雷夫·羅倫馬球 (RL) 2004 Q1 法說會逐字稿

Good morning and welcome to the Polo Ralph Lauren first quarter fiscal year 2004 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 Nancy Murray.

Good morning.

Thank you for joining our Polo Ralph Lauren conference call.

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

I will review the numbers of the first quarter and the financial outlook for the full year 2004, then Roger will update you on our Lauren business, the European consolidation, our retail business, and the domestic wholesale operation.

After that we'll open up the call for questions and answers.

As you know from past calls, we will be making some forward-looking comments in our discussions today, including with respect to future earnings and our development of the Lauren business.

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

And the principal risks are described in our earnings release and in the Form 10-K and we refer you to them.

Also please note that for today's discussion purposes, we will be comparing our results excluding the foreign currency gains and losses.

The Company believes that these adjusted results provide really a more meaningful comparison of its ongoing operational and financial results.

For a full analysis of the adjustments, please refer to the table reconciliation of GAAP results to adjusted results in the earnings release posted on our website at investor.polo.com.

Now to the numbers.

We posted an EPS of 4 cents for the first quarter in line with our guidance.

Note that the 4 cents includes the previously communicated additional expenses we incurred in the first quarter, as we completed our European consolidation and it includes the impact of a stronger Euro and Canadian dollar against the U.S. dollar, which, as you know, negatively impacted and amplified these softer results.

For the quarter, revenues increased 2.3%, primarily driven by double-digit total sales increases in our specialty retail group and the inclusion of the increased interest in our Japanese business.

We expanded our gross margin by 230 basis points and our operating expenses, as a percentage of revenues, increased by 490 basis points due to the additional expenses resulting from the European consolidation, a change in the business mix as a result of increased retail sales, and the consolidation of expenses of the Japanese master license in our results.

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

Our wholesale revenues were $161.6 million, which represents a decrease of 13.4% over the previous year.

Excluding the discontinued Ralph Lauren sport women's line, which was included in last year's sales, domestic wholesale revenues decreased approximately 3 million, or 2%.

As you know, the first quarter tends to be the weakest period of our European operations, given the lack of Summer shipping.

European wholesale sales decreased due to softer sales in major markets such as Germany and Italy, which then decreased the important re-order business for the quarter.

For the wholesale segment, the operating loss was 31 million, and that compares to a loss of 21.9 million in the prior year's quarter.

Turning to our retail segment, total sales grew 12% to 254.5 million, and that's on a base of 261 stores, or 1.84 million square feet operated in the first quarter.

This compares to total retail sales of 227.1 million on a base of 237 stores, or 1.76 million square feet in the first quarter of last year.

Interesting to note, our retail sales for the quarter accounted for more than 50% of the revenues.

Retail operating income for the first quarter was 11.2 million, compared to 15.9 million in the first quarter last year.

Our operating improvements in our domestic Ralph Lauren stores were offset by a soft retail environment in Europe, the expense of closing Club Monaco Toronto headquarters offices, and the impact of a stronger euro and Canadian dollar against the U.S. dollar.

On a consolidated basis for the quarter, retail comps were up 8.3%, and the consolidated comps were driven by positive comps in each of our retail formats, including mid-teen positive comps in Ralph Lauren retail, low double-digit positive comps at Club Monaco stores, and mid single-digit positive comps in outlets.

And as I said, at the end of the quarter we operated 261 stores compared to 237 at the end of the first quarter last year.

At quarter end, our retail group consisted of 54 Ralph Lauren stores, 62 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 added six stores.

For the quarter, licensing royalty increased 16% to 61.6 million, and that compares to 53.1 million in the prior year's quarter.

And this was driven primarily by the inclusion of our increased interest in the Japanese master license and strong performance from our children's wear and men's tailored clothing.

Operating income for licensing was 25.3 million as compared to 23.7 million last year.

Now let me touch on the balance sheet.

We ended the quarter with 287.5 million in cash, and our total debt was 315.2 million.

At quarter end, the debt consisted of short-term debt of 50.1 million, and our long-term debt of 265.1 million of euro bonds.

On June 30th, after the end of the fiscal first quarter, we used cash on hand to pay down the remainder of short-term bank borrowing.

For the quarter, our inventories increased 45 million, which primarily consisted of approximately 20 million of accelerated wholesale receipts in the U.S. to support 20 million in planned additional second quarter sales and approximately 13 million increase in retail inventories to support an expected double-digit increase in total retail sales in the second quarter.

The balance of the inventory increase is a result of exchange rate fluctuations in the Euro and the Canadian dollar year-over-year.

We continue to focus on inventory management and would expect inventories by the end of the second quarter to be in line to support high single-digit sales growth.

For the third quarter -- I'm sorry, for the first quarter our capital expenditures were 13.9 million, compared to 12.5 million last year.

We expect our capital expenditures for the year to increase by approximately 25 million, associated with the start-up of the Lauren line.

And that's primarily for our warehouse infrastructure and Lauren in-store buildout.

During the quarter we repurchased 10,588 shares of our stock, and since the inception of the stock repurchase plan in April of 1998 we have repurchased 78.2 million, or 4.1 million shares.

Our average share price since the inception of the stock repurchase is $18.99.

Turning to the outlook, and as we said in June, we would communicate as much detail to date about the Lauren impact on our fiscal 2004 business model.

We're very excited about our department store customers' initial reaction to the line, our strategies for growth and expansion, and we are on schedule to begin shipping the line beginning late January.

As we stated in the press release, we want to reiterate that we expect adjusted earnings per share for fiscal 2004, excluding start-up costs for the Lauren line and the loss of licensing royalty in the fourth quarter, to be in the range of $1.95 to $2.05.

We would expect the Lauren line start-up cost and fourth quarter loss of licensing royalty from the Lauren and Ralph lines to be approximately 20 cents per share in fiscal '04.

Including these expenses, we would expect adjusted earnings per share to be in the range of $1.75 to $1.85, and note that our definition of adjusted earnings per share is reported earnings per share excluding the foreign currency gains and losses.

We also want to reiterate that we expect adjusted earnings per share for the second quarter of fiscal '04 to continue to be in the range of 57 cents to 63 cents, and that compares to a 52-cent report in the second quarter last year.

The start-up costs for Lauren are expected to be approximately 8 cents per share in the second quarter, including these costs we expect adjusted earnings per share in the second quarter of '04 to be in the range of 49 cents to 55 cents.

After preliminary discussion with key retailers, we expect the Lauren line to generate 400 million in revenues in its first full year of operations in fiscal '05.

We would expect to give initial fiscal '05 EPS impact of the Lauren line on our second quarter fiscal '04 call which we will host in November.

And now I'd like to turn the call over to Roger for a discussion about our current businesses and our outlook for fiscal '04.

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

Thank you, Nancy, and good morning.

I'm pleased with the performance of our business in a very tough retail environment.

Despite a very difficult external environment, we executed well on a variety of new initiatives and near-term initiatives, both in the U.S. and internationally, and we continue to make significant progress in implementing our multi-year strategy.

This morning I'd like to spend a few minutes updating you on the Lauren business, detailing our European consolidation which we completed during the quarter, highlighting our progress in our retail business, and outlining our ongoing challenges in our wholesale business.

As you know, we reported two months ago that we would be assuming operational responsibility for the Lauren line as a result of the termination of the Lauren apparel license effective January '04.

We see this as an exciting opportunity for us to directly operate a very important part of our business.

A major brand that has grown in the past years to be one of the most successful better women's lines launched in the past decades with strong consumer loyalty and enormous future potential.

We are on schedule, including concepts, fabric, yarn, technical specs, patterns, and samples.

I assure you the excitement level in our company is very high.

Beginning with Ralph and the entire management team, we see this as a terrific long-term growth opportunity for our company.

While we are disciplined in our production of the line and we remain committed to a flawless on-time delivery and consistent fit, we have not lost sight of the most important person in this business, the customer.

We plan to provide improved fashion, high-quality product, and enhanced branding and marketing to the Lauren customer.

Beginning with Spring '04, we have increased the number of career suits and we have added better fabric.

We plan to infuse the line with newness and continue to increase the quality.

Let me touch on a few of the key issues we have been working on during the two months we have had the business.

First we hired Kim Roy to head up the Lauren management team.

Kim is a highly respected executive in our industry, who I've known for many years and I'm delighted to have her with us.

She demonstrates her leadership daily in developing and executing our plan, not only for Spring '04, but for the long-term performance of this business.

We also brought Benny Lin who began the Lauren line in 1995 into the Company.

Benny is responsible for the marketing, merchandising, and in-store presentation of the Lauren line, and again we are fortunate to have his knowledge and talent on our team.

We've assembled a team of professionals that are working enthusiastically to execute the line.

As you know, there are a lot of very skilled people here at Polo Ralph Lauren and in the industry, from pattern makers to sale coordinators, and our recruiting efforts are moving along on plan.

We would expect a full organization to be in place by the September market.

Designs were finished and handed off to production in mid July, and we're very pleased with the improvements we have made to the Spring line and the expansion of the career area.

We put a little more fashion and better makers in the line, and while we've been able to quickly add improvement to the line we've been sensitive to the areas of the line that must remain constant.

The Spring line contains a disciplined number of units and it's the same true fit that our customers have come to expect.

On the manufacturing front, all fabric orders have been placed, and production has been secured.

We're using many of the same factories that produced the line previously.

While we will be running the Lauren product through our distribution center in Greensboro, but since 60% of Lauren is hanging, we've added jet/rail systems to accommodate that merchandise.

As Nancy said, we expect to spend approximately $25 million on capital improvements associated with Lauren, primarily in Greensboro and in fixtures in the top doors.

Our Greensboro facility has adequate capacity to handle the line since investments in cross-docking and more efficient infrastructure has freed up space.

Key to the success of the Lauren line is our relationships with our retail partners.

Other the past few weeks Kim and Doug Williams have been on the road with important accounts and getting their feedback to our plans has been extremely encouraging.

Every retailer we've met has been supportive and continues to value the Lauren brand as the backbone of their better business.

While we're in the process of analyzing the buy door performance of the line we will look to eliminate certain doors.

We think 850 doors is the right number for missy and about 450 for special sizes.

In addition we plan to upgrade the top doors and are currently working on a new fixture concept.

In early September we open the market and will show the line to our retailers.

We expect the first shipments of Spring to arrive in our distribution center in early December and will process it for shipments to the retailer in late January.

While most people have focused on the Spring line, I just want to remind everyone that we're on track for Summer and Fall production calendars as well.

The first designs for Spring '04 have been handed off to production and Fall '04 lines is in its initial concept stages.

So we're excited, we're on track, and we think the up side is enormous.

Now let me just spend a few minutes updating you on the European consolidation, because we're pleased with the progress in Europe and our organization there.

We made an important hire during the quarter with the addition of Brian Duffy as President and COO of Polo Europe.

Brian is responsible for all of our day-to-day operations there.

We're also very pleased with our efforts in terms of the consolidation being a major part of our global strategy.

The consolidation which was finished on time and on budget was a short-term initiative we took in the past year to support a longer term international growth strategy.

A strong and flexible infrastructure at allows us to capitalize on opportunities whether in Europe or Japan or the Pacific Rim.

As you will recall, there were key key parts to the European consolidation.

The first piece was the consolidation of our headquarters from five locations to one, and we opened our new headquarters in general knee of the second week of June and have approximately 140 people in the location -- working in departments ranging from finance to human resources to production and sales and customer service.

The consolidation resulted in a 40% reduction in headcount and we peel we have the right number of people in the geneva office to support our business throughout the continent.

We opened a distribution center in Italy which was built in six months and began shipping the majority of our goods from there in June.

As we said on our call in May, we would run parallel shipping efforts in the beginning to assure consistent flow, but we will continue to ship some goods from the Netherlands.

We expect the parma consolidation to be complete by Fall and to ship between 10 and 12 million units this year from that facility.

During the quarter we consolidated our European organization into one I T platform, consistent with the U.S.

To date we have completed our global POS roll out and our core merchandise system.

Our retail P O S roll-out was our first focus since this system directly impacts our customers' experience with us.

With all of our retail on one global systems our customers sales history will be on line whether they're in London or east Hampton.

Through out 2004 we will migrate great the whole system to one global platform.

The sourcing and production systems that support our , allocations, shipping, and inventory management will be on one standard by the close of fiscal 2004.

The entire consolidation has gone smoothly, and I congratulate both the European and U.S. partners who have done a very good job on this.

While we're pleased with the execution of the European consolidation to support our long-term growth we are cautious about the near-term outlook of the economic environment.

Slowed consumer spending is not far off recessionary levels in many European countries.

Both the Iraq war and SARS has dramatically impact travel from Asia and is having a severe major impact on tourism throughout major cities in Europe.

In addition, the luxury sector continues to be challenged.

The promotional environment is sharper in Europe leading to more than usual pressure on the gross margins.

We expect the business to remain challenging for the balance of the year and we said earlier in our forecast we would expect sales to increase in the mid single digit range this year for the European business.

Overall we are cautious about the near-term outlook in Europe.

I am pleased our consolidation has gone as well as it has to support better efficiencies in our business, particularly in the soft economic environment.

As many of you know, we have a variety of initiatives we are managing both domestically and abroad.

The result of our multi-year infrastructure initiative is allowing us to bring the Lauren business in-house at an accelerated pace and is helping us to support Europe from the U.S. with a common platform.

In addition our ability to drive betters profits from our retail stores has been enhanced through supply chain initiatives.

A few minutes on our domestic businesses.

We are obviously very pleased with the strong performance of our retail group beginning with our success there begins with great products.

Ralph continues to create the most excite sing, most desirable, and the finest quality brands in the world.

Our stores are his vision, and we have made them unique retail environments and experiences.

With better planning, merchandising, and marketing we have filled our stores with the fresh flow of product and exciting mixes.

With our refined marketing and advertising initiatives we have created direct mail and magazine advertisements that speak directly to our core customers.

Because of our focus in the past two years in operational excellence, we've been able to create profitable specialty stores with strong futures.

As Nancy mentioned, our total store revenue increase of 12% and same-store comps of 8.3 were terrific.

The key driver for the high teens total sales increase and the high teens comp sales increase really in our domestic Ralph Lauren stores the sales were particularly strong in Boston, Palm Beach Houston, Phoenix, and pal 0 Al to.

In men's, the sales increases were really driven by suits, up 50%, shirts and ties up 20%, and of particular interest is the Purple Label furnishings business which was up 75% in the quarter.

Our women's business continues to be very strong with collection, black label and Blue label driving a 20% sales increase year-over-year.

We aggressively went after color and cash mere cable, cotton, and mesh, and for the quarter our cash mere sales were up over 40% to last year driven by consumers' multipurchasing colors and silhouettes.

We also had enormous success with our Polo shirt for both men and women.

One of our biggest -- big efforts has been the limited edition Polo shirt with custom first and color custom me sayings that has guarded editorial coverage in vogue, W, and others.

We offered this in about 100 stores.

To date MEP's's sales are 9% over last year and our women's slim-fit shirts have doubled.

In July we also launched an exclusive create your own Polo offering on Polo.com, and in just the first few days we sold over 1,000 customized mesh shirt.

Our children's store opened in April and has been a terrific success.

We had a 90% sale-through in our classic cash mere and we launched a new Blazer for boys and had a 53% sell-through even at a point higher than the previous best-selling brazer.

As I mentioned on the last call we've developed a strong real-estate and store strategy which we will roll out approximately 50 to 60 Ralph Lauren stores over the next five years.

We begin in thof with the opening of a large store in Connecticut.

The store will be merchandise with sports wear focusing on Blue and black labels for women and Polo Ralph Lauren for men.

We believe this store will provide a strong template for other markets across the UFS.

While we ever ear always focusing on what's important to the customer, we remain committed to operating our businesses efficiently.

To continue to make progress on our multi-year retail initiatives regarding logistics and expense management.

We continue to cross-stock and remain on plan this year to cross-stock four million units, more than double the units from last year.

In addition, you've heard me speak about the importance of payroll management systems that would allow us to better flex our retail staff with peak selling times.

We have installed that system for all of our outlets and we began the pilot program just last week in Beverly Hills.

We'd expect the roll-out to all stores to be complete in the domestic field by fiscal '04.

In addition to these sales increases in the Ralph Lauren stores we had a dramatic revenue climb at Club Monaco.

Revenues were up 19% in the quarter despite our Canadian business being negatively impacted by SARS, obviously in the Toronto market.

One of our biggest to discuss for Spring was color.

A departure from our black and white statements.

This year more than 60% of the Club Monaco line was color.

We believe the customer has responded very well to our expanded pallet and will continue that trend for Fall.

Comp sales were up mid teens led by a very strong performance in women's knits which were up 26%, cargo pants, T-shirts, and accessories.

We also had good response to men's cargo pants.

Our knits were very strong in men's and women's and comprised about 30% of the sales for the quarter.

On the expense side we continue to manage our store costs including wages and benefits to improve scheduling in the stores.

We did have an expense in the first quarter associated with closing the Toronto headquarters.

Our Club Monaco business is now fully managed out of New York, and we're looking for areas where we can share services between our two companies.

We continue to be encouraged and very pleased with the consumer response to our designs in our retail environment.

We encouraged by the sales trends we are currently seeing in our stores and look forward to a strong Fall as we continue to strive towards our long-term operating profit goals of 8 to 10%.

Let me just spend a few minutes talking on some initiatives in our wholesale business where despite the adjustments for the discontinued Ralph Lauren sport line and the impact of the international currency fluctuations it was still a difficult quarter.

We firstly believe the way to re ignite our department store business is to take a leadership position in the industry.

We are very pleased with the success we've had in our own retail business and think we can apply some of those lessons learned to our wholesale business.

We have taken unprecedented steps to partner with our department store customers on how to improve that business.

Beginning this August 1st, we embarked on a very integrated pilot strategy with one of our key retail partners.

The initiative focus on identifying the right merchandise for the market, adding additional staff, and coordinators, to better merchandise the brand, using selected capital spending to update shops, and adding progressive and multifronted marketing programs to excite the customers.

Both our team at Polo and our retail partners are very excited about this initial program.

And our objective is to add 30% sales growth to the existing retailers business over the next three years.

In addition, we recently conducted quantitative research study among 2000 department store core customers from 75% of our wholesale volume accounts.

The focus of the study was to better identify what our customers are thinking and how they are reacting to our product.

This has truly been a collaborative effort as the majority of our department store partners have allowed to us use their database to survey the customers directly.

We will be sharing the results of this study with our department store partners over the next few months and we believe what we will all learn from this is how to better target and market the consumer shopping in department stores today.

We also expect to find how to better enhance and improve our merchandising, assortment planning, marketing, and advertising.

As I mentioned, while Spring was difficult we are seeing better performances this Summer.

The performance of our fashion product improved for Summer with two of our key groups, light-house and Summer whited, selling through at a faster rate than our Spring fashion groups.

We continue to see strong performance in our seasonal key items that represent a large percentage of our business.

The number one item continues to be the solid mesh shirt which we saw 7.3% increase over last yer's level.

Looking forward to Fall we made the fabric weight of our key product a major focus.

Starting with July through December deliveries, we have paid particularly close attention to both northern and southern climates in terms of making sure the stores have weight appropriate product.

In addition, our merchandise mix has a strong herbal between casual and dress sports wear that is worn to the office, out at night, and on weekends, and we believe that's what the customer is looking for.

In closing, although the economic conditions continue to be soft, we are confident that our strategies in addition I can't activities will deliver strong results.

Fiscal '04 is a year of setting the stage for long-term growth of this company, and that includes our initiatives in Europe and Japan, moving Club Monaco to New York from Toronto, expanding our retail presence, and taking operational responsibility for the Lauren line.

Our brand continues to be leaders around the world, providing international expansion opportunities.

We have strong cash flow, which we'll use to build new stores, invest in our brands and capitalize on strategic opportunities.

We look forward to delivering another strong year of results for our shareholders in fiscal 2004 and will give you a mid-year update in November when we report our second quarter results.

I guess at this point we will be happy to field questions from the listening.

Thank you, sir.

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 push-button telephone.

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

Please stand by for your first question.

It comes from Dennis Rosenberg from Credit Suisse First Boston.

Please state your question.

Good morning, and congratulations for getting Lauren off the ground so smoothly.

I had a couple of questions on Lauren.

First, you haven't shown the line yet.

There are no orders.

There's going to be competition from some new brands, so how do you get to that $400 million for fiscal '05?

Okay.

Well, at this point, that number is our best guidance.

What we've done, Dennis, to try to build the right thoughtful number is we've taken the historic performance by door of all of the existing Lauren doors and we've sat down with every key account in the country over the last three weeks, and we went out on a Road show, met with the senior merchants and the principals of every major department store in the country, and not only worked through showing concept boards for Spring, but actually laid out, by door, everyone of their doors, our thoughts on locations, expectations for volumes, and really dialogued that pretty thoroughly with each and every key account.

So that number is really based on their excitement over our ability to bring some fresh fashion to this line, their excitement over our decision to add quality but not raise prices, and their confidence that we will deliver an exciting product, because in the end it's about product.

So that plan is built bottoms up by door, by classification, missy, petite, large sizes, and dresses, and that's what it rolls up to.

Obviously, with the first full line being shown in September, we've got a design merchandise all the way through the following Fall.

So we're feeling pretty good about the reaction we got, the commitment we got, the shops that we're going to spend money to upgrade and renovate, and that's what the number rolls up to.

Okay.

And I've been modeling a net 20 cent contribution from Lauren for next year after eliminating the lost royalties, which would imply a first-year margin in the mid to high teens.

Is that a realistic way of looking at it?

Yeah, I think we've said that our expectation is based on some of the things I've just talked about, putting some quality back, that we aren't trying to put a lot of pressure in the first year on maximizing the profit margins, but I would say that's a realistic range Dennis.

Thank you.

You're welcome.

Thank you.

Our next question comes from Margaret Mager from Goldman Sachs.

Please state your question.

Hi.

It's Margaret.

How are you?

Good morning.

Hi.

Couple of questions, actually.

First of all, for the Lauren line, you were talking about 850 doors.

I'm wondering, what had it been that you're scaling it back to a level you feel is more appropriate?

And does that account for the difference between 400 and the 550 million that the line was doing under the licensee?

Yeah, I don't know that I could give you the exact number that the doors were in.

I think Jones probably has that.

But my sense is that it had crept over a thousand doors.

And I'm using missy numbers because obviously there are ways of adding petite, large sizes, and others, but I would say we've probably scaled it back by about 15% in terms of locations, and I think that it's also fair to say, Margaret, that on a door-for-door basis, this number is probably closer to a flat plan what this year actual is running, not off the peak year of two years ago.

So we're feeling, you know, very, very encouraged by the reaction of, you know, the retail partners, who really see this as the backbone of their better business.

There's definitely some excitement about new products coming into the better area.

Hopefully that stimulates total raise in the business.

But we have not, meeting with these key people, had anybody not understand the Ralph Lauren franchise and what this means to their women's business.

So it sounds like the doors that you're actually still going to be in, you're not losing any ground.

I think that's a fair assumption.

Okay.

Let's see.

With regard to Club Monaco and the performance there, I'm just wondering, is that business, do you think, in fiscal '04, it'll be a profitable business, you know, a positive contributor to profits in the retail segment?

And how are you thinking about Club Monaco within the context of Polo overall these days?

Does it fit, in other words?

Okay.

Well, I think, you know, suffice it to say in this quarter to have, you know, a mid-teens comp in any kind of specialty store retailing is unbelievable.

I really think John and his team fully understand who that customer is, both female and male, and we're really beginning to see some unbelievable sell-through, both here in the United States and Canada.

Again, even with a lot of the stores in Toronto being impacted by SARS.

So I think, first and foremost, we are on track with who the customer is, and I think we're delivering the right product.

We don't break out the profitability by divisions.

As you know, we've said.

But Club Monaco, mid teens sales increases will obviously flow through in a very important way to the bottom line.

And we think that we're on the cusp of a very exciting performance.

We don't see that as a one-quarter flash in the pan.

We have, as you know, this year, because we wanted to make sure we had the right merchandise marketing, store execution strategies, a very limited number V new stores planned for this year, but starting with next year, we do plan to begin the expansion of that chain, because we now feel like we've got the customer and the right kind of real-estate strategy.

So I think you will see us beginning to grow that business.

I think it actually doesn't compete with the Ralph Lauren business but compliments it in that more modern, urban sensability which they've been able to execute over the last couple of quarters I think is very exciting.

Okay.

And then just quickly on the wholesale business, I'm curious about the extra 25 million in capex.

What is the expected capex for fiscal '04 at this point given those extra expenses, and then just the whole idea of trying to work with the department stores to give them more coordinators and upgrade your shops, et cetera, you know, how will that -- will that be a shared situation?

The way, you know, these arrangements have been in the past.

Or is it solely on the shoulders of Polo Ralph Lauren?

And is it really worth it?

Because don't they just have bigger problems than even a great brand like Polo can solve?

Okay.

Well, that's -- let me see if I can go through the answer to that as you asked it.

Capex, we started the year in and around 100 million, which has been about what we've spent the last couple of years.

The $25 million that Nancy talked about incremental to Lauren is really focused on building out the distribution center, which is terrific for us we own the Greensboro facility, only having to add some infrastructure is a real win for us and really gives us a chance to leverage that distribution cost.

The other major component is really the key shops.

We want to make sure that in the major shops around America we're going to rebuild those shops and relaunch them for the Spring deliveries, and some capex to build out an office complex.

I don't believe the 25 million will be 100% incremental.

Jerry and I are working with the divisions, because I don't think we can spend that and intelligently spend the core.

So we'll probably cut back the core capex by maybe $10 or $15 million, Margaret, so the net maybe $25 million will not be all incremental.

I think we probably would look for the year to be in the $115 million range.

In terms of the strategic initiatives with respect to our pilot program, I think there are issues in the department store channel.

They've been well dialogued, and everybody has weighed in on them.

But nevertheless, it is an important channel of distribution for us.

I think we have learned in our own retail, which, as you can see, had an unbelievable quarter, that we think presenting the merchandise right and getting the environments right, making sure they're properly staffed, and a bit more of a focused marketing program has paid off for us, and we think we can help improve the trend.

I don't think Polo Ralph Lauren can lift the department store industry, but I think we can do our bit.

And the incremental cost associated with this support is going to be a shared effort between the department store partner and us.

We're putting up some of the investment, they're putting up some of the investment, and we hope, over the next three years, to prove that we can change the trend.

We'll keep you posted, and we'll see how it works, but we think it's worth the time and energy to do that in a pilot way.

Okay.

Congrats on getting the European consolidation done on tame and on budget, and give Lance my regards.

Thanks.

That was great work on a lot of people's parts.

Thank you.

You're welcome.

Thank you.

Our next question comes from Noelle Grainger from JP Morgan.

Please state your question.

Good morning.

Good morning.

Yes, congratulations on Europe.

That's a nice job well done.

Thanks.

On the consolidation.

Hoping, actually, you could spend a little bit more time on Europe, giving us a sense in terms of are you seeing any differential in the performance wholesale versus retail?

Overseas.

And can you give us any sense of, kind of given the increase in the promotional environment, what's happening to margins over there and how do you look at that for the rest of the year?

Okay.

First of all, let me just embellish for a few minutes on where we are with the consolidation, because as you all know and have cautioned us, it's been a big project, but I think well worth it.

We really have gotten through the lion's share of all of the peace and parts.

The office in Geneva is spectacular, and the quality of the employee we've been able to attracted there, whether in the finance area or customer service area or any of the administrative areas, is really even higher than we thought.

A bit fortunate for us have been our efforts to do this, at the same time there's been some softness in the marketplace in Geneva, both in the financial services and airlines, so we've been able to attract a very high caliber.

They've all been trained, they're up and running, and we did have the grand opening in June, which I was there to thank and greet these Swiss officials.

Brian Duffy is located there and that is his base of operation.

At the same time, we obviously had to manage the down-sizing and the closing of office in three countries: Italy, France, and England.

And we've worked with the local officials and all the different regulatory agencies to work our way through that, have treated the people very fairly, and have made that transition happen.

In selected functions, we continue to have people that will work with us through August, September, and even early October, but everybody knows what they're doing, and that transition seems to be going smoothly.

The other miraculous thing is really from a hole in the ground, although we have been planning it for six months, the first shovel went in the ground in January in Parma, and when I visited in June, a state of the art high-tech distribution facility up and running and shipping Fall product is a pretty amazing thing in six months.

But it's absolutely turning goods around in 48 hours, where prior to this it had been taking us several weeks.

So we will continue to down-size the existing shipping in Holland and in Italy and hope by the end of the year we will be fully complete, and that's going very well.

I think the economic environment in Europe is a lot softer today than anybody would have anticipated a year ago.

They felt the war directly and really killed off a lot of the tourist business.

I think the SARS scare did kill off some of the Asian tourists, although on the flip side we can really talk about why our Japanese business is good, and I think some of that is because the Asian tourists were not traveling internationally, and there was more domestic spending.

Having said that, there are also difficult economic markets like Germany that are running double-digit unemployment.

So a lot of our European business is more reorder driven.

We do more shipping up-front at the beginning of Spring and Fall, and then particularly in the specialty stores and the department stores is a lot of fill-in reorder business.

A lot of that reorder business did not come in the April/May/June period because the Spring business has been tough.

Whether it will come or not in the Fall, hard to tell.

We are shipping Fall.

We -- our shipping for Fall is actually a little better than it was last Spring, but nevertheless it's too early to tell.

So we're very encouraged by the efforts to consolidate.

We're just a little cautious about the overall macroeconomics.

As you know, at the moment, our business in Europe is still more wholesale driven than retail.

Our retail business there did not perform to the same sales trends that it performed here in the United States.

But we could see the impact very directly.

While we were running double digit comps here in the U.S., we were running negative in Europe.

So when you look at the operating profits of retail, you've got negative profits in Europe in this quarter, amplified by the weak dollar.

But we think as Fall has started to hit some of that has begun to dissipate in late July and early August, and we're hoping for a better Fall at retail than we had in the Spring.

Did the consolidation, your kind of current expense base for Europe, assume -- now, are you going to be getting drag from that over the next couple of quarters because you've kind of been assuming a better growth rate, or are you going to start to get efficiencies so it maybe gets better from here?

Well, the way it's planned out, again, plus or minus a little bit is what we're on, the bulk of the parallel costs, sort of the back end of our first quarter, a little slop other into second quarter that, begins to dissipate as we work our way through August and September.

When we get into the third quarter, you know, the slightly extra costs are offset by the beginning of savings so that we're back down to a more normalized level, then we work through the balance of the year.

The 20-cent a share accretion we talked about for fiscal '05, which we still feel very strongly about, is really based on having the full year running rate of a much more efficient, nonduplicative infrastructure.

So all of that remains on track.

There's always a little in and out, but fundamentally we're very pleased.

Hoping you could also, just touching back on Lauren you know, on the missy business you've indicated 850 doors, you know, some of the -- most of the other competitors have indicated somewhere between several hundred and, you know, 700 doors.

It kind of doesn't all add up, and I was hoping you could maybe just weigh in.

I mean, are there other businesses out there that, you know, have been underperforming that are losing space?

Because it doesn't seem like you know, based on the previous Lauren distribution that it really all kind of fits together.

Well, I can't answer for what other people are saying about their door count.

I can tell you that our door count is somewhat reflective of the fact that we are at the high end or better.

So for us, people like Bloomingdale's, Lord and Taylor, the high end of Marshal Fields, are important backbones, in Nordstrom's, our important backbone, I'm not sure whether all of the other lines and placement strategies include that high-end piece of it.

I also think it's fair to say that the department store business has been difficult, and so to your question of whether there are other businesses that have not performed, that could be freeing up open to buyer space, I'm assuming the answer to that is yes.

But since I really can't respond to other lines and other strategies.

We're confident that, you know, that number, both for missy and special sizes, is what we've been in dialogue with the retailer about in are comfortable.

We've made it clear that in order to deliver on time, which is absolutely critical, we've had to put production into work well in advance of the market.

That's the way this business is always run, and that's the dialogue we've had with our key accounts.

So everything is subject to change.

We're obviously still in the early stages of learning the Lauren business.

Since I though everybody is interested in hearing progress updates, that's really where we stand.

Would you say, just to be clear, the 850 doors, do you have at this point what you would consider to be firm commitments for those doors?

We've developed business plans by door, by location, with each of the key retailers.

And, you know, it's not like we spent three minutes doing this.

We spent weeks putting together all the histories, all the performances, all the sell-through's, terms, margins, and sitting down, you know, in very long sessions with the key retailers.

That's the plan that, in concert with them, we've come to.

Again, if you're asking me is it possible there will be changes?

Of course.

But, you know, I think the sheer amount of success Lauren has had and the overwhelming dominance of the Ralph Lauren brand across all categories, I think it's something everybody is being very careful about wanting to disrupt.

That coupled with the excitement about the lines we've been previewing, the commitments to better fabrics which we've been showing, I think people are very excited

Thanks very much.

Thank you.

Our next question comes from Stacy Pak from Prudential.

Please state your question.

Actually, it Liz Dunn.

Thank you.

Can you discuss the breakdown between the 20 cents in loss of license income and start-up costs, how it breaks down?

Sure.

We think that the loss of licensing income has about 8 cents a share, and it's about 12 cents start-up.

The start-up includes everything from staff, which we started hiring actually even in the first quarter, just was not meaningful enough to identify, includes us building to an organization of about 200 people, which should be fully in place by September market.

It includes the addition of the incremental warehouse employment that needs to be put on line to handle this, which comes on later.

It includes, you know, all the costs of building and developing a line, and obviously, you know, to whatever degree capital impacts.

All of that gets laid up against our point of view about fourth quarter sales and our point of view about fourth quarter margins.

Obviously reduced by whatever we think we're going to spend on advertising to launch the brand aggressively.

And that comes to about 12 cents.

And again, it's not an exact science.

That's our best guess at this point with a lot of homework in it.

But, you know, we see, you know, 12 cents for that and 8 cents for the loss of the licensing adding up to the 20 cents.

Okay.

Have you -- does the 8 cents include a reduced assumption about license income based on what Jones is currently saying about the brand's performance this year?

And then also what do you expect to be the sales impact from Lauren in the fourth quarter of this year?

Well, our assumptions about licensing include no fourth quarter licensing royalty, obviously, and it's our best guess at the second and third quarter, based on forecasts we've had from Jones on jeans and Lauren, and our best estimates relative to our minimums.

The combination of that is what we've got built into our second quarter, our third quarter, and zero for the fourth quarter.

But in terms of sales for the line that will begin shipping in January, that will flow into this year, what are you looking for?

I think we'll have to wait until November to get that out.

I just want to make sure we get through the September market and we're confirmed.

But, again, our best thinking is built into the total 20-cent number.

Okay.

Then off of the 400 million estimate for fiscal '05, what do you think the growth is from there, and what can that business ultimately be, in your view, in terms of volume?

Well, it's the right question, I'm just not sure, sitting here today in August that we can go beyond that.

I can tell you conceptually we see it as a growth opportunity.

We've certainly looked at the by-door productivity in the doors we're targeting and think there is up-side.

We think career has been underplayed, and, therefore, will be looking to expand that.

There are also opportunities in categories like suits and coats and other product extensions, and then ultimately we have to evaluate the potential for whether or not we feed it as an international business.

So all of that business is really ours.

I think the other thing to remember is that, you know, this is a business that is target to the bull's-eye department store customer.

So some of it will depend on how department stores fair over the next three to five years.

But we don't see the 400 million as the cap, we just see it as our best thoughts in terms of fiscal '05.

Okay.

Great.

Then just one question on guidance.

Can you give the Q2 and full-year guidance for equity investment income?

Is that like a trick question?

Liz this, is Nancy.

You're talking about -- do you want -- and these are numbers net of taxes.

If you have your equity income from Japan then you back out your minority interest, so for the full year, that's approximately 4.5 million, and that's pretty equally divided among the four quarters.

Okay.

Great.

Thank you.

You're welcome.

Yeah, I think I said a little bit earlier, probably went through it quickly, we've actually had a very nice first quarter in Japan, and did get slightly more out of the new relationship than we had originally budgeted.

I think you also know we talked about earlier that we report Japan on a one-month lag, because by the time we get the closing information, get it translated from Japanese to English, so we're reporting Japan on a one-month lag.

But we've seen a strong performance of our brands in Japan.

We think the lack of travel has certainly been a factor, but we also think some of the new product offerings have been enormously successful, as well as Blue label in Japan, where we, as you know, wholesale , has been a very, very successful business.

So not unlike others, we've seen the Japanese market strengthen a bit and feel encouraged about it.

Okay.

Great.

Thanks.

Thank you.

Our next question comes from Lee Backus from Buckingham Research.

Please state your question.

Yeah, first on retail, congratulations on those comp store sales, I'm wondering, last year, your operating margins in retail were about 4% and your goal is 8 to 10%.

Yeah.

Your guidance for this year presupposes what -- how much improvement to get to that 8 to 10% level?

Well, we are, obviously, very, very excited about the comps, Lee, and I don't sit here and project comps like that for the full year, but I would be, you know, comfortable targeting, you know, at least a 200-basis-point improvement again as we did last year in our retail performance.

We methodically work our way to that 8 to 10.

Our current projections envision a more conservative you know, back half of the year than certainly what the first quarter ran, but the success we're having at the Polo stores really is very exciting and clearly Club Monaco's first quarter was beyond expectation.

So we've continued to use the 200-basis-point improvement as our guidance, but it could be more.

We'll see.

Also, just could you give a quick comment on receivables, which I believe were up over 20%?

Jerry will comment on that.

Over half of that was in our men's wear business and really represented just the timing of the shipments.

Europe was up, a piece of it due to the exchange rate fluctuations, and we had some licensing receivables this quarter that we didn't have a year ago as a result of the quarter closing earlier.

But our DSOs are actually down.

Thank you.

Our next question comes from Jeff Edelman from UBS.

Thank you.

Good morning.

Good morning, Jeff.

Two questions.

One, could you discuss the impact that Japan had on volume in the quarter and sort of like it ran through the income statement and what we should lack at for the full year, at least on the top line there?

The question again, Jeff, is the impact of Japan on the top line?

Right.

Yeah, we actually do an enter-company he will limb litigation for Japan in terms of royalty income versus the sales from Japan.

So in total it was only about 6 or 7 million dollar impact.

In the quarter?

In the quarter.

Right.

Okay.

Thank you.

And secondly, Roger, I believe you had said that your target volume for Blue label was about $100 million in the first year.

Yeah.

Could you give a sense as to how you're tracking towards that number and, you know, qualitatively domestic versus international?

Sure.

The volume number that you're referring to, Jeff, is a hybrid of both retail and whole sale, but let me break it out for you.

The Japanese wholesale business and the European wholesale business combined at wholesale was in excess of the $100 million.

In some cases, that's a replacement for the sport business, in other cases it represents new business.

Here domestically, where we're selling it through our Ralph Lauren stores, it represents about a third of our women's business, the rest being collection and Black label.

So in total, the first year, again using wholesale internationally and retail domestically, more than exceeded the $100 million.

So we're very, very pleased with the customer reaction to that and, you know, expect that to be a backbone of our own retail expansion.

You remember the genesis of this business, we really felt in order to have a successful vertical retail business here in the United States we needed to be able to have a counterpart to the men's Polo line.

Clearly the success that we've been reporting in the Ralph Lauren stores in one part is driven by our ability to get that balance.

So we're pleased with the line, that it's accomplishing really both objectives, international, wholesale and domestic retail.

One follow-up.

On your European outlook, that's on a reported basis, the mid single-digit increase?

Yes, it is, but, you know we have taken a very cautious view of exchange rates.

We're not trying to be currency speculators.

For what it's worth, for those who probably don't follow it this closely, the actual exchange rate in Europe versus last year represented 24% change and represent about 13% stronger euro than we had actually budgeted.

The Canadian dollar is also about 12% higher than we had budgeted.

So as we look out over the next three-quarters, which obviously will have more impact than a quarter than only represented 2% of our annual earnings, currency exchange continues to be an issue, but we have taken a cautious view about, you know, what we're using in terms of forecasting.

We will see what happens.

Thank you.

You're welcome.

Our next question comes from Virginia Genereux from Merrill Lynch.

Please state your question.

Good morning.

Can you help me again on the Japan situation?

Because I thought, Nancy and Jerry, I guess, that you guys were consolidating that royalty income so that would help royalty revenues, but that you were going to have to effectively, you know, back out minority interests so that, you know, minority interests equity income would be a negative.

Right.

There's two Japan pieces.

Right.

There's our investment in the sublicensee, which is reported as a net of tax as investment income and it has no effect on revenues.

We just take whatever their profits were, tax effect it, then our percentage ownership times that is what we report in our financial statements.

For the master license, there is a -- we consolidate that on a GAAP basis, including the revenues, which their revenues are what then get reported back to the U.S., contributed back to the U.S. in the form of royalty income.

So for the most part, and then what's left is the profit for that licensee, and we take 50% of that profit as a minority interest tax-affected after operating income.

So when we -- but when we report it, we can't duplicate their revenue and the royalty income.

So we eliminate the royalty -- we show it as royalty income and we eliminate the revenue.

Okay.

So, Jerry, I guess the sub license --

So the sublicensee has very little revenue, as I said, five to six million per quarter.

Expenses to profit which we would then take 50% of.

And on an equity on a minority interest, the sublicensee is basically more profitable than the master license?

No, it's not.

Oh, yes, the sublicensee is more profitable

So that's why equity income

That's right.

It's much more profitable.

Thank you.

Then on inventories, you all said, I think, that part of the inventory up increase was 20 million in U.S. wholesale receipts for additional September orders.

Can you comment on that a bit?

Is there --

That's a good question.

It really is a flow issue.

What it is impacting, and it's consistent with our earlier guidance in terms of sales, this is not new news, but obviously we had to bring in June what we needed to then turn around and she in the third quarter.

Third quarter wholesale will be up about 20 million to last year, which will then play out with third quarter being down a little and fourth quarter being down a little more.

It really is a nine-twenty-five delivery, which last year was a holiday delivery, and this year is the last delivery of Fall.

That obviously falls right on the cusp of the end of our quarter.

Our expectation is, therefore, you're going to have a July, August, and important September delivery where last year we had July/August, not such a good delivery, bigger October and November.

So it's more a flow than it is by the end of the year totally incremental.

Okay.

Great.

That 20 million is supporting that.

The euro conversion just inflates the value of the European inventory, and the rest is, you know, inventory that's driving our retail business, which, you know, I'm pleased to report July has been more of the same.

So we seem to be on a good trend there.

Great.

That makes a lot of sense.

Lastly, or second to lastly, maybe, the tax rate in Europe --

I'm going to need lunch pretty soon.

Okay.

The tax rate in Europe, may I ask, is that -- as you all look forward, shouldn't that begin to come down, and can you give us a sense for fiscal '05 what a lower tax rate in Europe might mean for your companywide tax rate?

Yeah, we do expect to get some improvements in the European tax rate, which we will make clear in our '05 guidance.

So when we break that out in some detail, we will be happy to take you through that modeling exercise.

Okay.

Great.

Thank you.

You're welcome.

Thank you.

And our final question comes from Jennifer Black from Wells Fargo Securities.

Please state your question.

Good morning, and congratulations as well.

Thank you.

Good morning.

I wondered if you could speak a little bit more on the Lauren line.

And I know that, you know, you're going to have better quality and better fabrication, and I just wondered if you could expand a little bit on some of the differences.

Are you going to be farther and deeper?

Can you give us any sense as to how the line will be changed?

Yeah, I think, Jennifer, obviously when you get down to the, it's about product.

And I would start at the top with really the beauty of this is Ralph's genius and design through collection and Black labels that allows us to make a Lauren line that is commercially broad-based, and the purity of that thought from Ralph through that, I think, is the driving force.

So first, without extremes, we think the line will have a little more fashion than it's had.

We think it's gotten a little flat.

Second, we think the line was very career-absent, and we think that particularly in view of where the marketplace is going, that we think there's an opportunity to get the career business to be a much more meaningful part of this than it has been in the past.

In terms of SKU's, or items per classification, per delivery, we are keeping that approximately the same.

I don't anticipate a major changes there, at least in the early stages as we see this flow through.

We've also committed ourselves to maintaining the fit as we've been led to believe that this is one of the best fitting product in the marketplace.

So all of the fits and bodies and specs will stay essentially the same.

And I think we've just taken a stand on using better fabrics.

We think the customer has been feeling the difference.

We've certainly think they are more receptive to better quality fabrics and if we can do that and not change the retail prices, which we think is critical, I think the retailer gets a higher unit sale, which I think they want in this environment.

I think department stores are thinking hard today about maybe not getting incremental transactions but wanting a higher unit sale, and I think the Lauren strategy plays well against that.

So I think we're being conservative in the right places about fit and deliveries and assortment plan.

I think we're being a bit more aggressive about fabrication, styling, and I think we'll also look to do a little more marketing and advertising as we work our way through the early stages of this.

So we think it's a multipoint plan that, again, interaction with all the key accounts around the country has been universe alley applauded.

And do you think it's about a year until you probably take this internationally?

Well, I think it's too early to tell.

We've bitten off a lot to get Europe done, to get this up and running.

You know, I think we'll take it in steps.

I think we're going to be very excited to have the September line opening, and Nancy -- Nancy is going to coordinate something to have all of you invited.

I think we will be excited to have first deliveries rolling out of the distribution center in January, and I think we'll go from there.

Thank you very much, and good luck.

Thank you, Jennifer.

Appreciate it.

Let me just say in closing, with all the uncertainties in the world, I am very pleased with our retail performance.

I think it shows an incredible strength around one of our core growth and go-forward strategies.

We're incredibly proud of the organization's ability to pull together and get the European integration properly executed, and I think we're all having a lot of fun in a very challenged and stimulated by the opportunity Lauren presents.

So much of what we're doing this year sets the stage for '05 and beyond.

And I think you can see we've at least thought about have a point of view, and are working hard to execute on all fronts.

So we'll look forward to seeing the customer reaction to Back To School, Fall, and Holiday, but at this point, you know, we're feeling pretty solid about where we are.

So appreciate your time and interest, and you can follow up with Nancy and Denise separately.

Thank you.

Thank you.

Ladies and gentlemen, this concludes our conference for today.

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

All parties may now disconnect.