Good morning, ladies and gentlemen, and thank you for calling the Polo Ralph Lauren Second Quarter Fiscal 2012 Earnings Conference. Just a reminder, today's call is being recorded. [Operator Instructions] Now for opening remarks and introductions, I would like to turn the conference over to Mr. James Hurley. Please go ahead, sir.

Good morning, and thank you for joining us on Ralph Lauren Second Quarter Fiscal 2012 Conference Call. The agenda for the call today includes Roger Farah, our President and Chief Operating Officer, who will comment on our broader strategic initiatives; Jacki 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 second quarter in addition to reviewing our expectations for fiscal 2012. After that, we will open the call up for your questions that we please ask you to 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 guaranteed, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings. Now I'll turn the call over to Roger.

Thank you, Jim, and good morning, everyone. I'm going to keep my remarks relatively brief this morning since I really got a cold and I'm losing my voice. There's no question that we're reporting better-than-expected second quarter results today. Double-digit revenue growth in each of our major geographies contributed to consolidated sales that were 24% better than prior year. The 18% increase in second quarter earnings per share reflects strong profit flow-through even as we're managing through substantial cost of goods inflation and continued investment in our long-term growth initiatives, including the integration of the strategically important regions and products now as directly controlled operations. The double-digit sales and profit growth come on top of double-digit gains in the prior year period, a clear demonstration of the growing desirability of Ralph Lauren brands across an expanding range of merchandise categories and on an increasingly global platform. The high-teens domestic revenue we achieved in the quarter is extraordinary considering the existing scale of our business. It's also well-balanced across distribution channels supported by a fantastic growth in our Men's business, kids, dresses and the successful launch of Denim & Supply. Our international revenues grew twice as fast as our domestic sales and represented approximately 38% of our consolidated revenues. In Europe, we are capturing share with our core merchandise offerings through a combination of productivity gains and incremental distribution, including the expansion of existing shops to accommodate the growing bandwidth of each of our brands. As we've discussed in the past, we don't have distribution for all of our brands in Europe yet, so we are rolling out new merchandise categories including Lauren footwear and Club Monaco, which is yielding incremental distribution and extending our reach through the continent. There's been a lot of concern about the European business trends, given…

Thank you, Roger, and good morning, everyone. The second quarter was yet another period of strong global expansion for us as evidenced by our multi-channel revenue growth. Our products are certainly an important driver of that success as are the thoughtful planning and merchandising strategies that are both supporting market share gains and helping to mitigate the impact of cost of goods inflation. As Ralph commented in this morning's press release, we continue to pursue exciting new avenues of growth by leveraging the desirability of our brand across the growing range of merchandise categories. Our unwavering commitment to product innovation is supporting the momentum in both core and emerging classification. This morning, I'd like to take you through some key second quarter product highlights, as well as update you on milestones for our denim and accessories initiatives. First and foremost, the growth in our Men's business worldwide continues to be spectacular. Season after season, Ralph and the design teams create distinctive new products that further distinguish us in the marketplace and drive incremental market share gain. The iconic vernacular of the Ralph Lauren brand enables us to address the more traditional aesthetic with Purple Label and Polo and the more contemporary ones of Black Label and RLX. We're now addressing a younger, more casual and more eclectic male customer with our Denim & Supply line but more on that exciting introduction in a moment. The momentum in Childrenswear is a similar story to Men's, and Childrenswear merchandise was an important driver of our revenue growth across channels and regions during the second quarter. The investments we've made in developing our assortment from layette and babies to boys and girls has fueled the appetite for our product worldwide. We are uniquely positioned to address the child's complete wardrobe requirement from school…

Thank you, Jacki, and good morning, everyone. As you've seen in this morning's press release, we reported excellent second quarter operating results. Consolidated net revenues were $1.9 billion, 24% greater than the prior year period and better than the high-teens to low-20% growth expectation we outlined for you in August. The increase in net revenues reflects double-digit gains at our wholesale and retail segments with higher sales of our core apparel products, particularly Men's and Childrenswear supporting our top line momentum across all channels worldwide. The combination of both the incremental revenues from the South Korea license transition and the favorable impact of foreign currency translation affected our total reported revenue growth by approximately 6%. The second quarter gross profit margin of 56.6% was 140 basis points below the prior year period and was in line with our expectations as we experienced the full impact of higher cost of goods inflation, which outweighed the combined offsetting effect of our selective price increases, a higher retail segment penetration and the beneficial margin impact of international sales growth penetration. Operating expenses of $728 million were 25% greater than the prior year period. We deleveraged operating expenses by 30 basis points, was considerably below the approximately 150 basis points of deleverage we anticipated in the quarter. The upside to our expectations was mostly due to our ability to leverage expenses on the higher sales level we achieved. The modest deleverage reflects a higher retail channel mix, including the transition of our formally licensed South Korea operations, which is entirely retail distribution. Our operating income of $351 million was 14% greater than the prior year period, and our operating margin was 18.4%, which was 170 basis points below the record 20.1% level achieved in the prior year period. The decline in our operating margin…

[Operator Instructions] We'll take our first question from Omar Saad, ISI Group.

Roger, your tone on the macro seemed to have softened just a little bit from last quarter but at the same time, the company keeps generating really incredible sales results and raising the kind of revenue guidance. Help us put this into context and what's really changed about this company? I don't think -- I can't remember these kind of revenue results since the company was much, much smaller. Are we at an inflection point? Or is this sustainable especially in context of the macro?

Okay, maybe my tone has something to do with I'm sick. But discounting that for a moment, as we push out around the world and as you've been a regular follower, following to the story, I think we just continue to see the global acceptance for Ralph Lauren product as we pushed out in Europe or as we're about to make a bigger push in Asia. And I think all of that, we've framed in the past and we've framed in terms of aspirations about what we thought we could do and quite frankly, we're doing that and then some. One of the real surprises in the revenue story is the very strong domestic growth. A lot of prior conversations that we've modeled with all of you talk about our ambition to do 1/3 of our business in Europe and 1/3 in Asia and 1/3 in the United States, and that was somewhat predicated on a slow growth U.S. scenario given the scale of what we did, the distribution we had and our belief that the international markets would grow faster. But lo and behold, as we just reported, the U.S. in this quarter had a high-teens growth rate and yes, Europe was double that. But given the scale of the U.S. business, that's made a meaningful difference to our top line performance. And as you know, sometimes size can fight against strong revenue growth without meaningful acquisition, and that's not our story. So as we look to continue to push out around the world, I don't think it dims any of our enthusiasm for the upside there. I think we've just surprised ourselves on the both domestic and wholesale fronts, as well as the direct-to-customer fronts here in the United States.

And next, we'll take a question from Kate McShane, Citi Investment Research.

Thank you for detail on the operating margin pressure that you expect on Q3. I was wondering if you could help me understand, given the dynamics that are happening between Q2 and Q3, why you're able to post a much better-than-expected operating margin in Q2 despite the guidance of 300 basis points pressure. And why you're still confident that there's going to be a higher level of operating margin pressure upcoming in Q3?

I think there are a couple of reasons for it, Kate. if you just start with the gross profit decline that we experienced in Q2. We expect that, that will continue in Q3 and Q4. So when I gave the 300 basis points of operating margin decline, I mentioned that half of it was due to gross profit. The other half is due to SG&A expenses. And we are continuing to make investments to grow the business in the future, while obviously delivering double-digit growth in the current quarters. Our growth does slow in the third quarter, some of it related to some of the door network closure in the Asia region that we spoke about, the Greater China region. So we did close a fair number of doors in the second quarter. And some of it related to some slowing of our business here in the U.S. So those 2 combined lead to greater operating margin decline.

Next up, we'll take a question from Adrianne Shapira, Goldman Sachs.

Perhaps just a follow-on question there in terms of the margin. As you had said, Tracey, that you did expect the second quarter sort of evenly split between gross margin and expenses. And obviously, it sounds like you hit your plan on the gross margin, expenses a little bit better. Maybe share with us given that this past quarter was the first quarter you saw the full effect of pricing. Share with us what you learned in terms of elasticity of demand as you basically hit your margin targets. And then a follow-on to that, given some near-term volatility in terms of traffic and sales since you've been leveraging better because of those better sales in the second quarter, how should we think about maybe anything you're thinking about contingency plans that relates to expenses if, in fact, sales continues to be this volatile.

I think that was 2 questions, Adrianne, but we're going to let Roger...

Does my answer have to be as long your question? Let's talk about the cost of goods and the way it's sort of playing out through the movie here. We knew from the beginning that during the course of late summer, into fall and then through the back half of this season, costs were rising really in their most spectacular fashion with this holiday season being sort of the apex of that. A lot of the suppliers in the early part of price escalation were still blending the prices with inventory on hand that had not experienced quite as big ramp up. As that inventory was depleted and you were now bearing the full brunt of the extraordinary run-up in prices, that's really a big part of what's pressuring the third quarter cost of goods in a greater degree than other quarters. Of course, as that begins to come back in line as it plays out over the next 9 months, they'll take that high cost of raw materials, and they'll begin to blend it in with lower cost materials. And then it should begin to plane down towards next fall. So there's definitely sort of a peak of the cost of goods that we'll be experiencing through the next 3 or 4 months. We chose to pass along in many cases, but not all cases, the full impact of the cost of goods, and that was the decision that was made by merchandise category and by region. The combination of that for us was the thought process about margin rates, as well as sales opportunity. And I think to Omar's question, part of our -- the story at sales, the results through the first 6 months, I think reflect the proper balance we struck between the margin rate and sales dollar. And we'll continue to do that as we work our way through this volatile cost of goods period. The customer, which I think is embedded in one of your questions, actually has responded very well in most cases to fashion first. So if it's new product and they're excited, they buy it. And the relative pricing of that is immaterial. I think when there's something that catches their attention, that's new and different, that's been a nonissue. In terms of products that are more perennials or basics, I think there was some deceleration in unit sales for a period, and that's been climbing back. The actual results are difficult to draw final conclusions given that you're seeing the results of our July, August, September, which were extraordinary. October was a bit of a softer month. And then the businesses come back stronger in November to date. So I think we're going to need to get through the back end of the holiday selling season to get sort of a final read on customer reaction to all this volatility.

And on your question regarding SG&A. Clearly, as we have in the past, if we see a significant slowdown in business, we will look at discretionary expenditures and make determination on how much of that we can pull back on, whether it's more purely discretionary expenditures or even some of our investment initiatives that we're pursuing. One of things I would just remind you of is, as we shift our business more and more into retail, that mix impact does have a fairly significant impact on both our SG&A rate because retail obviously comes with higher SG&A expenses, as well as our inventory levels. So versus -- the more we shift mix from wholesale to retail. Clearly, higher gross profit margins, higher SG&A and higher inventory levels.

And from UBS is Michael Binetti.

So just I wanted to clarify one thing and then I had a question. Were there any China closure costs in the quarter? I think Tracey gave some comments there. And then I guess my bigger question is, in this quarter, when we look at the margins on the wholesale side, was all the product that shipped in the quarter shipped at the higher prices this quarter? Or was it -- those prices kicked in at some point in the middle of the quarter? I just wanted to make sure that there's a calendar benefit to be thinking about in the December quarter here. And then finally, any comments you have on how we should think about the new Jeans business. You guys sound like you're getting pretty encouraged by what you're seeing, and I would love to know at how you look at the size and the global opportunity of that business as you're starting to get into it.

Okay. I think that was multiple questions as well, but I'll answer it. In terms of the closure costs, we had approximately $1 million of restructuring cost in the second quarter.

The cost of goods really hit us dead center in this quarter in terms of the true change of the increased cost were fully impacted in this quarter. And in terms of the Jeans opportunity, we are off to what we believe is a wonderful start. I don't know if you've had an opportunity to see it in the stores. But the presentation, the product, the sensibility of the product for this brand new customer for us is pretty exciting. As you know, with Denim & Supply, we went after a very elevated assortment. It's a great fashion story for both Men's and Women's, and we have very high hopes for a very significant denim business worldwide. We began here in the United States where at one point, we had a Polo Jeans Co. business, which was much more commoditized and very different than what we're presenting in Denim & Supply. We felt that this content of product would play extremely well worldwide. So in the U.S., in Europe, where we've converted from Polo Jeans to Denim & Supply, which is exactly what we've done in Asia as well, has played out very well at this point worldwide. And we believe that we're in the beginnings of something very exciting.

Our next question comes from Bob Drbul, Barclays Capital.

My question is on the Retail segment, particularly the full line Ralph Lauren stores. It's been a sequential slowdown in comps, and I think your guidance for the next quarter calls for another slowdown on the blended comp. Can you provide some more perspective on the trends there? And is there a noticeable variation between the U.S. RL stores and the European stores?

Sure, Bob. The headline I would identify in terms of the performance is really not distinguished by geography, but it's probably distinguished by markets that have important tourist components, whether they are in the United States or in Europe or even in Asia are the ones that outperformed any of the total numbers. So there is still a meaningful tourist component to gateway cities or tourist cities in Europe, the United States or Asia. Quite frankly, South Korea is a tourist destination for Chinese. So you really have to know that holistically. I would say the second piece of it is, the local domestic customer whether that's Europe or the United States was actually slower. So footfalls, shopping patterns in markets that are not considered gateway cities or supplemented by tourists was softer than average. So it's been a combination of those 2 factors really worldwide that make up the mix. And so as we look out over the holiday shopping period, really over the next 6 weeks, one of the interesting things is despite the macroeconomic issues and all the other issues we could rattle up together, one thing that retailers don't like to talk about but it's true is the weather. And as the weather has cooled off in Europe and the United States, we've actually seen pretty healthy returns of shopping patterns. So I don't think it's as much Europe versus the United States or Asia. I think it's more sort of global headline issues.

And our next question today comes from Evren Kopelman, Wells Fargo.

I wanted to ask about the Women's Sportswear business, some of the challenges you mentioned in the U.S. It's pretty impressive, your U.S. sales growth, given some of that. So how much do you think is company specific or industry-wide weakness in Women's Sportswear? And why do you think some of that weakness is? Is there no fashion trends? If you could comment on that, that would be great.

Okay. Well, I'll start and then I'll let our fashion guru, Jacki, give you the real facts. Yes, I think women's actually has been, from a sportswear perspective, one of the slower-growing categories for the industry. I think somewhat misleading though has been the strength of dresses, has been the strength of accessories, has been the strength of footwear. But I think some of this is, you can't get it at all categories at the same time. And if I go back several years ago to when sportswear was booming, it was tough dress markets, footwear was not as strong, and so I think women are spending money perhaps slightly differently but not less of it. Within the sportswear category, we are the lead resource, both domestically and in Europe. I was in 5 cities in Europe yesterday. Our presentations of Lauren, Blue Label, Black Label looks spectacular. So then I think within the category, it gets into fashion and product specifics.

Our next question today comes from Jeff Klinefelter, Piper Jaffray.

Roger, I wonder if there's just a little bit more detail you can provide on Europe, I mean, given the very strong top line growth trends, essentially doubled the U.S. Maybe a little more color on, how much of that growth was driven by the new distribution that you referenced versus sort of organic growth. And then just any color on kind of north versus south. I mean, outside of the obvious challenges in Italy. Any other color there would be helpful.

Okay. Well, I'll start with the north versus south, where I'll probably say what a lot of others have said. The north is stronger. So our performance in England or France or Germany or the Scandinavian markets is quite strong. But the southern part of Europe, we don't have that much distribution in Greece, but certainly Italy or Spain have been more difficult. I think it's also for us a particularly difficult quarter fall, where we're delivering a lot of heavyweight products. So whether it's the economic realities of Southern Europe compounded by this particular quarter is always more difficult for us. Those markets have underperformed. The northern markets have overperformed. The other thing that I guess we could debate whether it's Europe or not. But our business in territories like the Middle East, our territories like Russia have been very strong through this period. But while we can call them for us emerging markets, we can call them anything we want, the fact is our product and our elevated product in those markets is quite strong. I think the other subject that Tracey touched on was the more challenging specialty store, multi-brand specialty store business has been difficult in the southern parts of Europe for several seasons now. So our business and the strength of our business is really coming out of Mono brand stores, whether they're owned or joint venture or license and/or our department store business. So kind of a country issue and it's also a channel issue. In terms of new product categories relative to the total growth of Europe, I think what's been surprising to us and this somewhat comes back to Omar's question is when we went into this year, we went in with an investment point of view about new markets, new brands, new product distribution and those are all playing out. The strength of the year-to-date has actually been the core product, the core distribution outperforming. But the bulk of Europe's growth is not in the new businesses yet. I think those are flags or seeds we're planting for the future that will ultimately give us a lot of growth in the years to come. It's the core businesses that continue to outperform that are driving the top line.

Next up is Joseph Parkhill, Morgan Stanley.

I was wondering if you could talk a little bit more about your South Korea transition progress so far, if that's been progressing up to expectations both from a sales and margin perspective?

Sure. The South Korea business came back at the beginning of the year, January 1. We were fortunate to have a talented management team that was in place, that was kept in place. So we have less of the start from scratch, build a management team that we had in other transitions. We are now beginning to impact the buys, the assortments, the presentations more directly. A lot of what was in place was assumptions we made about buys last spring and summer for this year. The customer has reacted very nice to fashion, to some of the merchandising initiatives, and we're working carefully with key department stores in terms of future brand position, locations, adjacencies and the kind of issues you would expect us to do that we've done so well in the U.S. and Europe. It is a business that should be a big profit contributor to us, and we are seeing some of that now, but we think there's more to come.

And our final question today comes from John Kernan, Cohen.

Just wanted to follow up on pricing. How do you see that evolving as the sourcing environment improves a little bit into next year at least in terms of cotton? Do you see yourselves keeping pricing on -- the pricing actions you've taken thus far. Do you see some maybe pulling back on some of that?

Well, John, the good news is the pricing of cotton is coming back down. So whatever were the reasons it's spiked, they're now receding, and so we are looking at reduce cotton prices for next fall. Best to keep in mind there are offsets to that in that cashmere and wool and synthetics actually are rising. So while cotton is the dominant part of our raw materials and that returning to more normalized levels is really a big deal, there are some other commodities coming the other way. Having said that, by the time we get around to pricing next fall's products and we look at all the factors that go into that, including make and manufacturing cost, transportation costs, we'll have to develop a point of view about overall cost, not just the impact to the cotton. If, in fact, as we get through the rest of this fall and holiday selling into spring, if the prices we have today are well received, I don't envision us going back. So I thank you, all, for listening. I apologize for my somewhat scratchy voice. It's been extraordinary 6 months, and we're all mindful of the world we're trading in. But I think we have had reasons to be pleased with how we performed during the first 6 months, and we're kind of excited about seeing what happens for Christmas. So thank you, all, and you can follow-up with Jim and Tracey later.

And ladies and gentlemen, that does conclude today's conference. We would like to thank you, all, for your participation.