Ralph Lauren - Earnings Call - Q3 2012

Transcript

Speaker 5

Morning and thank you for calling the Ralph Lauren Corporation's third quarter fiscal 2012 earnings conference call. As a reminder, today's conference is being recorded. All lines will be in a listen-only function during the presentation today. At the end of the presentation, we will conduct a question and answer session. Instructions on how to ask a question will be given at that time. Now, for opening remarks and introductions, I will turn the conference over to Mr. James Hurley. Please go ahead, sir.

Good morning and thank you for joining us on Ralph Lauren's third quarter fiscal 2012 conference call. The agenda for today's call includes Roger Farah, our President and Chief Operating Officer, who will comment on our broader strategic initiatives. Jackwyn Nemerov, our Executive Vice President, will provide some product commentary, and Tracey Travis, our Chief Financial Officer, will provide operational and financial highlights from the third quarter, in addition to reviewing our expectations for fiscal 2012. After that, we will open the call up for your questions, which we please ask that you limit to one per caller. During today's call, we will be making some forward-looking statements within the meaning of the federal securities laws, including our financial outlook. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations also 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'd like to turn the call over to Roger.

Speaker 7

Thank you, Jim, and good morning, everyone. We're reporting strong, better-than-expected third quarter and year-to-date results. Our performance was supported by sustained focus on our global brand elevation efforts and our strategic merchandise initiatives. Around the world, customers clearly recognize Ralph Lauren for its extraordinary cachet, quality, and craftsmanship. We achieved double-digit revenue growth in all key geographies in the quarter and year to date. We also delivered excellent profit flow-through despite unprecedented cost of goods inflation and considerable economic turmoil in Europe and a holiday season that was promotional for apparel. Worldwide revenue growth was well-balanced across core apparel offerings. Emerging categories such as handbags, Denim & Supply, and dresses were also important contributors to our growth.

Our sales and profit plans for the holiday and fall seasons were aggressive to begin with, so to have exceeded those goals is a real testament to the vitality of the Ralph Lauren brand, the strength of our products, and the operational discipline of our global teams. Our continued focus on our key growth initiatives, which include expanding our international presence, extending our direct-to-consumer reach, and new merchandising innovations, have resulted in a more profitable mix of business compared to the prior year. Year to date, our international revenues have increased approximately 40%, more than the mid-teens expansion in our U.S. sales. We continue to make important investments in our long-term growth aspirations in Europe, such as e-commerce and several new stores of our own or our licensing partners.

Our new merchandising introductions include the expansion of Lauren apparel, the launch of handbags, footwear, and Club Monaco, all of which have been well received throughout the continent. Despite considerable near-term headwinds in Europe, we believe we are poised for meaningful growth over the next several years. We also achieved great progress throughout Asia in the first nine months of the year. Our teams are actively engaged in brand elevation and repositioning efforts across our major territories of Japan, South Korea, and greater China. They are successfully managing day-to-day responsibilities in these highly dynamic markets while simultaneously planning for a promising future. Sales trends throughout Asia continue to be very good for us in the third quarter, including double-digit comp growth in Japan, where we are benefiting from the successful implementation of more robust merchandising and planning disciplines that are yielding better-than-expected sales on a more profitable platform.

We are applying many of the same disciplines as we integrate South Korea, where we are already working off a substantial distribution network. South Korea is one of the world's most important luxury markets, not only for its strong local customer demand but also a major shopping destination for Chinese tourists. As we turn to China, we are well in the process of resetting our distribution throughout the country, an initiative that will result in the closure of approximately 95 points of distribution, or about 60% of the network we had in place at the beginning of this fiscal year. This is clearly a bold move, but one we absolutely believe is critical. We are taking accelerated action in order to build the strongest foundation possible to serve the world's most important luxury customers.

This means we're taking some short-term hits, shrinking an already modest regional size in terms of revenue, while bearing an expense structure to support our long-term growth expectations. We are actively looking for new stores but will be deliberate in the pace of openings because locations we want are among the most desirable in the world. It is not a question of if for us in China, it's a matter of when, and we're allocating resources accordingly. In aggregate, our international operations gained 400 basis points of share in our overall revenue mix for the year to date. While we are making progress diversifying our geographic mix of business, there is no question that our large U.S. operations have performed extraordinarily well. Sales from both our U.S. wholesale and retail segments expanded at a double-digit rate during the third quarter.

Solid comp growth in our domestic stores, coupled with our wholesale momentum, clearly suggests we're gaining meaningful market share. We are growing these more traditional channels of distribution, even as customers are spending more of their discretionary dollars online. It is clear that e-commerce has become an increasingly preferred channel for many of our customers. While we were pioneers in selling luxury products online, we remain committed to investing in this high-growth distribution channel and branding vehicle. As many of you know, RalphLauren.com has maintained strong double-digit growth over the last several years. Sales rose 30% during the third quarter, and traffic to the site continues to accelerate. We recently launched e-commerce in several European countries, and while sales are still modest in scale, we are gaining excellent traction. Club Monaco will also launch e-commerce this spring in the U.S. and Canada.

Our commitment to e-commerce is not limited to launching sites. It requires constant investment in technology and content to remain relevant and to involve and enrich the customer experience. We are already investing in exciting online content, from interactive fashion shows to videos, style guides, and even a magazine. We also create custom environments to showcase certain brands, such as Collection, Purple Label, Denim & Supply, RLX, or RRL. During the third quarter, mobile phones and tablets accounted for 20% of the traffic to RalphLauren.com and nearly 10% of the sales. These numbers are not only substantial, but they are also achieved in a remarkably short period of time. We are focused on making the right investments to assure our brand experience is optimized for these important customers, who also tend to have a higher average transaction size and shop with us more frequently.

We've achieved a lot in the first nine months, and we feel good about the decisions we made to manage the unprecedented cost of goods inflation and the considerable macroeconomic challenges while sustaining our investment in our long-term growth objectives. For those of you who have been following our company for a while, you know that we've spent the better part of the last 10 years thoughtfully taking direct control of strategically important merchandise categories and geographies and working to develop a meaningful retail business. We've consistently made outsized investments in the near term with an expectation that we would achieve greater functional and financial leverage as these high-growth merchandise categories, channels, and regions evolve into the future. Our year-to-date results are reflective of the progress that we have made executing our strategies in a fiscally prudent way.

In the last few years, our decisions to directly operate Asia and add additional key product categories will fuel profitable growth for the next 5 to 10 years. Despite whatever near-term external challenges that might arise, it's important to remember that this is a long-term strategy for us. We have very clear objectives, and we invest in and manage the business for sustainable growth. We have an incredibly diverse operating model that not only supported our strong growth over the last 10 years, but has also proven to be remarkably resilient. In addition, we have tangible, multi-dimensional growth objectives across geographies, merchandise categories, and channels, and we're nurturing these initiatives with the appropriate capital investment and the best talent in the industry. I'd like Jacky to provide some insight into our product and merchandising strategies.

Speaker 2

Thank you, Roger, and good morning, everyone. As you heard earlier, our strong third quarter and year-to-date performance was a function of broad-based momentum across several of our core and emerging merchandise categories. As the Ralph Lauren brand continues to captivate more and more consumers around the world, we are simultaneously driving substantial market share and productivity gains with our existing customers. Design-driven product innovation results in highly desirable merchandise that is equal part iconic and novel, which has always been an appealing combination for the Ralph Lauren customer. We showcase these wonderful products with focused merchandising initiatives, so when the customer sees the product in our dedicated, best-in-class shop environment, the message comes to life in a uniquely powerful way. We have excellent fall and holiday seasons, as evidenced by the double-digit revenue gains across channels and regions.

Our core gift strategies were presented across all key merchandise categories, and the customer responded with enthusiasm. The performance of our men's and children's wear merchandise was particularly strong, which was consistent with the trend we experienced throughout the year. These are categories where we enjoy powerful leadership positions and yet are still gaining market share, even in the most developed markets. The multigenerational appeal of our men's product and the broad reach of our children's product, from layette to infant and toddler to boys and girls, continue to provide opportunity for these well-developed categories. We also experienced solid women's trends during the quarter. The aesthetic of our Blue Label line resonated globally and was particularly strong in international markets. We continue to evolve our Lauren assortments to address the ever-changing needs of the modern woman. Our well-developed core sportswear is now complemented with strong denim, ashes, and dress assortments.

Club Monaco, its distinctive contemporary sensibility resonates strongly with both new and existing female customers, and we're excited to be growing that brand on a more global platform over the next few years. We continue to pursue new opportunities to participate in emerging merchandise categories. Our Ralph Lauren handbag and small leather good lines allow us to leverage the sensibility of our runway presentation in this high-interest category that the customer shops more frequently. This spring, Ralph Lauren handbag collections are amongst the most exciting and well-reviewed we've ever had. Soft silhouettes, light materials, and bright colors have been particularly popular and add seasonal interest to more core iconic styles. We are also expanding the international distribution of our Polo and Lauren leather goods to capitalize on enthusiastic customer response to these products.

This is due to the design of the product and the productivity we are generating in existing locations. As our assortments and distribution grow across all channels, we are buying and selling in greater depth and establishing our brand as a strong presence in this high-growth category. The global production of Denim & Supply, which we executed in the second quarter, was a considerable achievement for us. We installed hundreds of shops around the world with an eye to expressing a clear and powerful brand statement, whether in Macy's in the U.S., Selfridge in London, or a freestanding store in Amsterdam and Hong Kong. The customer response has been encouraging, and we are particularly pleased with the balanced sales mix between men's and women's.

This high-frequency fashion-centric customer is gravitating to the most novel and aspirational elements in the assortment, which confirms our belief that the more deconstructed bohemian aspect of the Ralph Lauren brand aesthetic is meaningful to this younger customer. Performance at freestanding store locations has been particularly strong, and believe we have an opportunity to open many more of them. The design of our product is the foundation of our success. Credit is also due to the clearly defined brand standards and the extremely disciplined approach to execution that define the Ralph Lauren organization. The increased control we've assumed over strategically important regions and merchandise categories over the last several years has enabled us to leverage cross-functional collaboration in a more impactful and efficient way. It has also supported our financial performance, particularly as we've navigated through substantial cost of goods inflation in the last 12 months.

As you know, we were thoughtful about how we responded to these unprecedented increases in raw material costs, primarily for cotton, but also for a host of other important materials such as cashmere, wool, silk, leather, and exotic skins. We always thought the worst portion of the inflationary pressure we were experiencing for cotton was due to short-term supply and demand imbalances. We were also very mindful of how any decision we made as a function of near-term dynamics might impact our long-standing relationships and the trust we have earned with our customers. We were not willing to compromise the quality and consistency of the make of our products, nor were we willing to risk disruption to our meticulously planned logistics and product flow. We ultimately made select and strategic pricing adjustments in the fall that we believe maintained an excellent value proposition for our customers.

While we did experience margin compression as a result of our actions, we do expect to begin to see some relief with our fall 2024 shipments. As we reflect on the last year, we believe we made the right decisions and that we've gained meaningful, long-lasting market share as a result. With that, I'll turn the call over to Tracey.

Speaker 3

Thank you, Jacky, and good morning, everyone. As you've seen in this morning's press release, our third quarter and year-to-date performance reflect strong top-line momentum, which has driven better-than-expected results. We've managed through extraordinary cost of goods inflation in a thoughtful manner, and we've achieved leverage on our operating expenses, even as we continue to fund our growth objectives throughout the year. In the third quarter, consolidated net revenues were $1.8 billion, a 17% increase from the prior year period, with double-digit growth in both our wholesale and retail segments. The increase in revenues was better than our low teens expectation for the quarter, with outperformance in both our retail and wholesale segments. Across channels, revenue growth was supported by strong gains in our men's and children's apparel, as Jacky indicated.

We also benefited from the incremental contribution of certain formerly licensed operations, such as South Korea and Home Textiles, which collectively contributed to our reported revenue growth by approximately 5%. The net impact of foreign currency translation was negligible for the third quarter. The gross profit rate of 57.1% in the third quarter was 150 basis points below prior year, which was essentially in line with our expectations and reflects the full impact of the peak cost of goods inflation we experienced for the fall and holiday seasons. This gross margin pressure was partially mitigated by selective price increases, greater retail segment penetration, which is largely driven by our growing international retail network, and accelerated e-commerce growth.

Operating expenses of $761 million were 15% above prior year, and we achieved approximately 50 basis points of operating expense leverage in the third quarter, which was meaningfully better than the deleverage we had initially anticipated. The increase in operating expense dollars primarily reflects overall business expansion, including strong retail segment growth and the incremental rent, depreciation, and labor that are incurred as a result of it. It also includes incremental costs associated with the transition of our formerly licensed South Korean Home Textiles operations. The leverage we realized was mostly a result of our revenue growth, in addition to a shift in timing of certain corporate expenses into the fourth quarter. Our operating income of $270 million was 10% above the prior year period, generating an operating margin of 15%, which was 90 basis points below prior year.

The decline in our operating margin was principally due to gross margin compression from cost of goods inflation that was partially offset by operating expense leverage in the quarter. Our net income of $169 million for the third quarter was relatively flat to the prior year period, as the increase in operating income I just discussed was offset by a higher effective tax rate of 36% this year compared to 29% last year, as we anniversary the favorable resolution of discrete tax items in last year's quarter. The 3% increase in net income per diluted share to $1.78 in the third quarter was a function of lower average diluted share count. Moving on to segment highlights for the quarter, our wholesale sales rose 11% to $750 million, a result of double-digit growth in both the U.S. and in Europe.

Continued momentum in men's and children's apparel worldwide was accentuated by the contribution from newer merchandise categories, such as Denim & Supply and home in the U.S., and the expansion of wholesale distribution for accessories, specifically handbags and footwear, and Lauren apparel products in Europe. Strength in the department store channel globally offset continued softness in select specialty store markets. Third quarter wholesale operating income of $116 million was 11% below the prior year, and the wholesale operating margin declined 390 basis points to 15.4%. The declines in wholesale operating income and operating margin rate are primarily due to the cost of goods inflation and the impact of new and emerging merchandise categories, such as home textiles and Denim & Supply. We continue to make excellent progress with extending our direct-to-consumer reach, as our retail segment sales increased 22% to a record $1 billion in the third quarter.

We achieved double-digit comparable store sales growth in all major geographic regions, and this momentum was further enhanced by the contribution from our newly opened stores, as well as incremental sales from our newly assumed South Korean shop locations. Our overall comp store sales rose 12% during the quarter, reflecting a 31% increase at RalphLauren.com, 7% growth at Ralph Lauren stores, 9% expansion at our global factory stores, and 17% growth at Club Monaco stores. As you are all aware, the weather was unseasonably warm in both the U.S. and Europe for much of the quarter, which affected sales at most of our retail formats in October and November. Consumers also shopped later in the season this year, taking advantage of what was a highly promotional environment in the U.S. and certain European countries. Traffic and transactions improved in December and were ultimately positive for the quarter for most formats.

Traffic trends continued to be most challenging at our U.S. and European Ralph Lauren stores, where we also experienced a stark deceleration in tourist sales relative to the first half of the quarter. Growth in Asia continued to be strong, as were sales at our factory stores worldwide. Club Monaco continues to benefit from well-balanced trend-right women's fashion assortments, which drove large improvements in their conversion as well as units per transaction. RalphLauren.com's 31% comp continues to lead all channel growth, with men's, children's, and Denim & Supply among the top performing merchandise categories during the quarter. We opened seven directly operated freestanding stores and closed three directly operated freestanding stores during the quarter, ending the period with 378 company-operated stores. We also operated 508 concession shop locations worldwide at the end of the third quarter.

Retail segment operating income grew 27% to $194 million in the third quarter, and the retail operating margin increased 70 basis points to 19.3%, which is a new peak level of retail segment profitability for the third quarter period. Our considerable improvement in retail operating income and the expansion in margin rate were achieved on top of exceptional gains in the prior year period and are a result of strong comparable store sales growth, as well as improved profitability in our international markets. The growth in retail segment profitability was partially offset by cost of goods inflation and continued investment in international e-commerce development. Licensing royalties of $50 million in the third quarter were 1% below the prior year. Lower international and home product licensing revenues as a result of their transition to directly controlled operations this year more than offset higher domestic apparel product licensing and global fragrance royalties.

However, operating income for our licensing segment increased 7% to $32 million, primarily as a result of lower net costs associated with the South Korea and home transitions. We ended the quarter with consolidated inventories up 28% from the third quarter last year. Approximately 12% of the inventory growth relates to non-comp items included in inventory this year, those being home textiles, South Korea, new stores, and international e-commerce. Approximately 9% of the growth in inventory was for merchandise to support revenue growth on comparable products, geographies, and distribution. The remaining 7% inventory growth is attributable to cost of goods inflation and foreign currency impacts. We spent approximately $68 million on CapEx during the quarter to support new retail stores, shop installations, and infrastructure investments.

We bought a modest amount of stock during the quarter and have repurchased $395 million worth of our Class A common stock in the first nine months of this year. At the end of the third quarter, we had $577 million remaining under our authorized share repurchase program. We ended the quarter with approximately $1.3 billion in cash and investments and $1 billion in net cash, both essentially equivalent to the prior year period and reflective of our strong financial condition. Our results for the first nine months of fiscal 2012 clearly showcase the momentum supporting the Ralph Lauren brand across our various merchandise categories and distribution channels worldwide.

They also reflect the diligence of our global teams as we have navigated through unprecedented cost of goods inflation and an uncertain consumer backdrop, even as we funded the investments we are making and will continue to make in Asia, in product initiatives like Denim & Supply and accessories, and in global e-commerce development. We are mindful of the fact that, as you are all aware, the global retail environment is still fairly unpredictable, although very recent macro indicators have been more encouraging in the U.S. The apparel customer still appears to be somewhat price sensitive. International tourism in the U.S. and Europe in our stores has been erratic, and while Asia comp growth has been strong, we will have closed, as Roger mentioned, approximately 60% of our greater China distribution network by the end of fiscal 2012.

Our raising our sales and profit outlook for the year on the strength of our third quarter financial performance, we continue to monitor trends across all of our channels and regions in order to proactively address any material changes that could affect our plans and outlook. I'd like to review that with you now. For the full year, fiscal 2012 period, we now expect revenues to increase by approximately 20%, which compares to our prior expectation of high teens to low twenties. Implicit in this outlook is an expectation for mid-teens growth in wholesale shipments and mid-20% growth for retail segment revenues.

Continued Europe macro concerns and the resulting decline in consumer confidence, a reduction in Hong Kong and China doors, and the anniversary of the South Korea acquisition in the fourth quarter, which has contributed to our retail segment growth on a non-comp basis in the first three quarters of the year, are all embedded within this outlook. Additionally, exchange rates, primarily the euro, are expected to have a net negative impact on our consolidated revenue growth given current levels. We are also raising our full year operating margin outlook for the year. Currently, we expect our fiscal 2012 operating margin to be approximately equal to or just slightly below the prior year's level, which compares to our previous expectation of a 50 basis point decline.

If you'll recall, we started the year anticipating a 100 to 150 basis point decline in our operating margin, so we are very proud to be able to expect to stabilize our annual profitability, considering that we've navigated unprecedented cost of goods inflation while still funding our growth initiatives. Our revised full year operating margin outlook assumes continued gross margin pressure from cost of goods inflation in the fourth quarter. Keep in mind, our fourth quarter is both a large wholesale shipment quarter for our spring merchandise, as well as the quarter when we will resell residual fall and holiday merchandise at our retail stores. Our retail segments related to clearance have a larger margin impact this year due to our higher penetration of retail sales in the quarter.

We expect to incur approximately $5 million to $10 million in restructuring charges associated with our Asia repositioning program in the fourth quarter. This estimate includes incremental expense related to closing the remaining stores and shops left in our plan. By the end of this year, we will have closed 95 points of distribution, somewhat more than our original expectation of 65 closures as we continue to refine our assessment of the network. As a reminder, these costs have been consistently segregated and excluded from the operating margin guidance we've provided to you. We currently expect a fiscal 2012 tax rate of approximately 34%. As Roger and Jackwyn articulated earlier, our success is rooted in our culture of clearly defined brand standards and merchandise strategies and an extremely disciplined approach to execution.

We are not providing fiscal 2013 guidance on today's call, but I do think it is important to acknowledge that we do expect a moderating of fiscal 2012's very strong top-line momentum in the next fiscal year. In addition to the continued uncertain consumer outlook in Europe, our sales base in greater China will be significantly reduced as a result of closing 60% of the shop network by the end of this year. It will take time, as Roger mentioned, to rebuild an appropriate, more elevated network to properly represent our luxury apparel and accessories assortments. Additionally, both home and South Korea will now be comped next year. Having said this, we are incredibly encouraged by the outlook for the global luxury market over the next several years and our increasing participation in that growth with our geographic expansion, luxury store openings, and expanded accessories assortments.

Indeed, we are investing today to capitalize on this opportunity, particularly in international markets online and online. Our company has a clear, compelling growth strategy, and we have a longstanding track record of success consistently in executing against our strategies. This bolsters our confidence in continuing to make the proactive investments and decisions that we believe are appropriate to drive incremental long-term shareholder value creation. With those remarks, I'll conclude the company's remarks and open the call up for your questions. Operator, would you assist us with that, please?

Speaker 5

Yes, thank you. Ladies and gentlemen, the question and answer session will be conducted electronically. To ask a question, please press the star key followed by the digit one on your touch-tone keypad. Again, that's star one to queue for questions. Our first question will come from Omar Saad with Evercore ISI.

Speaker 0

Morning. Great job this quarter, guys. I guess my one question would be, I know you spent a lot of time talking about this quarter and previous quarters, the global opportunity, but I thought it might be an interesting chance, Roger, for you to give an update on your view on the U.S. landscape, especially in light of some of the changes going on at one of your bigger customers, JCPenney, new management there. It seems like they're taking a new approach to the department store format. Would appreciate any of your views on that. Thanks.

Speaker 7

Okay, Omar, thank you. Where to begin? We talked in the prepared remarks about the extraordinary overall growth of our business, and clearly the international year-to-date trends in the 40s has led the charge, but we've been surprised by the incredible resilience and strength of our domestic business. As I said, that's come through our own direct-to-consumer initiatives as well as our wholesale. The results you've heard about third quarter from the wholesale landscape are sort of a mixed bag of strong to medium to more challenging, and I think the mid-tier channel had a more challenging third quarter. We've met with Ron Johnson and his team several times, Ralph and Jacky and I, so we've been very interested and excited to learn about his strategy and his revolution.

It's an interesting time for Penny's as they try to lead that organization in a new direction, and we're very excited, as everybody else is, to see how that plays out. We were at the end of a five-year commitment to American Living, and I think upon reflection, we decided mutually to move away from that business after the spring/summer shipments. We have a lot on our plate that is very exciting and challenging, and we want to make sure our efforts and energies are aligned with the opportunities. I think Penny's has a lot of change and transformation going on, and in some cases, that's going to take time to play out. We've left the door open to further dialogue, further relationships, but at this point, we're going to spend our time and energy building and controlling our brands the best way we know how.

It has a de minimis impact on our financial results, so upon the completion of spring/summer, really we'll be in a much smaller mode with that. Our domestic wholesale efforts focused on our existing customers, particularly with CHAPS being the number one brand at Kohl's, we think we have that channel well covered.

Speaker 5

Next question.

Our next question comes from Kate McShane with Citi Investment Research.

Speaker 6

Thank you. Good morning.

Speaker 7

Hi, Kate.

Speaker 6

On your last conference call, you had mentioned, I believe, that you had three flagships earmarked in China, and just with the announcement today about the 95 points of closure, can you update us on your view on flagships in China and the timing of those buildouts?

Speaker 7

Sure. The 95 points of distribution is a slightly larger number than we talked about earlier in the year. As we looked at our strategies in that part of the world, we became convinced that the customer there would respond to our elevated assortments. When we built a store in The Peninsula in Hong Kong and one in Shanghai and saw the extraordinary reaction to luxury products, we decided to get more aggressive about closing the B and C locations formally selected by our licensing partner. We are continuing to look and negotiate in Beijing and Shanghai and Hong Kong for flagships. At the same time, we're looking for additional locations throughout China and have an exploratory list that's quite long. How many of them will come to fruition in fiscal 2013 versus 2014 or 2015 is still up in the air, and we'll keep you informed.

The flagship statements we've made in New York or Paris or in Omotesando in Japan, we think are critical for the brand expression, and we need to build awareness of our luxury profile in Japan. We needed to build it in Paris, and we certainly need to do it in China, not only for the customers shopping in China, but for those travelers because they shop in Seoul, South Korea, they shop in the U.S., they shop in Europe, and our ability to tell our story is best expressed through flagships. At the moment, we're hard at work looking in those three markets.

Speaker 5

Our next question.

Next question.

Yes, our next question comes from Adrian Shapiro with Goldman Sachs.

Speaker 4

Thank you. I want to add my congratulations. Roger, just if we could talk a little bit about the share gains, obviously very impressive, but what's even more impressive is the margin opportunity as you talk about capitalizing on growth across more compelling and more accretive geographies, categories, and channels. Maybe if you could help us think about the margin potential both in the near term, as I think in the call you talked about relief in Fall 2012 shipments given cost of goods, but also the long term as you capitalize on these share opportunities across an even healthier margin platform. Thank you.

Speaker 7

Okay, Adrian, let me break my answer into two pieces. The cost of goods discussion, which has been well-dialogued among the industry, we took the position when that began to occur that we thought it would be a period of time of extraordinary inflation in raw materials and in labor, but believed it would not sustain. A lot of the actions that Jacky talked about and decisions that we made, we think have played well to our customers. We maintained quality. We did not change make or raw materials or trim or fit, and I think we've picked up market share because the customer has come to expect that from Ralph Lauren.

We passed along certain of the price increases, and that did affect, in the end, some of our margin, but we're all seeing now Fall 2012 and beyond raw materials, but particularly cotton, coming back to a more appropriate level, and we think our margins will begin to rise in the Fall 2012 and beyond period. We think we made the right decision there, and that's playing out around all product categories, particularly those that are dominated by cotton. Separately, we are seeing a mix change that's helping our margins. One, the retail margins are higher in rate than wholesale, and as you've seen this quarter particularly, we're getting extraordinary growth out of our direct-to-consumer business around the globe. Second, the international markets actually have higher margins than the domestic markets, and as that growth continues and the penetration rises, that will help margins.

In certain other product categories, as they continue to grow, including accessories and others, those should be, over time, margin-rich categories. The mix is working to our advantage as it plays out over the next two or three years, in addition to what we think is more normalized and predictable cost of goods changes. That's the end of my answer.

Speaker 5

Next, we'll hear from Michael Binetti with UBS.

Speaker 0

Hey, guys, let me add my congratulations on a wonderful quarter there.

Speaker 7

Thanks, Michael.

Speaker 0

I have just two quick questions. One is if you could give us a little bit of a comment on, I believe you said there was going to be a shift of some operating expenses from third quarter to fourth quarter. If you could help us understand what that is and perhaps what the size of that is. Obviously, it's in the guidance, but just maybe a little more detail. My question is really just if we could get some more conversation on Europe. I think seeing the volatility there, last conference call you spoke to it, and I believe that market's about 70% wholesale for you, so you do have good visibility from your retail partners there on what the orders will look like.

Maybe we can just walk us from last quarter to this quarter as far as what you're seeing in the backlog there in Europe and what the latest trends are there. I guess I'll just end that by giving my congratulations on what I thought was a very good result in Europe for the quarter for you guys, considering the volatility over there. Thank you.

Speaker 7

Thank you.

Speaker 5

Thanks, Michael. I'll take the first part of that question, even though that was two questions, and then Roger will take the second part as it relates to Europe. In terms of the expense shift that we saw from the third quarter and into the fourth quarter, it was a combination of corporate expense areas, advertising, some e-commerce investment, some headcount expenses that shifted into the fourth quarter that we had initially anticipated in the third quarter. We talked about the fact that we will have restructuring and impairment charges in the fourth quarter. That is the bulk of the incremental expenses that shifted from third quarter into fourth quarter. Magnitude of that is somewhere in the $15 to $18 million range.

Speaker 7

The European environment is volatile, as you know, and having just been there recently, you actually feel it even more so in the different markets because it's daily headlines. With that as a backdrop and with no attempt to be an economist or a, you know, a federal, you know, officer in terms of fiscal policy, I think there is a sense of uncertainty among the local customers about how the debt crisis, the euro crisis will be resolved, and a question about whether or not the fix for some of these unbalanced country budgets will be taxes or cut back in services in a way that will make for a longer-term recovery.

With that as a backdrop, our wholesale bookings, which at this point through early February are really mostly men's because we haven't really fully booked spring/fall products for women's, but the early reads by the products we have booked are, you know, up and adding market share, albeit with most retailers in Europe operating cautiously. I think they're taking a cautious view about inventory. I think they're taking a cautious view about capital, but within that, as they look to pair their resources and invest in the brands that they feel the strongest about, you know, we feel good about our position and our opportunity. The second piece of what will happen over time in Europe is a lot of the small specialty stores are being squeezed by these conditions, particularly in markets like Italy and some of the southern parts of Western Europe.

Over time, we will be looking to build up what we call monobrand or Ralph Lauren branded stores throughout Europe, whether owned or licensed. We will go more direct to the customer, and we also are seeing customers making choice about shopping internet. While the internet in general in Europe is trailing the U.S., our early reads on England, France, and Germany have been encouraging. We think we'll be taking our message more directly to the customer online through our own stores and then through taking share out of the key department store accounts in the other markets. Maybe not as buoyant as what we've reported to date, but we still think there's growth opportunities in Europe.

Speaker 5

Next question.

Next, we'll hear from John Kernan with TD Cowen.

Speaker 1

Hi, thanks for taking my question. I wanted to focus on two, what seems to be expanding initiatives for you guys, specifically Denim & Supply and Club Monaco. I think Jackwyn talked about 100 doors of distribution for Denim & Supply right now, and then you talked about e-commerce launch for Club Monaco, and certainly that brand is growing in Europe. How do you look at the global potential for both these initiatives going forward?

Speaker 7

which I think you've all seen has experienced significant comp store growth, compounded quarter after quarter, has really led what<edited_transcript> I think Jacky said hundreds, more than 100, because for us, it's an international launch, Europe, Asia, and the U.S. Here in the U.S., it's really closer to 200 through Macy's, and then there's the incremental doors outside of the U.S. We're actually very bullish on that brand. It's a full lifestyle offering in men's and women's and accessories, and the early reads, which we were hoping were particularly good for the denim part. A lot of times when you read about denim businesses, they're more about the sportswear and less about the denim, but in this case, Ralph and the team have come up with a spectacular balance, and we're getting it both men's and women's.

Club Monaco, which I think you've all seen has experienced significant comp store growth, compounded quarter after quarter, has really led what we think is a women's offering that is now being accepted globally. Here in the U.S., we distribute it through our own stores, soon to be e-commerce in Asia. We do it through licensed partners and are growing our footprint and being well received in Asia. It's a look and a style that the customer there is enjoying. We've recently launched through shop and shops and department stores and are studying whether or not freestanding stores in key markets are an opportunity as well. We're really seeing the worldwide acceptance of Club Monaco and really believe we're on a unique track there in a market where women's has not been particularly strong for a lot of competitors.

We think we're getting at that opportunity globally, and we think the brand has tremendous potential.

Speaker 5

Next question.

Next, we'll hear from Chris Nardone with Credit Suisse.

Speaker 0

Yeah, I have a more thematic question regarding the uppositioning of the brands in your key regions. Can you talk about how much of your assortment is at the desired price value points in the U.S., Europe, and Asia?

Speaker 7

I am going to give you a response that may not get exactly what you're asking, so if not, you'll ask me again. We think we give good price value at all ranges from Collection through CHAPS. We think the product and the price value is a fair one and represents fair value for the consumer. We put a lot into the product, and I think that consistent approach to high quality has served us well. I'm not sure how to answer that by brand or by channel beyond what I've just said.

Speaker 0

I guess if I could get some more color about what you mean by the up-positioning of the brand and how we should think about that going forward.

Speaker 7

The uppositioning?

Speaker 0

Yes.

Speaker 7

The.

Speaker 0

I guess I'll take the question offline.

Speaker 7

Okay. Sorry, Christian. Do you have another question?

Speaker 0

That's good for me.

Speaker 7

Okay, apologize for that.

Speaker 5

Next question.

Our final question will come from David Glick with Buckingham Research Group.

Speaker 0

Yes, good morning. I guess the last congratulations of the day.

Speaker 7

I hope it's the last, David. Maybe the last of the call.

Speaker 0

I was wondering if you could comment, Roger, on the importance of your new hire for the Head of, you created a new position over International, Daniel Lalonde, if I pronounced that correctly, and the thought process behind creating the position, what you think he will add to the strategy, and whether or not this may be a clue in terms of succession planning at the company.

Speaker 7

Let me, I'm going to broaden my answer a little bit. Daniel has been hard at work now for two days, so we are putting him through a crash orientation course, but I got to know Daniel over the last year through a variety of discussions, and I think he's a unique talent that's chosen to join us at a very opportunistic time. His background is in running luxury businesses. It's steeped in the accessory world, both LV and watches, and is steeped in international customers. Every one of those subjects are high priorities for this company. To date, we had international reporting, Jackwyn Nemerov in Asia and to me in Europe, and our desire was to make sure that the international voice is well represented holistically.

While Jackwyn and I want to take some credit for oversight, we also have new talent in Europe in John Hooks, who joined us in the fall, and Mark Daly in Asia, who joined us about this time last year. We think we've built an incredibly talented, experienced group of people now with the ability to take us to the next step. Under them, we are cascading down through the ranks looking to upgrade our talent in this critical subject. We set out a desire to make our business two-thirds international at some point, and we're making extraordinary progress. The only problem is the U.S. keeps growing quickly as well, so our timetable gets pushed back. The other thing I'd also comment on is we've made some other key hires over the last couple of months in product categories like home.

We hired Ian Sears, who's come in to run our home business, and several other key strategic talents. We have a longstanding commitment to talent because we won't get far with just the strategy and a good balance sheet. We need the talent. Internally, we've spent a lot of time and energy on development of our own people, but strategically, where we need to bring in a key hire that we think will take us to a new level, we've done that as well. I think the results we've reported today are really a function of a world-class team, and I'm very proud of the hard work that we've put into this group, whether it's design, merchandising, advertising, supply chain, on and on and on. This is not easy in this environment.

This is not as simple as it looks when we report it four times a year, but we expect Daniel and Mark Daly and John Hooks and others to contribute internationally, and the rest of the team here in New York is hard at work. I thank them all. I thank you for your interest. Hopefully, we'll get a chance to complete the year with the May call, but we're very excited about the future and have a lot of opportunities to challenge us for the next five or ten-year period.

Speaker 5

Thanks very much.