Ralph Lauren Q4'16 Earnings Conference Call: Full Transcript

Operator:

Ladies and gentlemen thank you for standing by. Welcome to the <b>Ralph Lauren Corp</b> Fourth Quarter and Full Year Fiscal Year 2016 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions and how to ask a question will be given at that time. If you should require assistance during the call please press star then zero. As a remainder this conference is been recorded.

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

Evren Kopelman:Investor Relations:

Good morning and thank you for joining Ralph Laurens fourth quarter and full year fiscal 2016 conference call. With me today are Stefan Larsson, the company's President and Chief Executive Officer; and Bob Madore, Senior Vice President and 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, which may include 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.

And now, I will turn the call over to Stefan.

Stefan Larsson:President and Chief Executive Officer:

Thank you, Evren, and good morning, everyone. Let me start by saying we are making progress in setting and beginning to execute our strategy to returned Ralph Lauren Corporation to profitable growth. In doing that we will balance driving near term performance with our long term vision. I look forward to doing a deep dive on our plan and providing a Q1 and fiscal 2017 outlook as well as discussing how plan will translate into long term financial performance at our Investor Day on June 7.

When we last spoke I share with you how I spent my first three months in the row. My initial observations in a rough outline of my approach to building the growth plan for this great company. Today I will provide an overview of our main priorities and recent performance before turning the call over to Bob to discuss the Q4 and fiscal year financial results in more detail.

In recent months, while I've been working hard to drive the business here in all I have also worked closely with our teams to complete the comprehensive review of the business and develop the strategic plan. So that work we have gained a very clear understanding of the underlying drivers of the current performance, and we now have a detailed view of what’s driving the downward trend. In short, we have not focused on our front, nor evolve enough to core of what made us great in product, marketing, and the shopping experience.

In addition, our underlying business engines are not at full speed. We also have an inefficient cost structure and an organization and that's nibble enough in the marketplace. What made us great was the crystal clear focus on owning classic iconic style and putting an effortless twist to it to make it current and desirable. We will become more true to our core focused assortment on creating the best iconic style in market, and evolve the way we twisted so it becomes more desirable for today.

Iconic style may current has never been more relevant, while staying total DNA we will also evolve of our marketing and the shopping experience to better reflect the inspirational life in style people dream on today. We have many unique strength to build on, these include our brand strength, being the regional for aspirational authentic, American, and iconic style, the very strong share position, the talented of team and the solid infrastructure.

In our diagnosis of the business are being deeply embedded with our global teams to create the customer offerings. These are the teams that create our products marketing and shopping experience as well as stronger inventory management sourcing and supply chain, the core value creating drivers in our business. They must provide our regions and channels with the consumer offering we need to win versus our best competitors. I have done this deep dive to understand how we create our offering and what drives to under performance of today. What I learned is encouraging, because we now know what we need to do differently and we have a clear line of sight to improving the way we connect with consumers and operate the business.

For most of my 18 year career in this industry, I have led team through the process of turning creative energy and talent into high performs businesses. I know the value driving components of the creative processes from my time with H&M and then in turning around the Old Navy. I am excited to see so much untapped potential at Ralph Lauren and we will leverage our brand vision into a much stronger consumer offering. This offering we will build by evolving our brand voice, our products, our marketing and our shopping experience.

In parallel we developing stronger underlying business engines, rightsizing our cost structure and strengthening our leadership team. Getting these settlements to right will help us connect more with our existing consumers, expand our reach to new consumers, and return the business to strong growth overtime. An important part of getting back to high performance is strengthening our leadership team on both the design and operations side of the business. I am pleased with how we are starting to come together here. We are recruiting new talent and challenging our top performance with expanded roles. A few examples are Valerie Hermann, Fredrik Hjalmers.

Valerie has been with Ralph Lauren for a little over two years and have started to build the foundation that will strengthen our luxury business shifts decades of experience in luxury, including CEO of Yves Saint Laurent and head of women's ready to wear footwear. She has built a track record of strengthening brands and driving high performance in luxury. She has unique experience in working to commercialized design and drive profitable growth. We have therefore recently expanded -- value his role as -- President to now also include Lauren, Polo Women’s, Chaps and Denim and supply. Fredrik Hjalmers joined us in April in the newly create role of Senior Vice President Global Expansion and Business Development. He has seven years of experience leading high performance global expansion to new markets within the H&M group. Fredrik will be responsible for globally leading the work to create and execute the strongest possible multi-brand and multi-channel distribution and expansion strategy for the company, which is one of the core components in our growth plan.

Holiday -- is joining our team in June as Head of Global Sourcing just 18 years of experience driving high performance within production and sourcing for H&M and her track record is stellar. Holiday has been a key driver for H&M stability to make sourcing a competitive advantage and she created a tremendous amount of value for them. We are looking forward to Holiday coming on board as we develop a best in class sourcing strategy. We will continue to strengthen our team in the months and years ahead and I am happy to say that our teams are aligned and excited about where we are going and how we are going to get there. We will move this company into the future in a way that excites our consumers, beats our competitors, and drives value for the company and shareholders. One way Ralph made this company great was by being an entrepreneur and that's what we are going back to. We are going to move fast to begin executing our growth strategy. Continuously learning and improve get closer to the consumer and get back to high performance.

Now let me turn to few key take away from our fourth quarter results. As you saw in the press release, net revenues were in line with our expectations for the fourth quarter, down 1% on a reported basis and flat in constant currency. The key driver for the top line performance in the fourth quarter was as expected pressure in North America which was offset by growth in international markets. Following a challenging fall in holiday seasons, we were focused on clearing end of season’s inventories across our channels of distribution in the US. I have been focusing much of time on our US business I have been working closely with our key customers in the market. As we look to fiscal 2017 we are planning our inventory and receipts very carefully in the US for the both wholesale and retail channels. Our strategic plan will address issues in our core US market.

Moving on to our profitability, Q4 gross margin was pressured by the inventory clearance activity in the US and continued foreign currency impact. Our operating margin was down significantly, but better than our guidance driven by stronger expense management. While I am feeling relatively good about how we managed expenses I want to make you clear that I see this kind of operating income decline as unacceptable. We had significance opportunity to further reduce cost and reinvest some of those savings and engines that will drive brand strength and profitable sales growth. Before I turn it over to Bob for the details of our financial performance in the quarter and fiscal 2016, I want to reiterate that we are looking forward to sharing our strategic growth done in detail with you at our upcoming Investor Day.

With that, I would like to turn the call over to Bob.

Robert L. Madore:Corporate Senior Vice President and Chief Financial Officer:

Thank you, Stephan and good morning everyone. Fourth quarter net revenues were flat with the prior period on a constant currency basis and declined 1% on a reported basis to $1.9 billion. This is in line with the guidance we provided in February of a flat to 2% decline on a reported basis. The negative FX impact to revenue growth was approximately 110 basis points slightly better than our expectation of 150 basis points of negative impact as foreign currencies move favorably during the quarter.

The company's fourth quarter and fiscal 2016 included a 53rd week to contributed approximately $70 million in sales and was primarily generated within the retail segment. For the full year fiscal 2016 period, net revenues grew 1% in constant currency and declined 3% on a reported basis to $7.4 billion.

Gross profit margin was 54.4% in the fourth quarter excluding restructuring charges. This was 90 basis points below the prior year period reflecting proactive measures taken in the US to clear end-of-season inventories related to the fall season in addition to the unfavorable foreign currency effects. For the full year fiscal 2016 period, gross margin declined 70 basis points to 56.8% excluding restructuring charges due to negative foreign currency impacts which was partially offset by a favorable sales mix shift to the retail segment.

Operating margin in the fourth quarter was 6.4% excluding restructuring and other charges. This was 370 basis points below the prior year due to gross margin pressure, unfavorable foreign currency effects, and incremental investments in infrastructure and marketing. However, operating margin was better than the outlook we provided in February above 400 to 450 basis point declines. This was due to disciplined expense management throughout the organization. For the full year fiscal 2016 period, operating margin declined 290 basis points to 10.7% excluding restructuring and other charges due to gross margin pressure, fixed expense deleverage, unfavorable foreign currency effects, and incremental investments in infrastructure and new source.

Net income for the fourth quarter was $74 million or $0.88 per diluted share excluding structuring and other charges. On a reported basis, net income in the fourth quarter was $41 million or $0.49 per diluted share. For the full year period, net income was $546 million or $6.36 per diluted share excluding restructuring and other charges. The effective tax rate of 34% in fourth quarter on an adjusted basis was higher than the guidance of 32% due to onetime discrete items and compared to an effective tax rate of 28% in the prior year period.

Moving on to segment performance, wholesale revenue decreased 5% in constant currency in the fourth quarter and 6% on a reported basis to $942 million. This was primarily due to a decline in North America as business trends remains challenging. We are refining our product assortments and deliveries for fiscal 2017 to improve trends in this channel in what is a very challenging environment.

Wholesale operating margin in the fourth quarter was 27.2% excluding restructuring and other charges. This was 350 basis points below the prior period due to proactive measures taken in the US and clear end -of- season inventories related to the fall season and negative foreign effects.

Retail segment sales grows 7% in constant currency and 6% on a reported basis to $889 million. Growth was driven by the benefit of 53rd week of sales, new store expansion, and e-commerce growth. On 13-week to 13-week basis, consolidated comparable store sales decreased 5% in constant currency and 6% as reported during the fourth quarter.

Brick and mortar traffic trends remain negative in the US. Sales to foreign tourists were down approximately 25% year-over-year in the fourth quarter and for the full year. E-commerce revenue was up mid-single digits on a global basis in the fourth quarter supported by the 53rd week, while comps were up slightly on a 13-week to 13-week basis.

We continue to expect to move to our new e-commerce platform later this fiscal year. The new platform will not improve the functionality of our site, but will allow us to improve how engaged with our customers, digitally and across our retail channels. We believe this will dramatically improve the customers experience on mobile devices. We look forward to delivering a best in class site experience.

At year end we had 493 directly operated standalone stores and 583 concessions globally. That represents an increase of 27 net new directly operated stores and 47 concession shops when compared to the end of fiscal 2015. In addition, our international licensing partners operated 93 Ralph Lauren stores in 42 dedicated shops as well as 58 Club Monaco stores and 75 Club Monaco concession shops at the end of fiscal 2016.

Retail operating margin in the fourth quarter excluding restructuring and other charges was 2.4%, which was 100 basis points below the prior year period reflecting proactive measures taken to clear end of season inventories in the US in addition to negative foreign currency effects. Licensing revenues increased 8% and operating income was up 9% in the fourth quarter reflecting higher royalties from increased sales of Ralph Lauren, Polo Ralph Lauren and Lauren products worldwide.

Now let me provide some color on performance by geography in the quarter. In the Americas, net revenue declined 1% in constant currency driven by pressure in our North American business that we spoke about previously. Same store sales were down mid single-digits in the fourth quarter.

In Europe, net revenues were up 4% in constant currency. We continue to experience strong sell through rates at our retail partners across most of our brands and same stores sales were positive in our own retail stores.

In Asia, net revenue growth of 3% in constant currency was muted by decline in same store sales which was negatively impacted by our strategy to reduce markdowns in Japan and Korea, our two key markets in Asia. We experienced gross margin improvement in our average unit retails were up strong double-digits in Japan and Korea and our markdown rates were down significantly. We believe that these actions will continue to help us elevate the brand and drive profitable sales growth in this region.

Now let me provide you with an update on our restructuring activities related to global brand management initiatives. The total restructuring charge for fiscal 2016 was $142 million. In addition, we incurred another $22 million of impairment related to underperforming stores subject to potential future closure. We now expect to deliver approximately $125 million of annual cost savings from the fiscal 2016 global reorganization plan, $15 million higher and $110 million that we communicated previously. This is driven by additional restructuring activities we identified and executed late in the fiscal year. We had a party of benefit in fiscal 2016 from our restructuring activities and we will have a full year benefit from fiscal 2017.

Moving on to the balance sheet, consolidated inventory was $1.1 billion at the end of the fiscal year, up 8% year-over-year. This growth reflects investments to support new stores and concession shops and a change in the timing of receipt plans. At the end of the fourth quarter we had 27 more directly operated stores and 47 more concession shops than year ago which is contributing to the growth.

Moving to capital expenditures, we spend $418 million in fiscal 2016 compared to $391 million in fiscal 2015, mostly to support new retail stores, concession shops, and infrastructure projects. The company repurchased 1.2 million shares of its common stock during the fourth quarter at a cost of $100 million. This broad our total buyback activity to 4.2 million shares for a total cost of $480 million for the full year. In addition, we returned a $170 million to shareholders via dividend payments.

Yesterday, the company's Board of Directors authorized an additional $200 million stock repurchase program. This amount is an addition to the $100 million available at the end of the fourth quarter of fiscal 2016 as part of our previously authorized stock repurchase program bringing the company's total current authorization to $300 million. We ended the year with approximately $1.3 billion in cash and investments on the balance sheet and $713 million of total debts. Looking now for fiscal 2017 as Stefan mentioned we plan to provide financial guidance at our Investors Day on June 7 for the new fiscal year as well as the first quarter of fiscal 2017.

With that we'll open the call for your questions.

Question & Answer

Operator:

Ladies and gentlemen if you wish to ask a question please press star then one on your touch tone phones. You will hear a tone indicating you have been placed on queue. You may remove yourself from the queue at anytime by pressing star then two. If you are using a speaker phone please pick up the handset before pressing the numbers. We ask that you limit yourself to one question per caller. Once again if you have a question please press star, one at this time. One a moment please for the first question. The first question comes from Omar Saad with Evercore ISI.

Omar Saad:Evercore ISI.:

Good morning, thanks for all the updates and information. To find I know you've probably don't want to still your own thunder for the Investor meeting next month, but I would love to hear if you have any updated thoughts and views as you have had another 90 days to be merged in the business regarding the complexity of the business structure and the brand structure across channels price points, sub-brands, categories, globally it's obviously a very unique aspect to the company and I am just wondering how you are thinking about it, and what you have learned on that front and how you does this access kind of complexity internally and externally the consumer is it something that you can address overtime or doesn't need to be addressed. Thanks.

Stefan Larsson:

Thanks, Omar. Yes you covered basically the agenda for the Investor Day. So, I am sorry to disappoint you, to refer the detail answer to your question we will have to wait until they Investor Day on June 7th. What I can say is that we have made progress in accessing and knowing exactly where we stand as a business and we feel really confident in that. We have the strategy to build the company back to high performance and part of that will be simplicity, because simplicity and focus is as I shared last quarterly call something that I believe is and I also believe in building on the core of what made us great and that's what the strategy is going to be build on.

Evren Kopelman:

Okay. Next question please.

Operator:

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

Lindsay Drucker Mann:Goldman Sachs:

Thanks. Good morning guys. I wanted to ask to find you talked a little bit about the focus on sort of the product iconic styles with an updated twist. As you think about the company's lead times and the work that you've already done. When should we think about the timing for new product to hit. And then separately, if you guys could just give an update on how effective the price increases you took overseas, where I know we heard that in Japan and I think Australia that's consumer accepted and it work but we were still waiting to hear on Europe for the early part of this year. Thanks.

Stefan Larsson:

Hey, thanks, Lindsay I go first, it's Stefan. So, yes so the work to evolve the products will be tightly connected with the work of underlying -- of strengthening our underlying business engine one being the supply chain. So your question is very relevant we will address it in detailed on June 7th. But we have the clear path to how we are going to evolve the products and how we are going to connect that with improvement in supply chain and when I can give high level source on supply chain which is I see big opportunities to start there and in two areas both the inventory management part and the lead time part. So, in essence I see opportunities to sell more with less inventory and I also an opportunity to drastically increase our speed and our flexibility. So, that will help us when we evolve the consumer facing offering.

Robert L. Madore:

Hi Lindsay, it's Bob, and I will take the question around the price increases. We are very pleased with the price increases that we've taken in. The major markets where we experienced FX headwinds mainly Japan, Australia, Canada and Europe and as an example that for instance, our European business revenues grew mid single-digits in the fourth quarter and we plan to maintain the price increase that we implemented across all those countries as another example of the acceptance by the consumer. Within our Asian business we've seen the significant improvement in our quality of sale metrics. Our gross profit percentage has increased, our average unit retails have gone up, we have seen an improvement in our comp gross margins dollars. So overall as I said, we are pleased and we are going to maintain those increases going forward.

Evren Kopelman:

Next question please.

Operator:

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

Michael Binetti:UBS Investment Research:

Hey, thanks a lot. Congrats on a nice quarter guys. No doubt is tough out there. So one question and follow up I guess. It's sounds like where going to get a lot of detail in June and the look ahead of the plan, but if we could just reference to your prior comment the revenues will be negative next year you rebased, but that operating margins can still be up. I know we talked about this during the quarter, but the math on that on that reality since pretty hard to envision and the market is deteriorating as we've seen earnings reports here this week. Are those guide posted on the table and if so Stefan now you had a look under the heard for while where do you see the most opportunity to manage cost to get to that reality?

Robert L. Madore:

Yes, Michael I'll take that one actually.

Michael Binetti:

Okay.

Robert L. Madore:

I think that general guidance still holds, but and I apologies for this, but we'll be able to give much more specific guidance at our Investor Day on June 7th. We think it's really important to provide a complete view of our strategic plan and the financial targets that are tied to the plan together. So, I am going to have to ask you to be patience and wait till June 7th Investor Day.

Stefan Larsson:

Just to complement on what Bob just said when it comes to rightsizing the cost structure is something that we have spend a lot of time on over the last few months and we see big opportunities there. So we are looking at every component of the cost structure. We'll go through it and share with you on the Investor Day.

Robert L. Madore:

And, now I have one other thing too. Just as a reminder and we mentioned it in our opening remarks that we did take restructuring actions within fiscal '16 and as we've noted that's going to drive approximately $125 million of savings. That $125 million savings number is an excess of the previously communicated $110 million really because towards the end of the fourth quarter we did take additional restructuring actions and activities that drove the increased savings number.

Evren Kopelman:

Next question please.

Operator:

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

Matthew Boss:JPMorgan Chase:

Hey, good morning. So on the distribution front Stefan, how do you view your wholesale positioning and off price exposure out of the quarter. Who do you think -- who do you see as you primary competition today and then as it relates to e-commerce what's the best way to think about is Amazon as a potential channel of distribution.

Stefan Larsson:

Thanks, Matt, good question. So when in terms to the US market where it's clear that we have been under the most pressure. My focus is to get back to high performance in the US wholesale channel. So that's a start trade, it’s our main focus. Working very closely with our big customers and I am feel confident that we have a plan to get back to strength. In parallel with that, we are expanding our direct to consumer channels and out of those channels the e-commerce is by far the most important to get back to strength and high performance and overall when it comes to the channels in the US we are working to make sure that we secure up the high quality distribution right balanced in the distribution between the different channels and we will come back and give you more details in June.

Evren Kopelman:

Next question please.

Operator:

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

Kate McShane:Citigroup.:

Good morning, thanks for taking my question. I think you had highlighted that in the calendar year fourth quarter that you had made changes to retail which I think it's part of that $125 million in savings or you've closed some doors but then I think you also rebranded some of the retail doors as well. Can you update us on how those changes have impacted the retail base and how you think about that going forward?

Robert L. Madore:

Yes. Hi, Kate, Bob I'll take that question. So for the fiscal year we actually closed approximately 43 stores. Part of that was incorporated within the restructuring charge activities and some of it was just natural lease explorations and stores that just unfit our strategic portfolio or plan. We from a re-balancing perspective, our ROS or Ralph Lauren portfolio between full price stores and Polo stores we had identified roughly 40% of the fleet that was essentially positioned more towards Polo. We've started to undertake conversion of some of those stores. Two standalone Polo stores versus the hybrid of Ralph Lauren and Polo and that will be done over a period of time. These aren't going to incorporate major remodel activities. These are silent changes and element of minor remodel activity etcetera and we've probably touched about 15% of that portfolio thus far with the reminder to be done over the next year 18 months.

Evren Kopelman:

Great. Next question please.

Operator:

Thank you. The next question is from Chris Svezia with Susquehanna.

Christopher Svezia:Susquehanna Financial Group:

Thank you for taking my question. I guess Stephan for you just when you think of the major US accounts the wholesale accounts and all the work you have been having conversations with them up late when you sit down and have a conversation with them what are they say about the brand opportunity to grow or return to growth beyond 2017 assuming that you've already sort of like to more share some of the strategic opportunities and brand positioning as we move forward. Just sort of what's what are they telling you that Ralph needs to do or needs to be, may be that would be helpful.

Stefan Larsson:

Yes, so thanks Chris. Good question. So, when I sit down and spend time we tell wholesale partners they start with how much they respect the Ralph Lauren brand and how important that brand is to them and their consumers. So that's where we start and then given the nature of how I lead I ask a lot of questions on how we can build on that strength and how we can involve our offering and how we can make sure that we start to drive high performance again which we have done from many, many years and they are very confident in evolving our products, evolving our marketing, evolving our shopping experience and combining that when I share how we are planning to high level strengthen our underlying business engines they get really excited and they want to be a part of that journey and I see them as a intricate part in evolving the business engines and I am excited to do this journey together with them.

Evren Kopelman:

Next question please.

Operator:

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

David Glick:Buckingham Research:

Thank you. Just a follow up on the US wholesale business. I am just curious when you look at and you've talked about meeting more innovation in the product. But when you look at the positioning of the brand from an initial price point prospective and you look at how sort of key item intensive the business has become and reliant on some of those key selling period promotions to drive key items. How do you see that evolving from a price point perspective and sort of key items versus fashion perspective going forward. Thanks.

Stefan Larsson:

Thanks, David. So when it comes to pricing I believe that we are in the world whether consumer decides today. So shortening of premium pricing comes back to having the best products and that's what our strategy is focused on. To go back to the core of who we are and where we come from and evolve that and make you current for today and have better authentic style, better quality and be more relevant and that's connects to the pricing and when it comes to the actual product strategy I look forward to sharing that more in detail when we see each other in June.

Evren Kopelman:

Next question please.

Operator:

Thank you. The next question is from Laurent Vasilescu with Macquarie Capital.

Laurent Vasilescu:Macquarie Capital:

Good morning and thanks for taking my question. I wanted to follow up on Valerie Hermann's appointment to President of the luxury collection. Last May you announced six group brand global brand groups. Are these six groups still in place and if so now that these groups anniversary full year can part that how big they are in terms of revenues. Can you ranked them in the order of performance and then any color around which division you are most excited about would be great.

Stefan Larsson:

Yes, thanks, Laurent. So let's starting with the brand groups and the global brand teams so I spend many, many hours over the last three months together with the global brand teams and they are more important than ever before, because the teams there they create global consumer offering, they create they design the products and do the overall inventory management and the planning and connects to the supply chain team. So they drive the core value creating engine and when it comes to evaluates expanded role she is, I am expanding her role because I want to leverage her experience of commercializing design and driving high performance out of creativity. So, the brand teams are doing great. I look forward to again sharing the details in June and in how the different brand teams relate to each other.

Evren Kopelman:

Next question please.

Operator:

Thank you. The next question is from John Kernan with Cowen and Company.

John Kernan:Cowen and Company:

Hey, good morning everybody. Thanks for taking my question. Stefan can you talk about how you are going to bring some of the best practices of the supply chain from H&M and obviously the execution there was fantastic while you are there and does it translate well to a wholesale and dominated business. Can you take a lot of those best practices in terms of the speed of design and the speed of the supply chain and translate that into a wholesale business?

Stefan Larsson:

Yes. John again I am sorry to disappoint you. In depth sharing of this we will have to wait until June, but high level I am very excited. When it comes to unlocking supply chain capabilities and getting to know the business the way I have done over the last months and getting to know how our customers work. I see big opportunities in implementing a lot of the same best practice and also excited about seeing that our wholesaling partners are very excited and willing to diving to improving the supply chain together with us.

Evren Kopelman:

Next question please.

Operator:

Thank you. The next question is from Rick Patel with Stephens, Incorporated.

Rick Patel:Stephens, Inc:

Thank you, good morning everyone. Stefan before you guide here the company invested quite heavily in SAP and e-commerce and I know a lot of that is still going on today. As we say here today are you satisfied with the capabilities you have from the technology perspective or should we expect the step up in terms of new investments that might be needed to get the company towards need to be?

Stefan Larsson:

Rick thanks for the question. Having, have the chance to dive deeper into the company. I am impressed by the capability when it comes to the infrastructure. So far it's the strongest I am seeing. So, I feel from a business strategy and execution of the strategy we have set up and the capabilities are going to enable us to do that in a way that I haven't seen before in any of the companies have been working out. So I am excited that we have that foundation of infrastructure in place and that we will just speed up our implementation of the strategy. Because the core elements of the strategy are not necessarily capital intensive it's about a methodology, it's about how we approached the business, how we evolve the consumer offering, how we get the business engines, the underlying engines to go, how we get the cost structure to be a right sized, and how we strengthened the leadership team continuously. So very pleased.

Evren Kopelman:

Okay. We will take one final question.

Operator:

Thank you. The final question comes from Dana Telsey with Telsey Advisory Group.

Dana Telsey:Telsey Advisory Group:

Good morning everyone. As you think about deleverage underneath the gross margin and especially if you are bringing in the new sourcing percent. What are the opportunities in those gross margins levels underneath and what you see is the opportunity to increase these market with sourcing? Thank you.

Stefan Larsson:

Hi Dana and thanks for the question.

Dana Telsey:

Hi.

Stefan Larsson:

Couple of source on that high level and then again June 7th in detail I love to share that with you. But high level we see opportunities when it comes an evolving the strength of the products. One area is developing a systematic repeatable way of how we create assortment and we go through that in detail in June. But I see definitely value unlock there in terms of gross margin expansion. Also when it comes to the demand driven supply chain. So when it comes to being more balanced in making sure that the inventory we planed and buy that that's matches with the consumer demand and then thirdly, I am excited to bring holiday with her sourcing expertise and her sourcing experience, because I know firsthand that she brings best in class, best in industry sourcing capabilities and she will have to have a few months of learning to business and then she will start to unlock gross margin dollars there as well.

Evren Kopelman

And that was the final question any closing.

Operator:

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