雷夫·羅倫馬球 (RL) 2005 Q3 法說會逐字稿

Good day, and thank you for joining the Polo Ralph Lauren third quarter fiscal 2005 earnings conference call.

As a reminder, today's conference is being recorded.

All lines will be in a listen only function during the presentation today.

At the end of the presentation, we will conduct a question-and-answer session.

Instructions on how to ask a question will be given at that time.

Now, for opening remarks and introductions, I'll turn the conference over to miss Nancy Murray.

Please go ahead.

Thank you, and good morning.

Before we get started on the call this morning, I'd like to introduce our new CFO, Tracey Travis, who joins us today and had joined us earlier in the month of January.

Tracey is a strong addition to our management group, and we're very pleased that she's going to play an important role in our investor communications in the future.

Good morning, everyone.

As a reminder we'll be making some forward-looking comments today, including our financial outlook, the principal risks that could cause our results to differ materially from our current expectations are described in our SEC filings.

And for today's discussion purposes, we'll be comparing our adjusted net income and EPS, which excludes the restructuring charges and foreign currency gains and losses.

All other discussions today on the call are based on GAAP results.

First, we are very pleased that our third quarter '05 adjusted EPS was $0.72, representing a 53 percent increase compared to $0.47 last year.

Our earnings per share is based on adjusted net income of 75 million on 104 million shares outstanding this quarter, comparing to 48 million with 101 million shares in the prior year.

Our total revenues increased 38 percent reflecting strong product sales in our wholesale and retail businesses, partially offset by a planned decrease in our licensing royalty revenues.

We generated a 44 percent sales increase in our wholesale and retail businesses in the third quarter, and that was on inventory flat to last year.

And should note that our quarter-end inventory levels this year include both Lauren and Childrenswear, not in our businesses last year.

In the third quarter, our gross profit dollars were up 32 percent, and those were primarily driven by the Lauren women's line and Childrenswear, our domestic men's wear and retail businesses, and our European wholesale business.

Our consolidated gross margin was 49.3 percent compared to 51.6 percent last year.

This slight decrease was due to reduced royalty and business mix, and it was partially offset by significant improvements in our gross margin rates and our domestic and European wholesale businesses, and ongoing improvement in our specialty retail businesses.

Our SG&A dollars increased 19 percent, and that's primarily from the inclusion of Lauren and Childrenswear expenses in this year's results.

Our SG&A expenses improved 580 basis points to 36.4 percent this quarter, as a result of improved infrastructure leverage and benefits derived from our European consolidation.

On an adjusted basis, SG&A increased 26 percent and improved 340 basis points.

We ended the December quarter with 115 million in operating income compared to 60 million a year ago.

A 90 percent increase and a 350 basis point margin improvement.

On an adjusted basis, operating income increased 51 percent.

Now, let me spend just a couple of minutes on our segments.

Our retail revenues grew 12 percent to 403 million, with comp store sales increasing 6.1 percent.

And that's on top of a consolidated 8.8 percent comp increase in the third quarter of last year.

Our comp store sales were up 3.4 percent at Ralph Lauren, 6.7 percent at Club Monaco, and 7.2 in our outlet stores.

Retail's operating profit increased 9 percent to 49 million this quarter, and our operating margins were 12.3 percent compared to 12.6 percent a year ago, which reflects improved retail gross margins offset by higher operating cost, including Milan, the startup cost of Rugby, as well as product misses in the fall season at Club Monaco that resulted in higher markdowns.

And please note that we are operating 15 more stores this year during the third quarter than we were in last year's third quarter.

During the December quarter, we opened 11 stores and closed 1, ending with 280 stores representing approximately 2 million square feet.

In our wholesale business, we reported a 95 percent sales increase over last year, driven by Lauren, the addition of our Childrenswear business, and strong gains in our domestic men's wear, and total European business.

Wholesale operating income was 48 million compared to a loss of 3 million last year, which included startup costs on Lauren preceding revenue.

In our luxury women's businesses, Collection and Black Label brands continue to drive strong performances, and our customers continue to be excited by Ralph's fashions.

You may recall that we launched our Collection pre-line last summer, and we're pleased with how it continues to be well-received as we are now flowing fresh products more frequently and seeing strong sell-through.

Lauren made a major contribution to our overall wholesale revenues as well.

As you know, it was a competitive women's space in the department stores, and we're very pleased to be on track with Lauren's performance year-to-date.

In our are European wholesale business, we continue to perform well, with strong sales and operating income increases despite an ongoing difficult environment there.

We have had a strong positive reaction to the products and greatly improved our on-time deliveries and customer service that increased strong reorders.

In our men's domestic business, we continue to make terrific progress.

Our overall men's wear revenues domestically and our operating profit were both up in the quarter as our repositioning strategy for that brand is taking hold.

We continue to monitor our door distribution, as you know, because our key objective in this area is to really elevate our brand through improved merchandising, in-store presentation, marketing and sales support.

And it's working.

We are continually working with our key account to improve sell-throughs, and in those areas, our overall performance in those key locations are positive and above trend in marketplace.

This is our second quarter with Childrenswear as part of our wholesale business, and we're pleased how well the integration of that business is going.

We had a strong performance during Christmas in our children's business, and we're increasing our market share in this category.

Now, let me spend a moment on licensing.

Our licensing revenues in the third quarter were 58 million, a decrease of 14 percent from last year because of the absence of women's, Lauren, and Childrenswear royalties.

In our core license products, we are seeing increases in such areas as tailored clothing, sleepwear, and our new Chaps businesses.

We entered into 4 new Chaps licenses during the quarter, dress shirts, neck wear, luggage, and underwear as we continue to extend this business.

We delivered denims in the fall with strong performance, and we delivered Chaps sportswear in January and we've seen a good customer response.

Now, let me spend a moment on the balance sheet.

As you all know, we have a very strong balance sheet, and we ended the quarter with 363 million in cash.

We have no short-term debt and 308 million of Euro bond long-term debt.

And we've seen a 20 percent decrease in our third quarter net interest expense year-over-year.

We continue to make very good progress with managing our inventory, and we ended the quarter with approximately 425 million in inventory.

What we are particularly pleased about is this inventory drove a 44 percent increase in sales, with trailing turns improving to 3.8 times from 3.0 last year.

Our capital expenditures for the quarter were approximately 42 million, compared to 30 million in the third quarter last year.

And the majority of this increase was associated with our specialty retail expansion program and men's wholesale.

And in addition to having these strong financial results, we are continuing to generate strong return on investment, and our current ROI is 26 percent.

As you'll note in our release this morning, we announced that our board of directors authorized a new program for the repurchase of up to 100 million of our shares.

This is -- $100 million of our shares.

This is in addition to the remaining $20 million balance in our current repurchase program.

The shares that we acquire under these programs will be used for equity compensation programs and other corporate purposes.

Now, let me spend a little bit of time on the fourth quarter outlook and our preliminary views on fiscal '06.

It's important to remember that while the fourth quarter is our largest profit contributor, our fourth quarter this year will have 13 weeks of retail compared to the 14 weeks fourth quarter last year.

As you know, this has a substantial impact on retail revenues and a significant impact on margins because of dramatic expense deleverage.

In the fourth quarter we expect consolidated revenues to increase in the mid single-digit percent range.

We expect a decrease in overall operating margins in the quarter.

And we expect the fourth quarter to reflect the smallest quarterly net income increase for the year due to the impact of one less week in the quarter compared to last year.

Because of this, EPS is expected to be approximately flat to last year, and that's really because of an increase in shares outstanding to 105 million shares this year compared to 102 million shares last year.

Now, let me give you a little flavor on the segments for the fourth quarter.

In retail, we expect revenues to be comparable to last year.

And we expect that retail operating loss will increase as our retail business is affected by expense deleverage resulting from the one less week of sales.

In wholesale, we expect fourth quarter sales to continue in the high single-digit percent range, and we'll anniversary the inclusion of Lauren in the fourth quarter.

Fourth quarter results this year will include Childrenswear, and we also expect improved performance in our European business.

We expect wholesale operating margin to improve slightly in the fourth quarter.

In our licensing group, we anticipate a low single-digit percent decrease due to the elimination of Childrenswear royalty in that segment.

We therefore expect that licensing operating income and operating margins will decrease.

Now, let me give you a little flavor on fiscal '06, our full year outlook.

And while our fiscal '06 year doesn't end until April 2006, we wanted to offer some brief and preliminary comments on it.

We expect to deliver strong results again next year as we continue to execute on our multi-year growth initiative.

Our initial outlook is that revenues would increase mid single-digits, our gross profit should expand significantly due to our growing retail business, while our SG&A as a percent of revenues is expected to increase slightly.

This drives improved operating margins of approximately 100 basis points, driven by sourcing and supply chain initiatives, more full-priced business, and our growing retail business.

As a result, we would expect net income to increase in a percent of mid teen.

We expect to have approximately 105 million shares outstanding in fiscal '06 compared to approximately 104 million shares in fiscal '05.

And based on that higher share count, earnings per share would be in the range of 275 to 285.

And please note that this preliminary guidance for '06 does not include the impact of the expensing of stock options, which will be required in fiscal '06 under the new accounting rules.

And with that, I'd like to turn the call over to Roger, and then we will open up the line for questions and answers.

Okay.

Thank you, Nancy, and good morning.

I want to apologize in advance for my voice.

I'm not feeling well, but hopefully you can all hear me.

I would also echo Nancy's welcome of Tracy.

I know she's going to make a meaningful contribution.

We're going to spare her a major speaking voice in today's discussion, but you'll be hearing more from her as she gets fully acclimated.

As Nancy outlined, we had a great quarter and really a great 9 months.

I think it's important to position our progress.

We're pointing out we had success even though we're operating in an environment that's been so affected by external events from war to port closings to really unprecedented weather.

Through all of this, we've stayed on strategy continuing to execute both short- and long-term initiatives and invest in the long-term growth of the brand.

I think this really speaks to the flexible business model we've developed and its unique ability to perform in a variety of business environment and geographies.

We think this strong performance is an affirmation of our multi-year strategy of combining world-class design and marketing abilities with equally strong business processes and infrastructure.

We have made some difficult decisions over the past few years about the distribution of our brand and are showing increased discipline about how and where our products are represented to elevating the brand in content through both wholesale channels and our own retail.

This tradeup strategy positions us with strength for the long-term.

This discipline in both operations and merchandising done a few years ago has enabled us to do several things, obviously purchase with cash on hand, and integrate the kids' business into our existing wholesale model.

The repositioning of our domestic men's wear business is now seeing positive sales trends in the right distribution channels.

We continue to successfully expand our specialty retail business with new stores ranging from Milan to Aspen to Princeton, all open on time and on budget and performing to expectations.

We've been able to invest and develop our first vertical retail concept called Rugby.

We believe that this is the right time to take a leadership role in better connecting with the important 18- to 25-year-old customer.

Our flagship in Milan has had a cascading affect on the demand for our brand throughout the western European continent.

Our European wholesale business is growing with double-digit sales growth in all categories, as we've improved service and deliveries as a result of our consolidation efforts.

We have rigorously managed our inventories, as Nancy said.

Flat inventories in essence drove a 44 percent sales increase, which is a phenomenal performance, and we continue to operate with a pristine balance sheet.

We have made thoughtful use of our resources and continue to maintain a conservative financial position.

All of this and delivering a 38 percent sales increase is a job well done by the entire organization.

But we've a lot more to do, and we look forward to next year and beyond as we remain committed to our strategies.

These strategies were put in place for the long-term health of our business, and, most importantly, the long-term growth of the brand that Ralph has creatively and consistently built for 37 years.

As Nancy said a few minutes ago, we're looking forward to fiscal '06 as another year of strong growth, we'll continue to invest in our brand, whether it's marketing, stores, new brands, or geographies, while carefully managing our balance sheet through inventory management and the thoughtful use of capital.

While we continue to focus on short-term results, we are willing to invest in the long-term health and growth of our business, and our main focuses for '06 include retail, where we'll continue to expand new stores in the U.S. for Ralph Lauren and Rugby.

We're going to continue to improve the flow of fresh products with investments in our Greensboro distribution center.

We're going to refine the cost structure in Europe for our retail businesses for more profitable performance, and we're focused on building a flagship in Tokyo, Japan to continue the important expansion in Asia and create a statement for Japan as we did in Europe with Milan.

Internationally, we continue to expand the European business through the right distribution channels and through improved visual merchandising presentation that represent the global point of view.

We've also undertaken significant studies to help us better understand and develop a long-term point of view about Asia and Australia.

We continue to review opportunities in Russia as well as other growing luxury markets where we feel our brand presence is important for the future.

Our wholesale businesses, there are several keys that run through really all brands, and we're beginning to emerge with a template that will drive the entire business, not just specific categories.

They certainly include a more direct control over our brand and its distribution, its proper placement in the marketplace, and the increased profitability through improved planning, selling, and marketing to these top doors.

Corporately, we'll continue to add to our investment in advertising and marketing, and refine our messages to both our retail customer in expanding our message around the globe.

We've made a significant multi-year investment in our global wholesale and manufacturing system to better manage the entire wholesale process worldwide, and we're building a sophisticated back office support for operations in more than 30 locations with 15,000 employees worldwide.

We're going to take on the development of the accessory business as a new initiative to add an important piece to our luxury portfolio.

As many of you know, unlocking a key to a successful luxury business is a challenge.

We spent considerable time in working on a variety of aspects of this category.

And during this year, we believe we will have the right products and team in place to support the beginnings of what will be an important long-term growth driver for the Company.

We're obviously excited about the results today, and more importantly look forward to another great year next year.

I think at this point we can field your questions, if there are any.

Thank you. [Operator Instructions].

Are there any questions, operator?

Lizabeth Dunn, Prudential.

Oh, thank you.

I didn't expect to be first.

I kept pressing it over and over again.

My first question has to do with -- with Ken Pilot's resignation.

What are you doing there?

Did he resign?

And -- because I just read it in Women's Wear Daily.

And what, if anything, does that say about retail?

And also on retail, were you disappointed with the comp in full-price retail stores, or how should we view that?

Okay.

Well, the Ken Pilot announcement in today's Women's Wear, I just read it, too.

We're sorry to lose Ken.

He has an opportunity that he'd like to pursue at this point in his career to take him in a different path.

He made a meaningful contribution, and we'll announce a replacement shortly.

In terms of the full price sell-throughs, remember, we were going against an enormous increase last year, and really feel like we performed very well on a global basis, although the comp number was certainly below the run rate of the first 2 quarters.

I believe while it was a luxury Christmas, and that's been reported in the press quite frequently, I think it was slightly more oriented towards accessories.

While we certainly enjoyed some of that success, as you know, our Ralph Lauren stores are more oriented towards apparel.

So we were very pleased with the results, and we had some phenomenal reaction not reflected in the comp, obviously, but to some of the new stores.

I think Nancy touched on it.

We had an amazing reaction in Aspen, where we opened a wonderful new store, places like Princeton opened, as well as the Somerset Mall in Troy.

So a combination of a good comp and some very exciting new store openings has us feeling bullish about where that business is going.

Excuse me.

In the past you've sort of mentioned the potential to raise your long-term targets for operating income in retail.

It seems like now you're -- you may fall a little bit short of 200 basis points in improvement in retail profitability this year, but are you at this point ready to talk about new long-term goals for that business?

I don't think at this point, Liz, we're going to get into the details of modeling next year.

I would continue to tell you that we are very excited about the long-term potential of upsides in the margin and retail.

Whether we hit the 200 basis points or not this year I think is kind of a fractional discussion.

I am feeling very good, because as we stretch out retail globally, we're getting the kind of consumer reaction that is encouraging us to press forward.

So I think the -- both the growth opportunities as well as the profit opportunities will continue to play out over the next couple years.

And I think we'll give you some more color on that as we get into next year.

Okay.

And then finally --

Liz, if you wouldn't mind we've got a long list in the queue today, so if we could have everybody just start with one question and then we'll cycle through.

Okay.

Thanks, and congratulations on pulling a -- pulling out a decent quarter in a tough environment.

Liz, I'm sorry to say if you're first up, you only get four questions.

Margaret Mager, Goldman Sachs.

Hi.

Good morning, Margaret.

Hey, Roger, Nancy, Tracy.

Can you -- my one question will be on Lauren Ralph Lauren, if I could.

Can you talk about you're happy with the performance there, how things went this fall, and how things are looking for you in the spring, given that we had some negative pre-announcements of other brands that have -- they are going to be down in the spring.

Are you going to gain market share and see your business grow?

If you could address that, that would be helpful.

And if I could just throw in there, any commentary at all on this lawsuit?

When will that go away?

Okay.

Well, let me deal with the business question first, Margaret.

I think you've all followed the better women's sportswear business and a lot of the people who entered that space over the last 12 months.

And obviously some people have begun to report results for this recent period.

I believe, and this has been confirmed through our partnerships with key retailers, that we really performed at the high end of the curve over the last time period.

I think since we launched Lauren in the spring, and have now cycled around 12 months, we've continued to deliver on our plans and our expectations.

And I think some other people have had some difficulty, that I'm sure they'll retool and come back at it again.

Our excitement is really on the go-forward, Margaret, in that we now have a full year of history.

We have results that are guiding whatever adjustments we've made for the seasons going forward as opposed to working off a blank sheet of paper.

And the early reaction to spring deliveries and spring products which have been on time is very positive.

So we feel very good about where Lauren has been positioned over the last 12 months, its performance, the retailers' excitement.

We continue to roll out our shop initiatives.

As you know, we talked about that last year as an aggressive initiative for last year and this year.

And so even in a choppy better market with a lot of people entering it, I think we've fared well and we'll deliver on our plans.

So I'm encouraged about the go-forward position.

The lawsuit is going through the proper legal channels.

At this point I don't really have any comments on it, but as soon as we have new news, we'll report it.

Can I just make sure I'm clear, you do expect Lauren Ralph Lauren to grow, let's call it calendar '05?

Let's see.

That's a trick question, calendar year '05 is our fiscal '06.

Yeah, I think we're going to grow and I think we're going to gain market share.

Okay.

That's my point of view.

Okay.

Thank you.

Noelle Grainger, JP Morgan.

Hi.

Good morning.

Hope you feel better, Roger.

Thank you.

I guess two quick things.

First, I'm hoping you can elaborate a little bit on your comments about launching into accessories.

That's clearly a nice opportunity.

Maybe just a little bit in terms of what brands you're thinking about, categories, timing.

And then my second question would be in terms of your preliminary outlook for fiscal '05, kind of a mid teens growth rate would be in line with your long-term objective.

But obviously some incremental accretion coming from kids as you commented last quarter.

So is the accessories investment one of the offsets we should be thinking about for fiscal '05?

Yes.

I think, Noelle, the fiscal '06 --

Sorry, fiscal '06.

-- numbers we gave.

I know our calendar is confusing.

It confuses me sometimes.

I think what we're trying to reflect in there is the really strong performances we've had on the initiatives we've articulated to date, and while the kids does represent incremental earnings opportunities for next year, I think running through the '06 guidance is a point of view about investment spending in a couple areas.

You've certainly touched on the first and foremost, which is accessories.

We believe we are underdeveloped in accessories.

That ranges from both the Collection product in men's and women's down to what, we hope, will be a better-coordinated effort around the Lauren accessories, with the success of the Lauren's women's brand.

I'm not sure we fully developed the opportunities in footwear or handbags or any of the other accessory components.

So whether it's the luxury piece or whether it's the piece at the Lauren price point, we think there's a ton of opportunity, and we're working through that and making investments in design and infrastructure to better support that going forward.

Secondly, we are very interested in the international aspects of growth.

You've seen the time and energy and money we've put into Europe and the payoff we're now getting.

I think over time, we are appropriate to be spending time, money, and energy in Asia, and I think those are initiatives that will pay off for us in the long run.

And I also believe that -- that the startup of a Rugby and some of the retail initiatives will not literally translate into day one profits, but they are investments in the future.

So some of that is running through the '06 numbers and resulting in the mid teens kind of earnings feeling for next year.

Okay.

Great.

That's very helpful.

Thanks, Roger.

Thank you.

Jeff Edelman, UBS.

Thank you.

Good morning.

Good morning, Jeff.

I'd like to explore the fourth quarter a little bit.

I realize the dynamics of retail with one less week and then the overall business as it relates to your overhead, but retail's only 30 percent of your sales.

And it looks as if we see roughly a 50 percent decline in the EBIT margin versus maybe a similar increase.

We use what most of us were looking for.

Is there something else in there that's representing some additional costs?

I heard that maybe you were not continuing to -- the Lauren dress line, didn't know if that was a factor.

Are there other factors that might be either one-time or ongoing?

I think, Jeff, without getting into too much of a modeling exercise, I think Nancy talked about the headline issue, which is the loss of a week in March, is a meaningful week to the overall deleveraging of expenses in retail.

When you start asking about one-time issues, the only thing that I would put in that bucket is the ongoing effort that everybody is putting into Sarbanes-Oxley, which, as you know, since you follow the industry, is not an insignificant time, energy, and money investment for a lot of companies.

As that represents our fourth quarter, we'll be coming down the stretch to -- to the year end.

Other than that, there's really nothing unusual running through the quarter.

Okay.

Could you comment on Lauren dresses, the dress division?

Sorry.

We had decided to do the dress business as a piece of the sportswear category, which is the way it really was most successful at its -- at its peak.

It's really a very small business and it's a rounding error on the total.

It's not a significant issue.

Okay.

Thank you.

You're welcome.

Lee Backus, Buckingham research.

First, congratulations Roger and team on a great quarter, great year so far.

Could you discuss a little bit more about your men's -- domestic men's Collection business?

I know you've had some price increases this past year.

Did they stick, and did that really help to let it continue going forward?

And also, maybe you could talk a little bit about that -- your investment in Asia and Japan.

Do you think that will include additional investments in some of your licensees, or taking back some more of your licensees?

Okay.

Well, let me say this, obviously the last year has been a year of repositioning in the men's business.

We've certainly reduced off-price, we've certainly reduced the number of doors we're in, all with a strategy to focus on the doors that we want to be in and improving performance.

As part of that strategy, Lee, as you mentioned, we have elevated the prices on certain items.

Some of that started around Father's Day and continued through the fall season.

And we've seen very good reaction by the customer.

They've accepted the price increases, and by the way, the retailers are excited, because, in fact, as you know, the deflationary pressure that's on retail is not insignificant.

Though this is demonstrated with some strength of conviction that the customer is willing to pay for a better product.

And I think it's helped elevate us from some of the competition.

That said, we've also talked in the past about our focused account strategy in men's where we have really tried to take through the 7T [ph] partnership this fall and elevate the brand both in terms of the assortment, the way it's presented on the floor, the staffing levels, and the marketing support.

As we've talked about in the past, our decision to convert some of that "vendor support" -- I use that word in quotes, into driving full price sales away from end of the season markdown money has produced very successfully for us.

So we're encouraged.

We like that strategy, and we're going to continue to do more of the same.

In terms of the Asia business, it is today a series of relationships both product license and/or geographic licenses.

We have spent considerable time and money analyzing that part of the world, how our brand is positioned, how it's perceived, what our imaging needs to be, what our marketing needs to be, as well as the existing network of licensed stores.

I think that time and energy invested is well spent, Lee, and I think over the next couple years we will be looking to remake some of the content and quality of the business in the Far East similar to what we've done in Europe.

And we have some initiatives under way there now.

We are going to start with a major commitment to a Tokyo store.

That should open February next year.

And that was really just a beginning of what we think will ultimately be a very large and important company-wide investment in that part of the world.

I think we've sat for a long time with licensing relationships that have been nice.

But I think over time we're going to try to raise the bar.

Thank you.

You're welcome.

Virginia Genereux, Merrill Lynch.

Thank you.

Two against if I may.

The first, Roger, can you update us on your thinking around Club Monaco and whether -- whether you might still -- I know you had a few years ago been considering a possible divestiture of that business, or feel good about trying to grow it.

That's one.

All right, Virginia.

I would say after several years of very strong comps, we had a bit of a stubbing of our toe in the fall delivery.

I think some of the color pallets that we introduced did not get received by the customer well.

And so we've -- we spent some extra markdowns in the third quarter to flush that out and get the inventories back in line.

And now with spring deliveries, we seem to be getting a return by the customer to the product.

So, in any fashion business, you can hit a speed bump along the way.

After several years of strong comp, we had that.

I believe that it does fit nicely with our expression to the customer.

It is a more contemporary and more European feel than what we're doing in Rugby or any of the Ralph Lauren brand.

So we continue to push forward and most of the store openings we've had in there this fall have been successful.

So, I don't take anything from the fall, other than we -- we needed to flush that product out and move on.

Okay.

Thank you.

And secondly, can you give us any preliminary thought about what the impact of options expensing would be, or how you guys are going to --

I don't know, Jennifer.

We're all in the same boat.

We've got a very large pronouncement from the government in the middle of December.

We're reading it, we're digesting it, as soon as we have information, we will get it out to you.

Thank you all.

Okay.

Beth Montgomery, SG Cowen.

Hi.

I have a question on the European business.

I believe you said you're looking at ways to refine the cost structure there next year.

I wondered --

In the retail -- in the retail part of Europe.

In the retail part.

I wondered if you could give any color on how the operating margins there compare right now to the overall operating margins and what the growth prospects might be.

I really can't do that.

But what I can tell you is that European retail has a bit of a different economic model for almost everybody.

Usually the real estate costs are higher, the spaces are generally smaller, they're more eclectic, they're not -- it's not a mall-driven shopping experience.

So finding and procuring real estate usually has a higher cost than the U.S.

Generally margins on merchandise are higher.

It's a less promotional environment in many countries.

The price stays [ph] are controlled by the government.

So generally you should expect higher gross margin.

And then you -- you have differences from country to country, but the social costs in Europe are generally higher.

So the economic model there is just a little bit different than the United States.

We've -- we are very bullish on the long-term future of our European retail business.

We just want to continue as we are in all of our retail formats to drive to higher margin.

I think one of the questions somebody asked earlier was in that regard, and we continue to aspire to raise the overall margins on a worldwide basis.

And would it be fair to assume that the operating margins of the European retail business would improve with scale?

I think scale helps, but I think scale is not a panacea for the right operating model.

I think sometimes that there's a trap that if you just have more sales, everything gets better.

I think generally it helps, but I don't think that's the only thing you can count on.

Okay.

Thanks.

Thank you, Beth.

Jennifer Black, Jennifer Black and Associates.

Good morning, and let me add my congratulations.

Thank you, Jennifer.

Thanks.

I just have a couple of questions.

I was curious to know, Roger, the visionary you are, over the next 3 years, do you have a goal for operating margins in your retail businesses?

And then I also wondered how big you think the Rugby business could be over the next 3 to 5 years, and how do you feel about the price points currently?

Oh, that's a big question, Jennifer, and you've laid a big responsibility on me.

Let me start with the Rugby business.

I think -- we're not in it for a little business.

So really the answer is we think that's a big market.

We think by going vertical retail we have the ability to pursue it in a pure way.

We think we're doing it with something different than what's in the marketplace.

I'm not going to declare victory after one store, but we were very pleased with the reaction we got.

So I think that can be a big business, and then I think it can expand beyond even the categories that are in today that store.

I think in time, the counter to what I said to Beth, manufacturing product we will get scale as we grow that business.

As you could imagine, to produce the breadth and depth of product for 1 or 2 or 10 stores is not a very efficient process.

And we will, over time, get real economy to scale as that business gets some size in terms of the price points and the margins we can anticipate.

So, you know, a lot -- a lot can happen there as we begin to roll that out.

What was your visionary question?

Oh.

The operating margins for your retail businesses, if you were having -- if you had goals over, say, the next 3 to 5 years, where do you think those businesses -- what kind of operating margins would you shoot for?

I'm not sure I have a clean answer for you, honestly, Jennifer.

We have come a long way from where we were, as most of you remember we were at a point several years ago where we had very little or almost no profits out of retail.

We sort of put a stake if the ground that said we had to get to at least 8 to 10 percent to feel good about ourselves.

We're approaching that and have made a lot of progress.

I think the things that get us from where we are to where we want to go are a little bit different than the things that got us to this point.

And so as we look to refine where we build stores, how we build stores, what it costs us, how do we run a larger network of stores that we can't touch and feel on a daily basis, how do we institutionalize some of the magic that's in a Ralph Lauren store that makes it special.

How do you do it on a worldwide basis?

Those are really the challenges that -- that we wrestle with because it's not a cookie cutter or formula retail experience.

When you walk into Milan we have absolutely blown away the other competitors there.

I wouldn't be surprised if there is a raise-the-bar effort going on around us.

And then you walk into an Aspen or a Princeton and it's a completely different experience.

So how we get economies and efficiencies into that unique experience, I think is what's going to lead the charge into the next phase of our earnings improvement in retail, which I think is significant.

Because I don't think we should be satisfied with that 8 to 10 percent range.

Okay.

Can I ask one last short question?

Sure.

When do you feel the accessory business will become meaningful?

And I'm assuming the margins are much higher.

Well, I think if you run the accessory business right, the margins should be higher.

So we're all hopeful that when we get where we want to go, those will be very profitable businesses.

I think we've had a business that when you add up all the accessory components that's in the hundreds of millions of dollars.

It's all through licenses.

But I think -- we are not where we want to be.

Ralph and I are very committed to making the time, energy, and money commitment to growing that business, because I think while we could represent the luxury apparel business well on a global basis, we have some work to do to get there in the accessory business.

We have some nice products now, but I think we can really move that forward.

Having said that, Jennifer, I don't think that's a 1-or 2-year initiative.

I honestly believe to do that right and to do it across multiple product categories, it's going to take several years until it's got scale and meaningful earnings contributions, but that's our objective and not unlike some of the other objectives that we've laid out for ourselves over the last 3 or 4 years, we'll get there on this one, too.

All right.

Well, thanks a lot.

Congratulations.

And at this time I'll turn the call back to management for any additional remarks.

All right.

This is management.

Just want to thank you all for your ongoing interest.

We've obviously had a spectacular 9 months.

I know everybody here at Ralph Lauren is very proud of what we've accomplished, yet continue to be excited about the future.

We have really a lot of opportunity ahead of us.

And hopefully you're in agreement with the way we're going about achieving it.

So with that, you can follow up with Denise or Nancy for any other specific questions, and we appreciate your interest.

We'll speak to you again at the end of the fourth quarter.

And that concludes today's conference call.

We thank you for your participation.

You may disconnect at this time.