Ralph Lauren Corporation (RL) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Third Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. [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. Thank you for joining us on Ralph Lauren’s Third 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 third 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 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 turn the call over to Jacki.

Thank you, Jim, and good morning, everyone. The third quarter results we are reporting today demonstrate the disciplined operational management of our teams through a competitive holiday season and against the backdrop of an unusually volatile macro environment. The 3% constant currency revenue we achieved in the quarter was below our expectation, largely due to external forces. As the U.S. dollar continue to strengthen against several major currencies and geopolitical tensions remained elevated. There was a sustained negative impact on global tourism, and in certain instances, local customer demand. The U.S. market size was more competitive with greater promotional activity across all distribution channels. We gain share early in the holiday shopping period, which positioned us well as the environment became more competitive in the three weeks before Christmas. I’m proud to report that we navigated these challenges in a brand appropriate way, controlling the controllable and delivering operating profitability at the high end of our outlook. We aggressively managed expenses even as we continue to invest in our long-term strategic growth initiatives. As both a company and the brand Ralph Lauren is always taken a long view and this quarter was no exception. Now let me turn to product highlights of the fall holiday season, and begin with our luxury brands. Both men’s Purple Label and Women’s Collection performed well in the quarter by challenging traffic trends in our retail stores. Not only to these lines represent the purest expression of Ralph’s design vision, but they exemplify the quality craftsmanship and attention to detail that the true luxury customer appreciates. Sportswear and outerwear were particularly strong categories where our distinctive aesthetic proved especially compelling. As you know, we recently launched Polo for women, the high awareness and broad appeal of the Polo brand has translated well to the women’s offering and customers around the world are embracing it. Momentum is growing with each new delivery as the distinct fashion sensibility of the brand continues to resonate with the younger customer across retail and wholesale channels. The distinctive lifestyle positioning and retail presentation of our Denim & Supply brand has created real differentiation in the marketplace. Its appeal among millennial’s had led to a strong performance of both the foundational Denim component of the line as well as the more directional fashion elements. From a category perspective, dresses continued to be a standout performer across all of our distribution channels and we’ve expanded the assortment to fully represent day cocktail and formal occasion needs. Handbags and footwear also experienced strong growth in the quarter with terrific consumer response to both iconic silhouettes and new styles. Finally, the distinctive point of view and emphasis on fashion drove strong growth for our Club Monaco brand across women’s apparel, men’s apparel and footwear. I’d like to provide some perspective on sales trends by region since there were some very interesting differences during the quarter. Importantly, we achieved constant currency revenue growth in each of the three major operating regions of the Americas, Europe and Asia. This is despite lower sales to important tourist customers especially those from Russia and the Middle East, who have been most impacted by the volatility in currency and commodity market. International performance was especially strong, growing double-digits in current currency with greater China and Europe registering the strongest gains. This is encouraging not only in the contest to difficult geopolitical and macroeconomic condition. But also because growing our international revenue is one of our most important strategic objective and in the year-to-date period, international revenues represented one-third of our total revenues. Our European revenues rose double-digits in constant currency during the third quarter, led by strong spring wholesale shipments and reflecting broad-based momentum throughout the region. Generally speaking, we continued to see the best trends in Northern Europe recovery in the southern part of the continent and more steady expansion in central Europe. We achieved high single-digit constant currency growth in Asia, led by our free standing store network, with trends varying by country. Sales in Japan were quite good and continued the momentum we had last quarter. Korean sales remained challenging for the apparel sector, especially in the department stores, which represent the majority of our distribution. Double-digit constant currency revenue growth in greater China largely reflects the investment we have made a new distribution. While Hong Kong was disrupted by prolonged political protests, we are encouraged by the performance of our recently opened Lee Gardens flagship. This is an important market for luxury brands and we believe the store appropriately positions the Ralph Lauren brand to this customer. We achieved modest growth in the Americas were lower customer traffic to brick-and-mortar stores was a formidable headwind. A planned shift in seasonal customer receipt plans for certain merchandise categories impacted our wholesale shipments during the quarter. Our North American e-commerce business grew at a double-digit rate in the third quarter and both our retail and wholesale channels. To expand on e-commerce, since that’s another important area of strategic focus, our global e-commerce revenues grew 17% in the third quarter, supported by double-digit expansion in each region. Traffic to our e-commerce sites increased significantly, with over 40% growth in mobile traffic alone. We experienced equally strong momentum for our wholesale e-commerce business. We were well prepared for this year’s kickoff to the holiday season during the Thanksgiving, Black Friday week, which now stands through the increasingly important cyber Monday. The strength of our retail e-commerce was due in part to a number of site enhancements we’ve made over the last several months. These include more impactful visuals, redesigned product detail pages, enhanced quick-shop capabilities and a more streamline checkout process. We added preorder to capabilities for our women’s collection line, which is an important feature for the luxury customer who wants to shop the runway. We’ve also develop more robust omni-channel capabilities, leveraging technology to share inventory across our retail format. This enables us to enhance our customer service and maximize sales, while improving the productivity of our inventory. The investments we are making in e-commerce and omni-channel capabilities beautifully showcase the Ralph Lauren lifestyle, while offering the product focus and clear call to action that this customer expects. These efforts will be enhanced even further in the next two to three years with our new e-commerce platform. This investment will ensure that ralphlauren.com is the most robust and expansive expression of the Ralph Lauren brand, and will support what we believe can be a billion dollars in sales. I’d also like to highlight the efforts of our global supply chain organization during the quarter. Over the years, our sourcing and logistics teams have navigated through not only the growing scope of our global operations across regions, channels and product categories, but also dynamic changes in input cost and all the while meeting the company’s extremely high standards of quality and innovation. The benefits of our decision to design a global supply chain organization were especially apparent during the third quarter as we contended with the West Coast port situation. The end-to-end visibility from product sourcing to customer delivery enabled our team to develop and execute robust contingency plans, minimizing risk, controlling costs, and maintaining business continuity. I’m delighted to report that our service levels to customers have been maintained despite the 3 to 10 day extended transit times that the disruption has created for the industry and I want to extend my thanks to this remarkable team for their extraordinary work. The global supply chain teams also made excellent progress on a number of critical strategic initiative design to continuously improve our productivity. Some of the most compelling areas of opportunity have come from improved supply and demand visibility. This is allowed us to better leverage our volume growth and to be more disciplined with respect to managing product minimum, reducing product lead times and consolidating shipments. We believe that they are still more opportunity and this will continue to remain an area of focus. The unexpected challenges we faced in the third quarter followed better than expected sales and profit trends in the first half of the year. We are proud of our progress against the company’s long-term growth objectives and with our ability to consistently invest in these areas while still executing day-to-day operations to our exacting standards. We are able to do this as a result of the strategic diversity of our operating model, the power of our brand portfolio, the desirability of our products, and the high level of operational control we have over business. In November, I mentioned the next exciting endeavor for our Polo brand, the global launch of Polo Sport, beginning with the introduction of men’s and boy’s for the fall ‘15 season. Across the globe, the feedback on this product has been strong and seen as a natural fit with the spirit and sensibility of Polo. As you know, the active segment of the apparel market is growing at a rapid rate and we believe there is a significant long-term market share opportunity for Polo. I also want to mention the most delicious extension of our Polo brand, our new restaurant in New York. The Polo bar officially opened on January 9th and the response has been sensational. From the food to the service to the decor, Ralph has brought something special and unique to the Manhattan dining scene and we are overwhelmed by the enthusiasm people have to experience the brand in this way. Based on the continued uncertainty of the global macroeconomic environment, we are planning the fourth quarter next year cautiously and responsibly. This included a comprehensive look at our operating model. Chris will take you through some of our plans to move to a global brand management structure with new systems and processes to support the stronger sales and profit growth we expect over the next five years. As challenging of the macro environment is, I believe we are operating from a position of strength and that our company is mobilized to manage through it. We have a long-term plan; a clear strategic roadmap to help us realized that plan, the managerial talent to navigate that roadmap and $1.4 billion in cash and investments on the balance sheet to support our efforts. The board shares our confidence in both our future growth plans and our financial condition as evidenced by increase in the quarterly dividend payment that was announced today. And with that, I’ll 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 1% to $2 billion in the third quarter. Adjusting for FX headwinds, revenues increased 3%, which was achieved on top of a 9% gain on the prior year period, led by the retail segment and driven by our strategic focus on e-commerce and new store development. Every geographic region grew on constant currency during the quarter with the international business up double-digits. Reported revenue actualized below our outlook of 3% to 5% growth, due to negative foreign exchange and weaker than expected trends at our retail stores, which were impacted by a decline in traffic, especially among important tourist customers and a more promotional holiday period in the U.S. Gross profit margin of 57% was a 120 basis points below the prior year period. We anticipated decline in gross profit margin was due to mix impacts, the more promotional U.S. marketplace and unfavorable foreign exchange impacts. Operating margin of 15.5% was 110 basis points below the prior year, entirely attributable to the lower gross profit margin. This was at the high end of the outlook with provided in November, due to strong and proactive expense management throughout the organization and despite incremental investments and new store openings, marketing and infrastructure projects. Net income of $215 million was 9% below the prior year, and net income per diluted share decline 6% to $2.41 million. Moving on to segment performance, wholesale revenues increased 2% in constant currency, which was achieved on top of 14% gain in the prior year period. On a reported basis, wholesale revenues of $837 million or in line with the prior year. Growth in European whole shipments was offset by lower shipments in the Americas due to the cadence of seasonal receipt plans and unfavorable foreign exchange. Wholesale operating margin of 24.7% was 120 basis points below the prior year due to product mix impacts. Retail sales rose 5% in constant currency and were up 2% to $1.1 billion on a reported basis. Growth was driven by the incremental contribution from new stores and included double-digit growth for global e-commerce. Comparable store sales were in line with the prior year in constant currency and declined 2% on a reported basis, due to foreign exchange. Constant dollar comp trends reflect strong e-commerce performance and positive growth internationally that was offset by a decline in comps in the Americas, which continue to experience challenging traffic trends at brick-and mortar stores. Retail operating margin was 16.9%, 260 basis points below the prior year period, reflecting the more promotional U.S. marketplace and cost associated with the company’s global store and e-commerce development efforts. Licensing revenues increased 6% and operating margin rose 7% in the third quarter, due to higher royalties from increase sales of Ralph Lauren, Polo and Lauren products around the world. Consolidated inventory was $1.2 billion at the end of the quarter, reflecting investments to support anticipated sales growth for existing operations and new store openings. We spent approximately $124 million on capital expenditures in the third quarter, mostly to support new retail stores and infrastructure projects. Company also repurchased about 550,000 shares of its common stock, utilizing $100 million of its authorization and bringing year-to-date repurchased activity to $350 million. At the end of the quarter $230 million remained available for future buybacks, and we have $1.4 billion in cash and investments on the balance sheet. At this point, I’d like to review our outlook for the balance of the year and provide some preliminary perspective on fiscal ‘16. For the fourth quarter, we expect consolidated revenues to increase at a mid-single digit rate in constant currency, which is an acceleration from the third quarter and year-to-date results. Based on current foreign exchange rates, FX is expected to negatively impact revenue growth by approximately 550 basis points. Operating margin for the fourth quarter’s expected to be 250 to 300 basis points below the prior year with relatively equal pressure on gross margin and operating expenses. The decline in operating margin reflects unfavorable foreign exchange impacts, investments and the company’s strategic growth objectives and a cautious view of the global environment, which we believe this prudent of this time. Fourth quarter tax rate is expected to be approximately 31% to 32%. For the full year fiscal ‘15 period revenues are expected to increase about 4% in constant currency and we now anticipate of 200 basis point negative impact from foreign exchange. This compares to our prior outlook of 5% to 7%. The full year fiscal ’15 operating margin is now estimated to be 170 to 190 basis points below the prior year’s level compares to a prior expectation of a 100 to 125 basis points decline. The change in operating margin guidance is driven by the lower sales outlook and foreign exchange. As a remainder, the primary drivers of the year-over-year contraction in operating margin are the incremental investments for making to expand our global store network strengthen the company’s infrastructure and increased advertising and marketing. The fiscal 2015 tax rate continues to be estimated at 30%. If we look to the future, we remained committed to investing in the growth initiatives that we believe we’ll provide us with a more robust platform for future sales and profit growth. While we have not yet completed our fiscal 2016 budget, I want to provide some qualitative insight into how we are approaching next fiscal year. The context in which we are operating has changed. In addition to political and economic challenges around the world, we are experiencing significant headwinds from foreign exchange rates. Based on current exchange rates, FX will have about a 550 basis point negative impact on fiscal ’16 revenue growth. The combination of translational and transactional currency effects is estimated to reduce our full year operating income by approximately $185 million. This is the most significant currency impact the company has experienced in the fiscal year. To deal with these external realities, we are taking decisive actions to mitigate their impact. First, we intend to raise prices in certain markets that have been impacted by currency devaluation including Japan, Canada and Europe. Second, our supply chain organization is negotiating lower prices across our manufacturing base as a result of lower raw material cost and oil prices as well as the strength of the U.S. dollar. Finally, we intend to reduce operating cost by restructuring the organization something I’ll come back to you later. With that as a backdrop, we are currently planning mid-single digit constant currency revenue growth in fiscal ‘16 supported by significant contributions from the strategic initiatives in which we’ve invested over the last several years. These include new product development, new store development and global e-commerce. Retail segment revenues are expected to grow faster than wholesale due to expanded square footage in continued momentum in e-commerce. On a constant dollar basis, we expect operating margin from continuing operations to improve from fiscal 2015 level due to gross margin expansion and SG&A leverage. We intend to reinvest that improvement in two main areas, the build out of the new global e-commerce platform and global store development including the renovation of several existing stores. Over the next two years, we expect to re-merchandize several existing locations to our Ralph Lauren or Polo concepts in order to refine brand positioning, streamline assortments and better service the customer. On a reported basis, we expect operating margin to be down due to the foreign exchange impact I mentioned earlier. We will provide more specifics on our fiscal ’16 operating margin expectations in May after we completed the budget process. Let me now turn to the operating model change that Jacki referred to few minutes ago. For a number of reasons, we decided that the time was right to transform the way in which our organization is structured, how we design and manage our processes and how we make decisions. This is a significant change to position the company for stronger future performance. About 15 years ago, the company embarked on a long range plan to assume direct control over strategically important regions and merchandise categories. This began with the acquisition of the European business in 2000. Over the next decade, the company acquired more than a dozen previously licensed businesses. These actions allowed us to maximize the sales and profit potential of each of these businesses while elevating the presentation of the brands. The result however was a complex operating model. To address this, we first turned to infrastructure upgrading systems in order to integrate what was a highly fragmented channel and regional structure. Next, we began to globalize several critical corporate functions, such as finance, IT, supply chain and merchandizing. Today, we are taking the next step to simplify our operating model. Over the next several months, we will commence plans to move from a decentralized channel and regional structure to a fully integrated global brand-based organization structure. We have always believed that our brands are greatest assets and a significant competitive advantage. Our strength as a company stems from the vitality and desirability of our brands. In this new structure, we will create global brand groups that will not only define the strategy from the design and merchandising to retail concepts and marketing, but will also have accountability for financial performance around the world. Importantly, we will continue to have regional channel and functional teams, but not only provide critical expertise and insight to the global brand groups, but also operate the business on the day-to-day basis. We believe this will strengthen the connectivity from the design vision to the consumer impression and ensure greater clarity and consistency of brand expression. While each of our brands enjoys high awareness and regard today, we believe this new organization design will further enhance brand equity. We see this next step is a critical milestone to realizing our vision of operating as a truly global business, maximizing our growth potential and realizing significant operating efficiencies. Let me give just one example. Now that we have completed the SAP rollout across design in global manufacturing, we have visibility for the first time into our SKU development, adoption and performance. We now know that last year, we designed 130,000 SKUs across the company with the commonality rate by brand in like locations around the world that is very low. The new structure and processes will enable a significant reduction in SKUs, which will lead to lower inventory levels, better gross margins and SG&A cost savings. Our goal once the new structure is fully implemented is to achieve over $100,000 in annual expense savings. Only a modest amount will be realized in fiscal ‘16 with more significant savings in fiscal ‘17 and beyond. We expect to incur restructuring charge as a result of this reorganization and we are currently working through the details of the plan. We will provide more insight in May. We are very excited about the company’s growth prospects. We are investing in the business and making the right strategic decisions in order to minimize the impact of near-term market realities and maximize shareholder returns overtime. With that, we’ll open up the call for your questions. Operator, can you assist us.

[Operator Instructions] The first question comes from Omar Saad with Evercore ISI.

Thanks, good morning. Chris and Jacki, hoping you could elaborate little more on some of the organizational changes that you discussed this morning. The impetus behind them, maybe some more anecdotal ideas around where you can see benefits accrue over time, as you shift the organizational structure and then where you stand on the HR perspective, I believe in teams and people in place for a kind of brand centric global organization. More color on those would be really helpful. Thanks.

Yeah, let me start, I think that a lot of the work that we’ve done in the company over the last couple of years to globalize the company in terms of our systems, in terms of some of the functions that we move to a global basis, as really enabled us to take the next step. And so we think now is the right time because of a lot of this ground work that we’ve laid over the past couple of years to really set the stage for the new organization model and we think that this creates a platform for future sales and revenue growth acceleration, because what it’s going to enable us to do is be more focused on a by brand basis and really integrate the work of design, merchandizing, marketing, retail store concepts around the world. And so if you think about the way we’re operating today, because of the way we’ve acquired licenses, we’re really operating with many different groups around the world that are performing similar activities. And we believe that this new construct will allow us to enhance the brand clarity and consistency around the world, while driving operating efficiencies at the same time. In terms of where we are from an HR standpoint, I think as we alluded to prepared remarks, this is going to require a detailed design work which we’re in the middle of and we expect to have much more specifics when we come back and talk on the May call on that basis.

Next question? Lora we’re ready for the next question.

Thank you. The next question comes from Michael Binetti with UBS.

Thanks, good morning guys. Chris, I was wondering if you could help us with a little more color on your comments on the operating margin outlook for fiscal ’16 when you exclude FX.

Yeah. So I guess I would say a couple of things. First, let me just describe the FX impact a little bit and then I’ll come back to the underlying. So, I think as we mentioned we expect FX at current rates to have about a negative 550 basis point impact on the top-line. A lot of our cost structure is in U.S. dollars, Swiss francs and Hong Kong dollars, because that’s where we have our big standards of operation from an SG&A standpoint from overhead and of course a lot of our manufacturing base is in currencies that have not depreciated as much as the Euro, the Japanese yen, the Australian dollar and the Canadian dollar. So when we look at the FX impact on the top-line of 5.5%, the flow through of that to the bottom-line is a little bit over 40% in terms of the impact that it has which is what leads to the $185 million headwind because our cost structure is not denominated in local currency. On the underlying basis, back to your question, I think that we expect our operating margin on the underlying basis to be up versus this year and that’s because some of the investments that we’ve been making in terms of our infrastructure, in terms of the retail store development and in terms of the increased marketing and advertising were seeing positive trends from those that are driving growth in operating margin on an underlying basis. The two headwinds that we have next year which we expect to offset the underlying increase in operating margin are the e-commerce platform, which will be a bigger investment next year than this year, but we believe strategically the right thing for us to do as we’ve talked about in the past and the continuation of our retail store development effort particularly where we’re looking to re-merchandize many of our stores from the world of Ralph Lauren concept into distinctive Ralph Lauren luxury stores or Polo stores, which we think are clearer to the consumer.

Next question?

Thank you. The next question comes from David Glick with Buckingham Research Group.

Yes, thank you. Just a follow-up question on your America’s business, I was just wondering if you can give us obviously the international business in constant currency was very strong, little bit of noise in North American wholesale. How do you think about in the sort of context of the new world as you describe and how do you think about the underlying growth potential on a near and intermediate long-term basis of your wholesale and retail businesses in U.S. in comparison to what continues to be strong performances in Europe and Asia.

I think if you – if we look at the wholesale business, we believe the wholesale business which is largely focused in U.S. and Western Europe as a channel is likely to grow at a sort of a 0% to 2% rate. We believe we have opportunity to grow market share and we’ve pretty consistently been growing market share in that channel if we look over the last 10 years and so we think we can grow a couple of points faster, which would position us at sort of a low to mid-single digit growth rate in the wholesale business going forward. The retail business we believe we can grow faster both driven by the e-commerce business where we had high teens growth in the current quarter and we think that the e-commerce business is going to continue to grow at an accelerated rate, which is why we are investing behind the e-commerce business and then when you go to the brick and mortar retail business, I think that – we think that the brick and mortar retail business, we had strong performance internationally and a little bit of a slowdown and performance in U.S. that was below our expectations primarily driven by traffic trends. We saw traffic trends in the quarter at the factory outlet channel that were down mid-single digits and that’s what really affected us relative to the expectations we had going into the quarter.

I think also that in the U.S., the third quarters interesting because what we saw was that we continued to take market share in the quarter even across all of our categories on that we blend and represent, that was – I think unique as certainly the backdrop of the quarter was more challenging around.

Next question?

Thank you. The next question comes from Kate McShane with Citigroup.

Thank you, good morning. Chris, I just wondered if you could walk us through the revenue guidance that you have for the remainder of fiscal year 15, which you’re guiding to be up mid-single-digits in constant currency, which is up against your toughest comp and would be the stronger sales growth of the year. What are the drivers of that and what are you basing your confidence on that this can be achieved in Q4?

Yeah, so I think as we look at Q4, we think that we’re planning the business prudently with a mid-single-digit constant dollar comp growth. We have good visibility in our wholesale business from a booking standpoint and we certainly expect the wholesale business in the fourth quarter to grow at a faster rate than what we saw in the third quarter and in the year-to-date period. From a retail standpoint, we are anticipating a bigger impact on retail primarily due to new store openings. So baked into our constant dollar comp guidance is not a big expectation for a constant dollar comp increase. It’s more around the acceleration where we see in the wholesale business as well as the full impact of our retail store development activity and of course we’re continuing to view the e-commerce is operating very successfully, which we have been doing.

Next question?

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

Thanks, good morning, Chris. For the fiscal ‘16 outlook, I just had a question on that, I think it was a $185 million operating profit drag. Number one, is that on a fully unhedged basis and have you hedged any of your inventory that would delay that flow through? Number two, is any of that $185 million occurring in the fourth quarter? Or is that just a fiscal ‘16 number? And then lastly, how much visibility do you have to lower costs from cotton and energy and other items, offsetting some of that operating profit drag? Thanks.

Yeah, okay. So we do hedge our inventory purchases, a portion of our inventory purchases and we typically hedge sort of six to nine months out. So we’re not hedged for the full fiscal year next year and we’re not hedged to the 100% rate. We typically hedge at sort of a 70% of our exposure rate. So there is a significant impact from currency in that guidance for next year that’s inventory related, but there are also will be an additional flow through in the following year from the portion of inventory next year, where we do have a hedge on, if you think forward to fiscal ’17. With regard to the fourth quarter, there certainly is a foreign exchange impact on the bottom-line and on the operating margin in the fourth quarter and in fact it’s fairly significant. And the reason for that is that when you think about the flow through that I talked about earlier, if the FX drag on the top-line is flowing through next year to a little bit over 40% rate. We’re also seeing a similar type of impact in the fourth quarter and with the 550 basis point drag from foreign exchange on the top-line in the fourth quarter, that’s creating an operating margin pressure in the fourth quarter, which is a big part of the reason for our guidance change on operating margin, not just for the fourth quarter, but also for the fiscal year – the current fiscal year. And then on comp on raw material and oil cost, we have some visibility to that and so when we saw the drop in commodities and we saw the strength of the dollar and we saw the drop in oil prices. We immediately began working with the global manufacturing and supply chain teams, who have at this point gone over and met with the number of our manufactures in Asia and began the work on getting cost reduction. We don’t have full visibility to the cost reduction that we’re going to get, but we are certainly confident that we’re going to get some cost reduction as part of this and that’s part of the detailed work that we have and finalizing the budget ahead of us over the next couple of months. There is a timing lag in terms of when that flows through because typically the seasons that we’re negotiating are six months out or so from the time that we began that negotiation process.

Next question?

Thank you. The next question comes from Christian Buss with Credit Suisse.

I was wondering if you could talk a bit about retail performance and what your expectations are going forward for outlets versus full price stores.

Yeah, I think on the outlet business, we saw retail comps up in the international outlet business and so we’re seeing sort of a tale of two different environments. In the international business, the outlet business continue to – we are able to continue to drive comp store sales gains and we’re not seeing the traffic declines in the international outlet centers that we are in the U.S. and the U.S. I think the traffic declines that we’re seeing to the center are putting more pressure on that business. It’s still a large business and still a very profitable business for us, but we believe that with the growth of the e-commerce business which is become particularly large in the U.S. that’s starting to cannibalize a little bit into that channel, also as some of the brick and mortar stores that are closer in to the urban areas have gotten more competitive on pricing it’s reduced the consumer desire to drive to get to the outlet center. And so we’re factoring that into our plans as we go forward because we expect that trend, although you can never predict but we certainly think the consumers going to continue to shop more and more on online and as that happens we think that’s going to continue to put pressure on brick and mortar.

Next question?

Thank you. The next question comes from Evren Kopelman with Wells Fargo.

Thank you. Good morning. Can you give a little bit more color around your comments about the promotional environment in the U.S. maybe more by channel what you saw at department stores versus the outlet channel, where you saw the biggest pressure and what do you expect going forward?

Yeah, so I think what we saw was that as we enter – I think Jacki sort of talked about this in the prepared remarks. But as we enter the holiday season, we got off to a pretty strong start over the Thanksgiving period, the week before Thanksgiving through Cyber Monday, and then we saw a little bit of a drop in sort of the consumer purchase behavior and that period between the Thanksgiving – the end of the Thanksgiving shopping period and the first couple of weeks of December. And as a result of that what we saw was that a lot of the competitors ratcheted up the promotional intensity in terms of trying to deal with the inventory that they had on the floor and so reacted to that not to ensure that we stayed competitive during the period and I think that’s what we were alluding to in our commentary. And again, that was really a U.S. phenomenon, not so much international.

Next question?

Thank you. The next question comes from Joan Payson with Barclays.

Hi, good morning. Could you talk a little bit about the Polo women’s business, how that’s performing in retail stores compared to a point of sale at wholesale and also how it’s doing internationally compared to domestically.

Yes, the Polo women’s business is off to a nice start. As you know, we started that business just this past fall. And we’re seeing a strong response from that younger customer and on an overall basis we are seeing a nice reaction in the department stores. We’re seeing a nice reaction in our retail stores and from an international basis, also a very strong reaction in the international markets in Europe and in Asia. I think that as any new brand is launched, there are opportunities to continue to build and perfect and as we are now receiving next season’s merchandise and so forth, we’re continuing to see those changes and an improvement consistently in the momentum of the brand. We really believe that it’s unique and addresses a new audience and so I would say that we are pleased so far with the results, but more to do and more to build and develop.

Next question?

Thank you. The next question comes from Barbara Wyckoff with CLSA.

Hi everyone, following on Joan’s question, talk about, please, the performance of Lauren in U.S. department stores this year versus last year and how do you see it going forward?

Our overall performance in the Lauren brand all of its categories which are obviously – we have a sportswear business and important dress business, footwear business and accessory business, multiple licensed businesses and the brand has been growing steadily over as you know many years. I think that we see opportunity in certain aspects of the business, certain businesses are on huge acceleration and other businesses have slowed slightly and we continue to work on a daily basis to be able to address that. The dress business is on fire. Lauren represents the number one dress brand in almost every department store. We’ve had a phenomenal footwear season with accelerated growth in footwear. Our bag business is also building nicely and we had an excellent season in bags. Our sleepwear business, a lot of – our coat business also was spectacular for the season. So I think that it moves on a category by category basis, but overall strong growth in the brand.

Next question?

Thank you. The final question comes from Erinn Murphy with Piper Jaffray.

Great, thank you, good morning. Just on the gross margin side, could you just help us aggregate that 120 basis point decline during the quarter? What was tied to the promotional environment versus FX versus mix shift and then, did you guys have to air freight more to work around the port issue. And then just in context with the gross margins, as we think about your guidance for 2016, you talked about constant currency gross margin being up. Just speak to the drivers there. Thank you.

Yeah, so on the quarter on gross margin, really there were three things that impacted the 120 balance sheet. Certainly, currency had a significant impact as we mentioned the promotional U.S. marketplace and then we had a mix impact as well, and part of that was due to the cadence of our wholesale shipments. The cadence of our wholesale shipments in the quarter, we round up shipping more women’s product in the third quarter than we did men’s product in the third quarter from a growth rate standpoint and the men’s business operates at a significantly higher gross margin for us than the women’s business. And so we saw a mixed impact that was due to the men’s versus women’s growth mix. If you look at those three aspects, I would say that the three aspects were relatively equal in nature. There was not one that was overwhelming relative to the other aspects on gross margin during the quarter. We did have to air freight more product during the quarter. We also round up routing a lot of product via all-water routing. So we shipped it around the U.S. and received it in the East Coast ports. And what that did is Jacki eluded to was that allowed us to avoid some of the issues in the West Coast port situation, but it takes more time to ship it to the East Coast. So we then had to accelerate once the product was unloaded in the East Coast, receipt into our Greensboro distribution center and staffing our Greensboro distribution center to turn that inventory around faster. So we did see an impact from the West Coast port strike. But I would say that impact was relatively minor because of the strong management of our supply chain teams. And with regard to next year, on an underlying basis, we do believe gross margins going to be up as we gone through the initial stages of the budget process and I think there is a couple of reasons for that. One, as we expect the retail segment to grow faster than wholesale and of course our retail segment has higher gross margins than wholesale. Two, we expect the accessories business to grow at a faster rate than the balance of the business and that also tends to be a gross margin sweetener. And then third, at least in constant currency, the international business is projected to grow at a faster rate and of course we have higher gross margins in the international business than we do in the U.S. and so when you look at those three elements, I think all of that is driving us to underlying gross margin that’s improving in next year’s forecast versus this year.

Thank you very much for attending and as always, we’ll be available for follow-up calls.