雷夫·羅倫馬球 (RL) 2003 Q2 法說會逐字稿

Good morning, and welcome to the Polo Ralph Lauren 2nd quarter 2003 conference call.

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

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

I will now turn the conference over to Ms. Nancy Murray.

Good morning, and thank you for joining our second quarter, fiscal '03 conference call this morning.

We are very excited to report the details of this quarter to you.

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

First, let me go over the flow of the call today.

I'll review the numbers for the quarter.

Then Roger will update you on our current business and the outlook for the rest of the year.

After that, we'll open it up for questions and answers.

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.

They've all been detailed in our recent SEC filings and we refer you to them.

Also, recall that my discussion today will be based against pro forma, as if the European operation results had been consolidated on a current basis in 2002.

Now, let me get to the numbers.

We posted a second quarter EPS of 52 cents and that's at the high end of our range, based on net income of $51.9 million.

We continued to manage our balance sheet with vigilance and we ended the quarter with a 104% reduction in net debt; $8.5 million in cash, excess of total debt, and inventory levels were reduced by 7.2%.

In addition to the report this morning, we are also re-affirming our earnings for the full fiscal year in the range of $1.80 to $1.90.

And that represents a 48% to 60% increase in earnings for the next six months.

Turning to the business segment, wholesale revenues were $310.7 million, that represents a decrease of 8.9% over the previous year.

While our European sales rose significantly, they were offset by a planned decrease in the men's domestic business, and the elimination of the women's Ralph Lauren Sport line.

Wholesale operating income was $35.8 million and that compares to $58.5 million in the prior year's quarter.

Wholesale apparel square footage increased to 2.44 million, that's a 6.1% gain over the second quarter of fiscal 2002.

And that was really driven by the inclusion of the Italian businesses square footage in this year's numbers.

In our retail segment, sales grew 6% to $263.8 million.

That was on 1.79 million square feet or 243 stores operated in the second quarter.

This compares to retail sales of 248.9 million or 1.74 million square feet, representing 231 stores operated in the second quarter of last year.

I'm pleased to report that on a consolidated basis, comps were driven by mid single digits positive comps in outlets and Club Monaco stores, offset by low teen negative comps in Polo retail.

Retails operating in comps for the second quarter were 13.3 million, compared to 13 million in the second quarter last year, representing a 2.2% improvement in operating profits over the previous year.

For the first six months, we've achieved a 160 basis point improvement over the same period last year.

And we remain comfortable in our efforts to improve the overall profit levels of our retail business.

For the quarter, licensing royalty was 66.3 million, which is approximately flat to the prior year's quarter.

Increases in our home business were offset by the elimination of the Italian royalties that were included in last year's numbers.

Operating income was $35.6 million, with a margin of 53.7%, and that compares to $43.6 million, or a margin of 65.8% in the prior year's quarter.

Now, let me touch on the balance sheet.

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

On a consolidated basis, our inventory decreased 7.2% from the previous year.

We improved our trailing 12-month inventory turn to 3.17 times from 2.47 times; that represents a 28% increase.

In addition, we drove our cash-to-cash cycle down 13%, to 116.3 days.

That compares to last year, and that also represents a 22% improvement from our 150-day cash cycle two years ago.

We are, for all intensive purposes, without debt as we enter the quarter, with $355.5 million in cash, or $8.5 million more than our total debt.

Our total debt was $347 million, and that consists of the short-term bank debt of $120.4 million.

That includes $80 million of the bank term debt, and $40.4 million of short-term bank lines of credit.

Our long-term debt consists of $226.6 million of Eurobonds.

For the quarter, our Cap Ex was $29.4 million, and that compares to $24 million a year ago quarter.

As I said earlier, we are re-affirming our previous guidance for the full fiscal year.

To reiterate, we would expect 3rd quarter earnings to be in the range of 45 cents to 50 cents, compared to 23 cents in the prior year's quarter.

The year over year increase is driven by high single digit sales growth, and a strong increase in operating margins of approximately 500 basis points.

For the 4th quarter, we would expect the range to be 75 cents to 80 cents, and that compares to 58 cents in the previous year's 4th quarter.

This would be as a result of revenues increasing high single digits and operating margins expanding by approximately 300 basis points.

We look forward to speaking with you again in February to update you on the results of our holiday season, and we will be giving our initial fiscal 2004 guidance with our 3rd quarter earnings release in early February.

Now, let me step out of the numbers for a moment, and my pure investor relations role, and speak to you coming from my new communications position.

This year, as many of you know, we're celebrating the 35th anniversary of Polo Ralph Lauren.

This celebration has driven unprecedented media attention.

Just to detail a few of the much-deserved accolades, let me go through a couple of the things that you might be looking at on your newsstands right now.

First, you'll recall Ralph appeared on the cover of "Time Magazine" during the quarter.

This was his second cover with the publication and this time he was on the international edition.

Earlier this month he was named one of "GQ's" men of the year, and is featured on this year's cover with Denzel Washington and Hugh Grant.

He made his third appearance on the cover of "Town & Country" this October.

And most recently, he and Mrs. Lauren are featured on the November cover of "Architectural Digest." with a 14-page story, and that's the largest the magazine has ever devoted to one story.

Tonight, Ralph will be giving the keynote address at the WWD-DNR Apparel CEO Summit.

Next week he'll be in Washington appearing as the only CEO and chairman featured speaker at the "Fortune's" global forum.

We're very excited about these events and hope you take a moment to look at all of the covers and read the stories.

Now I'd like to turn the call over to Roger for a discussion about our current businesses and strategies for fiscal '03 and after, Roger will open up the call for your questions and answers.

Thank you, Nancy, and good morning.

I'm sure we all congratulate Nancy on her new role.

By all accounts, the past few months have been challenging for our industry.

During the quarter, we experienced the dock strike and an extremely difficult retail environment and consumer confidence levels that have now reached a new nine-year low.

Considering all these factors, I believe we're managing our business well in what continues to be a challenging environment, and I'm satisfied with the results we've posted this morning.

I'd like to spend a few minutes talking about our business and their outlook, as well as update you on our progress concerning our multi year initiatives.

When we began the year, we said we'd be taking appropriate steps in our wholesale business, which were consistent with our philosophy of better controlling the brand.

In the men's business, that meant selling in more appropriate levels of inventory, dramatically curtailing our offprice selling and eliminating returns.

This Fall we sold in less men's products to create more open divide on holiday and resort seasons.

We believe a fresh flow of new products in the stores is key to exciting the customer, particularly in this environment.

During the quarter, we also dramatically reduced our sales to the offprice channel, by 46%.

This initiative is the right approach to the long-term success of our brand.

Although the men's department store business continues to be challenging, we think our products are performing better than others in the category.

Also, as businesses adapt more formal dress policies again, we are seeing a resurgence in our suit and furnishings business.

We think the department store channel for men will remain up over the next few quarters, however, we're pleased with our Spring bookings which are on plan and about flat to last year.

Our women's collections are exceeding expectations and we're pleased to report that our sell throughs are on track.

Our Fall collection, named one of the top 10 collections internationally, is performing well.

The Black Label business also continues to perform well in top stores.

The new Blue Label is proving to be successful both domestically, where it's sold in our own retail stores and internationally, where it's available in selected wholesale doors.

We completed the transition of our collection brands distribution process, moving to Greensboro last week, and closed down the satellite facility that we were using in Secaucus, New Jersey.

In addition, we continued to increase the number of women's collections produced in Italy.

We finished our women's Spring market last month, and our bookings for the runway collection, identified as Ralph's best ever, are up 25%.

Our European wholesale business continues to exceed expectations and sales are up high double digits.

The demand for both men's, women's and children's apparel continues to be strong.

Looking to retail, I'm very encouraged by the improvements we drove in our business this past quarter, and the trends we are seeing for the first six months.

For the first half of the year, they were positive with the positive comps continuing to accelerate through the quarter and through October.

Through better planning and further implementing of our efforts, we have reduced our domestic inventories dramatically.

We continue to be excited about the domestic retail business.

Although we are up against heavy promotional calendar activities in July and August from last year, which we did not anniversary, we saw a strong increase in sales in September and October and we see sales actually beginning to accelerate.

We've reduced our receipts of fall merchandise in the stores in order to sell through more cleanly, and to increase the flow of fresh holiday and resort products into our stores.

This will be the first quarter we see an increase in receipt flows into our retail stores versus last year.

We've also increased our gift-giving assortments, and I believe we're well-positioned for the holidays, and I'm encouraged by the latest results.

Another retail highlight of the quarter was the addition of Wayne Michner as the President of Polo Retail, and Charles Fagan, Promotions and the Head of Global Retail Brand Development.

Wayne has an extensive background in merchandising and store management after 23 years with Saks Fifth Avenue, and now will direct our domestic Polo retail stores.

Charles, a 60-year veteran, will now direct the integration of merchandising, visual presentation, advertising and marketing strategies in our stores on a worldwide basis.

In our outlet division, our comps remain strong.

Better planning, execution, and the notable performance of our floor purse program, resulted in major reductions in our promotional efforts, and produced higher merchandise margins.

In our Club Monaco stores we're continuing to see positive results.

We ended the quarter with positive mid-single digit comps and our current business continues to perform very well.

We've received great response from our Fall product.

Our women's business was driven by key items such as woven shirts, knit tops, skirts and blazers, while the men's business is being driven by novelty styles.

In fact, men's shirts sales are up 80% from last year.

I am also pleased to report today that the U.S.

Club Monaco store volume now exceeds those of their Canadian counterparts, in roughly half the stores.

The transition of the majority of the Club Monaco headquarters to New York is now complete with our design and merchandising groups all in one city.

Our European retail business continues to perform well, and we ended the quarter with strong comp sales.

As part of our efforts to more directly control our brand retail presence in Europe, we acquired three of our previous license stores, Munich, Hamburg and Frankfurt this last month.

We're continuing to review our other license stores in Europe for future opportunities.

Our licensing business was on plan for the quarter, and we're pleased to report the launch of Polo Blue has been outstanding.

It was the number one fragrance for us this Fall, and is still the number one fragrance in department stores.

We also continue to see significant growth in our children's business both domestically and internationally.

In our international license business, we continue to see solid growth in Japan.

We're on schedule with the $70 million renovation of 150 shops that our licensee began two years ago.

We're approximately two-thirds of the way through the project, and the doors where the work is completed, we're enjoying double digit sales growth.

Our home business also exceeded the plan as a result of the successful implementation of our tiering strategy.

Our Lauren businesses distributed in department stores has met with initial success, we're seeing positive response to our Lauren bedding.

We are encouraged by this response and we're looking to add more products to this in future seasons.

Let me just spend a few minutes talking about our holiday marketing efforts.

For all of our businesses, we are supporting the holiday season with focused marketing and advertising initiatives, we'll be launching new, direct mail pieces to support holiday gift giving and be sending holiday mail booklets to key Polo customers as part of our personalized marketing effort.

You'll also see two Polo commercials this season.

The first is specifically targeted to support our Polo Blue fragrance, the second is a Polo.com commercial that was part of our partnership with NBC and Ralph Lauren Media, that was launched this weekend and will continue to run in prime time advertising positions through December 29th.

Let just me review with you for a few minutes our multi-year initiatives in retail supply chain and improvements to our balance sheet.

We continue to make solid improvements in the long term profitability of our retail business, and over the past six months, we've increased our growth margins, by proactively reducing markdown activity and improving the receipt flow of new merchandise.

This has resulted in a more consistent ability to deliver growing sales and improving profits, despite the difficult retail environment.

And we remain on track to achieve our goal of 8% to 10% operating margin over the next two to three years.

In the past two years, we've also made tremendous progress, and we're about halfway through the building of our logistics capabilities, that will enable us to support supply chain infrastructures that will enhance our worldwide growth business.

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

During the quarter, we executed our [pull point] network in all major regions in the U.S. to support our outlets floor first merchandising programs.

With a [pull point] network, we're able to ensure much more consistent and timely delivery of products to the floor.

As we talked about in our last call, we began phase one of our cross docking strategy in June, and currently 10% of our retail shipments are being cross docked.

Phase 2 of this strategy is on schedule to cross dock between 40 and 50% of our volumes that come from the Far East.

By the end of the year, we should be cross docking a net of 60% of our retail shipments.

During the quarter, we also saw continued improvement in our Holland distribution center, where we have doubled capacity to support the larger delivery seasons ahead of us.

We are now running 10 cent purse unit less than last year, and have also decreased our European air freight by 76%.

Even with the dock strike and slowdowns this Summer and Fall, we took appropriate measures and were able to flow our products consistently and on schedule.

To date, we have received 95% of our holiday products, and expect the remaining product in shortly.

We are still shipping a large amount of freight through Miami, and it is working well for us.

We anticipate addition air freight costs of less than $2 million for the season, because of these initiatives.

The third major corporate wide goal was to maintain financial flexibility.

It's an important key in our ability to invest in both our existing business as well as in future opportunities.

We remain disciplined in our cast management and diligent in the management of our balance sheet.

We have reduced our debt by 104%, and today have no debt net of cash.

We have accumulated a strong cash position of $355 million, and have recently announced an agreement with our Japanese partners that will be funded through available cash.

We continue to believe that maintaining a strong cash position is vital to our ability to execute opportunities that may occur in this environment.

We have spent a great deal of time over the past couple of years talking about our international opportunities, and we continue to exceed our expectations.

Our double digit sales increases in Europe reinforce our belief that it is an important long-term growth driver for us.

Since taking direct ownership of Europe, we have seen our compounded annual growth rate tracked to be greater than 38%.

Europe is on plan and is continuing to track to approximately a half a billion dollars of business this year.

In the beginning of fiscal '03, we said we'd be undertaking initiatives in Europe in order to develop a scalable infrastructure necessary to drive our international growth.

We began implementing supply chain initiatives to improve Europe's cost structure and inventory returns last quarter, but we view this as only a short-term action.

Since acquiring our two major European licensees, Polo Europe and Polo Italy, in 2000 and 2001 respectively, we have supported operations in,offices in five cities in three different countries.

In addition, there are redundancies of skills and responsibilities.

We began the first of those steps today with the official announcement in Europe of a strategic review of our businesses there, with the intention of centralizing and more efficiently consolidating the growing business operation.

Various legal requirements in each of the countries include many processes, steps and proposals.

The current proposal being evaluated, calls for the establishment of the headquarters in Geneva, Switzerland, where the back office functions would be consolidated.

Over the next few months, the Polo management team will be discussing the proposal with its employees and work councils, according to the legal requirement in each country.

This process can take several months, but as developments occur, we will update you on our progress.

While we remain focused on the immediate needs of our international business, we continue to look at a long-term opportunity to grow other increasingly global business.

From our experience in Europe, we have gained the knowledge and skills necessary to further build a strong international business.

In October, we took a new and very important step to gain greater control of our brands and better influence its distribution in international markets.

We entered into agreement for increased management in our growing business in Japan, which has been licensed in [INAUDIBLE] department stores since 1978.

The agreement, in principle, includes a series of transactions whereby we will acquire a controlling interest of our Japanese master license, and an 18% interest in the company that holds the sublicensees of Polo men's, women's and Polo jeans in Japan.

This is a major step in developing a more meaningful impact on the sales of our brand in this important region.

Of approximately $500 million in wholesale sales today, Japan is the second largest sales region for our company.

Over the next three to five years, we believe this should be a major growth vehicle for the corporation.

Our commitment to these long-term goals, even in these difficult times is important to the future of our company.

We continue to invest in product design and marketing, and we continue to expand our international businesses as we make important improvements in our supply chain and infrastructure.

I'm encouraged by the current trends in our retail businesses, both domestic and internationally, as well as our products continue to be in demand throughout the world.

Even in this difficult year, we are tracking to deliver our previously announced targets, and at this point, I think we're all prepared to field your questions, if there are any.

Chris?

Thank you.

The question and answer session will begin at this time.

If you're using a speaker phone, please pick up the hand set before pressing any numbers.

Should you have a question, please press 1 followed by 4 on your push button phones at this time.

If you wish to withdraw your question, press 1 followed by 3.

Your questions will be taken in the order in which they are received.

Please stand by for your first question, from Dennis Rosenberg, please state your affiliation followed by your question.

Credit Suisse First Boston.

Good morning, and congratulations on delivering what you projected.

Roger, a couple questions on international.

On Europe, you've been talking about this consolidation for the past year or so.

Could you give us some more details about what the redundancies are and what the timing of the implementation might be?

And secondly, in Japan, the steps that you announced a few weeks ago, is this the way it's going to look finally, or somewhere down the road might there be some further steps where you would increase your position more?

Dennis, let's talk about Europe.

I think that, you know, it's fair to say that when we bought the Polo Europe business, it was roughly $180 million business.

And it was run by entrepreneurs with a bit of a rickety infrastructure.

It was a Paris-based business, there are two offices in Paris that support that business.

We had been building a bit of an office in London, built around the flagship store there at the same time, and the acquisition of Italy, which has headquarter locations in both Bologna and Milan, has made for a very complicated management situation where we are partially located in five different offices.

In many cases we are experiencing three different functions in each country.

For instance, Jerry could talk to you about three treasury departments that we currently have.

We could talk to you about multiple banking relationships instead of a consolidated global cash management.

We had, you know, in some cases, two and three groups of people doing the same thing.

We knew that to build a billion dollar business that we have articulated and seem to be tracking very well to deliver, we would have to look at one group of people, the best and the brightest located in one location.

There's a great deal of work to be done in going from where we are today to where we would like to be.

But the payoff for the company is enormous.

And if we're to be competitive with other global brands, it's very inefficient to be operating out of five separate locations.

So whether consolidation of financial functions, merchandise functions, duplication that exists in the marketing function, we believe that our ability to operate at a one central back office supported with regional sales offices and appropriate regional public relations and marketing offices, is the right structure.

We have been studying and working on our thoughts today in Europe, which is obviously six hours ahead, we announced to the individual offices in Italy, France and England, our intent to partner with them over the next couple months, and work through our proposal or any thoughts they have, in order to accomplish our objectives.

The initial reactions this morning have been encouraging, but we think it's a process that could spread out over the next three to six months.

Hopefully when we get to the end of that, we will begin to execute on that plan.

But it's a very, very important issue, and can have enormous benefits and gives us the platform to get from $500 million to $1 billion.

The second piece of your question, which is really the Japanese piece, we had been working for some time to develop the right opportunity for us to begin to get more involved in our Japanese business.

As you know, we've had a strong relationship with [Saboo] for many years, but we really felt that based on our experience in Europe, that our ability to impact that business more directly was important.

So as I'm sure you've all talked to Nancy, when we had the announcement, this two-part announcement, one piece applying to the master license and one piece applying to the sublicense, which is a deal in principle we expect to close in February, is, I think -- then it's fair to say, probably the first step of what will be a multi step process over the next three to five years that will see us looking to get more and more involved in our Japanese as well as our Asian business in total.

Thank you.

You're welcome.

Our next question comes from Virginia Gennero.

Please state your affiliation followed by your question.

Thank you.

Merrill lynch.

And nice job with the quarter and the outlook.

Two questions, if I may.

The first, Roger, Japan now sort of a $500 million business for you all, about the same size it sounds, as Europe.

Although Europe has, probably at least double the population.

If you think about Japan, can you give us a sense of what you think the growth opportunities are?

I know you don't have much retail there.

But could you talk a little bit about that first?

Thank you.

Are you going to reserve the second question until I answer the first one properly?

Can I?

Okay.

Let me try the first one.

You know, Japan, we believe, is really the lynch pin to Asia.

And I think it's fair to say that much of the world's luxury goods buying is stimulated by Asian customers, whether in their local markets or in their travels.

And I'm pleased to say that some of that travel business is becoming a little steadier, our store in Hawaii is actually seeing nice increases after a tough year -- post September 11th.

So, we think Asia, Japan, Singapore, Hong Kong and Korea, and all the others is an enormous market opportunity.

While we've built a very nice business in the crowd of 500 million that we do.

I think the upside in Japan and Asia in total is at least to double that business.

And if you haven't been to Japan in a while, I think you'll see that department store business is still important in Japan.

We have very nice representation, but as we work our way through these renovations, they're not only renovations of the physical plants, we are spending a lot of time re-merchandising and adding to the assortment and adding to the higher end product there which is being very, very positively received.

So even in a difficult Japanese market, we're trending very well in those places where we've made the investment in environment and content.

We're also trending up year to date in Korea, 20%.

Hong Kong is up 6, Australia is up 15.

So we're seeing nice and exciting reaction to our products throughout the region.

And I would say, although we don't have the same direct control, obviously, as we have in Europe, at this point, applying that -- those techniques to the wholesale business as well as a more aggressive point of view about retail, should see that business accelerate and achieve what I would say is a medium term goal of $1 billion.

Thank you.

That's great.

And secondly, if I could -- Nancy or Roger -- get you to chat a little more about retail.

The margins there, and I know the specialty stores were comped down against a lot of promotions.

But margins there were sort of flattish to slightly down year over year.

Can you talk about one, sort of, margin trends this quarter in the outlet full price Club Monaco businesses?

And Nancy, as you look into December, where across those three segments do you see the most opportunity for margin gain, if you could comment?

Thank you.

Well, I think, Virginia, the comment, the fair one, although I want to make sure that we don't get too hung up this quarter on segment reporting, because if you take the segments of wholesale and licensing, you'll see a much greater improvement in retail and licensing.

We've made some changes to better cleanup and standardize what we're calling corporate.

And then the reallocation of that is a little uneven compared to last year by quarter.

It will work out by the end of the year.

For instance, certain of our divisions were being charged for occupancy, others divisions weren't.

How we categorize national advertising was uneven from division to division.

So Jerry and his team, when we put this year's budgets together have spent a lot of time trying to standardize what we're calling corporate and what we're calling division.

And then when we allocate it back out to the divisions it comes through a little bit uneven on a quarterly basis.

So the improvement in retail pre-corporate allocation was significantly better than than that represented by the numbers Nancy articulated.

But, I think by the end of the year, you will be very pleased with where we are going to end up.

We saw very significant margin improvements in both Club Monaco full price retail and outlet in the quarter.

We dramatically scaled back our promotional activity, our markdown rate was half of what it was last year, in our full price stores, significantly less in the outlet business, and so we're running a much healthier, full-price business and we think it's helping drive sales.

If you look at our 3rd quarter, which is October, November and December; while I can't predict Christmas, the trends we've seen in October and early November are very encouraging on what I would call luxury products, cold weather products as well as the beginning of our gift giving and holiday merchandise, and that's really across all channels.

Obviously, a lot of that business is back end loaded from Thanksgiving to Christmas, so we have to let that play out.

But we have an expectation of comp store numbers built in our forecast for the 3rd quarter that is in the middle to low single digits.

So while we do expect some improvement against last year's numbers, we still think it's reasonably conservative.

Great.

Thank you.

And Roger, may I ask, are we going to have the same comparisons with December?

I mean, is that -- could there be some allocation issues, where last year's margins -- I know wholesale will be up because of some shipping, but will there be some shift that is make comparison margins difficult?

If we stuck our neck out and said we were going to have a 100% increase in the 3rd quarter, everything looks good if we deliver it.

But the ups and downs of corporate allocations will begin to smooth out as we head into the back half of the year.

Thank you.

You're welcome.

Thank you.

Our next question comes from Jeff Eddleman.

Please state your affiliation followed by your question.

UBS Warburg.

Again nice work in a mine field where others have failed miserably.

Before I ask a question, Nancy, I assume you have the restated numbers for last year, given the effects of the change and allocation ready to be E-mailed to us today?

Jerry, how about you?

No.

I think the numbers that we have given out, both in the press release and verbalized are the numbers we're giving out.

Okay.

Just trying.

Nancy's moving on to fashion, communication and corporate affairs.

Okay.

So we bother you with the numbers then?

Yes, please call me.

You'll get a prompt return call as soon as I deem appropriate.

On another more serious note, looking at your department store business, there seems to be some moving trends at retail where the traditional collections business has been really very soft, and looks as if this whole modern updated area has been sort of gaining momentum.

Is this an area that you're participating in, and really, what are you doing in terms of shift and merchandise mix that's given the strong brand -- the edge its got?

Well, it's a good question.

And let me, you know, just talk for a few minutes about our wholesale business.

I think, you know, in general, of all seen the department store trends have been difficult.

And we're hopeful Christmas is better, but I think in general, men's has been, you know, probably trailing the overall trends for the last 18 months.

Our business has performed better than the peer group in department stores, although, again, I'm not sure men's has, in general, held up as well.

The collections that are classically labeled as modern, I think, have performed better in the latter part of Spring and the early part of Fall, albeit, small in size and less broadly distributed.

In many cases, those collections are limited to A doors only, or A and B-plus doors.

Where our brands are distributed through all doors, and have to carry some of the weight of C and D doors, which make the comparisons a bit unfair.

I think if you haven't had a chance to come up and see the lines, and I know Nancy likes to hold walk throughs, we believe that the collections today represent appropriate amounts of, you know, very forward and, you know, updated merchandise as well as some of the things Polo is well known for.

So, you know, I think we represent the best of men's wear, products for us, and our stores are selling extremely strong, they're selling extremely strong in an international way.

But I think some of the department store malaise is affecting everyone's business, ours included.

I think for a resource that's distributed through every door, every major chain, I think we're performing reasonably well.

Here again, saw an improvement each month of the 3rd quarter, second quarter as we worked our way through July, August and into September, obviously, with some better weather, October was even better than the prior three months, so we'll see how Christmas goes, our inventories are in-line at department stores, we have significantly less clearance on the floor in department stores and we're really trying to push more of a full-price selling, which is it difficult in a promotional environment.

Okay.

Thank you.

Our next question comes from Margaret Major.

Please state your affiliation followed by your question.

Hi it's Margaret.

How are you?

Good morning.

Congratulations, Nancy on your new job.

You're going to continue to do IR, right?

I could never leave you guys.

Okay, good.

I have a few questions, actually.

In your press release, you -- there was a mention about accessories being one of the good performers in the most recent quarter.

Can you elaborate on, you know, what -- why that was included and what's going on in the accessories business?

And secondly, when we were digging into the Japan announcement, looking at the trends in your license income from Japan, for the fiscal year of '02, so the one ending in March, you had quite significant growth in Japan, it kind of surged.

And I'm just wondering why that happened?

And then going forward, you know, what -- as you kind of said, you think it's a billion dollar opportunities, but it has been growing sort of single digits.

So, you know, how do you get it to go to a billion, when it's been sort of a -- you know, much slower than that recently.

And then I wanted to just ask about the operating margins and the --

I'm running out of -- can I try to get through the first couple before we get further down the list?

Okay.

I won't be able to retain all your questions in my head.

Roger, I know you're better than that.

But the accessories and Japan then, and then I want to ask about the operating margins.

Okay.

We'll give you a chance to ask about that.

Let's separate the accessory information into two pieces.

Those pieces that I would call accessories in our own stores and then we can talk a little bit about the wholesale business through our licensing relationships.

First, our own stores, we have seen through our own efforts to improve certain categories of men's accessories.

We've delivered for the first time in the last month, men's Purple Label accessories, which we're distributing in our own stores, that has just begun to hit at retail and we'll see a much big area assortment of gift giving, leather goods, all sorts of desk accessories being setup in our Polo retail stores worldwide.

And the early reaction to that has been terrific.

Whether it's small leather goods, or frames or any of those kind of products.

Additionally, we're seeing a significant up tick in what I call cold weather accessories, gloves, scarves, hats, anything that the weather change has brought on.

And we think we're better prepared to take advantage of that.

We've also had a very strong season in women's belts, and so we are seeing some of that business come at us.

We're not yet seeing, to be honest, a hand bag business to the degree we'd like, and that still remains a major opportunity for us.

In the accessory business through licensees into stores, in addition to the categories I've mentioned, we've seen a very strong worldwide growth out of our glasses -- sunglasses, on a worldwide basis, they're performing exceedingly well.

And we've seen a nice up tick in our footwear business.

We're seeing pieces of the accessory business perform for us, we are actually up, you know, 25% in our glasses, and that's a big deal.

Shoes are up 27%.

So again, not yet there in handbags, perhaps, but seeing other parts of our accessory business perform very nicely.

In reference to the second question, which is Japan, I would say the following -- you know, when I made a trip to Japan a couple years ago, and I really looked at the Polo business in our corners, in many levels it's highly productive.

We have corners doing 2,3, $4,000 a foot, but if you look at the merchandise assortments in those stores, what you saw was a lot of classics and a lot of basics, and a lot of the products that, perhaps, iconic in nature, but very much limited in its breadth and depth, compared to what we have built into our assortments here in the United States or Europe.

So the whole layer of business that has not been pursued in Japan, we think that's enormous.

What Japan has built in a pretty large scale, proportionately, is the kids' business, the apparel business for women is actually larger in Japan than the men's, which is the only place in the world that's true.

We also do not yet have Home fully developed in Japan.

We certainly don't have the jeans business and a lot of the casual businesses developed.

So, when you actually get into a classification and a content analysis, I think it's pretty easy to see, just even in the existing locations where we think we've got opportunity.

Secondly, we only actually have two retail stores in Japan.

So there's a lot of opportunity to build an appropriate amount of stand alone retail.

And I think that's why we're encouraged about the opportunities.

Some categories like golf and kids are pretty developed, other categories are pretty underdeveloped.

Now, your third question about margins?

Yeah, on the improvement in margins, for the 3rd and 4th quarter, the 500 and 300 basis points of operating margin improvement, Nancy, I was wondering, does that get you to the middle of the range of 180 to 190?

Because, it's actually, particularly for the 3rd quarter, it's a little below what I have in my model.

But I'm granted at the high end of the 180 to 190.

I just wanted to ask you that question.

And then if I can, Roger, I just -- a lot of stuff going on with you guys.

With regard to the wholesale business and the outlook there, wondering if -- what kind of growth you're including in your forecast for the second half for your U.S. wholesale business, I know you said bookings are flat.

But do you think shipments will still be down or up?

How do you see U.S. domestic wholesale in the second half?

Okay.

The answer to the margin question is, I think Nancy was using approximately, you know, 300 and 500 basis points.

Obviously, we can't predict with that level of precision exactly to the gnat's eye what third and fourth quarter is.

We've given the ranges that we think are realistic, I think Nancy was just trying to dramatize how big that was.

But, they are approximations.

You all can do the math on the high and low edge of the range and come up with your own number.

It was not an attempt to be precise to the actual midpoint.

You all know it's a volatile world, and, you know, we're -- we'll do our best to deliver the maximum profit on a quarterly basis for our shareholders, but it can't be called that precisely at this point.

In terms of our wholesale business, we have continued to plan our department store sell-in more carefully and have anticipated that our resort cruise shipment will be less than last year, with Spring shipments being flat to last year.

That will be the first season that we will have anniversaried our new strategy and at this point, having shown Spring and receiving the lion's share of the commitments, that seems to be where we are tracking.

Our replenishment business is actually performing nicely, as we continue to use that to drive about a third of our total business.

We're managing that very carefully, and have seen, you know, very nice performances from our key items.

So what we're really talking about is the more fashion side of the cruise, resort and Spring deliveries.

And we expect the ongoing elimination of significant amounts of all price.

The cleaner inventories are running to see a bit of a decrease in the domestic wholesale shipping and 3rd quarter flat in what I would call the 4th quarter.

Okay.

Thanks a lot, Roger and Nancy.

Take care.

Operator?

Thank you.

Our next question comes from Lee Baccus.

Please state your affiliation followed by your question.

Buckingham Research.

Congratulations, Roger, on a great performance in a tough environment.

And Nancy, congratulations on your new responsibilities.

Roger, I know there are a lot of moving parts in the operating expense line, but maybe you could take us through some of them.

How operating expenses domestically looked.

Whether some of the increases in operating expenses were from one time expenses in opening the stores, how much is from mix, and just kind of a sense going forward?

Surely, and thanks for the congratulations.

It's an interesting time to be operating a business.

The expenses for the quarter are flat in the domestic business, almost entirely.

The increase is represented out of Europe: Combination of the addition of the Italian business as well as the ongoing growth to support that business.

The only unusual things for the quarter that I could report are a little bit of a step up in advertising to launch Blue Label.

A little bit of a step up in transportation costs to work around the dock strike, a little bit of an up tick in the ongoing dilemma over insurance, which I think everybody is facing.

But I think our current forecasts are that by the end of the year, you know, the combination of very tight controls in the United States and supporting the European business will see a very small up tick in the end of the year expense rate compared to last year of, you know, pretty modest proportions.

And so, you know, we're pretty comfortable with our expense forecast for the year, and, you know, where we're going to end up.

Your improvement in gross margins going forward, is that primarily from mix?

Or -- give us a sense of what's happening with domestic gross margins.

It's a combination of mix, which is represented by stronger retail sales.

The margin in retail are up dramatically with our reduction of off price promotional activities in our own stores.

We're running a much cleaner business.

Also, to some degree, the supply chain initiatives paying benefits in terms of distributions, logistics, transportation costs.

I think most of the sourcing opportunities we've gotten over the last year to 18 months.

As you all know, the business climate has produced some opportunistic relationships with our Asian sourcing base, but I think that is sort of stabilizing at this point.

All of the increases we anticipate going forward will really be on the back of merchandise mix, a significant improvements in our retail margins, dramatically less off price selling in the wholesale business, and, you know, we'll see how that all plays out.

But we're pretty comfortable with where we are in our forecast, barring any unforeseen difficulties.

Thank you.

Operator?

Yes, one moment, thank you.

Our next question comes from Noelle Granger.

Please state your affiliation, followed by your question.

JP Morgan.

Good morning.

Good morning.

A couple of questions, first on international, related to the review operationally, Roger, can you give us any sense of how you might look at the potential cost saving opportunity there?

And what you think the time line for capturing that would be?

And also, is any of that built into your current outlook, perhaps for the 4th quarter?

Okay.

I think that's a good question.

And I will take you through the level of detail that I'm capable of doing, only inhibited by the fact that we've just announced today in Europe and the process is a little different in Europe.

And this is a country by country conversation, England, France and Italy all have different legal requirements as it relates to our existing employees, or what's called in Europe work councils.

For those of you who are not familiar, work councils represent the employees that are elected on an annual basis to represent them to management.

It is not a union, but it does represent their interests.

The legal requirements that we are going to follow in each of those countries really start today with an announcement of the intent to have this review, and our discussions about what we think are the right actions.

Over the next couple weeks, in Europe, they begin to digest the plans, the work councils begin to come back with their suggestions and this process goes back and forth in varying degrees with the most lengthy being the French piece over the next couple months.

So it will play out a little bit differently in each country.

But again, over the next couple months, we should see those discussions going from our original thinking to what the employee reaction helps us shape.

In the end, we expect to be working through that on a timetable that is probably 3 to 6 months.

It's not dissimilar to what happens when St. Lauren was acquired by Gucci.

It's our intent to work toward this one location in Switzerland that will eliminate duplicate indication and hopefully give us a world class staff there.

We have detailed -- and I'm sure you all realize, we have in great detail what we think is the right structure and what the benefits will be.

But until we go through the work council process, really not in a position to communicate that, it's impact on our ongoing earnings.

Assuming we get through that in that kind of timetable and assuming we begin to look at, you know, implementing this, we will probably end up running parallel costs for a bit of time where we are transitioning from three locations to one.

So we will probably look at several months of parallel costs before we'll we'll then be able to move over to a new organization.

We think that the impact of this, you know, will impact the back half of our fiscal '04.

And that's about as clean as I can be, given, you know, today's announcement and our legal requirements.

That's helpful.

I'm curious, on the same topic.

Why have you chosen Geneva ?

My understanding is, none of your current operations are there?

Well, I think for us, it's centrally located.

It, today, you know, what we've proposed, you know, to the work councils as the new beginnings.

I think it allows us to work around a infrastructure from technology, from transportation, that gives us a centralized hub that we think has all the connections that, you know, a business that's going to be scaled at the rate we're going to scale it has.

And, you know, at least early reports are, that we're getting a lot of our existing employees, based on today's announcements, encouraged, and perhaps looking to come with us.

I would also like to ask, the women's bookings were quite strong, and I'm curious if that number included Blue Label, and if you could just discuss a little bit more what's driving that, given the general weakness on the luxury side?

Yeah, the number that we talked about, the 25% increase in Spring bookings is really just a collection, which is the highest price point and routes, you know, most specific direction.

We had a runway show at the Cooper-Hewitt early this Fall that received an overwhelming response, and I really think it was rated the best collection in the season.

So the 25% bookings in a down market is really quite amazing.

And that's really a cross of both our domestic and international trades.

That's not included Black Label or the Blue Label line.

So it's really quite special.

We've also begun our trunk shows for Spring product with our existing customer base.

And we've also seen a similarly, you know, positive reaction to the actual individual customers.

So while I do think luxury goods in general have not performed, we're seeing whether it's purple label in our stores, whether it's the collection product, the high end of our products are performing very well.

And we see that as a very encouraging sign for the future.

Operator.

It's Nancy, again.

I think we have time for two more questions?

Okay, sure.

Our next question comes from Stacy Pack.

Please state your affiliation followed by your question.

Good morning, this is actually Gary Rafferty from Stacy Pack's office, from Prudential.

Good morning, Gary.

Two questions, could you elaborate a little more on what's behind the sales acceleration through October?

You mentioned some strengths in accessories, could you talk about any other strengths in apparel or specifically in wholesale?

And then the related question is, how have you seen the promotional pressure in department stores?

Thanks.

Gary.

I think, you know, I would lead any discussion about our sales performance with products.

We think our products this season, both men's and women's are the best we've ever had, and we're gratified that even in a tough market, the customer is at least responding positively.

We have seen, you know, through September and October, good performance in men's tailored clothing and dress furnishings, I think I said earlier, you know, the climate for casual work wear is sort of diminishing and people are looking to get into a more dress up mode.

So, we've seen very strong tailored clothing and dress furnishings businesses.

We've also seen very strong reaction to our Fall products in leather, outer wear, sweaters and wovens.

We've seen good reaction to that part of our business.

In the women's line, we had a very strong Black Label delivery, cashmere is selling again at a high rate, where it had been soft for a little bit.

So we're seeing, you know, in our own retail, some of those customers returning.

And interestingly enough, when you look at the store performance, our biggest stores are performing the best.

So whether it's Beverly hills or Chicago, or New York that seems to be where that customer is responding again in a positive way.

So, we're feeling pretty good about that as we head into the season.

We're also beginning to see a good acceptance to more of our home product which is more gift oriented for the holiday season.

We have new collections in silver, throw pillows and blankets, and a lot of that product has just been hitting the floor in the last couple of months, and we've seen good reaction there.

All in all, October does not make the 3rd quarter, and we all know that Thanksgiving to Christmas is fraught with peril, not only from a calendar point of view, but all the other uncertainties, but we're taking it as a positive sign of where the business is heading.

I think the department store business, and I haven't seen October results yet, other than, perhaps, what I think perhaps what May Company talked about.

I'm not sure how they performed in general, but I know that our business in department stores performed better in October with the same kind of key items and key classification that's working in our stores, working in department stores.

So, you know, our whole strategy this six months was to sell in the appropriate amount of Fall, so we didn't end up sitting in November and December with Fall product that we had delivered in June, July and August, so it wasn't there 4, 5, 6 months later.

We sold in the appropriate amount of Fall and have a lot more open to buy for, you know, holiday gift-giving, cruise and resort products.

So as we get that new, fresh product in the store, we think the customer's going to react well to it.

But again, you know, we'll report back in February on how that strategy works.

Thank you.

And operator, I think we're ready for our final question.

Thank you.

Our final question comes from Jennifer black.

Please state your affiliation, followed by your question.

Wells Fargo.

It's Jennifer black, and congratulations on the quarter and congratulations, Nancy.

Thank you.

I just had a couple of short questions.

One, I wondered if you could tell us what percent of your business, both with men's and women's consolidated would be towards the suiting?

You mentioned that suiting, I mean, we all know there's been a resurgence of suiting, what percentage of your business is that?

It's like a trick question, huh Jennifer?

You've been up all night thinking of one last trick question.

Just ballpark.

Ask your second question, Nancy's going to see if she can figure that out for you.

She is not fully finished with her old job until she gets finished with this earnings call.

I don't know if you went over this, but I was curious to know if the margins in Europe are higher than the margins in Japan?

That's kind of what I thought, but I wasn't sure the way it's structures.

Well, you know, that's kind of an apples and oranges question.

The margins in Europe, you know, as we now own the business are certainly higher than when we licensed the business.

Right.

And over, you know, an appropriate amount of time, would also track, we think, higher than the United States.

The business in Japan, you know, is a little bit different, because you've had a master licensing in [Saboo], who, in turn, has sublicensed the product out to various specific manufacturers.

So there's profit margins in both the sublicensee and the [Saboo] deal and then the royalty to us.

We think overtime, if your question is, assuming comparable vertical integration, the opportunities, we think, are very high in Japan, perhaps, slightly higher than Europe, and certainly higher than the United States.

In both the Japanese market an the European market, there is not nearly the promotional activity that exists in the United States.

Product is sold through the season at full price, disposed of at the end of the season at an appropriate timetable.

So really they should be much higher margin businesses.

But today, even with our change in the, you know, relationship with the [Saboo] and sublicense.

It's still not going to match really what the vertical nature of Europe is or the United States.

Well, my last question kind of dove tails into that.

What your retail strategy is, both domestically and internationally?

I'm sorry?

Say that again.

Your retail strategy for continued -- for stores?

Oh, okay.

Both domestically and internationally, because you had mentioned you're going to, you know, you can open up some stores in Japan, you've got two there, and so could you speak a little bit about that?

You know, we have in the last 6, 7 years really bought back all of the U.S. license stores except two.

We have just embarked in Europe, as I said, we've bought back three of our German stores and we will continue to evaluate the rest of the stores in our on.

We continue to have about 100 internationally licensed stores, and, you know, consistent with our desire to own and operate where we think it's best, license out where it's appropriate, you know, we will be reviewing all of those stores over the next year or so to see which makes sense and when.

I think Ralph's vision is really that of a network of global, you know, stores in all the appropriate locations.

I think, you know, when we add a talent like Wayne and when we put Charles in a position that's more toward a global overview, we're beginning to invest in the executive talent that's necessary to run a global network of stores.

In my travels over the last couple years at Ralph Lauren, I think we've been inconsistent in how we look, whether I go to a store in Hong Kong or Paris, or in Singapore.

I think one of our big opportunities is to take Ralph's message to those markets and execute them in a much more consistent way.

I mean, clearly we want to be sensitive to local needs, but the eclectic way we run those stores on a worldwide basis should not be the customer's problem.

The customer should see a seamless execution of merchandise vision from the runway or the show runs to the advertising, to how it's presented its stores, you know, executed in the right environment.

And I think to be fair, we've done that in an uneven way around the globe.

This is easy to talk about, not so easy to do.

But I think our vision, Jennifer is really that of a well-run, you know, global network of stores, and that's what we're Marching too.

That's a great answer.

I just guess I -- would you open -- you know, you said that you would acquire the rights to -- you have 100 stores left, but would you also open stores at the same time?

Absolutely.

We currently aggressively are working in Europe.

And recently hired a very senior real estate person on the ground in Europe.

I think you'll see an acceleration of our retail strategy in Europe being the first initiative of that master plan.

Okay.

And what about domestically?

Would you open any more stores?

Yes, we are continuing to look for the right opportunities domestically as well.

I think we talked about, over the last year or two, we wanted to make sure that we were tracking to the profit rate that is we all thought were appropriate for this business.

And as we've seen encouraging signs of that, we are looking now to begin to move more opportunistically in real estate both domestically and abroad.

When will you be able to give us more details on what your plans are?

I think, Nancy said earlier in the February guidance for '04, not only will we report on 3rd quarter results, give you our best thoughts for 4th quarter, but try to give you our thoughts on '04 and some of the pieces and parts that will drive that.

We really want to get through the holiday season, see how the business is performing, and then we'll be able to articulate that with a great deal of clarity.

At this point I'd like to thank you all for listening.

The call's run a little longer than normal.

But we're excited about our ability to achieve the first of two quarters of the year clearly believe that the back half of the year, you know, we've talked about in some detail this morning, hopefully when we get together in February we'll get a chance to go through some of the actual results, but we're feeling encouraged and, you know, hope the customer comes back for Christmas.

So thank you very much.

We appreciate it.

Thank you all for participating have a nice day.

All parties may now disconnect.