Ralph Lauren Management Discusses Q2 2014 Results - Earnings Call Transcript

Nov. 6.13 | About: Polo Ralph (RL)

Ralph Lauren (NYSE:RL)

Q2 2014 Earnings Call

November 06, 2013 9:00 am ET


James Hurley - Director of Investor Relations

Jackwyn L. Nemerov - President, Chief Operating Officer and Director

Christopher H. Peterson - Chief Financial Officer, Chief Administrative Officer and Senior Vice President


Omar Saad - ISI Group Inc., Research Division

Kate McShane - Citigroup Inc, Research Division

Michael Binetti - UBS Investment Bank, Research Division

David J. Glick - The Buckingham Research Group Incorporated

Erinn E. Murphy - Piper Jaffray Companies, Research Division

David Weiner - Deutsche Bank AG, Research Division


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.

James Hurley

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.

Jackwyn L. Nemerov

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 throughout our entire organization. There is no question that we have the right people with the knowledge, experience and passion to help us take this company to the next level.

The diversity of the Ralph Lauren portfolio, the strength of our lifestyle positioning and our increasingly global reach are enviable assets that position us for strong long-term growth. As a leadership team, we are very excited about our future.

And now shifting gears to the strategy. I'd like to spend some time today reviewing the 3 core pillars of our growth plans, which are building our international presence, extending our direct-to-consumer reach and investing in merchandise innovation. Let me take each of those in turn.

First, the expansion of our international presence. We've articulated a goal of having the Americas, Europe and Asia, each represent 1/3 of our revenue. Today, the Americas represents approximately 2/3, Europe accounts for about 20% and Asia is a low double-digit percentage at this point. Over the last 10 years, we've made excellent progress on growing our global reach. International revenues have gained about 1,300 basis points of share in our consolidated revenue mix. The outlook for global growth is equally compelling as we focus on additional market share gains in existing markets and explore high-potential emerging territories, such as Greater China and Central and Eastern Europe. We're developing each market with the optimal mix of retail, wholesale and licensed distribution in order to maximize our opportunities.

We'll support our global growth aspirations with world-class merchandising and marketing strategies that have always been both a defining characteristic of the Ralph Lauren brand, and an integral component of the company's success. Our recently created global merchandising organization is off to a strong start already, addressing local market needs across all channels of distribution, while simultaneously driving greater consistency across our assortments worldwide. We expect this consistency to deliver several benefits over the long term, including better leverage on our global sourcing, manufacturing and marketing efforts.

Extending our direct-to-consumer reach is our second core strategic pillar. Today, our direct-to-consumer activities encompass a broad range of global retail formats, both physical and digital. Our physical Ralph Lauren, RRL, Denim & Supply, factory and Club Monaco stores, as well as our concession shops and licensed stores in Europe and Asia, showcase our brand messages and product assortment. And of course, we are excited about the launch of our Polo store on Fifth Avenue in the fall of next year, which will offer a beautiful assortment of men's and women's apparel and accessories and a restaurant. We believe that Polo stores are a compelling new way for us to leverage the powerful global appeal of our most iconic brand.

On the digital front, e-commerce is another critical component of further extending our direct-to-consumer reach. This has been our fastest-growing distribution channel over the last several years, and we expect the momentum to continue as the consumer continues to respond to the convenience, selection and pre-shopping research capabilities of the online space.

Because of the ongoing importance of these online stores, there has been an area of significant investment for us. During the second quarter, we opened a greatly expanded distribution center for our North American e-commerce operations, launched e-commerce in South Korea and are now transacting online in 10 European countries. We've invested over $1 billion in capital in our global retail development over the last 10 years, which has led to strong retail segment operating profit improvement in that same time frame. Looking to the future, we expect a growing portion of our capital will be allocated to our direct-to-consumer efforts, particularly as we see the worldwide appeal of our brand. We are simultaneously investing in the people and processes that will enable us to accelerate this growth over the next several years.

The third core pillar is merchandise innovation. As you heard me say before, our products are the hallmark of our brand and the lifeblood of our business, and our ability to consistently deliver innovative products is one of our most powerful competitive advantages. The combination of Ralph's vision and the investment we've made in our world-class design, merchandising, sourcing and production talent is unmatched. The bandwidth of the Ralph Lauren brand and the desirability of our products have fueled strong multi-year growth. Consistent innovation has enabled us to intensify our leadership position in core merchandise categories and establish both excitement and credibility with new brands and product categories, such as Denim & Supply, our handbag business, footwear, watches and fine jewelry.

Ralph has always believed in the combination of the finest quality, the most aspirational appeal and the most enduring value. Our women's Collection, men's Purple Label, luxury accessories and Ralph Lauren watches and fine jewelry lines are the purest expression of his vision. The intricacy of design and quality of materials from hand-beaded Collection gowns or a bespoke Purple Label suit to a crocodile Ricky handbag or our tourbillon movement watch, are now appreciated by our customers who recognize the craftsmanship behind these extraordinary luxury products. The magnificent store environments and global advertising, marketing and PR efforts, bring Ralph's spectacular world to life and establish the halo for our entire product portfolio.

Our recent Paris fashion show, in support of the company's contribution to the restoration of L'École des Beaux-Arts is the most recent example of our world-class brand coming to life in a unique and highly impactful way. And for those of you who may have missed it, I encourage you to visit RalphLauren.com to view the dog walk. The first runway show for dogs that was both an interesting way to showcase our fall Luxury Accessories Collection and a successful philanthropic effort for the ASPCA. This global effort has already drawn a tremendous editorial and social media attention around the world, with close to 140 million impressions today in broadcast, print and online, and over 10 million social media impressions globally.

While sell-throughs for our entire product portfolio have been strong across most of our major distribution channels and geographic regions in the first half of the year, performance of our Luxury products was particularly noteworthy during the second quarter. The introduction of new products, such as the Steel Link Stirrup watch, the Safari watch and the soft Ricky Bag, each of which draws inspiration from our extraordinary design vocabulary and are quintessentially Ralph Lauren, have been extremely successful.

Accessories will continue to be the main focus of our global merchandising, advertising and marketing efforts over the next several months. This fall, we had an impactful pop-up shop presentation for the soft Ricky in key wholesale locations around the world, from Harrods in London and colette in Paris to Saks Fifth Avenue in New York City. Our upcoming holiday campaign builds upon this momentum with a fully integrated product focus message behind our newest accessories icon that will be consistent across all key consumer touch points. If the women in your life does not already have a soft Ricky, we can't think of a better holiday gift.

Our results for the first 6 months of fiscal '14 continue to demonstrate the strength and resilience of our diversified operating model. In the face of an uneven global operating environment, we plan the business prudently and experience solid results in our largest markets, even as we continue to make significant investment in the infrastructure necessary to support our long-term growth objectives.

As many of you know, we have consistently made outsized, near-term investments with an expectation of achieving greater functional and financial leverage down the road, as high-growth channels, regions and merchandise categories evolve into the future. The consistency of this approach has allowed us to deliver strong shareholder returns over the last 3-, 5- and 10-year periods.

And with that, I'll turn the call over to Chris.

Christopher H. Peterson

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 was $205 million, 4% below the $214 million achieved in the comparable period of fiscal 2013, and net income per diluted share declined 3% to $2.23. An effective tax rate of 29% in the second quarter of fiscal 2014 includes the benefit of restructuring certain international operations and compares to 38% in the prior year period, which included the net negative impact of a onetime discrete tax item.

Moving on to segment level details. Wholesale revenues grew 1% to $928 million in the second quarter, primarily a result of the contribution from the newly transitioned Chaps men's sportswear operations and continued growth in core North American merchandise categories, which continue to gain market share. A planned reduction in shipments to certain European customers, lower Japanese wholesale sales and a shift in the timing of certain wholesale shipments due to SAP implementation, partially mitigated wholesale revenue growth during the quarter. Wholesale operating income of $202 million was 13% below the prior year period due to the foreign exchange dynamics and lower international wholesale sales.

Retail segment sales rose 5% to $944 million in the second quarter, reflecting the incremental contribution from new stores, including the recently transitioned Australia/New Zealand operations, and growth for the company's e-commerce operations. Excluding the impacts of discontinued businesses and foreign currency, retail sales increased 8% from the prior year.

Consolidated comparable store sales declined 1% on a reported basis and were up 1% in constant currency during the second quarter, on top of challenging multi-year comparisons. Positive comp growth of freestanding stores and e-commerce operations was more than offset by negative comp growth at Japanese concession shops.

With the exception of e-commerce, customer traffic trends were soft across most retail formats during the quarter. However, the teams continue to mitigate lower traffic levels with exceptional customer service efforts that have contributed to improved conversion and higher average dollar transactions at most of our retail formats worldwide.

Retail operating income of $135 million was 14% below the prior year period, primarily due to investments in the company's global store and e-commerce development efforts, foreign currency effects and lower profitability at concession shops.

Licensing revenues of $43 million were 6% below the prior year period due to lower Chaps licensing revenues as a result of the men's sportswear license take-back. Licensing operating income of $35 million was in line with the prior year period.

Consolidated inventory of $1.2 billion at the end of the quarter compares to $1.1 billion in the prior year, reflecting the integration of formerly licensed operations as directly operated businesses, investment to support anticipated sales growth and the accelerated receipt of inventory related to the SAP implementation. We spent approximately $148 million on capital expenditures to support infrastructure investments in new retail stores and shop installations.

The company repurchased about 285,000 shares of its common stock during the second quarter at an average cost of approximately $176. $427 million remains available under previously authorized share repurchase programs for future buybacks.

We ended the quarter with $1.4 billion in cash and investments. Included in our cash balance is $300 million of new bonds that we issued at the end of September. The proceeds from that offering were used to repay the euro bonds that matured in early October, which is why our consolidated cash and investments increased versus the prior year. Our net cash balance of approximately $835 million is essentially the same.

Now I'd like to turn to some important developments on our strategic growth initiatives. We made excellent progress on our SAP implementation during the quarter. At the end of September, we successfully completed a major conversion of our systems platform from legacy systems to SAP. This latest wave represented about 1/2 of our North America wholesale business. We successfully converted millions of pieces of data, including materials, purchase orders, sales orders and inventory records with accuracy rates in excess of 99.9%.

We went live on the new system in early October and quickly got to full operational capability. We'd like to thank the team for their extraordinary efforts and acknowledge the great partnership of our wholesale customers as we've executed this important project.

With a series of successful codeovers [ph] behind us, we are confident in our approach to the conversions and are well on track to realize the benefits of SAP over the next several years. These benefits include more ready access to information, cost leverage through procurement savings and gross margin leverage through global merchandising.

We also completed the integration of our Chaps men's sportswear operations during the quarter, and that business is now fully on Ralph Lauren systems and supply chain. The take-back of our Australia/New Zealand operations was also executed seamlessly, and that business is also fully operational on Ralph Lauren systems and supply chain. The successful SAP conversion and smooth integrations of formerly licensed operations were achieved while managing complex day-to-day operations and are great examples of the company's ability to execute with excellence.

The foundational work that we've done in the first 6 months of the year is expected to be a critical enabler of our long-term sales and profit growth. We are pleased to be delivering highly resilient profitability in the context of these substantial investments, particularly with the global operating environment characterized by considerable political instability and fragile consumer confidence. As you will recall, fiscal 2014 was planned with increased investments in retail store and e-commerce development worldwide, the transition of certain formerly licensed products in-region to directly controlled operations and upgrades to our management information systems.

Now let me turn to our expectations for the balance of the year. Based on the timing of our specific projects, we've characterized fiscal 2014 as a tale of 2 halves, with modest sales growth and outsized investment spending in the first half of the year, transitioning to accelerated revenue and profit growth in the second half of the year. Our year-to-date results have materialized exactly as we expected, and I want to provide some insight into why we are confident in the accelerated growth we anticipate for the back half of the year.

There are 3 key drivers supporting our revenue outlook. First, we have good visibility in our wholesale orders for the balance of the year, and we expect them to be significantly stronger in the back half. Second, we anticipate greater contribution from new stores worldwide, including a larger benefit from the transition of our Australia and New Zealand operations to directly owned. Finally, we've seen strong customer reaction to our fall assortments in both our wholesale and retail channels.

With that as backdrop, I'd like to review the outlook we provided in this morning's press release. For the third quarter of fiscal 2014, we expect consolidated revenues to increase by 8% to 10% with wholesale segment sales growing faster than retail segment sales. Foreign currency is estimated to negatively impact revenue growth by approximately 100 basis points in the third quarter, and will primarily affect our retail segment given its geographic business mix.

Discontinued businesses are estimated to mitigate third quarter sales growth by an additional 100 basis points. Operating margin for the third quarter is expected to be approximately equal to the prior year's 16.5%, as a lower gross margin is essentially offset by operating expense leverage. The third quarter tax rate is estimated at 30%.

For the full year fiscal 2014 period, we are raising our revenue expectations to 5% to 7% growth, which is toward the high end of our previous range of 4% to 7%. Our revenue outlook includes an approximate 200 basis point negative impact from foreign currency effects and headwinds from discontinued operations. Adjusting for those factors, we expect to achieve high-single-digit revenue growth for the full fiscal year period.

Based on the momentum we are currently experiencing and the growth we have planned for the remainder of the year, we have decided to intensify our investment in our global retail operations in the second half of fiscal 2014. This investment includes incremental spending on store operations and for our omni-channel efforts, in addition to more advertising and marketing spending. As a result, we currently expect our full year fiscal 2014 operating margin to be at the low end of our outlook, which called for a 25 to 75 basis point decline from the prior year's 16.2%, which was a record level for us.

As a reminder, the year-over-year contraction in the operating margin outlook primarily reflects the integration of newly assumed operations, accelerated investments in our various our strategic growth initiatives and foreign exchange impacts. Without that pressure, operating income growth would be up low-double digits for the year. The fiscal 2014 tax rate is now estimated at 30%, down from the previous 31%, based on the favorable impact of restructuring certain international operations.

We are one of the world's strongest and most admired brands and we are highly profitable and we have a strong balance sheet. The leadership team is excited about the clear and compelling growth trajectory ahead of us. Fiscal 2014 is a year of important investment for the company. We are allocating talent and capital to our most compelling, high-return opportunities and we intend to continue operating the business according to the clearly defined strategies and disciplined execution that are the hallmarks of the organization.

Our expectation for accelerated sales momentum in the second half of the year is a testament to the growing desirability of the Ralph Lauren brand across an expanding range of merchandise categories and on an increasingly global platform. Improved sales growth is expected to be matched with even stronger profit expansion as we leverage the investments we are making in the business.

We are confident that the strategic decisions and investments we are making will support substantial shareholder value creation over the long term. The board's decision to raise the quarterly cash dividend by 12.5%, demonstrates its conviction in the company's operating strategies and growth prospects.

Now we'd like to open the call for your questions. Operator, can you assist us with that?

Question-and-Answer Session


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

Omar Saad - ISI Group Inc., Research Division

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?

Jackwyn L. Nemerov

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.

Christopher H. Peterson

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.

Kate McShane - Citigroup Inc, Research Division

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?

Christopher H. Peterson

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.

Michael Binetti - UBS Investment Bank, Research Division

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?

Christopher H. Peterson

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 a positive gross margin mix effect. So I think we're dealing with a couple of isolated events this year. But I think over our planning horizon, over the next 3 to 5 years, we expect some of the broader mix drivers to begin to take hold. And then on Europe, I would say on Europe that -- we were fairly encouraged in the quarter on Europe. And the reason we're fairly encouraged that the quarter on Europe is because about half of our business in Europe is wholesale now and about half of our business is retail. The retail including both our full-priced stores, our e-commerce business and our outlet business. And if you look within the European revenue results, what you would see is that our retail business in Europe in the second quarter was up double digits on revenue. And our wholesale business, we had planned to be down in the quarter, which largely offset the retail growth during the quarter, because we had proactively pulled back on shipments into the wholesale channel as we wanted to reduce our exposure from an inventory standpoint from some of the specialty stores, particularly in Southern Europe. As we look to the back half of the year, we're expecting the wholesale business in Europe, in the back half of the year, to be up versus year ago. So we now think that we have cycled through that planned pullback in shipments into the European wholesale channel.


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

David J. Glick - The Buckingham Research Group Incorporated

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?

Christopher H. Peterson

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.

Erinn E. Murphy - Piper Jaffray Companies, Research Division

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?

Christopher H. Peterson

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.

Jackwyn L. Nemerov

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.

David Weiner - Deutsche Bank AG, Research Division

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?

Christopher H. Peterson

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.

James Hurley

Great. Are there any additional questions, operator?


We have no further questions.

Christopher H. Peterson

All right. Thank you very much.

Jackwyn L. Nemerov

Thank you.


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

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