雷夫·羅倫馬球 (RL) 2003 Q4 法說會逐字稿

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

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

I will now turn the conference over to Ms. Nancy Murray, Senior Vice President, Corporate Affairs.

Please go ahead.

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

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

Let me go over the flow of the call today.

First I'll review the numbers for the fourth quarter and the full fiscal year, and give you a financial outlook for fiscal 2004.

Then Roger will discuss our business drivers and accomplishments and highlight our strategies for fiscal 2004.

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

As you know from past calls, we will be making some forward-looking comments in our discussions today.

You will recall there are some risk factors that could cause our results to differ materially from current expectations.

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

In addition, we will be presenting information on an adjusted basis.

For the GAAP information, we refer you to our web site at investor.polo.com.

We have a lot of exciting news to discuss with you today.

As you've seen from the press release issued this morning, we announced record earnings and a regular quarterly cash dividend that annualizes at 20 cents per share.

The dividend is payable July 11th, 2003, to shareholders of record at the close of business on June 27th, 2003.

Before I get started on our performance for the quarter, let me remind everyone that we are in ongoing business discussions with Jones Apparel Group, and, therefore, we won't be discussing this further today.

When there is a resolution or a new development in the situation, we'll be happy to report back to you.

Please note that for today's discussion purposes, we will be comparing our results excluding the foreign currency gains and the restructuring charges in the fourth quarter of fiscal 2003 and the fourth quarter of fiscal 2002.

Now to the numbers.

We posted record fourth quarter earnings of 77 cents, that's an increase of 33% over the year-ago quarter.

Revenues increased 9.4%, primarily driven by a strong performance of our brands in Europe, better than planned royalty income from product and home licenses, and a strong sales report in our specialty retail group.

We expanded our gross margin by 80 basis points, while we reduced expenses as a percentage of revenue by 200 basis points.

As a result, operating income rose 29% to 123 million with an operating margin of 17.8%.

And that represents an improvement of 280 basis points for the fourth quarter.

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

We ended the quarter with a 108% reduction in net debt.

In addition, we used 67 million of available cash on hand to complete our acquisition of a 50% interest in our Japanese master license and an 18% equity interest in a company that will hold the sublicenses for Polo's men's, women's, and Polo Jeans businesses in Japan and we completed that transaction in the end of February.

Now let me give you a few details on our business segments for the quarter.

Wholesale revenues were $421.7 million, an increase of 7.4% over the previous year, primarily driven by double-digit sales increases in Europe.

Wholesale operating income increased 24.5% to $92.6 million, compared to $74.4 million in the prior year's quarter.

The increase was based on a combination of better expense management, both domestically and internationally.

In our retail segment, sales grew 8.7% to $195.9 million, and that's on a base of 255 stores or 1.82 million square feet operated in the fourth quarter.

This compares to retail sales of $180.3 million on a base of 236 stores, or 1.76 million square feet in the fourth quarter of last year.

Retail operating loss for the fourth quarter was $19.5 million, compared to a loss of $15.1 million in the fourth quarter last year, even though we experienced improvement in our gross margin and better expense management at the division level.

At the store level, operating margins year over year improved significantly pre-corporate allocation.

On a consolidated basis for the quarter, comps were up 5.8% despite the comparison against the fourth quarter last year that included Easter.

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

At the end of the quarter, Polo operated 255 stores compared to 236 stores at the end of the fourth quarter last year.

Our retail group consists of 50 Polo Ralph Lauren stores, 60 Club Monaco stores, 93 full line outlet stores, 22 Polo Jeans Company outlet stores, 21 European outlet stores, and nine Club Monaco outlet stores.

During the quarter, we opened six stores and closed two stores.

For the quarter, licensing royalty increased 23.9% to $74.7 million, compared to $60.3 million in the prior year's quarter, primarily driven by strong performances from our children's wear, men's tailored clothing and eyewear.

Operating income for licensing was $50 million with a margin of 66.9%, and that compares to 35.7 million with the margin at 59.2% in the prior year's quarter.

Now let me spend a few moments on the full year review.

Our full year fiscal 2003 results will be compared to our pro forma fiscal 2002 numbers presented in the press release.

You'll recall the pro forma results reflect the European business restated on a current basis consistent with the fiscal 2003 results.

For comparative purposes, I also will be excluding the foreign currency gains and losses and the restructuring charges in fiscal 2003 and 2002.

Our net revenues for the year grew 4.9%, or $113 million.

We ended the year with gross margin expansion of 110 basis points to 49.5%, while operating expenses increased $57 million over the prior year.

Operating income for the year rose to 12.4% of sales, representing a 40 basis point improvement over last year.

We drove more of our operating income to the bottom line in fiscal 2003 through the diligent management of our balance sheet, which reflects a reduction in interest expense of 29% year over year.

As a result, net income grew 12.6% to $183.7 million, compared to $163.2 million in fiscal 2002.

And that translates into an 11.4% increase in earnings per share to $1.85 compared to earnings per share of $1.66 in fiscal 2002.

Turning to the segments for the full year, wholesale revenues grew modestly at 2% to end the year at $1.2 million -- $1.2 billion for the full year, and that was primarily driven by sales at the Polo Ralph Lauren brand in Europe offset by planned decreases in the men's domestic business.

Wholesale operating income was $124.5 million, with a 10.5% operating margin compared to $128.5 million in fiscal 2002, and an operating margin of 11.1%.

In our retail segment, sales were $1 billion, a 7.8% increase over the previous year.

Operating income for the year was $40.4 million, with an operating margin of 4% compared to operating income of $18.9 million in fiscal 2002, or a margin of 2% for the prior year.

We ended the year with a 200 basis point improvement in our retail margins, in line with our previously stated goal for the year.

In addition to improving our retail operations, we continued to drive positive comp sales and ended the year with a 4.7% positive comp sale increase.

The comp increase was driven by high single digit positive comps at the outlet, and mid single digits positive comps at Club Monaco, partially offset by mid single digit negative comps in the Polo stores.

For the year, our licensing royalty revenue was $250 million, and that's compared to $232.9 million in the prior year.

Licensing operating income was $138 million, compared to $132.2 million in the prior year.

We saw a double digit improvement in our home business, and our international license business in Japan, Hong Kong and Korea was up against last year as well as planned.

Now let me touch on the balance sheet.

While our domestic inventories decline year over, these declines were offset by increases in European inventory as we continue to build that business.

On a consolidated basis we ended the year with a 4% increase in inventory from the previous year.

We increased our trailing 12 month inventory turn by 10.5% to 3.26 times from 2.95 times, and we have reduced our cash to cash cycle by 15% since embarking on this initiative two years ago.

We ended the year with $343.6 million in cash, and our total debt with $349.4 million.

The debt consists of a short-term debt of $100.9 million, and our long-term debt of $248.5 million of Euro bonds.

We used portions of our available cash to pay down 50 million of our short term debt in April, and we will pay off the balance in June.

Our capital expenditures for the year were $98.4 million, and that's compared to $88 million last year.

CAPEX for fiscal 2004 is expected to be approximately $110 million.

During the year, we repurchased 8.4 million Euros of the Euro bonds, and we have retired 47.7 million Euros of the original debt since 2000.

During the year, we repurchased 229,426 shares of our stock, and since the inception of the stock repurchase plan in April 1998, we have repurchased 77.9 million, or 4.1 million shares.

Our average share price since the inception of the stock repurchase is $18.98.

Turning to our outlook, we are reaffirming our fiscal 2004 guidance previously issued on February 6th, which anticipates modest consolidated revenue increases to produce adjusted earnings growth in the range of $1.95 to $2.05.

For the first half of fiscal 2004, the company expects adjusted earnings per share to be in the range of 59 cents to 69 cents, and that's excluding foreign currency gains or losses, and that compares to adjusted earnings per share of 61 cents for the first half of fiscal 2003.

The company projects first quarter adjusted earnings per share to be in the range of 2 cents to 6 cents and second quarter adjusted earnings to be in the range of 57 cents to 63 cents per share.

This compares to adjusted earnings per share of 9 cents and 52 cents for the first and second quarters of fiscal 2003 respectively.

Specifically, we planned our first quarter adjusted earnings to be down compared to last year, as the $10 million or approximately 6 to 7 cents per share of parallel expenses we will be running in Europe will occur in this April to June quarter.

In addition, the first quarter tends to be the weakest period of our European operations, given the lack of summer shippings in Europe.

Therefore, the impact of a stronger Euro against the dollar will negatively impact and amplify these softer results.

However, in the second quarter, we will reap the benefits from the exchange rate positive impact on what tends to be our second strongest quarter of the year in our European operations, as we begin to ship fall.

Our quarterly profits for the balance of fiscal 2004 will flow similar to fiscal 2003.

Our January to March period or our fourth quarter will remain our strongest contributor to profits as we continue to build our European wholesale business and as the spring shipments become the most significant delivery dates for our domestic wholesale business.

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

And now I'd like to turn the call over to Roger for a discussion about our business and our outlook for fiscal 2004.

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

Thank you, Nancy, and good morning.

I'm proud of our organization's tremendous accomplishments in what has been a difficult environment.

The reality of war, ongoing challenging economic and financial conditions, sluggish consumer spending, low consumer confidence, a dock strike in Los Angeles and the SARS outbreak were only some of the obstacles we faced in fiscal 2003.

In addition, our micro-business environment continues to include a highly promotional department store reality, particularly in the men's business.

Despite these issues, we produced another record year of results.

I think the key reasons we've been able to produce record results is that our brand driven by Ralph's leadership and vision can successfully cross geographic boundaries and product categories.

We have always been driven by design excellence in marketing, and even in this environment, we continue to invest in our brand, invest in our advertising, and invest in our business infrastructure.

Also, I would like to thank the ten thousand employees who make up Polo Ralph Lauren worldwide.

I'm very proud of this organization's talented people who are responsible for this outstanding performance.

I'd also like to recognize the audience on today's call.

From a financial point of view, it was a complex story to follow this year due to the calendar shift of our quarterly profits.

It was the right step to put the European business on our domestic calendar, but it did make comparing the yearly profit flows more difficult.

We appreciate your understanding of this decision, and your support throughout the year.

It obviously helps that we ended up delivering the profits we forecasted.

This year we've had a lot on our plate both domestically and internationally.

We've made significant progress on our long-term strategies and our multi-year operating initiatives, while at the same time have delivered strong earnings growth, significant margin expansion, and improvement in our overall financial flexibility.

As I outlined for you a year ago what our initiatives would be in fiscal 2003, I'd like to go through some of the accomplishments of the year.

First, we plan to make meaningful improvements in our retail business.

And I credit our retail leadership with driving that progress.

We had a veteran merchandise team in place led by Bridget Ryan Burman (ph) who heads Worldwide Retail Operations.

Our other business leaders include Wayne Mitener (ph), who joined us after twenty years at Sachs, Jim Bendell (ph) who heads our Outlet Group, John Mehave (ph) who is in charge of Club Monaco, Charles Fagan who has been in Polo for 18 years and Alfredo Fredi (ph) who heads up our Creative Services and Home Design, ensures our stores are consistently and creatively merchandised around the world.

In a weak environment, we saw phenomenal customer response to our luxury designs that drove a sales performance which exceeded our expectations.

We also met our anticipated goal of a 200 basis point improvement in our operating margins in our retail division.

This improvement was driven by a dramatic curtailment of promotional activities in our store, better planning and better forecasting that enabled us to flow fresh product that kept the customer excited.

The implementation of cross-docking initiatives also contributed to margin improvement.

We ended the year surpassing our phase one goal in cross stock units, and we are targeting 33% of our total volume to be cross stocked in fiscal 2004.

Turning to our domestic wholesale group, we said we expected the business to remain challenging as a result of the difficult menswear environment in department stores.

We have seen a distinct and notable shift of our male customer from casual sportswear to dress attire which bodes well for our own retail stores, however, unfortunately this is not the case in our department store business, which is primarily dominated by sportswear-inspired products.

We began the year with an appropriate and conservative plan that focused on realistic sell-in levels.

We also put together initiatives that would give us better control over the brand to protect the long-term strength of the brand.

We focused on reducing sales to authorized stores and ended the year with significant reductions in goods being delivered to those channels.

We are very pleased with the performance of our licensing group this year.

Our product, international and home groups all exceeded expectations.

We will continue to invest in exciting opportunities to extend our brand in new product and new markets by partnering with licensees and capitalizing on our combined strengths.

Only the most appropriate partnerships are formed to ensure the brand maintains its consistency and relevance to the customer.

And as you know, we have successfully tiered both our men's and women's apparel products with Purple Label and Polo for men, collection Black Label for women.

This year we took a similar tiered approach to our home business, with we launched the Lauren brand for department store customers.

While we maintain the Ralph Lauren home collection for our own retail stores.

We are pleased with the transition to Lauren and recently announced two additional product lines for this collection, consistent with our lifestyle approach.

This fall we will introduce a Lauren line of furniture in 175 new stores.

Our current projection based on response at the recent market and high point will exceed the first year plan.

In October, we will show the new Lauren table top product that is licensed through Mikasa.

We are planning a spring 2004 launch in department and specialty stores.

At the higher end, last month we opened a 14,000 square foot showroom in the D&D building in New York City for interior designers and the traffic has been terrific.

To date, we have more than 500 designers registered per account.

This is a market that we have not catered to specifically in the past, and if we continue to see this type of response, we hope to open showrooms in major cities across the U.S.

We also continue to build our home business internationally.

In December, we opened the first home floor in our Ralph Lauren store in the Brompton Cross area of London.

In September of this year, we will convert the lower level of our new Bond Street store to a full-blown home collection, and when we hope our new Milan store next fall, a full floor will be dedicated to Ralph Lauren home collection.

While we successfully manage the variety of major initiatives domestically, we devoted considerable effort and appropriate capital spending towards developing a scalable infrastructure necessary to drive our next phase of international growth.

Since we bought our European business about three years ago, we have more than doubled its size from $180 million to more than $450 million today.

We believe our European operations have a potential to develop into a billion dollar business.

Our efforts have focused on three main areas.

The first is the consolidation of five international headquarters in three cities into one central location in Geneva.

We are opening our offices in mid June, and they will be the headquarters for housing approximately 140 to 145 employees, including customer service, finance and systems.

The second part of the plan is the consolidation of European logistics and distribution into a central location in Parma, Italy.

We broke ground on our third party state of the art distribution center in January, which was paid for, built and staffed by our partner.

The center is one hour from the nearest airport and due to its efficient location, it will decrease transit time from Asia by about two weeks.

We also expect cost per unit to decrease approximately 40% over the next two years as a result of the efficiencies in this center.

A 160,000 square foot facility will shift between 10 and 11 million units in fiscal 2004, and we are right on schedule to begin shifting and billing for retail from Parma in mid May and wholesale in mid June.

The third area of focus is our information systems, and as we migrate to standard global systems for all of our operations, all of Europe's warehouse management systems, planning systems, ordering systems, sourcing systems and financial systems will be integrated seamlessly.

To date, we have completed the retailing and merchandising upgrade, we have installed global financial systems and a new global sourcing system.

In the next year, we will complete the installation of a new wholesale system.

This is a very complex move, and to date, due to the hard work of lots of people, we are shipping and billing on schedule, our key hires are on board, and we are transitioning our operations smoothly.

As we accomplish all these initiatives at retail and wholesale and licensing in Europe, we also continue to improve our financial flexibility while we generate significant cash flows.

We outsourced our accounts receivable functions, which we anticipate will give us greater visibility and improve our turns, we entered into a cross-currency swap that reduced our overall interest payments on our Euro bond debt, we paid down $50 million of short term debt in April, and in June, we will pay off the balance or an additional $50 million of short term debt, thus further reducing our interest expense.

Because of these efforts, we have reduced our net debt by 108% in the past year, and currently have significant available cash to take advantage of strategic opportunities.

In February, we were able to use available cash to fund the $67 million Japanese transaction.

The continuation of our ability to generate cash encouraged our board of directors to authorize a regular dividend program announced today.

As we enter fiscal 2004, I'd like to spend a few minutes on our point of view on a multi-year initiative and some new programs.

While we continue to face a difficult environment in department stores, and have seen a disruption in travel as a result of SARS, the outcome for --the outlook for the economic picture is also one of slow growth.

All of these conditions lead us to a conservative sales line for the fiscal year while still producing improvement in our margins and delivering earnings increases.

In retail, we'll continue to focus on improving our existing portfolio stores, retail remains on track to achieve our long-term goal of 8 to 10% operating margins.

As we continue to refine our strategies and realize improvements in our retail business, we have developed a strong real estate and store strategy from which we will roll out approximately 50 to 60 Polo Ralph Lauren new stores over the next five years.

In our wholesale business, we continue to work hard with our department stores to ensure that Polo Ralph Lauren is properly merchandized and visually positioned in each of our locations.

Nevertheless, as I mentioned before, we do not see a near-term catalyst for the men's business.

Turning to our licensing businesses, we have seen the most impact from SARS in Hong Kong, where we would expect our sales to be soft this year.

On the other hand, our Japanese and Korean businesses are planned to be strong.

We're also optimistic about our new initiative in home and continue to see strength in our kids' business.

While we continue to extend our brand with new licensing opportunities, we also believe in the direct ownership of those businesses whose expertise falls within the scope of our core competence.

An important part of our future growth strategies will involve strategic acquisitions of both product or geographic licenses, which will allow our company the benefit from increased profits as we grow these businesses at a faster rate by leveraging our flexibility and our global infrastructure.

A continued focus on acquiring those licenses that make sense to our business will be an important part of our company's future growth strategy.

Although there is a great deal of uncertainty in the market, we continue to be comfortable with our full-year outlook, we continue to throw off strong cash flow, which can be used to build new stores, invest in our brand, and capitalize on strategic opportunities.

We are pleased that in a difficult environment, we drove a double-digit increase in earnings from modest top-line improvement.

We made strong progress on our multi-year initiative, and feel good about our plans for fiscal 2004.

We continue to keep a steady hand on the controls of our business and look forward to delivering another strong year of results for our shareholders.

I guess at this point, we'd be happy to field any questions that you might have.

Thank you.

The question and answer session will begin at this time.

If you are using a speakerphone, please pick up the handset before pressing any numbers.

Should you have a question, please press "star 1" on your pushbutton telephone.

If you wish to withdraw your question, please press "star 2".

Your question will be taken in the order it is received.

Please stand by for your first question.

Our first question comes from Dennis Rosenberg from Credit Suisse First Boston.

Please state your question.

Good morning, guys.

A few questions.

First could you comment on how Blue Label is going, and as it relates to that, when you talk about 50 to 60 new Polo stores over the next five years, does that exclude the possibility of opening Blue Label stores?

Does that include Blue Label stores?

I think we heard you, Dennis.

You were a little far from the microphone.

In reference to Blue Label, you know, we're absolutely pleased with the results we've had since we first started delivering that product last fall.

As you remember, it is a wholesale business in addition to our own stores in Europe.

It's a retail business for us vertically here in the United States and it's a label that we've worked with our license partners in Asia, and so it reflects there through licensing.

The initial expectation of that line were met with strong consumer reaction to both the fashion and basic pieces of that, and in Polo Retail, it's more than offset the elimination of what had been the Sport Label.

So we're very pleased with the results of that.

It's been an important part of our success in Polo Retail.

As you remember, it was originally created to give us a compliment to the men's Polo line that would encourage us to roll out retail stores, so the 50 to 60 stores that we've signed off on and have instructed the real estate people to begin work on, as a matter of fact, they're at the real estate convention in Las Vegas this week, includes some high end luxury stores as well as the beginning of a rollout of a concept that could fit into a New Caanan or a Greenwich or locations that have affluence but a more casual lifestyle.

So that's inclusive of that, and that's really the domestic number.

That does not include ultimately what we think we can do in Europe.

So we have said over the last couple years we needed to get ourselves organized in retail.

We needed to see that we could make money in retail, we needed to see that we could drive comps in retail.

We needed to build and develop a team and systems in retail.

All of that in the last couple years, despite a very difficult economic environment, has given us encouragement to begin the rollout and really what we're saying today is that has begun.

So we're looking forward to that.

We're looking forward to retail being a growing part of our business, both here in the United States and internationally, and we think we have the team and the strategies to execute that

Ok.

And one other question.

Could you discuss inventories of your product at retail in the various channels?

Could you elaborate on that question a little more, Dennis?

Yeah.

There've been indications that retail inventories have been building up in general, not anything specific to Polo, and I'd just like to get a sense as to what you're seeing in department stores, in the off price channel.

That's basically it.

Ok.

Well, I have certainly read with interest a lot of the reports that have come out over the last month or so about various retail people, specialty department store off price, and it clearly looks like, you know, if you take that on the face of it, that sales have come through for most people a bit disappointing and there's a bit of an inventory build and then the obvious question about what does that mean for liquidation.

Our products, if we start with our own retail, I think you can see by the comps that Nancy quoted, we enjoyed a better than expected January, February and March with January being outstanding, February particularly with the snowstorm around President's weekend being tough, and then March being better than expected even with the Easter shift, we're probably one of the few companies that has the ability to move Easter from one quarter to the next, where most people have it within the same quarter.

But to still come through with those comps, we're very comfortable our department store businesses and trends are different than what we're seeing in our own retail.

I'd add that we're continuing to enjoy strong business into the new first quarter.

I think in the department store world, I think business has been softer than anticipated, both in total department store business, men's specifically, and then within that, you know, we've had our fair share of disappointments in terms of plan.

We did sell in carefully.

We are very close to our department store partners and their levels and I anticipate if the business heading up to Father's Day doesn't pick up, you'll probably see some more aggressive promoting through the latter part of June and July.

Into the off price sector, as you know, we have been dramatically cutting back our sell-off to them as we've gotten better control of our inventories, but of course you must remember that because we don't take returns anymore, at some point our normal department store customers at the end of their promotional cycle may be on their own choosing to sell into that channel even though we pulled out.

So I think it really depends on the channel you're talking about, but in a macro answer, Dennis, I think probably softer sales for the industry has probably reflected generally higher inventories than people would have wanted.

Thank you

You're welcome.

Thank you.

Our next question comes from Stacy Pak from Prudential.

Please state your question.

Thanks.

First of all, just a follow-up on Dennis's question on the off price.

You know, we've actually continued to see a decent amount of product in the off price sector, and maybe that is the department stores or I guess it is, but I was wondering, can you comment, I mean, if the department stores are increasing their sell into the T.J.

Max's of the world, how does that benefit Ralph, and is there anything that you can do to reduce the overall level there or is that just not a concern?

And then second of all, can you comment more on the shift in the men's business to the more dressier side?

Is there anything you can do to address that in the department stores, and then finally, the SG&A number continues to be good.

Can you give better guidance in dollar terms what we should be expecting for the year there?

For the new year?

Right.

Let me start at the beginning of your list of questions.

The comments you made about seeing a growing amount of off-price T.J.

Max, I don't think is true.

I don't know if it's growing.

It's just still a lot, so--.

You know, I think T.J.

Max is how many doors?

Quite a few.

How many have you been in.

I live in northern California and I travel around, but I can't say I've been in every single door

How many have you been in, do you think?

50.

Ok.

So less than 5% of their doors.

And I think that at least from the amount of goods we produce, the amount of goods we sell to department stores, the amount of goods we've sold off to secondary markets because of excess inventory is down dramatically from prior years.

Can you comment how much it's down, Roger?

Will you share that?

No.

But it's down dramatically.

And if you'll follow our forecasting of wholesale business for 2004, in the new year, we're actually planning wholesale down again because we continue to take enormous, aggressive action in terms of the reduction of product into the marketplace, whether it goes into off price or whether it's sold into a difficult trend in department stores.

The other thing that is somewhat parallel to this is that as you know, we have all watched and had angst over what we think is the black or gray market selling of our product, and I think we've talked in the past about our desire to absolutely cut that off, starting with the beginning of fall shipments, we have developed a technology that allows us to code every one of our labels as to whether it was an official label and a official order.

We can track which manufacturer made it, and we can track which retail customer or wholesale customer bought it.

So beginning with our fall shipment, we will have a wanding (ph) device that we can scan a label and tell exactly if it's real or counterfeit, whether it's authorized and appropriately ordered merchandise, whether a factory is making additional merchandise and selling it out the back door, and anything you wanted to know about that product from its inception to its manufacturing to who the customer was, and I think that's unique in the industry.

I know the luxury brands like Burberry and others have all been fighting the issues of unauthorized goods or counterfeit goods.

We are taking very aggressive action that has been two years in the planning and really supervised by Doug Williams and the wholesale group, and we're very excited about the ramifications of what that will mean for our ability to really step on the air hose of what we think is a significant problem.

So this is, you know, new technology, long in the making, and we think as that plays out and it becomes clear what's going on, that's going to have a noticeable impact beyond our own initiatives that we've talked about before.

In terms of the men's business and its overall direction, I think the reality is that the movement towards dress casual to work which started out as Friday and then expanded into the whole week and then became sort of a poster child for the Internet age has really been pared back dramatically.

I think with the difficult job market, the seriousness of the economic conditions, many, many companies have migrated back to a more formal work attire for men.

Shirt and tie if not suit at least, sport-coat, and I think to some degree, that has hurt the casual bottom business for men, hurt the woven shirt business for men, you know, those things that were deemed appropriate in the past are being pulled back on.

So Roger, do you see that department stores shifting the amount of square footage devoted to that segment?

You know, I'm not sure that they're going to do that, but I can tell you that in my own business at retail where we have a more balanced dress furnishings and where we have a more balanced clothing assortment, we're seeing enormous increase.

We also, I think, reported earlier that our licensee [inaudible] has seen an enormous ramp-up in his business for what his department store priced clothing, and I think that movement is happening.

Now unfortunately, a lot of department stores business over the last ten years has moved more and more heavily towards sportswear.

And I think, you know, that was appropriate based on the trend, but I don't know about your personal experiences, but as I travel in and out of financial companies or legal companies or other parts of my business interaction, I'm seeing a very dramatic movement.

I guess the last question you had, which was the acknowledgment of appropriate SG&A work and then, you know, can we be more specific about that going forward, you know, I'm going to direct that to Nancy.

Hi, Stacy.

In absolute numbers, we're looking for about a 6% increase year over year in SG&A, and if you back out that $10 million that we've talked about the parallel costs, it's about 5% increase, and you'll remember in your models for fiscal 2004, you're seeing larger revenues from retail, and as you know, that comes with a larger gross margin and higher expenses.

Great.

Thank you very much.

You're welcome.

Thank you.

Our next question comes from Jeff Edelman from UBS Warburg.

Please state your question.

Thank you.

Good morning.

I was wondering, Roger, if you could give us some sense of your thinking on royalty income this year, the new fiscal year.

I know you didn't want to talk about the Jones situation, but it seems to me that the timeline for anybody to produce the spring line is probably closing down to, I don't know, 30, 60 days.

We saw your note that you published recently, referring to that, Jeff.

In regards to your question about royalty income from the -- for the year, we are planning a modest increase, really driven by, as I said earlier, improvements in the home where we are expecting the new product extension into Lauren to be helpful, ongoing strength in our kids' business, where we are continuing to see a growing market share for that business.

We also are continuing to see strong growth out of Korea and Japan, so we're looking for a nice increase in royalties for the year.

That's a combination of what is baked into the guarantees as well as our projections and our business partners' projections about opportunities.

Obviously the people who hold wholesale licenses have visibility farther out into the year since in many cases, they've already booked part of the year already.

Those people that still have retail licenses are obviously less predictable, but we're coming off a strong year.

We've got some new partners and some new product categories, and we're feeling pretty comfortable about those partners' ability to produce increases in the total number.

Ok.

Would you make any comment into the timeline that I speculated?

Really, I think Nancy addressed at the beginning of the presentation that we are continuing to work with Jones, we're continuing to work what we hope will be the right solution for the customers, the brand, both Jones and ourselves, and as soon as we've got something to report, we'll make the proper announcement.

Thank you.

Thank you.

Our next question comes from Margaret Mager from Goldman Sachs.

Please state your question.

Hi, Roger and Nancy.

How are you?

Hi, Margaret.

Can you get closer to the phone?

I'm not sure we can hear you.

Can you hear me?

Yes.

Thank you.

Ok.

A couple questions.

First of all, how many stores do you plan to open in fiscal 2004, and can you just talk about the positioning of your Polo Retail stores vis-à-vis your product in department stores?

Are you still sticking with a higher price point and higher end positioning there?

And within the context of the department stores, do you see yourself reducing the number of doors that you sell into in that channel distribution in favor of the development of your own specialty retail?

So those are kind of intertwined questions, and then I have another one.

A separate topic.

Let me try and respond to the product and then the door numbers and all that.

You know, one of the things that I think is working, and it's apropos to your question, Margaret, is that our retail stores are positioned with more of a luxury product orientation.

We have had a fantastic spring with collection.

We've had the best Black Label results we've had in a couple of seasons, and obviously as we've talked about earlier with Dennis, Blue Label has been a terrific addition for us.

So our women's business, contrary to the department store in total women's results has been outstanding.

I think as I said earlier, the dress furnishings, clothing and dressier sportswear side of our business, particularly driven by Purple Label, has really given our stores, I think, a better performance than a lot of what's in the department stores with chino pants and woven shirts.

We've also got product that is unique to our stores in accessories, obviously Blue Label.

We have significant additions to our home assortments in tabletop and top of bed and gift assortments which are not available in department stores, so there is a decent part of our assortment, Margaret, that are not only higher end, which is certainly available to our wholesale trade, but also unique to us.

And as we continue to build more stores both domestically and internationally, our ability to sell higher price points, more forward fashion, and more unique product, I think is going to continue to separate us from the more moderate prices of what's going on at department stores.

It is clearly an important part of what has been propelling our growing comp store results.

I think that, you know, even if you look at the kids' store that we opened up on Madison Avenue a couple months ago where we've had phenomenal success, while there is certainly product in there that is also represented in department stores, we did add a layer of product that was designed and resourced directly that really is the best selling part of what we have in there.

Cashmere sweaters for children at a level we can't even believe are flying out of the stores.

And so we're seeing an appetite for better product, and that's giving us encouragement to continue down that path.

I think the flip side of it is certainly those locations, Margaret, that are tourist locations, particularly in Europe.

I think the war would sell more directly in major cities, London and Paris with the business as soon as the war started sell off dramatically, and now quite frankly the tourist business there is being affected by the lack of desire on a lot of people reluctant to travel with SARS.

So we're continuing to see softness in the European major city business with more strength out in the provinces.

In answer to really where we're going with department store doors, you know, really Doug and the wholesale team have worked with each of the major accounts.

I think our feeling is, is that we will look to pare back C and D level doors where appropriate.

We've gone through very detailed analysis of really what's the amount of business we have to do in a store to give our product line the proper assortment.

And we're not anxious to be reduced to just basics, we're not anxious to just be reduced to a couple tables in very small remote locations, so we're going through, you know, a vigorous exercise that is in partnership with our department store customers, and I do believe we will see a door reduction over the next couple years as we work through that carefully.

Those are important parts of movements in our strategy that I think are the right ones for us long-term.

That's very helpful.

Thank you.

Thank you.

Do you have a number of stores that you actually plan to open, Nancy, in fiscal 2004?

I think in fiscal 2004, we're looking at about eight to ten stores.

All right.

And the question I had separately was, the European business, was there any meaningful foreign currency impact in the fourth quarter, and your outlook for fiscal 2004 of low single digit sales growth, can you elaborate on that?

I actually was thinking it might be stronger than that, but maybe there's a strong strategy behind why you slow down in fiscal 2004 verses what you've seen over the past couple years.

Yeah, the currency impact in the fourth quarter, Margaret, actually cuts both ways, because obviously if we're making money in Europe, the stronger Euro to dollar rate and when it's translated back into U.S. dollars gave us a little bit of an uptick, offset by, you know, those goods that we manufactured in Europe, and that come in at higher costs and give us negative gross margin hit obviously unless we're willing to take the prices up, which we did not do.

So the in and out of that, particularly as we've chosen to move more manufacturing to Europe for collection and more manufacturing for Black Label and Purple Label, you know, may net out to be about a penny.

The issue, interestingly enough, works the other way in first quarter of 04, which as Nancy said, Europe historically, that's a quarter that operates at a loss because they had very little summer shipping, so the magnification of the exchange rate kind of works the other way in the first quarter depending if that currency holds up at the rate it is, probably works a little bit to our favor in the second quarter, so there's kind of a little up and down that goes on from quarter to quarter, but it's also netted out against the amount of goods we're manufacturing in Europe, and that impacts on our gross margin.

So at this point, it hasn't been a significant issue one way or the other.

In terms of the growth rate for Europe, I think we said initially when we looked at the amount of work that we had on our plate in terms of this consolidation, changing logistics, changing distribution, obviously systems, that we were going to take a very conservative point of view to our business in Europe.

And take the year to really get those changes implemented and running smoothly.

I think it's also fair to say that, you know, there have been some softening of the economic conditions in Europe over the last year, most notably in Germany and particularly France, which are running, you know, very high unemployment.

So I think some of this plan, I think some of it is based on the economic realities of what's going on in Europe, and the retail side of that is more tourist-related.

So I think it's a combination of all that that has us talking about top line growth at the level we are, and obviously if we can implement this consolidation which is well underway and the tests have gone well and we've started to shift and then come back at the year after with a more aggressive mind-set, I think we'll be comfortable.

All right.

And good job on the year.

Thank you.

Yeah

We were worried.

We were one of the people who worried.

I knew you had the faith, Margaret.

You did it, and congratulations.

I knew you had the faith.

And tell Ralph we said hi.

Thank you.

I will pass that along.

Thanks.

Thank you.

Our next question comes from Virginia Genereux from Merrill Lynch.

Please state your question.

A couple of questions.

Nancy and Roger, the licensing revenue pickup in March, could you -- that came in well ahead of where we were and the margins were a lot higher.

That does not include the Japan sublicense consolidation, right?

So if you can talk a little bit about what drove the strength there.

On the revenue and margin side, please.

Ok.

Well, the licensing results which I think Nancy talked about the highlights included strength in our clothing businesses, strength in our eyewear businesses, strength in our kids' business also the international business, Japan and Korea, you're correct in that the new arrangement in Japan does not kick-in in that quarter.

We also tend to, at the end of the year, have the results for the full year with our licensing partners, so in the quarters leading up to that, we are taking in royalty income at the minimum level or the guaranteed level or major trend line, but the fourth quarter tends to be where we end up, you know, getting the exact numbers pinned down.

So we've seen strength in various parts of our businesses internationally, domestically as well as sort of that end of the year, you know, finalization of the actual numbers.

Ok.

Great, so it’s [inaudible] up.

And then if we look into next year, and I'm sorry if I missed this earlier, can you give us a sense maybe, Nancy or Roger, how the operating margins will sort of shake out by segment, and maybe excluding the European integration charge, which I understand is kind of mostly in wholesale?

Can you give us a sense of that?

You're looking for a segment guidance?

Is that what you're looking for?

Just a feel, maybe, of wholesale/retail licensing, what sort of segment margins will be up and down, what will be driving the business.

Well, let me give you directionally what's happening.

Let me lead off with retail.

We continue to expect ongoing improvement in retail.

We are very proud of the accomplishments in what has been a very tough year for most retailers, and we are staying the course and still committed to the margin expansion in retail.

And so I would expect that fiscal 2004 continues to reflect our multi--year initiative in retail paying off for us.

That is, again, what has encouraged us, and in discussion with Ralph and Bridget and Wayne and Jim Bendell and John Mehave, to really move forward aggressively.

So retail will really lead the segment improvement rate.

Wholesale, we are planning conservatively.

We do not think that department store environment is going to change anytime soon.

We continue to pull back on our overall amount going into the outlet industry, so from a margin percentage point of view, we're really looking at wholesale as relatively flat.

Really in licensing, as I answered one of the earlier questions, we do anticipate kind of mid single digit growth in licensing royalties.

Most of that should flow through to the bottom line.

We don't anticipate incurring incremental expense in licensing.

There is a little bit of a shift as we begin to adjust for the new Japanese relationship, but that's sort of the overview of how we see it.

If you take out the parallel costs in Europe that Nancy has alluded to, the $10 million we anticipate running in the early part of the year to continue to run existing systems of people so the new ones work, because we think that's the prudent way to work our way through this exercise, you know, on a company-wide sales of -- call it $2.5 billion, it's not significant dollars, but it does impact the first quarter, which is obviously a much smaller quarter.

Ok.

Great.

And Roger, your commentary is helpful.

Can you give us a sense of how much of your European business is actually manufactured in Europe?

I can tell you it's an interesting question because, you know, a couple years ago, Ralph was very anxious to have more of or our high-end product made in Europe, so we moved the largest part of our collection production to Europe.

Black Label has been moved dramatically to Europe.

Purple Label is now Europe.

Parts of the high end Polo business are in Europe.

A lot of our imports that we talked about that we're doing vertically for Polo Retail, whether it's kids' product or home product, is now coming out of Europe.

As well as, interestingly enough, those products in Europe that are in some cases manufactured by us because there's no license for, such as jeans and kids.

Those licenses are really domestic licenses, and we manufacture in Europe, you know, products for our European distribution, which are made in local factories.

So I can't give you the exact percentage, but actually growing amounts of products are being made in Europe, and so that sort of works against the current currency exchange that's helping in Europe.

Ok.

So it's well more than half the business though, it sounds like.

I don't think so, because the lion's share of our men's business in total is still made in Asia, but I would say it's certainly a significant and growing part.

Ok.

And then lastly, the dividend announcement, can you give us a sense of maybe how you arrived at the yield and should we -- do you think, Roger, there's any thought of raising that?

You certainly have the sort of free cash capacity as you go forward.

Thank you.

I appreciate the encouragement to raise it the morning we declared it.

So we would certainly not have embarked on a dividend without careful thought and consideration.

And really, the exercise we went through as Jerry did it, is a careful analysis of our anticipated financial condition over the next five years, our cash flows, and it was very clear to us that even with ambitious plans to grow retail, even with ambitious plans to invest in infrastructure, even with ambitious plans for acquisitions, we were still very comfortable that a yield at least in the beginning in and around 1% was appropriate.

Certainly like to believe that if we continue to deliver the kind of double-digit earnings we've just delivered, that we would carefully look at future years and what's the appropriate amount, but, you know, this is a big first step and we're very excited for our shareholders.

We think it bodes well for management's belief in the way the company's being run and our financial condition.

We think, you know, it supports what we've been saying all along, which our economic model has held up pretty well in difficult times, unlike some others, so we think it's a board-driven decision that we're all very excited about, and we'll review it as time goes on and see what the appropriate level should be.

Great.

Well, thanks for taking my questions.

You're welcome.

We have a last question?

Anybody?

Ok.

Thank you.

Our last question comes from Noelle Grainger from J.P. Morgan.

Please state your question.

Good morning.

I guess I squeaked in there.

Can you speak up a little bit, Noelle?

Sure.

Is that better?

Yes.

Thank you.

Ok.

A couple of questions on really the retail side.

Roger, do you -- you've kind of reiterated your long-term goal in terms of the margins for that business.

Yes.

Do you see it as a fairly straight line trajectory?

You did a great job of meeting, you know, your target this year.

Do you think it's kind of 200 basis points a year till you get to 8 to 10, or --

Wouldn't that be nice?

I wish I had that kind of crystal ball.

I would tell you this, that obviously, you know, if the retail environment had been even slightly better, we would have seen more, but the initiatives we have in place to improve it, which are really multi-faceted, we've talked about them before, we obviously see how we're going to get from where we are to where we have to go.

And as I said in response to, I think, Margaret's question, we do think retail will continue to lead the margin improvement charge.

I'm not smart enough and not able to control the business in a way that I could guarantee 200 basis points a year.

That's a bit unrealistic.

But we are aggressive in our thinking.

We are feeling encouraged by not only our profit but our sales performance in a tough climate.

We've learned a lot in the last year about micro-marketing, about targeted marketing, using more in-store events.

We've certainly learned to plan and allocate and flow product better.

A lot of the supply chain initiatives which are connected to manufacturing have added value to our retail business, and we think we've built the right management team in all pieces and parts to deliver those kind of numbers.

So, you know, we'll keep in touch closely on it, but I think it may be a bit much to ask to say that we're going to get it in a nice 200 basis point stair step, you know, every year through the next couple years.

Ok.

Can you give us just kind of an updated sense?

It sounds like cross stocking, further progress on that initiative is going to be a pretty important driver.

Is there one or two other things that you would highlight as what you're looking towards as far as the initiatives that are really going to matter for fiscal 2004?

In terms of relative improvement?

Sure.

You know, we've talked a bit in the past about the supply chain, so I won't go through some of that.

Obviously we've hit and surpassed our first year expectation with cross stocking.

We're actually seeing the costs coming down as we had hoped in terms of our overall supply chain.

Speed to market is really what we hoped to win and we talked even in Europe about the Parma facility taking two weeks off inbound receipt, and also it's going to have the same turnaround expectations that now are taking us several weeks to get out of all these small facilities.

The next major initiative that this year we'll see is labor scheduling.

We have actually just completed and installed a labor scheduling and staffing model that will be rolled out to all retail divisions that will give us a much better hand on our matching hours against customers.

We've been counting traffic in the stores and we'll match our schedules better against that, and we expect to see significant leveraging of our payroll dollars against that.

You know, I guess lastly, and I briefly touched on it before, this whole Jeff Morgan led initiative in terms of direct marketing to our customers and further refining that and developing the effectiveness, I think we make some of the world's most beautiful marketing pieces, imaging pieces.

We spend a lot of time, energy and money on those, but we've also learned how to reach our customers in a more efficient way.

So in many cases, we're seeing a return on investment on those vehicles which, oh, by the way, we never measured before, we are seeing very significant return on investment there that has helped us figure out which vehicles are effective and which are not.

It's also allowed us to take some of the money we were spending that was not productive and feed it into in-store event and in-store marketing which we're finding on a micro basis is a more effective way to advertise than broad based or newspaper or any other vehicle.

So we really have initiatives on every subject.

And again, we think we're getting major progress in a difficult environment and we expect to see more this year.

Great.

Just one last retail question which would be, on the comp, you're really standing out from the competition in terms of how your stores are performing, and I'm --

Thank you.

I'm wondering if, given your better capability to kind of track data, if you can share any metrics in terms of traffic at your stores verses price verses, you know, number of transactions to give us a sense of what's driving the comp.

You know, quite frankly, you know, I would have a different answer depending on the format.

As you've been listening and following us, we have seen significant improvement in our comps both at Club Monaco, which we think are driven off product, and clarity of message, and that is not so much, I think, a traffic as it is an improved matching up of customer demand against product.

We're seeing higher average unit sales and higher multiunit tickets.

We track performance not only by the dollar of the transaction, but how many pieces of product are in each transaction, because both Polo Retail and Club Monaco are really lifestyles, and our ability to sell the lifestyle should enhance our ability to sell multiple products to that customer at the same time.

So I don't think we've seen an increase in traffic.

I think what we've seen is an increase in average unit sale, and an increase in the average number of pieces in each transaction, because I think we're better satisfying the customer.

If we could get the trifecta and get increased traffic into the marketplace, we'd really be off and running, but at this point, I think most of that lifting is coming off of our initiatives to clarify our message in terms of assortment and presentation, and then translating that into average sale and average number of units.

I guess you only have control over so many things, right?

Much as I'd like to say we can control everything, we can't.

Thank you very much.

You're welcome.

Thank you, all, for calling.

We really appreciate your patience through the year.

I know that financials have been hard to follow.

We're certainly proud of the results in a difficult environment, and, you know, we look forward to seeing you at the shareholder meeting or talking to you in August about first quarter.

We are planning to open our Geneva office in the third week of June, so we'll be doing some international traveling at that point, but otherwise it's going to be a pretty busy summer.

Thank you very much.

Ladies and gentlemen, this concludes our conference for today.

Thank you all for participating, and have a nice day.

All parties may now disconnect.