雷夫·羅倫馬球 (RL) 2003 Q3 法說會逐字稿

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

At this time, I would like to inform you 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 Ms. Nancy Murray, Senior Vice President of Corporate Affairs.

Please go ahead, ma'am.

Good morning and thank you for joining our Polo Ralph Lauren third 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 3rd quarter, the financial outlook for the 4th quarter, and our initial guidance for fiscal year 2004.

Then Roger will update you on our current business and the business 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, please note that in our discussions today, we'll be comparing our results to pro forma 3rd quarter fiscal '02 numbers presented in the press release.

The pro forma results reflect the European business restated on a current basis that's consistent with the fiscal 2003 results.

For purposes of guidance, all numbers and percentages should be compared to the pro forma results, both for the quarterly information and for the business segments.

For today's discussion we are excluding the foreign currency gains and losses and the $8 million restructuring charge or $5.1 million net of taxes, related to the United Kingdom and Italian portion of our European consolidation of it's business operations which we announced in November 2002.

Now to the results.

We posted a 3rd quarter EPS of 47 cents.

That's an increase of 104% over the previous year's quarter.

We drove a 13% increase in revenues, and an 8.7% increase in retail costs on 11% less inventory than we had a year ago.

Our gross margins expanded by 270 basis points, while we reduced our expenses as a percentage of sales by 220 basis points.

The result was an operating margin improvement of 480 basis points for the 3rd quarter.

And not to belabor the point, but these results were accomplished in the worst holiday season in 30 years.

In summary, we are very pleased with these results and we continue to believe our business model is a strong one.

In addition to managing our operations well, we continue to increase our financial flexibility through prudent attention to our balance sheet.

We ended the quarter with a 278% reduction in net debt and $97.7 million in cash, excess of total debt.

Now, let me give you some detail on our business segments.

Wholesale revenues were $268.3 million.

That represents an increase of 17.4% over the previous year, and that was driven by double digit sales in Europe.

Wholesale operating income was $18.1 million, and that compares to a loss of a half of a million in the prior year's quarter.

The increase was based on leveraging the double digit sales increases in Europe and improvement in the domestic gross margin.

We also experienced good expense management in both the men's and women's businesses.

In our retail segment, sales grew 11.6% to $315.1 million, and that was on 1.81 million square feet, or 251 stores operated in the 3rd quarter.

This compares to retail sales of $282.4 million on 1.77 million square feet, or 234 stores in the 3rd quarter of last year.

Retails operating income for the 3rd quarter was $30.7 million, compared to $14 million in the 3rd quarter last year.

That represents a 119% improvement in operating profits over the previous year.

The retail margins for the quarter were 9.7%, compared to 5% in the prior year's quarter, or a 470 basis point improvement.

I am pleased to report that on a consolidated basis for the quarter, comps were up 8.7%, the third consecutive quarter of positive comps.

The consolidated comps were driven by positive comps in each of our retail formats, including low double digit positive comps in our outlets, mid single digit positive comps in Polo retail, and low single digit positive comps at Club Monaco.

For the quarter, licensing royalty was $55.9 million compared to $53.8 million in the prior year's quarter.

Operating income for licensing was $28.8 million with a margin of 51.5%, and that compares to $27.9 million, and a margin of 51.9% in the prior year's quarter.

Now, let me touch on the balance sheet.

We ended the quarter with a double digit decrease in wholesale and a single digit decrease in retail inventories in our domestic businesses.

Those decreases were slightly offset by increases in the European inventories as we continue to build the business.

On a consolidated basis, our inventory decreased 11% from the previous year.

We increased our trailing 12 month inventory turn by 36% to 3.44 times from 2.53 times and we drove our cash-to-cash cycle down 7%.

We ended the quarter with $441.6 million in cash and our total debt was $343.9 million.

The debt consists of short-term debt of $105.8 million and our long-term debt of 238.1 million of Euro Bonds.

In the near term, portions of our available cash will enable us to finance our $70 million Japanese acquisition, and to pay down our short term debt of $100 million in the 1st quarter of fiscal 2004.

Our capital expenditures for the quarter were $19.5 million compared to $20.8 million last year.

We continue to forecast our Cap Ex at approximately $100 million for the full fiscal year.

Interest expense was $3.4 million, which is $1.1 million down from last year, but approximately $1 million over expectations, due to a combination of lower interest rates on cash, and short-term investments, unfavorable euro rates affecting our Euro Bond debt, and payment of prime on our revolver during the refinancing of the debt.

Looking at the 4th quarter, we continue to expect adjusted earnings to be in the range of 75 to 80 cents, compared to 58 cents in the previous year's quarter.

We expect our earnings to be driven by high single digit revenue increases and operating margin expansion of approximately 200 basis points.

As I mentioned earlier, the restructuring charge for the 3rd quarter was related to our Italian and UK operations, and the headquarters consolidation in Geneva.

We would expect the final piece of the consolidation process, the French consultation regarding the back office functions, to be completed by the end of the 4th quarter.

Since the French consultation affects the majority of our European employees, we would anticipate taking a 4th quarter restructuring charge of approximately 3 to 7 million -- that's net of taxes, to complete the headquarter and back office relocation portions of our overall European consolidation plan.

For our initial fiscal 2004 guidance, conservatively we would expect modest revenue increases to produce earnings per share growth in the range of $1.95 to $2.05.

The sales increases are driven by increasing retail sales, offset by plan decreases in our men's domestic wholesale business and low single digit sales in Europe, as we manage our way through the consolidation process during fiscal 2004 that I will detail for you in a moment.

For fiscal 2004, we would expect our gross margin to increase as we continue to grow our retail business and the mix of our business changes to one more of a retail model.

Our expenses as a percentage of sales will increase due to the higher penetration of our retail business, and for the first half of the year, we will be running parallel operations in Europe as we transition.

We expect to incur approximately $10 million of additional expenses in fiscal 2004, related to the headquarters and back office relocation, the centralization of the logistics operations to Italy, and the migration of the European information systems platform to a global one.

The full benefit of the consolidation effort should be significantly accretive in fiscal 2005.

We would estimate that the consolidation efforts should increase our earnings by approximately 20 cents in fiscal 2005.

While we will be giving our quarterly earnings per share ranges with our fourth quarter earnings report, please recall that our quarterly profits in fiscal 2004 will flow similarly to the fiscal 2003.

Our January to March period, or our fourth quarter, will remain our strongest contributor to profits as the spring shipments become the most significant delivery dates for our wholesale business.

Our third quarter, or our holiday -- December-end period -- will be our second largest quarter as our retail business becomes a larger contributor to our profit mix.

Our second and first quarters will be our smallest contributors to our profits, due to the shift in mix between our domestic and international businesses.

We would continue to expect that two-thirds of our profits will be delivered in the second half of our fiscal year.

And one-third of our profits would come from the first six months of our fiscal year.

Specifically, we would expect our first quarter fiscal '04 earnings to be down compared to last year, as the $10 million of additional expense -- or approximately 6 cents per share of parallel expenses that will be running in Europe will occur in the April to June or our first quarter.

We will update you on more details about our fiscal 2004 plan, and as I said, including quarterly guidance when we report our full-year results for fiscal 2003.

And now, I'd like to turn the call over to Roger, for a discussion about our current businesses and our outlook for the balance of fiscal '03.

After Roger, we'll open up the call for your questions and answers.

Thank you, Nancy.

And good morning.

Before I get started on our performance for the quarter, let me spend a moment on our ongoing discussions with Jones.

Since we are in negotiations with them, we won't be discussing this further after these comments.

Jones has been a good partner, we've had a long standing relationship with them.

I think both companies would agree that Lauren has been and continues to be a top performer in the women's better sportswear areas of department stores and we continue to see opportunities to expand the Lauren brand.

Having said that, we are confident in our legal position regarding the Ralph and Lauren contracts, and that our rights are very clear.

We are in active discussions with Jones and we hope we can reach a mutually beneficial outcome that reflects the value of the Lauren brand.

To jump to any concrete conclusions about the outcome would be premature.

Now, let me talk about our business performance.

I am very pleased with the performance this quarter and our ability to manage our business well.

We delivered strong earnings growth, produced significant margin expansion, and improved our overall financial flexibility in a retail environment that has been labeled the most difficult in three decades.

We entered the quarter with conservative sales plans based on cautious consumer spending and a slowdown in the global economy.

We delivered better than expected retail sales, while our wholesale department store business performance was more challenging than we had initially anticipated.

We continue to be driven by excellence in product design and marketing and we have continued to invest even in this current environment.

In short, in a very difficult quarter our balance strategies supported by solid financial management delivered a strong performance.

Furthermore, as we continue to operate our business model more efficiently, we believe we have the ability to deliver the full 2003 performance we conveyed to you last April.

As I said earlier, I am very pleased with the outstanding performance of the retail division.

In a weak economy, we saw phenomenal consumer reaction to our luxury designs that drove the performance that exceeded our original plans.

In talking about Polo retail, we entered the holiday season with a strong mix of luxury, gifts and fashion items that excited the customer and sold through at full price.

In addition, better planning and forecasting contributed to a fresh flow of product to our stores which drove sales throughout the quarter as we dramatically reduced our promotional activity.

Our women's fall collection received very positive reviews and increased editorial coverage this year.

The customer responded very well to our fashion product and we're very pleased with their strong results.

We've had good reaction to our spring "Look Books" that our retail stores use to presell the women's collection.

Our Black Label business continues to grow at double digits and our new women's Blue Label business continues to exceed expectations both domestically in our stores and internationally.

The Blue Label brand is bringing in younger customers which give all of our customers new options for casual and weekend dress.

In men's, the suiting business was significantly up compared to last year, which is a healthy sign that the move back to more formal business attire is taking root and giving our core customer another reason to frequent our Ralph Lauren stores.

With the combination of right product and diligence expense management, we drove more profits through the bottom line.

The sales trend continued to be encouraging as comps accelerated throughout the quarter with December comps up in the low teens.

I think this is in stark contrast to the rest of the industry.

Our outlet business outperformed our expectations as sales increased in the quarter, really driven by better merchandising strategies and dramatically less promotional activity.

For the holiday season we focused on gift-giving and four key item categories.

Sweaters, outerwear, wovens and sleepwear drove about two-thirds of the increases in the sales in the quarter.

We continue to operate our business more efficiently and we've been able to leverage strong increases in sales combined with good expense work.

In the domestic wholesale division, the environment was more challenging than we had anticipated, as the department store channel remained highly promotional and mall traffic slowed.

Despite the environment, we drove margin improvements through better sell-in and careful expense management.

We saw increased volume in our replenishment shipments and we maintain a higher price point than many of our peers.

We continue to execute our multiyear initiatives of decreasing sales to offprice channels, and our excess domestic wholesale inventory continues to be reduced.

In terms of our wholesale outlook for fall, we completed our Polo brand fall '03 market yesterday.

We think the full line provides the customer with a sense of newness at key price points.

The line is more youthful with updated Heritage pieces.

Our license business continues to perform well, and we are encouraged by the strong trends we are seeing in our children's business.

During the quarter, we also entered into a new global agreement with Apparel Ventures for our women's and girls swimwear products that they will begin shipping this spring.

Our home life business continues to perform well, with bedding and bath replenishment remaining strong in the 3rd quarter.

We're also pleased with our customer's reaction to our Lauren home products and the launch of the new Lauren new classic towels in December.

Let me spend a few minutes on our international business.

Our European wholesale and retail business continues to perform well.

We believe that we are on tract to produce more than $450 million in sales this year, which more than doubles the business since we acquired it.

Our success in Europe is really being driven by our products and the enthusiastic response to our marketing efforts.

Our men's and women's jeans business performed well.

And the women's Blue Label line has exceeded our initial expectations.

Our children's business continues to grow, and we believe we are just at the beginning of tapping the potential for this market.

In December, we opened the unique store concept in London, in the area of Bronson Cross, that has been very well received.

This 6,000 square foot store is merchandised similar to our East Hampton, New York store and also houses the first home collection store in Europe.

As you'll recall, in November, we announced that we are conducting a strategic review of our European business with the intention of formulating a plan to specialize and to more effectively consolidate its growing business operations.

The review involves three key areas of focus over the next 12 months.

The first area is the consolidation of our headquarters from five locations in three countries to one central location in Geneva.

We've completed the consultation process in the UK and Italy regarding the headquarter relocation and we hope to complete the French consol - process regarding the back office functions in the 4th quarter.

The second part of our plan is the consolidation of European logistics and distribution into Italy.

Currently we distribute through 10 warehouses in five cities throughout Europe.

Our plan calls for one distribution group located in Parma, Italy which will be able to handle our long-term growth expectations in a more efficient manner.

The third area of focus is our information systems.

As we migrate to a standardized global system for all of our operations, Europe will be the recipient of that new system.

Today, Polo Worldwide actually operates six warehouse management systems, six planning and ordering systems, four sourcing systems and four financial systems.

We are moving to one for each of these areas over the next 24 months.

Also, globally, we are moving to one wholesale system that gives us more efficient capabilities to manage our inventory, sales and forecasting, regardless of the time zone.

Currently in retail, we have a host of domestic legacy systems that will be upgraded and incorporated into the global retail systems so our customer transactions and sales histories will be seemless whether they're shopping in our store in London or whether they're shopping in Los Angeles.

In addition to the long-term efficiencies of the centrally located headquarters, improved systems and better supply chain management, our European consolidation will also result in an improved tax rate.

While the consolidation was designed to directly support our European operations, we will also have the ability to connect seamlessly into our global infrastructure.

In October, we announced our next geographic focus with our transaction with our Japanese partners.

We're on track to complete the agreement with Sabo later this month, which will increase our direct management of the businesses in Japan including Polo men's, women's and Polo Jeans.

Our business continues to perform well there with sales forecasted to increase by 5% this year.

We are on track with 150 shops at $70 million renovation projects with our Japanese partners that we began last year.

To date 65 shops have been completed and re-merchandised.

And in those locations sales have increased double digits.

The balance of the renovations are expected to be completed during calendar 2003.

Both Hong Kong and Korea continue to perform well with Korea's business increasing double-digits year-to-date, as a result of a more aggressive women's business and an improvement in the sales of our renovated stores.

I'd now like to update you on our multiyear initiatives.

And throughout this year we've better managed our resources and made considerable improvement in our supply chain and global logistics.

The net effect of our efforts is significantly improved cashflow and greater financial flexibility.

Let me just give you three examples of how these initiatives impact the quarter.

Because of better forecasting and distributions, we have decreased domestic inventory levels by 22% while continuing to drive strong sales year-over-year.

Although we've incurred $2.5 million in additional air freight expense due to the dock strike, we've been able to reduce our domestic air freight by 31% year-to date.

Our European air freight charges are down 34% for the same period.

Also, because of the efficiencies in our Greensboro distribution center, our processing cost per unit is down 11 1/2% year-to-date.

And as we talked about, cross stocking, we've now completed 1.1 million units for the year and expect that to grow over the next couple quarters.

We continue to reduce the number of satellite distribution facilities as we become more proficient at handling a variety of products and distribution channels from our Greensboro facility.

We have eliminated 2 of the 3 satellite facilities in New Jersey this year and plan to have all distribution processing through Greensboro in fiscal '03.

In addition, we have successfully transitioned our accounts payable department, and its systems to Greensboro, where we believe it's an effective use of our existing office space in that facility.

We are also outsourcing our accounts receivable and collection functions now, enabling us to take advantage of industry best practices to reduce our current processing time, and to further shrink our cash-to-cash cycle.

I'm very pleased with the results of our supply chain initiatives that have significantly improved our turnover.

Domestic wholesale and retail being down 22%, has driven a 36% improvement in our inventory turn and a cash-to-cash cycle that improved 21% since we began this initiative two years ago.

These efforts, in addition to our diligent management of our balance sheet have further strengthened our financial flexibility.

We currently we have $441 million of cash on cash and $334 million of total debt.

We have reduced the days outstanding and accounts receivable by 19%, and have increased our receivable turn by 25%.

We will continue to pay down debt to maintain optimum amount of financial flexibility that will allow us to further pursue our long-term goals.

In the first quarter of fiscal '04, we'll use available cash to pay down $100 million of short term debt.

So in closing, I am cautiously optimistic about the balance of the year, as we enter our largest wholesale quarter.

And I believe we're on track to deliver the solid earnings growth we conveyed to you last April.

I also believe we have a very strong and strategic business plan for fiscal '04, and I think it's one that supports our worldwide growth.

So at this point I think we're prepared to field any questions you might have.

Thank you.

The question-and-answer session will begin at this time.

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

Should you have a question please press star one on your push button telephone at this time.

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

Please stand by for your first question.

Our first question comes from Lee Backus from Buckingham Research.

Please state your question.

Yes, first congratulations, Roger on a good quarter in a tough environment.

Could you discuss your retail plans?

New store openings, your expected comp store sales based upon the guidance you gave for '04?

Sure.

I would say that what we're looking at now over the last three or four months of retail sales are unbelievable to us particularly in this environment, to get the kind of comp stores that we experienced through the holiday season with December being the best of all, really even surprised us.

So as we look out over the balance of this year, January, February and March, and obviously think about our comp store sales for next year, you know, we're seeing good, strong comps in the 4th quarter, so we seek some of that trend to continue, which is very pleasing to us, based on some of the January numbers we've seen come out in the last couple hours.

We are planning, quite frankly, next year more conservative comp store numbers in the low sing digits.

But obviously, the more vertical we've become, the more we can supply a fresh flow of product if we need to.

What's interesting to us, Lee, is what's really driving our retail business has been a lot of the high-end products.

We had a phenomenal season with collection.

We had a lot of high-end home gift initiatives, tabletop and silver and top-a-bed and decorative accessories that were really received very positively by the customer.

Our high end men's business has been very good.

So I think some of that is flying in the face of what else is going around.

But we are going to go into the year with a fairly conservative plan, and then shape the business, you know, if we have to.

We think we've got our supply chain to the point where we can pull in fresh goods if we need to.

How important was Blue Label to those comps?

Well, the Blue Label business, if you lay it up against last year's Ralph Lauren sport business, was extremely successful.

We saw, you know, 20 and 30% growth in those price points against the sport business.

So that was enormous.

But our overall women's business ran at double digits and very profitable.

So it was really across the board from the high end to the moderate.

I would say that -- you know, I touched on it briefly in the prepared comments.

The men's business is really moving very hard into more of a dress up look.

We saw not only strong results in suits, but dress furnishings, neck wear, accessories, all experienced a very strong fall.

To some degree that, you know, play golf against sport coats and trousers, but in general we saw the dress-up side of men's come on along very strong.

The other thing is, that talks about retail, as you all know we've been committed to improving the profitability of our retail business.

And I think as Nancy read you the numbers, you can see that we didn't only get the top line, but we got tremendous improvement in our profitability as our strategies are working.

So I think, Lee, in terms of new stores, we give that out at the end of the 4th quarter.

But we're going to continue to be modest in our store count as we drive the profitability to the number we've all talked about, which is the 8% to 10% range.

I think it's fair to say we're tracking very nicely against those objectives.

I don't expect to maintain comp store numbers that we've experienced in the last three or four months, but I certainly feel good about how our stores are performing and how we executed in a tough environment.

Could you also discuss Club Monaco and your plans for Club Monaco?

Well Monaco actually had an unbelievable December, they were up 17% comp in the month of December.

So, you know, we've seen strong improvement there in product flow, their business was really driven by tops, the woven business and the sweater business were very big successes, as well as their accessory business.

We've also seen strengthening in the men's business through the last quarter, so, you know, Club Monaco, particularly in the United States, has seen a very strong performance.

I think the Canadian market is a little softer, a little more difficult through the holiday season.

But, you know, I don't know too many specialty stores that had a 17% comp in December.

So we're feeling good about the progress there, and, you know, continue to expect, you know, results that are improved.

We did open three or four stores that we think are more the model of the future.

One in Dallas, one in Westchester, one in California, that better reflect the size and the layout.

And those stores on a four wall basis really performed well for us.

So we're beginning to feel that business is heading in the right direction as well.

Thank you.

Do we have time for one more question, is that it?

Thank you.

Our next question comes from Virginia Genereux from Merrill lynch.

Please state your question.

Thank you.

And, yeah, great job on the retail side.

Let me ask you, Roger, a number of us are over here in Europe with Nike and thinking about your, sort of, the Europe consolidation and the IT project, you know, a lot of vendors have had a tough time trying to do something similar.

How conservative in terms of what you're trying to do next year with consolidation and the IT platform, and the distribution facility, how conservative do you think you've been in terms of a timetable and the costs for doing that?

And your ability to -- is all of that going to be done next year?

If you can just talk a little bit about that, please.

Well, that's a great question.

I think the fact of the matter is that the growth we've experienced in Europe since we acquired it has been well beyond anything we imagined.

As aggressive as our thoughts were, I don't think we thought we'd double the business in three years.

You know, reflected in our guidance for next year is some of our hesitation to want to continue to plan those kind of excessive sales increases while we're going through the move to Geneva, the elimination of redundancies out of three offices, rebuilding every system that supports that business, as well as going from 10 distribution points to 1.

So it's an enormous challenge for us to execute, and, you know, we are really leading a group of people both on this side of the Atlantic and on the European side that is going through this in great detail on a monthly basis.

Because it is a daunting task.

We really feel, unless we have the right platform there, and that it's plugged into our international strategies, that growth beyond the level we are now, we will not be able to handle in our distribution facilities or any of the other infrastructures.

So we have looked at Europe next year, much more conservatively for growth, you know, the low single digits, we see it as a year to manage through these very important transitional issues, which as Nancy said, on the backside, you know, give us a huge payback, 20 cents per share in fiscal '05.

So in addition to the one-time charges that we articulated, the parallel cost which Nancy talked about, is $10 million in the 1st quarter, is aimed for us to begin shipping and operating out of these new facilities by the summer.

So we're on a very aggressive timetable.

We're managing it very carefully, we have a lot of new people that we have to hire in Geneva and train.

We've got to install these systems, and as we've said, we have to go 10 distribution points down to 1 state-of-the-art facility.

The benefits beyond EPS are something that is really exciting, because the Parma facility saves two weeks of transit time, in terms of getting goods out of manufacturing points.

It will speed product in and out the same day, where today the facilities are overloaded and it's taking several weeks.

So there's a lot of benefits beyond pure EPS that are going to come out of this.

And if we want to get to a $1 billion business and do it successfully, now is the time we feel to get these operational strategies executed.

But you're correct in identifying it's a lot of work that we think we're on top of, but it's a tight timetable.

And Roger, may I ask, are you using third-party vendors?

And if so, who?

Yes, our current logistics are third-party -- primarily based in Holland.

But in that case, we are relatively a small player in the scheme of what they do.

So I'm not sure that we're getting the service level that we would like.

Our move to Parma which is being supported by a brand new facility, which is halfway through completion of being built, it will be tested in April/May, and then is ready to go in June/July.

We will continue to have the other facility available if we're not able to deliver our timetable.

So we will ensure our ability to deliver small products to our European customers by having available parallel support.

The third-party logistics provider in Parma is Senot.

And we have used with our Italian license before.

We will end up being the major part of their business, so we have their full attention.

We're very pleased with the service levels and the commitment to what we have to do over there.

Thank you very much.

You're welcome.

Thank you.

Our next question comes from Dennis Rosenberg from CSFB.

Please state your question.

Can you elaborate more on Europe --

Dennis, can you get closer to the phone, we can't hear you?

Could you hear me now?

That's perfect.

Thank you.

Okay.

I'd like some more detail on Europe's sales going low single digits next year.

You had Blue Label out for about half of the year this year, you'll have it out for a full year next year.

And I would assume the majority of the $100 million in sales this year was in Europe.

So what kind of growth do you expecting for Blue Label and will that account for all of the low single digit growth in Europe next year?

And then once you get through all of this consolidation, what kind of annualized growth would you hope to achieve there?

Okay.

Are you in Europe too, Dennis?

Yes, I am.

The Europe growth next year has been planned conservatively for really the reasons we just described, which is the business rifts that we feel are inherent in the very complicated operational moves we're talking about.

But two, you know, we have a belief that current softness in the German market and the softness in the French market, where in Germany today, the economy is extremely soft with unemployment running in the double digit range, and France, where the unemployment is hovering around, I think, 9% at the moment.

We have a belief that under any scenario, those markets would experience some slowdown from the rates they had been running.

And so I would say, at least a third of our conservative point of view on Europe is based on the economic conditions over there.

Two, I think the reality is, is that we have stretched our current infrastructure to the point that we really can't handle, you know, more business running through it than, you know, we've got currently booked.

So we've taken a conservative point of view.

I'm not sure if you understand, but in Europe, a lot of the accounts really work off about a 25% reorder mentality.

And so certainly if the business performs through the spring and fall, you know, we expect some upside on those sales.

And we're also planning it at current exchange rates, so we don't have any insight of an unusual nature into the currency fluctuations.

Blue Label represents, you know, about half of the growth that we do anticipate, and has had an unbelievable fall, both in our own stores, obviously, and our European distribution.

So we continue to see that business growing and it's distribution and acceptance growing.

Because as you've correctly pointed out, we only started delivering that last fall.

Also, I think in terms of store -- our own retail business, we have gone from a very small business up to a point where it's about a third of our business in Europe now.

And we have chosen to concentrate on the Milan store that will be opening and a couple of the bigger locations as opposed to, you know, smaller stores that won't be a big part of next year's program.

So that's how we're thinking about Europe.

Okay.

How are you thinking about the growth in Europe beyond fiscal '04?

We think it will resume a double digit growth rate once we get through this transition.

Fueled by accelerating retail businesses, because we had a good success there with our retail business, as well as selected wholesale growth.

Okay.

And the 20 cents accretion that Nancy was talking about in '05, is that over and above the elimination of the absence of the 6 cents that will be incurred in '04 or is that incorporating that?

The 20 cents is on top of that.

So we're looking at 26 cents combined --

Yeah, because the 6 cents is a -- is a first quarter negative this year that, you know, we don't see as ongoing, so it really has the full impact of 26 cents.

Okay.

Great.

Thanks..

Which is -- you know, that is quite frankly a huge number on a -- on a business this size.

Yeah, it is.

It's terrific.

And that's why the - Virginia's comments are valid in the execution of all this, but the payoffs are enormous.

Okay.

Thank you.

You're welcome.

Thank you, our next question comes from Caroline Jones from Goldman Sachs.

Please state your question.

I'm calling in on behalf of Margaret Major who's also over in Europe.

I had a couple of questions? -

Is Margaret not going to be one the call?

You know, the time zone change there, it's the afternoon, I think.

Right?

I think she had a conflicting appointment.

Oh ,okay.

Sorry about that.

Alright.

No problem.

I'll try to pinch hit.

On the sourcing side, what are you seeing in terms of pricing in Asia, and what are you looking for in fiscal '04?

We've heard some various comments.

Different people have talked about opportunity for getting additional pricing from manufacturing in Asia.

I tell you, quite frankly, I'm not seeing that big of an opportunity.

You know, I believe in the last year, when the manufacturing base in Asia was reacting to the slowdown in sales over the back half of '01 and '02.

I think you saw some available capacity, and I think you saw some willingness to, you know, sharpen the pencil.

I think some of that played through people's P&L's only offset to whatever degree there was incremental markdown.

I don't actually think that at the quality end, at the high end of production expectations we're going to see on a like basis, much of a reduction of costs.

I think we're looking at it as more of a flat situation.

We actually are trying to go the other way, which is put more quality into the product, you know, where appropriate, and keep costs the same.

At least for Polo Ralph Lauren, the issue isn't trying to strip out where we can, and I don't think there's any natural sourcing benefits to be had.

Okay.

On the inventory side, do you expect inventory to continue to be a source of cash for you and how are your department store customers planning or thinking about inventory for fiscal '04?

Well, as Nancy mentioned, we've experienced tremendous improvements in our inventory turnover with six quarters of declining inventory.

We would expect to be showing ongoing improvement in the new year as we get more and more efficient.

I think department stores are planning carefully.

I think the real issue for department stores is really what kind of sales numbers can they expect, because, you know, negative comps have run pretty consistently now for a while.

And against those expectations, how are they planning?

At least our experience interacting with the department stores are cautious.

I think they're planning carefully.

And we're trying to use our replenishment process, which we've been able to get up to 99% shipping, to shave the business where appropriate.

So would you expect inventory to be a source of cash in fiscal '04?

Yes.

And then finally, could you please be a bit more specific about what sort of growth you're expecting in retail in the U.S. and what sort of decline you're expecting in the U.S. for the wholesale business for fiscal '04?

No I think at this point the guidance we've given '04 is about as much as we can give out.

I think there's more detail available at the end of our 4th quarter.

We've certainly tried to advance our discussions about next year to this call to help everybody, knowing how last year the change in quarters were confusing, and there some doubt that we'd be able to deliver the year because of the movement.

I think we've obviously dispelled that, and know it's been a complicated year, but next year should be easier to follow, and we'll give out all sorts of juicy details at the end of the 4th quarter.

Okay.

We look forward to it.

Thank you.

You may look forward to it.

I'm not sure I look forward to it.

But we'll try anyway.

Thank you.

Our next question comes from Jeff Edelman from UBS Warburg.

Please state your question.

Hi, this is Meredith Love for Jeff Edelman.

Regarding the Jones negotiations, just real quick, if you were to terminate the Lauren license, does this imply that you have the necessary infrastructure, you know, to produce this line in-house?

I think we said at the beginning of the remarks that we have made all the comments we have to make on that situation.

Do you have another question?

My other question has already been answered, thanks.

Okay.

Thank you.

Thank you, our next question comes from Noelle Grainger from JP Morgan.

Please state your question.

Good morning or good afternoon, I guess, depending on where you are.

Can you hear me?

Yes.

Thank you.

Okay, great.

Two questions, I guess.

The first is, with respect to your broad expectations for modest revenue growth for '04.

Roger, can you discuss a little bit how the department stores are approaching -- or your view of how they're approaching the traditional men's category with respect to square footage as well as just, you know, their buying plan for next year.

And then your relative positioning - competitive positioning, are you holding your square footage, losing square footage.

Are they pulling back on the category?

Can you just address that a little bit?

And then I have a follow-up.

Okay.

Well, you know, I'll give you my view, I don't know that I know everything about what they're doing, but we took a trip through a great many department stores in and around November/December with a lot of our team here to see what the stores looked like, what was going on.

I think it's fair to say that the stores that we were in seemed to be attempting to emphasize the younger business the trendier business.

Some of that's denim based, some of it's not.

And I think in general there, was a migration to allocation of space to those kinds of businesses.

I tell you, this department store that really impressed me was Bloomingdale's during this trip, where I think some of the changes they have made, in terms of merchandising, presentations, the staffing levels, I think really made a difference.

And our business performed very well there.

I think the movement that we saw, you know, is a little bit toward that kind of trendy business.

Our position within that is, you know, rock solid, we don't see any movement in our space in the kind of positioning we've been allocated.

As you all know, we spend a lot of time planning in great detail with the department stores, space, location.

And we're very committed to supporting store buildout programs.

We spend a lot of money on a coordinator and programs that help presentations.

So I think our relationship is such that, you know, we suffered in the overall softness of the men's department store business, but I think within that group of resources, you know, we've performed better than the rest.

So I think some of that is being reexamined, but at least as it impacts our business, we're not seeing space issues discussed.

I think we'd all like to see the men's business in total perform better.

Particularly, men's sportswear.

But as I said earlier, there's a movement back towards more dressing, and I think that helps everybody, because it instigates a change in wardrobes and a change in mentality.

So I think department stores are planning conservatively.

I think they're planning men's particularly conservatively.

And I think within that, may be some moving around more towards this younger look but that has not impacted us.

Okay.

Great.

That's very helpful.

And my next question would be, you know, in light of how promotional the environment has been and continues to be overall, can you give us some help in understanding your level of success or your level of satisfaction with your policies with respect to no returns and markdowns, managing the markdowns?

Perhaps -- I don't know if you're willing to give out any metrics in terms of closeouts on a year-over-year basis, or markdown dollar changes.

Well, let me talk to you, Noelle, about what we're trying to do.

This is part of our ongoing discussions, and this is also in partnership with the stores, this is not our -- you know, a singular discussion.

But , you know, it was our view that there was too much goods being sold into the department store channel, which resulted in too much promotional activity, too much excess merchandise available, some of which came back to us, which we then had to turn around and sell in our own stores or an off-price channel, which further created promotion activity around our brand.

And we just didn't think that was a healthy way to go.

You know, when department store business was growing 10%, 15%, 20% a year, could you afford to sell in some extra goods in the hopes they would sell it through.

It was a relatively small issue.

As growth rates have moderated and the promotional activity has picked up.

We just don't think it's healthy for our brand to be participating in that kind of over sell, over promote, take back what doesn't sell, and then sell it off into a channel that doesn't help us either.

So our belief is that if we sell in and plan the business right up front, we certainly results in less gross sales up front much but the sell through should improve, the amount of Polo merchandise available on sale should reduce, which makes for a healthier business for the department stores and us.

And then we don't have the excess goods to dump off.

It's the right answer for us over the long haul.

Now, we try to support the department stores with expensive buildouts, with rotators in coordinator, with marketing efforts that despite the downturn in the economy we have not cut back, so we keep the brand high.

We try to support them with as much markdown money as we can, and we are giving out more markdown money in this difficult environment.

We're doing everything that we can do to help department stores and our own business perform.

I would tell you that having spent a lot of time in the stores in November and December, I'm not sure that in some cases we really fully understand the kind of staffing and sales coverage that's necessary to sell better product.

And I think that if there was a focus for the next year or two, I think we would choose to have that discussion, because there were plenty of instances where, you know, product was available, customers were available and somehow that match wasn't happening.

I think the results in our own retail stores demonstrate the same product properly presented and properly, you know, supported with selling, produced unbelievable comp stores.

So you know we think we had a terrific assortment of, you know, product and product categories for this holiday season, and I think we're doing everything we can to try to help it sell through in all channels that we choose to sell.

But we don't want to go back to the days of over selling, taking it back, having a separate distribution for that, dumping it off in the secondary market which hurts the brand.

You know, we're really in this for the long haul and that can't be a good thing to be doing.

Do you plan on having increased investment related to this staffing issue that you've raised with -- in conjunction with your department store accounts?

Well, I think it's an interesting question, because we believe that in many cases, you know, the staffing is an important part of what needs to be done.

Whether that becomes an incremental support in the arsenal of things we're already doing or whether that becomes a tradeoff, or maybe something we're doing that's not as helpful, I think that's at the heart of the discussion.

Okay.

Alright.

Thank you very much.

You're welcome.

Thank you, our next question comes from Amir Asradi from Elmridge Capital.

Please state your question.

Hi.

Thanks.

I was just wondering if you could comment on cashflow from operations?

I'm sorry.

Could you repeat your question.

I didn't hear you.

I was just wondering if you could comment on cash flow from operations?

Well, I think we've seen over the last two years tremendous improvements in our cash flow.

We've got free cash flow well in excess of our capital needs.

We have chosen to paydown debt and make acquisitions out of cash.

I think we believe strongly in a very conservatively managed balance sheet.

We're not going to leverage this company.

So even as we look out over our acquisition activities over the next couple years, we will continue to manage conservatively.

We've seen a very significant growth in free cash flow over the last couple years, we expect that to continue.

What was it this quarter?

I don't have it in front of me.

We had, you could follow-up with Nancy and pick that up later in the day, if you would.

Okay.

Thanks.

You're welcome.

Let me just say in closing, we're really very excited about the success of our luxury retail strategy.

Clearly that has led the charge for us, continues to be a major focus for us.

As Nancy articulated in some of the early directional information on '04, we believe retail will continue to grow and be an important part of our mix.

You know, we're comfortable with the balance of the year, recognizing that March is the most important month of that quarter, both for retail and wholesale.

But sitting here today, that's our thoughts.

And, you know, we feel good about our 4th quarter and our '04 guidance, recognizing that, you know, we're absorbing some transitional costs in what Virginia clearly pointed out as a very complicated move with what Dennis pointed out with enormous implications.

Even though it's an uncertain world.

We're comfortable with the results we're getting from our initiatives and how we've managed our way through different times.

So, thank you for listening, and, you can follow-up with Nancy later in the day if you have additional questions.

Thank you, ladies and gentlemen.

This concludes the conference call for today.

Thank you all for participating.

Have a nice day.

All parties may now disconnect.