雷夫·羅倫馬球 (RL) 2005 Q2 法說會逐字稿

Good day everyone and thank you for calling the Polo Ralph Lauren second-quarter 2005 earnings conference call.

As a reminder today's call is being recorded.

(OPERATOR INSTRUCTIONS.)

Now for opening remarks and introductions, I would like to turn the conference over to Ms. Nancy Murray.

Please go ahead, ma'am.

Good morning.

Thank you for joining our Polo Ralph Lauren second-quarter conference call.

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

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

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

But for today's discussion purposes we will be comparing our adjusted earnings which exclude restructuring charges and foreign currently gains and losses.

We refer you to the table reconciliation of GAAP results to adjusted results in the earning release and that is available on our website at "investor.polo.com."

Now, let's talk about the numbers.

We are very pleased to report that our second-quarter '05 adjusted EPS was 76 cents, and that's a 46 percent increase compared to the second quarter last year.

Our net income was 79 million this quarter compared to 53 million last year.

Diluted shares outstanding increased 2.8 million reflecting our stock price appreciation during the year.

Our total revenues increased 25 percent and that was driven by the women's Lauren line, the addition of our Childrenswear business as well as gains in our European wholesale business.

We generated a 30 percent sales increase in our wholesale and retail businesses in the second quarter and that was done with only an 11 percent increase in inventory.

You should note that our quarter-end inventory levels now include both Lauren and Childrenswear.

Our revenues also reflect a 17 percent decrease in licensing royalty because of the absence of the income associated with the previously licensed Lauren and Childrenswear business.

The revenues also benefited from foreign exchange.

In the second quarter our gross profit dollars were up 25 percent.

Largely from the Lauren line, Childrenswear, our European wholesale business, and our global retail businesses.

While we had strong improvements in both our retail and wholesale gross margin rates, our consolidated gross margins were the same as last year due to the less licensing revenue.

Our SG&A dollars increased 17 percent primarily from the inclusion of Lauren and the Childrenswear business in this year's results.

As a percent of sales our SG&A expenses improved 240 basis points to 35.4 percent this quarter from 37.8 percent in the second quarter last year.

And that's as a result of improved leverage in our infrastructure and benefits derived from our European consolidation.

We had terrific flow-through from our incremental sales resulting in a 50 percent increase in operating income of 125 million compared to 83 million a year ago.

And that is with a 240 basis point margin improvement.

Now let me spend a few minutes on our segments.

Our retail revenues grew 7 percent to 319 million with comp store sales increasing 3.7 percent.

Our comp store sales were up 14.2 percent at Ralph Lauren stores; 4.4 percent at Club Monaco stores; and .2 percent in our outlet stores.

And those comp numbers are going against an overall 8.3 comp store sales increase in the second quarter of last year.

This retail performance is despite losing nearly 6 million in sales in hurricane-affected areas.

Our retail operating profit increased 10 percent to 23 million this quarter.

The 20 basis point improvement in retail operating margins reflect expansion in retail gross margins from stronger full-price selling environments partially offset by preopening store costs and some one -time asset write-down costs.

During the second quarter, we opened 11 stores, including the flagship in Milan, and we closed three; and we ended the quarter with 270 stores reflecting 1.92 million square feet.

Now, on to our wholesale businesses.

As you know the second quarter has traditionally been the second largest wholesale quarter for our company.

As you can see we've reported tremendous improvement over last year with our revenues up 50 percent; and wholesale operating income more than tripled to 82 million with an 860 basis point improvement in the wholesale division operating margin.

We are very pleased with the continuing success of our women's businesses, including Collection, Black Label and Lauren.

Our Collection preline, which we launched this summer, was well received by our customers and now allows us to flow product more frequently.

We achieved tremendous sell-through in advance of the arrival of our fall runway product.

In addition, our Lauren shipments in the second quarter were on track.

We continue to make progress with our new shop installations with 92 new shops installed in this quarter.

Our European wholesale business performed well this quarter with both strong sales and operating income increases.

We experienced strong retail sell-throughs in Europe in all of our apparel categories, particularly in women's.

Earlier deliveries in Europe throughout the quarter drove a more active reorder business.

Our overall domestic men's wear revenues were down in the quarter as we continue to reduce stores and eliminate sales in the secondary market.

This is part of our initiative to really elevate our brand and focus on impactful visual presentation.

As we've mentioned to you before, with our success at Macy's West and project overhaul, we have expanded that project, now called "Focus Account Strategy," to seven new accounts.

We are pleased that we drove positive retail comps in our focused men's wear doors, and we are encouraged by the continuing positive results of our initiative.

In addition we drove dramatically improved gross margins on increased full-price selling in men's wear.

Now, this is the first quarter we have our Childrenswear as part of our wholesale business, and we just want to report that the acquisition was smooth and we are pleased with our efforts in the integration of this business and with the back-to-school performance.

Now let me spend a moment on licensing.

Our licensing revenues in the second quarter were 62 million and that's down 17 percent from last year because of the absence of women's Lauren line and Childrenswear royalties.

Turning to the balance sheet, as you know we have a strong balance sheet and we continue to make significant progress with managing our inventory.

We ended the quarter with 444 million of inventory or 11 percent more inventory than at the end of the second quarter a year ago; and that inventory number now includes Childrenswear and the women's Lauren.

And what's particularly satisfying is that this inventory drove a 30 percent increase in sales.

We ended the quarter with a cash position of 146 million and that's after purchasing the Childrenswear business in July with cash on hand.

We have no short-term debt and 281 million of Euro bond long-term debt.

We executed a new bank credit facility in October by entering into a new five-year credit agreement with an expanded syndicate of banks.

The new credit agreement, which is substantially on the same terms as the prior credit agreement, increased our revolving line of credit to 450 million subject to increase to 525 million.

This facility is available for direct borrowing and the issuance of letters of credit.

For the quarter our capital expenditures were 48 million compared to 26 million last year.

The majority of the increase was associated with our specialty retail expansion program, shop for the Lauren women's line and men's wholesale shop.

Now, before I go on to the outlook for next year, for the rest of this year, let's take a look at holiday.

First of all, we are very well positioned for holiday.

Our deliveries for our stores are on track with our stores ready to be turned to holiday by mid-November.

We are really ready to continue to satisfy the demand for the luxury customer with a strong line of items.

We have accelerated our collection Cruise for the sunbelt stores, and we will continue to expand on our dramatic advertising and marketing that will support these initiatives.

The advertising will kick off on Thanksgiving weekend in the New York Times magazine where there will be a 12-page spread featuring holiday and Cruise.

Once again we are the leader in winter color.

Then you will also see our women's collection prominently featured in important monthly magazines over the next few seasons; and in addition, at Polo.com they have recently launched a Create-Your-Own monogramming for gift-giving this holiday season that complements the wildly popular Create-Your-Own program from Polos-to-Oxfords that we've had so much success with over the past year and a half.

Let me turn to the outlook for the rest of the fiscal year.

We continue to see fiscal '05 as a very strong year for us, and we are happy to reaffirm our outlook to be in the range of 235 to 245.

For fiscal '05 we appreciate high teens percent, consolidated revenue growth, and approximately 120 basis points improvement in operating margin.

That operating margin improvement is based on mid-30s percent growth in the wholesale sales, including now three quarters of children's sale.

We would expect high single digit percent growth in retail revenues and a low double digit percent decrease of licensing revenue; and again, that's the result of the elimination of the Lauren and Childrenswear royalties.

We also continue to expect the earning results of each quarter in this fiscal year to exceed the comparable quarter in fiscal '04, and our quarter quarterly profit flows are similar to fiscal 04.

As a note please remember that while the fourth quarter is our largest profit contributor, the fourth quarter this year will have 13 weeks compared to the 14 weeks fourth quarter last year.

We would expect to have over 103 million shares outstanding in the third and fourth quarter of fiscal '05.

And we also expect our consolidated effective tax rate to be 35.5 percent in the third and fourth quarters, and for the full year to be 35.6 percent.

Let me turn to a few more details for the third quarter.

For the third quarter, our December end quarter, we expect consolidated revenues to increase low 30s percent; and we expect operating margin expansion in both the wholesale and retail businesses while licensing operating profit will decrease reflecting the elimination of Lauren and Childrenswear royalties.

Looking at retail in the third quarter, our retail expansion strategy in fiscal '05 is on plan, and we expect to open six Ralph Lauren stores in the US and three Club Monaco stores during the third quarter.

For the third quarter we expect retail revenues to increase high single digits, and we continue to expect consolidated comparable store sales improvement in the low single digits.

This is on top of an 8.8 percent comp growth in last year's third quarter.

In our wholesale group, we expect those sales to grow in the mid to high 70s percent range driven by Lauren, Childrenswear and our European business.

We also expect wholesale operating margin to improve dramatically in the third quarter reflecting the inclusion of the Lauren Childrenswear and for our ongoing leveraging of our expense structure.

In licensing we anticipate a high-teens decrease in the licensing revenue in the third quarter as a result of the elimination of the Lauren and Childrenswear royalties.

And as a result of those, we would continue to expect licensing operating income to decrease.

And now just some brief comments and direction on our outlook for the fourth quarter.

In the fourth quarter, we expect consolidated revenues to increase in the low single digit percent range with slight operating profit improvement.

And now I would like to turn the call over to Roger for a discussion about our progress on our initiatives, and then we will be happy to open up the call for your questions and answers.

Thank you, Nancy, and good morning.

We are obviously pleased with the results for the quarter and really how many of our major initiatives from last year have played out successfully.

It's an affirmation of our multi-year strategy of really marrying world-class design and marketing capabilities with equally strong business processes and infrastructure, all of which delivered a 25 percent gain in revenue and a 50 percent gain in operating profit while staying true to our strategy.

As many of you know our strategy over the last four years has included a focus on retail, taking more control of our wholesale business, global expansion, and then the ongoing improvement of our infrastructure and balance sheets.

Each of those are coming to play in this quarter and will continue to be the focus of our management going forward.

We continue to push our retail strategies and results, including in that is the opening of a spectacular store in Milan this quarter.

In addition, the launching of a new vertical retail concept, Rugby, which you have all heard something about, in the last couple weeks.

The wholesale business has taken more control of its strategies with the inclusion of a men's revamping the Lauren business, the women's business and the new kids' business.

We continue to upgrade and expand in Europe, and we are seeing a return on our efforts there and really think we are poised for the future.

The leveraging of our infrastructure to handle new businesses plus the expense leveraging is playing out very strongly as we push for more full price selling and gross margin expansion by business to offset the loss of royalties and business-mix issues; while at the same time strong management of the inventories and cash flows provide us with the wherewithal to invest and grow into the future.

If we look at the retail business, I'm obviously very pleased with the continued success of our luxury strategy in Ralph Lauren stores.

The luxury customer continues to spend and has stayed with us.

We've had a very strong fall season.

And as that business has really been better managed, we are now expanding the store count, where in the past we have been more cautious.

We have picked up the pace and will open stores in Princeton, Troy, Aspen, recently in Costa Mesa and Nantucket; all have resonated well with the customer.

The Milan flagship is a spectacular store, opened on time, on budget, and had a very strong reaction from the local customer.

Where for many years we were known for our men's wear in Italy, really the surprise has been the overwhelming success of the women's product and the women's accessory products as we exceed our plans with that store; and it gives us hope for the ongoing expansion of our retail business in Europe.

As we continue to push ahead with store expansion, we are looking to raise our retail margins with more full-priced selling and the leveraging of our shared-service expense base.

We have now begun to develop the right kind of real estate skills and store build-out skills that will serve us well as we look to expand on a global basis.

Also, while we continue to add to the complexity of our retail business, I think we are attracting the best and the brightest in terms of talent to manage that business on a global scale.

The second major leg of our strategy, which is really the wholesale business, has seen a lot of progress in our transformation of our men's business, both in positioning and elevating the brand.

We have developed new partnerships with the retailers to encourage more of a full-price sell-through.

We have intensified our product mix by elevating the brand and the diversity of the mix of products.

We have really focused on our top-tier doors and accounts and pursued aggressively our specialty doors.

We have also executed the focus strategy that Nancy referred to that has us very pleased with the retail results for fall on less inventory, which means there will be less excess, which means there will be less sell-off.

The Lauren business continues to deliver on time, really only 15 months from its inception.

We are now executing on the lessons learned from last spring and summer where we are going to anniversary and have seen spring/summer bookings on plan.

We continue to grow our women's collection of Black Label business with prelines that offer fresh product five times a year; again, historically, only three deliveries a year, and the customer seems to be voting yes on that.

And, as Nancy said, the acquisition of the Children's business into our corporation has been seamless.

We are very pleased with the results there, and they enjoyed a very strong back-to-school at retail.

We now can also better leverage our relationships with major retailers.

We have men's, women's, kids, home, and allows us to go into the retailer with more of a unified front than when many of those businesses were licensed in the past.

We can continue to focus on visual merchandising.

Our coordinators and sales planning exercises get that much more efficient and we expect the results there to continue to improve.

That business, now head by a very talented merchant in Jacki Nemerov, we think will continue to show tremendous progress.

Our focus on global expansion continues in Europe where I am very pleased with the quality of the infrastructure and the management team we now have in place in Europe.

We really delivered fall on time and saw much stronger reorders and sell-throughs than last year at this time.

The distribution issues, the infrastructure issues, all give us a lot of hope and excitement for the future of where we can go in Europe, both from a retail point of view and a wholesale point of view.

Lastly, our ongoing efforts in infrastructure has allowed us to tackle all these initiatives and parallels.

Our new IT systems have allowed us to complete the integration of new businesses as well as run a more complex global business than we had several years ago.

Our ongoing ability to manage our inventory and drive incremental sales with less inventory on hand has been a major initiative for several years and continues to show terrific improvement.

We have been able to process and distribute goods out of our existing facility as we have leveraged sales volumes against that.

And our balance sheet continues to be managed very conservatively, where we have been able to pay cash for our acquisition and generate outstanding cash flows to fund our future needs.

We really remain committed to our long-term strategies.

They have weathered the volatile retail environment over the past few years very well.

And we continue to look to the long-term health of our business; and really the elevation of the brand that Ralph created and sustained over the last 37 years, we continue to be very excited about the opportunities going forward.

With that I think we will be happy to take a few questions, operator.

(OPERATOR INSTRUCTIONS.)

Lee Backus at Buckingham Research.

First, Roger, let me offer my congratulations to a good quarter and a good outlook.

Thank you very much.

Could you talk a little bit about the men's business, your domestic men's business, where you are in the process of consolidating that business; when you think that business will stabilize.

It sounds like you are getting good sell-throughs.

When will we actually start to see that in the wholesale top line?

Okay.

The good news is, Lee, that the sell-throughs have been strong.

Fall product was well received; and with our -- not only our focus door account strategy, which represents about half the volume, but really all accounts, we saw a nice reaction to fall, which I think is the beginning of stronger financial results.

I think the back half of the year, Lee, over the next six months, will flatten out compared to last year, which will be against the decreases we have been running.

We continue to prune unproductive doors out of the mix; we continue to prune the offprice out of the mix.

But I think what we're beginning to see is, with a little more scarcity of product, that's helping the department store, as well as the specialty accounts, as well as Polo retail.

So we think it's working nicely, and I think the back half of the year should flatten out and then fiscal 2006 should be the beginning of an uptick.

Could you also discuss licensing revenue.

When you back out the Lauren and the Children's reduction in licensing, could you discuss the health and the potential opportunities in the balance of your licensing portfolio?

Yeah, the reductions, Lee, are really based on the elimination of categories we used to enjoy.

If you take those out, I think the licensing would have shown a slight increase really, with some ups and downs by product category.

I think one of the things that we are most excited about is the beginning of the Chaps strategy, which at this point we have pretty much set the men's business and the men's partnerships in place.

Warneco has delivered the first product, just under the Chaps label without Ralph's name on it.

It was really the denim product that delivered in the last quarter and received very strong sell-throughs at retail, and we'll begin to deliver the men's sportswear product this quarter.

We continue to look at opportunities to expand that business into other merchandise categories like women's, like kids.

I think we will have more to say on that in the future, but the rest of the licensing business is performing fine.

It's really just the conversion of those two businesses from license to own.

Noelle Grainger with JP Morgan.

Could you guys give us some help in understanding the impact of kind of some of the new businesses on the top line for the quarter, specifically kids, Lauren and FX?

Then I have a second question.

I think it's fair to say that if you look at the top line -- let's put retail aside and let's put licensing aside -- the FX was probably in and around 1 percent of our revenues in terms of impact, so it's not major.

With men's wholesale down, women's up, and the European up, I think a lot of the rest of the wholesale increases were attributable to the new businesses.

The fact that we were able to flow it disproportionately to the bottom line, I think, speaks to our infrastructure and operating skills at this point; but that's probably how I'd see the revenues divvying up.

Then, Roger, can you elaborate a little bit more on Europe in terms of the trends that you saw over there in the second quarter?

Now we have kind of had two quarters where that business has started to pick up.

You are sounding a little bit more optimistic.

So is that being driven by kind of the luxury goods customer over there?

The marketplace still seems kind of difficult, so I'm wondering what you think is leading to the pickup in your business.

And then on the infrastructure side, are you done with the systems consolidation at this point?

Okay.

Well, let me start with Europe; and if I don't remember the systems, ask me again.

The European marketplace from a macro point of view, I believe, continues to be choppy.

That's what most luxury goods companies report.

By country there are some ups and downs, so I don't think the natural environment there is dramatically better and would be nice if it was.

I think what we are getting now is a return on our time and energy and money that we put into, really, positioning our business for the next phase.

Our retail businesses were very strong in the quarter, even before the Milan store opened, but certainly with Milan as we enjoyed mid single digits in July, low single digit increases in August, and then by September mid to high single digits on our comp stores.

So we are beginning to see in our own retail growing acceptance, and our ability to merchandise that customer was, as the quarter went on, was getting better.

Obviously, Milan was way beyond our expectation, not only in terms of financial results, which is nice, but really the way the local Milanees accepted us and embraced the merchandise and embraced Ralph Lauren is particularly satisfying because we think it's a stake in the ground for us to build a luxury European business that puts us on a par, hopefully, better than the other luxury players on that avenue or other major shopping streets in Europe.

I also think that our wholesale business delivered on time on fall products.

We had enormous success in women's at retail during the quarter; we had enormous success with our kids' product at retail; and we had a strong men's business.

And as I think we have talked about before, Europe has more of a reorder business than the US.

So with more timely deliveries, we did get reorders and were able to fill those reorders, which then, obviously, encouraged the mostly specialty store distribution there to come back for spring feeling more optimistic.

So I think we have got a strong management team.

The consolidation is over, the distribution consolidation is over and working.

They're focused on driving the business, and we had some terrific fall products that were well received, both in our own stores and across the board.

If the marketplace for the high end improves over there, I think we will do even better.

But we are very pleased with the output of a lot of hard work and energy by a lot of people, and I think we are past the transition.

In terms of major systems, I think we've talked about it before, we basically rebuilt every system in the Company, except the last one we're working on, which is really a global wholesale and manufacturing system.

Our desire to have a system that allows us to match global supply and demand and be used as a forecast and manufacturing tool is really the last leg of the stool.

It will take the next two years to get there.

Today, we have very siloed systems in our wholesale and manufacturing operations that I think this is really going to pay off for us big time.

And that's really the last piece of our major system initiative; and when it's done, we should be at a world-class status.

Dennis Rosenberg with CS First Boston

Good morning and congratulations.

Thank you Dennis.

Roger, could you comment on what's happening in the women's better arena given that some of the new entrants have not worked.

What are retailers saying about orders for next year and is that benefiting the Lauren?

And could you give us some thoughts as to what kind of growth you think Lauren could achieve in calendar '05 year?

Yeah, I think that the better women's market at department store in the fall has been softer than it was in the spring.

I think most department stores enjoyed a very strong, perhaps surprisingly strong spring season.

I think the fall performance to date -- and everybody can talk about weather and hurricanes and Republican conventions and all that stuff -- I think in general, fall has been softer in the better categories.

I also think there's been a lot of new players entering the marketplace, some more successful than others, so the pie is being shared in a lot of sense.

I think the retailer is going to be forced to make some edit decisions, who they want to place their long-term bets with, who they want to commit long-term open to buy space advertising with.

We think Lauren will be a long-term winner of that.

The retailer has reinforced that.

So I think as we circle around on our first delivery, which was January, February, March of last year, we now have the learnings of those to work with, to focus on the business components that work; and, obviously, that's what the retailer is encouraging us to do.

I think some of the new businesses that came on the scene have had erratic performances, and I think the retailer is going to have to evaluate how many better lines they can support properly for the customer.

One of our focuses is to be important in the top doors.

Not unlike the men's strategy, we think there's more to be gained by focusing on the top stores as opposed to just huge amounts of small new doors.

So I think for spring and summer of next year at least then is we are going to focus on the existing door count we are in with Lauren and continue to try to drive incremental business through that.

I think we will have more clarity on a forecast for next year as we get through Christmas and talk about next year's guidance at that point.

Second question, on retail, I think on last quarter you said you were going to be updating your margin expectations for that business going forward or your margin goals.

Could you discuss that?

And could you discuss your door expansion plans for fiscal '06 in retail?

Dennis, I think we continue to believe this year should generate in and around that 200 basis point number that we are looking for, which at least gets us into the beginning of that 8 to 10 percent range.

I think we have also said we're not declaring victory, as that's not the end game; and we would expect to see upside in that as we go forward.

But I would reserve guidance for next year, either on margin or door counts or expansion, until we get through Christmas and give you all a more complete update on fiscal '06 at that point.

Jeff Edelman with UBS.

Nice quarter.

Thank you, Jeff.

You're welcome.

Roger, the first question is you have taken some pretty noticeable price increases in your wholesale business.

I guess in the Polo shirts and woven shirts.

I was wondering if you could sort of walk us through, at least qualitatively, the impact this has had on both the top line and the margins here in this quarter, and shouldn't that have offset some of the lower margin in the kids' business as we get into the fourth quarter?

Well, honestly Jeff, I'm glad you brought it up, it's a good question.

The price increases that we started to implement in and around Father's Day, both in our wholesale accounts as well as our own stores, really were broad based, certainly started with some of the key items, but has moved on to a broader number of product categories.

We really felt it was part of the overall strategy, Jeff, to elevate the brand, as we have cleaned up distribution, reduced offprice, elevated the amount of fashion we are putting into stores; really felt that it was time, after many years of holding a line on prices, that it was time to elevate the brand and elevate the prices.

We really felt the customer would receive it comfortably, although initially some of the retailers were concerned.

The reaction has been terrific.

We have gotten very strong feedback from our wholesale partners that the customer has accepted the new prices.

That has allowed us to gain margin.

And I think, again, some of the models that I saw that allowed us to get a better margin in the second quarter will certainly allow us to have a more favorable outlook for margin expansion in the wholesale business as we look out over the next couple years.

And I think that the dollar impact was significant because, in many cases, unit sales were similar with higher retails, obviously higher dollars.

So the net of it all was really a successful and courageous step in terms of elevating the product at a time when most department stores were really coming out of a period of looking down, looking for lower prices or, in fact, price deflation.

I think we are bucking the trend, but it's a piece of a bigger strategy, Jeff.

And we will continue to look for opportunities for pricing as we go into '06 and beyond.

Then on Europe, what kind of an increase would you expect the European business to show this year, and will the Milan sort of be a big chunk of that?

I think Milan is kind of won off, Jeff.

I think it's a remarkable achievement for us and the store has been wildly successful.

So I'm like you, I tend to look at what I'll call "comp growth," and then I look at total growth.

I think Europe will probably end up in the high single digits in terms of what I'm going to call "comp growth"; and I think Milan is certainly extra, or new stores as they come on line would be extra.

And I'm very pleased with that, because, Noelle talked about earlier, the overcall macro marketplace is not booming.

But as we continue to build Europe carefully in a quality way, it's not a pellmell rush for growth; it's really something that we believe is sustainable and done at a high level like everything else we are trying to do in the Company.

So I think that's probably high single digits for the balance of this year.

With Bank of America, Robbie Ohmes.

Two quick questions.

First, Roger, with the ability to kind of flow the new businesses to the bottom line that you showed in this quarter, you know, why wouldn't we see that for the next couple of quarters and see that pushing your guidance up a little?

Then the second question is just on the Childrenswear license.

And I know you sort of guided initially that it would be sort of neutral this year, but is it actually helping earnings?

Thanks.

Robbie, I think that the second quarter does demonstrate our ability to flow through either new businesses or incremental sales to the bottom line.

That would certainly continue to be an important part of our third-quarter expectations.

We think in fourth quarter for a variety of reasons, that will not be quite the same.

One, I'd start with -- I think the macro economics for the back half of the year are not as good as the front half of the year.

I think most major retailers are proceeding with caution on spring.

They're definitely proceeding with caution on Christmas.

So I think it's our view that probably the economic environment, irrespective of the election, is probably not as good in the back half of the year as it was in the front half of the year.

Additionally, for us, our fourth quarter last year had an extra week because we were on our 53rd week calendar last year.

This year we will lose a week which is critical for the retail business, as well as some of the wholesale accounts.

Third, the early deliveries of Lauren last year in the fourth quarter were really to fill the pipeline on a business that had run dry through the transition; so I don't expect to see the kind of upside there.

And lastly, I think we're trying to be more thoughtful about shipments that naturally, perhaps, and retailers want us in April that in years past we might have shipped in March.

So some of all of that is wrapped in our fourth-quarter point of view, which has us still maintaining an annual number which is consistent with where we started despite the fact that the first half of the year has probably exceeded some of our expectations.

I think if we get through Christmas and Christmas turns out to be better than most people think, we will come back and revisit it at that point.

And then on the Childrenswear license and how that may be helping your numbers.

Yeah, I think Childrenswear, as Nancy said, is certainly helping the top line, the margin line.

I think the offset to that is clearly the loss of licensing revenue.

Purchase accounting eats into some of that, as well as the transitional service agreement we had with Schwab that play out over, really, the 18 months of transition, are more expensive ways of servicing the business than we would do when it's fully integrated into ours.

So as we work through the kids' business, we continue to be very excited by their back-to-school.

They have picked up enormous market share.

We have the kids' company working very closely now with Europe to better understand how they can service that business going forward.

We, obviously, if you haven't seen it, opened the boys' store on Madison Avenue, which has been very successful.

So we are very bullish on where the kids' business can go.

I just think that this year we are working through the transitional issues.

So for next year you would still expect a 15- to 20-cent incremental to what you're going to put up this year due to the Childrenswear license coming in house?

Yes, we continue to believe that's true.

Liz Dunn with Prudential.

I would like to add my congratulations as well on a great quarter.

Thank you, Liz.

My questions are sort of longer term in nature.

Can you sort of just update us on what you're thinking with Europe?

In the past, you have given a longer-term goal of potentially doubling that business.

Do you still feel like that's a reasonable goal and what sort of time frame should we be looking for?

And then on retail, talking about a little bit more aggressive expansion plans, what could we look for from retail as a percent of the business?

Okay.

Well, I like long-term questions.

They take me off the hook short term.

We continue to believe Europe has enormous potential.

I think Ralph's been talking about it;

I have been talking about it.

We think it is really critical for us to compete in the luxury business in Europe, not only from a financial point of view but from a branding and worldwide positioning, because in many cases it sets the standard for that.

So we continue to believe it will be a combination of retail and wholesale; we continue to believe we can achieve the billion dollars; and we continue to believe that the time, energy and money we have put into this last two years of consolidation and rebuilding infrastructure systems and discipline is critical to achieving that.

And so I think the issue for us is less compounded growth rate, which again I think when we talk about guidance we can talk more fully about when we give that for next year.

I think it's more about the balance of retail and wholesale, our distribution strategies; and my belief that over time Europe should be even more profitable than the United States because the marketplace is much more full price in its orientation, it is certainly less promotional, it is high-end and luxury products, and that's the path we are trying to pursue.

I think it will take investment in the expansion of retail in that marketplace.

Milan is terrific, but we have to do a lot more there.

And I think we are proving that really our retail education here in the United States can be transported to Europe and benefit from that side as well.

Our retail business in the US has come a long way.

I think we now have a team in place that knows how to run a retail business, and I think our results have shown that.

I think we talked about, the last couple quarters, our willingness to now ramp up a store opening program that probably will have us opening 50 stores in the United States over the next five years.

We are well on our way to achieving that this year and have identified many of the key locations for next year to do that.

Of course on top of that, you then have the new development of Rugby, which opened in Boston last couple weeks ago to an overwhelming success.

And I think many of you have read about it.

It really brings a whole new customer to the Company.

It's a new dimension to what we do.

It's vertical retail.

It will not be wholesaled.

And with the success of that, we may have to go back and evaluate what was, I think, a normal retail expansion for next year, and we may have to up that as we look to accelerate the growth of what has been a very well received concept.

It's merchandise that's really aimed at an 18- to 25-year-old.

It is about 40 percent less expensive than Polo, but very original in its design.

It's both male and female with the early result of the store being about 60 percent women's, 40 percent men's.

But the customer there, without any advertising and is really a local customer, and a college customer, a Newberry Street, has really responded to the product amazingly.

So I think that's a whole new dimension to our retail strategy that we didn't have in the past, Liz, and I think we will continue to flesh that out and talk about it as our plans develop more clearly.

Okay, great.

One short-term question, what can we interpret, if anything, on the Club Monaco comp?

Is business slowing down there or is it just that you are starting to anniversary test (ph) comps, and how do you feel about it sort of accelerating the growth of that concept?

Well, I think we have been running huge comps there, so to some degree we are up against a more difficult comparison.

I also think to some degree, because of the unusual number of stores in New York, the Republican Convention, which despite what many of you may have heard, is not a good thing for business.

It did, in fact, cut off for that week a third or 50 percent of our sales.

I also think that the women's business there continues to move along at a very high rate, and we've probably had a couple product issues in men's for the quarter; but we still continue to be pleased with that business, and I think we have opened five or six stores either in the last quarter or just opening a couple now.

So we continue to push forward on that as planned.

Marie Driscoll at Standard and Poors.

Oh, hi, congratulations on the quarter.

Thank you.

I was really hoping that you could fill me out a little on the retail, but it seems that you have answered the question.

Virginia Genereux at Merrill Lynch.

Let me ask you, you have been -- you have guided for the past two quarters to mid-teens' revenue growth and beaten that pretty handily, Roger, by better than -- you know, by 10 percent, about.

Can you talk a little bit about that sort of relative to your outlook?

You mentioned reorders in Europe.

I know retail was maybe a little stronger last quarter.

If you can just touch on that, and then maybe connect that to, Nancy, your outlook for December and especially the wholesale growth of sort of mid to high 70s percent.

I feel like I have a decent idea of what the new brands are doing.

That looks like a big pickup in the underlying business as well, relative to the last couple quarters on the wholesale side.

So if you could just first talk maybe about -- I don't know whether that's some shipments or something, something else going on there.

Thank you.

Okay.

Virginia, I would say, and then Nancy can elaborate, in the third quarter we have a couple things going on.

Clearly the new businesses are an important part of that.

I think that also reflects an ongoing European business trend.

And I think to Lee's question earlier, we do believe that it will reflect an increase in the men's business in the third quarter.

So there are some pieces and parts beyond the new business that are -- have us giving that kind of guidance.

Of course, we have got to deliver it, but that's how we are feeling right now.

The European business does have a reorder component; and even in the United States, there is a basic stock replenishment business that runs through kids', some in Lauren, and in men's.

And I think with our inventories clean and the retailer's inventory clean, I think they are taking advantage of those replenishment programs, even at the higher prices that Jeff pointed out.

We are getting a nice pull on those programs.

So at this point that's our best thinking.

Nothing is guaranteed in this world, but we feel pretty good about that.

The flip side of it is, in our own retail businesses, our revenue for the third quarter is consistent with what our plans have been the whole year.

Our first quarter retail results were certainly above our plan; second quarter, we're on plan; and we're projecting third quarter on plan as well.

The combination of all that kind of rolls up into the guidance that Nancy articulated earlier.

Thank you, Roger.

Secondly, if I may, I know -- it looks like revenue is coming in better for the full year.

I think, relative to you -- on your last call I think you talked about 140 dips (ph) of operating margin expansion, or this quarter, Nancy, I think you said 120 with the higher revenue.

Completely understandable, but I -- have you guys maybe decided to invest more in some of the initiatives, Roger, like Rugby and things like that given the better revenue outlook; is that --

Well, I think Virginia, let me just correct one thing.

We started the year at 140 basis points.

When we added kids' and we said we would be adding sales but no earnings, I think we guided the number to 120 last quarter, and we have maintained that.

So that's not really a new initiative.

It's really the impact of the incremental sales without the incremental profit coming through with the kids' acquisition.

Having said all that, guidance or no guidance, if we think it's appropriate to make an incremental investment or close a store that we don't think is right or invest in something that may in the short run impact that number, we will do it; but that 120 is really consistent with where we adjusted after the kids' acquisition for a lot of top line, not much bottom line, in that acquisition in the first nine months.

Roger, I beg your pardon, I looked back at the last -- my understanding, Nancy, was that it was, that the 140 did reflect -- it was on the last quarter call at the beginning of August -- did reflect the kids' integration.

You didn't give the segment breakdown, but my understanding was -- maybe I'm wrong there.

We can discuss that offline.

Lastly, if I may.

Roger, can you talk a little bit about sort of Blue Label, how that fits into the strategy going forward?

You had talked at a time that -- I know that was a wholesale initiative outside the US and that you had opened or were opening some Blue Label stores in Connecticut and other places.

What's the thought there as sort of a retail and wholesale concept?

Thank you.

Okay.

Virginia, I think that Blue Label, as we discussed, was going to be part of our retail repertoire here in the United States.

It really filled out the retail offering for women because prior to that we only had collection and Black Label.

So Blue Label was really created a couple years ago to give us a counterpart to Polo Blue Label and give us a female product that we could sell beyond the Palm Beaches and Rodeo Drive.

Truth in fact is that it's worked very well.

We have had terrific results in our own retail stores; we continue to refine that product; and it's been a big part of what has allowed us to be able to successfully go into some of these other communities with a balance of women's and men's.

One of the interesting things is that most of the new stores we are now opening, at least in the early stages, whether it's Milan or Rugby, are starting off with a stronger women's business out of the box.

So I think that's great news for us.

Internationally, we do wholesale it; we do wholesale it to selected specialty stores in Europe; and we do use it as an important part of our women's business in Asia.

So the strategies are somewhat different, but the line is the same with only adjustments for size scale and size specs in Asia being the difference.

So we continue to think it's an important part of the strategy.

And then we use Lauren, obviously, as our domestic department store business.

So really the full complement of women's has now been fleshed out.

Well, we appreciate you all staying on the call this morning.

We continue to believe that our long-term strategies properly executed will take us in the right direction.

Certainly if you have follow-up questions, you can follow up with Denise or Nancy later, and we will talk to you at the end of the third quarter.

That does conclude today's conference call.

Thank you all for your participation.