雷夫·羅倫馬球 (RL) 2003 Q1 法說會逐字稿

Good morning and welcome ladies and gentlemen to the Polo Ralph Lauren first quarter fiscal 2003 conference call.

At this time, I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode.

At the request of the company, we will open the conference up for questions and answers after the presentation.

I will now turn the conference over to Nancy Murray.

Please go ahead ma'am.

Good morning, and thank you for joining us for our Polo Ralph Lauren first quarter fiscal 2003 conference call.

With me on the call today are Roger Farah and Gerry Chaney.

Let me go over the flow of the call today.

First I'll review the numbers for the first quarter, then Roger will be on the call to update you on our progress, and also to highlight our outlook for fall.

And after that of course, we'll open it up for your questions.

As you know from past calls, we'll be making some forward-looking comments in our discussion today.

You will recall there are some risk factors that could cause our results to differ materially from current expectations, and they have all been detailed in our recent SEC filings, and we refer you to them.

Please note in our discussions today, we'll be comparing our first quarter results to the pro forma first quarter fiscal '02 numbers presented in the press release.

The pro forma reflects our European business restated on a current basis, consistent with the fiscal 2003 results.

And also for purposes of guidance, all numbers and percentages should be compared to the pro forma results.

That's both for the quarterly information and business segment information, and we've provided a supplement with the release today, for that material.

Also, for both periods, we are excluding the foreign currency gains or losses.

Again, this is really to give you a better comparison of the actual performance of the businesses.

Now let me get to the numbers.

We posted nine cents for the quarter, and that's two cents better than the high end of our range, on net income of 8.7 million.

Gross profit as a percentage of sales was 49.8 percent.

The improved margin - merchandise margins in the domestic retail segments were offset by domestic wholesale margin decreases.

Operating expenses increased 7.7 million and that was primarily driven by the expansion of retail in Europe and the inclusion of the expenses from our accounting business that we acquired in October 2001.

We continue to manage our balance sheet well, and ended the quarter with a 110 percent reduction in debt.

Two - 21.3 million in cash excess of total debt and inventory levels down 16.4 percent.

Now turning to the business segments, our wholesale revenues were 186.7 million.

That represents a decrease of 7.4 percent over the previous year, and that's a result of a planned decrease in the men's domestic business due to a reduction in off-price sales.

The operating loss for the quarter was 21.9 million, compared to an operating loss of 3.9 million in the prior year's quarter.

The operating decrease was primarily based on gross margin pressure in the men's domestic business and the inclusion of the Italian business expenses in this year's numbers.

Our wholesale apparel square footage increased to 2.36 million, and that represents a 4 percent gain over the first quarter of fiscal 2002 that was really driven by expansion in Europe.

Now in our retail segment, sales grew 4.3 percent to 227.1 million, and that was on a 1.79 million square footage operated in the first quarter.

This compares to retail sales of 217.8 million on 1.77 million square feet in the first quarter of last year.

Retail operating income for the first quarter was 15.9 million, and that compares to a 6.9 million in the first quarter last year and represents a 129 percent improvement in the operating profit over the previous year.

The retail margins for the quarter were seven percent, and that compares to 3.2 percent in the prior year's quarter, a 380 basis point improvement.

I am pleased to report that on a consolidated basis for the quarter, comps were up 1.2 percent, and that was driven by high single-digit positive comps from the outlets, mid-single-digit positive comps at Club Monaco, and these were offset by mid-teen negative comps in Polo retail.

For the quarter, licensing royalty was 53.1 million, compared to 52.5 million in the prior year's quarter.

Operating income was 23.7 million with a margin of 44.7 percent and that compares to 24.9 million with a margin of 47.5 percent.

Last year's numbers, you'll recall, included the royalties from the Italian license that we acquired in Fall of 2001.

Now, let me touch on the balance sheet.

We ended the quarter with significant decreases in both wholesale and retail inventories in our domestic businesses offset by increases in the European inventories as we continued to build the business there.

On a consolidated basis, our inventory decreased 16.4 percent from the previous year.

We are, for all purposes, without debt as we ended the quarter with 371.6 million cash or 21.2 million more than our total debt.

Our total debt was 350.4 million and that consists of short-term bank debt of 124.9 million and that includes 80 million of a bank term debt and 44.9 million of short-term bank lines of credit.

Our long-term debt consists of 225.5 million of Euro bonds.

Our cap ex for the quarter was 12.5 million and that compares to 16.2 million in the year ago quarter.

During the quarter we repurchased 7.75 million of our Euro bonds and we have now retired 43.65 million of the original debt.

For the second quarter of fiscal 2003, we remain comfortable with our previous guidance, which was in the range of 48 cents to 53 cents compared to a pro forma earnings per share of 71 cents in the prior year's second quarter.

Looking at the second half of the year, we would expect earnings to be in the range of 35 cents to 50 cents for the third quarter.

And that compares to 23 cents in the prior year's quarter.

The year-over-year increase is driven by high single digit sales growth and a 500 basis point increase in operating margins.

For the fourth quarter, we would expect the range to be 75 cents to 80 cents.

And that compares to 58 cents in the previous year's fourth quarter.

This would be as a result of revenues increasing in high single digits and operating margins expanding by approximately 250 basis points.

And now I'd like to turn the call over to Roger for a discussion about our current business and our strategies for fiscal '03.

And after Roger, again, we'll open up the call for your questions.

Thank you, Nancy, and good morning.

I'm pleased with our performance for the quarter and I believe we have managed our business well in what continues to be a challenging environment.

I think the first quarter results show strong progress on all fronts.

And when we began the fiscal year we discussed our key initiatives with you.

First, we said we planned to make meaningful improvement in our retail business over the next two to three years to achieve the long-term goal of an eight to 10 percent operating margin.

Second, we said we clearly expected challenges in the domestic wholesale business and would have continued growth from our international sectors.

Third, we said we would continue to make improvement on our worldwide supply chain efforts.

And finally, we said we would continue to improve our financial flexibility.

Today I'd like to spend some time taking you through and update of our progress.

Our better than expected performance for the quarter was really driven by the stronger sales results in our highly productive retail group.

We have made considerable progress increasing our operating margins through this improvement in gross margin and good expense work.

Our gross margin expansion was a combination of better forecasting and planning, flowing fresh product, and dramatically reducing our promotional activity as a result of much more appropriate inventory levels.

We made corresponding improvements in our expense rate, driven by our movement to a shared service model, better control of payroll, and improvement in our operating standards at the store level.

In the Ralph Lauren stores, the customers responded well to our product, and we're particularly pleased with our women's collection.

Ralph's spring collection was named one of the top ten international collections, and we had very strong sell-through with novelty and special runway pieces for spring.

In the outlet business, we continued to see profit increases as a result of better merchandising and significantly less promotional activity.

We are particularly pleased with the improved execution at point of sale, since we initiated our floor first program, designed to better coordinate the flow of deliveries with staffing levels.

In our Club Monaco stores, where we have spent the past two years reinvigorating the business, we are seeing strong results.

For the first quarter we have strong comps and even stronger margins.

Our current business continues to perform well.

We recently turned the stores to pre-fall product, and with the full fall assortments due in the stores about mid August.

We are receiving very good responses to women's product, particularly our women's skirts and wovens, and demand for our men's product is exceeding our plans.

In the wholesale business, while men's spring and early fall business has been difficult, our wholesale business is tracking to our plans.

Some of you were at our spring showrooms recently during the walkthrough, and saw a new product for next year.

We've had a very good response from our retailers and our comfortable with our plan for the men's business next spring.

We think the spring line accomplishes two important goals.

One, providing an optimal balance between dress and casual assortments.

Also developing fresh fashion items.

Overall we have maintained our price points with well-priced new fashion basics.

When we began this fiscal year, we said we were taking appropriate steps that were consistent with our philosophy of better controlling our brands and our business.

I think it's important to spend a few minutes focused on these strategies, since coupled with the reporting of Europe on a same time basis, they're really the key drivers of our different pattern in profits between our first half and second half of the fiscal year.

In the men's business, these decisions meant dramatically curtailing off price selling, and significantly reducing returns.

The results have been a fundamental change in the way we manage our wholesale business.

While it has impacted the first half of the year, it will improve our profits in the second half of the year, and help us deliver good improvements for the full year.

In the women's business we decided to shift our Ralph Lauren Sport line to Blue Label, which has a much larger potential.

While Ralph Lauren Sport mainly was a department store resource, we are merchandising Blue Label exclusively in our specialty environment of our own Polo Ralph Lauren stores.

In Europe, which has a more specialty store environment, we are selling Blue Label in selected luxury based stores.

This decision supports the consistent positioning of our brand, and assures them of a long-term growth, both here and abroad.

Turning to the international business, Europe was also on plan for the quarter.

In Europe, Ralph Lauren is positioned as a pure luxury line and we continue to enjoy strong customer response to our collections.

Last month Ralph presented his men's purple label collection in Milan, and once again it was well received by the European press, with headlines such as I quote, "With Ralph Lauren, Man Is Elegant Again".

Ralph was also featured two weeks ago on the cover of Time Magazine in Europe and was featured in a five-page spread discussing the European business and tremendous growth.

This is a real coo for us in this market, since that magazine is well respected in Europe.

We are just beginning to deliver the first groups of our new blue label collection in Europe and the reaction to the new line has been good, particularly in our Paris store.

While the line is exclusive in our Polo Ralph Lauren stores domestically, it will be available in Europe in 800 selected specialty stores.

Let me turn now to our supply chain initiatives.

In the past two years we've made tremendous progress in building capabilities that will enable our supply chain infrastructure to support our worldwide growth.

In the short-term we have addressed immediate needs and improved execution across all of our supply chain activities.

For example, in the past year we have reduced our wholesale air freight bill by 59 percent.

In Europe during the first quarter, our air freight was 65 percent less than last year.

This represents significant progress.

Other the last year we have also seen retail turnaround time in DC reduced from four weeks to three to four days.

In June we began cross docking a portion of our retail product.

We expect to reduce retail processing time to less than two days, and each month we will increase the amount of units that we cross dock.

During the quarter we also completed a short-term process improvement at our Holland distribution center where we now have the ability to handle twice the volume of units per day as we did this time last year at a cost per unit that is decreased by six percent.

Due to the improvements in our supply chain, we have made dramatic reductions in our domestic inventory levels, both in wholesale and retail.

The consecutive decrease in inventory we have experienced in each quarter over the past year is the result of discipline throughout our entire wholesale, retail and logistics organizations.

We will apply those same techniques to our European business and over the next 12 months we would expect to see similar improvements in our European inventory levels.

We have also applied those same disciplines to our cash management and we have decreased our cash to cash cycle by 16 days, or 12 percent over last year.

In addition to our operational improvements during the quarter, we remain diligent in the management of our balance sheet.

We have reduced our debt by 110 percent and today have no debt net of cash.

The accumulation of a strong cash position of 372 million is designed to support our growth plans and take advantage of opportunities that may occur in this environment.

Looking ahead, I think we're off to a good start and we are currently turning our stores over to fall product.

We have a strong advertising and marketing program to support our plans for the fall season.

We are launching our fall women's collection campaign with a series of 11 page advertisements that feature our collection in rich Ralph Lauren settings.

These multi-page features are slated to appear in important September fashion magazines, both in the U.S. and Europe.

Our fall home collection campaign, also richly toned, will launch in October magazines in important shelter titles.

We are just beginning to receive our first group of new Blue Label for women and it represents an exciting and exclusive business for our domestic retail stores.

The initial reaction has been strong with the

items in great demand.

Our Polo Blue Label advertising campaign begins this Sunday in the New York Times Magazine.

We will be supporting the print campaign for Blue Label with a direct marketing book featuring our new collection for women and that will be packaged with a new Polo book for men for the Fall season.

The double books will be sent out in early September to more 100,000 customers of Polo retail to introduce the new line for women and to feature our men's looks for Fall.

In addition to our media placements to support our Fall business, we're working with numerous publications that are planning major features celebrating the 35th anniversary of Polo Ralph Lauren.

Ralph has been interviewed and photographed for quite a few magazine covers and he'll be featured in a number of additional publications as well.

In the past 35 years, the company has grown from a single

to a $10 billion in retail sales business in 65 countries under Ralph's leadership and world class designs.

While most of us would be happy to take a moment to celebrate more than three decades of unparalleled accomplishments and achievements, Ralph continues to keep his eye on the future and look for opportunities to expand the

and to build our presence worldwide.

Although there is a great deal of uncertainty in the market causing it to be more difficult to be precise, we continue to be comfortable with our full year outlook.

We have made strong progress on our multi-year initiatives and feel good about our plans for Fall and the balance of the year.

We'll continue to keep a steady hand on the controls of our business and will deliver another record year.

At this point I think we're prepared to field questions if there are any.

Thank you.

The question and answer session will begin at this time.

If you're using a speaker phone, please pickup the handset before pressing any numbers.

Should you have a question, please press star one on your push button telephone.

If you wish to withdraw your question, please press star three.

Please standby for your first question.

The first question comes from Dennis Rosenberg.

Please state your question.

Good morning.

Good morning, Dennis.

Roger, could you elaborate a little bit on retail?

The growth in this quarter was driven by outlets and Club Monaco.

What's the story with the full price stores and what's the strategy for getting that going?

Do you expect Blue Label to drive comps positively?

OK, really, we are very pleased with the quarter's performance in retail.

Apropos of our commitment to get retail's profitability going, we think a 380 basis point improvement in one quarter is certainly a nice way to get the year started, Dennis.

We did see strong growth in Club Monaco, where we have spent several years getting that business repositioned.

We saw strong retail growth in Europe.

We saw strong growth in our outlets.

And we actually beat our plans for both sales and profit in the full price stores, albeit against tough comps.

We have dramatically pulled back on the amount of promotional activity that was occurring in those stores and with the inventory levels in the line and the flow of fresh product, we actually saw a noticeable improvement in that business.

If you remember, this time last year and through summer we were actively clearing out excess inventories and that, I think, distorted sales and will continue to distort sales through the August period and then again in the November, December and early January.

So I think the retail performance in Polo is where we expected it to be.

Some of that's a softening of the luxury market, I think you've heard reports from various people from Gucci and others that the business has been softer than this time last year.

But we're actually getting a strong reaction to the women's product, and we've had strong reaction to home.

I think like the department store's men's has a been a little softer.

But the early fall selling we've received, and we're watching that very carefully, we actually are running up in fall product sales in women's, men's, accessory and home right now.

We are not anniversarying a lot of the promotional activity, and sales that were generated during the deep discounting that went on in June, July and August.

So I think retail comps for our expectations should start turning positive in that sector, you know, mid to late September, and then on through the rest of the year.

And thank you.

And one question on wholesale, could you discuss what, how you're planning the men's business for next spring, year over year?

How we're planning the business for next spring.

Well I'm not sure

, were you at the walkthrough this week?

was.

Oh, OK.

Well the spring lines which we broke about ten days ago have been very well received, and we think it will be, you know, the first season where we're seeing an increase after a couple seasons of a decrease.

I think you know that we have made a major philosophical change in how we sell in wholesale, and we are no longer accepting returns from the department store group.

So we are trying to sell in more carefully, we have let them know that there will be no returns at the end of the season.

We think it's the right strategy for us, because it's just been too much goods on the retail floor, which has encouraged too much promotional activity.

Then we take returns, we at one point had a warehouse set up just to handle returns, and we've discontinued that.

That number had gotten as large as $80 million, and we are very comfortable that we will end up with a more profitable year this year, and then next year we'll be going against comparable numbers.

Thank you.

The next question comes from

.

Please state your question.

Hi.

Good morning

.

from Goldman Sachs.

Can you, Nancy could you talk about, or Roger, in the first quarter, in the ...

can you get a little closer to the phone?

I can barely hear you.

Yes.

Can you hear me now?

Yes.

Thank you.

Can you talk about in the first quarter, could you just give us a sense of within the wholesale segment, how did Europe look year over year, versus the U.S.?

I know you said the U.S. was kind of tough.

And I'm also a little curious, I don't really understand how you're off price could be down, you know, significantly in the first quarter in the wholesale business, and yet your gross margins are down as well.

So usually when, you know, off price is down a lot, gross margins go up a bit.

So maybe you could help me understand that?

And then looking forward ...

Wait, let me, let me handle those two first

, and then we'll ...

OK.

... we'll get to your third question.

Quite frankly the European business in the first quarter was spectacular in terms of its percentage increase, you know, very, very high double-digit increases, although as you know, this is a very small quarter for the first, for the European group because of the very small summer business.

So while the percentage increase was almost double last year's, the pure dollars are not that significant.

The domestic wholesale business really is - is going through two pieces when we talk about off-price.

There is the significant reduction in the amount of inventory that we had to sell to the secondary market, two pieces of that.

One is because we have not been taking returns of any consequence for the last six months, we have about 80 percent less units to sell into that market than we had this time last year.

And so that has you know, affected first quarter, and to some degree will affect second quarter.

The flip side to that is, that when we decided to migrate Ralph Lauren Sport to blue label, the costs of closing that business down and our willingness to help the retailers support their migration you know, caused the expense to fall in the first quarter and caused first quarter gross margin pressures, which obviously should have bayed in the second and third quarters.

You really have two - two different pieces to that answer.

OK.

What was your - I didn't - your third question was what?

I wanted to get a sense of - of looking ahead.

Like what's implied in the sales guidance with regard to the U.S. wholesale business versus Europe?

Like you know, in the second half you said you're looking for high single-digit sales increases, I mean not through the whole company.

If you could give us a sense of how that breaks down by segment, and then even a little more granularity on the wholesale business.

Yes I mean, I think directionally

, the factors that have impacted first quarter domestic wholesale sales will continue in the second quarter.

We - we begin to see that abate in the third and fourth quarters with the fourth quarter representing we think the year-over-year increase compared to last year.

Again, because we've eliminated returns as a - as a part of our business, until we anniversary that, which is spring of next year, it's a little bit of an apples to pears.

We expect the European business to continue to run at double-digit rates, recognizing that the European group has distorted second and fourth quarter shipments and reasonably light first and third quarter shipments.

Their pattern is a bit different than the - the pattern we have here, partly because they do not have the replenishment basic business that we have that you know, from quarter to quarter runs about a 30 percent of our total, which tends to give us a little more balance than the peaks and valleys of the European quarters reflect.

OK.

Nancy, I think we were estimating that Lauren for Men and Polo Sport combined were about $90 million, with 60 million of that being in your first and second fiscal quarters.

And then you were supposed to make - make that up in the second half with blue label.

Is - are those numbers still the right numbers, and as far as the blue label, is it a - is it a - you know how much do you see yourself selling in women's blue label this fiscal year?

I think those numbers are in the ballpark,

.

OK, is blue label and equal amount for the second half?

Is that the right idea, 100 million, I think?

Well I don't know.

I think it's 100 million for the year.

I think it's you know, there's some of that - that has started up with a little bit of an August delivery, so it's you know, it's compacted into what I would call seven months as opposed to 12.

The women's sport and the classification Lauren line was really spread perhaps a little heavier through the first nine months of the year and a little bit less in the fourth quarter.

But, Roger, you're still OK -- you feel good that Blue Label is going to meet your expectations?

Yes.

OK, great.

Thank you.

Actually, the early deliveries, for what it's worth, that have hit Europe and the United States have seen some very nice selling.

The customer has reacted very well to a lot of the key items -- mess and oxfords, chinos, the back-belted chinos -- all of which have shown good early selling.

And we think the marketing piece that is going to hit in about three weeks is very exciting.

The significance of Blue Label is it goes beyond the first year volume.

It's really the compliment to Polo and it really is the backbone of what we hope will be a much larger specialty store strategy that we are going to develop that gives a male and female counterpart.

And allows us to look at store sizes and markets that we haven't been able to pursue in the past.

And with our retail profitability so dramatically improving, we're very encouraged that we're on the right track.

OK, thank you.

You're welcome.

The next question comes from Jeff Edelman.

Please state your question.

Good morning.

It's UBS Warburg.

Several questions, Roger or Nancy, regarding the international businesses.

I guess, one, the high double-digit increase.

Was that Europe excluding Italy or was that driven by Italy?

Second, what was the trend of your own retail stores in Europe?

And then thirdly, could you give us some flavor the consumer response to the other international?

Well, the double-digit increases in Europe were inclusive of Italy, although Italy was extremely small in its contribution to that quarter.

Where we talked about Europe being very much the second and fourth shipping pattern, the Italian business, if you remember, was our women's business, is even more distorted towards second and fourth.

So, while we picked up the expenses of Italy, which pretty much spread out evenly over four quarters and impacted the expenses in the first quarter, sales for Italy are distorted even more so for second and fourth.

So the comparable European business actually was significant double-digits without Italy.

Two, the retail performance in Italy and in Europe was in the high single-digit comp range.

So we really were very excited about the retail business as well as the wholesale business in Europe.

Really, three, the non-European international business, which is primarily Asia, has very strong first quarter results with Japan experiencing high single-digit increases.

Korea 65 percent ahead.

Australia 31 percent ahead.

So we have seen, really, across all of the European countries except Hong Kong, dramatic acceptance of our product, our marketing and the brands.

In Japan where we've talked to you in the past about a three year store renovation program -- we're obviously in year two of that three year commitment.

We have 42 stores in Japan scheduled for renovation this Fall starting in August.

Those stores have produced dramatic increases well in excess of the total Japanese number.

Korea continues to be very strong across the board.

We are opening some new doors.

And clearly, the World Cup, which was successfully hosted by Korea recently has helped the overall economy.

So, you know, our overall international business, not just Europe, is seeing a great acceptance to product, and we, you know, we really quite frankly expect that to continue.

I think we're doing a lot of the right things in those markets.

Great.

Thank you.

And just one follow-up.

Will you expect your total Europe sales to end up this year, because I know you'll get the benefit of some store openings a little later?

I think we're forecasting Europe to be somewhere between 450 and 500 million, depending on the foreign exchange rate, which would represent about a 20 percent increase over prior year.

Great.

Thank you.

You're welcome.

The next question comes from

.

Please state your question.

Hi, this is

calling in for

.

Hi

.

Hi, how are you?

Good.

Good.

It looks the upside in this quarter will be offset by another quarter, it looks like December possibly, since you left guidance flat.

Can you explain what this could possibly be due to in December?

Well I don't know,

standing in for, I don't really know where you got the December.

I think what we have said with our guidance is that while we're very excited and pleased relative to our expectation in the first quarter, and really we're excited because it came out of retail.

As you know, the least predictable part of our business is retail, because you can't, with a great deal of accuracy, forecast - you can plan, but you can't forecast to the same degree you can in wholesale, where you've got bookings to work around.

So for us, to get that kind of first quarter, and to hopefully see that continue is a real positive, particularly knowing that our wholesale business is tracking to our plans with a strong spring reaction.

The reason we left guidance really the same is that despite the excitement over the first quarter performance, it still represents only two percent of our annual contribution of profits.

So we still have 98 percent of the year's profits still in front of us, and it didn't seem to us prudent until we saw more of the fall selling, and some of the post September 11th customer reactions, to adjust.

I think depending on how the second quarter goes, at that point we'll have more of the year in, and if we feel, you know, comfortable at that point, we'll make the appropriate adjustments.

OK.

On the licensing side, what was stronger?

This quarter came in significantly above our expectations, but was home real strong, and how is the, how are the other businesses doing in licensing?

OK, well that's a good question.

I mean, I'll first reference Jeff's remarks, where international obviously has performed well for us.

I also think that we're beginning to see some traction in our home business, particularly with the fall deliveries of the new Lauren product in textiles.

We're feeling encouraged about our ability to segment that business into two distinctive labels.

We've also seen some strength out of the women's business.

I think you've probably heard from others reporting, particularly

, that women's products in department stores have probably performed a bit better than men's this spring.

And I think we've seen good reaction to the kid's business, where not only for spring, but the early back to school business has been encouraging.

So I think, you know, we're seeing it on a couple fronts.

And, you know, coupled with the international numbers I articulated earlier, I think that business is tracking a bit ahead of our expectations.

But not significantly.

OK.

And last question.

We've been hearing a lot about retail traffic dropping off a lot in the last part of July, I guess the last two weeks.

Have you observed any of this at your retail stores, and what have you heard from you know, from your - from your customers?

Well I don't know what I can say about hearing form my customers.

I would say that our - our trends in July track similar to the first quarter and I didn't see any noticeable movement one way or the other.

OK.

Thank you very much.

The next question comes from

.

Please state your question.

Yes Roger or Nancy, could you discuss your retail plans for the rest of the year and maybe into next year as far as number of stores to open, close, and the type?

Sure.

We have plans for the balance of this year, Lee, that include 11 stores in Europe, nine to 11 depending on the real estate out of Club Monaco, so we expect a gross number of openings of about 25, including a couple domestic Polo stores.

We see closings about - numbering about four.

We are going to close two domestic licenses - two domestic outlets, -- off-price outlets, one Club Monaco off-price outlet and once Club Monaco store.

So we see approximately 20 you know, net stores for the year concentrated in the third and fourth quarters of this year, which should receive about three quarters of that.

I think what we're going to anticipate, Lee, while our plans are still up in the air, is we are getting more comfortable with what's happening at Club Monaco.

We're going to continue to see some nice controls, but a ramp up of growth there, almost exclusively in the United States.

I think as we are getting more comfortable with the blue label product, we are not out planning for a more aggressive domestic rollout of - of Ralph Lauren Polo stores and I think we have said that Europe will continue to see an improvement in their retail strategies.

So I would expect next year to be more aggressive than the last two years as we've tried to get our arms around our retail profitability and seem to be tracking that way.

As you know, it probably takes at least 12 months you know, to plan, acquire and develop store sites.

So as we look at next spring and next fall, we're feeling more bullish about our ability to open stores and open them profitably and have them be a meaningful contributor to our bottom line.

Could you put some parameters around increasing the square footage for next year?

I don't think we have that number yet, Lee, but as soon as we do we'll - we'll get that out to you.

Could you also discuss now that you are generating quite a bit of cash and have a lot of cash in the balance sheet, your thoughts about using that cash?

Sure.

We're obviously very pleased to have managed our balance sheet to the degree that we really are sitting with no debt at this point.

We have said and continue to believe that beyond our - our cap ex needs, some of which is new stores, some of which is infrastructure, we will focus that - that cash and - and the balance sheet in total on a appropriate acquisitions.

We believe that our infrastructure is - is getting to the point where we can better assimilate acquisitions and I think we've also been clear that our primary focus will be on you know, those licensed businesses that we feel comfortable you know, we can - we can manage.

And I think with the 372 million; it certainly gives us a nice jump start in terms of a war chest to make those decisions intelligently without you know, destabilizing our balance sheet in the marketplace where I don't think I'd want to be operating you know, with a lot of debt.

Thank you.

You're welcome.

The next question comes from Noelle Grainger.

Please state your question.

Hi.

Good morning, Noelle.

A couple of questions.

First, just a followup kind of on your acquisition comments, Roger.

Your development of the Blue Label line for women.

Do you think that gives you a core competency in women's wear?

And would you -- is that a license that you would look to to bring in-house over time?

Well, I think that the Blue Label line, which we think is very compatible with the products that Jones is making, is really a compliment to what they do.

It sits above the Lauren line.

It's really different in fit silhouette, in concept.

And so, you know, we and the Jones people both think it's a great opportunity for us to create another layer on top of what they do.

And because it's only being distributed in our own stores domestically it really is not a conflict.

You know, I think we've always felt we know how to be successful in the women's business.

And I wouldn't use this as a trial balloon for core competency, but I think it certainly adds a dimension to the company that gives us an opportunity, really, to be successful in retail.

When you think about our luxury store strategy, whether that's Worth Avenue or Rodeo Drive or Madison Avenue, that's one kind of business.

But when you start thinking about, you know, other locations like a New Canaan or a Greenwich, the ability to have a compliment to the men's Polo line has always been what has held us back from feeling good about four to five thousand square foot specialty stores where it's vertical margins -- not through license product -- and we can make a lot of money.

So, this is really a major tool that Ralph has given us to, you know, begin to get serious about how we want to run our retail business.

You know.

We're very pleased with the Jones business.

They've done a terrific job growing and managing that business.

And so, at this point, they're really independent subjects.

OK.

And on your retail business -- because in the nice result in the first quarter, have you adjusted kind of your targets for the year?

And could you address what they are at this point within the context of, you know, you're long-term eight to 10 percent operating margin targets?

Well, sure.

We, as you know, have reported, you know, two to three percent type operating profits up and down a little bit over the last couple of years.

As we talked about before, we were making good progress last year in the first and second quarter until September 11th came along.

So, you know, we really still believe that the blend of retail expressions we have with the different business, we're comfortable that that eight to 10 percent is achievable over the next two to three years.

We have, obviously, looked to get a nice chunk of that going this year.

We've looked at, you know, the first quarter as a better than planned quarter.

I wouldn't expect 380 basis points to continue every quarter, but I would certainly expect us to be able to make progress against that in and around, you know, 200 basis points, you know, range for the year.

If it turns out to be better, that's great.

But we think that's pretty aggressive in this fairly turbulent retail environment.

You had pretty, I would say a loss, you know, in retail in the fourth quarter.

Do you expect year-over-year improvement in retail margins each quarter?

Or is it primarily going to be, kind of, first quarter and fourth quarter?

Yes, we think we'll have in varying degrees profit improvement each of the four quarters.

You know, that's our current plan.

Subject to customer reaction, but at least sitting here today, our plan reflects some kind of improvement, you know, each of the four quarters this year.

OK.

And my last question would just be on wholesale.

With the respect to the gross margin decline, I think Nancy indicated that, you know, you did have downward pressure in men's, and I'm still not clear, given your response to Margaret's question, you know, if the off price in men's is down, and that, you know, the Blue Label on the women's side impacted the gross margin?

I'm not sure what's going on in the men's side ...

Yes, well let me ...

... of the business.

... let me try again, because maybe I wasn't clear with

.

First of all the Blue Label product that we're delivering, we didn't really ship any in the first quarter.

So the impact was zero.

We are beginning to ship now, we expect some impact in the, in the second quarter, and obviously more in the third and fourth.

The negative impact on the first quarter was a combination of a more difficult men's environment at department stores, which we believe in concert with the department stores was important to clean out and really get a fresh start.

So while our inventories are down at wholesale, they're also down at the retail partners we have.

And we think that's a good thing.

Two, with the dramatic reduction in off price, we feel very good about that, but in the women's business, we were cleaning out the ends of Ralph Lauren Sport, as well as helping the retailers clear out the end of Ralph Lauren Sport to clear the deck for, again, second quarter deliveries on Blue Label.

So, you know, those are the major components that are impacting first quarter wholesale margins, you know, in a major way.

OK.

Thank you.

OK.

No problem.

The next question comes from

.

Please state your question.

Hi, good morning.

Salomon Smith Barney.

Good morning.

A couple of questions.

First, is there any way that you could talk maybe just directionally, or give us a level, if you look at fiscal '03 versus fiscal '02, you know, and obviously a lot of moving parts in wholesale, but where might you think or, you know, as a percentage of the business, where might off price have been last year, and where do you think it would be this year, in terms of maybe a percentage of the business?

Or is there any way you can quantify that for us?

I think the best answer I could give you

from a directional point of view, is that over a multiyear plan, we are going to make dramatic reduction in the amount of inventory that's available to sell into the off price channel, because we think while it is business, and, you know, it has been part of our numbers in the past, we think it's really not in the best long-term interest of this brand.

And this year, fiscal '03 versus fiscal '02, we think, or we are planning and forecasting for a reduction in the neighborhood of 40 to 50 percent less than we had last year.

Now that's not a number that's a percent of our total shipments, but it ...

Right.

... gives you a sense and a direction of the order of magnitude that was involved here.

Recognizing we closed the distribution center that used to carry those goods and also recognizing that I think I told you earlier, last year we - we had as much as $80 million in returns from our retail partners that we are looking to eliminate.

On the return policy, is that for all wholesale businesses?

Yes.

OK.

We're out of the return business.

That's good news.

We don't have to segment report that, do we?

Not - not if you don't want to.

Well, I don't know.

We'll run it by our corporate

committee.

Good luck on charge backs.

Well...

...that's another story.

Anyway, on the - on the wholesale operating margin as we look to the - to the full year, I - I can't recall, I think you were planning maybe flat to up a bit year-over-year?

Could you just refresh my memory on the wholesale operating margins, what we're thinking about for the full year?

We - we are expecting to have a wholesale operating margin that's slightly higher than last year.

We think that's the good news on obviously all the moving parts that we've articulated - the first half would be down and the second half obviously would be up, but we think the net of all that is at the moment, is forecasted for higher profit margins for the year.

And - and that's with all of the things we've talked about doing.

So we think that's a pretty good deal.

Last question, in the men's wholesale business, you know there's been a lot of discussion about department stores trying to find a way to you know, put some - put some increases behind the category.

Are you seeing or are you getting pressure - there's been a discussion here they're moving in to young men's and taking square footage away from the larger, more traditional resources, such as yourself and you know, Tommy and Nautica, and I was wondering if you comment on you know, where in the U.S. you know, you think the business you know, will and in terms of square footage at retail in the department stores.

OK, well first of all, I'm not sure that the Polo belongs in the same category as Tommy and Nautica.

I think Tommy and Nautica really are - are representative of a different situation.

We are not anticipating losing square footage.

We've had no dialog that would indicate we are losing square footage.

As a matter of fact we are strategically looking to continue to invest in the right kind of shops and the right kind of stores.

I think a lot of the conversation about young men and contemporary being stronger performers at department stores is fine, except when you then ask how many doors they are in beyond the A or double-A doors, a lot of that product has not yet tried to be successful in B and C and D doors and you know, it's one thing to be successful in A doors only, it's another thing to you know, try to be an all door resource for a May or a Federated or a Dillard's.

And so, for Polo Ralph Lauren, we are not experiencing decreases.

I think we've met with all the major retail heads over the last couple of months.

I think they all like Polo because of the product and the distinctiveness and the marketing power and the brand to really be the lead for them.

And so we've not experienced that kind of space reduction discussions.

Great.

Thank you very much.

You're welcome.

The next question comes from

.

Please state your question.

Hi, yes, this is

.

Hi,

.

Hi, how are you?

I'm curious with respect to the department stores and no longer having a return policy.

My first question is, what do they get in return for no longer being able to return?

Is it better prices going in?

Is there some other arrangements that are being made to help them move through some of what would have otherwise been returns?

That's my first question.

Well, let me hear your second one and I'll think about your first one.

OK.

My second one relates to the off price channels.

If year-over-year there's 40 percent to 50 percent less clearance merchandise to offer them at a discount, are you making more merchandise for them up-front?

Are they placing larger orders up-front?

Is there, you know, what is the pricing relative to last year?

What's the change in pricing for that up-front business that they must then place with you to compensate for the business that they did last year in the clearance?

Well, let me answer your question this way.

We're not giving the department stores anything to offset a reduction in returns.

What we've said is, we are willing to sell in less.

We are willing to reduce the amount of goods that you have on your floor because of the way the merchandise is handled and their ability to sell through it.

Hopeful improvement in gross margin we'll enjoy with less product available.

And with that discussion up-front and a willingness to sell in more appropriate levels to make the stores look better, to get a better regular price sell through, I think we're all going to enjoy a more profitable business.

For us, it obviously eliminates the need to produce extra goods to receive them, to ship them, to handle them, to take them back, to repackage them, and to sell them to an off price channel.

It's very unproductive.

So, we think it's a win-win and, you know, we're operating the business accordingly.

In terms of the off price channel, we have no obligation to the off price channel other than to try to make available if we have any kind of excess at fair prices products.

It's not really our concern whether they've got goods to anniversary their numbers.

We think for the long-term health of our brand having less Ralph Lauren product available on sale in whatever channel -- our own stores, department stores or off price -- is absolutely mission critical for us to go where we want to go.

And we are not going to take the brand down market and continue to feed discounted sales.

And this is very consistent with what we said all along about not building more outlet stores our self.

All the pieces and parts are consistently pointed in the same direction.

We are not going to be chasing sales or providing sales or providing inventory for product that's going to end up in a promotional environment.

And whether that's wholesale, whether that's retail, or any other forum, we believe it's a very important statement and hopefully you will understand that to do that is right for our brand and still deliver a record year.

We're feeling pretty good if we can do all of that.

But I don't really have obligations to support the off price channels, you know, with ever increasing amounts of inventory.

So, I mean, that said, as you look at your business two or three years out from now, the two primary domestic distribution channels, the department stores and the off pricers, you see, you envision both of those materially smaller than they are today.

No, I didn't say that.

I'm asking, I'm not, I'm not ...

No, I see the primary channels for our product being our own stores, which I think in answer to Mr.

question, we talked about a growth strategy.

We're pleased with the progress we're making.

I think in response to the department stores, I think we see a healthier sell in, a healthier sell through, and we hope more satisfied customers, because the shops look better, the merchandise is handled better, and we've got a sales increase.

I would expect a decrease in the off price channel.

That's correct.

OK.

Thank you very much.

You're welcome.

The next question comes from

.

Please state your question.

Hi, thanks.

Most of my questions have been answered.

Oh, it's

on behalf of ...

Hi

.

You mean the six-part question

that everybody's asked is not sufficiently covered your question?

I do have a couple of follow-ups.

OK.

The third quarter guidance was below what we had in our model as well, and maybe we were just off, but can you talk about, a little bit about holiday bookings, and what you're seeing there?

And was there any reduction, or is it just that we all, all of our models were off?

Well, you know, quite frankly

, the guidance for the back half of the year was framed as a six-month number.

This is really our guidance breakout by quarter, so, you know, I think it's hard for all of you to be precise, you know, with just a six month number to work, and so many moving parts.

These guidance models really reflect our plans and forecasts, both budgeted and forecasted.

Really for how we've been running the year, so it's not reflective of any movement on our part.

I can't sit here and tell you how Christmas is going to be.

And that, obviously for us is a lot of what third quarter represents.

But the wholesale sell ins, our own retail plans, are really unchanged.

We're obviously encouraged by the profit improvements in our retail businesses, and if we were to continue that through the holiday season I think we'd see an up tick.

But this is pretty consistent with where we've been all along.

OK, great.

Then also can you update me on inventory guidance for the second quarter and the year?

Inventory guidance for the second quarter of the year?

Yes.

Yes, we expect that the, you know, dramatic inventory improvements that you will see will begin to abate in the retail business, because this time last year we began to see significant reductions, although we'll continue to see them in second, third and fourth quarters.

I think the major wholesale reductions really represented last year, third and fourth quarter, so we expect to see comparatively compared to second quarter last year, some improvement.

You know, and we think, you know, as we said in the opening, that the European business, which has not yet had the benefit of a lot of the techniques we've applied in the United States over the last two years, and therefore has probably been running turns more consistent with what we used to run at Polo.

I think we'll see a 12-month improvement there.

So second quarter should represent a good improvement in wholesale, less in retail.

And then third quarter a little bit less, and by the time we get to the end of the year, our end of the March,

I think we will have expected to, you know, show some improvement, but relatively speaking, less than the 16 percent we just saw.

We have made such enormous improvement in our inventory management and our cash flow management, I think you'll see the percentage improvement will begin to slow down, but I think we'll continue to see quarter-to-quarter improvement for the balance of the year.

OK, great.

And then finally, the Ralph license with Jones, I know it was below it's minimums.

Is there any update there?

I didn't know that...

...that's well, that's what they've said.

OK.

Is there any update there?

I think that the Ralph line, which was placed initially with a lot of enthusiasm and then needed some tweaking over the first year or two, from what I'm told their performance at retail has you know, improved to the point where they are now re-discussing some of the door expansion that - that they lost during the pull back when the line was being repositioned.

So to the best of my knowledge, you know the - the current assortments have been - excuse me - well received and you know, we'll see where it goes from there.

So you are not - you don't have any current plans to sit down with them and - and rework that agreement?

Well we sit down with them all the time.

I don't know that there will be any additional sit-downs.

But let me ask you something, I understand you were at the men's showroom.

How did you think about the look of the spring product?

I thought it looked great.

Really very strong, and holiday the mini-market I particularly - I'm sorry?

Did you place any specials for loved ones?

Well I won't discuss that.

Oh, OK.

We did have - we did have strong reaction, which obviously takes some of the angst out of the back half profit forecast that I know you all have been experiencing.

Let me just wrap up here, because we've - we've all spent a lot of time and I appreciate the interest.

We are obviously pleased with the first quarter and hopefully there is a better understanding of the quarter-to-quarter expectations as we work through you know, what I still think is a turbulent and uncertain year.

We hope that as we get through early fall reaction and begin to get some holiday selling, the better customer will come back a little strong, the men's customer will come back a little stronger and you know, hopefully post-September 11 the world will stabilize a little bit.

You know we are very comfortable with the current direction that we've embarked on, and the - and the controls we have in place to manage this business through difficult times and you know, barring any unforeseen political or other major economic upheavals, we're currently feeling comfortable with the forecast that we've got for the year, which was again, report record results.

So thank you for your interest and time, you can follow up with Nancy separately and have a good morning.

Ladies and gentlemen, this concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.