雷夫·羅倫馬球 (RL) 2005 Q1 法說會逐字稿

Good morning and welcome to the Polo Ralph Lauren first quarter in fiscal year 2005 conference call.

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

I will now turn the conference over to Nancy Murray.

Please go ahead.

Good morning and thank you for joining our first quarter conference call.

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

The principal risk that could cause our results to differ materially from current expectation are described in our earnings release and in our SEC filings and we refer you to them.

Please note that our press release has both GAAP results and adjusted numbers.

For today's discussion purposes, we will be comparing our adjusted earnings which exclude restructuring charges and foreign currency gains and losses and we refer you to the table reconciliation of GAAP results to adjusted results in today's earnings release.

Now let's talk about the quarter.

Our first quarter adjusted EPS was 14 cents compared to 4 cents last year and at 14 cents with a net income of 14 million this year compared to 3.6 million last year.

Diluted shares outstanding increased 3.3 million this year reflecting our stock price appreciation during the year.

Our sales increased 29% driven by the women's Lauren line and strong comps in our retail business, while we ended the quarter with inventory levels 9% lower than last year excluding the Children's business.

Our total revenues including licensing increased 24% and that reflects an 8% decline in licensing because of the absence of royalty income from the previously licensed Women's Lauren's business.

Revenues also benefited from foreign exchange.

Our retail revenues grew 17% to 297 million with our comp store sales increasing 12.6%.

And that was driven by a positive performance in all of our retail formats.

Our comparable store sales were up 16.1% at our Ralph Lauren stores, 10.4% at Club Monaco stores and 11.6% in our outlet stores.

It should be noted that that goes against an overall 8.3% comp store sale increase in the first quarter of fiscal '04.

We had stronger growth margins due to reduced promotions in our stores and fewer mark downs and expenses decreased as we leveraged our sales gain.

Our operating results more than doubled from 11 million last year to 28 million this year, representing a 510 basis point improvement in the quarter.

During the first quarter, we opened three stores and closed four ending the quarter with 262 stores with 1.87 million square feet.

Let's talk about our wholesale business for a moment.

We continue to be pleased with the success of the Women's Lauren relaunch.

Our shipments in the first quarter were on track, we're making good progress with our new shop installations and we plan to have 500 installed by the end of the calendar year.

Most important, the new lines have been well received by the consumer with strong sale through.

Our European wholesale sales increased significantly this quarter as we had more timely and earlier fall deliveries and stronger summer reorders.

While our overall domestic men's wear revenues were down in the quarter and that was really driven by significant decreases in our off price business.

However our sales at retail are ahead of plan in our Polo brand men's business.

In that core business our gross margin improved dramatically compared to last year.

We also ended the quarter with significantly reduced men's inventory level.

Our wholesale operating loss in the quarter was 18.6 million this year compared to a loss of 31 million last year.

Our licensing revenues in the first quarter declined $4.7 million and that's primarily because of the absence as you've noted of the Women's Lauren's royalties and that was partially offset by increased revenues from our Japanese master license.

For the quarter our gross profit increased 23% to 307 million.

That increase was really driven by the Women's Lauren line now reported in our wholesale business and strong full price sales grew globally at our Ralph Lauren stores and our Club Monaco stores.

Our gross margin decreased to 51.8% compared to 52.1% last year.

And while we drove significant improvements in our wholesale and retail businesses, those gains were offset by planned licensing revenue decreases and business mix.

Gross profit also benefited from foreign exchange.

Our SG&A expenses improved 270 basis points to 48.2% as a percent of sales this quarter from 50.9% in the first quarter last year.

The actual SG&A dollars increased 17% and that's driven primarily from the Lauren Women's line and the dollars needed to support the incremental retail sales.

Please note that our SG&A also included 3 million to buy back a royalty sharing agreement related to the use of our trademark in various countries in Central and South America.

And also note that the SG&A was negatively affected by the change in the Euro in the foreign exchange mix.

Our operating income increased to 21 million from 5.5 million, representing an operating margin of 3.6% and that compares to 1.2% last year.

The improved operating profit generated by our retail businesses, the Lauren line, and our men's Polo business and European business was partially offset by a decrease in our licensing operating profit.

Now let me spend a minute on our balance sheet.

As you know we have a very strong balance sheet and we continue to make significant progress with managing our inventory.

We ended the quarter with 418 million of inventory, 12 million or 3% less than the end of the first quarter a year ago.

These inventory levels reflected a decrease in men's wear which -- or continues to result from our efforts to distribute the brands in the right channel.

And keep in mind that this year's reduced inventory levels also include the Lauren's Women's line as well as Children's wear and we acquired that at the end of the quarter so you are seeing the inventory before sales.

We ended the quarter with a cash position of 175 million.

And that is after purchasing our Children's wear business for 240 million in cash just before the end of the quarter.

We have no short term debt and 279 million of Euro bond longterm debt.

For the quarter, our capital expenditures were 36 million, compared to 14 million last year.

The majority of the increase in CapEx is associated with the shops for the Lauren's Women's line, our specialty retail expansion program and systems development.

Now let me turn to our fiscal 2005 outlook.

We continue to see this year as a very strong year for us.

Therefore, we are reaffirming our outlook to be in the range of $2.35 to $2.45.

For the full fiscal year, we anticipate mid-teen percent consolidated revenue growth and approximately 140 basis point improvement in the operating margin.

These numbers are based on low 30s percent growth in wholesale sales which now will include three quarters of the Children's wear sales, mid single digit percent growth in retail revenues, and low double-digit percent decrease in licensing revenue as a result of the elimination of the Women's Lauren and Children's wear license royalty.

We also continue to expect the earnings results of each quarter in fiscal '05 to exceed the comparable quarter in fiscal '04 with our quarterly profit flows similar to that of last year.

Our second quarter specifically will include now the Lauren Women's line fall shipment and we expect the operating profits in this quarter to be the second largest in the year with our fourth quarter remaining the largest profit contributor for the Company.

As we speak of the fourth quarter let me just remind you though however that the fourth quarter this year has 13 weeks versus a 14 week fourth quarter last year.

Now, let me go into a little more detail on our outlook for second quarter of '05.

For the second quarter, we expect consolidated revenues to increase high teen percent.

In retail, as you know, we are very excited about our specialty retail expansion strategy and we plan to open six Ralph Lauren stores in the U.S. in the second and third quarters, a flagship store in Milan in September and eight Club Monaco stores.

The net openings for the year should be 12 in total.

For the second quarter, we expect retail revenues to increase mid single digits and we would expect growth in all of our retail formats.

We continue to expect consolidated comparable store sales improvement in the mid single digits as we begin to anniversary double digit comp growth last year.

We expect second quarter wholesale sales to grow in the low 40s percent and that is driven by the Lauren and Children's wear businesses.

We expect the second quarter to be a strong quarter for our European business with high single digit increases.

And as we discussed, these gains in wholesale will be partially offset by planned decreases in our men's wear off price business as we continue to focus the Polo brand in selected department and specialty stores and will continue to eliminate sales to low volume stores and dramatically reduce our sales to the off price channels.

In our licensing business, we anticipate a high teens decrease in licensing revenue in the second quarter as a result of the elimination of the Lauren license royalty and the Children's wear royalty which is now the sales will be reflected in our wholesale segment.

And as a result we would expect this operating income also to decrease in the high teens.

Our sales outstanding are anticipated for the quarter to increase approximately 2 million shares.

And that should hold true for the remaining quarters as well.

And now, let me turn the call over to Roger for a discussion about some of our progress and our initiatives.

And then we will open up the call for your questions.

Thank you, Nancy and good morning.

We are obviously pleased with the first quarter results.

And while the first quarter is our smallest quarter, it is a good start to the new fiscal year, showing operating improvements in both retail and wholesale driven by strong revenue and significant profit margin improvements.

All of this accomplished with dramatically reduced inventory we feel has us well positioned going into the fall.

Also, many of the key areas that we are counting on for the full year delivered in the first quarter including retail, Europe, the Lauren business, the Men's business, and we are pleased with the early transition of our ownership of our kid's company.

If we spend a few minutes talking about the retail business, there are some common themes that are running through all of our retail formats that we are very excited about.

First of all, as Nancy said, we had great sales in all of the product categories coupled with strong execution.

Terrific margin improvements so we experience good flow through on the incremental sales.

We ended the quarter in retail with less inventory still driving large increases as we continue to refine our flow of new products to drive full price selling.

We reduced the promotional activity and extended the full price selling windows.

We continue to improve the operation, staffing and expense management and believe our shared service model now including Club Monaco is really paying dividends.

All of this has encouraged us to continue our new store roll out plan while we continue to edit unproductive stores from the portfolio.

We spend a few minutes on the Ralph Lauren stores clearly a 16.1 comp is outstanding.

There has been a high demand for luxury and fashion as well as Ralph leading the charge on color this season, all very well accepted and contributing to success in all the merchandise categories.

We have six stores opening during the second and third quarter and all of the new stores now are beginning to hit our performance criterias including the cost to build, sales against projections and four wall process.

So we feel strongly we are on the right track with the Ralph Lauren stores.

The same strategies are now beginning to be applied to Europe and we believe we will make some real progress on the retail front there over the next couple of years and continue to be on track to opening our Milan flagship on September 9th.

We think we've raised our level of merchandise presentation, customer service, marketing efficiencies and others all of which are contributing to the growing success of the Ralph Lauren stores.

Club Monaco at 10.4 comp also against a very strong first quarter last year showed strong merchandising results in Men's , Women's and accessories.

In Women's the demand for color, skirts and knits really drove the increase.

Men's it was wovens, all patterns of all kinds, color and really cargo shorts.

Again, increases accomplished on less inventory than last year.

We basically consolidated the [INAUDIBLE] function, and here also have begun to get more aggressive with real estate and have eight stores scheduled to open this fall.

The factory outlet stores at 11.6 comp really driven by operational excellence across the board with strong performances in Men's, Women's and Children's.

Particularly strong in the sunbelt.

We experienced tremendous flow through on incremental sales and our inventories here are also in good shape heading into the fall.

We really feel we have the right strategies in retail and are now executing them across all formats.

There is also a couple common themes running through our wholesale businesses that apply equally to Men's, Women's and soon to be Kid's .

One, clearly we want to have the right fashion at high quality levels at the right price.

We are trying to be disciplined about the right number of doors we sell and the appropriate sell and amounts of those doors to increase the full price selling.

We are working hard to enhance the visual merchandise presentation and we're supporting that with extra capital.

We are trying to improve the amount of fashion compared to basics we are showing the customers and we are identifying and executing on replenishment items.

All of this being accomplished at the same time we continue to reduce the amount of off price inventory in the market place should result in increased margins for the retailer and us, and as we extend our partnership with key specialty and department stores, we continue to look for more and more full price selling.

Specifically in the men's business, we enjoyed a strong spring in retail.

We ran a positive trend of 6% on less inventory and improved margins and our retail partners are very happy.

The product was right and the execution was improved.

And as Nancy said we ended the season with dramatically less inventory both at the retailer level and at our own level significantly reducing off price sales.

We continue to focus on our top doors for in store visuals, proper selling, we've enhanced the coordinator programs and increased the selling support.

We've targeted our marketing better and we have added more fashion and higher prices to the assortment.

Many of these are similar to the strategies that we have used successfully in our own retail and they seem to be working.

The Macy's West pilot program which we've talk about the last couple of quarters continues to produce terrific results as they ran a 17% increase for the spring season.

The success of that has encouraged really us to add six additional store groups this fall, covering an additional 400 locations to this focused account strategy.

We expect the results there to be similar as we begin to deliver and execute on our fall commitments.

Business in Europe is tracking as expected.

We are beginning to see the benefits of our consolidation in the organization.

New senior management is now in place at all key jobs including the marketing, wholesale, HR and finance.

We saw good reorder business off of strong spring summer line that drove some of the first quarter increase Nancy talked about and we are very encouraged that the fall shipment -- by the end of July, we had shipped 62% this year, versus the end of July last year we only shipped 38%.

So we have really put a lot more fresh goods into the retailer.

Early reaction to fall both at wholesale and retail is strong and we're already beginning to get some reorder action on that.

We really feel good about the first quarter in Europe and feel we are on our way.

Nancy said the Lauren business continues to perform on plan.

We continue to execute, design and deliver flawlessly.

The career in polished casual business really differentiates us from others and the team of leadership we have at Lauren is really delivering on all fronts.

We are right on track for the spring '05 line which we will take to market in September.

And have installed 222 shop [INAUDIBLE] in 80 different stores for spring.

The fall will be supported by a very strong advertising campaign.

In addition to which we are launching a new fragrance "Lauren Style" that will add to the exposure of this brand to the female customer this fall.

Briefly, in terms of Children's, we closed really on the last day of the fiscal year.

As Nancy said, we ended up including the inventory on hand but had no sales against it.

We are very pleased with the integration really in all phases through the first five or six weeks, believe there is real potential both domestically in wholesale and retail.

Also believe it will help us support significant opportunities in Europe for the Kid's business.

We continue to believe while neutral in fiscal '05, the Kid's business will add 15 to 20 cents to our earnings next year.

At the corporate level, we have made real progress on many important and complicated initiatives over the past few years.

Building a global infrastructure, developing common systems for all major areas as we are working now on the last piece, which is the wholesale piece.

We've developed a global supply chain from design through manufacturing, transportation and delivery that has driven down cost and increased the speed to market.

We continue to invest in our people and in all of the human resource areas.

And we've got a pristine balance sheet.

All of which is supporting what we think are the right division initiatives including the development and execution of a real estate strategy for both profit and growth.

The relaunch of the Women's Ralph Lauren line, integration of the European operations into a central and sufficient organization to support future growth and the repositioning of our men's business to regain growth and branding.

We also continue to extend the control of our brands with the resent acquisitions of the kid's company.

The successful implementation of all of the above should drive the results for this fiscal year and beyond.

And Ralph and I would really like to thank the 13,000 employees for their hard work and dedication that has made all these changes possible.

I think with that we will try to field some 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.

If you have any questions, please press star, 1 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 guys.

Congratulations on a terrific quarter.

Could you talk a little bit more about the Polo men's business in the U.S. Roger?

You talked about a positive trend of 6% in the first quarter.

What exactly did that represent, is that just the doors that you stayed in?

And what are you looking for for the rest of the year in men's and when do you think possibly on an absolute basis the men's business could turn positive?

Well, first of all thank you for the congratulations.

They really go out to a lot of people.

The men's business performed very well for us, Dennis, this spring at retail.

So the 6% we talked about on less inventory relates to the retail performance at our department and specialty store accounts.

Meaning, with less sell in, they had better sell through, better margins, higher average sale pricing meaning less promoting and they came out of the spring/summer clean.

So the product is really selling towards retail.

It obviously starts with great product and we think Ralph and the design teams really delivered assortments that the customer reacted positively to.

But I also think we are executing a lot of our initiatives including working harder at presentations, our coordinator programs, our staffing programs.

So many accounts like Bloomingdale's, Macy's West and others ran actually double-digit increases in terms of their retail performance which obviously is encouraging as they are now coming back to buy spring next year.

They are coming off a successful spring even though we sold in less, they sold through better.

It has allowed us to shift fall in without having a lot of spring/summer left over on the floor.

So we think that transition and that receipt flow will continue to propel the business forward.

I think the other good news, as I said, is that the Macy's West experiment as we talked about in the fourth quarter and into the spring continues to produce significant increases.

We had every major account in the U.S. looking for us to do something similar with them.

And we really didn't think we could do them all at the same time, so selected 6 partners representing 400 doors to focus on.

I believe the sell in will begin to increase as we now have cleaned through the system and have a new point of view about how to run the men's wholesale business.

We have seen booking increases with the cruise, holiday and into spring line.

So for us that's what we anticipate where the retail selling will continue to improve as well as the wholesale sell in.

We have also seen an uptick in our replenishment business in the men's area which is a very exciting bit of news too.

Given all that and the positive results you have had in retail and the fact that you beat the high end of your earnings guidance in this first quarter, how come you are just leaving the full year guidance unchanged?

Well, I think the reason we are leaving it unchanged, Dennis, and it is a fair question.

While we are very excited about this first quarter and beat our own expectations really on almost all fronts, it does represent a relatively small part of our full year, it is certainly less than 10% of our earnings.

I think it is prudent for us to deliver fall both at wholesale and retail.

Get through the second quarter, our second quarter is our second largest quarter of the year as Nancy said.

If we in fact deliver a second quarter or continue the run rate, I think at that point we look to recalibrate the full year.

I just think it is premature at this point despite the terrific first quarter.

It is still a very a small part of our total year.

I am excited because all the pieces and parts are working.

So the things that we strategize and hopefully have spent our time on are all contributing.

And, you know, if we get through the second quarter and fall looks to be well received by the customers, then I think we will come back and readjust it at the end of the second quarter.

Thank you.

Thank you.

Your next question comes from Margaret Mager from Goldman Sachs.

Please state your question.

Hi, how are you?

Good morning.

Let's see.

We catch you off guard, Margaret?

Oh no, no.

Just, on the retail segment, you are coming in way ahead of our expectations there on the profitability.

This juncture, you know, the way our numbers are sort of shaking out we are coming out ahead of your longer term goal to be up in the range of 8 to 10% operating margin for retail.

And I know that on the last quarter you said you would you update your thinking on where you think that segment can go after you've achieved your goal.

And so, or got through this year any way.

At this point is there anything that you would add to the outlook for the retail profitability in terms of that longer term goal that you set up several years ago which you are now very much on track?

Yes, I think we are very pleased with the progress we've made in retail.

And it's really the culmination of several years of initiatives.

I believe, Margaret, when we set out at the 8 to 10% that seemed pretty far out there because we weren't making much money of any kind.

And we are quickly approaching it as you noted.

The only thing to remember about this fiscal year, is that loss of the 53rd week in the fourth quarter has more of an impact on retail.

So we expect the bulk of the improvement in the retail profits to be in Q1, 2 and 3 and certainly less in Q4.

Nevertheless, we continue to track very nicely on our objectives for the year.

And I am encouraged we continue to plan the balance of the quarters more conservatively than the first quarter actually delivered.

As you can see, on less inventory we can certainly deliver more sales if it's there to be had.

I think that the 8 to 10 was our stake in the ground.

It was our point of view that got us into the game.

I don't think that is where we will ultimately be satisfied and I think if the rest of the year continues to track well, probably post Christmas, we would create a new stake in the ground for us in the next couple of years.

But at this point we are obviously pleased with the sales and earnings and quality of retail.

If you have been in our stores, the shopping experience from merchandise to visual presentation, to customer service, we think is what the customer is voting yes on.

You know, we can't control the economy but feel very good about that.

And you know, should get in that range this year and then we will see where we go from there after Christmas.

Okay, thanks.

And do you have anything to say about sort of trends in Japan.

We have been hearing a lot from the luxury companies about a shift in purchasing among Japanese consumers.

Is that a factor you see at all in your U.S. stores and tourist locations or in your Japanese business to any extent?

I have been reading you know, really some of that too.

I think for the last year, really, as we have talked, the United States has certainly experienced a resurgence in luxury as has the Far East with Europe trailing that.

Our business continues to track along those trends.

I read some of that recent information.

We have not seen a fall off in our Japanese business and actually begin to think there is some light at the end of the tunnel in Europe.

So I am not really seeing it as it relates to our business at this point, Margaret.

Okay, Roger.

Thanks so much and great quarter.

Thank you.

Our next question comes from Virginia Genereux from Merrill Lynch.

Please state your question.

Virginia?

Virginia?

Go ahead.

Sorry.

Good morning.

Good morning.

Sorry about that.

Great job.

And if I may, can you guys comment a little bit on the margin outlook for licensing and the sort of margin compression that we saw this quarter?

I know you lost some revenue leverage even looking at that it looks like margins were down more than we had them forecast this quarter.

The only thing I would add to the loss of revenue is the $3 million that is in the quarter in expense and licensing.

We used that money to buy back, you know, some South American arrangement that we were sharing revenue and had an opportunistic deal to close out that relationship and that cost us $3 million in the quarter which tends to throw off the margin in a distorted way over a one quarter basis.

Okay.

Thanks, Roger.

That's helpful

And Virginia, it's Nancy.

Just to reiterate.

Because we are looking in second quarter guidance as kind of a high teen decrease in the royalty, but as you know, with the way that the business runs and licensing, it really is going to look like kind of a low 40s decrease in margin because of that.

Okay.

Again and sort of on that, Roger and Nancy, do you all have a -- as you look out and you know, Roger, you've long had this sort of 14 to 15% margin target.

Wholesale and retail are going up fantastically.

Can you tell us where you think the licensing margins sort of bottom.

As we think about sort of the mix of business.

Is licensing going to be 30% margin business for you, 40, 50?

How can we think about that?

You know Virginia, it's a fair question.

I am not sure I have have an answer to give you that is well thought out.

It really depends on obviously over time which businesses we decide to stay in as licensing relationships versus which ones we plan on obviously staying in as owned businesses.

I think, you know, what we have looked at is the net incremental profit to the company, as exemplified by Kid's or Lauren.

You know, the net numbers to us if we can run the business is overwhelming in terms of ownership.

And so we will continue to look at it that way.

But to model it out over several years would require us to have a level of precision over the expiration of licenses or the acquisition of licenses that would be hard to give you.

Okay, is it fair to say that there is a fixed cost element in your licensing business that is sort of going to be there regardless of where, how revenues flex Roger?

Yes, that's between the actual people working on licensing and/or the corporate allocation.

There's a certain amount of inflexibility to that.

Of course, as we move businesses from licensing to wholesale, with that comes some of the corporate allocation.

So you should see some shift in that.

But I think you will begin to see less margin and licensing on some levels and more coming out of wholesale and retail.

The mix of all that should continue to drive the Company's total margin up.

Okay.

You still feel, Roger, 14 to 15 is a reasonable longer term target?

That's what we would like to get to.

As Margaret's question addressed, clearly retail making the progress it's made today and hopefully continuing is a large part of that as we begin to execute on our strategies there.

Great.

Last one real quick.

The Kid's business being the 15 to 20% accretive.

15 to 20 cents.

15 to 20 cents, I'm sorry.

Not percent. 20 cents accretive to '06.

Roger, do you view that, should we think about that as additive to your sort of longterm, 10 to 15% type of earnings target or part?

As a part and sort of driving some of that?

Well, you know, I think that when we come out with '06 guidance, some of that is going to be additive, you know, what I say that every year 15 to 20% is going to come from existing businesses and then deals on top of that are going to add to it.

That may be a little rich.

But I think, you know, we believe that against our prior expectations for '06, Kid's will add to that total and we come out with our '06 guidance which we tend to do after the third quarter and holiday season.

I think we are going to be adding to what we had originally contemplated.

That was a big part of why we made the deal.

Great.

Thanks very much.

Okay.

Thank you.

Your next question comes from Jeff Edelman from UBS.

Thank you.

Good morning.

Roger, could you talk a little more about Europe?

What did it grow at in this quarter and where would you expect to see it go for the full year?

Well, as Nancy said in her modeling exercise, we continue to see the European business as high single digits.

In constant dollars the European business was up 36% in the first quarter.

So we are very pleased with that.

Albeit it is a small part as we talked about in the past.

The European business is clustered around second and fourth quarters but the first quarter was up 36%.

So that's an indication of the progress we have made in both our execution, reaction to product, in terms of reorders.

As you know, Europe is a bit more of a reorder business than the United States and our ability to deliver fall where Europeans want that early.

Because they don't have much of a summer delivery.

And as I said earlier we delivered 62% of our fall business through the end of July versus 37 last year.

So we are excited about the progress in Europe.

We have a full team in place to focus on the business.

We've got key people in every country.

Products are being well received, we are excited about the fall campaign and we'll see what happens.

But that was a pretty terrific first quarter.

I know many of us were waiting to see that come to fruition after the transition through the consolidation.

Okay, so I guess modeling on a reported basis we should look for, that high single digit for the full year, Nancy?

Yes.

Okay, then a question on the domestic wholesale Men's.

Could you give us some sense as to how much of that, it looks as -- by our calculations if Lauren might have accounted for 75, $80 million and Europe was up although small.

We are seeing this decline in the Men's wholesale.

Could you sort of give us a sense of how much of this is coming from reduced sales to the off price channel and what was that peak and where is it now and then the rest from cutting back from other accounts?

Well, I think the sell in of what I am going to call regular accounts was probably down to mid to higher single digits.

And then the off price reduction which was dramatic was really the rest.

And as I said earlier, I believe the sell in levels starting with cruise, holiday and spring to the regular accounts will start to show an increase and the amount of off price reduction will begin to dissipate as a percent to total dramatically heading into next spring.

Because I think we have done the heavy lifting on that through the balance of this year.

Okay.

Great.

Thank you.

Thank you.

Thank you, our next question comes from Jennifer Black from Jennifer Black & Associates.

Please state your question.

Good morning, Nancy and Roger.

Good morning, Jennifer.

I have a few questions.

I wondered first if you could speak, Roger.

You've done such a great job in the back of the house two cycle times.

I wondered what the average line times were and what kind of goals you have to shorten them and both for your own retail stores as well as wholesale and what percent of your business in total is on replenishment?

Alright.

Well I think I will remember all that.

Let me start with cycle time.

Really the cycle from design through development, through manufacturing, through transportation, through distribution, you know, this is an average Men's, Women's, all of it.

We have probably taken 30 days out which is pretty significant.

We have made the bulk of that improvement in the transportation and logistics as well as really the manufacturing cycle.

At the same time we have been able to dramatically reduce the amount of air freight we used to spend because product is running on time.

It's running through the pipeline on time.

So we can actually put it on a boat which as you know is much less expensive than air freight.

So that's been an interesting play.

The European consolidation to date, again mostly clustered around supply chain, has saved us 17 days and we expect to drop that at least another week or two over the next year.

So we think that's a big part of what we are seeing in the inventory management.

To drive 24% or 28% without licensing increase on less inventory and excluding the Kid's where we had the inventory for one day.

A 9% decrease in inventory driving a 28% sales increase.

I think speaks to the progress we have made on all that.

It helps our balance sheet and helps everything else as well.

I expect that the progress from here going forward will be a little bit less on those areas and perhaps a little bit more on the front end, the design and the merchandising process and getting from approval to, you know, the manufacturing execution.

So, you know, I would say we are probably two thirds of the way through the kind of progress I think we can make.

What percent of your business in total is replenish?

Well, in Men's domestically it bounces around between about 15 and 20.

The European business can go as high as 30% and it is less than 10% in the Women's business.

Okay.

Then, one more question.

Can you further enhance the productivity at the Club Monaco stores and would you take that format overseas?

Yes, we can enhance the productivity.

We would like to continue to drive sales and sales productivity.

One of the things that we've also figured out over the last couple of years is that we do as much business in a 4,000 square foot store as we do in a 6 or 8,000 square foot store.

So clearly driving comp store sales which we have been doing now for the better part of two years in Club Monaco helps.

We have also realized with new stores, anywhere from 3,800 to 42, 4,400 feet is what we need to execute and deliver our concept.

That helps productivity.

We eventually believe not only the Club Monaco name but the look of the merchandise and its branding and imaging could be an international concept but we are still in our early stages of growing it in the United States.

I think this year and really into next year, as we begin to ramp up store growth.

It is going to be 100% domestic and in the years to come, I think there is international opportunity but it would be premature now to go after that.

That brings with it a level of complications and distractions for this organization and I think we will focus on the U.S. for the next couple of years.

Great.

Lastly, can you comment on the internet?

Well, I could comment in that we have had a spectacular, spectacular year.

That business continues to run tremendous increases.

Its sophistication, its offering to the customer, its service levels all have been extremely well received by the customer.

There are some unique features on there, like you can make your own Polo shirts or make your own Oxfords which the customers are just going crazy with.

We are very pleased with that business.

It is a money maker.

It continues to grow and we think it is great branding for the company at the same time.

So not unlike our other retail businesses, we think we are on the right track with that as a direct to customer as well.

Thanks a lot.

Congrats.

Your're welcome.

Thank you.

Your next question comes from Liz Dunn from Prudential.

Please state your question.

Good morning, thank you and let me add my congratulations.

My first question, just regarding wholesale, I know that last quarter you mentioned bringing some prices up on some of your classic Polos.

Are there other opportunities like that that you see to raise prices and how much of the 6% increase in sell through at retail was a result of higher AUR?

Well, that's a good question, Liz.

We actually only started to deliver product with higher retails around Father's Day.

So it had very little impact on the spring and particularly the first quarter.

We believe and have gotten the right kind of customer feedback that we have been overly cautious about the pricing of our product.

We 're a luxury brand, we're a premium brand, we've got the quality and the design to support it and I think in some cases maybe have been listening a little too hard to the lower end department stores which we're focusing less on now.

We are looking at pricing in knits, our wovens, our dress shirts and really a lot of our key items and key classifications because in many cases those prices haven't moved in many many years.

In some cases we are adding quality and different features to the product.

But we think the full impact of some of those pricing decisions will play out in the fall and into next spring.

It had very little impact on this first quarter's result.

Okay and then can you discuss trends in July, you know, both in Men's and Women's in your wholesale business or your retail business or both?

Well, July is a bit of a funky month because, as you know, it's mostly a clearance month and the fact of the matter is we had very little clearance.

We had very little clearance units in our own retail stores and we had very little clearance relatively speaking in the wholesale doors.

The best indicator for me is that because we've had good deliveries on fall, we are getting a very good reaction to fall product.

Even at the collection price point in Women's, for the first time Ralph did a preline that allowed us to deliver fall product in late June, early July to these retail stores which has been a phenomenal success.

Usually we usually would not be delivering collections well until the back end of August.

So we have been able to fill some of the gaps that in the past were promotionally units driving business.

We have been able to fill them with higher margin early fall business whether it's Europe, whether it is Men's wholesale.

Clearly Lauren is delivering every month and even in some of our luxury price points.

We have had a very nice reaction to new fall received, but we are selling less clearance unit than we sold last year because we had a significant reduced number on hand.

Great.

Final question, on quota.

Can you update us on your thoughts as to what you expect from the elimination of quota on your own costs and maybe how it should play out on the pricing environment for you.

Okay.

We continue to get smarter and smarter every quarter about that.

We are in a very specific dialogue with all of our manufacturing base.

We believe, starting in January, we will begin to capture most of that reduction in cost.

Which is really what it is.

And we are having very frank and specific conversations with our key suppliers on that subject.

I think it may cause us to bring extra receipts in in the third quarter, October/November, just to protect ourselves in case there is some disruption particularly around Club Monaco or even in some of the Women's and Men's wholesale but I don't expect that to be a large amount.

I think we are pretty locked in, in terms of service to us during that second and third quarter.

So I expect, starting calendar next year, it to be a positive to our gross margin.

I don't believe that we will see any impact to our retail pricing.

Okay.

Thank you very much.

Okay.

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 the great quarter.

Great outlook.

Just one last question on the Men's area.

You talked about for holiday, that your wholesale business ex -- off price should begin to stabilize and, in fact, be up.

Overall Men's business do you think for spring season, including the off price, we will see a turnaround in the business?

That should be up?

I think the sell in, the wholesale business for spring should show some signs of an uptick.

Everything included.

Okay.

Then for next year it should be up?

I think so.

As far as marketing and advertising as a percentage of total sales, how is that trending?

Well, you know, it's been interesting, Lee, over the last couple of years when business was tough in our industry and a lot of people were cutting back on advertising, we have actually been adding to our marketing and media spends.

And we continue to see an increase this year.

Some of the efficiencies we are getting in different parts of the Company, we have been plowing back into advertising and marketing.

I think it is one of the great things we do.

The question earlier on the internet is interesting.

Because we think that's a great economic engine but it is also good branding and marketing.

This fall with the launch of Lauren Style, the Lauren products as well as all the regular campaigns, we have added incrementally to the advertising.

To support the, you know, the business initiatives and I think we are going to continue to do that, Lee.

Thank you.

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

Please state your question.

Good morning.

Good morning.

A couple of things, first on the inventories, really a great job there.

I am wondering, it sounds like you think with some still kind of more front of the house opportunities that inventory can continue to move down and you know, be a source of cash.

Is that the right way to think about it or do you really think you are close to the end?

That sounds so ominous.

I'm not sure I'd ever admit I'm close to the end of anything.

The fact of the matter is we have made enormous progress on our inventory and inventory management and supply chains in Men's.

Obviously Lauren is running very well in all of our retail formats.

You know, it's a little hard for me to say apples to apples because now we have Kid's coming online and it kind of throws the metric out.

I think the one area that we probably on an apples to apples basis have room for improvement is Europe.

Because we are just in the early stages of supply chain and replenishment that we have been doing here for the last couple of years.

Having said that, I expect the company's total inventory turn to continually improve over the next two or three years.

I don't think we are yet as complete in that thought process although we have made enormous progress.

I think we have used the statistic before that said we will do over a billion dollars more business this year than four years ago on less inventory.

That's a pretty startling statement on the progress we have made but I do believe that we have got some opportunities over the next couple of years to make still more progress on this subject.

That's great.

On Lauren, hoping you can elaborate a little bit.

In terms of your comments last quarter about some variances in performance that you were seeing on the higher end doors, relative to the lower end, are you still seeing that and kind of, you know, what types of adjustments are you making?

Are you considering changing, you know, perhaps the presentation in some of those lower end doors or perhaps even pulling out of some of those doors?

Well, I think it is a fair question.

We are still in a learning process and to that end we actually did some focus groups with our customers to get a reaction to how they are feeling.

And generally, we have gotten high marks across the board in terms of quality, fit and styling.

I think that the -- what I am going to call the better doors continue to do extraordinarily well even some of the fall products that we have delivered early into Nordstrom's or Bloomingdale's has been doing extremely well.

I think that what we have tried to do is listen hard to that B and C level door to understand what their needs are and have made some adjustments for this spring line which we will show in September for delivery next year.

That will actually be the first line that anniversaries last year's numbers.

So we have made some adjustments.

We think they are both appropriate and what we have heard back in these customer focus groups continue to push the A doors and the A customers very hard.

And I think that will help us with some of the B and C types of location.

We are not planning on reducing door count in any way going into next year.

Okay.

My last question would just be on the operating margin outlook Nancy, I think you indicated looking for 140 basis points for the year of improvement.

That's a slight down tick from, I think, your previous 150 and you came in ahead on the first quarter.

Is there any particular areas that that is coming from or is it just a nuance at this point?

Well the nuance is that we added sales from the Kid's wear acquisition without adding incremental profit in the first year.

So that just -- the math throws more sales on and does not come more profit.

It takes down the rate of tick.

It was all Kid's.Thank you,.

You're welcome.

Thank you, our next question comes from Robby Ohmes from Banc of America.

Please state your question.

Thanks.

Two quick follow ups on some questions that were asked.

First on the Kid's business you gave us the sales for fiscal '06.

Can you give us the sales you expect in fiscal '05 and also why isn't Kid's going to be a profit contributor sooner than fiscal '06?

Well, let me answer the sales.

Nancy's guidance modeled in Kid's sales for second, third and fourth quarter.

So, you know, it is roughly 75% of next year's full guidance.

We believe that, you know, plus or minus about right, and you know, some of that is a function of what used to be recorded by the outside licensees as wholesale sales to us now are not sales to us.

They are, they are cost of goods.

I also believe that the purchase accounting adjustments that have to be made and the cost of integration are what's offsetting potential first year profitability.

All of that is over and, therefore, fiscal '06 should be, you know, obviously the 15 to 20 cents we've talked about.

Light loss in interest on the money we spent out of cash.

Obviously loss of licensing revenue.

All of that mixed together gives us kind of a neutral point this year and 15 to 20 cents next year.

Got you.

And then a quick follow up on retail.

Can you give us a sense of how much of the comps were driven by transactions versus average ticket?

Thanks.

Is that in our own retail or at the department store retail level?

Sorry.

That would be in your own retail.

So Club Monaco and the Polo stores and the outlet stores if you can.

Yeah, I would say at Club Monaco it is almost all transaction because we really did not experience a unit increase per se.

I think in the Ralph Lauren stores, both full price and off price, we experienced both.

Less promoting, trading up, higher retails drove a higher unit price out the door.

But obviously with, you know, 16 comps and 10 and 11 comps, some of that was in fact a transaction increase as well.

So we really got it on both ends which is really a good news story.

In outlets?

Outlets, both transaction and price increases drove the 10 6 comp.

Great, thank you very much.

You're welcome.

Okay.

I will take one more question before we wrap up.

There are no further questions in queue sir.

Good.

Well let me just say we are pleased with the first quarter.

As I said earlier, it is a small part of our year but directionally it has been very satisfying to see the year get off to a good start and all the pieces and parts that are important to us for the next three quarters are all seemingly tracking nicely.

So I appreciate your interest.

Look forward to the update at the end of the second quarter.

We'll hear more about how fall is performing and you can follow up with Denise separately, if you have additional questions.

Thank you.

Thank you.

Ladies and gentlemen, this concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.