雷夫·羅倫馬球 (RL) 2005 Q4 法說會逐字稿

Good morning and thank you for calling the Polo Ralph Lauren fourth quarter and fiscal year 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 queue up will be given at that time.

Now for opening remarks and introductions I will turn the conference over to Miss Nancy Murray.

Please go ahead.

Thank you and good morning.

With me here today are Roger Farah, Tracey Travis, and Denise Gillen.

As you know, Tracey joined us in January as our Chief Financial Officer and she will review our fourth quarter and full year fiscal '05 financial performance today and talk to you about some of the recent accounting adjustments.

I'll review our '05 segment performance and outlook for '06, and then turn the call to Roger.

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.

We report our financial results in accordance with U.S.

GAAP, but also provide supplemental presentation of results adjusted to exclude certain items that we believe provide our investors with useful information regarding our core business.

Now for today's discussion purposes we'll be comparing our adjusted net income and EPS, which excludes several items as outlined in our earnings release.

These items include a litigation reserve for the Jones case, a reserve associated with alleged breach of our retail computer system, the adjustment and accounting for leases, restructuring charges associated with our European consolidation, and foreign exchange.

All relevant financial disclosures related to the adjusted results are included in our earnings release which is available on our Web site at Investor.Polo.com.

And now let me turn the call over to Tracey.

Thank you, Nancy and good morning, everyone.

I'm happy to be here today joining you to report on the Company's fourth quarter fiscal earnings release after my first quarter here at Ralph Lauren.

As I'm sure you have determined from reading our press release we ended the year with a very strong quarter and an outstanding year operationally despite some unusual items that I will expand upon in a moment.

For fiscal 2005 fourth quarter and the full year, as Nancy mentioned, because of the number of adjustments we had in the quarter, in order to provide you with more clarity on our business operating results, I will first highlight our pro forma EPS adjusted results which speak to the fundamental operating performance of our business.

I will then highlight the restatements in one-time items we incurred that will bring you to our GAAP reported results.

So we are very pleased to report that our fourth quarter '05 adjusted earnings per share was $0.81per diluted share, a 3% increase over last year.

And our full year fiscal '05 adjusted EPS was $2.47 per diluted share, which was 35% greater than last year.

You should note that this EPS is based on an outstanding share count that is about 3 million shares higher than it was last year this time.

On a GAAP basis, including both one-time items and restatements, our fourth quarter reported results are $0.22 per diluted share and our full year reported EPS is $1.83 per diluted share.

And all of this information, as Nancy mentioned, is there in the press release.

Now moving on to revenues.

Our total revenues increased 10% in the quarter and 25% for the full year which reflected our strong product sales in both our wholesale segment as well as increases in our retail segment, which now on a GAAP basis will include the full impact of Ralph Lauren Media.

As you may recall from prior discussions, Ralph Lauren Media is our e-commerce site which I'll speak more about in a moment.

On a gross profit basis in the fourth quarter our gross margin is expanded 510 basis points driven by the addition of the childrenswear line and Ralph Lauren Media, as well as improvements in most other areas within both wholesale and our retail segment.

For the full year gross profit expanded 110 basis points across almost all product lines driven by higher sell-throughs due to strong product assortments.

From an SG&A perspective our adjusted operating expenses increased 25% in the fourth quarter and 23% for the full year.

The increases were largely driven by the addition of childrenswear and Ralph Lauren Media, higher spending in Europe to grow our bring our wholesale and retail businesses in line with strategies that have been explained to you in the past, as well as the addition of new stores in the United States.

Additionally, the following items are included in our GAAP reported earnings and these items all impacted our reported SG&A.

First, as a result of the Appellate Division's March decision denying our request for the appeal of and earlier court decision, we have taken a reserve of $100 million associated with the ongoing Jones litigation.

Second, I am sure most of your aware of our alleged retail computer systems breach.

Although we have no conclusive evidence that any breach occurred, we have recorded a $6.2 million charge related to this alleged breach.

This charge is for potential penalties, monitoring expenses, card reissuance cost, and other related claims that we understand we may incur as a result of further investigation by the credit card company.

It's important to note that although we have taken this charge we plan to vigorously contest both the appropriateness and the amount of these penalties and claims.

Third, we recorded a restructuring charge as the final piece of our operational consolidation in Europe which we started in fiscal 2003.

The effect in the fourth quarter was $500,000 or $.5 million and 2.3 million for the full year.

Fourth, as many other retail companies have done this year, based on a clarification in February by the SEC regarding accounting for leases, we have adjusted our accounting for leases.

This adjustment in accounting requires us to retroactively restate back to fiscal 2001.

There are two pieces of the clarification that applied to us and required us to restate.

First, the timing of rent recognition we adjusted so that we will now begin to record rent expense at the time we sign a lease rather than our prior practice of beginning to record rent expense when we open a new location.

Additionally, tenant allowances will now be classified as a reduction of rent expense instead of a reduction of depreciation.

The effect of all of the adjustments was a $1.3 million expense in the fourth quarter and a $5.8 million expense for the full year 2005.

And finally, let me expand on the impact of Ralph Lauren Media and what we did here.

In February of 2000 we formed a 30-year joint venture with NBC and its affiliates and we established our e-commerce Web site, Polo.com.

We own 50% of the joint venture and NBC and its affiliates own the balance of the joint venture, the other 50%.

Since inception, we have been accounting for this joint venture using the equity method of accounting which was appropriate.

At the end of the fourth quarter of 2005 we determined that under FASB Interpretation 46R, it was appropriate to consolidate Ralph Lauren Media into our financial statements as of fiscal year end April 2004.

The net impact for our portion of the venture on our income statement is 2.6 million for the fourth quarter and 4.2 million for the full year.

Excluding these charges we ended the quarter with adjusted operating income of 149.5 million, which is a 90 basis point margin improvement.

Our full year adjusted operating income was $414 million, a 140 basis point margin improvement for the full fiscal year.

This full year operating income result represents a 42% increase over prior year, very strong performance.

Now turning to our balance sheet.

We continue to maintain a strong balance sheet and ended the year with 350 million in cash and 291 million of euro bond long-term debt.

We also continue to make very good progress with managing our inventory levels and have improved our turnover this year to 3.7 times compared to 3.2 times last year.

At the end of the quarter we had $430 million of inventory, up from last year primarily due to the addition of the childrenswear and Ralph Lauren Media segment business.

For the year we drove a 25% increase in sales on a 15% increase in inventory.

In fact, we have generated over 1 billion more in sales in the past four years with approximately the same inventory level.

Our Capital expenditures for the quarter were approximately $49 million, compared to 55 million in the fourth quarter last year.

Our full year spending was approximately 176 million with the majority of the increase over last year coming from our retail division as we continue to expand our store opening program.

We expect our capital expenditures in fiscal '06 to be roughly flat to fiscal '05, in the neighborhood of $175 million.

And with that I'll turn the call over to Nancy.

Thank you, Tracey.

Let me spend a moment and review some of the highlights of our quarterly segment results and then turn our attention to the fiscal outlook for fiscal '06.

As you know, we operate in three integrated business segments, wholesale, retail, and licensing.

Now historically, we have fully allocated our corporate overhead expenses to each of the segments.

We are changing our corporate overhead allocations to reflect how management presently views the business and we're finalizing the allocations for our fiscal '05 segment reporting and will be included this information in our 10-K, which we plan to file by July 1.

And for comparisons sake, we will also report the previous years in the comparable manner.

But to give you some flavor today, I'm going to discuss our segment results using our prior allocation method because of the magnitude of the charges we recorded this quarter really has distorted the underlying performance of our businesses.

Now let me start with retail.

First, we continued to be excited about the success of our specialty retail stores.

Our retail revenues grew 12% in the quarter and 15% for the full year.

And I'd like to remind you that fiscal '05 was a 52-week year compared to a 53-week year in fiscal '04.

Our comp sales adjusted for this one week difference were 4.1% for the fourth quarter and 6.3% for the year.

And that 6.3% is on top of a 9.7% overall comp in fiscal '04.

In the quarter, retail gross margins expanded more than 600 basis points with expense growth to support new stores.

Before allocations in the items Tracey outlined a few moments ago, operating income dollars grew more than 45%.

For the full year retail gross margins expanded 300 basis points with expenses increasing to support the new store expansion.

The operating profit dollars improved 30% in retail prior to corporate allocation.

In our wholesale segment we reported a 10% sales increase over last year's fourth quarter and a 41% increase for the year.

The primary growth drivers in the quarter and the year were childrenswear in Europe.

On a pre-corporate allocation basis our wholesale gross margin expanded 400 basis points in the quarter and more than 300 basis points for the year.

For the quarter expenses rose slightly in wholesale while the year saw strong leverage on increased sales and wholesale had a 200 basis point decrease in expense margin.

Our women's pre-lines, which we introduced last summer, continue to do very well.

More frequent flow of products to the sales floor has improved sell-through and enhanced the shopping experience for our customers.

And Lauren is a success by any measure.

We elevated the Lauren brand and launched it into a crowded marketplace where it was well received by the customers.

Europe's wholesale business had a strong year and we are seeing the benefits of the hard work of the consolidation that's ranged from development of common systems and its improved on time deliveries.

We've opened a new luxury showroom in Milan and we're very excited about the future.

And the integration of our childrenswear business, which we acquired you'll recall last summer, has exceeded our expectations.

In our licensing segment our full year licensing revenues decreased approximately 9% compared to last year, and that's primarily due to the absence of Lauren and childrenswear royalty.

However, we had a 4% increase in the fourth quarter and that was based primarily on increases in international licensing royalty.

We continue to see licensing as an important element of our overall business.

Our expansion into new product categories with our Chaps line for men has been very well received.

We have identified and employed successful strategies in our wholesale business and we're partnering with our licensees to take the same approach to all of our brands.

Now let me just spend a few moments on our fiscal '06 outlook.

We're very pleased to reiterate that we expect earnings per share in fiscal '06 to be in the range of 2.75 to 2.85.

Since we gave this guidance, we announced the acquisition of our footwear license which we believe will be slightly dilutive this year.

And now that guidance also includes the slightly negative effect of the adjustment in lease accounting and the slightly positive effect of the consolidation of Ralph Lauren Media.

These projected full year '06 results anticipate mid single-digit percent consolidated revenue growth.

We expect mid single-digit percent growth in wholesale, high single-digit percent growth in specialty retail, and licensing royalty to be flat.

For the year we expect gross profit to expand significantly due to growth in both of our wholesale and retail businesses.

Our SG&A dollars are expected to increase slightly with inclusion of a full year of childrenswear expenses, a partial [wear] of footwear and Ralph Lauren Media, and our SG&A as a percent of revenues is expected to increase.

The result is expected to be an improvement in operating margins of approximately 100 basis points.

For the year we would expect our tax rate to be 35.5% and to have approximately 106 million shares outstanding.

For the first quarter of fiscal 2006 we expect a 25% sales growth in wholesale, a 10% growth in retail, and a slight decline in licensing royalty.

An important driver in our wholesale segment is the inclusion of childrenswear in the first quarter results.

First quarter operating income is expected to expand significantly with operating margins almost doubling those of last year.

For the first quarter our tax rate is 35.5% and shares outstanding should be between 105 million and 106 million shares.

So let me now turn it over to Roger and then we'll open it up the call for question and answers.

Okay.

Thank you, Nancy and good morning.

We clearly had a great quarter and a great year.

As we continue to execute our strategy to promote the long-term growth and health of our businesses, we really build that strategy around five major points.

One is to elevate, enhance, and promote our brands.

We have added each and every year to the advertising budgets to do that on a worldwide basis.

Two, we want to improve the direct to customer experience, whether it be retail or whether it be Polo.com.

Three, we want to refine our distribution and partnerships on a worldwide basis.

We want to develop new ideas and new merchandise categories.

We want to support all of that with world class infrastructure, world class people, and world class discipline.

Consistent with these goals we have stayed focused and delivered results.

In retail we have built a strong business that continues to comp and gain in productivity.

It also continues to add to our growing profits.

By increasing our luxury assortments and increasing our exclusivity we continue to satisfy and delight the customer.

During the past year we have also built unique stores with unique customer experiences in places like Milan, Aspen, or Nantucket, and this compliments and supports our wholesale business as well.

We've had a strong and growing reaction to Polo.com experience.

We see continued growth there as well.

In addition to all of the above, we launched the Rugby concept with three stores with as a vertical concept which we have high hopes for into the future.

Our wholesale businesses as Nancy said, had a terrific year.

The first full year of Lauren was amazing.

Based on the short amount of time and the limited information we had to get this line up and running, we're very pleased with this result and we've taken the learnings from the first year and really applied it to this year and we've had a terrific spring as well.

It's really a testimony to the strength of the entire organization to really execute something on this scale in that short of time.

As Nancy said, we added pre-lines to our collection businesses which continued to allow us to flow fresh product both into our own stores and in our wholesale accounts.

The acquisition, integration and results of the kids business has been very satisfying and we believe this merchandise category has unique worldwide opportunities.

The repositioning of the men's brand has continued to improve our full price sell-through in margins.

More limited distribution, elevated product and assortments, focus on larger doors, and changing how we work and support our key partners is all paying off for us.

In Europe the consolidation is now complete and we're operating with a very focused strategy both in retail and wholesale.

We have a very strong management team in place, new infrastructure, and we continue to elevate the amount of fashion and luxury assortment in all points of our distribution.

We've added significantly to the marketing efforts this year as well as we're very encouraged by the customer reaction to our fashion.

New efforts include the launching of Chaps for women and missy sizes and boys 8 to 20 and we'll be doing that in-house.

We really think it's an opportunity to maximize the value of this brand while at the same time reducing the amount of RL products that's in the market.

We believe the growing organizational strength we have in Lauren and kids can handle this in-house and we've decide to launch with Kohl's on a one-year exclusive and I can tell you they're equally excited.

Our home group continues to push forward with exclusive Ralph Lauren Home products in our stores, a new home floors have opened in London and Milan to great success.

And the Lauren home products continue to develop new merchandising strategies for furniture, tabletop, and textiles.

We really have two new priorities that we're focusing on for the new year, one is clearly accessories.

The acquisition of our footwear license is really the first major step in moving down a more consistent worldwide path.

We continue to invest in design, talent, and managerial talent to grow and expands this business and we're working closely with our licensee partners to drive new fashion products.

Internationally, Asia will be getting a great deal of our time, energy, and financial support.

We think the future growth of Asia will be strong over the next three to five years and we are pleased that Scott Bowman has joined our organization to head that up.

He brings tremendous international luxury experiences to our team and we're all expecting big things from that part of the world.

The Tokyo flagship will open in the spring and it will be impact the business we believe to the same degree that Milan did in Europe.

And here again we'll work more closely with our multiple partners in Asia to elevate the level of luxury and fashion in all countries.

All of the above is supported by our commitment to a world class infrastructure.

And while we have made good progress there's still a great deal more to do.

The primary focus remains on our supply chain.

From the front end, design and merchandising how that's structured and the disciplines involved through how and where we manufacture we want to integrate all of our worldwide products into a common standard to ensure worldwide quality, consistency, and the best possible prices, and then how we move our products to our stores and our customers worldwide, every piece of this being explored and enhanced.

All of this is being supported by a major investment in the last piece of our systems overhaul, which was a three-year project we're in the middle of to build a brand new state of the art structure to support our supply chain effort.

We expect all of these developments to develop consistent product quality, improve our gross margins, continue to improve our inventory turns, and allow to us bring goods faster to the market to react to new products.

So while our business continues to grow and get more complex, we continue to believe in our ability to deliver in a changing worldwide environment.

Ralph and I are very proud of our teams results and efforts and we really look forward at a strong fiscal 2006.

So I think with that we'll be happy, Operator, to field a couple of questions.

Operator?

[Caller instructions].

We will take our first question from Robby Ohmes, Banc of America.

Hi, everyone.

Robby Ohmes from Banc of America.

A couple of questions, Roger, on the Chaps women's and boys announcement today.

I guess the first one I wanted to get clarity.

Does your earnings guidance, you know, the reiteration of the earnings guidance range for fiscal '06 include the roll-out of those Chaps businesses with Kohl's?

And then also could you give us a little more detail on how you see the roll-out going on a multi-year basis?

Is there sort of an initial narrow selection or assortment that's going to be put out and then you'll grow it for several years?

And then finally, if this goes well, are there other Chaps businesses that you think you could do in-house as well, like footwear, for example?

Thanks.

Thank you.

Well, the plan that we have given you guidance on includes the expenses that it will take to build out and start the Chaps line with a targeted first delivery into Kohl's January, February, which is our fiscal fourth quarter.

So we're obviously carrying the start up expenses with only a quarters worth of revenues but that is also baked into the earnings guidance that Nancy gave you.

We're very excited about the results they are getting in men's, whether it's through the Warneco sportswear license or some of the other products including clothing, dress shirts, neckwear, or denim, that has encouraged us to move forward our plans for other product categories.

And as I said earlier, our growing comfort level that we can design, manufacture, and deliver to this channel caused us to make the decision to bring the missy business and the kids boy's business in-house and we think it's enormous opportunity and so does Kohl's.

Based on their support and their desire to put it in all stores and make it a mainstay of their assortment, we did give them a one-year exclusive to really launch the product, get behind it and develop the proper customer demand.

Assuming all goes well there are other product categories that we would consider, whether licensed or in-house, but right now we're obviously working on the women's and the boy's business.

And just a quick follow-up your thoughts on the profitability of these two lines you're going to be launching relative to your core business?

Well, I think the impact on our fiscal '06 is really relatively minor.

I think going forward properly run this can be a very successful and profitable business and I think that it would be something that would enhance our overall profitability.

Terrific.

Thanks a lot.

Okay.

Thank you.

We'll now hear from Lee Backus, Buckingham Research.

First, Roger and the team, congratulations on a good quarter.

I'd like to explore, you talk about low single-digit wholesale growth, how that sort of breaks down, and in men's you sort of indicate men's will be down.

Where are we in the cycle of reducing distribution and getting the distribution to where you want?

And does the wholesale growth at this point also include footwear?

Okay.

The wholesale growth which, as Nancy said, is low single-digit is really a reflection, Lee, of what we believe is the last piece of door closures and/or ongoing reductions in off price.

The actual core business on comparable doors is stronger than that.

It's certainly stronger than that in kid's, Lauren' and men's, I think men's has taken the brunt of a door reduction program and a reduction in off price.

And so the net of all that looks like relatively modest growth.

I think our expectations are much cleaner sell-throughs, much better inventory turns, much better margins for both the retailer and us, and so I would assume this is sort of the last, last piece of that process.

Much of the improvement in inventory turn we started several years ago in the low 2s and we're up to 3.7.

Much of the improvement in the gross margin, I think Tracey said 510 basis points in the fourth quarter.

I think you're beginning to see the quality of our sales really coming through in our P&L and in our inventory management and our cash flows.

And I think fiscal '06 would sort of be the last leg of that repositioning.

Does that wholesale include footwear?

Yes.

Could you discuss a little bit of the transition, how much are you taking over and do you have to build your own infrastructure for the footwear business?

We anticipate the close early July so really for us it's going to be a nine-month business.

Like kid's we are buying the entire business which means they have a team of people.

We will share services with Reebok on a transitional basis over the next year or so until we cut it over into our infrastructure.

We're going to pull back some of the off price business that was done there.

We don't think that's a long-term direction we want to go in and then we will continue to invest in supplementing the existing team and integrating it into our worldwide sourcing, financial systems, merchandising tracking systems, so forth and so on.

The men's and women's businesses they were doing directly.

They had sublicensed out the kid's footwear business.

So this license, a little bit different than kid's was also a worldwide license.

So for us it's a chance to take control and enhance business in Europe and better support the business in Asia.

Thank you.

Thank you.

We will now hear from Liz Dunn, Prudential Equity.

Good morning.

Thank you.

First, just a clarification.

I jumped on the call a little bit late, did you give an explanation for why the tax rate was so high this quarter?

That's my first question then I'll get to my real question.

The answer is we didn't explain it in the part you missed.

I don't realize the tax rate is so high, I think it's fractionally higher than it was.

Well just looking at pre-tax income versus my estimate which was, I was at $0.80, you beat buy about $0.07 but there was a higher tax rate than anticipated or at least than I anticipated in the quarter.

There was a reason or?

I think we'll have to try to get that to you off-line.

Okay.

In terms of the longer term opportunities of buying back licenses, would you ever consider any of the kind of soft home categories or fragrance, what are some of the other opportunities that might make sense in terms of potentially buying back licenses?

Well, you know Liz, we obviously continue to evaluate regularly which businesses we think we can run and perhaps add value to it which ones are better served through the current licensing structure, whether they're product categories or geographic regions.

I think you've seen with our track record now in Europe geographically, we've learned to run businesses internationally.

Obviously you've seen with Lauren and kid's our ability to handle new product categories.

So we are, we are mindful of that yet we also respect what good licensees bring to the party, and I'd really prefer not to go down the list of ones we might or might not be interested in.

I think right now the shoe business, the accessory business in Asia will take on a huge part of our focus in terms of integration and growth opportunities.

Okay.

How does Club Monaco fit into your longer term plans because it seems like everything strategically you're doing focuses on the Ralph Lauren brand?

I think that, you know, we've talked about that.

The Club Monaco concept is a compliment to what we do in that it's really a bit of a different customer profile, a bit of a different age group.

But it is vertical retail.

It is something that in the last year we brought back in-house into our organization.

We're off to a good start this spring and feel good about the product.

But you're right, most what have we do we talk about are the Ralph Lauren Corp. opportunities worldwide, we just haven't talked as much about Club Monaco.

I think as we begin to move forward now that that's fully consolidated and located in New York and we seem to have a bead on the customer we'll probably give you a more expanded update on the next quarter.

Thank you and let me add my congratulations.

Thank you, Liz.

Moving on we hear from Noelle Grainger, JP Morgan.

Hi, good morning.

Good morning, Noelle.

Maybe we can talk about retail for a minute.

It sounds like you have a list there you wanted to pick from and decide to pick retail.

Is that true?

That's true.

Okay.

Well, I figured we haven't kind of talked about it too much yet.

Okay.

Obviously you've talked about the 8 to 10% goal for some time now.

Yes.

Could you kind of revisit that and obviously with your segment reporting changes that may ultimately change but maybe if we just kind of talk in old terms, is that a number you're prepared to move higher at this point in time?

It looks like you're pretty close to that for this year.

And then maybe address your specific store plan for fiscal '06 as you move forward with kind of reaccelerating the openings.

Okay.

You're right, we're getting dangerously close under the old segment and again when we finalize the new segment we'll update those goals to make them comparable.

I think we made tremendous progress in the last couple of years and more progress was made last year.

The interesting thing for us is that we're getting it both in terms of sales productivity.

So the sales comping quarter after quarter year after year has really worked for us.

The margin expansion and much better understanding how to build and expand stores.

I think honestly, and we talked about this last year, when we firmly get in that eight to ten range I do believe there's opportunities higher, I will be prepared at that point to set some new standards because I think we all like to have goals that we can shoot for and I think when we get done with the segment allocations we'll recalibrate all of that.

I'm very encouraged by the results of our businesses.

Our Ralph Lauren stores that we've opened have been tremendously accepted by the customer.

We continue to open five to seven unique Ralph Lauren stores domestically.

We continue to look for the right kind of European store opportunities, recently opened one in Cannes.

I used to think it was Cannes, I've been told it's Cannes.

But in fact that store has done exceedingly well and the retail team will be in Europe next week looking for additional sites.

So the progress we've made there, factory stores, really on a worldwide basis has given us encouragement to push forward more aggressively.

I think the other thing that when we talk about retail, although as a start up, does not contribute to our profits, is Rugby.

I think Ralph has touched a nerve with that customer.

The three stores we've opened to date has been very successful.

Our original plan for fiscal '06 was five or six, if we could find seven, and we're looking to accelerate that because we really think we're on to something.

It will be a couple of years before that kicks in to be a profitable contributor, but if that really turns out to be what we think it can, it has the potential to be enormously successful on a vertical basis, and we're encouraged but we're not giving into the international partners we have who are clamoring to get Rugby out into their marketplaces.

So I think we've got a lot of good thing going on in retail.

We've got about 20 new stores planned for next year in total.

And we continue to look for those kind of choice locations that we think not only enhance the brand, enhance the image, support our wholesale distribution, but are going to add to our profitability, and I think we're on our way.

I think at the end of this year or the middle of the end of this year we'll probably talk about some new expectations in retail going forward.

Okay.

Great.

And then maybe just on Asia, with the addition of Scott, what are his kind of top priorities for the next six months?

Is the team that you need established or are you still kind of in that mode?

Maybe give us a little bit of an update on what we should expect in the next six months.

Well, as you probably know or don't, most of our business there is done through country licensed partners.

In the main they have picked up the product from us and then executed at a local level.

We have recently taken over the manufacture and production of all Asian products so that it now goes through our sourcing to elevate the quality and make sure it's consistent on a worldwide basis so it will not be made locally.

Two, Scott and I have embarked on a decision to build a merchandising team that will do nothing but focus on the assortments in Asia.

Here again like Europe, we want to elevate the luxury quotion and we want to elevate the fashion quotion.

Oftentimes licensees in marketplaces, you know, want to merchandise to the lowest most common denominator and we think that elevation of product will dramatically improve our assortment.

Third, we'll be adding expertise in marketing on the ground in Asia so that our overall media and marketing strategies are better integrated into our global brand strategies.

And, of course, we're building a store in Tokyo which will be a complete brand statement and really put a stake in the ground in terms of where we're going.

So there's a lot going on in Asia that's going to play out over the next three to five years and we think it has enormous potential.

Great.

Thanks a lot.

Okay.

At this time we'll hear from Jeffrey Edelman, UBS.

Thank you.

Good morning.

Morning, Jeff.

Roger, you really haven't talked much about Europe.

I seem to talk, ask about this all the time, but that's what's left from [inaudible] questions.

Could you, one, where is the size of it today at year end?

And, two, could you talk a little bit about the mix now between wholesale and retail?

And then thirdly, is there an opportunity to get into more doors or is it just really further penetration of existing wholesale doors?

Okay, well, it's exciting to talk about retail, Jeff, I'm glad you asked.

We had a phenomenal year in Europe.

We had enormous growth retail and wholesale.

It's roughly one-third retail at this point, roughly two-thirds wholesale.

And that's a significant growth in the retail business from where we were.

We have obviously spent a lot of time and energy on the consolidation, Jeff.

At the end of the day we think there's probably up to 60 stores in what I would call Western Europe available to us, today we only have 14.

We believe the wholesale business is not a question of incremental door count, but is a question of doing more with the existing businesses.

The split in wholesale is about 50% small specialty stores and about 50% what I'd call larger department stores.

We are today pursuing the right kind of location.

We're investing in the right kind of build out and we are beginning to see enormous results.

We just opened a brand new [Harrah's] men's store on the main floor that dramatically expands the space and enhances a product assortment and it is booming.

The business today in Europe, as you know, when we bought it was about 180 million, today it's somewhere between 580 and 600 million.

So we are tracking well on our goal for $1 billion in sales there.

They've had a terrific spring in a very choppy market over there and at this point our fall bookings are well in excess of our plan.

So we are very encouraged by the customer reaction and our new infrastructure can now better handle timely deliveries, reorders, and on and on and on.

So it's not about a wholesale door expansion, it's about more business in existing stores.

It's certainly a growth story in retail, and at least at this point all sell-throughs and forward bookings look pretty strong.

Great.

Thank you.

And then just one little housekeeping issue.

Was there a restatement of the first three quarters as we went through some of these reserves?

Because if you take the fourth quarter, add it to the first three quarters, will we end up with like 2.42 instead of the 2.47 you talked about on the continuing operations, Nancy or Tracey?

There will be a restatement by quarter for both lease accounting as well RL Media.

Okay.

And--

The net of that should come back to the 2.47.

Right.

Okay.

Could, just for our purposes now, could you give us a sense of what the first quarter is?

Well, the first quarter of which year?

I'm sorry.

We're running out of time, can we do that catch up later?

Because I just want to make sure we get to all the bigger questions.

And Jeff, obviously, that will be in our 10-K.

Yeah.

Okay.

Thanks.

We'll now hear from Virginia Genereux, Merrill Lynch.

Thank you all and great job.

Maybe, Tracey, one for you on the, why would, and I think the difference in the prior quarters is that the consolidation of Polo media ends up being a little accretive.

If it's a 50/50 JV why is that?

Well, it goes back to what I mentioned in my earlier statements related to a new accounting pronouncement that came out at the end of 2003 called FIN 46R and it's a fairly complicated accounting pronouncement so I'll try to make it brief.

One of things that it made us look at was whether or not we had a variable entity within the joint venture and because of some of the provisions of the contract we determined that we did.

So then we had to go down a path of determining who was the primary beneficiary of the joint venture.

And we determined that we were the primary beneficiary, i.e., we had the most to gain or lose depending on the performance of the JV.

So even though from an equity method of accounting it was a 50/50 joint venture, because of the new FIN 46R pronouncement, and having to go through this additional assessment, it was determined that because we are the primary beneficiary we had to change our accounting method from equity accounting to consolidated accounting.

So we had in effect for fiscal '05, we restated it as of year end '04 balance sheet to incorporate the inventory and other assets of RL Media and assets and liability, and for fiscal '05 we are restating quarters consolidating their revenue, cost of good sold on down the line and then in the other income line backing out the minority interest of our joint venture partner, NBC.

This is consistent, just so you know, with how we also account for New Polo Japan.

But it really was a result of a new accounting pronouncement that came out at the end of 2003.

I understand those mechanics, I guess I'm asking why are you capturing now more of the economic benefit when you still, when it's still 50/50?

We're really not because through the minority interest adjustments we are giving NBC the 50% proportion that they would be getting otherwise so there's no negative effect on NBC.

We are not taking more of the profits.

But what we are doing is reflecting their business performance in our financial statement prior to adjusting in the other income line.

Right.

I apologize but that's why, your prior to Jeff Edelman's question, your know, the prior quarters are a little, the 247 is a little higher, you know what I mean, then it says your three quarters year-to-date are coming in a little, are going to be restated a little higher.

So I guess in my inference was that Polo Media was the reason for that.

Is that not right?

Well, Polo Media would be certainly a gain.

The lease accounting would be a loss, we've have to look at the net impact by quarter to see how the quarters were affected first quarter, second quarter, third quarter.

That's great.

We can do that off-line.

I'm sorry.

That's okay.

Just one more, maybe.

The $100 million, people have asked a lot about the core businesses which are doing great, the $100 million, I guess, accrual for this Jones litigation, the reserve, is that your alls' estimate of your exposure here or how are you guys arriving at that may I ask?

With the latest court ruling with respect to the K., our view on the case is the same but because of FAS 5 disclosure we were required to estimate a reserve for potential damages related to the ongoing litigation of the case.

Based on the information that we have at this time, which is relatively sketchy because we haven't gone through any discovery yet on this particular case, we estimated with the best information that we had the $100 million reserve in conjunction with our outside legal counsel as well as with our auditors.

Thank you.

I'll let somebody else get in.

Thank you.

Moving on we'll hear from Dennis Rosenberg at DSR Consultants.

Good morning.

Could you give an update as to what's transpired in the Jones legal situation since the latest court ruling?

Well, the only thing that's transpired, Dennis, is we filed an appeal back to the same court.

We filed that appeal about six weeks ago.

We are waiting to hear back from them.

So at this point beyond that nothing has changed.

How do you appeal to the same court that ruled against you?

What's the basis of that?

Well, you appeal the ruling on the basis that they didn't come to the right conclusion.

They have a right to rehear it or pass it up to the higher court, the highest court in the state, or they have a choice to reject that.

So we are six weeks into a response and we had a chance to put in our papers, Jones had a chance to put in their papers and we'll see what happens.

Thanks a lot.

Thank you.

We'll now hear from Andy Graves, Pacific Growth Equities.

Congratulations on the gross margin improvement in the quarter and what appears going forward.

That's great news.

Thank you, Andy.

Could you give us some brackets on the childrenswear side of the childrenswear business as we look into fiscal '06 in terms of revenues and potentially earnings contribution?

I don't think we break out the specifics of a segment like that.

The fact is we bought the business I think at the time we articulated it was a business north of 200 million.

That business continues to track very well at retail.

We had a very strong Easter and we seemingly are off, positioned for a strong back-to-school.

That business is a very positive contributor in terms of profitability to the overall wholesale segment.

So without the specifics it is a business that we're very pleased with its growth prospects and really what it can do for the overall profitability.

As we discussed earlier, this is also a business that is now supporting the kids business in Europe.

If you remember the Schwab license did not include Europe or Asia.

So today not only is it a domestic business but it's growing in Europe and it will be contributing in the Asian growth as well.

And in the particular Q4, should we assume that somewhere between 40 and 50 million were in the Q4 thirteen-week period from childrenswear?

We don't really break that out by quarters but it was a plus for the quarter and it will be a plus in the first quarter of fiscal '06.

And seasonally how does the childrenswear business work?

Similar to your other wholesale business or are there any other quirks to it?

Well, there's actually some quirks to it because they really have the three piece, it's the pre-Easter, it's the pre-back-to-school and then it's the pre-Christmas.

So where the rest of our wholesale businesses tend to build to spring and fall crescendos with smaller summer and holiday deliveries, the kid's business is kind of evenly split but it's got three sort of little spikes to it.

Right.

And are we still sort of on track, it sounds like we are, to the initial guidance in 2004 that it would add somewhere in the range of 15 to $0.20 any further break down from there?

No, I think we're still comfortable with that and are tracking for that.

Okay.

Thank you very much.

Thank you.

And we hear from Jennifer Black with Jennifer Black and Associates.

Good morning and let me add my congratulations as well.

Thank you, Jennifer.

I wondered, Roger, if you could talk about your vision of how big you think that the accessory business including small leather goods and handbags can be over the next three to five years?

And then I have two other questions.

Huge.

I still have a shoe on my desk that's covered in some interesting art work that goes back four or five years.

Look, the world is talking about accessories.

Most brands are trying to pursue accessories.

We have today through license relationships accessories businesses that total almost $400 million.

Having said that, we're not satisfied.

We think that we are pre-eminent in apparel, we're pre-eminent in home, we're pre-eminent in the kid's business.

I think we all accept that the upside for us in the accessories business whether that's leather goods, meaning handbags, small leather goods, shoes, luggage, whether that's jewelry or any of the other pieces is a real opportunity.

I don't think we would have bought back the shoe business, which was a very long-term license, if we didn't think we could add significantly to that business.

It's going to help our retail stores.

It's going to help our wholesale business.

And I would expect it to be an accelerating piece of our business over the next three to five years.

It's going to take some investment.

It's going to take some time, but I think Ralph is very focused on it, the design teams are very focused on it, and I think owning the shoe business gives us direct access to implement the same kind of strategies and thought processes we've applied to the other businesses.

So it's just the beginning.

It's not going to happen overnight.

But we're feeling very optimistic about our ability to get after it.

So it could be a $1 billion business over three to five years?

Well, I'll quote you on that and see how you're doing later.

It could be huge.

Okay.

And then I was curious to know, out of the sable of your brands, I wondered what you're the most excited about for Japan?

Well you know really the business in Japan has been primarily built in what I'm going to call Blue Label.

That's the Polo Ralph Lauren men's business and I think that's the Blue Label.

The women's business, which is only available in our stores domestically and as you know, we wholesale in Europe and we wholesale in Japan.

I think the upside in Asia, Japan particularly, is in Collection, Black Label, Purple Label, accessories, and high-end of the kid's business.

We have not tapped that market.

There is an appetite for that product.

We see it when the Asians travel into our stores in the U.S., when they travel to our stores in Asia.

And we have not done a very good job of working through our license partners to get that into the marketplace.

So we are pushing hard in the Tokyo flagship but around the horn, whether it's Korea, whether it's Sidney, Australia or any place else I think it's going to be on top of the existing strength in the Blue Label business.

Okay.

Great.

And then just one follow-up.

Did you say that currently Europe is 850?

Europe is 600 million.

We started when we bought back the business in 2000 at 180 million and we are continuing to believe the opportunity is to get to $1 billion, so tracking well against that.

Okay.

So it's 600.I Couldn't hear it.

Thank you very much and good luck.

Thank you, Jennifer.

Thank you all for your interest and following the earnings release.

We're excited about not only last year but really the very strong start that we're off to in fiscal '06.

So we look forward to talking to you again in early August at the first quarter conference call.

That does conclude today's conference call.

We thank you for your participation.

You may now disconnect at this time.