雷夫·羅倫馬球 (RL) 2004 Q3 法說會逐字稿

Good morning and welcome to the Polo Ralph Lauren third 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 third quarter fiscal '04 conference call.

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

I will review the numbers for the third quarter, our outlook for the fourth quarter and our initial guidance for fiscal '05.

Then, Roger will give you an update on our strategy and the successful execution of our multi-year initiative.

After that, we will open up the call for questions and answers.

Before we dive into the numbers, I want to report that Mike Oldman was appointed to Polo's Board of Directors during yesterday's board meeting.

As many of you know Mike was most recently the Director General group managing director of LB&H. where he led five major business groups.

In addition, he's held several executive positions with major retailers and corporations in Asia and the United States.

He is a seasoned executive with international luxury experience and we look forward to benefitting from his expertise.

As you know from past calls we'll be making some forward-looking comments in our discussion today including future earnings expectations.

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

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 while our press release has both GAAP results and adjusted numbers, for today's discussion purposes we will be comparing our earnings adjusted to exclude foreign currency gains and losses resulting from certain balance sheet transactions and restructuring charges.

We believe that these adjusted results provide a meaningful comparison of our ongoing operational and financial results.

We refer you to the table reconciliation of GAAP results to adjusted results in the earnings release which is posted on our website at investor.Polo.com.

The restructuring charges consist of approximately $12.2 million related to an adjustment in the reserve for lease termination cost associated primarily with two Club Monaco properties.

Those properties were included in the company's fiscal 01 operational plan.

The reserve was adjusted in the third quarter of '04 because of market factors less favorable than estimated.

The charge also includes approximately $3.7 million for operational consolidations efforts in Europe consisting of severance and contract terminations.

Now to the numbers.

We posted adjusted EPS of 47 cents for the third quarter and that includes a loss of about 8 cents of start up costs associated with the new Lauren line and the loss of licensing revenues associated with Lauren, Ralph and the Canadian business.

For the quarter revenues increased $6.2 million, or about 1%.

Our revenues this quarter reflect strong mid-teen total sales increases in our specialty retail group and a 20% increase in licensing royalties which were offset by significant reductions in off price sales in our men's wholesale business.

Our gross margin increased to 51.6% and that represents a 340 basis point improvement from last year.

This increase primarily reflects strong increases in our own retail merchandise margins due to better full price sell-throughs, less promotional activity and increased licensing royalties.

Our operating expenses increased $26.2 million, or 11.4%, due to a change in business mix related to those higher retail sales, the start up costs associated with the Lauren line and the consolidation of expenses of the Japanese master license captured in our results.

In addition our interest expense decreased 25% due to the payoff of short term debt.

And we recognized $800,000 of tax affected income due to our interest in our Japanese business.

Now, let me give you a few details on our business segments for the quarter and please note that we've also included the segment table with our earnings release today.

Our wholesale revenues were $219.1 million, and that represents a decrease of about $49 million or 18.3% compared to last year's number.

The decrease was primarily in our men's wholesale business which resulted from a planned reduction in off price sales.

In the third quarter we had an operating loss of $3.3 million in the wholesale segment, primarily because of a dramatic reduction in the off price sales as I mentioned before, and the start up costs associated with the Lauren line.

In our retail segments sales grew $43.9 million, or 13.9% on a base of 265 stores, or 1.88 million square feet operated in the third quarter.

This compares to total retail sales of $315.1 million on a base of 251 stores, or 1.81 million square feet in the third quarter of last year.

On a consolidated basis for the quarter retail comps were up 8.8%.

The consolidated comps were driven by positive comps in each of our retail formats, and that includes mid-teen positive comps in Ralph Lauren stores, low 20 positive comps at Club Monaco stores and mid-single digits positive comps in our outlet stores.

Retail operating income for the third quarter was $45.4 million that compares to $30.7 million in the third quarter last year, representing a 48% increase in operating profit and an operating margin improvement of 290 basis points.

The higher operating income reflects significant improvement in all of our retail formats and that improvement represents a 12.6% operating margin for the quarter.

As I said, at the end of the quarter we operated 265 stores compared to 251 stores at the end of the third quarter last year.

Our retail group consisted of 55 Ralph Lauren stores, 62 Club Monaco stores, 117 Polo outlet stores, 22 Polo Jeans outlet stores, and 9 Club Monaco outlet stores.

During the third quarter we opened one store and closed one store.

Our new domestic story is in New Kaman, Connecticut, opened in November, and is one of our new formats that offers a selection of apparel for men and women as well as children's wear.

If you haven't had an opportunity to go to the store I would encourage you, it's a beautiful store.

For the quarter, licensing royalty increased 20.3% to $67.2 million, compared to $55.9 million in the prior years third quarter.

The increased licensing royalties reflect stronger sales in footwear and children's wear and the inclusion of the increased royalties as a result of the consolidation of our Japanese master license.

Operating income for licensing was $34.3 million, and that compares to $28.8 million last year.

Now let me touch on the balance sheet.

We ended the quarter we $338 million in cash, and our total debt was $285 million, and that's the long-term euro bond.

At quarter end we had $53 million cash net of debt.

And there was no short term debt and we paid down our balance last quarter.

For the quarter our total inventories increased 82 million, or approximately 24%.

And that was primarily because of the strengthening of the euro, the start up of our Lauren wholesale business, and the balance is really there driving our retail growth.

We are on track, though, to end the year with the appropriate inventory level.

Trailing inventory turns was 3.03 times, reflecting the increased inventories I just mentioned without the corresponding sales for the Lauren line in the quarter.

For the third quarter our capital expenditures were $30.1 million, and that compares to $19.4 million last year.

The majority of the increase was associated with the Lauren line, primarily for modifying our Greensboro warehouse infrastructure, store refurbishing, and the establishment of operations and headquarter offices for the Lauren line here in New York.

As we said on our last call we expect our fiscal '04 capital expenditures to be approximately $115 million, and that number includes approximately $25 million associated with the Lauren line.

Now turning to our outlook.

As we stated in the press release, we remain comfortable with the adjusted earnings per share for the fourth quarter fiscal 2004 in the range of 75 cents to 80 cents, and that compares to 77 cents in the fourth quarter last year.

And just as a reminder, that includes approximately a 4 cents loss for Lauren's start up cost and loss of licensing revenues from the Lauren, Ralph and Canadian license royalty.

We continue to be on track to produce a high-teens revenue increase for the quarter but a lower gross margin due to the elimination of Lauren's royalty in the fourth quarter.

We would also expect expenses as a percent of revenue to decrease due to the inclusion of Lauren's sales in the quarter.

Our initial guidance for fiscal '05 shows very strong earnings growth compared to fiscal '04.

We expect a high single-digit percent increase in revenues driven by mid-teens percent growth in our wholesale business and that's largely from the sale of Lauren partially offset by a reduction in men's off price wholesale, and our refocus on the top tier doors for the brand.

In retail, we expect a mid single-digit percent growth in sales as we continue to execute our specialty retail expansion and open ten Ralph Lauren stores domestically, a flagship in Milan this fall and eight Club Monaco stores.

Our forecast is based on ongoing consolidated comp store sales improvement in the low to mid single digits.

We would expect licensing royalty to decrease slightly as the loss of Lauren, Ralph and Canadian royalty for the first nine months is somewhat offset by gains in Japan where we have a successful and ongoing relationship with our partners.

We would expect this revenue growth to be leveraged with approximately 150 basis points improvement in operating margins and a tax rate decrease from 36.5% to 35.5% as a result of the European consolidation progress.

Therefore, we expect that earnings per share and that's excluding foreign currency gains and losses resulting from certain balance sheet transactions, will be in the range of $2.35 to $2.45 which represents an earnings growth of approximately 30 to 40%.

One final item I'd like to point out to you today is that the company in a separate release announced it plans to file a registration statement with the SEC later this month for a secondary offering of common stock owned by investment funds managed by Goldman Sachs.

Please note that neither the company nor Ralph Lauren nor any of his related entities will be converting or selling shares, nor receiving any proceeds from this offering.

And now I'd like to turn the call over to Roger and then we'll open it up for questions and answers.

Thank you, Nancy, and good morning.

We are very pleased with our results this quarter especially as they continue to validate our multi-year initiative.

I'd like to briefly review some highlights for the quarter with you but then focus on our strategies and how it affects our future growth plans.

Our retail business had a great quarter with overall positive comps of 8.8%.

And that is on top of the strong performance in our third quarter last year when we posted an 8.7% comp.

At the Ralph Lauren stores our holiday best sellers were luxury items, in particular cashmere and accessories for both men and women.

We continue to improve our merchandise presentations and service levels and had mid-teen comps with virtually all regions of the company participating.

Club Monaco continues to show tremendous improvement as shown by our comps north of 20% and much higher margins as we refine our supply chain and reduce promotional activity.

Our Club Monaco customers, both men and women, love the improved styling and attention to fashion, color and texture.

Our accessory businesses there also had a very strong performance in the quarter.

We continue to make progress in our integration of Club Monaco into the Polo systems which will result in better cost structure at Club Monaco going forward.

We closed our Toronto office and completed the office move to New York.

We will be complete in all phases of our integration initiatives including retail merchandising, loss prevention, purchasing, IT, and finance, by the ends of fiscal '04.

Our European consolidation is on track.

You may recall that we began the European consolidation effort with 12 different distribution centers and by the end of this fiscal year we will be operating three and will ends fiscal '05 with one.

And the staffing of our consolidated headquarters is almost complete with two locations closed and two still to close in fiscal '05.

All of this is designed to reduce costs, increase service levels and provide an infrastructure to support future growth.

Having said that not all the benefits have flowed through to the bottom line because of the softer economy for luxury goods in western Europe.

The development of our Lauren business continues to be on plan.

We held our summer market in November and we completed the hiring and training of our retail development organization.

Shipments have left our distribution center on time for the 125 deliveries and we'll talk more about that in a few minutes.

While our overall domestic wholesale revenues were down in the quarter we did experience improved sales performance at better doors like Bloomingdales, Macy's West, and Marshall Fields, indicating that some of our strategies are building some traction.

Let me now turn to the future and I will start with retail.

We have made significant investments in our strategic initiatives over the past couple of years and we are very proud of our accomplishments and are poised for fiscal '05 to be a break out year for us.

We have set out to have a world class specialty retail store business and you can see from our results we are heading in the right direction.

We told that you we would open approximately 50 new stores in the next five years in the U.S. and we are on track to that.

As Nancy said, we plan to open ten new Ralph Lauren stores in fiscal '05 in key markets, whether they are in metro areas, resorts, affluent communities or luxury malls.

Our retail strategy, of course, starts with product and Ralph continues to design the best and most sought after products available in the marketplace.

We continue to increase the amount of exclusive or limited distributed product in our Ralph Lauren stores.

Our core customer is affluent and sophisticated and appreciates high quality and unique products.

We are also working on expanding the full price selling windows by delivering merchandise earlier each season and reducing our promotional periods.

The newly designed preline for women's collection and the further development accessories are huge opportunities for us going forward.

We increased the penetration of our women's apparel with our Black label and Blue Label line and our home and children's businesses are becoming larger components of our merchandise mix.

In addition we have focused our marketing for our stores and have seen strong return on investment in our direct to customer advertising.

Our holiday mailer was a new concept that focused on the world of Ralph Lauren from children's wear to home to men's and apparel and accessories, it was a strong and successful statement giving core customers additional ideas for holiday shopping.

We continue to make investments in our infrastructure to support our anticipated growth.

At our Greensboro distribution center we have introduced efficiencies such as cross stocking to speed up the handling of shipments of merchandise to our stores and expect to cross stock approximately 8 million units next year.

All of this with an eye towards superior customer service, improved expense management and enhancing our cash to cash cycle.

We plan to expand our retail presence in Europe and will begin with an important opening of a new flagship store in Milan in September.

This store is our first retail presence in Italy and makes an important statement about the breadth and depth of brand.

The four story building will house men's, kids, men's Purple label, Polo Ralph Lauren, home, as well as women's collections Black label and Blue Label.

In our outlet stores we are concentrating on a few key initiatives. l In fiscal '05 we'll increase the penetration of women's, continue to reduce the promotional activity and expand cross stocking in our Greensboro warehouse.

We will continue to refine our execution and deliverables as we look to very limited new store growth in this concept but with a greater focus on productivity gains.

At Club Monaco we are ready for accelerated growth.

With systems in place and the headquarters now in New York we plan to increase store count by opening new stores in approximately eight locations.

We believe fiscal '05 is an important year for Club Monaco brand as we are now able to take advantage of a clarity about our customer and the product they want as well as an integrated support structure to leverage the impressive sales we have had.

Our goal is to produce margins of 8 to 10% over the next few years and we are on track to that.

This has encouraged us to be more aggressive about more real-estate in key global markets.

As we turn to wholesale there are really two major components of our wholesale business, it's menswear and Lauren, both primarily distributed to better department stores.

Lauren was and continues to be a huge undertaking.

From a dead start only eight months ago we have built what we project to be a $400 million business in the first year under our direct control.

We executed on time, on budget and we started only in June of this year when we assembled a first rate team of approximately 150 people.

We design, manufacture, and take into market two lines, spring and summer.

We retrofitted 350,000 square feet at our Greensboro warehouse to accommodate the Lauren product which is primarily hanging and in a few weeks we will go to market with our fall, 2004, line.

Lauren is right on schedule.

Our important end of January shipments of spring merchandise left our warehouse on time and will be on the selling floor this week.

But even though we had a condensed time period to execute we were careful and we were particular.

We improved the fashion, we improved the quality of the product, the styling and the fabrications and the trim.

We improved the mix of career to daytime and evening wear but we did not change the fit or the price.

I really have to give our hole team an A. plus for what they accomplished.

Our next milestones is really the customer reaction and the earlier read has been outstanding.

The fit and new attention to details have resulted in successful early sell-throughs.

In addition we continue to partner with better department stores to make sure the brand is positioned correctly.

We see this relaunch as an opportunity to review the Lauren doors to make sure they are all appropriate.

In the department store environment we believe that all of Ralph Lauren brands have to stand the part and we have shop renovations completed or underway at 200 doors to elevate the in-store presentation.

A year ago this line was sold into more than 1,100 doors.

We think the right number is closer to 900.

We did a very careful review of locations and reduced the distribution so we can focus on the top tier doors.

We closed smaller doors where the promotional environment was too pervasive and profits were eroding or in markets where we felt that Lauren was over distributed.

Our objective is to keep this lifestyle brand aspirational.

We know the Lauren customer well and we plan to service her wardrobe needs as she goes through her busy day from work to family commitments to cocktails to formal to weekends.

We also have a tremendous opportunity with special sizes as well as basic stock replenishment.

Importantly Lauren will now also be available on Polo.com, the most frequent call that comes into our customer services at Polo.com is customers asking if they can buy Lauren on line.

That will be available to them in spring of '04.

Now, turning to the men's business.

For many years our men's business was the primary driver of our wholesale business and for that matter the overall companies results.

As you all know, in recent years the overall department store channel has been losing market share and has been especially difficult, particularly in menswear.

We are committed as part of our multi-year initiative to work with our department store partners to reposition our brand in the better department stores.

We think we can do this by sharing what we've learned in the successful development of our specialty retail business.

Our Ralph Lauren specialty retail business has the right mix of elements to attract the better customer.

It starts with product and includes the right mix of merchandise, visual presentation, and excellent customer service.

Admittedly the number of Ralph Lauren stores is a small sample set but we think the learning there has been powerful.

We began a pilot program with Macy's West last summer to export some of our best ideas into that environment.

I can't say this too many times but it all starts with product so we made sure the product was fresh and that we had the right assortments in the store.

We increased staffing both through our coordinators and their sales associates and trained them to better understand the Ralph Lauren merchandise and the Ralph Lauren customer.

We upgraded the fixtures making it a more exciting shopping environment and targeted the customer through our direct marketing plans.

All of this has a goal of increasing sales by 30% in the next three years.

After just a few months of concentrated efforts we've changed the trend in a significant way and here are some of the results.

Last spring the trend was a negative one in the mid-teens.

By early fall when the program was just starting that improved to a mid single-digit decrease.

When the program was in full swing we had holiday selling that was up mid-teens in November and December, and that holiday trend continues into January.

This is an extraordinary turnaround.

We will review the pilot program very carefully and refine it as needed.

As you may have anticipated it paid off best in the larger doors but there were also some effects in the smaller doors.

We basically used this program as a laboratory for new ideas and we are ready to take lessons learned and successes realized to additional retail partners so we can roll this program out in other appropriate doors.

So where does this lead us?

Well, we completed a few weeks ago the fall '04 market and had a very successful sell in.

We took a focused approach to how the line was assorted and bought by the stores.

Not only do we believe in our products we believe in how they should be presented.

We focused on expanding our relationship with the large doors with special attention on the more upscale distribution.

We engaged our partners in allocating resources to a broader fashion assortment and better merchandising presentation.

All that with the objective of attracting and entertaining the best customers for our brand.

In summary, we believe we have a thoughtful and clear plan.

We will shape the business going forward and tailor resources against it.

All this will necessitate some reduction in the business by eliminating the bottom doors that we don't feel will attract our core customers or the ones that are not committed to making the investment to provide the right environment and service levels for our brand.

Going forward we will concentrate our service and marketing efforts on the top tier doors as they are responsible for about 50% of our men's business and they create the best environment for our products.

We will keep you updated on our progress.

Another important aspect of our distribution initiative is the control of the brand's exposure in the off price channel.

While pushing goods through this channel may be somewhat profitable and a source of cash flow in the short term we firmly believe that it is bad for the business in the long-term.

We have taken two dramatic steps to ensure that we maintain the brand integrity.

First we significantly reduced the amount of product available in the off price channel, whether indirectly through returns or through product sold directly to the them.

This initiative is not without financial consequences.

The off price channel is a profitable one in the near term but in the long-term can negatively impact all parts of your business and your ability to grow your business.

We have been reducing our off price sales and continue to this.

Over the next two years we will decrease this to a minimal part of our wholesale business and use it as a small controlled manner for predictable excesses.

Another important aspect of controlling the brand is the implementation of our counterfeit and diversion technology for producing labels.

We began phase I last Fall and implemented the smart thread in 2.4 million units.

The thread carries the DNA of the manufacturing process in it, the factory and the customer it was shipped to.

When a wand is passed over the label the readout will give you all the information about sourcing and destination of the product.

Use of this technology has already resulted in a large shipment of allegedly counterfeit goods from entering undesirable channels.

We believe we are all doing the right things to protect our brand and drive strong profitable growth and look forward to sharing this progress with you over the next couple years.

Now, in licensing let me spend a few minutes on our initiatives.

Our product licensing strategy is the lineup of our various businesses against core competencies to get the right mix of what we own and operate and what we license to appropriate partners.

We've recently renewed several contracts with improved royalty rates that better reflect the growth and value the brand has experienced over the last five to ten years.

Going forward to make these relationships fit more appropriately within our business model and to support our specialty retail strategy, we have also renegotiated margins for license products sold in Ralph Lauren stores and on Polo.com to bring us closer to a vertical business.

In keeping with the philosophy I described earlier about protecting our brands integrity we have instituted dramatic and specific limits on our licensing agreements as to how much branded license product can be sold in the off price channel.

Another important part of our licensing strategy is to tier our brands for the right distribution channel, a good example of this is how we position our home business through our multi-tiered brand strategy that is designed to elevate the brand and position us in the right doors.

At the higher end we have the Ralph Lauren collection with exclusive categories and products that we sell in our Ralph Lauren Retail stores.

Demand continues to grow as we present the collections within our store environments.

We opened major home floors this year in our Beverly Hills and London stores and both are exceeding plan.

The new Milan store will also have important home presence.

We opened our first designer showroom in New York which was successful and will introduce others next year in selective cities.

At the same time we developed the Lauren home brand for distribution through better department stores.

That includes tabletop and furniture and will be expanded to include table linens, broadloom carpet and bath accessories.

Our first Lauren line has shipped for spring '04 and it's in 200 doors.

With Lauren apparel and now home we can present a full lifestyle collection in better department store doors and for the first time will present an integrated apparel and home advertising campaign to support the launch of these important product categories.

None of this would have been possible without the investments we've made in supply chain and information systems infrastructure in the past couple of years.

We've made the dramatic changes in the way we support our businesses and we now have a flexible platform to leverage the growth of our various businesses.

Whether it is in the delivering, delivery improvement, cash to cash cycle reduction, or significant cost per unit per distribution decreases, we now have a global logistics platform that can support our current business and allow us to take advantage of future opportunities.

We've talked about this before but I'd like to wrap up by highlighting a few accomplishments in what's next.

Keep in mind that our initiatives in these areas are predicated on a disciplined use of capital and focus on three objectives, to maximize the productivity of our inventory, to have a consistent and sufficient supply chain and to have true global collaboration with our supply chain partners.

We've consolidated our point-of-sale and sourcing system and have adopted and consolidated new financial and human resource systems.

Europe is now integrated on a standard global system platform and as I mentioned, Club Monaco we made tremendous progress in merchandising, warehouse and financial systems and expect to be fully integrated with Polo systems.

The savings and efficiencies that we are generating from all these initiatives have enabled us to continue to invest not only in product design and development but in additional advertising and marketing.

On the logistics side we executed our plan to consolidate the European distribution center in Parma, Italy, in record time.

Today our cost per units per distribution in Europe is 62% less than it was two years ago.

No sooner had we completed that when we began the Greensboro warehouse modification required to handle the Lauren merchandise which ships primarily on hangers.

And we did this modification while continuing to reduce our cost per unit in Greensboro.

Today our costs are 22% lower than they were two years ago at Greensboro.

Next year we plan to consolidate four warehouse management systems to one and implement a global wholesale system encompassing sourcing booking allocation and shipping.

I think the most important results of the multi-year initiative is the ability it has given us to grow and take on new challenges.

Next year we will have driven a half a billion dollars of incremental sales on the same level of inventory we had three years ago.

This is a phenomenal accomplishment by our entire management team.

In closing you can see that we've made tremendous progress in many important and complicated initiatives.

From the integration of our international business in Europe to the integration of Club Monaco we've made progress in our specialty retail businesses that have resulted in significant improvements in our profits.

Our execution of the Lauren line has been nothing short of extraordinary.

While the men's wholesale business is in a state of evolution we are confident that we will reposition it over the next couple of years to make it stronger than ever.

Today we have a much more diversified portfolio of businesses and are supported by our multi-year initiatives.

We have embarked on a more profitable business model that provides a new global foundation that's built on Ralph's vision and is driven by his leadership.

Our willingness to invest time, energy and money in a true global infrastructure has made these achievements and more to come possible.

As I said a few minutes ago we see fiscal '05 as our break out year, a year when Europe gets some traction, Lauren continues to come to fruition, retailing goes to the next level, a year in which we roll up all the hard work on our various initiatives which will produce substantial earnings growth.

So at this point I think we will be happy to field questions.

Thank you.

The question and answer session will begin at this time.

If you are using a speaker phone, please, pick up the hand-set 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.

Good morning.

I have a few questions.

First, could you discuss the rationalization of the men's doors and the rationalization of the off price business in terms of what the costs might be in fiscal '05 and in terms of what the revenue impact would be in fiscal '05?

Sure.

I would say that, let me start with the rationalization of the off price.

I think it goes without saying and so I won't spend a lot of time on it, while the off price market can in the short run add profit to a company it is really a trap.

And we have over the last couple of years continued to make significant progress on reducing that in absolute dollars as well as a percent to our total business.

Just as a point of interest, year-to-date we are down almost 40% from last year in terms of sales into that channel and specifically in the third quarter where we registered a meaningful decrease in wholesale, we were down 80% against last year's third quarter.

So we think this is a long-term and very successful strategy on our part.

Although we recognize and it continues to run through our P&L on a negative short-term basis.

In terms of the guidance for next year, Dennis, we continue to see ongoing reductions of off price.

One, because we have less inventory which is clearly the good news as we've talked about before, we are no longer in the business of taking back returns, which creates significant amounts of off price and because we've made the decision that over the next couple of years we are going to get it down to be less than a single digit part of our total business.

So I would say that in the modeling Nancy communicated for the '05 guidance that's not an insignificant piece.

In terms of the rationalization of the men's wholesale doors, I think, again, if I didn't go too quickly or stumble over the words, the Macy's West is a pretty dramatic example to us of what happens when we actually focus with a partner and Macy's West was clearly a good partner, in terms of getting the right assortments in and in fact putting the right presentations and service.

I think what we also learned from that, Dennis, is that we have less impact using those same techniques on the smaller doors.

And since 80% of our men's wholesale business is done in 40% of the doors I think it's fair to say that our focus, our resource allocation, is going to be heavily oriented towards those doors.

The trend change from spring through November, December, at Macy's West, was so dramatically different in the large doors that it just served the return on investment.

That also means we will look at those bottom 10 of 15% of our doors and make decisions in partnership with our resale customers that perhaps we can't and they can't support the right assortments, the right presentations, the right staffing, nor perhaps have enough better customers to make those worthwhile for us.

So we are in dialogue with those stores now and we will be looking to make some decisions in the very near future about our focus and perhaps where we are not going to spend time, energy and money.

That is also embedded into the guidance for next year where in fact we have planned our wholesale business for kind of a mid single-digit decrease in men's.

That reflects our anticipated door closings with single-digit comps in the doors we are going to focus on.

The mix of all that, the loss of the off price selling we think is going to deliver something in that minus mid single-digit range.

Okay.

Could you discuss what's going on in Europe?

Europe is one of your big growth drivers going forward yet it's been a pretty tough business for the past year.

So could you provide some detail as to what's been happening in this past year and what gives you confidence that you will grow as much you plan to grow in the next few years?

Sure.

Well, I would start with really the two pieces which I think are the main issues in Europe.

One, you know, we have been on a path to position our European business as more of a pure luxury play.

We have not brought over many of the more moderate and department store labels that we have here.

I think it's common knowledge if you read any of the luxury analyst reports or results, last year western Europe was not particularly healthy, at least for the first nine months of the year, in terms of luxury business.

Whether it was local customer or the lack of tourism because of the war and SARS in the early part of the year, or some concerns about travel in the latter part of the year.

The business did pick up in the holiday period.

Both our wholesale customer as well as our own retail stores.

So there perhaps is some hope that that's the beginning of a trend.

But in general that business has not seen the recovery really that the U.S. has been experiencing.

And we have gone into next year with a conservative plan.

Not that we can't achieve more if it happens but we've gone in with a conservative plan.

We've also attempted to plan that business not at its full current exchange rate.

The currency has been relatively volatile although the euro has been strengthening for most of the year we have planned the next year budget and the guidance Nancy gave at a more conservative dollar to euro rate.

If the euro stays where it is we see some upside on that but we are really not in a currency speculation business so we've gone into that with some caution.

I guess the internal issues that affect Europe really have to do with the time and energy that went into the consolidation, the amount of new people, the amount of dislocated people.

I'm not sure that we were as focused last year on customer service, on servicing the businesses as we were on the actual consolidation projects which was a mammoth undertaking.

I think as we get through the back half of that and we head into '05 as we begin to sell in whole sale and as we begin to get our retail businesses up to speed and more closely aligned with the progress we've made in the domestic businesses I think we'll see that business begin to accelerate again.

Okay.

And one final question.

On retail, it looks like you are tracking to better than a 200 basis points improvement this year and with all of the initiatives benefitting next year does it look like you can get into that 8 to 10% margin range in '05?

Yeah, it's pretty exciting the progress we've made over the last couple of years and I think this year's numbers continue to be more of the same.

I believe that and this is under the heading of, to be proven, but I think we continue to track in that range over the timetables we've talked about, and, again, as Nancy said while we are running a comp for the year of eight plus which is fantastic, we have built our plans next year and our forecasts are based on low to mid single-digit comps.

We believe that's the prudent way to plan and run the business.

We certainly can get more if it's there to be had.

But we think we've made enormous progress on how to run this business and if we get those kind of sales or above the flow through should be enormous.

So we'll see what happens.

But we are very committed to do delivering those results.

Thank you.

Thank you.

Our next question comes from Noelle Grainger from JP Morgan.

Please state your question.

Good morning.

Good morning.

A couple of questions.

First on inventories, I was hoping you might be able to give us a little bit more color in terms of the breakdown of the increase as it relates to Lauren versus some of the other pieces?

Sure, $34 million is Lauren that we received in November and December in preparation for the 125, $23 million is currency exchange; and the rest is primarily retail.

You have to remember that our quarter ended December, the Saturday of Christmas, so that last week of post Christmas selling that most people have in their results which is a big week of selling down which was a phenomenal week of business for us actually falls into our 1st week of January.

So the big pieces were currency exchange and Lauren as I articulated, the rest is retail but it's absolutely current and on trend.

Okay.

Great.

On the retail stores, you talked about continuing to ramp up the exclusivity of your product.

Can you talk about where you are right now in that process in terms of, how much of the stuff in your store do you consider to be exclusive and where do you end up taking that?

And can you give us any related metrics on the level of promotional activity that those products would carry versus non-exclusive?

Okay.

Well, I think you've captured at least a piece of what we've been doing in retail.

We have moved in the Ralph Lauren stores to north of 75% of the products either being exclusive or what I will call limited distribution, meaning collection product, Purple label, which are only sold in very limited wholesale accounts like a Neiman's or a Sach's.

Those products today represent north of 75% where three years ago the products probably were importantly under 50%.

So as we've responded to trading up those stores and continuing to position them as luxury we have made important progress on those areas.

We've also begun to build product like Ralph Lauren Home or our kids product that, or the Blue Label line, that is entirely exclusive to us.

That product is being simply run on a basis of fashion of and trend right and world class quality and we only put those on sales at the end of season for clearance purposes.

So there is no promotional activity in that product and even when some of the people in limited distribution run sales we did not respond accordingly.

A lot of that has been a wonderful plus for our sell-throughs, the management of the high-end customer and it's been clearly a margin beneficial to our bottom line.

So we are going to continue to push the envelope of that and that's whether it's Europe or the United States.

It sounds like you probably have captured the bulk of that benefit already?

Yeah, I would say the bulk of the heavy lifting is done.

There might be some modest incremental work still to be done.

But the bulk of that has already been accomplished over the last three years.

Okay.

And then could you also address your comment about some of your renegotiated licenses in terms of the rates and your margins in the store?

Yes.

Sure.

Many of our licensing contracts go back 10, 20 years.

And at the time I think they were probably ground breaking and had all the appropriate features and benefits that were prevalent at the time.

In the last ten years the size of this company, its global reach, the amount of marketing we do, the imaging that's coming our of PR and advertising as well as our own stores has really made this a much more valuable business and we are trying to reflect that in the categories that we are renegotiating.

That means higher royalty rates.

That means larger discounts in the products that we sell to Polo retail.

Because, it used to be that about a third of our products in the Polo store came from licensees and much of that product did not capture the kind of vertical margins we needed to sustain Madison Avenue like rents or Madison Avenue like service levels.

Licensees, because of the uniqueness of the presentation and how that helps them in their business, have been willing to rethink how they felt that product into us so we've been able to capture more vertical margins; which has allowed us to be more aggressive about rolling stores out; which helps their business on a worldwide basis.

So where we've made those decisions to relicense products, we've done it with win win in mind.

The win for the licensee is that they today have a much bigger platform to work against and from a dollar profit point of view should see significant upside.

We, on the other hand, should be getting higher royalties, less off price products being sold with our name into the channels we don't want, and more vertical margin. into our own stores.

Do license products still represent about a third of your store?

No.

That's come down because of the amount of direct product we are now doing at home at the high-end and the direct product we have begun to add into things like children's and the high-end accessory businesses which we are now doing more direct.

All with approval of the licensees but more of that product today is coming directly through our own manufacturing and sourcing capabilities.

Okay.

Thank you very much.

Great and If we could ask, please, if people could limit to one question the first time in the queue.

We have a long list of people wanting to ask questions and then we will circle back on your second question.

Thank you.

Thank you.

Our next question comes from Lee Backus from Buckingham Research.

Please state your question.

First let me add my congratulations to a good quarter and a job well done, especially with the Lauren line.

Thank you, Lee.

With so much focus on retail going forward could you discuss your current store base?

I mean is it--as the stores becomes more exclusive are the stores located where they should be located?

Are they in the shape that you want them and are there any changes that you have to make in your current store base?

Well, that's a good question.

We actually can talk a little bit in each of the formats.

In the Ralph Lauren stores, in addition to the new stores that we talked about for next year which are in locations that we think are suuperb for our customer and include places like Nantucket, where we have gotten an amazing location, we will open this summer, places like Princeton, places like Carmel, California, as well as selected upscale malls like South Coast plaza or Troy, Michigan, we are being very selective about new stores and in some cases, Lee, where we have a couple stores that I would consider hold overs from when these stores were licensed or franchised we are going to either relocate those or rebuild those.

But that's just a handful of stores.

The bulk of the clean up in Club Monaco has been accomplished and we have a very high comfort level in the new store format pro forma, 3,500 to 4,500 feet in the right urban and or upscale malls.

We have a very extensive real estate program locked in there and the current network of stores they have are in pretty good shape.

We will gradually work our way out of the outlet business in Club Monaco because that's not something we want to be in.

In Europe we really are in our infancy there.

We've got about 13 stores.

We are probably a year or two behind in terms of putting together the right retail and infrastructure and methodology to run those businesses.

So while the Milan flagship is going to be the primary focus for this year, the year behind that I think you'll begin to see a real estate program ramp up in Europe not unlike the one you are seeing in the United States.

So the current real estate portfolio is really very healthy and we continue to invest and maintain those facilities at a pretty high rate, Lee.

We really, other than where we've acquired a license store back do not let those run down.

Next year we will relocate three stores in markets we think are right but are not appropriately sized, South Coast, Troy and Houston.

A quick question to follow up on Europe.

Certainly you are going after the luxury market but the answer to your question that you indicated you in fact may be introducing some of the lower price lines to Europe?

No, we are not doing that.

Okay.

Thank you.

Okay.

Thank you.

Our next question comes from Virginia Gerereux from Merrill Lynch.

Please state your question.

Thank you.

Very nice quarter.

I'm going to ask two questions but try to jam them in, they are very specific.

One, can you.

Hey, Virginia, I can't hear over the baby crying in the background.

Congratulations.

Thank you.

You had a better quarter than we did.

Thank you.

Can you.

Are you blushing over the phone?

Yeah, I am.

Okay.

Can you quantify, Roger, coming out of fiscal '04 how much of the wholesale business is, if you would, off price and outpriced or in sort of, doors that you guys would like to exit?

And, two, may I ask, any comment on the timing of Goldmans secondary sale this morning?

Just seems like you guys are just as you say getting all this traction and showing some great EPS growth.

Was there anything that they need to close out a fund or anything like that?

That's it.

Thank you.

Okay.

Well, the Goldman investment has 12 years history with the company.

They invested in '92 when we were private.

We represent the only investment left in a fund that was closed--that really ended about ten years ago for the other investments.

They've been wonderful partners.

They've been wonderful supporters of the brands and really 12 years later we and they think it's very appropriate to move the last block of shares.

We also think over the long run it adds to the availability of our stock which we think is a good thing and so this is all under the heading, we believe, of good news.

We will anticipate filing with the government agencies and then not too far after that follow up with a relatively brief road show and hopefully move the shares that way.

But we see it as a natural conclusion of what has been a twelve-year relationship.

All very positive.

Under the heading of, can I quantify the amount of off price reduction or door closure reduction either this year or in '05, I really can can't do that.

I think it's fair to say that with so many other parts of our company working and coming on line it's only encouraging us to be more aggressive and more disciplined about those initiatives in wholesale for men's because I think in the end it's the right thing to do.

Even this time and energy we spent for two years developing this counterfeit label, we actually, we are very excited to hear that in Canada we managed to stop the largest shipment of a designer brand ever in Canadian history from reaching the marketplace.

And so I think of all these initiatives, drying up that over assortment of product in the multiple channels is only going to help our own retail, the department stores we are in and I think we can afford to do it right now perhaps even more aggressively than any time in our past.

So the net of all that, as I said to Dennis, will result in our plans being about a single, mid single-digit decrease in men's wholesale but we think that's entirely appropriate.

Thank you.

Thank you.

Our next question comes from Jennifer Black, from Jennifer Black and Associates.

Please state your question.

Good morning and let me add my congratulations.

I wondered, Roger, if you could talk about the stance you'll take on mark down allowances with the Lauren line?

I know that they have been absent from the couponing, I'm sure it will stay that way and I also wondered if you had any early reads you could share with us on the selling of the Lauren line?

Well, I think the good news, Jennifer, on Lauren is that, one, when all the products started coming in November and December into Greensboro we actually had fit models for every size for every style try on the product and it fit wonderfully, so that was another hurdle we had to get over.

We started delivering products early on the 19th.

It went out, except for the ice storm last week in Greensboro we are at this point 92% shipped on the 125.

So the early reads, and I bracket this around early because it's only a week or two, were 8% sell through at Bloomingdale's which we think is pretty spectacular, and then in some cases we have sell-throughs that represent only partial weeks.

So fit, quality, fabrications that have been hitting the floor, the retailers are very excited and we are just beginning to get some retail reaction.

So we are kind of encouraged about that.

What was your other question?

The, your stance on mark down allowances.

Well, at 100% sell-throughs we won't have any markdowns, I guess that would be my stance.

Short of that, not unlike any other wholesale business we have built in expectations on what we think we want to do to support the retailer and that's anywhere from shops to coordinators to advertising to mark downs and our profit estimates for next year include that.

Obviously sell-throughs in the end dictate the results but until we have a better read from the customer I think our economic model has been built with appropriate conservative thinking.

Okay.

Thanks, Roger.

You're welcome.

Our next question comes from Randy Connick from Goldman Sachs.

Please state your question.

Hi.

Can you just reiterate the operating income from the wholesale segment?

And then secondly you commented on renovating about 200 doors either done or underway for LR L. and you said you had plans to put the product in about 900 doors.

When do you plan on renovating the other 700 doors if you are going to do that and then secondly what type of Capex implications will that have going forward?

Okay.

Well, I'm not sure in your first question, what is it you want us to reiterate?

The third quarter operating income from the wholesale segment.

Just in the interest of time that's in the table in the earnings release, you could pick that up there.

In terms of the Lauren door count, we obviously developed a environment by our creative people that we were happy with.

We have a plan and when we talk about 100 doors or 200 doors, within each door, we are redoing the missy, petite, and women's size department, so that's three shops per door, so when you talk about 200 doors, that's actually in essence significantly more shops.

We are biting them off in order of priority from largest to smallest and we expect to continue to roll through every six months a similar number.

That will work its way through the pipeline.

The current capital allocation on an annualized basis to do that is about $10 million.

And we'll continue to work our way through the country in largest to smaller priority.

Thank you.

You're welcome.

Thank you.

Our next question comes from Jeffrey Edelman from UBS.

Please state your question.

Thank you.

Good morning.

Roger, could you talk a little more about Europe?

I believe for the first half their revenues were down about 15% in local currencies.

How much better did they trend in the third quarter?

And could you, sort of, talk about the split between wholesale, retail, and then within this to what degree are you getting a benefit from sourcing in the Far East and selling in euros?

Thank you.

Well, I think our forecast for the year which runs through end of March, Jeff, is Europe will be about flat.

And so whatever was the, and I don't have it in front of me, the first six months, will be offset by the back six months.

And clearly as you know the pattern of our quarters our fourth quarter represents significant volume where our third quarter is relatively small.

So what we are seeing in that business is probably going to come out around flat for the year.

Is that flat in reported dollars or local currencies?

Well, that's reported, that's in what we would call constant dollars which is what we budgeted against at the beginning of the year against actual currencies at that point.

And that dovetails a little bit on an earlier another question when we talk about next years strategy for Europe, we are not budgeting Europe at the current currency of whatever it is, $1.25.

We have budgeted it at a much more conservative exchange rate.

Although from a cost of goods we are taking a more pessimistic view and budgeting that at the higher $1.25.

So we are trying to hedge ourselves against currency.

Because as you know, if you make profit in Europe at a better exchange rate it's positive somewhat offset by the cost of goods going up and your inability to raise prices in the U.S. in a significant way.

So the net of all that which I guess is the essence of your question, is we are getting in terms of our bottom line about a wash between the positive affect of the exchange rate in terms of conversion on profit offset by the negative effects of the cost of goods sold in Europe still taking into account Asian goods bought in dollars and retailed in euros.

Okay.

Thanks,.

Not to belabor the point, flat--that business will be flat in euros, then, for the year?

Or flat in U.S. dollars?

Well, I'm giving you directionally that it's going to be flattish in constant dollars.

We report in dollars.

Okay.

So then local currencies it is down?

I mean there's about a 15% differential at this point, if not more, 20% differential between dollars and euros.

Well, we convert at the prevailing exchange rate every quarter so you really can't take the full years exchange rate and apply the differential.

It's really on a quarter to quarter basis.

Okay.

Fine.

Thanks.

Is that your question?

Yes, thanks.

Nothing on Lauren or retail, Jeff?

You told us to limit it to one.

Oh, okay.

Just wanted to make sure.

I have a lot more.

I will wait for everybody else.

All right.

Thank you.

Our next question comes from Susan Sansbury from Max group.

Please state your question.

It looks like Susan withdrew her question.

There are no further questions in queue.

I will turn the conference back to Roger Farah.

Okay.

Well, we appreciate everybody's interest.

We're sorry we ran a little over but we wanted to give everybody a chance to at least get in one question.

We've tried to be clear about our strategies.

We've tried to give you an update on the things we've been tracking over the last couple of years.

At this point we feel good about where we are in our initiatives and we will try to stay in an update mode at the end of the fourth quarter as we plow into what we think is going to be a very exciting fiscal '05.

So we thank you for your interest and have a great day.

Thank you, ladies and gentlemen, this concludes the conference for today.

Thank you all for participating and have a nice day.

All parties can now disconnect.