal to refocus on and evolve from core iconic products to make them even more desirable to today's consumer.

The response so far has been very positive.

In conclusion, we are making good progress against our Way Forward Plan.

While most of it is still to be done, I am excited with what I see.

During the last three months while we have been getting ready to execute the holiday season, I've been traveling extensively and spent much time with our teams and our biggest customers.

From my perspective, whether I am in Little Rock, Arkansas with our friends at Dillard's or seeing our newly renovated flagship store come to life on Rodeo Drive in Beverly Hills or visiting our new Polo store on Regent Street in London, I feel the excitement from our teams and partners that we are starting to move towards unlocking the true potential of this great brand that Ralph started almost 50 years ago.

So with that, I would like to turn the call over to Jane.

Thank you, Stefan.

Good morning, everyone.

It is great to be with all love you and to be a part of the Ralph Lauren team.

I am excited about executing our Way Forward Plan and sharing our progress with you.

Second-quarter net revenues of $1.8 billion were down 8% to last year on both a reported and constant currency basis.

This reflects our quality of sales initiatives starting to take hold and is in line with the guidance we provided in August of mid to high single-digit revenue decline.

Foreign currency translation did not have a material impact on revenue growth this second quarter.

On an adjusted basis, gross margin was 56.9% in the second quarter excluding non-cash inventory related charges of $81 million associated with our restructuring activity.

This was 40 basis points above prior year primarily driven by favorable geographic and channel mix shifts, improved product costing and initiatives to improve quality of sales primarily through reduced promotional activity in our international businesses.

This was partially offset by unfavorable foreign currency effect of approximately 80 basis points.

Operating expenses on an adjusted basis were $809 million excluding $69 million in restructuring and other related charges.

These expenses were down 4% compared to last year primarily as a result of the expense initiatives under the Way Forward Plan including headcount reductions and seven store closures.

Store closures in the second quarter were lower than expectations.

We delayed closures to take advantage of the peak holiday shopping period and to minimize store closure costs through negotiations with our landlords.

Adjusted operating margin in the second quarter was 12.4% excluding $150 million in restructuring and other related charges.

This was 110 basis points below last year due to fixed cost expense deleverage on lower net revenues which was partially offset by our improved gross margin.

The adjusted operating margin performance was better than the outlook we provided in August of a 200 to 250 basis point decline.

This was primarily driven by improved gross margin in our international markets and a change in the timing of about $12 million of planned SG&A expense which benefited the second quarter and will shift into the third quarter.

Adjusted net income for the second quarter was $158 million or $1.90 per diluted share excluding restructuring and other related charges.

On a reported basis, net income in the second quarter was $45 million or $0.55 per diluted share.

The effective tax rate was 29% in the second quarter on an adjusted basis, similar to the effective tax rate of 29% in the prior year period.

Moving on to segment performance, wholesale revenues decreased 10% to $831 million on both a reported and constant currency basis in the second quarter.

The decrease was primarily driven by a decline in North America as shipments were strategically reduced as a part of the Way Forward Plan.

This was partially offset by wholesale revenue growth in Europe.

Adjusted wholesale operating margin in the second quarter was 26.4% excluding restructuring and other related charges.

This was 40 basis points below prior-year.

Retail segment sales decreased 5% to $942 million on a reported basis and were down 6% on a constant currency basis driven by a comparable-store sales decline.

Consolidated comparable-store sales decreased 9% in constant currency and 8% as reported primarily due to challenging traffic and average dollar transaction trends.

Similarly, global e-commerce revenues declined 7% during the quarter on a reported basis and 6% in constant currency driven by our price harmonization initiatives.

Retail operating margin in the second quarter excluding restructuring and other related charges was 11.8% which was 100 basis points below the prior year period.

Licensing revenues increased 2% on a reported basis and were flat in constant currency.

Licensing segment operating income increased 5% in the second quarter compared with the prior year period.

Turning to distribution, at the end of the second quarter, we had 485 directly operated standalone stores and 620 concessions globally.

Compared to the second quarter of fiscal 2016, the Company had five net new directly operated stores and 44 net new concession shops at the end of this second quarter.

In addition, our international licensing partners operated 102 Ralph Lauren stores and 20 dedicated shops as well as 59 Club Monaco stores and 77 Club Monaco concession shops at the end of the second quarter.

We continue to close underperforming doors that we identified as a part of the Way Forward Plan.

In the second quarter, we closed seven standalone stores bringing the total for the first half to 15 store closures as a part of our restructuring activity.

These stores were geographically dispersed and primarily in our full price concept.

For the full-year, we still expect to close approximately 50 stores.

More of the closures are now slated for the fourth quarter after the holiday period.

We continue to take a pragmatic approach to closures, balancing closure timing with realizing peak holiday season sales volume and minimizing door closure costs.

Additionally, we continue to right-size our cost structure and expect to make continued progress as we close out our fiscal year.

Now let me provide you with an update on our restructuring activities related to the Way Forward Plan.

The Company continues to expect restructuring activities to result in approximately $180 million to $220 million of annualized expense savings related to its initiatives to streamline the organization structure and right-size the cost structure and our efforts to optimize the real estate portfolio.

We continue to expect restructuring charges of about $400 million as a result of our Way Forward Plan and about $150 million in inventory charges related to our restructuring activities.

These charges are expected to be substantially realized by the end of fiscal 2017.

In the second quarter of fiscal 2017, the Company recorded $150 million in restructuring related impairment in inventory charges.

Moving onto the balance sheet, consolidated inventory was $1.2 billion at the end of the second quarter, down 15% or $200 million compared to the end of the prior year period.

The reduction was attributable to both restructuring actions and about 40% due to our operating process initiatives to reduce inventory including a proactive pullback in receipts and our early efforts to move toward a demand driven supply chain.

Our progress in the second quarter increases our confidence that inventory will continue to show double-digit declines for the remainder of the year and inventory quality will continue to improve.

Moving onto capital expenditures.

We spent $87 million in the second quarter of fiscal 2017 compared to $134 million in the prior year period mostly to support our retail store network and infrastructure projects.

During the second quarter, approximately 80,000 shares of Class A common stock were retired as a part of the $100 million accelerated share repurchase program the Company initiated in the first quarter of fiscal 2017.

There were no new share repurchases in the second quarter.

At the end of the second quarter, $200 million remained available for future share repurchases.

We ended the second quarter with approximately $1.1 billion in cash and investments on the balance sheet and $692 million of total debt.

I would like to now turn to guidance for fiscal 2017.

As a reminder, this guidance excludes the restructuring and other related charges in connection with the Company's Way Forward Plan.

For fiscal 2017, we are maintaining our guidance.

We continue to expect consolidated net revenues to decrease at a low double-digit rate as we execute our Way Forward Plan.

Key elements include a proactive pullback in inventory receipts, store closures, pricing harmonization and quality of sale initiatives.

Based on current exchange rates, foreign currency is expected to have minimal impact on revenue growth in fiscal 2017.

The Company continues to expect operating margin for fiscal 2017 to be approximately 10% as cost savings are expected to be offset by growth in new store expenses, unfavorable foreign currency impacts in gross margin and SG&A, infrastructure investments and fixed expense deleverage.

Fiscal 2017 tax rate is expected to be approximately 29%.

For the third quarter, the Company expects consolidated net revenues to be down low double digits, down low teens on a reported basis.

Based on current exchange rates, foreign currency is expected to have a minimal impact on revenue growth but should pressure gross margin by at least 120 basis points.

Operating margin for the third quarter is expected to be approximately 200 to 225 basis points below the comparable year prior period.

Key pressure points are FX pressures to gross margin and the shift in timing of about $12 million in planned operating expenses from the second to the third quarter.

In addition, savings initiatives from the Way Forward Plan will be more fully realized in the fourth quarter as more store closures are slated for after the holiday period.

The third-quarter tax rate is estimated at 29%.

In closing, we are pleased with the progress we are making on our Way Forward Plan.

We have the key elements in place to ensure continued progress.

We have strong and collaborative relationships with our wholesale partners, a strong brand, a strong balance sheet and a motivated and committed team of over 25,000 Ralph Lauren employees around the globe.

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

(Operator Instructions).

Omar Saad, Evercore ISI.

Thanks, good morning.

Congrats on the progress.

I wanted to ask kind of a macro question.

It is super turbulent out there still, a lot of moving pieces from a top-down perspective in the markets on a global basis.

You are making progress on the Way Forward Plan.

How do you think about your ability to stick to that plan and for the plan to hold up given all the changes and turbulence in the marketplace both from a near-term and a long-term perspective?

Well, my perspective has always been and will be that the highest performing companies and management teams out there are focused on what they can influence.

So when we look at the Way Forward Plan, it is largely within our control.

So independently, our macro environment is the same macro environment for us as for all of our competitors.

We are focused as a management team to execute on our plan.

And what both Jane and I and the management team are excited about is to see the progress that we are making in executing from going from developing the plan to executing the plan that we are seeing that we are making progress in all the areas that we set out to make progress within.

So independently of where the market is going, we are going to stay focused, increase our focus on what we can control and continue to drive and continue to learn and improve and learn and improve.

So that is my philosophy.

Michael Binetti, UBS.

Good morning.

Congrats on the progress.

And, Jane, it is nice to hear you back.

Let me just ask you two quick questions.

You have a lot of moving parts on the retail side but with some of these store closures pushing into fourth quarter, I think it is important to kind of think about the change in the cadence in terms of what that means looking out past fiscal 2017.

It probably means we expect to see some of the year-over-year impact of those closures more focused in the first half of 2018 if that is safe to assume?

Can you help us fine tune the revenue from guidance that we are going to be stabilizing in fiscal 2018 based on that change and how we could think about magnitude?

And then just on the gross margin for our models in the third quarter, can the gross margin in the third quarter actually be positive year-over-year if we include that 120 basis point drag from currency that you mentioned, Jane?

Thanks.

Yes, so Michael, as you look at it, we have looked at those store closures.

As I said, we are going to be very pragmatic about capturing holiday season sales and negotiating the best deals possible with our landlords.

Obviously if we close at the end of the year, there will be spillover effects on growth into FY18 from store closures.

But remember those stores are our smallest and least productive doors.

So while that will be a factor and we will play that into our initiatives, overall our guidance for FY18 that we will see stabilization is still intact.

As we did with the North America Come Back plan, we are working through 2018 on an initiative by initiative basis and we will come back to you in the fourth quarter as is our practice and give you much more specific guidance on that.

Then as you look at the third quarter overall in terms of gross margin, here is what I see in terms of headwinds and tailwinds.

The tailwinds that we saw in the second quarter of the benefit of product and channel mix and the benefit of markdown rates notably in our international markets, those are going to be intact as we move into quarters three and four.

The headwind as you saw in Q2 will be FX and it will increase.

We were at 80 basis points in Q2, it is going to go up to about 120 basis points in Q3.

But I still remain optimistic about our ability to move through on a conservative basis to hold or even grow gross margin.

Kate McShane, Citi Research.

Good morning.

Thanks for taking my question.

My question was on the discontinuation of Denim & Supply, how that could impact the sales outlook as well for next fiscal year?

And how should we think about that space in the department stores as it seems to have pretty good real estate and prevalent space in the department store, how should we think about what that will look like going forward?

Yes, overall just in terms of Denim & Supply, as we looked at that brand, it is a pretty small portion of our revenue.

It is about 2% of global net sales so it is not a material impact.

And further as we have looked at our portfolio of brands, we think we have a great opportunity in Polo and in denim specifically to recapture those sales over time.

So we feel really good about continuing the plan of refocusing on the core, stretching our very strong brands like Polo to pick up the opportunity that we had in Denim & Supply and to move forward from there.

When it comes to the space in department stores, what has been important for myself and the team when we worked on the North American Come Back is that it is about the partnership at our wholesale customers and we have had that from day one.

So our space in the department stores comes back to our brand strength, our strong market share with the consumer and our ability to come back to strength.

And what excited me from day one is the excitement from the wholesale partners in driving these initiatives that will drive us back jointly back to high-performance, one being the shorter lead times, being able to buy much closer in and being able to react to the sales trend in season.

That is something that is a viewed very favorable by our partners and they have frankly been waiting for us to get our assessment done and get going.

Now we are in the exciting stage of getting going together.

Lindsay Drucker Mann, Goldman Sachs.

Thanks.

Good morning, everyone.

I had a quick housekeeping question for Jane.

Given some of the volatility in currency, I was curious if -- I don't think the outlook for FX impact on revenues has changed much but has your view on the impact of gross profit or earnings changed at all?

In other words, is there more of a headwind embedded in your updated guidance or is it consistent?

Then my bigger question for Stefan is thank you for the initial detail on Jeff's thoughts on the North American Come Back.

You talked about cutting 20% to 25% of your tail distribution points.

Can you talk about the complexion of those changes, retail versus wholesale, whether that involves additional store closures above and beyond what you have already announced and how you plan to reinvest more aggressively in the core areas that you are sticking with?

Thanks.

Lindsay, as we looked at FX impacts, we have seen an impact overall to FX and largely it is playing out in terms of gross margin.

Our guidance is still intact.

We are accommodating that change within our operations.

But as I look at operating profits, foreign currency will have about a 100 basis point impact to overall operating margin for the full year.

Yes, so when it comes to the 20% to 25% cutting the tail of the distribution in wholesale.

It is the shortest -- the bottom 20%, 25% the least productive shops.

So even though it is a high number in terms of share of the shops being cut, it is a very low number in terms of sales and even lower number in terms of profit both for ourselves and our partners.

So it follows the same strategy as the assortment strategy.

It goes back to the core and the core doors and the core shops for us are very important and we are going to refocus our energy there and making sure that we provide an outstanding shopping experience there and that will drive our come back.

Bob Drbul, Guggenheim Securities.

Good morning.

Jane, welcome.

Congratulations.

Thank you, Bob.

The question that I have is can you talk a little bit about tourism trends both in the US and your international stores and how that is impacting the results?

Yes, as we have looked at foreign tourist trends overall, we continue to see a decline in overall tourist traffic but I will tell you both in the first and the second quarter we have seen an improvement, although they are still down, we have seen an improvement versus prior year.

So it is not as severe as it was but we do still see that traffic down and it is most notable in our outlet business.

Ike Boruchow, Wells Fargo.

Good morning, everyone, and welcome aboard, Jane.

Just curious.

So wholesale down 10% in Q2.

I think North America in Q1 was down around midteens.

I'm just kind of curious, can you comment on what the North America piece of wholesale looked like in the second quarter?

And then just for the back half to hit your plan for the year, what you are kind of expecting out of the North America wholesale channel as well?

Thank you.

Yes, overall, we do see that North America, one of the reasons that we focused the North America Come Back Plan to high-performance, the first phase is on wholesale is because it is so important to our business and we are not satisfied with the overall trends.

So as we continued to focus on pulling back inventory, closing doors, moving back from the heavy promotional activity, we expect to see continued pressure in that North America wholesale business and that was contemplated in our guidance.

Matthew Boss, JPMorgan.

Good morning.

This is Steve (inaudible) on for Matt today.

Thanks very much for taking our questions.

I had a question.

Your second-quarter comps came in slightly below our model.

Just looking for the full-year, your topline guidance, how should we think about comps in the second half of the year?

Well, we are holding to our overall comp guidance of down mid to high single digits so I think you can do the math and you will see a little bit of an uptick in the second half.

Dana Telsey, Kelsey Advisory Group.

Good morning, everyone.

Nice to see the progress.

Jane, as you think about turnarounds you have been in in the past, what it is most similar or dissimilar compared to what you have executed in the past and how do you think the progress here?

Stefan, how do you look at the three brands that you are focusing on, the difference between price and margin as you continue to evolve the business?

Thank you.

I would say that one of the things that when I came in to Ralph Lauren that pleasantly surprised me is this is an organization that is really ready for change.

And although Stefan unveiled the Way Forward Plan in June, I think organization has embraced it enthusiastically.

The difference between from what I see at Ralph Lauren is that we have to work in partnership with our wholesale partners in order to affect this comeback that we have outlined and I think as we unveil the North America Come Back Plan, that is certainly our intent.

So the need for partnership is one of the most notable things that I see.

But overall obviously with the early signs of progress, I am very encouraged.

Dana, when it comes to our brands and our progress within our brands and my thoughts connecting to pricing and margin there, so as I shared in the opening remarks, I am excited by the work of Valerie and the brand teams doing in being very strategic in identifying the unproductive product tail, the assortment tail and cutting that.

And we see and measure the progress on that but that is just an enabler to then put more focus and more creativity into refocus and executing the core.

And then thirdly, it will be about adding strategic newness.

And so it should have a positive margin effect and as of now, we are early into the execution of the plan and I see the brand teams taking the steps that are necessary for us to unlock the strength in the assortment.

So I am excited even though it is early days.

Christian Buss, Credit Suisse.

Hello, congratulations.

I would like to ask what your plans are on the outlet side of the business?

The penetration of outlets is increasing as store closures start.

How do you think about the health of that outlet business and the potential for that outlet business in the mix over the long-term?

So my take on outlet is that it is an important channel for us.

It is an important channel to keep being balanced with the full price selling.

So as we have mentioned before, our outlet presence in North America given that that is our biggest market is not high in relation to many other very strong brands and high-performing brands.

So what we are doing is two things when it comes to outlet.

We are making sure that we keep outlet in balance with the rest of the channels so that we can deliver on our overall Way Forward goals which is to strengthen our brand and drive sustainable profitable sales growth.

And in parallel, we are optimizing the outlet business that we have.

I would say that so many of the Way Forward Plan initiatives, the improvement of product assortments, buying closer in to demand are going to benefit the outlet channel.

Breakthrough marketing are all going to benefit the outlet channel as well.

One of our strengths as a brand is the massperational appeal of what Ralph and the team has created over soon 50 years.

That it appeals to absolute luxury as you can see on the runway show that we had where we went back to the DNA, the Mansion on Madison Avenue, and added newness and we created 2, 2.5 times the media value.

And then we have aspirational luxury in Polo and then we have entry through our outlets.

So the strength for us is that appeal to every part of the market and our job as a management team is to keep the right balance.

Jay Sole, Morgan Stanley.

Great.

Thank you.

My question is about your retail business.

Can you talk about how unit demand has changed as the ASPs have gone up and has that met your expectations?

And have you tested different ASPs to see how demand is impacted as prices change?

Yes, so what we have seen, Jay, is we are always testing pricing.

Pricing is such an important lever in our market and what we have seen in Asia where we have seen our AURs go up or ASPs go up 10% is that we have been able if I take outdoor closures is that we have been able to hold onto most of our unit demand.

And so that is really the sweet spot for us.

Obviously this Way Forward Plan is predicated on a long-term rise of AURs but we will take those sequentially over time as we are largely happy with our price point but that is a part of the Way Forward Plan.

Erinn Murphy, Piper Jaffray.

Thanks for taking my question.

I wanted to follow up on the wholesale strategy in North America.

Could you just quantify the sales volume of that 20% to 25% doors that you are closing and then the timeframe of shuttering those doors?

And then secondly related to that strategy, you talked about further partnering with your top wholesale accounts but reducing product going to value or value channels.

With that as the context, how do you view the role of T.J. Maxx going forward?

So, Erinn, as I look at the volumes in what I am calling -- what we are saying is the tail of our distribution, that 20%, 25% of the doors.

it is about 1% of overall sales.

So not a material amount of sales and obviously it is not a material amount of sales and it is least profitable point of distribution in the wholesale doors.

We have really taken time to look across the wholesale doors and look at points of distribution.

Obviously we have a portfolio of brand.

Look at points of distribution within the department store and go in surgically to eliminate the least profitable and lowest sales points of distribution even within the door.

When it comes to the distribution overall including off-price, our distribution strategy is to follow where the customer is going and keeping the balance between the different channels.

One way of improving the quality of sales and improving the full price channel's performance is to reduce the buys.

So it is the number one driver in the North American Come Back is to reduce our overall inventory buys to better match demand.

And the way we reduce them is one is reducing them to demand and buying closer in is a way of reducing and being more accurate and having to buy less.

So our idea is to buy less and sell more at the higher AUR.

Erinn, right now we are working with our wholesale partners on this effort to cut the door tail and we are adjusting our buys as we speak to make sure that is fully incorporated into our buys.

John Kernan, Cowen and Company.

Good morning, everyone.

Thanks for squeezing me in.

Welcome, Jane.

Stefan, I know the Way Forward Plan, two of the four key pillars did center around sourcing and supply change.

I am wondering what you are seeing in terms of product costs and your ability to bring product costs down as we look into spring 2017?

And can you just comment on product costs and direction there and the impact on gross margin would be helpful.

It is probably a combination between Jane and I but I can start in terms of I am very pleased with seeing how our sourcing teams are rising to the Way Forward challenge and sourcing starting to become a strategic value driver for us.

So one very concrete progress that we have made there is to platform our fabric so when we platform and consolidate our fabric of our core product, we can get a number of benefits at the same time.

We increase the quality to start with because quality, we are going to compete with quality.

So we increase quality, we increased our ability to negotiate the better cost price for that fabric and we increase our flexibility and can shorten our lead times dramatically.

That is just one of a number of sourcing initiatives that we are driving that will have a direct impact on the P&L over time.

Yes, just in terms of gross margin as I looked at this quarter, the biggest impact, our biggest impact was the favorable geographic and channel mix.

Improved product costing was our second most favorable impact followed by initiatives to reduce markdowns especially in our international market.

I do view this as a long-term tailwind for us.

It will obviously given the current long cycle times, it will play out over time but I do view it as something that we will see as a favorable tailwind to gross margin.

This is something that [holiday] and the team, the sourcing team, they are also taking a partnership approach with our best suppliers and partnering up with them to unlock joint value and we are seeing good progress on their work.

Okay.

So that was the questions.

So in closing, I would like to say that I am excited by the good progress of starting to execute our Way Forward Plan.

I'm very grateful for how the team has embraced this and how we step-by-step start to execute and drive improvements and learn from those improvements.

This will be a continuous improvement journey that we just started but very excited by that.

Excited also by the North American Come Back plan that we have a strategy to come back to strengthen North America.

And I am pleased that we are keeping the guidance that we set out during the investor day.

So with that, I would like to thank you for joining the call today and look forward to speaking with you in a quarter.

Ladies and gentlemen, this concludes your conference for today.

Thank you for your participation.

You may now disconnect.