Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren's Second Quarter 2014 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. Thank you for joining us on Ralph Lauren's Second Quarter Fiscal 2014 Conference Call. The agenda for this morning's call includes Jacki Nemerov, our President and Chief Operating Officer, who will comment on our broader strategic initiatives and provide some merchandising highlights from the quarter; 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 fiscal '14. After the company's prepared remarks, we will open the call for 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. Since this is the first call Chris and I are hosting in our new roles, let me take this opportunity to talk about the recent change in our organizational structure. As most of you are aware, we've created the Office of the Chairman that includes Ralph Lauren, our Founder, Chairman and CEO; Roger Farah, now our Executive Vice Chairman; myself as President and Chief Operating Officer; and Chris Peterson, Executive Vice President, Chief Administrative Officer and Chief Financial Officer. The Office of the Chairman is a leadership structure designed to enhance the company's ability to support the growth of our business in an increasingly complex global environment and to allow us to capitalize on new opportunities that will drive the evolution of the company in the coming years. This new leadership team has a remarkable combination of tremendous and highly relevant experience starting, of course, with Ralph's unmatched vision, creativity and excitement about the future, and extending to this team's product and merchandising experience, operational discipline, global perspective and track record of leadership. Roger and I have worked both so closely with Ralph over the past 13 and 9 years, respectively, and Chris brings us all a fresh perspective, as well as his financial acumen and global operational sophistication. This collaborative structure will enable us to translate Ralph's extraordinary vision for the company into focused growth and long-term success. It is important to clarify that this new structure is intended to sharpen and deliver against, rather than change the company's strategic focus. Chris and I have spent much of the last 2 months meeting with our new team and visiting our offices and points of distribution around the world. We've come back from our travels so impressed by the exceptional talent that runs…

Thank you, Jacki, and good morning, everyone. The second quarter sales and profits we're reporting today are in line with the expectations we provided in August, and I'd like to start with a recap of the quarter. Consolidated sales grew 3% in the second quarter, which was at the high end of our expectations. Excluding the impacts of discontinued businesses and unfavorable foreign currency translation, revenues were 4% higher than the prior year period. Growth in the Americas, Europe and most of Asia was partially offset by lower sales in Japan. Global sales trends were uneven during the quarter. July and August were slower as we cycled out of the more promotional spring/summer season, and trends were stronger in September as we transitioned into fall. Footsteps to brick-and-mortar stores remained challenging worldwide, although we continued to experience robust growth on the various online platforms where our product is distributed. Gross profit margin of 56.6% for the second quarter of fiscal 2014 was 220 basis points below the prior year period, primarily due to unfavorable foreign currency dynamics, the mix impact from integrating the Chaps men's sportswear business and lower profits from concession shops. Operating expenses of $789 million in the second quarter were 6% greater than the prior year period. The higher operating expenses primarily reflect cost associated with newly transitioned operations and continued investment in the company's strategic growth initiatives. The growth in operating expenses was partially offset by disciplined operational management. Operating expense rate of 41.2% was 110 basis points above the second quarter of fiscal 2013. Operating income was $295 million and operating margin was 15.4%, 330 basis points below the second quarter of fiscal 2013. Operating margin was in line with the guidance we provided in August. Net income for the second quarter of fiscal 2014…

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

Jacki and Chris, congratulations on your new roles and in your first kind of conference call with your new responsibilities. I'd love to hear your take on the Polo store opportunity. I know it's still early. The flagship on Fifth Avenue doesn't open for a while, but I'd love to hear your vision for what it will look like, what kind of categories, price points, any sub-brands, the kids or RLX, kind of the long-term potential for that business. It seems to me that kind of Blue Label category has been mostly a wholesale business, historically, and the distribution expansion has been limited. And how do you view this opportunity as a way to take that kind of the heart of the brand there and expand it globally, and will there be any impact on your wholesale business?

Excited to talk about this opportunity. As you know, you're absolutely right. The Polo store opportunity is a core strategy for us going forward. We opened our first Polo store, actually, in East Hampton this summer and met with outstanding results. Followed that, last month with an opening in the Short Hills Mall, the new Polo concept, primarily men's Polo. And in this case, women's Blue Label as over the next year we'll be transitioning to a new defined line called Polo Women's. That line will open in concert with our Fifth Avenue opening next fall, and we're very excited about that. So the categories will be men's and women's apparel. Our price points in women's, as you know our price points in men's, will be very consistent with our men's price points. So aspirational, exciting product but affordable and democratic in its reach and its audience. Our intention is to expand this concept globally and we already have a site planned and located in London, and are very excited about that location, as it is highly visible and heavy traffic. So we're really working hard on the new women's Blue Label line. It will be distributed for retail and wholesale. We're currently in conversations with our wholesale customers over new points of location within their stores, and we have met with a lot of excitement. That line will open over the next couple of months and it might be an opportunity to invite everyone to the showroom to see our new launch of Polo Women's, which we're obviously quite excited about.

Omar, the only thing I would add is that, certainly, we see the Polo store rollout as a key plank in the company's growth strategy over the next 3 to 5 years. And we're looking very actively at real estate locations in the U.S., in Europe and in Asia to rollout the Polo brand. And I think your observation is correct which is, today, the Polo brand is largely distributed in wholesale, and we think we've got an opportunity to expand the distribution of the Polo brand given the strength of the brand and the desirability of the brand through a direct retail store rollout.

The next question comes from Kate McShane with Citi Research.

My question is around the incremental investment that you highlighted today. I wondered if you could tell us a little bit more about where you're allocating that spend. Is it more towards Europe and Asia or is it more evenly distributed? And then how should we think about -- I know it's a little early, but how should we think about how this success towards fiscal year '15? Are you bringing any spend forward because of what you announced today and how does that impact spend for next year?

Sure. Well, first of all, with regard to the incremental investment, I would say that the incremental investment is really focused on 3 areas. The first is we're intensifying our investment in store operations. The second is we're focused on investing more money in some of our omni-channel capability that's directed against the retail segment. And the third is some of our marketing and advertising spend, where we're intensifying investment, based on some of the strong results that we've seen to date from the consumer response to a couple of our marketing campaigns, which I'll talk in a minute about -- I'll talk in a minute more about. We believe that this incremental investment is going to result in improved traffic trends and conversion for our retail stores going forward. And that's part of the reason why we're taking our revenue guidance up for the balance of the fiscal year versus our initial outlook. A couple of the examples on the marketing spend, just to give you a flavor, the first is we've -- for the first time, really, across the company, globally, come out with an advertising campaign around the Ricky handbag, the soft Ricky product, and we've coordinated that as a big idea where we've got it holistically supported in every market in the world. We have the product in our stores and we've -- are doing a holistic marketing and advertising campaign that's really hitting the consumer across multiple touch points. And we started to see that really resonate and drive an acceleration in our accessories business. And given the holiday season that's upcoming, we felt like that was a good one to continue to support and spend money behind going forward. The other one that you may have seen is, we have the Olympics that the company sponsors, which is coming up in Sochi in February. And we put a fairly significant effort behind an advertising campaign around Made in America, where the product that we're going to be rolling out for the Olympics will be made in America and we put an intense sort of advertising campaign and PR campaign around that product. So those are a couple of examples of where we're spending the money, and we're expecting to see a good return from the incremental investment that we see. With regard to fiscal '15, well, it's a little bit early for us to provide guidance on fiscal '15, we're just about to kick off our planning process. I suspect we'll have some initial thoughts to share on our next earnings call with regard to fiscal '15, and then we'll provide guidance for fiscal '15 as we always do at our end of fiscal year call.

The next question comes from Michael Binetti with UBS.

Two questions. First, Chris, obviously, the noise on gross margins has been significant this year. I know you just said you're not -- we're not looking ahead to fiscal '15 yet. But as we think out about -- as we think past fiscal '14, how should we look at the gross margins? How much of that do you think you could start to recapture and maybe where will it come from? So when did the Chaps margin start to improve and when does the mix shift benefits you guys have start to override the current headwinds? And then secondly, can you talk a little bit more about Europe trends with the 2 businesses, where we're at on wholesale, and is that on track to still return to positive growth by spring?

Sure. So on gross margin, I'd say a couple of things. So the first is, if you look at the gross margin in the second quarter, the biggest driver of the gross margin decline in the second quarter was foreign exchange. That accounted for about 1/2 of the gross margin decline in the quarter. The second big driver in gross margin decline was the take-back of the Chaps men's sportswear business which, of course, goes from a license business, which has a very, very high gross margin, to a directly-operated business, which has a lower gross margin. So if you were to strip out those 2 elements, the gross margin this year was actually not down nearly as much as what the reported numbers would be. To your point on where we go going forward, I do think that we believe that gross margin can grow over the next 3 to 5 years versus where we are today, and there's a couple of reasons for that. I think as the business shifts more from a wholesale business to a retail business, that tends to have a positive mix effect on gross margin because, obviously, our gross margins in our retail business are higher than our gross margins in our wholesale business. The second thing I would say is that as our business shifts to stronger growth internationally, that international growth tends to come with higher gross margins because of the price points, particularly in Asia, tend to be higher with higher gross margins than they are in the core U.S. business. And then the third thing I would say is, some of the product categories that we're focused on, particularly the accessories product category, as that business continues to grow faster than the balance of the merchandise categories, can have…

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

A question on capital allocation and leverage. You announced a nice increase in the dividend today. It does appear you have excess cash balance and certainly some balance sheet capacity to borrow. You just refinanced one of your issues. And some of the feedback we got from investors is that there's potential to more meaningfully increase the dividend, more meaningfully increase share buybacks. As someone relatively new to the team, is that one of your strategies to be more aggressive in utilizing the balance sheet and returning more cash to shareholders?

Yes. I would say a couple of things. In fact, we just had discussion on the capital structure with the board earlier this week. But I would say, our strategy on capital is, first and foremost, we want to make sure that we're fully funding investments into the organic growth of the business going forward, and that will always be our sort of top priority. Beyond that, we believe the company is going to generate excess cash that we intend to return to shareholders. And I think that the decision by the board to increase the dividend this quarter is a reflection of that fact that we are committed to returning excess cash to shareholders. I don't think that we have a strategy of trying to hold excess cash on our balance sheet. And as -- if you look over the past couple of years, we've tended to repurchase anywhere from $400 million to $500 million of stock a year and I think we planned to continue that trend as well. From a debt ratings standpoint, I think we like being about in the single A tolerance area, which is where our current ratings are. And so I would expect our strategy on, from a credit rating standpoint, to be relatively consistent. I wouldn't expect a change in strategy there. And then the final thing I would say that we're managing along with many other companies is not all of the cash on our balance sheet is in the U.S. We have a mix of cash that's in the U.S. and a mix of cash that's outside of the U.S. And obviously, the cash that's outside of the U.S., we believe, is better used investing in growth opportunities outside the U.S. rather than bringing back into the U.S. at this point, given the tax friction that would be created from that.

The next question comes from Erinn Murphy with Piper Jaffrey.

Just a question on Asia. The concession seemed to be still a little bit of a headwind. Can you just contextualize some of the pressure points in the key markets there? Is it more macro, is it more competitive environment changes? And then in particular in Japan, can you just maybe parse out how the Denim & Supply stores versus the Ralph Lauren stores are performing? And then I guess as it relates to the acceleration in growth in Q3, what are your expectations around the Asian markets there?

Okay. I'll start with Asia. And I guess what I would say on Asia is, if you looked at the Asian revenue results, excluding Japan, the company revenue was up double digits in the second quarter. The Japan business was down significantly, and really there were 2 things that were driving that revenue decline in Japan. The first, as many of you have been following, is the Japanese government has embarked on a macroeconomic strategy of weakening their currency with the attempt to accelerate GDP growth in the region. The currency impact year-over-year in Japan to the company was greater than a 20% drop from a translation standpoint in the sales results in the Japanese market for us. So that was kind of a first impact that hit us in Japan. I think as we talked previously, we have priced to try to recover some of that, but not all of that currency impact. The second big driver that's impacted us in Japan in the second quarter is that the traffic trends in the department stores continue to be challenging, and our business today is heavily weighted in the department stores. So the vast majority of our business in Japan is in the department stores. What we're trying to do there in the market is both reinvigorate our growth in the department stores and try to create a little bit more of a direct-to-consumer model with the launch of e-commerce and with the opening of some of our freestanding stores. You mentioned Denim & Supply, and I think we've got a handful of Denim & Supply stores open now in Japan. It's a little early to tell fully the results because it's still a new brand that we're driving brand awareness, but we're off to an encouraging start in the Denim & Supply stores in Japan.

We have a couple of new stores that opened. Our store on Cat Street, which is near the Omotesando District. And most recently about a month ago, we opened our Denim & Supply store in Osaka, and that has met with outstanding results. So we're very encouraged in terms of the Japanese consumer, both loving our RRL brand, which is a cornerstone of authenticity and has been wildly successful in that market, and now followed by Denim & Supply, which is we feel we're off to a very good start in that market.

The final question comes from Dave Weiner with Deutsche Bank.

So I just wanted to ask about, earlier in the call when you started the call, you talked about some of your long-term initiatives, which was pretty helpful. I guess, I was wondering if you could maybe, without speaking exclusively to guidance to next year, but just over time over the next several years, talk about how you think about sales and earnings growth? I think in the past you've talked about historic trends in the 10% to 11% range for sales and more like mid-teens for EPS growth. Is that still kind of how you think about this business given all the transitions that are happening kind of over the long term?

Yes. I guess I would say a couple of things on that. So I think if you look back over the last 10 years, the numbers you're talking about of 10% to 11% revenue growth and mid-teens EPS growth is, historically, what the company has delivered over that time period. I think if you look over the last 10 years, part of what's characterized the company's growth has been the take-back of significant license businesses, which have added to the top line. I think the path going forward is going to be a little bit different than the path that the company has come on over that last 10-year period, because the path going forward is going to be more about growth through the strategies that we have articulated, direct-to-consumer, international expansion and product and merchandise category innovation. So I think we haven't provided long-term guidance in terms of what we expect over the next 3 to 5 years. But certainly, we anticipate delivering results going forward that we believe will be very competitive in the industry and we believe will lead to shareholder value creation.

Great. Are there any additional questions, operator?

We have no further questions.

All right. Thank you very much.

Thank you.

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