Evren Kopelman - Ralph Lauren Corp. Stefan Larsson - Ralph Lauren Corp. Jane Hamilton Nielsen - Ralph Lauren Corp..

Omar Saad - Evercore ISI Michael Binetti - UBS Securities LLC Kate McShane - Citigroup Global Markets, Inc. (Broker) Lindsay Drucker Mann - Goldman Sachs & Co. Robert Drbul - Guggenheim Securities LLC Ike Boruchow - Wells Fargo Securities LLC Steven Zaccone - JPMorgan Securities LLC Dana L.

Telsey - Telsey Advisory Group LLC Christian Roland Buss - Credit Suisse Securities (USA) LLC (Broker) Jay Sole - Morgan Stanley & Co. LLC Erinn E. Murphy - Piper Jaffray & Co. John Kernan - Cowen & Co. LLC.

Ladies and gentlemen, thank you for standing by. Welcome to the Ralph Lauren Second Quarter Fiscal Year 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions on how to ask a question will be given at that time. As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mrs. Evren Kopelman. Please go ahead..

Good morning, and thank you for joining Ralph Lauren's second quarter fiscal 2017 conference call. With me today are Stefan Larsson, the company's President and Chief Executive Officer; and Jane Nielsen, Chief Financial Officer. After prepared remarks, we will open up the call for 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. Principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.

To find disclosures and reconciliations of non-GAAP measures that we use when discussing our financial results, you should refer to this morning's earnings release and to our SEC filings that can be found on our Investor Relations website. And now, I will turn the call over to Stefan..

first, reduce our overall buys to better match demand. This will reduce the overflow of inventory going to value channels. Second, cut the product tail and refocus the investments in the evolved core. This will improve inventory productivity. Third, we will cut supplier lead times.

This will allow our customers to buy much closer in and improve the flexibility to chasing season. Fourth, we will refocus our marketing efforts, in line with our Way Forward Plan, to develop cut-through marketing campaigns for our main brands. This will be targeted to drive traffic and conversion.

Our first initiatives will start with Polo in the first quarter of fiscal 2018. Fifth and finally, working in collaboration with our partners, we will reduce and close the tail of our distribution, which accounts for 20% to 25% of the total distribution points.

These shops represent a very small share of sales and profit for us as well as our partners. Just as with assortment, we will refocus on and evolve from the core, which means the top-selling doors, and invest in refreshing and rebuilding the store experience.

This will create an exciting shopping experience and supercharge the evolved assortment strategy. It's worth mentioning again that we believe in a strong wholesale channel and a well-executed department store.

We believe a well-curated department store offers a convenient and exciting shopping experience that saves the consumer time, while also bringing them into the brand. Our distribution plan will follow the consumer and department stores off and online represent one of the largest channels the full-price consumer shops today and in the near future.

Parallel to strengthening our wholesale efforts, we're also strengthening our e-commerce presence. But even though department stores represent one of the biggest channels for our consumers, the e-commerce channel has the highest growth rate and is increasingly important.

Our assessment of our e-commerce challenges and our plan to strengthen e-commerce are also very much in line with our overall Way Forward assessment and plan.

We are reducing the overall buys, we are reducing the promotions, we are reducing the product tail, we are refocusing on and evolving our core products, and we'll start to present them in an evolved and refreshed way. We have taken the first steps here and you can now see our refreshed landing pages on both our mobile as well our desktop sites.

We recently launched our redesigned mobile site, which features significant improvements in functionality. We improved the checkout process, navigation, and creative execution, and many more steps to follow on that. Finally, a few words on marketing. In September, we held our first ever See-Now-Buy-Now runway show for the women's collection.

The show was held in a glass structure on the sidewalk outside our Madison Avenue flagship. We even managed to close down Madison Avenue for a few hours. It was a big success and generated more than twice the global media value compared to the previous season's show.

We also recently launched a Ralph Lauren Icons campaign in our women's luxury business. It's built on our Way Forward goal to refocus on and evolve from core iconic products to make them even more desirable to today's consumer. The response so far has been very positive. In conclusion, we are making good progress against our Way Forward Plan.

While most of it is still to be done, I'm excited with what I see. During the last three months, while we have been getting ready to execute the holiday season, I've been traveling extensively and spent much time with our teams and our biggest customers.

From my perspective, whether I'm in Little Rock, Arkansas with our friends at Dillard's, or seeing our newly renovated flagship store come to life on Rodeo Drive in Beverly Hills, or visiting our new Polo store on Regent Street in London, I feel the excitement from our teams and partners that we're starting to move towards unlocking the true potential of this great brand that Ralph started almost 50 years ago.

So, with that, I would like to turn the call over to Jane..

Thank you, Stefan, and good morning, everyone. It's great to be with all of you and to be a part of the Ralph Lauren team. I'm excited about executing our Way Forward Plan and sharing our progress with you. Second quarter net revenues of $1.8 billion were down 8% to last year on both a reported and constant currency basis.

This reflects our quality of sales initiatives starting to take hold and is in line with the guidance we provided in August of mid- to high-single-digit revenue decline. Foreign currency translation did not have a material impact on revenue growth in the second quarter.

On an adjusted basis, gross margin was 56.9% in the second quarter, excluding non-cash inventory-related charges of $81 million associated with our restructuring activities.

This was 40 basis points above prior year, primarily driven by favorable geographic and channel mix shifts, improved product costing and initiatives to improve quality of sale, primarily through reduced promotional activity in our international businesses.

This was partially offset by unfavorable foreign currency effects of approximately 80 basis points. Operating expenses on an adjusted basis were $809 million, excluding $69 million in restructuring and other related charges.

These expenses were down 4% compared to last year, primarily as a result of expense initiatives under the Way Forward Plan, including head-count reductions and seven store closures. Store closures in the second quarter were lower than expectations.

We delayed closures to take advantage of the peak holiday shopping period and to minimize store closure costs through negotiations with our landlords. Adjusted operating margin in the second quarter was 12.4%, excluding $150 million in restructuring and other related charges.

This was 110 basis points below last year due to fixed cost expense de-leverage on lower net revenues, which was partially offset by our improved gross margin. The adjusted operating margin performance was better than the outlook we provided in August of a 200-basis-point to 250-basis-point decline.

This was primarily driven by improved gross margin in our international markets and a change in the timing of about $12 million of planned SG&A expense, which benefited the second quarter and will shift into the third quarter.

Adjusted net income for the second quarter was $158 million or $1.90 per diluted share, excluding restructuring and other related charges. On a reported basis, net income in the second quarter was $45 million or $0.55 per diluted share.

The effective tax rate was 29% in the second quarter on an adjusted basis, similar to the effective tax rate of 29% in the prior-year period. Moving on to segment performance. Wholesale revenues decreased 10% to $831 million on both a reported and constant currency basis in the second quarter.

The decrease was primarily driven by a decline in North America, as shipments were strategically reduced as a part of the Way Forward Plan. This was partially offset by wholesale revenue growth in Europe. Adjusted wholesale operating margin in the second quarter was 26.4%, excluding restructuring and other related charges.

This was 40 basis points below prior year. Retail segment sales decreased 5% to $942 million on a reported basis and were down 6% on a constant currency basis, driven by a comparable store sales decline.

Consolidated comparable store sales decreased 9% in constant currency and 8% as reported, primarily due to challenging traffic and average dollar transaction trends. Similarly, global e-commerce revenues declined 7% during the quarter on a reported basis and 6% in constant currency, driven by our price harmonization initiatives.

Retail operating margin in the second quarter, excluding restructuring and other related charges, was 11.8%, which was 100 basis points below the prior-year period. Licensing revenues increased 2% on a reported basis and were flat in constant currency.

Licensing segment operating income increased 5% in the second quarter compared with the prior-year period. Turning to distribution. At the end of the second quarter, we had 485 directly-operated standalone stores and 620 concessions globally.

Compared to the second quarter of fiscal 2016, the company had five net new directly-operated stores and 44 net new concession shops at the end of this second quarter.

In addition, our international licensing partners operated 102 Ralph Lauren stores and 20 dedicated shops, as well as 59 Club Monaco stores and 77 Club Monaco concession shops at the end of the second quarter. We continued to close underperforming doors that we identified as a part of the Way Forward Plan.

In the second quarter, we closed seven standalone stores, bringing the total for the first half to 15 store closures as a part of our restructuring activity. These stores were geographically dispersed and primarily in our full-price concept. For the full year, we still expect to close approximately 50 stores.

More of the closures are now slated for the fourth quarter, after the holiday period. We continue to take a pragmatic approach to closures, balancing closure timing with realizing peak holiday season sales volume, and minimizing door closure costs.

Additionally, we continue to right-size our cost structure and expect to make continued progress as we close out our fiscal year. Now, let me provide you with an update on our restructuring activities related to the Way Forward Plan.

The company continues to expect restructuring activities to result in approximately $180 million to $220 million of annualized expense savings related to its initiatives to streamline the organization structure and right-size the cost structure, and our efforts to optimize the real estate portfolio.

We continue to expect restructuring charges of about $400 million as a result of our Way Forward Plan, and about $150 million in inventory charges related to our restructuring activities. These charges are expected to be substantially realized by the end of fiscal 2017.

In the second quarter of fiscal 2017, the company recorded $150 million in restructuring-related impairment and inventory charges. Moving on to the balance sheet. Consolidated inventory was $1.2 billion at the end of the second quarter, down 15%, or $200 million compared to the end of the prior-year period.

The reduction was attributable to both restructuring actions and about 40% due to our operating process initiatives to reduce inventory, including a proactive pullback in receipts and our early efforts to move towards a demand-driven supply chain.

Our progress in the second quarter increases our confidence that inventory will continue to show double-digit declines for the remainder of the year, and inventory quality will continue to improve. Moving on to capital expenditures.

We spent $87 million in the second quarter of fiscal 2017, compared to $134 million in the prior-year period, mostly to support our retail store network and infrastructure projects.

During the second quarter, approximately 80,000 shares of Class A common stock were retired as a part of the $100 million accelerated share repurchase program the company initiated in the first quarter of fiscal 2017. There were no new share repurchases in the second quarter.

At the end of the second quarter, $200 million remained available for future share repurchases. We ended the second quarter with approximately $1.1 billion in cash and investments on the balance sheet, and $692 million of total debt. I'd like to now turn to guidance for fiscal 2017.

As a reminder, this guidance excludes the restructuring and other related charges in connection with the company's Way Forward Plan. For fiscal 2017, we are maintaining our guidance. We continue to expect consolidated net revenues to decrease at a low-double-digit rate, as we execute our Way Forward Plan.

Key elements include a proactive pullback in inventory receipts, store closures, pricing harmonization and quality of sale initiatives. Based on current exchange rates, foreign currency is expected to have minimal impact on revenue growth in fiscal 2017.

The company continues to expect operating margin for fiscal 2017 to be approximately 10%, as cost savings are expected to be offset by growth in new store expenses, unfavorable foreign currency impacts in gross margin and SG&A, infrastructure investments and fixed expense de-leverage. Fiscal 2017 tax rate is expected to be approximately 29%.

For the third quarter, the company expects consolidated net revenues to be down low-double digits to down low-teens on a reported basis. Based on current exchange rates, foreign currency is expected to have a minimal impact on revenue growth, but should pressure gross margin by at least 120 basis points.

Operating margin for the third quarter is expected to be approximately 200 to 225 basis points below the comparable year-prior period. Key pressure points are FX pressures to gross margin and the shift in timing of about $12 million of planned operating expenses from the second to the third quarter.

In addition, savings initiatives from the Way Forward Plan will be more fully realized in the fourth quarter, as more store closures are slated for after the holiday period. The third quarter tax rate is estimated at 29%. In closing, we are pleased with the progress we are making on our Way Forward Plan.

We have the key elements in place to ensure continued progress. We have strong and collaborative relationships with our wholesale partners, a strong brand, a strong balance sheet, and a motivated and committed team of over 25,000 Ralph Lauren employees around the globe. With that, I'd like to open up the call for your questions..

The first question comes from Omar Saad with Evercore ISI..

Thanks. Good morning. Congrats on the progress..

Thanks, Omar..

Thank you, Omar..

Sure. Yeah, I wanted to ask, I mean, kind of a macro question. It's super turbulent out there still, a lot of moving pieces from a top-down perspective in the markets on a global basis. You're making progress on the Way Forward Plan.

How do you think about your ability to stick to that plan and for the plan to hold up, given all the changes and turbulence in the marketplace, both from a near-term and a long-term perspective? Thanks..

Thank you, Omar. Well, my perspective has always been and will be that the highest performing companies and management teams out there are focused on what they can influence. So, when we look at the Way Forward Plan, it's largely within our control.

So, independently of macro environment, it's the same macro environment for us as for all of our competitors, we are focused as a management team to execute on our plan.

And that's what both Jane and I and the management team are excited about, is to see the progress that we are making in executing from going from developing the plan to executing the plan, that we are seeing that we are making progress in all the areas that we set out to make progress with.

And so, independently of where the environment is going, we are going to stay focused, increase our focus on what we can control, and continue to drive and continue to learn and improve and learn and improve. So, that's my philosophy..

Okay. Next question, please..

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

Hey, guys. Good morning and congrats on the progress. And, Jane, it's nice to hear you back..

Thanks, Michael..

Let me just ask you two quick questions. You have a lot of moving parts on the retail side, but with some of the store closures pushing into fourth quarter, I think it's important to kind of think about the change in the cadence in terms of what that means looking out past your fiscal 2017.

It probably means we'd expect to see some of the year-over-year impact of those closures more focused in the first half of 2018, if that's safe to assume.

Can you help us fine-tune the guidance for revenues that were going to be stabilizing in fiscal 2018 based on that change and how we can think about magnitude? And then, just on the gross margin for our models in the third quarter, can the gross margin in the third quarter actually be positive year-over-year if we include that 120-basis-point drag from currency that you mentioned, Jane? Thanks..

Yeah. So, Michael, as you look at it, we have looked at those store closures. As I said, we're going to be very pragmatic about capturing holiday season sales and negotiating the best deals possible with our landlords. Obviously, if we close at the end of the year, there will be a spillover effect on growth into FY 2018 from store closures.

But remember, those stores are smallest and least productive doors. So, while that will be a factor and we'll play that into our initiatives, overall our guidance for FY 2018 that we will see stabilization is still intact.

As we did with the North America comeback plan, we are working through 2018 on an initiative-by-initiative basis, and we'll come back to you in the fourth quarter, as is our practice, and give you much more specific guidance on that.

And then, as you look at the third quarter overall in terms of gross margin, here's what I see in terms of headwinds and tailwinds.

The tailwinds that we saw in the second quarter of the benefit of product and channel mix, and the benefit of markdown rates, notably in our international markets, those are going to be intact as we move into quarters three and four. The headwind, as you saw in Q2, will be FX, and it will increase. We are at 80 basis points in Q2.

It's going to go up to about 120 basis points in Q3. But I still remain optimistic about our ability to move through on a conservative basis to hold, or even grow, gross margin..

Great. Next question, please..

Your next question is from Kate McShane with Citi Research..

Thanks. Good morning. Thanks for taking my question. My question was on the discontinuation of Denim & Supply. How that could impact the sales outlook as well for next fiscal year? And how should we think about that space in the department stores? It seems to have pretty good real estate and prevalent space in the department store.

How should we think about what that will look like going forward?.

Jane do you want to start for the Denim &....

Yeah. Just overall, in terms of Denim & Supply, as we looked at that brand, it's a pretty small portion of our revenue. It's about 2% of global net sales. So it's not a material impact. And further, as we've looked at our portfolio of brands, we think we have a great opportunity in Polo and in Denim specifically to recapture those sales over time.

So we feel really good about continuing the plan of refocusing on the core, stretching our very strong brands like Polo to pick up the opportunity that we had in Denim & Supply, and to move forward from there..

And when it comes to the space in department stores, what's been important for myself and the team when we work on the North American comeback is that it's about the partnership with our wholesale customers, and we have had that from day one.

So our space in the department stores comes back to our brand strength, our strong market share with the consumer, and our ability to come back to strength. And what excited me from day one is the excitement from the wholesale partners in driving these initiatives that will drive us jointly back to high performance.

One being the shorter lead times, being able to buy much closer in and being able to react to the sales trend in season. That's something that's viewed very favorable by our partners and they have, frankly, been waiting for us to get our assessment done and get going. And now we're in the exciting stage of getting going together..

Next question, please..

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

Thanks. Good morning, everyone. I had a quick housekeeping question for Jane.

Given some of the volatility in currency, I was curious if – I don't think the outlook for FX impact on revenue has changed much, but has your view on the impact of gross profit or earnings changed at all? In other words, is there more of a headwind embedded in your updated guidance or is it consistent? And then my bigger question for Stephan is – thank you for the initial detail on Jeff's thoughts on the North American comeback.

You talked about cutting 20% to 25% of your sort of tail distribution points.

Can you talk about the complexion of those changes retail versus wholesale? Whether that involves additional store closures of above and beyond what you've already announced? And how you plan to reinvest more aggressively in the core areas that you're sticking with? Thanks..

Yeah, Lindsay, as we looked at FX impact, we have seen an impact overall to FX, and largely it's playing out in terms of gross margin. Our guidance is still intact. We are accommodating that change within our operations.

But as I look at operating profits, foreign currency will have about 100-basis-point impact to overall operating margin for the full year. Do you want to do the 20% to....

Yes. So, when it comes to the 20% to 25%, cutting the tail of the distribution in wholesale, it's the shops. It's the bottom 20%, 25%, the least productive shops.

So, even though it's a high number in terms of share of the shops being cut, it's a very low number in terms of sales and even lower number in terms of profit, both for ourselves and our partners. So it follows the same strategy as the assortment strategy. It goes back to the core, and the core doors and the core shops for us are very important.

And we're going to refocus our energy there and making sure that we provide an outstanding shopping experience there, and that will drive our comeback..

Okay. Next question, please..

Thank you. The next question is from Bob Drbul with Guggenheim Securities..

Hi. Good morning. Jane, welcome. Congratulations..

Thank you, Bob..

The question that I have is, can you talk a little bit about tourism trends both in the U.S.

and in your international stores and how that's impacting the results?.

Yeah, Bob. As we've looked at foreign tourist trends overall, we continue to see a decline in overall tourist traffic. But I will tell you, both in the first and the second quarter, we've seen an improvement. Although they're still down, we've seen an improvement versus prior year.

So it's not as severe as it was, but we do still see that traffic down, and it's most notable in our outlet business..

Okay. Next question, please..

Thank you. The next question is from Ike Boruchow with Wells Fargo..

Hi. Good morning, everyone, and welcome aboard, Jane..

Thank you..

Just curious, so wholesale down 10% in Q2. I think North America in Q1 was down around mid-teens. I'm just curious if you could comment on what the North America piece of wholesale looked like in the second quarter.

And then, just for the back half, to hit your plan for the year, what you're kind of expecting out of the North America wholesale channel as well? Thank you..

Yeah. Overall, Ike, we do see that North America – one of the reasons that we focused the North America comeback plan to high performance, the first phase is on wholesale is because it's so important to our business and we're not satisfied with the overall trends.

So, as we continue to focus on pulling back inventory, closing doors, moving back from the heavy promotional activity, we expect to see continued pressure in that North America wholesale business and that was contemplated in our guidance..

Okay. Next question, please..

Thank you. The next question is from Matthew Boss with JPMorgan..

Hi. Good morning. This is Steve Zaccone on for Matt today. Thanks very much for taking our questions. I had a question, your second-quarter comps came in slightly below our model.

Just looking for the full year, to hit your top-line guidance, how should we think about comps in the second half of the year?.

Well, we are holding to our overall comp guidance of down mid- to high-single digits. So I think you can do the math and you'll see a little bit of an uptick in the second half..

Okay. Thank you. Next question, please..

Thank you. The next question is from Dana Telsey with Telsey Advisory Group..

Good morning, everyone, and nice to see the progress..

Hi, Dana..

Hi. Jane, welcome.

Jane, as you think about turnarounds you've done in the past, what's most similar or dissimilar compared to what you've executed in the past? And how do you see the progress here? And Stefan, how do you look at the three brands that you're focusing on, the difference between price and margins, as you continue to evolve the business? Thank you..

Yeah, Dana. I'd say that one of the things that when I came into Ralph Lauren that pleasantly surprised me is this is an organization that's really ready for change. And although Stefan unveiled the Way Forward Plan in June, I think the organization has embraced it enthusiastically.

The difference between from what I see at Ralph Lauren is that we have to work in partnership with our wholesale partners in order to effect this comeback that we've outlined. I think, as we unveiled the North America comeback plan, that is certainly our intent. So the need for partnership is one of the most notable things that I see.

But, overall, obviously with the early signs of progress, I'm very encouraged..

And, Dana, when it comes to our brands and our progress within our brands and my thoughts connecting through pricing and margin there. So, as I shared in the opening remarks, I'm excited by the work that Valérie and the brand teams are doing in being very strategic in identifying the unproductive product tail, the assortment tail, and cutting that.

And we see and measure the progress on that. But that's just an enabler to then put more focus and more creativity and to refocus on executing the core. And then, thirdly, it will be about adding strategic newness. And so it should have a positive margin affect.

And as of now, we are early into the execution of the plan and I see the brand teams taking the steps that are necessary for us to unlock the strength in the assortment. So I'm excited even though it's early days..

Okay. Next question, please..

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

Yes. Hello. Congratulations. And I'd like to ask what your plans are on the outlet side of the business. The penetration of outlets is increasing as store closures start.

How do you think about the health of that outlet business and the potential for that outlet business and the mix over the long-term?.

Yes. So my take on outlet is that it's an important channel for us and it's an important channel to keep in balance with the full-price selling. So, as we have mentioned before, our outlet presence in North America, given that that's our biggest market, is not high in relation to many other very strong brands and high-performing brands.

So what we are doing is two things when it comes to outlet. We are making sure that we keep outlet in balance with the rest of the channels, so that we can deliver on our overall Way Forward goals, which is to strengthen our brand and drive sustainable profitable sales growth. And in parallel, we are optimizing the outlet business that we have..

Yeah. And I would say that so many of the Way Forward Plan initiatives, the improvement of product assortment, buying closer in to demand are going to benefit the outlet channels, breakthrough marketing, are all going to benefit the outlet channel as well..

And one of our strengths as a brand is the masspirational appeal of what Ralph and the team have created over some 50 years that it appeals to absolute luxury, as you can see on the runway show that we had where we went back to the DNA, the mansion on Madison Avenue, and added newness and we created 2, 2.5 times the media value.

And then we have aspirational luxury in Polo and then we have entry through our outlets. So the strength for us is that appeal to every part of the market and our job as a management team is to keep the right balance..

Great. Next question, please..

Thank you. The next question is from Jay Sole with Morgan Stanley..

Great. Thank you. My question is about your retail business.

Can you talk about how unit demand has changed as the ASPs have gone up? And has that met your expectations and have you tested different ASPs to see how demand is impacted as prices change?.

Yeah. So what we've seen, Jay, is we are always testing pricing. Pricing is such an important lever in our market. And what we've seen in Asia, where we've seen our AURs go up or ASPs go up 10%, is that we've been able, if I take outdoor closures, is that we've been able to hold on to most of our unit demand. And so, that's really the sweet spot for us.

Obviously, this Way Forward Plan is predicated on a long-term rise of AURs, but we'll take those sequentially over time as we're largely happy with our price points. But that is a part of the Way Forward Plan..

Okay. Next question, please..

Thank you. The next question is from Erinn Murphy with Piper Jaffray..

Great. Thanks for taking my question. I wanted to follow up on the wholesale strategy in North America.

Could you just quantify the sales volume of that 20% to 25% doors that you're closing and then the timeframe of shuttering those doors? And then, secondly, related to that strategy, you talked about further partnering with your top wholesale accounts, but reducing product going to value, or value channels.

With that as the context, how do you view the role of T.J.Maxx going forward? Thanks..

So, Erinn, as I look at the volumes in, what I'm calling, what we're saying is the tail of our distribution, that 20%, 25% of the doors. It's about 1% of overall sales, so not a material amount of sales. And obviously it's not a material amount of sales, and it's our least profitable points of distribution in the wholesale doors.

And we've really taken time to look across the wholesale doors and look at points of distribution. Obviously, we have a portfolio of brand, look at points of distribution within the department store, and go in surgically to eliminate the least profitable and lowest sales points of distribution even within the door..

And when it comes to the distribution overall, including off-price, our distribution strategy is to follow where the consumer is going and keeping the balance between the different channels. And one way of improving the quality of sales and improving the full-price channels' performance is to reduce the buys.

So it's the number one driver in the North American comeback is to reduce our overall inventory buys to better match demand. And the way we reduce them is one is reducing them to demand and buying closer in, it's a way of reducing, and being more accurate and having to buy less. So our idea is to buy less and sell more at the higher AUR..

Yeah. And Erinn, right now we're working with our wholesale partners on this effort to cut the door tail and we're adjusting our buys, as we speak, to make sure that that's fully incorporated into our buys..

Okay. We'll take one last question, and then come back for closing remarks..

Thank you. Our final question comes from John Kernan with Cowen & Company..

Hey. Good morning, everyone. Thanks for squeezing me in. Welcome, Jane..

Thank you, John..

Stefan, I know the Way Forward Plan, two of the four key pillars did center around sourcing and supply chain. So I'm wondering what you're seeing in terms of product costs and your ability to bring product costs down as we look into spring 2017.

And can you just comment on product costs and any direction there, and the impact on gross margin would be helpful?.

So it's probably a combination between Jane and I. But I can start in terms of I'm very pleased with seeing how our sourcing teams are rising to the Way Forward challenge, and sourcing starting to become a strategic value driver for us. So, one very concrete progress that we have made there is to platform our fabric.

So, when we platform and consolidate our fabric of our core products, we can get a number of benefits at the same time. We increased the quality, to start with, because we are going to compete with quality. So we increased quality. We increased our ability to negotiate the better cost price for that fabric.

And we increased our flexibility and can shorten our lead times dramatically. So, that's just one of a number of sourcing initiatives that we are driving that will have a direct impact on the P&L over time..

Yeah. Just in terms of gross margin, so I looked at this quarter sort of in biggest impact. Our biggest impact was the favorable geographic and channel mix. Improved product costing was our second most favorable impact, followed by initiative to reduce markdowns, especially in our international market. I do view this as a long-term tailwind for us.

Obviously, given the current long cycle times, it'll play out over time. But I do view it as something that we'll see as a favorable tailwind to gross margin..

This is something that Halide and the team, the sourcing team, they are also taking a partnership approach with our best suppliers and partnering up with them to unlock joint value. And we are seeing good progress on their work..

Okay..

Okay..

So, that was the question. So, in closing, I would like to say that I'm excited by the good progress of starting to execute our Way Forward Plan. I'm very grateful for how the team has embraced this and how we step-by-step start to execute and drive improvements and learn from those improvements.

So this will be a continuous improvements journey that we just started, but I'm very excited by that. Excited also by the North American comeback plan that we have a strategy to come back to strength in North America. And I'm pleased that we're keeping the guidance that we set out during the Investor Day.

So, with that, I would like to thank you for joining the call today and look forward to speak with you in a quarter..

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