Ralph Lauren Corporation (RL) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter 2015 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. James Hurley. Please go ahead.

Good morning, and thank you for joining us on Ralph Lauren's Second Quarter Fiscal 2015 Conference Call. The agenda for this morning's call includes Jacki Nemerov, our President and Chief Operating Officer, who will provide an overview of the quarter and comment on our broader strategic initiative. Chris Peterson, our Chief Administrative Officer and Chief Financial Officer, will provide operational and financial perspective on the second quarter, in addition to reviewing our outlook for the balance of the year. After the company's prepared remarks, we will open the call up to your questions, which we ask that you please limit to one per caller. During today's call, we will be making some forward-looking statements within the meaning of the federal securities laws, including our financial outlook. Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings. Now I'd like to turn the call over to Jacki.

Thank you, Jim, and good morning, everyone. The better-than-expected second quarter results we are reporting today demonstrate the progress we continue to make on each of our core strategic growth objectives. Revenue growth of 4% included sustained double-digit expansion for our international and our worldwide e-commerce businesses, as well as the successful launch of our newest brand, Polo for women. Diluted EPS of $2.25 was better than we anticipated, largely due to the disciplined operational management of our teams around the world. We are especially proud of these results in light of the challenging global operating environment during the quarter. The U.S. dollar strengthened against several major currencies, and geopolitical tensions escalated in Eastern Europe, the Middle East and parts of Asia. Collectively, these events had a negative impact on global tourism, and in certain instances, have also weighed on local customer demand. The highlight of our second quarter was, of course, the global introduction of Polo for women. This natural complement to our iconic Polo men's lines allows us to present the brand to consumers at retail in an even more powerful way. The launch of Polo for women coincided with the opening of our first Polo flagship store on Fifth Avenue in New York City, but the voice and the impact of the brand was felt around the world, and the product message amplified by nearly 400 new Polo women's shops. We kicked off fashion week in New York with a groundbreaking 4D fashion show in Central Park, featuring the Spring 2015 Women's Polo collection. Staged over 3 consecutive nights, the show was a holographic, cinematic runway experience projected onto a 60-foot wall of water that was unlike anything the industry or the consumer has seen before. Thanks to the impact of the event itself and the global reach of RalphLauren.com, the show has achieved nearly 120 million social media impressions and over 2 billion media impressions to date. The high awareness, recognition and appeal of Polo has translated seamlessly to the women's offering, and the response has been terrific. The product is outstanding, the assortment is distinctive, and we believe that Polo for women fills a whitespace in the market around the world. We've spoken in the past about the creation of a global merchandising organization and the consistency of assortment and presentation around the world speaks to this relatively new team's remarkable results. I'd like to recognize the hard work of our design, merchandising, supply chain, retail, visual presentation, advertising, marketing and public relations teams for their extraordinary contributions to this important launch. For those of you who may not have yet had a chance to see the new Fifth Avenue Polo flagship, I encourage you to do so. Our team has done a spectacular job and the store is the perfect stage on which the depth and impact of the Polo brand story comes to life. The store brings brand heritage, lifestyle sensibility and product innovation together in a way that both clearly defines the Polo women's offering and perfectly complements the men's offering. The fits, fabrications and fashion elements of the women's and men's line are resonating strongly with the younger customer our associates see in the store. Speaking to the global appeal of the Polo brand, 40% of the store sales to date have been to foreign customers. In addition to the Fifth Avenue flagship, we have opened 20 stores in the first half of the year, and are on track to achieve our accelerated store development plans across our portfolio. We opened a Polo store in Shaw Centre in Singapore, and this is just the starting point, as we will be expanding Polo thoughtfully over the next few years, with a store in Las Vegas that opened this week, another in Houston set to open for the holiday season and a flagship on Regent Street in London in the first half of 2016. We have also opened a spectacular Ralph Lauren luxury flagship in Hong Kong's Causeway Bay Lee Gardens shopping district. This 20,000 square-foot store showcases our full range of women's and men's apparel, an exceptional presentation of accessories and footwear, a watch and fine jewelry salon, a beautiful collection of decorative accessories and gifts from our home collection, and a special vintage offering. Our expanding retail presence in Asia not only has a positive impact on our business, but also on our brand positioning with this consumer, both in the region and in other markets where they encounter our brand when they travel. Our Club Monaco business continues to grow in major markets as well. During the quarter, we opened 2 Club Monaco stores in London, as well as a recently renovated and expanded location in Boston's Prudential Center, with additional stores opening in Miami and Montréal later this year. The company plans to open an additional 20 to 25 stores in total across the portfolio over the next several months. And based on this accelerated store development activity, we expect to achieve a higher level of retail sales growth in the second half of the year. We are also on track with the increased investments in advertising and marketing that were planned for the year, including more digital, print and social media around the world for both Polo and the Ralph Lauren brands. We expect these investments to support accelerated revenue growth in the back half of the year as well. Speaking for a moment to the season that's upon us, I'm pleased to share that our fall merchandise assortments have been well received across product categories and distribution channels around the world. This is evidenced by strong sales boosts at wholesale accounts and improved conversion in our own stores. We have seen momentum with our luxury collections in men's Purple Label, Women's Collection and RRL, as well as strong performance for our Polo, Lauren and Denim & Supply brands. Now I'd speak briefly about our next exciting endeavor, the global launch of Polo Sport. Polo Sport will be the next evolution of authentic modern activewear. As in everything we do, this line will unite the highest standards of quality and construction with our iconic approach to design, resulting in assortments that will take the consumer from field to street with workout essentials and sports apparel that ideally suit today's active lifestyle. The Polo brand has always reflected an active spirit and sensibility, and our company is proud to be associated with some of the world's most admired sporting events and championships in the worlds of tennis, golf, polo and of course, the Olympics. The strong consumer response to these partnerships and products affirms our belief that our brand's credibility and potential in the active space is unique and powerful. The brand's introduction will focus on men's apparel, with our first delivery for fall '15 season. As you know, the active segment of the apparel market is growing at a tremendous rate, and we believe there is a significant long-term market share opportunity for Polo. Our better-than-expected results for the first 6 months of fiscal 2015 demonstrates the strength of our brand and the resilience of our diversified operating model, both of which allow us to make substantial investments in our longer-term growth objectives. As Ralph said in this morning's press release, our sustained focus on growing our international presence, extending our global retail reach and innovating with new products, has always served us well. I do want to mention some of the macroeconomic pressures facing our industry. As you know, growth has slowed for many of the world's largest economies, and we are closely monitoring both the global operating environment and the consumer reaction. We have set the bar high with respect to our sales plans for the year and believe in the strength of our rigorous planning process and our proven ability to carefully navigate through these kinds of challenges. We have confidence in our product and marketing strategies, and the sophistication of our global supply chain and merchandising organization enables us to read and react to changes in market dynamics better than ever before. Our unwavering commitment to the quality of our product, the integrity of our brand and the unique value proposition they provide will be our competitive advantage for the upcoming holiday season. And with that, I'd like to turn the call over to Chris.

Thank you, Jacki, and good morning, everyone. I'd like to start with a brief recap of the quarter. Consolidated net revenues rose 4% to $2 billion in the second quarter. Growth was led by the retail segment, driven by our direct-to-consumer strategy. Every geographic region grew in the quarter, with the international business up double digits. Adjusting for the incremental headwind from foreign exchange since early August, revenue growth was closer to 5%. Gross profit margin of 56.8% was 20 basis points above the prior year period due to favorable channel and geographic mix. Operating margin of 14.4% was 100 basis points below the prior year, and was significantly better than the outlook we provided in August due to strong and proactive operational management throughout the organization and a shift in the timing of certain expenses into the back half of the year. The operating margin decline was entirely attributable to incremental investments in new store openings, marketing and infrastructure projects. Net income of $201 million was modestly below the prior year. Net income per diluted share rose 1% to $2.25 due to a reduction in diluted share count as the company continues to return capital to shareholders through its share repurchase program. Moving on to segment performance. Wholesale revenues of $943 million were 2% above the prior year, reflecting growth in all geographic regions. Wholesale operating margin of 26.2% was in line with the prior year, as improved profitability for underlying operations was offset by incremental investments in advertising and marketing. Retail sales rose 7% to $1 billion. Growth was driven by the incremental contribution from new stores and included double-digit growth for both the international retail business and global e-commerce operations. Comparable store sales increased 1% during the quarter, supported by strong e-commerce performance and improved conversion at brick-and-mortar stores, which continued to experience challenging traffic trends. Retail operating margin was 13.6%, 80 basis points below the prior year period, reflecting costs associated with the company's global store and e-commerce development efforts, in addition to increased investments in advertising and marketing. Excluding those incremental investments, retail profitability improved from the prior year's level on strong international performance. Licensing revenues and operating income each rose 2% in the second quarter, due to higher royalties from increased sales of Ralph Lauren, Polo and Lauren products. Consolidated inventory was $1.3 billion at the end of the quarter, reflecting investments to support anticipated sales growth for existing operations and new store openings. We spent approximately $91 million on capital expenditures in the second quarter, mostly to support new retail stores and infrastructure projects. The company repurchased about 413,000 shares of its common stock, utilizing $70 million of its authorization and bringing year-to-date repurchase activity to $250 million. At the end of the quarter, $330 million remained available for future buybacks and we had $1.2 billion in cash and investments on the balance sheet. As we mentioned in August, we recently established the company's first commercial paper program and had $210 million of notes outstanding at the end of the quarter. We believe this is an attractive financing vehicle, since the cost to borrow is currently about 20 to 30 basis points. We are pleased with our second quarter and year-to-date results, both in terms of financial performance and progress on all of our key growth initiatives. We achieved our sales objectives and delivered better-than-expected profitability, despite a challenging operating environment. The team's skill balancing near-term market realities and our commitment to our long-range goals is a defining characteristic of our organization. Now let me turn to the fiscal year. Our fiscal 2015 plan calls for incremental investment in 3 key areas. The first is expanding our global store network, including important flagship projects. The second is strengthening our infrastructure, including implementing SAP and upgrading our e-commerce platform. And the third is increased advertising and marketing to support exciting new initiatives, such as the launch of Women's Polo, the opening of the Ralph Lauren Hong Kong flagship store and other high-profile store openings. Jacki talked about the progress on new stores and marketing initiatives. I would like to spend some time on our infrastructure projects. We've made very good progress and are on track with our plans for the year. Our global design, merchandising and sourcing operations have now fully transitioned to SAP, as has most of the North America wholesale business. We expect to complete the North America wholesale transition over the next several months. Based on the successful results to date, we recently kicked off the project for Europe, which we plan to complete over the next 18 months. We expect the SAP project to lead to both revenue growth and margin improvement opportunities over time as the project is fully implemented. We are also making excellent progress on a multiyear project to upgrade our global e-commerce platform. Today, we work with a single partner who manages the front end of our e-commerce sites. That front end includes our core commerce, content management and order management functionality. We handle the back end, essentially fulfillment, distribution and customer care, ourselves. Over the next 2 to 3 years, we're working toward assuming more direct control of that front end. This will allow us to significantly improve the consumer shopping experience, enable omnichannel capabilities and reduce cost versus our current structure. To do this, we recently completed a vendor evaluation process and have now selected the software providers we'll use for our core commerce, content management and order management functions, as well as a systems integration consultant. We're investing in new talent and capabilities so we can manage application development and systems integration in-house going forward. This will enable us to be far more nimble in responses -- and responsive to changes in technology and consumer behavior, allowing us to deliver a best-in-class customer experience that is uniquely Ralph Lauren. It's an exciting evolution and a critical investment, considering the growing importance of e-commerce worldwide. We expect a strong return on investment for this project and will provide more quantitative perspective once we have completed the fiscal 2016 budget process. Now I'd like to turn to the outlook for fiscal '15. On a constant dollar basis, we are maintaining our outlook for the year. That being said, foreign exchange rates have become a substantial headwind over the last 3 months. As a result, we now expect reported revenue growth of 5% to 7% for fiscal 2015, which reflects about 100 basis point negative impact from FX that is concentrated in the second half of the year. The full year fiscal 2015 operating margin is still estimated to be approximately 75 to 125 basis points below fiscal 2014's level, attributable to accelerated investment in our strategic growth initiatives. Based on current foreign exchange rates, we expect operating margin to be at the mid to low end of that range since our unallocated corporate costs are incurred in U.S. dollars. The full year tax rate is estimated at 30%. For the third quarter of fiscal 2015, we expect consolidated net revenues to increase by 3% to 5%, led by retail segment growth and including a 200 basis point headwind from foreign exchange rates. Operating margin for the third quarter is expected to be approximately 100 to 150 basis points below the prior year period, due to higher cost of goods and incremental investments in the company's strategic growth initiatives. The third quarter tax rate is estimated at 30%. Our priorities are clear, and we have both the talent and the financial strength to attain them. The company has a long-standing track record of success in executing its strategies. We are excited about what we expect to achieve over the next several years as we continue to focus our capital and managerial resources on the most compelling long-term opportunities. As Ralph said in this morning's press release, we believe the investments we are making today will create significant value for our shareholders over the long term. At this point, we'd like to open the call up for your questions. Operator, can you assist us with that, please?

[Operator Instructions] Our first question comes from Omar Saad with ISI Group.

I wanted to ask a broader question around the broader retail strategy and what's going on in that piece of the business. And if you look back over the last several quarters, it's kind of been trending around a low single digit flattish comp sometimes. But I know you've got a lot of new retail rollout plans, the new Polo store on Fifth Avenue, and you had some pretty significant openings recently. Maybe you can give -- put this in context of how you expect the retail business to unfold over time and perhaps even an update on how some of the new stores in China and on Fifth Avenue and Singapore are doing to date would be helpful.

Sure. Thanks, Omar. Let me start with the Fifth Avenue store. So I think the response to the Fifth Avenue Polo store, which has been open about 1.5 months, has really been excellent, with broad-based acceptance of icons and fashion pieces. Interestingly, the Women's Polo business is representing about half of the sales of that store, which we are very encouraged by, because we think that the Women's Polo launch gives us another leg to the stool for the Polo retail strategy, and we're seeing strong response to that product. We're also seeing, as Jacki mentioned, about 40% of the sales go to foreign tourists in that store. And so we're seeing a strong resonance of Polo product with the foreign tourist. And the other interesting point I would say on that is that the #1 tourist shopper now in the United States is the Chinese, which we also think is encouraging, given the size of the Chinese consumer in the global market. We are very underpenetrated in China. And as you know, a lot of our retail strategy focuses on getting a broader penetration in international markets where we're -- that are more whitespace for us. And so we're excited to see the strong product acceptance among the Chinese consumer. More broadly, on the Polo store strategies, I think it's still a little bit early days. We've just launched the Polo Women's line. What we're seeing on the Polo Women's line is that the AUR, or the average unit retail price, on Women's Polo is about 40% lower than Blue Label, which we discontinued. But what we're seeing initially is that the unit velocity is dramatically higher. And so we expect the sales volume for Polo for women to far outpace that of the women's Blue Label line as we go forward. And we're seeing early good signs of that as we go along. We've only got about 5 directly operated Polo stores opened at this point, but we have a significant -- significantly greater number planned over the next 6 to 12 months, and we'll continue to learn as we open those.

The next question comes from Steve Strycula with UBS.

Got a question for Chris regarding SAP. Wanted to see, given your experience in prior SAP implementations, just how you think about this in greater detail over the long term? You spoke to it a little bit in the early part of your call, but could you address maybe how this impacts your gross margins and SG&A efficiency longer term?

Sure. So I think we're through the point where we've implemented SAP, and I think we've done a very good job of not dropping the ball from the implementation of SAP. So the transactional systems, the data conversion rates, the ability of the system to operate at scale, we feel highly confident in at this point. I think the next phase of the journey is beginning to realize some of the financial benefits. One of the things that we're very excited about is the -- what SAP is going to enable in terms of allowing us to operate on a more global basis. So for the first time, now, recently, in the last month or 2, we now have visibility to the number of SKUs that we're creating around the world and the SKU overlap because we now have common style numbers. And we believe we have a significant opportunity through our global merchandising organization to drive greater brand consistency around the world by improving the SKU -- by rationalizing our SKU base as we go forward. If you think about that rationalization of the SKU base, that has significant margin and revenue improvement opportunities for us, because what it will allow us to do is focus our design and merchandising efforts on the SKUs that we believe are the highest potential sellers. It allows us to manufacture at a higher scale per SKU. It allows us to reduce inventory going forward. It should allow us to have lower markdown rates, and it should allow us to market more -- in a more common way around the world. And so we're very excited about the prospects that the SAP system will enable. Now, it will take time to fully flush through our system. The first season that we're working on for SKU reduction is fall of 2015 because we tend to design 9 months out. So we're expecting to see initial benefits toward the back half of next fiscal year, and we expect the benefits to grow from that point.

The next question comes from Kate McShane with Citi Research.

I wondered if you could clarify, Chris, your commentary in the outlook of higher cost of goods in Q3. Is that sequentially going to be higher from what we saw in Q2? And how should we think about that going into Q4? And just as a longer-term part of the question, can you update us on any refinements in the supply chain that you are working on that can ease some of the rising costs we're seeing over the longer term?

Sure. So I think on the higher cost of goods, I think this is a reflection of some of the investments that we're making in the season to move some of the production into Italy for some of our more luxury-oriented lines, invest more in the product quality, as well as -- which we believe is important to elevate the product. And that's really what we're talking about in terms of higher cost of goods that we expect in the third quarter. There also is a piece in the third quarter of product mix that we expect to impact the gross margin a little bit in the third quarter. But I don't view this as a sustainable trend. I view this as sort of a -- more of a one-off, so to speak. But we thought, given that we saw that trend, that we should mention it to The Street on the call so that it wasn't a surprise after the fact.

And regarding the supply chain, what we have recently done is taken our manufacturing, sourcing and supply chain distribution organizations and consolidated that under a single leadership. And what we're seeing is that there is now a seamless view from start of manufacturing through delivery of our customers. And what we are working on and seeing quickly is that there are some important benefits by that close-tied relationship from start to finish, from factory to delivery to our stores and our customers. And we're just beginning to identify and recognize those opportunities.

The next question comes from Lindsay Drucker Mann with Goldman Sachs.

I just wanted to follow-up on your full year guidance, your 3Q guidance and what that implies for 4Q as it relates to revenue. The pace of revenue growth in the fourth quarter, how much of that is a function of your store openings? And any visibility you have as far as what your forward order book might look like for the spring season, particularly in light of all the pressure we're seeing retailers feel right now.

Yes. So I think we've got very good visibility to our bookings through the balance of the year. And I think it's that visibility that we have in our bookings through the balance of the year, coupled with the accelerated pace of new store openings, that's factored into our guidance of accelerating revenue growth in the back half of the year, and in particular in the fourth quarter. Of course, the retail segment is a little bit more volatile depending on consumer traffic patterns, macroeconomic trends and consumer spending patterns. And so we're staying very close to that and monitoring it in a read-and-react fashion. But I think you've hit it right, which is the visibility we have in the wholesale bookings, which is pretty good at this point, coupled with the accelerated pace of retail store openings, is what's factored into our guidance for the balance of the year.

The next question comes from Christian Buss with Credit Suisse. Christian Buss - Crédit Suisse AG, Research Division: So I was wondering if you could provide some perspective on how you're thinking about the development of your supply chain when it comes to lead times. One of the things we've been thinking about is faster lead times becoming a responsibility for every vendor. Could you talk about what you're doing in that regard?

Sure. So I think one of the things we're looking at is our cycle time. And I think it's what Jacki meant -- talked about when she was talking about the combination of our global manufacturing and sourcing group with our supply chain group. By putting those 2 groups together, we're taking an end-to-end look at the time from design to the products being on the floor in the store. And in some cases, our current cycle time makes sense because it's optimized for cost and responsiveness to the consumer demand. In other cases, we believe that there could be an opportunity to accelerate cycle time so that we're more responsive to consumer demand and we can read and react on a faster basis. And I think one of the benefits that SAP is going to give us is even better visibility into those types of decisions going forward. So it's early days, because we've just combined these organizations and we're just in the middle of the SAP implementation. But it's certainly something that we are looking at actively. And we're not looking at it on a one-size-fits-all basis. We're looking at it very much on a product category basis.

Christian, also let me add that the SKU count initiative and the dramatic reduction that we're looking at there also, we believe, combines to give us tremendous agility. And in terms of what we're managing and how our teams are managing it broadly from design through delivery, and that would be also an important outcome of that initiative.

The next question comes from Evren Kopelman with Wells Fargo.

Could you give a little bit more color on the geographical basis on your retail comp, international versus U.S.? And then in the U.S., maybe a little bit more color on how outlets did relative to full price.

Sure. So we saw, on a comp basis in our retail business that internationally, we -- our comps were up low to mid single-digits. In the international business, we had double-digit comp growth in the e-commerce business in the quarter. In the U.S. business, the comps were relatively flat. And the channel that continued to experience the most challenge was the U.S. factory outlet business, where traffic to the outlet channel in the U.S. continued to be down. We did see an improvement in conversion, in our case, in that channel, which muted some of that traffic decline in the outlet business. Interestingly, in the international outlet business, traffic was up, and our comp store sales growth was up in that channel outside the U.S.

The next question comes from Dave Weiner with Deutsche Bank.

So I was wondering, Chris, you had talked earlier about -- you gave some color on the different expense buckets, and that was helpful. I guess, if we think about those in their totality, can you give a little color on maybe what the cadence of that might look like going forward? And then, kind of related to that, you talked about the launch of Polo Sport. Could you maybe just dig a little into that in terms of what we should expect there from the expense side as well?

So, on the expense side, I think that, as we mentioned a little bit earlier, I think the peak expense pressure from the SG&A cost of the new store investments, the marketing investments and the infrastructure investments was really in the second quarter that we're reporting today. That being said, the dollar impact, that's from a margin standpoint, the dollar impact is going to be a little bit higher in the third quarter and the fourth quarter, but we expect that not to have as great a margin pressure because of the accelerated pace of revenue growth in the third and fourth quarter. And so that's sort of how we're looking at it playing out during the fiscal year. So we expect the SG&A pressure to moderate in the third and fourth quarter versus what we saw in the second quarter from the incremental investments. On Polo Sport, I think Jacki sort of touched on it. We were very excited about this initiative because we think it gets us into a very large, fast-growing part of the apparel business. Our first launch is going to be for fall of next year, so this is a fall of next year launch. And we're really focused at the launch on the Men's business and we're focused on launching in our stores, in e-commerce and in select department and specialty stores around the world. So more to come in terms of quantification of that opportunity as we get closer to the launch date.

The next question comes from Erinn Murphy with Piper Jaffray.

I guess I have a question for Jacki. I know millennials have been a group that you guys have been focused on, and it seems like the Polo Women's launch is definitely helping to tap into that. Did that change how you're thinking about Denim & Supply longer term? Would just love an update on how that brand has been trending at wholesale.

Interesting, it's -- we're finding that the Polo Women's product definitely has an appeal to the millennial customer. And it is evidenced, clearly, if you stand in Fifth Avenue and you watch the audience who is buying that product, which was an important target for us as a company. So we really believe and see that we are realizing that result sort of as we are observing the results. The Denim & Supply product is doing extraordinarily well, although it has a more narrow distribution in a few stores that we've opened to date. And then more broadly, in wholesale internationally and of course, in the U.S. with Macy's. So the results have been fantastic on the brand, and the -- the audience is similar, however, the expression of the products are very different. The Polo Women's product really speaks to the, sort of the young preppiness, but with a twist and a very relevant to today's trend for that customer. And Denim & Supply has a much more -- a bohemian style about it, much more of a freestyle. And so they're quite differentiated when you look at the product. Both doing well and both really hitting their target audience.

The next question comes from Joan Payson with Barclays.

With some concerns out there around Europe recently, I was wondering if you could maybe speak more in detail to that business, either how it's been trending recently or if there have been any recent changes by region?

Sure. So, I think we were very pleased with the performance we had in Europe in the quarter. Our revenue was up high single digits in Europe in the quarter. We had our retail business grew double digits, and our wholesale business was up low single digits. If you look within Europe, I think we continue to see strength in the U.K. and Northern Europe. But importantly, we've seen a stabilization in Southern Europe that's contributed to a return to fairly strong growth in that region.

The next question comes from Barbara Wyckoff with CLSA.

Can you talk about what strategies you're planning to offset declining outlet traffic? And why do you think that the traffic continues to be tough? And then the follow-on to that, what posture you're taking in Macy's and other department stores with the continued price promotion focus.

Sure. I'll handle the outlet question. So from an outlet question, I think that what we're doing is a couple of things. Number one, we're focused on increasing and making our marketing investments more relevant and more targeted to that outlet shopper to try to have call-to-action advertising that drives traffic into the center and our stores in the center. And I think that is helping mitigate a little bit the traffic trend in the U.S. outlet channel, which I would differentiate from the international outlet channel. That being said, I think longer term, what we believe is that with the expansion of the e-commerce business, we believe some of those e-commerce shoppers are choosing to shop online rather than drive to the outlet. And so we do believe there is a cannibalization impact that's impacting the outlet channel. And we think that it's important for us to play in both channels, and it's important for us to focus on both driving traffic in both channels and improving conversion in both channels.

We also believe that with the gas price reduction and the fact that it often takes an hour to drive to an outlet mall, that, that also will provide some relief to the channel and could be an important differentiator as we move forward. In terms of price promotion at the department stores, I guess I've been doing this so long that it doesn't feel like it's any different to me. We have navigated through this season after season, through -- with every customer. We work hard to stay out of the fray and to guide our results based on our performance and product. As I said, I think we're happy with where we are for the fall season and we feel very comfortable as we guide ourselves into holiday and spring that we are well set up for the right appeal of product to our customers. So as I said, I don't feel it's any different than it's ever been before. And I think that, as I said, we are confident in how we move into the holiday season.

The next question comes from Rick Patel with Stephens.

Just a question on China e-commerce. I think you're still in investment mode right now. Can you give us an update on where you are? I'm curious on how you're positioned to take advantage of the growing demand in that side of the world as consumers embrace your concepts.

Yes. So, we are early days on that. We just turned on in June of this year our Hong Kong e-commerce website that has ship to capability to a number of markets in Southeast Asia. We have not yet penetrated the Mainland China e-commerce business. We also, I would point out, just recently turned on social media in China as part of our increase in marketing and advertising spending this year, which we're very excited about. We are, of course, investigating how to approach and tackle the e-commerce business in Mainland China, given the size and growth of that business. But we have -- we're working through what we believe is the right business model, and we'll update you as we make decisions on that.

The final question comes from Rick Snyder with Maxim Group.

You indicated in the first quarter that there was a revenue shift in wholesale to Q2 in the U.S. And I'm looking at the wholesale growth, and it's only up 1.6%. I think it's a net loss for the quarter. Can you just talk about that shift? And did it play out as you expected?

Yes. So, I think one of the challenges is that our financial quarters don't line up nicely to the seasons. And so what we tend to look at is the spring/summer season, and then we look at the fall/holiday season. And what our focus is on the wholesale channel is growing market share. And so as we looked at how we closed out the spring/summer season, which included Q4 of last year, Q1 of this year and Q2 of this year, our wholesale business globally grew faster than the wholesale channel, and we grew market share in the channel over that period. We believe that we have a very strong plan for fall/holiday, that we have confidence we'll continue to grow our market share in the channel. There can be quarterly shifts in timing of shipments related to that, that follow wholesale customer receipt plans, but we tend to be more focused on the season basis than on the quarter basis is how we look at it.

Great. Thank you very much for calling in today and participating.

Thank you.

Thank you very much, and we'll look forward to talking to you all again soon.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.