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The 2Q11 print of $2.09 compares to our estimate of $1.89, and the Street at $1.71.  It looks relatively clean (in fact the tax rate was on the high side)…though there may be items related to accounting for China and Korea that come out on the conference call. That said, the source of the upside came from US and European wholesale revenue, as well as considerable delevering.  There was even strength across the board as it relates to regions, channels, and products. Handbag line appears to have started on the right foot. E-commerce accelerated AGAIN, and that’s before launching in the UK in October. There was nearly a 400bp delta between reported EBIT margins (+180bps) vs. guidance (-100-150bps).  The icing on the cake from my perspective is that the company stepped up its share repo, which not only was accretive, but also sends the right message to those who bought into Mr. Lauren’s offering 2 quarters ago.

What did I not like? As solid as EBIT margins were, the Gross Margin rate was up only 90bp. That’s hardly a number to get freaked out about. But RL does have to deal with cotton costs the same way everyone else does, and that will show up in the RL’s 4Q11 (Mar). On the same token, RL’s sales/inventory spread took nearly a 20 point tumble. Does an inventory build make sense as it relates to launching handbags, Korea, UK e-commerce, and having opened up two major flagships during the quarter – this will explain away much of it. But is it 3pts or 30pts? It’s a question to answer. A massive comforting factor is that they guided to a HIGH-TEENS top line growth rate in 3Q. Find me any other name in this space with those characteristics…

All in all, this was a knock-out punch for RL.  

RL Quick Take: Knockout Punch - RL S 11 10