雷夫·羅倫馬球 (RL) 2006 Q1 法說會逐字稿

Good morning and thank you for calling the Ralph Lauren first quarter and fiscal 2006 year conference call.

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

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

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

Instructions on how to participate will be given at that time.

Now for opening remarks and introductions, I will turn the call over to Nancy Murray.

Please go ahead.

Thank you and good morning, and thank all of you for joining our conference call today for the first quarter fiscal '06.

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

Tracey will be reviewing our first quarter consolidated financial performance, and I will review our segment performance and outlook for the second quarter, second half and full year fiscal '06.

Then Roger will get on the line to give you an update on our long-term strategic initiatives.

We will 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.

With that, I will turn it over to Tracey.

Thank you Nancy.

Good morning everyone.

Before I begin reporting our results I would like to point out that we are comparing first quarter of fiscal 2006 to restated fiscal 2005 numbers.

And to remind you, fiscal 2005 was restated for items, such as the consolidation of Ralph Lauren Media, which is our Polo.com e-commerce side, and for an adjustment to our accounting releases.

Now our first quarter results were as follows: Total revenues increased by 24% in the quarter, driven largely by our childrenswear collection, which as you know we acquired the license back for in July of 2004, and our domestic menswear line and wholesale.

We also experienced strong sales growth in Europe, and in our retail stores.

Our gross margin in the quarter expanded 300 basis points to 55.1% of revenues.

Increases in full price sell-throughs in our wholesale product lines, supply chain efficiencies, and improved worldwide performance in our retail stores, all contributed to the improvement in gross margins.

We also leveraged our 24% growth in revenue and drove a 440 basis point improvement in SG&A margin in the quarter.

SG&A dollars increased 13%, driven by increased spending in the U.S. to support our growing specialty retail business, increased marketing support for branding in Europe, and the inclusion of childrenswear expenses this year.

We ended the quarter with $80 million in operating income versus $19.7 million last year.

And the resulting operating margin of 10.7% represents a 740 basis point operating margin improvement versus last year.

Our effective tax rate in the quarter increased 37 points to 37.6%, versus 35.3% last year; driven by the higher mix of domestic wholesale and retail income tax, which is taxed at higher tax levels.

Net income was $50.7 million or $0.48 per diluted share.

Please note that our shares outstanding were 105.5 million, or 2.7 million shares more than the first quarter last year.

Turning to our balance sheet, we continue to have a strong balance sheet, and ended the quarter with 522 million in cash, and 269 million of Euro bond long-term debt.

As we announced previously in July of this year, we funded the Ralph Lauren footwear license acquisition with approximately $108 million in cash.

Our working Capital management continues to improve with our accounts receivable DSO declining 9 days due to our increased focus on collections.

And ending the quarter with 468 million of inventory, we have improved our turnover to 3.8 times this year, compared to 3.4 times in the first quarter last year.

In fact we generated a 27% sales increase in our wholesale and retail segments, with only an 8% increase in inventory levels worldwide.

Lastly our Capital Expenditures for the quarter were comparable to last year at 33 million this year versus 36 million last year.

We continue to invest primarily in our specialty store growth strategy, our corporate infrastructure, and our wholesale shop-in-shop upgrades and expansions.

Now I would like to turn the call back over to Nancy.

Thank you, Tracey.

Now let me review some of the highlights of our segment results, and then finish with the financial outlook for the balance of the year before Roger gets on the line.

As you know, we operate in three integrated business segments, wholesale, retail and licensing, and at the end of the fourth quarter we adjusted the way we allocate corporate overhead expenses to each segment, and it now reflects how management presently views the business.

We have included all of the segment information for the first, second and third quarters in our press release today, to really help your analysis of our results at the segment level, and I refer you to our press release.

So let me start with retail.

Our retail revenues increased 15% and our comps were 7.3%.

And that's on top of strong comps in the first quarter last year of 12.6%.

During the quarter we drove strong performance in our U.S. and European stores through merchandise assortments, particularly in women's and children's, and we posted a 7.1% comp in our Ralph Lauren stores.

Our factory stores also performed well.

In particular in the men's and childrenswear with a comp of 6.5%.

At Club Monaco, store comps were 12.6% driven by a more focused assortment in bottoms, both in men's and women's.

And Ralph Lauren media sales increased 22% as a result of strong children's and wear now assortment in men's and women's.

For the quarter retail gross margins expanded driven primarily by global Ralph Lauren stores.

While expenses increased to support our expanded store base, the SG&A margin decreased as a result of better leverage.

As a result, our retail operating income increased 46% in the quarter with a 210 basis point improvement in our operating margins.

Now turning to wholesale, we reported a 41% sales increase in wholesale over last year's first quarter.

The primary growth drivers were childrenswear, domestic menswear, and our European business.

We had very strong gross margin improvement reflecting strength in all of our wholesale businesses.

Plus we benefited from strong leverage on these increased sales with a decrease in the expense margin.

Children's which is in our first quarter wholesale segment this year, where last year it was part of our licensing group, continues to be a very strong contributor.

And our menswear business in the U.S. had a very strong first quarter performance.

And this is really clear evidence that our multi-year strategy about repositioning our Polo brands is working.

Our women's wear brands are also performing very well, and this is reflecting the success of the collection and Black Label prelines which we introduced last May, good support and response in Blue Label and our stores in the international market, and Lauren had a terrific spring.

Europe had a strong quarter with double-digit revenue increases and improved gross margins and expense as a a percent of sales.

Despite a tough macro environment, we continue to see benefits of our consolidation in Europe.

And we continue to improve the delivery of merchandise and improve our shops in department and specialty store locations throughout Europe.

All of these performances across our wholesale product categories resulted in a $46.3 million operating profit in this segment.

And that results in a 13.7% margin.

And that 46.3 million is against a 2.6 million loss last year.

So a job very well done in the wholesale segment.

In our licensing group the first quarter licensing revenues were slightly improved compared to last year, as increases in international licensing offset the decrease in domestic licensing royalties from the absence of childrenswear royalty.

Now let me turn to the outlook and spend a few moments going through that.

We worked very hard to make sure the guidance is clear and I want to reiterate that it's against GAAP results for last year.

So as I go through all of these numbers, particularly when we start with the fiscal 2006 outlook, it is against a GAAP basis of $1.83 last year, that we are now comparing our fiscal '06 outlook that we raised this morning to a range of $2.85 to $2.92.

In raising our expectations this morning, these projected results reflect very strong operating performance for the year, but those strong operating results will be slightly offset by an increase in the dilution from the acquisition of the Ralph Lauren footwear.

As you noted today, we have a higher tax rate for the full year.

We also have higher share counts for the full year.

And it also reflects the effect of unfavorable exchange rates in our growing European business.

For the full year we project our consolidated revenues to be high single-digit, reflecting high single-digit growth in wholesales, low teen growth in retail, and licensing royalty flat to last year for the full year.

For the full year our operating margins are expected to increase in a range of 400 to 450 basis points and, remember, this is compared against the GAAP operating margins last year of 9.1%.

This operating margin expansion reflects expansion in our wholesale and retail segments and again somewhat offset by a decrease in net licensing income.

Below the line interest income net of interest expense is actually expected to be 2 million, based on higher interest rates on higher cash balances this year.

Our other income is expected to be an expense of approximately 3.6 million, and that's primarily due to the minority interest related to Ralph Lauren media.

For the full year we would expect our consolidated tax rate to be 37.2%, and we would expect to have 106.6 million shares outstanding at the end of the year, compared to 104 million shares last year.

Now let me give you a little flavor on the second quarter.

Again, this is against GAAP results last year.

We would expect consolidated revenue to be low double-digit, and that's a combination of high single-digit growth and wholesale sales, as we deliver our fall merchandise.

Mid teen growth in retail sales and licensing royalty flat to last year.

Operating margins, and this is comparing against last year GAAP of 13.6, we are expecting that to increase in a range of 150 to 200 basis points.

Interest income is expected to be slightly positive based on higher interest rates on higher cash balances.

Other income expense again is expected to be an expense of 2 million, again primarily due to the minority interest related to Ralph Lauren media, in the second quarter we would expect a consolidated tax rate of 37.1, and to have 106.2 million shares outstanding.

Now let me give you a little bit of feeling for the second half of our fiscal '06 outlook.

The consolidated revenue growth is projected to be mid single-digit and that reflects a slight decrease in wholesale, low double-digit growth in retail, and licensing royalty flat to last year.

For the second half, the operating margins are expected to increase in a range of 450 to 500 basis points, and that is against a GAAP of 8.7% operating margin last year.

Interest income is expected to be approximately 1.5 million, again based on higher interest rates on the higher cash balances.

We would expect to have other income expense, again to be an expense as I mentioned before about the minority interest related to Ralph Lauren media, the tax rate for the back half of the year is expected to be 37.1.

And we would expect to have approximately 107.4 million shares for the second half of fiscal '06.

For the full year we expect our capital spending to be $160 million.

Now I would like to turn the call over to Roger and then we will open it up for questions and answers.

Good morning and thank you, Nancy.

I hope you all can follow that.

Let me just first say it was a terrific quarter on all fronts.

Really enjoyed the strong spring summer selling.

We had terrific deliveries and getting a nice early reaction to the fall product that we've put into stores.

It was really strength in all divisions both in wholesale and retail, both here in the United States, as well as our international groups.

So one of those quarters where it all comes together for all the operating units.

The retail performance was terrific.

Strong comps even without Easter.

As you know our April/May/June this year did not have Easter against last year's Easter, so we really performed well against that.

We continue to make strong gains in our productivity reflecting regular price sell-throughs, which drive a meaningful 210 basis point improvement in our segment profit.

So we continue down our articulated strategy of raising productivity and profitability.

The Ralph Lauren stores we've recently opened continue to deliver to plan.

We have an aggressive program this fall also tracking on schedule at this point.

We've enjoyed a very strong spring response to our new concept, Rugby, and we will be opening several stores this fall there as well.

Both Club Monaco and the factory stores performed very well to plan in the quarter.

So really across all segments of retail we enjoyed very strong success.

The wholesale performance was clearly outstanding.

All divisions had major improvements.

We had strong selling of spring summer with our partners.

We really gained market share in all major merchandise categories.

Very strong margin growth, really driven by better sourcing, supply chain, and inventory management efforts.

The integration of kids has gone smoothly.

They had a terrific spring season.

I just wanted to comment that Jackie has had a very strong positive impact on our entire wholesale and licensed areas, and she and the team should get a lot of credit.

Europe continues to build on their strength.

The consolidation is over and the management team has really raised the bar on their performance.

We've improved merchandise presentations.

We've elevated the products and price points.

We've added significantly to the luxury advertising and marketing.

And we've made significant investment in rebuilding key locations.

So despite a difficult European economy we are getting stronger results.

The wholesale business was up 41% in revenue in the quarter, and if you take the kids business out, it was up 15% on a like basis.

So that's really a very strong performance both at the sales and profit line, and they are off to a great start in the new year.

We continue to get strong results from the consistency of our clear strategy that the team has executed very well.

Our inventory is very clean and continues to turn quickly.

The balance sheet is strong and gives us flexibility.

And we continue to invest in our long-term future, both capital and expense, whether it's opening key retail strategies, new merchandise focuses like accessory, new geographic territories like Asia, or the infrastructure to support operating profit expansion.

We've also continued to invest in advertising and marketing on a worldwide basis to continue to move the Company forward.

So we really have a great team, and I think Ralph and I are very proud of how they have performed this year.

I think at this point, we would be happy to answer some of your questions if you have any.

[OPERATOR INSTRUCTIONS] Our first question will come from Margaret Mager, Goldman Sachs.

Hi, wow.

Great results, guys.

Good morning, Margaret.

Really fantastic!

Thank you.

I wanted to ask about the operating margin outlook and why would there be sort of less of a pick up in the second quarter versus the second half.

What are some of the elements of why you think there would be such strong operating margin expansion in the second half of the year?

Well, I think Nancy can respond at a more detailed level.

Let me just say as we have said 50 times, I think the distortion to the GAAP numbers is much bigger in the back half of the year, than it is in the front half of the year.

I don't think on an adjusted basis there is as much distortion as you are probably seeing at this point, Margaret, as you are just hearing the numbers for the first time.

We are anticipating good gross margin improvement straight through the year.

I think you've seen both in the fourth quarter of last year and the first quarter of this year, that we are getting very nice lift off of our investment of supply chain and sourcing and pricing strategies.

I think that will continue.

Second quarter as you know is our largest quarter of the year.

So it's our largest wholesale quarter, and we will really get hopefully the margin lift there as well, based on Nancy's guidance.

So I don't see in a macro level, the major quarterly swings, but let Nancy give you a more detailed answer.

Margaret, really what you have going on in the second quarter is you are now incurring the footwear expense for the first time.

So you have expense there.

And you also have more retail selling costs.

Because if you look at our store count year-over-year, and as we are opening more, you are really getting more burden of that in the second quarter.

That helps.

If I could, two other little questions.

Club Monaco, this is a big turnaround in the comps there.

Can you give us a sense of what's happening at Club Monaco, why this is coming on so strong, and what is your expectation as you look out over the second half of calendar '05 for Club Monaco?

And on the men's business, it sounds like things are really picking up in menswear.

I'm hearing it in some other places there as well.

What do you think is happening that's causing men's to come back?

Is it something in fashion, or have we finally hit bottom, and guys just have to buy some new stuff?

All right.

Well, let me try the Club Monaco piece first.

I think as you know, you all know, we suffered through a difficult fall last year with Club Monaco.

I think we got a little over sorted, the color pallets were off, and I think we got a little sophisticated in our looks.

We really spent the fall and early spring clearing that out.

As we got into the new receipts we reduced the SKU count dramatically.

We had a much clearer statement in our product assortment both men's and women's.

Enjoyed terrific success in April and May with primarily a white with color story, and that continued straight through the quarter both in Canada and in the U.S.

Our new fall sets which are really the fall product that will take us through the balance of August and into September, are being set up in all stores today worldwide.

We ended up presetting two stores last week, which I saw and I think they look fantastic.

So I think they are back on trend from a product point of view.

I think most of the disruption of consolidation into the U.S.

New York marketplace is over.

So we would expect, I don't know about a 12 plus comp every quarter, Margaret, but we would expect strong results for Club Monaco this fall.

In terms of the men's business as you rightfully said we enjoyed a terrific quarter.

We are feeling very excited about where we are.

I don't think it's a trend of men's buying more sports area, because I think the dress up trend is still what is driving suits, suit separates, shirts, ties, and that in many ways is still the stronger natural business.

I think we've just done some things in our sportswear business over the last couple of years, in terms of getting our distribution under control, about supporting the stores in a different way than we've done in the past.

We had some terrific product this spring, and also early fall deliveries are being well-received.

So I think we are actually swimming against the tide in men's sportswear, better than the rest, and therefore picking up tremendous market share.

Well, nice to see you at the top of the industry, but I can't honestly say it's not surprising, so congratulations on a great quarter.

Taking a question from Lee Backus, Buckingham Research.

First, congratulations, Roger and team, on just a terrific quarter, and just a terrific outlook.

Thank you, Lee.

Reflecting on the footwear business it seems like there are just terrific opportunities, whether it's Ralph Lauren footwear, Polo, Lauren, Chaps.

Could you maybe quantify a little bit about the hit that you see in the short term, and talk about when it will be additive, and give a sense of your overall strategy for footwear?

I think it's a good question, Lee.

We have very high hopes for footwear over the long-term.

We think it's a bedrock, obviously to the accessory business.

And as you just rattled off a couple of the initiatives that we are anxious to explore, both in men's, women's and children's, we think there are lots of opportunities to tier the brand.

I think unlike the children's business where we were able to sort of hit the ground running, and have developed a very nice first 12 months there, I think the footwear business which we initially bought knowing full well there was some inventory, and/or distribution issues we wanted to be aggressive with, I think with business being better in general, we have decided to be even more aggressive over the next nine months, in terms of reducing off-price, and cleaning up some of that distribution.

So what started out as slightly dilutive to us I think we are going to be a little more aggressive to get out of that business.

Don't feel we want to perpetuate it, and that will probably take footwear to a dilution that's more in the $0.08 to $0.10 range.

We believe beyond that clean up period our fiscal '07 and '08 and beyond, there's enormous opportunity.

I think Ralph has something to say.

I think obviously with the strength of our apparel businesses worldwide, we have an opportunity to tier it from collection through Blue Label, and all the way down to Chaps, as you said.

Maybe a little less impactful in year one and two, but I do believe it will be a positive profit contributor next fiscal year, slightly more dilutive this year than what we originally set out.

Also on sourcing, you mentioned sourcing improvements and I know Tracey has talked about data sourcing as a big focus.

Could you discuss some of the initiatives you've taken, and what you've seen?

Yes.

I think, Lee as we've added product categories like women's including Blue Label and Lauren, I think as we've added children's.

I think as we've now begun to supply our international licensees with more product that we manufacture, versus in the past what they used to manufacture it, we've been pushing ourselves to get more global in our thoughts, not only where we make it, but how we move it to its final destination, be it Asia, be it Europe or be it the U.S., and how we handle it once we get it there, i.e. the supply chain.

I think our margin improvement, and I think our very meaningful inventory turnover improvement, are really a testimony to the progress we made.

We actually do almost 1.5 billion more business now on less inventory than we had five years ago.

That is driving margin improvement, that is driving inventory turns, and in many ways we've been able to maintain or improve the quality, which is always the starting point.

More to come.

We don't think we are 100% there yet, but we have made a lot of progress, and I think you will see more of that flowing through in the quarters to come.

Thank you.

We will take a question from Noelle Grainger, JP Morgan.

Hi, congratulations.

Thank you.

I'm sorry, my apologize, I had to hop between two calls, so hopefully I'm not too repetitive here.

How are they doing, whoever is on the other call?

Not as well as you.

I'm sorry to hear that.

Maybe, have you talked about Asia?

No, we haven't.

It's all for you.

Great.

Hoping you could talk a little bit about was see are the opportunities in Asia, particularly on the retail front with the store in Tokyo, kind of coming up ahead of you and my understanding is that you have, that retail in Asia is not a licensed business, and I'm hoping you could maybe talk a little bit about your thoughts there?

Okay, I think it's a good question.

We've obviously said several times Asia is a big source of opportunity for us.

The recent addition of Scott Bowman to our team, came at the end of a full year consulting project he did for to us, to study the opportunities.

As you may or may not know, our Asian market is supported through two different types of licenses.

One, our geographic licenses, so countries like Korea or Australia are geographic.

Other licenses are product-specific like in Japan, where we have a licensee for kids, different than men's or women's, or jeans.

So in order to think through our future strategies in Asia and what we want to do about approaching that opportunity, one of the things we've had to look at is what the licensees do, and what they are competent at.

Very few of them are retailers.

We believe as we've successfully done here in the United States our strategy is a blend of the right kind of retail and wholesale.

I think you are seeing that play out now in Europe, where we've opened some very important and successful stores, in combination with the right kind of wholesale.

We think that's also true in Asia.

So our first step at that will be the Omotesando store in Tokyo, opening middle of March next year.

But we think that's the beginning of additional store sites that we will open not just in Japan, but other Asian markets to complement the correct wholesale distribution.

So as we have taken on production of a lot of those products, those products are now common, in terms of quality on a worldwide basis.

We do adjust for the Asian fit, but it's now the same products coming out of the same factories, out of the same piece goods.

We are beginning to integrate a more cohesive worldwide marketing message, which will also halo both wholesale and retail.

So we are really in the early stages of investing time, money, capital and expense, in building the team and raising the standard of product.

Much of the success in Europe that we've had has been raising the products, increasing the exposure of Collection Black Label, Purple Label, not just being a khaki pant or knit shirt company, and that's been received very successfully in Europe.

That's in essence what we will be doing in Asia, starting with the Tokyo flagship in March.

Okay.

As you study the marketplace over there, and you look at the wholesale landscape of your customer base, is that a business that you feel you have a good understanding and core competency for, or can build that?

I think we do.

In many cases, the businesses over there that are called wholesale are some versions of consignment.

You build the assortment.

You build out the shops.

You staff the stores.

And you run them almost like a consignment basis.

Because the productivity is so high, your actual points of distribution are much smaller.

But we have a store in one of the Tokyo markets that does $14 million in 1800 feet.

So you are really a pseudo-retailer, in terms of how that is put together.

And I think we are learning by the day, and I think we will be ready when the time comes to execute and elevate how it's operating today.

Great.

Thanks so much.

Congratulations again.

Okay.

Thank you.

Now moving on to Virginia Genereux with Merrill Lynch.

Thank you and let me add my congratulations.

You guys should feel great about yourselves.

We really have had a great quarter.

I'm not sure I want it to stop but we are already into August.

Right.

Let me ask you, I think the gap to your comments about GAAP, Nancy, as I do the math we have your K, and you've given us restated quarters, which is helpful.

As I do the math, you are actually calling for, if we back out these $100 million of charges in the fourth quarter, in the March quarter of last year, you are actually not calling for much margin expansion in the back half at all.

Because as, because your last year full year was 9 and change.

May I ask, first, why would that be, given where -- I mean is it Federated/May, or can you give us some more specifics on why you wouldn't see margins expanding much in the back half, X these one-time charges?

Well, I think, Virginia, let me start and Nancy can finish.

I think our fourth quarter in our own mind will have the smallest margin improvement.

We had a huge fourth quarter margin improvement last year if you remember.

So we are beginning to come around the horn on some of that.

Two, with the new accounting for leases we will be bearing the brunt of the Japanese store opening in that quarter.

There is also just to remind you and everyone else, there was no Easter this year in the fourth quarter, which again for most retailers is not an issue, for us it is.

And the footwear drag, we also think will impact that as we get through the back end of it.

So there are some things that are in our forecast.

Some of them are predictions.

Some of them are realities.

And we've also taken a more conservative view to the exchange rates out of Europe.

If you remember last year for most of the year, the exchange rates were above 130.

Now they are bouncing around between 119, 120, as Europe has grown, and its importance has grown, that has begun to keep us a little more conservative about that exchange rate through the balance of the year.

Those are some of the things that are issues for us, as well as what Tracey mentioned earlier, in terms of some of the other issues.

Then maybe sort of following on that.

If you had such great growth in the wholesale business this quarter, sort of as you said kind of 15% underlying.

Why may I ask would wholesale be flattish, footwear should be coming on.

Will you have Chaps.

I know just at the very tail end of the year.

No, I think it's a fair question.

We actually, I think we talked last phone call, which seems like only a couple of weeks ago, the last phases of off-price elimination which we've made such tremendous progress on the last three or four years, I think today we are down 75% of where we were in prior years.

And the last pieces of that will run through the balance of this year, and then we will be done.

I think some of that is helping us get higher margins and getting faster inventory turn.

But our inventories are squeaky clean, turning quickly.

We are delivering on time.

We just don't have nor want the excess we've had in the past.

That's not sales we want to chase, and we are very happy to give it up.

In this case we are giving up the footwear piece of it at an accelerated rate.

I think that's the headline issue.

Our performance at retail continues to be very strong.

I think if you checked around you would see spring/summer, we really outperformed the competition in each of our major merchandise categories.

So we are, we will continue to see that hopefully through the rest of the year, and we will see if the forecast holds up.

Okay.

And no impact, Roger, from Federated/May, the Federated/May merger coming out of your markets?

We have taken the fullest that has been communicated under the assumption that we did not get any of those real estate locations converted into an existing customer that we would want to sell, and we lost 100% of the business, it's worth about 1% of our wholesale business.

So I wouldn't consider that a major impact.

Thank you.

That's helpful.

Jeff Edelman, UBS, next question.

To follow up on Virginia's question, if we look at the guidance Nancy gave us, Vis-a-vis what we had previously in terms of operating income, and back out the first quarter this year and what we had previously had, it looks as if the operating income and margin is somewhat below prior guidance, I guess part of it can be answered by the footwear.

Is the rest currency or are we seeing other maybe expenses or initiatives being built up for the following year?

I think, Jeff, it's really a couple of things.

One, we are taking a different tact with footwear over the next three quarters, than we originally contemplated.

With business being as strong as it is, we just felt it was the right time to be more aggressive and clear that out.

Two, we are in fact for the forecast taking a more conservative Euro to dollar exchange position.

Don't know what will happen, but we've taken a more conservative view of that.

I also think that our original capital and expense plans are unchanged.

With the stock price up over $50 as you know, Jeff, that does cost us more in terms of expenses.

So that is new news to the operating numbers.

Otherwise we feel pretty solid about the rest of the guidance.

The only relatively impactful in the fourth quarter is the Japanese store, where you know in the past if you had free rent running up to the opening, it would not have been expensed.

Now it is.

So that's, that's a ding in the last six months of the year, against original guidance.

Okay.

And secondly, could you talk about Lauren?

You mentioned it had terrific performance, but it was not one of the divisions that showed higher sales in here.

Yes.

Is it store mix or what?

As you know last year was our first spring with Lauren.

So as we plan this line, got feedback from last year's selling, receipts that went into stores January, February and March and really drove, let's call it April, May, June, we had the benefit of one full year of knowledge.

So actually on fairly similar receipts we had dramatically improved sell-throughs.

So the natural retail margins for the stores, as well as our support moved considerably in our favor, and that strong sell-through, and their desire to pull up goods had us ending the season very clean.

Although the initial sell-in was not significantly higher than last year's initial sell-in.

The sell-throughs at retail were dramatic.

So today we are picking up almost on a by-door basis, increased or better space including a huge new shop in Bloomingdale's that will open this fall, on the back of a beautiful Black Label and collection shop at Bloomingdale's that opened last week.

So, you're right, not huge sell-in difference, but huge sell-through improvement.

Great.

Just one final thing if you could help us out, I know you are not yet willing to give guidance for March '07.

A lot of us are required to incorporate some impact from stock options into our earnings estimates for the out year.

Could you give us your preliminary thoughts on what you are looking at, would it be restricted stock, should we just take last year's number, tack it on there, just some sort of insight there, please?

Okay.

Well, you're right, we don't have '07 publicly modeled at this point.

I think if you look through our public filings the impact of stock options probably is similar to the last couple of years.

I don't anticipate it being significantly off those numbers.

Okay.

Great.

Thank you.

Thank you.

Now moving on to Robby Ohmes with Banc of America Securities.

Thanks.

A couple of quick questions.

First, can you just tell us the success you are having with Rugby, have the roll-out plans changed, could you be ticking that up?

And my second question is you mentioned the advertising and marketing increases globally, can you tell us the percentage increase in the first quarter, and also what your expectations are for global marketing spend for the rest of the year?

And just finally on Chaps, women's, and boys can you help us understand what kind of impact that could have on your wholesale business in the fourth quarter, and heading into fiscal '07, and also any help on timing on when you might do some of the roll-out in Chaps, like footwear?

Thanks.

You are hoping we have a good memory here, Robby.

Let me start with Rugby.

We are very pleased with the reaction we've got in the three stores we've opened, we do open a couple more this fall.

One here in New York City.

So many of us will get a chance to go down there on a regular basis, and watch how that performs.

I also think that we are currently planning to open a store in New Canaan, which is not too far from our existing Ralph Lauren store.

So I think we are going to be very on top of the new stores which continue to be laboratories.

I think our encouragement there would have us look to a more aggressive store opening schedule starting next year.

As you know, it takes about 12 months to look for, and get the right site.

So as we've now gone about nine months with Rugby, we opened November of last year, we will probably look for our fiscal 2007 calendar to see a more aggressive store opening schedule.

We've enjoyed both female and male success there, and early reaction to fall is also good.

So not this year, Robby, but next year.

In terms of global advertising, I think one of the strengths and success of our business over the last couple of years, we've continued to add incremental to our advertising and marking spend.

Even when the market was choppy in '01, '02, '03, we did not cut back, or in fact stayed even, we've been adding to our spend.

As a matter of fact, this year for Europe for the full year, I can't give you first quarter, we've added over 35% to our marketing spend in Europe, which we feel is going to be helpful long-term.

That's a combination of image and product advertising.

We are now looking to add to the Asian spend level, both funded by licensees or funded by us for fiscal '07.

We think we need to take up the amount and energy of our international marketing, and that will be built into our plans going forward.

In terms of Chaps as you know, we are incurring expenses.

Second, third and fourth quarter, and just beginning to get revenue with fourth quarter and margin in the fourth quarter.

I expect it to be slightly negative to the second and third quarter because of the start up costs, breakeven in the fourth quarter, and then we will begin to see the full impact of that for fiscal '07.

We've had a very, very exciting partnership with Kohl's.

They are pushing us like mad to be aggressive.

We think women and kids, which will be the next categories launched by us in spring, are categories that they should be very, very successful with.

Both sportswear, clothing and dress furnishings at Kohl's this spring have been star performance for them.

So the Chaps opportunity for the corporation is meaningful.

It's just getting our toe in the water fourth quarter.

We think the investments are relatively modest, and are well within an ROI characteristic that I think all shareholders will be proud of.

So we are tracking very nicely against that objective as well.

And, Roger, just quickly, the U.S. marketing spend for Polo brand, could you just tell us where that's been, and where it's going?

I think that it's, you know, about mid-teens up, in terms of the U.S. spend.

Terrific.

Thank you very much.

You're welcome.

The next question will come from Liz Dunn, Prudential.

Hi, good morning.

Congratulations.

Thank you, Liz.

I wanted to ask some questions regarding the accessories opportunity.

First understanding that there is some noise in the numbers this year, as it relates to footwear, do you think that once you sort all of those out, that footwear can operate at a higher operating margin than the apparel business, and the other question is what handbag categories are you allowed to do on your own?

I am assuming that the 10,000 or $12,000 green crocodile bag, that's been featured in some of the fashion magazines, you are doing that on your own.

What other --?

Are you looking to partner with us, Liz, on that?

Send me one and I will get back to you, yes.

That's a good question.

We have a licensee relationship that allows them the rights to all that product.

However, over the last couple of years we have in cooperation with our licensee taken on the direct design and manufacturing of the very high-end collection pieces, like the one you are referring to, that's not the kind of product that the licensees have wanted to be involved in, and we've developed some developed some terrific bags this fall, that are heading into the stores now, that we think raise the standard in terms of design, quality, the likes of which I'm not sure anybody else in the industry is doing.

That's product we would do directly with the licensees approval.

We think the footwear business, once it's up and running and properly contributing, can be and should be at least equal of the apparel business.

Obviously first quarter is a little taste.

We think the apparel business margins are headed up.

We think we are going to see growth in those profit rates as time goes on.

But I think the footwear business when it's run properly, should keep pace with that.

You can also do accessories for Chaps, there's nothing you haven't --

That's correct, that's our license.

That is our right to do.

Okay.

Great.

Congratulations again.

Thanks, Liz.

Now we will take a question from Dennis Rosenberg, DSR Consultants.

Hi, guys, congratulations.

Could you give us a little bit more detail on the footwear, Roger?

You said there was great opportunity for '07 and '08, and it sounded like you are looking for more of an opportunity in '08.

And you indicated some profit in '07.

So could you just elaborate on what you are looking for in '07?

Well, and consistent with my answer to Jeff's question we are really not publishing modeling '07.

Not in terms of numbers but more in terms of magnitude?

We do have a three-year plan.

We have a point of view about what we can do, from distribution through manufacturing.

I think what we wanted to in footwear, Dennis, is make sure we've got the right manufacturing base.

We have service agreements with Reebok that we will be working through over the next year or so.

As we unplug from that, and develop our own sourcing, be it in Europe or in Asia.

I think we want to make sure we have that right, because not only has the quality got to be right in footwear, the fit has to be right.

So I think we are going to move through '07 in a fiscally profitable way, but I don't think we are going to be looking to drive enormous volume and/or profit, as we get our first owned deliveries put into the stores, get feedback from that, make whatever adjustments, and then go forward.

I think '07 will be profitable.

I think '08 will represent the beginning of a stepped up sales and profit expectation.

Okay.

Also on Club Monaco, the last I think it was a quarterly conference call someone asked a question about the longer-term strategy there?

And you said to stay tuned that you might have some more information on this conference call.

I think somebody did ask it, that's correct.

People have asked it on and off.

I think, I think our response, Dennis, if I said that I don't remember it, it was, we are pleased with the progress we've made with Club Monaco.

We've put a lot of time and energy to getting Club Monaco to the point it is.

Obviously the first quarter comps and their contribution has been meaningful.

We continue to look to grow that business.

I really have no reason to want to anything but grow that business, and grow it profitably.

We are successfully raising the bar on all of our retail.

As you can tell, we've continued to make good progress against our operating objectives, sales per square foot, turnover objectives, and I think Club Monaco is contributing nicely to that.

So I don't see any change in that.

Thank you.

Keep up the good work.

Thank you, Dennis.

Good to have you back.

Christine Chen, Pacific Growth Equities.

Congratulations on an amazing quarter guys.

Christine, can you get a little closer do the speakerphone or phone.

I apologize, I think that was my headset.

Is that better?

Yes.

Thank you.

Congratulations.

Most of my questions have been answered.

I think you said amazing quarter, didn't you?

Yes, amazing quarter.

I got that part of it.

Polo Black, how many doors is that expected to be in?

You are talking about men's or women's?

Men's and then women's, if you are planning on rolling that out as well.

Well, the men's Black Label is only in Ralph Lauren doors, so we don't wholesale that business.

We actually had a terrific success this spring.

It was the fastest-selling clothing product we had in the stores.

I'm talking about the fragrance.

Oh, excuse me, I thought you meant.

I'm sorry, I didn't make myself clear.

That's okay.

The fragrance is a fall launch.

I don't know that I can give you the number of doors.

Nancy, do we have the number of doors?

Christine, I will have to get back to you.

Okay.

Okay.

Sorry.

I thought you meant the apparel launch.

That's quite all right.

Is there a plan to do a Black fragrance for women as well, since you have the Blue fragrance for both?

I don't think at this point we have that.

We obviously have Turquoise, which is an important fragrance for us, and then Black.

Our dance card is pretty full for this fall.

I don't think at this point we have plans beyond that.

Thank you.

Moving to a question from Marie Driscoll, Standard & Poor's.

Good morning.

Can you hear me?

Yes, good morning.

Great quarter.

Congratulations.

Thank you.

Could you elaborate a little on your strategies for Rugby, the opportunity you see there, in terms of number of doors, your real estate strategy?

And if you could remind us your overall corporate goals for retail versus licensing versus wholesale?

In terms of profitability or size or what?

In terms of the mix, right.

Well, let me start with Rugby.

I think we said when we launched the concept that Ralph really believes this can be a huge business.

We see it as a vertical retail business, meaning we don't see it as a wholesale business.

Our first couple of stores have been in street locations, in college campuses, as will the next two both in New Canaan and New York City.

Over time we begin to look at new real estate around the U.S.

We will look at both street locations, college environments, and/or malls.

I don't think we see this early on, as a singularly mall-based concept as a lot of the other young retailers are.

Although over time as we grow the number of doors, we will certainly have to consider the better malls as a place where young people shop.

So as that plan continues to unfold, and we continue to get consumer feedback, we will look to modify that real estate strategy but that's where we are today.

In terms of the mix of wholesale and retail, I think today our business is split pretty evenly between wholesale and retail, as we move through Europe.

As we expand here domestically with Chaps and other things.

I think we would continue to maintain about a 50/50 split.

Licensing, I don't expect to grow dramatically, although I think even having lost the European royalty, having lost the kids royalty, now footwear and Lauren, I think we've done an admirable job of replacing it with other royalty streams.

So we will continue to weigh new merchandise opportunities, whether it makes sense to do it in license form, or joint venture form, or direct ownership, we will continue to evaluate that as they come up.

I don't think we are trying to artificially manage to a preconceived percentage.

We are now making significant money in all formats and I think that gives us some flexibility.

I had one more question or actually a clarification.

When Nancy went through the second half and talked about other expense, did you provide a number there or not?

Let me get Nancy to give you that number again.

Yes, Marie.

For the second half, I will give that you number.

Thank you.

Marie, second half, the other expense is expected to be approximately 2.0 million, and that's again the same reason primarily due to the minority interest related to Ralph Lauren media.

Thank you all for listening.

Your questions are right on point.

We are obviously very pleased with the first quarter, and the way the year has opened up.

There is still a lot of worked to do, but so far so good.

So you can follow up with Nancy or Denise later in the day.

We appreciate your ongoing support of our Company.

Thank you.

That will conclude today's conference.

We thank you for your participation, and have a wonderful day