Ralph Lauren Earnings Call Nuggets: Accessories Boom and Finance Details

On Friday, Ralph Lauren Corp (NYSE:RL) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Accessories Boom

Omar Saad – ISI Group: Roger and Jacky too I think, would you guys mind addressing this idea that we’re in this – globally we might be in this – consumers might be in this accessories boom. As we think about the accessories business versus the apparel business, obviously Ralph Lauren is still primarily an apparel driven company, but especially on the women side, do you see that happening in your consumer base just kind of shift away from apparel or to maybe lower priced apparels in terms of the wallet spending towards more investment in accessories and footwear and things like that. Do you think that’s having an impact in your business, how do you see that going forward. Do you think it’s cyclical or structural and your efforts around the accessories business as well, how important do that become if it’s really what’s happening?

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Roger N. Farah – President and COO: I’ll start it and then I’ll let Jacky continue. I think it’s pretty common knowledge that the concept of accessories broadly defined has been an importing growth category for the industry now for a while and whether that accessories at luxury prices or what’s called affordable luxury or even at more moderate prices, I think the accessory category has clearly outperformed apparel and specifically women’s apparel for a while now. I think in defining accessories you’ve got to open it up to a range of products that include handbag, small leather goods, but clearly footwear has been a strong category for the last couple of year’s watches, eyewear and even more broadly, I think, cosmetics. So, with that I think a female customer can express herself, freshen her wardrobe and accessories has fulfilled that. Interestingly enough it’s not this similar to the way Europe evolved over time, where customer was more willing to buy a handful of high quality investment pieces in apparel and then used accessories to keep them fresh. I think the other part of accessories that you all understand is that for emerging markets with new wealth accessories and particular signature accessories are a way of people showing their success and their success and they’re arriving more easily than apparel. So whether that’s been the Middle East, whether that’s been Russia or whether that’s now Asia specifically China, I think the customer who is finding wealth is expressing themselves through either signature or easily identifiable high-end product. You know the mix of our business at Ralph Lauren I think uniquely includes all product categories. So we are seeing business from that customer in apparel be it men’s or women’s or even the extraordinary success of our kids business. Because I think customers as they acquire spending capabilities are spending it on their children particularly in countries that have limited birthrates. So interestingly enough you have parents and grandparents all focused on one child that tends to drive up their willingness to spend on apparel as well. I think our accessory businesses are in early stages. We’ve taken back and many of the key licenses over the last five or six years. We’ve developed sourcing capabilities, we think the Ralph Lauren esthetic translates beautifully into accessories and where we have partnerships or licensing relationships with Luxotica or partnerships with Richemont or L’Oreal. I think we’re with world class, best-in-class partners. So I’m very pleased with where we stand and where we’re going one of the interesting realities of our results to-date both the extraordinary margin in wholesale and the extraordinary margin we now operate in retail is without high penetration of accessories. Which properly executed brings with it higher profit margins. So I think we’re making good progress I think we’re making quality progress I don’t think we’re looking to jam this business artificially in the early stages. My guess is over the long-term it’s going to be a very big part of what we do and that will be more prevalent in Asia and some of the emerging markets, and perhaps some of the more mature markets, but I don’t want to back off the apparel business. I think we’re very pleased with the way we’ve got our market share and our positioning in all of the key apparel categories. Long answer, but it was a long question, Omar.

Finance Details

Michael Binetti – UBS: Just one modeling question, and then I have a follow-up. I think as I said last quarter that the three items that you mentioned is one-time or is the China store closures FX and American Living would be a little bit higher in this quarter about 700 to 800 basis point drag to revenues, it looks like there’re only about 500. Just want to see if any that was push back – I mean in the back half or if there was any other change that I might have missed. More importantly, Roger, as you think about all the work that you’ve done with the Company to establish Ralph Lauren as a luxury business over the last few years, obviously the more mainstream brands like the Polo brand are huge input to the profit story for the Company globally. Do you think there is an opportunity to I guess even boost the focus on that side of the business over the next year and refocus on some of those big profit drivers, now that you’re more established as a luxury player.

Christopher H. Peterson – SVP and CFO: On the modeling question, I’ll address that and then turn it over to Roger. The real difference between the three items 700 to 800 basis points in the guidance and what we reported was FX, which strengthened a little bit from when we gave guidance last time, so that accounted for the difference, FX which is better than we expected when we gave guidance previously.

Roger N. Farah – President and COO: The known effects of the store closures at American Living are very clear, so it’s really just the movement of the FX as Chris said. Michael, I think your question is spot on. I think that we as a company feel that the core brands or the brand such as Polo have enormous legs on a global basis, and one of the internal discussions we’re having at the very moment is how to make sure we’re properly focused to capture the extraordinary appeal of some of those brands, and while we don’t want to back off the incremental luxury positioning either in retail or product developments that Jacky has alluded to, absolutely brands such as Polo and others are bedrock for us and we’re looking at how to accelerate their position in growth now, whether it’s distribution ideas or marketing and branding ideas. So I think you’ll hear more to come in the next couple of quarters about strategies we hope to employ to focus on those.

A Closer Look: Ralph Lauren Earnings Cheat Sheet>>