雷夫·羅倫馬球 (RL) 2004 Q2 法說會逐字稿

Good morning and welcome to the Polo Ralph Lauren second quarter 2004 earnings 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 call over to Nancy Murray, Senior Vice President of Corporate Affairs.

Please go ahead.

Good morning, and thank you for joining our Polo Ralph Lauren second quarter fiscal '04 conference call.

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

I'll review the numbers for the second quarter and the financial outlook for the full year fiscal '04, then Roger will update you on our retail strategy, our wholesale business, including the Lauren business, our international operations and expansion opportunities and the developments in our licensing business.

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 discussion today, including future earnings expectations 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 our forms 10-K and 10-Q, and we refer you to them.

Please note that for today's discussion purposes, we will be comparing our earnings excluding foreign currency gains and losses that are a result of certain balance sheet transactions.

The company believes that these adjusted results provide a meaningful comparison for its ongoing operational and financial results.

And we refer you to the table reconciliation of GAAP results to adjusted results in the earnings release posted on our Web site at investor.Polo.com.

Now to the numbers.

We posted adjusted EPS of 52 cents for the second quarter, in line with the range of guidance we provided.

Just recall that the 52 cents includes start-up costs associated with the new Lauren line and reduced royalty from the current Lauren and Ralph lines.

For the quarter revenues increased 10.4%, primarily driven by double-digit total sales increases in our specialty retail group, the inclusion of the increased royalties as a result of the consolidation of our Japanese master license and a high single digit increase in our wholesale business.

Our gross margin declined slightly to 49.5% from 50.1%.

And that's primarily from softness in the European wholesale business and the promotional environment in the men's domestic business in department stores, and those two were actually partially offset by strong increases in retail merchandising margin.

Our operating expenses as a percentage of revenues increased 90 basis points to 37.8% due to a change in the business mix as a result of increased retail sales, start-up costs associated with the operations of the Lauren line and the consolidation of expenses of the Japanese master license now in our results.

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

And you'll note today that we've included a segment table with our earnings release.

Our wholesale revenues were $336.1 million, which represents an increase of 8.2% over last year.

This increase was primarily driven by timing in our domestic men's business as there was a seasonal shift of more fall product shipping in September this year as compared to October in the prior year.

For the wholesale segment operating income was $25.5 million and that compares to $35.8 million in the prior year's quarter.

These results include the effect of the softness in the European business that I mentioned earlier and the inclusion of the Lauren line start-up costs.

Turning to our retail segment, sales grew 12.6% to $297.1 million and that's on a base of 265 stores or 1.88 million square feet operated in the second quarter.

This compares to total retail sales of $263.8 million on a base of 243 stores or 1.79 million square feet in the second quarter of fiscal '03.

On a consolidated basis for the quarter, retail comps were up 8.3%.

The consolidated comps were driven by positive comps in each of our retail formats, which includes mid-teen, positive comps in Ralph Lauren retail, high teen positive comps at Club Monaco stores and mid-single digit positive comps in the outlet stores.

Retail's operating income for the second quarter was $21.1 million compared to $13.3 million in the second quarter last year.

That represents a 59% increase in the operating profit and an operating profit margin improvement of 210 basis points.

The higher operating income reflects significant improvement in our domestic Ralph Lauren stores and our Club Monaco stores.

As I said, at the end of the quarter Polo operated 265 stores compared to 243 stores at the end of the second quarter last year.

Our current retail group consists of 54 Ralph Lauren stores, 62 Club Monaco stores, 96 full line outlet stores, 22 Polo Jeans company outlet stores, 22 European outlet stores and nine Club Monaco outlet stores.

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

For the quarter licensing royalty increased 12.4% to $74.5 million compared to $66.3 million in the prior year's second quarter.

This was driven by the consolidation of our Japanese master license.

Operating income for licensing was $36.4 million compared to $35.6 million last year.

Now let me touch on the balance sheet.

We ended the quarter with $210.6 million in cash and our total debt was $264 million of long-term Euro bonds.

At the quarter end there was no short-term debt because you may recall we used our cash on hand to fully pay down our short-term bank borrowings at the end of June.

For the quarter our total inventory decreased slightly, which is consistent with our strategic initiative to control inventory levels.

As we told you on our conference call in August, we had expected those inventories by the end of the second quarter to be in line.

U.S. inventories were down approximately 9%, and that was offset by an increase in Europe driven primarily by changes in currency.

Trailing inventory turn was 3.19 times, approximately flat to last year.

For the second quarter our capital expenditures were $25.6 million compared to $23.7 million last year.

As we said in August, we expect our fiscal '04 capital expenditures to be approximately $115 million.

And that number includes approximately $25 million associated with the start-up of the Lauren line, primarily for our Greensboro warehouse infrastructure and Lauren in-store refurbishing.

Now turning to our outlook.

As we stated in the press release, we want to reiterate that we expect adjusted earnings per share for fiscal '04 to be in the range of $1.75 to $1.85.

And that number includes approximately 20 cents for the Lauren line start-up costs and loss of licensing royalty from the Lauren and Ralph lines.

We expect adjusted earnings per share for the third quarter of '04 to be in the range of 44 cents to 49 cents.

And that compares to 47 cents in the third quarter last year.

And we expect adjusted earnings per share for the fourth quarter of '04 to be in the range of 75 cents to 80 cents.

And that compares to 77 cents in the fourth quarter last year.

And now I'd like to turn the call over to Roger.

And then we'll open it up for questions and answers.

Okay.

Thank you, Nancy, and good morning.

We're very pleased with the quarter, particularly with our performance and our growing retail business.

In addition to meeting our expectations for the quarter, we made progress with our multi-year strategic initiatives both domestically and internationally, which are designed to generate greater benefits in the future.

This morning I'd like to spend a few minutes updating you on our retail business, our progress with the Lauren line and our men's wear, as well as our international expansion opportunities, and lastly our licensing business.

We are extremely pleased with our retail performance for the quarter and for the first half of the year.

And as Nancy pointed out, second quarter our retail revenues were up 12% with an 8.3 comp and operating improvements of 210 basis points.

With our operations on track and our merchandise and assortment strategies in place, we feel we have strong momentum going into the holiday season.

As any good merchant will tell you, our success in retail all starts with the right product.

Ralph continues to create and design the best and most in-demand products in the world.

We've been adding experience and strength to the leadership of our retail group, and that coupled with the right merchandising and marketing support has resulted in significant progress in how we run our retail stores.

At our Ralph Lauren stores during the second quarter our performance dramatically outpaced last year's, and exceeded our forecasts in all categories of products, including men's, women's, children's and home.

Compared to last year's second quarter, we had double-digit increases in all of these merchandise categories.

In addition, the right product flow and geographic allocation of product have also produced strong results in all major markets.

We continue to see a return to career exemplified by our increases in men's suits, shirts, ties and women's in our response to the Black Label brand, which continues to exceed expectations with sales up over 20% in the quarter.

To continue our momentum into the holiday season, we plan to be set up for holiday shopping two weeks earlier this year and will be emphasizing luxury items such as cashmere in all of our areas of business.

We'll have a continued push on gift giving for home, accessories, apparel and kids, and you'll see a lot more color this holiday and trending into spring.

Turning to the outlet stores, we continue to see a strong performance, particularly against last year's equally strong performance.

Our outlets continue to benefit from significant operating improvements, our staffing initiative and climate-appropriate regional merchandising.

We have introduced systems to create efficiencies such as payroll and staff management and will see the benefit of this in the future as we more closely align sales associates' schedules with customer traffic flow, especially on busy shopping weekends.

We are already seeing the benefits of our cross-stocking initiatives in our Greensboro warehouse as we ship more and more units directly to our stores with minimal handling at our distribution center again, contributing to reduced costs and faster inventory turn.

Club Monaco had another terrific performance with high teen increases in revenue and high teen positive comps in the quarter.

And this is despite the lingering effects of SARS in the Toronto market and the blackout in the New York market, both of which occurred this quarter.

As you'll recall, over 50% of our U.S. sales are concentrated in New York City.

We introduced a significant amount of color in spring and summer at Club Monaco, and we're continuing this trend into fall.

As I mentioned, with comps in the high teens, we're getting strong contributions from both our women's and men's lines as well as accessories.

We're seeing a strong and growing trend in career items and Club Monaco has successfully increased its penetration in this category.

In women's the big items are skirts, knits, basic pants and blazers, and in men's, knits and woven shirts are the key drivers.

Our accessory business, especially bags and belts, has doubled in the past year.

You'll see more of this as we go through the year with career being even stronger as a category in spring of '04.

Our holiday merchandise will arrive in the stores mid-November, and emphasis will be on holiday dressing, sweaters and flannels.

Accessories such as bags, scarves, gloves and hats should be big sellers, so we're increasing our selling floor capacity above its non-holiday level to capture this increased business.

During the quarter we completed the Club Monaco headquarter move to New York.

Right now we are in transition with certain Polo and Club Monaco information systems, but we have begun to integrate key back office and infrastructure systems with Polo.

We are now leveraging best practices in various areas.

For example, loss prevention practices, systems and purchasing were full integrated into Polo during the quarter, and by the end of our fiscal year, we'll have all our systems and infrastructure including merchandising, financial controls and payroll integrated with our Polo retail systems.

So, our back of the house integration for Club Monaco should be complete by the end of the year.

And we'll start fiscal '05 with a business model that is fully integrated.

While we don't report Polo.com in our numbers, we think it's interesting to tell you where we are and give you some flavor as Polo.com continues to be a very important part of our retail initiative.

We're also very excited about this holiday season.

To promote Polo.com as a gift destination, all of our retail direct mailers will highlight the holiday gifts and features on the site.

Polo.com is also the exclusive destination for what we believe will be the hottest gift of the season, create your own Polo, where customers can create shirt color and pick the pony color, which we will embroider, including the vintage year on the left side vent.

Polo.com is also serving as a virtual stockroom for our stores.

Where our store associates can find products for the customers, when a certain item size, or color is out of the stock in the store, we can ship it directly to the customer's home.

We will be supporting all of our holiday initiatives with dramatic print advertising campaigns.

We begin the season with a 14-page spread in the "New York Times" magazine section on this Thanksgiving weekend.

We will also be featured in a variety of magazines and newspapers emphasizing our holiday and cruise items.

This will be followed up by a tightly targeted direct mail piece covering a wide selection of Black Label, blue label, kids, fragrance, estate jewelry and footwear.

So as you can see, our direct to customer businesses, whether it's retail or Web-based, are performing very well.

Turning to the wholesale business, there are two main items I want to discuss this morning.

We can start with the men's business, and then we'll move to an update on the Lauren line.

Overall the men's wholesale business continues to be challenging.

While we saw strong sales increases in our top tier and better doors, the business continues to be more difficult in major department stores.

We are pleased that at the better doors such as Neiman's, Bloomingdales or Marshall Fields, our men's business is trending positively.

In addition, on the last conference call I discussed an integrated strategy we're beginning with one of our key retail partners.

As I mentioned, the initiatives focus on identifying the right merchandise for the market, adding staff and coordinators to better merchandise the brand, using selected capital spending to update shops and add multi-tiered marketing strategy to excite the customer with the objective to increase sales over the next three years.

Two months into the project, our partner is pleased with the progress we've made in the A and B doors where the positive trend change is in the mid-teens.

However, the smaller C and D doors we have not seen any change.

We'll keep you updated on this initiative as we progress over the next few years.

These positive trend changes in the top tier doors support our initiative to review our domestic distribution point and make sure that our product, our merchandise is in the strongest channel of distribution.

While this strategy impacts our domestic sales negatively in the short-term, it is absolutely the right decision for the long-term local growth of our brand.

Moving onto Lauren, over the last five months we have worked very hard on our new Lauren line and are very excited about the results to date.

Our organization is in place under the leadership of Kim Roy who joined us this summer as President of the Lauren brand.

Kim and her team have done an outstanding job.

We've hired the right people, assembled a first class team, designed the line in record time for spring '04 and launched it during market in September.

When retailers saw the line in September, their reaction was universally positive and they were enthusiastic about our improvements in fabrication and styles of the line.

We continue to feel confident in our original outlook that the Lauren brand will produce approximately $400 million in sales in its first full year of operation in fiscal '05 and that we can manage the business to produce mid-teen margins.

Going forward, we expect the mid-teen margins on this business will more than make up for the loss of the royalties under the former licensing agreement.

Many of you have seen the spring '04 Lauren collection either in person or in the press and have given us very positive feedback, which we appreciate your support.

But I want to point out to you that while all the external attention has been on the spring line, we're also busy getting the summer and fall '04 lines underway, and we are scheduled for the summer line to go to market next week and the fall line is in development.

We are extremely pleased where we are at the moment.

The new Lauren line is distinctively Ralph Lauren, both in modern and classic.

We updated the styling, the trims and the fabrics but didn't change the fit.

This is an invigorated life style line that covers all activities from black tie to go to work to polished casual to weekend to denim.

It offers misses, petite and women's sizes for fashion and fashion basics including woven shirts, knits, sweaters, bottoms, outerwear and dresses.

We've listened to our customers and in response have increased the proportion of the line to be about 20 to 25%.

Lauren is designed especially for the woman who appreciates the Ralph Lauren esthetic and wants to shop at department store prices.

And through our economies of scale and relationships in the industry, we've been able to upgrade the quality yet keep the prices constant.

For example, jackets are in the 169 to 250 range and knits are in the 29 to $59.00 range.

On-time delivery is critical to the success of the line.

Kim Roy, Doug Williams and I were in Asia in early September to meet with all of our key supplies and manufacturing partners to be sure that production is well underway and on track.

We are committed to a flawless, on-time delivery, and our schedules with those deliveries reflect that.

We plan to ship the first part of the spring line at the end of January for early February in-store presentation.

The next shipment is scheduled for end of February for early March, and we plan to have our first summer shipments leave the distribution center in late March to be on the selling floor in early April.

As I mentioned, we're confident in the $400 million revenue forecast and we are tracking all the direct Lauren expenses and making the corporate allocations appropriately to get a firm grasp on the effects of this business on our overall operating income.

Capital expenditures estimated for the year relating to Lauren are about $25 million.

That money is earmarked for three projects.

The first is our Greensboro distribution center to build out jet railing to handle the increased hanger merchandise.

The facility has adequate capacity to handle the increased volume from the Lauren line because of our earlier initiatives to use the space more efficiently through cross stocking, the elimination of returns and other improvements.

Our Greensboro facility is ready to receive the first shipments of basic replenishment items in December.

The balance of the capital for Lauren covers upgrading of shops and fixtures in approximately 100 of the top doors and the building out of a New York-based office location.

As we said many times, we see this as an exciting opportunity for us to directly operate a very important part of our business.

Lauren is a great brand with very strong marketplace recognition and consumer demand.

We're excited not only about the imminent spring launch and the follow-on summer and fall designs, but more importantly about the long-term performance of this business.

The potential for the future of this line is tremendous.

Turning for a moment to internationally, we have strong strategies encompassing Europe, Japan and down through the Pacific rim.

We're very excited about the opportunities for expansion in these regions.

While our approach to each region is specific to the business climate and structure there, a common goal is to broaden our reach largely through the increased direct ownership and control of our brand in opening new specialty retail stores.

In Europe we started this strategy by buying back our licenses and building an infrastructure that would support a business twice the size of our existing business there.

Our consolidation of offices was largely complete this summer with our move to Geneva.

Our headcount in Europe was significantly reduced as we eliminated duplicate functions in multiple locations.

Most recently we closed our Paris office in September.

So, essentially all Pan European functions from IT to customer service to sourcing now reside in Geneva.

The office is staffed and up and running.

About 40% of the people were transfers from our offices in other countries, so we're able to preserve the knowledge base, which we then supplemented with very high-quality local hires.

We began the European consolidation effort with 10 different distribution centers throughout Europe and by the end of this fiscal year we will be operating just four facilities with further rationalization in fiscal '05.

We opened our new primary distribution center in Parma, Italy this summer, and it's running beautifully with the majority of the goods being shipped from that location.

All these efforts are designed to reduce costs, increase service levels and have an infrastructure to support future growth.

While we have signs of a U.S. economy picking up, Europe continues to face sub economic climate, particularly in Germany and France.

However, I've said before we are very pleased that our consolidation efforts are largely behind us and that we are positioned to benefit from efficiencies in our business there, both now and in the long-term.

In Asia our strategy is to continue to expand the brand through the select wholesale doors as well as strong retail presence for the Ralph Lauren specialty stores.

As you know, we bought back the majority of our master license in Japan and a 20% interest in the primary sub license.

There are several licenses in Asia coming up for review in the next couple of years, and our strategy is to review these arrangements as they come up for renewal with an eye towards establishing a broader presence in Asian and to insure the best placement of our brands while securing an appropriate return on our invested capital.

In the past three years we have renovated 200 shop-n-shops in Korea and 125 shops in Japan.

Sales are up double digit in the renovated shops.

We expect Japan to continue to be a strong contributor to our profit both in the short and long-term and play a meaningful role in our global strategy.

Our licensees have also opened 20 free-standing Ralph Lauren stores in Taiwan, Malaysia, Singapore, Korea and Australia.

We are currently active in the identification stage and expect that over the next 12 months we'll have identified additional retail locations that is are appropriate for our free-standing retail stores.

During the quarter two new stores were opened in Australia and the Sydney store was renovated and expanded.

Last month a new flagship store in Seoul and another significant store in Singapore were opened.

These new locations are owned and operated by licensed partners.

Our product licensing strategy consists of looking at our various businesses and lining them up against our core competences to get the right mixture for success between what we own and what we operate and what we license to appropriate and strategic partners.

In licensing we're also looking at the proper tiering of our brand with our partners.

Our home product line is a great example of this strategy at work.

We have licensed our brand for such items as tabletop, bed and bath, furniture, paints, broadloom and gift items, and we have built a tiered business strategy within the broader category of home to best marry products with distribution channels.

Selected Ralph Lauren stores carry Ralph Lauren home furniture as well as exclusive tabletops, bath and bedding items.

In additions, we opened a showroom in the D&D building in New York supported by excellent sales service to broaden our reach to the interior design professionals in both Ralph Lauren home and the showrooms.

Ralph Lauren home.polo.com is quickly becoming a strong part of the sales story with virtually every product on-line for customers to view and order.

We are very encouraged by the business we see here, and it's likely that we will add another regional design showroom center in fiscal 2005.

The Lauren brand, where both bath product, tabletop and furniture, is a brand we are furthering the development for our better department store partners.

Our new Lauren furniture line will ship before the end of the calendar year for spring '04 launch in over 200 doors, and we just recently introduced the Lauren tabletop line for spring.

So, in summary, while we're certainly keeping our eye on delivering results in the short-term, we're also building a foundation for future growth.

Our retail stores are performing extremely well, and we will continue our expansion plans.

International is a significant opportunity for us in Europe, Japan and the rest of Asia, and we continue to review our licensing programs to be sure we have the best partners to manufacture and market our products.

We have managed our financial resources well resulting in a strong balance sheet to support these initiatives and we're excited about the Lauren summer '04 launch and about the holiday season.

As I indicated earlier, we expect a strong year in fiscal '04 and we will give you some guidance on fiscal '05 when we report our third quarter numbers in February.

So at this point, we'd be happy to field questions if there are any.

Thank you.

The question and answer session will begin at this time.

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

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

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

Your questions will be taken in the order they are 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 and congratulations on another --

Dennis, we can't hear you.

Can you speak --

Yeah.

Hi.

Congratulations on another strong quarter.

I had three questions.

First, the men's wear business, you said that's trending better in your own stores and the A and B stores.

Could you talk a little bit more about what's happening in the C and D stores and what your strategy might be there?

Do you want me to go through all three questions at once or should I come back after --

Why don't I answer them one at a time?

Okay.

Yeah, I think we characterize the men's business as challenging, and I think that sort of captures the headlines.

But what's interesting is underneath that, the very, the better specialty stores, which is really a Saks or a Neimans or the better department stores which, perhaps, you know, Bloomingdale's, Marshall Field's, are all running nice comp increases.

And where we have partnered in this pilot program, what we've seen is a significant improvement.

And what I would call the A and B doors, or the tier 1, tier 2 doors.

What is happening, however, is we're not getting the lift or movement or trend changes of smaller doors.

And we think that's because of a couple reasons, Dennis.

I think one, where we've got a better customer, a better audience, less price conscious, less value driven, perhaps more fashion driven, our products, whether it's our own stores or the tier of distribution we talked about are responding better.

I think in the C and D doors where we have smaller assortment, less breadth and depth to our presentations or perhaps are in smaller markets or more rural markets where pricing is perhaps the bigger issue, and I think department stores are going through some price deflation, and I think our products there stand out in contrast to perhaps what they're surrounded with, greater assortments of private label and perhaps promotional activity means more.

So, we're seeing this kind split in the performance of the business, which is interesting.

What we do about it is another interesting question, and I think that's what we're wrestling with.

Is this a short-term phenomena, or is this more of a dichotomy in, you know, by door location strategy that we've got to think through with our department store partners?

For the most part we've always been the backbone of their rollout in growth strategies, and in some cases the smaller store, smaller markets are more challenging for us to develop the right kind of assortments, price points, presentations to perform at the level we'll all be happy with.

So, that's a bit of a work in progress.

Okay.

And the second question.

In your retail operations the comps and your full price stores start to get tougher beginning in this next quarter.

So, could you give us some thoughts on what your expectations are going forward in retail comps?

Yeah.

I don't think, you know, in all honesty, Dennis, we planned the first half of the year to run double-digit comps in Polo retail or high double digit teen comps in Club Monaco.

We're certainly appreciative that the hard work and strategies paying off, but I'd be foolish to say that we have those kind of comp trends built into our plans for third and fourth quarter.

While we'd like to think we're going to get them and we're very optimistic based on results to date in the quarter, I think that we have an expectation that the comps will come back to a somewhat more normalized level in the third and fourth quarter.

But again, I think we're well positioned.

We've got deliveries in the stores that the customers are reacting to.

We had a strong reaction to fall and early holiday has been positive, and really, October for us was a strong month.

So, cautiously optimistic, but to be fair, the guidance and the base plans are a more conservative comp number.

We'll see what happens.

Okay.

And finally, I'd like you to talk a little more about Europe, especially when we look to next year.

Next year you will be benefiting from the cost reductions, but the marketplace is pretty tough.

So, when do you see sales starting to recover in Europe and what's going to drive that?

And secondly, in Europe you indicated that there might be some more DC consolidation next year.

Will there be any costs associated with that?

Well, let's talk about Europe.

I think the economy over there is trailing the United States.

I think it went into a tough economic period after the U.S. and I think will probably pull out later.

We have not yet seen the economic signs, particularly in the difficult markets like Germany and others, coming around yet.

And we could all debate long and hard if the U.S. indicators seem to be pointing in the right direction.

But I think they are.

We're planning Europe next year, and this is more directional.

You know, relatively conservative single digit sales trend with a benefit from consolidation, the lack of parallel costs associated with what's running through the P&L this year as well as the elimination of the distraction of the consolidation, all helping deliver a significantly improved bottom line in Europe with a conservative and cautious top line.

I don't think there's any value in us planning ahead of an economic recovery.

There's more risk than there is upside.

But I think Europe next year will be an important contributor in proved profits for those factors.

The ongoing consolidation of logistics in distribution was part of the original plan.

We've gone from 10 down to 4.

Next year we'll complete that.

And there are no additional costs next year associated with that final piece of the puzzle.

Okay.

Thank you.

Thank you.

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, Margaret.

How are you?

Good.

Thanks.

I wanted to follow up on the question about --

Margaret, can you also get closer to the mike?

We're having trouble hearing a little bit.

Okay.

Hold on.

Hi.

Can you hear me better?

That's much better.

Thank you.

A question on, when you say that the change in trend in the men's area improved double-digit, does that still imply that men's is still trending down, even though it's greatly improved from where it was?

And I'm curious about the pull forward of sales into Q2.

If we combine your 1 and 2Q, your first half is flat in wholesale.

Is that what we should be thinking for wholesale going forward?

How should we think about that segment of the business?

If you had another one, let me answer this one first.

I wanted to ask about retail, too.

So, go ahead.

Let's stay on the wholesale.

The trend change, the mid-teen trend change that we have experienced with our partner in the A and B doors moves it from a negative to a slight positive in those doors.

And that sales trend change is reflective of that mid-teens.

The C and D doors have not seen that trend change, so they continue to run negative, to be fair to that.

The Bloomingdales, Marshall Fields, better stores are all running nice positive increases so that's sort of the mix that's running though the current performance in men's wholesale.

And I think the 6-month wholesale number which is essentially flat is an accurate reflection of the business through the first half of the year and is probably not excluding Lauren too dissimilar to the back half of the year.

So if the first half is flat, is men's wholesale down and Europe is up?

Because those were the two major pieces, right?

Yes, men's and Europe and the smaller women's business are the major pieces.

So, is one down and one up, or are both flat?

Both plus or minus a little bit in that same range.

Okay.

Thanks.

And they were my other question was about -- I guess maybe we should talk about the Lauren line and how that's going to impact the wholesale segment in the second half of your fiscal year.

You know, if you still expect $400 million of sales in your first year of shipping the Lauren Ralph Lauren line, how would that spread out among the four quarters, and would we have a disproportional positive impact if the first quarter that you ship because you're filling pipeline?

I guess the answer is that the $400 million annualized number is what we're giving for the first through fourth quarter of fiscal '05.

That's not a 12-month calendar number from January of this year till December of that year.

So, you know, we'll give the guidance on Lauren and all of our guidance and thoughts for next year in the February call.

The impact on the fourth quarter wholesale shipping for Lauren is not distorted in terms of its quarterly representation relative to the $400 million.

So, you know, it's an important quarter.

We really don't start significantly shipping till we get the 125s out, which are in store February, the 225s, which are really in March.

And quite frankly, we're growing to on purpose ship less in March than was previously distributed because that customer doesn't really want as much summer in March as has been shipped in the past.

So some of that we'll get rebalanced between March and April.

But at this point we'll give more detail guidance on the four quarters next conference call.

Thanks, Roger.

And then one quick question on the retail segment.

When you talk about your assortments being better, can you elaborate further on that?

You know, what have you actually done at your full price Polo stores and your Club Monaco stores?

A little bit more color would be helpful.

Thanks.

You want the black box secrets to our merchandising assortment that is driving the mid-teen comps, is that it?

Yeah, because everyone else is not doing anything close to that.

Well, it's a little bit of a different answer.

I'll give you a summary of Ralph Lauren stores and then I'll give you a little bit of a headline on Club Monaco because really those businesses are both cranking away at a significant rate.

I think would start by saying that we've always had terrific products.

And so, you know, this is not about we had a better line or didn't.

I think what we are doing, however, is more and more of the product that are in the Ralph Lauren stores is product that is limited distribution.

I think when we talked earlier about the tiering of home products between the Ralph Lauren line and the Lauren line, really the Ralph Lauren line at this point is primarily distributed in our own stores.

You talk about kids wear.

We developed some exclusive products that is at a better price point, higher quality, more imports out of your Europe.

And that represents the bulk of our kids products.

Really, in men's, the Purple Label, which is available through the better stores but not broadly distributed, is representing as much as 40% of our men's business as well as collection of Black Label being the primary drivers of the women's business.

So all the of that product is the result of several years of trading up the stores, learning by market distribution decisions, flowing it more carefully as opposed to, you know, big waves, and then what I would call significant improvements in targeted marketing as oppose today blanket marketing.

That coupled with a clarity about service and operational improvements, you know, I think are culminating for us in a significant trend change.

Much of what, you know, we've talked about over the last couple of years when we talked about what did we have to do to get the retail business to be a meaningful contributor to the company, I think you're all seeing the payoff of that last year, this year, and obviously we expect that to continue into next year.

Club Monaco, which we're equally proud of, has made enormous progress in knowing their customer, both male and female.

We're getting good reaction to men's product this year, which is a big improvement to where we've been.

We've seen enormous improvement in accessory items and are getting a lot of editorial credits and play.

And our women's business continues to be now for the second year in a row really on trend with an ability to fill that niche, strong career as well as key item merchandising for that woman 20 to 30 years old.

And I think as we begin to develop more and more retail expertise and can carry that from merchandising through marketing, through operations and service, I think that's playing out for us in our retail business, and that's why on the last conference call we talked about our comfort level in expanding those businesses on a worldwide basis.

So, do I expect high teen comps to continue forever?

No.

But I do believe it's not just it's because it's cold or it's hot in different parts of the country.

I think it's a concerted effort by a lot of people that has us feeling much more bullish about our ability to execute that on a broader scale.

Thank you so much.

We'll talk to you soon.

Our next question comes from Virginia Genereux from Merrill Lynch.

Please state your question.

Hi, this is Michelle Graham for Virginia Genereux.

Hi, Michelle.

We have three questions.

Okay.

As long as you talk up, we'll answer all three.

Okay.

Great.

First of all, you've discussed the weakness in the European business for about two quarters now.

Do you think the challenging environment will jeopardize your target of 26 cents if net EPS accretion from Europe in '05, in fiscal '05?

You've mentioned earlier there should be 20 cents this year and 6 cents in March.

I'm not sure where the March piece is coming from.

I think we talked about the consolidation and the opportunity in fiscal '05 to see a 20 cent accretion for that and we're still comfortable with that.

Obviously the base of Europe moves up and down depending on what we feel about the overall business climate.

And as I said earlier, at the moment we're approaching it cautiously into next year.

I'm not sure what the 6 scents in March refers to.

I guess we had got that from an earlier call.

Well, it's 20 cents.

We still feel good about that and that is really as a function of the operational changes and those are going as planned.

Okay.

That's great.

And also, I guess, with respect to the Lauren launch, can you be a bit more specific about the quarter by quarter dilution?

What do you expect in December and March?

Earlier you talked about, when you disclosed what Jones was paying, you suggested an 11 cents in EPS accretion for next year.

Can you comment on that?

I encourage you offline to just pick up with Nancy or Denise to get some of these numbers right.

Let me review with you what we said.

We thought the impact this year would be based on the Lauren transition.

We said the impact we anticipated, and that is not an exact science, but we anticipated for the three quarters of this year that the combination of start-up expense, lost royalty revenue as well as the positives of shipping product and the margin and profit that come with that would probably have a negative impact on our year of about 20 cents.

We said that was probably split between about 8 cents in the second quarter, 8 cents in the third quarter negative and a negative 4 cents in the fourth quarter.

And that's still what we're tracking and what we feel comfortable with.

So, that's our point of view on the impact of Lauren this year.

And we haven't changed much, and it seems to be holding up pretty well.

Does that answer your question?

That's helpful.

That's very helpful.

Okay.

And lastly, the licensing operating margins, are you -- should we expect them about down 400 to 500 basis points given the consolidated Japan?

Yeah.

I think the effects of how we're treating the Japanese acquisition is making the comparisons this year to last year on the operating margin rates a little, you know, apples and pears because of how that's running through the P&L, but that's about right.

Great.

Thanks so much.

You're welcome.

Thank you.

Our next question comes from Lee Backus from Buckingham Research.

Please state your question.

First let me add my congratulations, Roger, and your team on a good performance in a tough environment.

Thank you, Lee, we are excited.

First question is, you really haven't talked that much about Ralph Lauren Blue.

Could you discuss how that's doing at retail in Europe and also impact on your domestic retail comps?

Sure.

The Blue Line has run a 20% comp increase within our Polo retail stores.

That's somewhat comparable to last year.

As you know, we were in the Blue business this time last year.

So, that shows important growth and a stronger section from the domestic customer.

Interestingly enough, Lee, actually the wholesale sell-in of Blue Label is bigger in Japan than it is in Europe.

We tend to think about Europe as just a sort of calibrated order of size.

The Japanese business is the biggest wholesale market we have in Blue, and that's been extremely well-received there.

And Europe it has been a good fall, albeit I think it has some of the cold that the rest of the business over there has.

So, it's been a little more up and down by market depending on the economic environment and the channel of distribution there.

So, overall, you know, we're pretty pleased with its contribution in the evolution of the line as well as the marketing.

I think support has been a real positive for the company.

It's also been a very successful piece of Polo.com.

Again, you know, interesting addition at the more affordable prices for that female customer.

We've had a very positive reaction there, as well.

So, I feel pretty good about where we are and what we've learned and where we're going with that.

Also a couple of balance sheet questions.

Could you discuss the increase in the accounts receivable and also prepaid expenses?

I presume the prepaid expenses has to do with the Lauren launch?

Gerry's going to take you through the balance sheet.

Hi, Lee.

In the receivables area it's broken up about two-thirds/one-third.

If you remember, Nancy mentioned that goods that we shipped in October of last year we moved forward into September of this year.

And as a result of that, those were reflected in our receivables.

We had a very large wholesale shipping month in the month of September.

The balance of the increase is due to exchange rate increases or the dollar devaluation in Europe.

In terms of the prepaid expenses, we have as part of the consolidation in Europe, we had to sell our inventory from one legal entity to another legal entity in Italy, which caused an increase in VAT.

And we have a VAT receivable there which we expect to collect in November.

The way that works, Lee, is the inventory is now coming in and getting processed through Italy.

And we end up having to pay VAT, and then we apply and get a return on the VAT in subsequent months.

Okay.

Thank you.

For what it's worth, since Gerry identified in the balance sheet the impact of the Euro/dollar exchange rate.

Even on a fundamentally flat inventory level, the Euro exchange rate hit at about $20 million to the inventory.

So, we actually would have been about 5% under last year, which is consistent with what we talked about on the last conference call.

Okay.

Any more questions?

Yes.

I have a question coming from Jeff Edelman from UBS.

Please state your question.

Thank you.

Good morning, Roger, Nancy and you guys.

Would you discuss a little more the wholesale business, international versus domestic for the first six months and where you think international will come out for the full year?

I think I answered earlier to Margaret that in terms of its performance on a this year/last year basis, you know, they're both running about the same, which is plus or minus a little bit flat.

That's probably less than we had expected in Europe, perhaps consistent with what we expected here in the United States.

I would also say based on wholesale bookings which, you know, is more predictable, at least in the near term quarter or two part of our business at retail, we expect, excluding Lauren, that to be about the same trend change.

Okay.

And that was reported in current dollars, or adjusted for currency?

That's reported in current exchange rate.

So, it is not reported in constant dollars.

Okay.

Okay.

And the whole currency issue as we grow our international business is going to get more and more complex.

And we all are struggling with how much on every line item and every part of the balance sheet, P&L, you know, we're going to have to go through recasting currencies up and down, which is now not only the Euro, but the yen and other pieces of our international business.

So, that's a new level of complications that we all have to live with.

But we are reporting in current dollars.

Right.

Okay.

Then on the same thought process, what is the impact as you translate the restructuring costs in Europe back here because of the change in the Euro?

Well, all of the costs that we had talked about when we articulated that were based on current exchange rates.

So, the fact of the matter is as they play out over the course of first, second, third quarters, they come back through the P&L at slightly higher rates than were originally communicated.

But, you know, they're in proportion to everything else, sales, margin, overall expenses.

And again, as Gerry talked about some of the issues in the balance sheet, some of the items, depending on Europe's role in the total company have more of an impact with currency, some have less.

So, currency impacts not only the P&L, it impacts balance sheet and it impacts, you know, as we talked last time, about manufacturing costs and the cost of goods as it comes back into the United States.

So, there are multiple points of impact, both good and bad, as currency moves around.

We try to where appropriate, hedge as a conservative step but there's also some currency risks as you work through international businesses.

And just finally, where would you expect international revenues to approximate for this year?

As a percent of total?

As a percent of total or dollars.

I'm not sure I can answer that because it depends on your definition.

Does that include the licensing revenues out of Asia, or are you just talking about own --

Your owned wholesale and retail.

Well, we have continued to track in Europe towards that, you know, $500 million this year number.

And that's still, you know, pretty much where we think we're going to end up.

So, not accounting for Japan or the transaction earlier this year in Asia, that's about where we think it's going to be.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from Noelle Grainger from JP Morgan

Good morning.

Good morning, Noelle.

On Europe, Roger is there any noticeable difference between what you're seeing in your trends at wholesale and at retail within your European business?

Yeah.

Interestingly enough, our retail business was tracking with the wholesale business through, you know, much of the spring, summer and early fall.

And we've actually in our own stores seen a very nice improvement in October in retail.

And, you know, we'll see how that runs through the rest of November, December.

But we actually began to see some return of tourism in the major cities.

The actual weather did cool off a little bit there.

And we did see a pickup in performance in the last 30 days.

So, you know, maybe the November-December periods, which are important for them, will show some improvement on a broader scale.

What actually I would give you as an overview is that the major cities in Europe were most severely impacted by tourism, whether it was the war or SARS or some of the other things that wrecked havoc during the spring and summer.

And some of that looks like it may be beginning to come back.

The macroeconomic issues in Germany where unemployment is extremely high and some of the other countries, I haven't seen any change in the trends there.

But for what it's worth, the last 30 days have been an improvement in our retail business.

So, we'll hope that that continues through Christmas.

Okay.

That's encouraging.

And on your retail operating margins were up nicely in the quarter, 260 basis points or so.

210, yeah.

Okay. 210.

How do you feel about, you know, I think your targets for the year are something in the 100 basis point range?

Do you think you can do better than that at this point halfway through the year?

Yeah.

I think that -- I know there was a lot of hand wringing over the first quarter because we had the inclusion of the closing of the Toronto office and some of the other things.

But I think we're very comfortable that the second quarter is a more accurate reflection of the underlying strategies and strength of the business, and we actually believe the end of the year should be closer to 200 basis points improvement on retail as we continue to drive towards our medium term goals that we have been consistent about over the last couple years.

So, we're feeling pretty good about that.

Okay.

Great.

And your wholesale operating margins were a little lighter.

Obviously Lauren expense is in there.

Can you give us any sense, though, of how European operating performance is generally trendwise?

Well, I think the margins in wholesale were lighter for a couple reasons.

One is certainly the inclusion of Lauren expenses.

There is a little bit of a tail running through the consolidation, parallel expenses in Europe running through wholesale particularly.

I also think the domestic wholesale business has had margin pressure, as we've certainly, you know, tried to clean up spring, summer and move properly into fall.

And I think some of those pressures are felt in Europe, as well, because it wasn't for the European marketplace, it wasn't nearly the spring-summer they had the year before.

So, I think, you know, in order of priority, it does start with the Lauren expenses and the parallel Europe expenses.

But I think the underlying margin also had pressure during the quarter from both the United States and Europe, to be fair.

Okay.

My last question would just be on depreciation.

It was it was down pretty significantly year-over-year and also quarter-over-quarter.

Can you just elaborate on what that relates to?

The depreciation is down dramatically year-over-year?

Yeah.

You reported $19.1 million.

I think that's actually a reclassification issue.

Reclassification.

I don't think that's a depreciation issue.

Our actual Cap Ex spending is not, you know, is not far off of what we said, you know, the $115 million over the prior years.

The depreciation, I don't know, as I'm looking at it looks like it's up about $1 million for last year.

In the quarter.

In the quarter.

Are you on the consolidated income statement?

Yeah, I probably didn't adjust it from --

We appreciate the benefit of the doubt.

We're up about a million.

Oh, I see.

We didn't adjust last year appropriately.

Okay.

Thanks a lot.

I think we have time for one more question, Nancy tells me.

Our next question comes from Stacy Pak from Prudential Financial.

Hi.

Thanks.

Good morning Stacy.

Morning.

A couple questions, and then I'll come back for two more if I could and they're all short.

That sounds like four.

Yeah, but they're short.

Okay.

First on Europe, the $10 million in expense you expect for '04, what are the key things that could make the company do better or worse than the $10 million?

Okay.

Well, the major components of that include parallel HR costs where we were running people in one office as we are also starting up and paying people in another office.

A second piece is the parallel office costs, meaning we made assumptions about how long it would take us to get rid of the excess real estate that we were, you know, abandoning, as well as duplicate systems costs, because one of the things I think we all talked about that was a risk is you put in new systems in every piece and part of your business and you don't want to turn one off until you really have tested and are sure the new one works.

So, we've been running in some cases parallel system costs.

In terms of risk, I would say we're very comfortable with where we are in systems.

The new systems are working.

We will be turning off the old ones on the same time schedule we earlier anticipated.

I think the HR costs are also tracking pretty consistently, you know, with where we thought we'd need to, you know, close down one operation and get the other started.

I think the risk Stacy, quite frankly, is whether or not our assumptions about the cost of real estate disposal are accurate.

We made some assumptions based on the professionals in that local marketplace on what it would take to get out of the excess office or distribution capacity.

And, you know, we'll have to see if those assumptions hold up.

So, I think that's where the risk and/or perhaps the upside could be if in fact, you know, that plays out against our original assumptions.

What kind of magnitude are you talking there?

Plus minus.

A couple million dollars either way maybe.

Okay.

And then were the start-up costs with Lauren 8 cents this quarter?

Yeah.

By the time you take the, you know, the fact that in early June we started this whole program, that's about what they ran and anticipate the run through the balance of the year, it's also clear that the fourth quarter will have no licensing royalties.

But what we had not anticipated, which was in the numbers, is a softening in our second quarter royalty revenue as well as our forecasting of a reduced third quarter royalty revenue that is probably a bit more subdued than what we would have anticipated in June.

So, those numbers are absolutely, you know, imbedded in our forecast, but they're not fully in our control.

Okay.

And then the last two, with regard to career you mentioned it a lot, and obviously other people have, too.

Where do you see career overall going, you know, from as a percentage of the mix and, too, in spring and fall versus, say, last year, and then longer term where do you see retail getting as a percentage of the mix?

Were the first two questions the easy ones or this one?

I thought they were all pretty simple.

I think it's hard to say.

Maybe this gives you a sense.

I would have said that, you know, if you take the Lauren line and where it has been historically career and where we're taking it, we've probably put a number that's 100% to 150% larger on career than what has been in the line traditionally.

I would also say as it relates to our own Polo retail stores the very strong success of Black Label, which of all the women's labels is in fact, you know, booming is really a reflection of a great line, but it's also a reflection of a career customer.

I also can see in our clothing, furnishings businesses as opposed to sports wear, you're seeing penetration changes of 5 to 7% this season.

And if that continues, you know, you could see penetrations of, you know, 10 or 15 basis point movement.

So, where it's maybe 25% of the business, it could end up 40% of the business.

I think those are pretty significant movements after many years of a pretty quiet career business.

And I think we're seeing it in Club Monaco.

While it's hard to be clear on which knit top is career and which somebody is wearing on a weekend, I think the movement towards dressier fabrics, suitings, more tailored pants are all indications of that customer looking to go to work in a little bit of a dressier outfit.

So, we're seeing it really through all the businesses.

I think it's a multi-year trend.

I don't think this is a six-month or 12-month change.

I think it's going to continue for several years.

And then just ultimately retail in the mix, where do you see that getting to?

Well, you know, we think retail is going to be the largest part of our business.

And it hasn't been.

It's obviously growing very quickly.

Clearly adding a Lauren wholesale business at $400 million does, you know, in the short run sort of recalibrate the percentages.

But, you know, we see retail on a worldwide scale ending up being, quite frankly, the larger part of our business.

And I can't give you a percentage.

I think this year it's trending to be half the business.

We think it's going to be over the long-term more than that.

Okay.

Thank you.

Okay.

Thank you.

So, I appreciate your interest.

Obviously we're all excited about holiday.

We think we're delivering not only in the short run, but, you know, across several major strategic initiatives this company has embarked on, whether it's Europe, whether it's the start-up of Lauren, whether it's the consolidation of the shared services in retail or the repositioning and rebuilding of Club Monaco, we are both keeping our eye on the short run and the long run, and we think seating ourselves for the next couple years with the right kind of strategy.

So, we appreciate your interest, look forward to updating you in the post-holiday season.

Thank you.

Thank you.

Ladies and gentlemen, this concludes the conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.