雷夫·羅倫馬球 (RL) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

And thank you for calling the Polo Ralph Lauren second quarter fiscal year 2006 earnings conference call.

As a reminder today's conference is being recorded.

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

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

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

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

Please go ahead, ma'am.

Good morning.

And thank you for joining our Polo Ralph Lauren second quarter fiscal '06 conference call.

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

Tracey will begin by reviewing our second quarter and first half consolidated financial performance.

Then I'll review our segment performance and outlook for the remainder of our fiscal '06 year.

Then Roger will give you an update on our long-term strategic initiatives, and then we'll open it up for questions.

We'll be making some forward-looking comments today including our financial outlook.

The principal risks that could cause our results to differ materially from our current expectations are described in our SEC filings.

And now, let me turn the call over to Tracey.

Thank you, Nancy.

And good morning, everyone.

Before I begin with our results, I'd like to point out that we are comparing our fiscal 2006 performance 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 Internet and e-commerce site, and for an adjustment to our accounting for leases.

We are delighted to report that we had a very strong second quarter, which followed a very strong first quarter.

We believe this is the outcome of our long-term strategy, combined with excellent short-term execution.

Our investments in talent and infrastructure to service our expanding business needs have produced strong results and we expect that they will continue to deliver positive results.

And now, let's review our performance.

Total net revenues in the second quarter were $1.027 billion, a 15% increase to last year's $896 million.

Our net revenue growth was driven by a 17% increase in sales in our retail stores, based on both strong comps as well as our new stores performing well.

We also had a 15% increase in our wholesale sales driven primarily by menswear, better womenswear, childrenswear and our European business.

Please note that we completed our footwear acquisition this quarter.

So that category is now included primarily in our wholesale numbers.

Excluding footwear, wholesale revenues increased 11% in the quarter.

Our total net revenues for the first half are 1.779 billion, an 18% increase to last year's 1.502 billion.

This net revenue growth was driven by a 16% increase in sales in our retail stores, and a 23% increase in our wholesale sales.

Again, driven primarily from menswear, better womenswear, our European businesses, and in the second half, the additional inclusion of footwear in the second quarter, and childrenswear in the first quarter, due to the timing of those acquisitions.

We continued our strong gross margin performance in the second quarter as gross profit increased 24% to $552 million from 446 million last year.

This increase was due to our combined revenue growth as well as our gross margin rate expansion of 390 basis points to 53.7% of net revenues versus 49.8% last year.

The increase in gross margin rate is a result of sourcing initiatives we implemented in the third quarter of fiscal 2005, and higher full price sell-throughs in both our wholesale and retail businesses.

Our gross profit for the first half of the year increased 27%, to $966 million, from $761 million last year.

With a 360 basis point expansion in gross margin rate in the first half to 54.3% of net revenues versus 50.7% last year.

Again, increases in full price sell-throughs in our wholesale product lines and improved worldwide performance in our retail stores combined with sourcing efficiencies contributed to this performance.

Regarding our SG&A expense, SG&A dollars increased 16% in the second quarter, largely driven by spending to support our retail business, ongoing investment in talent, and increased branding support in Europe.

The inclusion of footwear expenses this year also contributed to the increase in expense dollars and margins.

In the second half, SG&A dollars increased 14%.

As a percent of revenues, SG&A was 39.8%, 150 basis point improvement, compared to 41.3% last year.

The result of all of that was a 45% (ph) increase in our operating income for the quarter, to $177 million, with a 350 basis point operating margin improvement, or a margin of 17.2%, compared to 13.7% last year.

Our six-month results were 257 million in operating income, up 81% compared to last year's $142 million.

This performance represented a 500 basis point improvement in operating margin to 14.5%, compared to 9.5% last year.

Our net income was $104 million, or $0.97 per diluted share.

Please note that our diluted shares outstanding at the end of the quarter were 107.4 million, or 3.8 million shares more than where we ended the second quarter last year.

And at 37.6%, our tax rate is 240 basis points over last year, due to the dramatic growth in our domestic wholesale and retail businesses while licensing remains flat.

For the first half, net income was 155 million, or $1.46 per diluted share compared to 92 million or $0.89 per diluted share last year.

And now turning to our balance sheet, we continue to have a strong balance sheet and ended the quarter with 383 million in cash after paying for our footwear license, and 268 million of Euro bond long-term debt.

Our solid cash flow from operations has allowed us to continue to reinvest in the business, via both strategic acquisitions as well as increased capital spending while maintaining low levels of debt.

We continue to make important progress on improvements to our working capital.

At the end of the quarter, our inventory was 513 million, up 12% to last year.

And in the second quarter, our DSOs improved three days compared to our second quarter a year ago, due to our focus on accelerating the collection of receivables.

Inventory turn and improved DSOs will continue to be priority focused areas for us.

Our ongoing infrastructure investments to service the business and support our growth continue to produce positive results for us.

In an ever-changing macro environment, we are committed to controlling the quality and placement of our product in the market place.

Specifically, we have made and are continuing to make investments in our supply chain, and they are paying off ranging from global sourcing initiatives to improved flow of goods to the market.

In addition, our technology investments, particularly our global supply and demand systems, should offer enormous opportunities for inventory management improvements in the future.

This project, in its second year of a three-year initiative, goes live this fall when we convert our Lauren and childrenswear line to the new system.

And we will continue to roll it out to other product categories in fiscal 2007.

As you're probably aware, we are extremely pleased with the performance of our recent acquisitions.

Our childrenswear business, which we acquired 15 months ago, continues to deliver excellent results.

And we are excited about our latest acquisition, Ralph Lauren Footwear, as we develop and implement the strategies to build our worldwide accessories business.

Shifting to capital expenditures, our year-to-date expenditures were 78 million compared to 84 million in the first half of last year.

For the full year, we do expect to increase capital spending, and we expect that our capital spending for the full year will be approximately $20 million higher than our earlier projections as we believe that such strong results year-to-date in all of our businesses, we should accelerate some key growth initiatives.

Our principal capital investments are in our own specialty stores, corporate infrastructure, and department and specialty store shop and shop upgrades and expansions.

As part of our corporate infrastructure investment over the past three years, we have been standardizing all of our global systems.

This should enable scalability to support our organic growth, new product development, and the integration of acquired businesses.

So as you can see, we are simultaneously making investments in our future, and delivering near-term strong performance.

We have confidence that our strategy is working and will continue to work in the future.

And with that, I'd like to turn the call over to Nancy.

Thank you, Tracey.

Let me review some of the highlights of our segment results, and then our financial outlook for the balance of the year.

As Tracey said, this was a great quarter, and we're pleased to acknowledge it also is our first billion-dollar sales quarter.

Now going to the segments, let's start with retail.

Our retail revenues in the second quarter increased 17% with comps up 6.2%.

And that's on top of comps in the second quarter last year of 3.7%.

We posted a 3.6% comp in our Ralph Lauren stores.

And we had strong performance in both our U.S. and European Ralph Lauren stores.

And that's really a reflection of full-price sell-throughs of a terrific merchandise assortment in men's, women's, children's, and our new luxury handbags and accessories.

There's been a return to suits for men which is captured with some of our new product launches.

For example, our new Polo suit collection called Hand Tailored.

We've also had phenomenal success with our new Black Label for men.

And our luxury handbag collection, introduced this fall, already has a waiting list for the alligator Ricky bag.

In our European Ralph Lauren stores, we have improved our merchandise mix with a higher ratio of fashion items, and we've had tremendous customer response to our top end labels.

We posted a 7.6% comp in our factory outlet stores.

And this is really been a robust business for us, with both average unit retail increasing in the quarter, as well as increased transactions.

We believe our outlook performance really demonstrates the overall strength of the brand, our focused distribution, and of course, the operating efficiency.

We continued the expansion of our Rugby stores this quarter with the opening of our fourth store here in New York on University Place, and I would encourage you to go by and see it and most importantly to shop.

At Ralph Lauren Media, or Polo.com our sales increased 52%, driven by categories ranging from Lauren to our Big Pony products.

Making that channel really an increasingly important contribution, not only to brand-building efforts but it really allows us to service customers who do not live near one of our stores.

Turning to Club Monaco, comps were 2.4%.

The comps were notably higher in the U.S. and Canada where there was a product slow disruption earlier in the quarter because of a trucker's strike in Vancouver.

At Club Monaco, our urban neutral colors and items such as dress shirts and black turtlenecks performed well for men and women, while jewelry, belts, and handbags really drove the accessories business there.

In the second quarter, retail operating income more than doubled to 39 million this quarter, from 19 million last year.

And our retail operating margins improved 440 basis points to 10.2%.

This growth reflects significant increases in gross margin, primarily driven by our European and domestic Ralph Lauren stores and our global factory outlet stores.

While expenses increased to support our expanded store base, we were able to hold our SG&A margin rate constant as a result of improved expense management.

For the first half of the year, retail revenues were up 16%, to 745 million, and that compares to 641 million last year.

For the first half, our retail comps were 6.7% with a 5.5% increase at Ralph Lauren stores, 7.1% in our factory outlet stores, and 7.5% at Club Monaco.

For the first half, retail operating profit increased 72% to 75 million compared to 44 million last year.

Our retail operating margin improved 330 basis points to 10.1% in the first half of fiscal '06.

Now, let me spend a couple of minutes on our wholesale business.

We reported a 15% sales increase in wholesale over last year's second quarter.

The primary growth driver for our domestic menswear, childrenswear, and our European business.

Our menswear brands in the U.S. continued to have very strong performance with both increased revenues and improved sell-throughs.

And this is really clear evidence that our multi-year strategy for the Polo brands are working.

And as we've said previously, we'll continue with an aggressive reduction in offprice in the second half of '06 with our goal of ending the year with the right mix for the future.

Children's continues to drive strong revenues from fall sell-throughs, and delivered strong margins.

And we're especially pleased with how successful our childrenswear products are performing really in all distribution channels, and in all geographies.

Our Lauren line continues to out perform and gain market share in women's better ready to wear.

And if you'll recall, a large part of our strategy there was really to target the fashion doors that convey the Lauren by Ralph Lauren esthetic by creating modern and intimate shopping environments.

For example, at the end of August, Macy's Herald Square opened a beautiful 3,300 square foot shop dedicated to the Lauren line.

And in mid October, a 2,800 square foot shop in Bloomingdale's 59th Street opened.

The increase in both of these new areas has been dramatic.

Our career dressing has been very successful with Lauren.

And we've improved performance with better sell-throughs, and our special sizes for petites and women's as well.

Despite a tough macro environment, Europe continues to have strong revenue increases and improved gross margin.

We continue to see the benefits of our consolidation efforts in Europe, with improved delivery of merchandise, and our expanded shops and department and specialty store locations.

Our Milan luxury showroom is a very powerful statement and selling tool about our luxury brand and we recently complemented it by opening a showroom there for childrenswear as well.

All of these strong performances across all wholesale product categories resulted in a $143 million operating profit for the second quarter, or a 43% increase compared to last year.

Wholesale margins for the second quarter improved 490 basis points, to 24.8%, compared to 19.9% last year.

For the first half, wholesale sales increased 23% to 915 million, reflecting strength in our menswear, childrenswear, better womenswear, and European businesses.

Please note that the first half includes footwear, which we acquired beginning in the middle of July, and it includes childrenswear, in the first quarter.

Wholesale operating income in the first half increased 95% to 189 million, with a margin of 20.6%, and that compares to 97 million last year, with a 13.1% margin.

So you can see a tremendous margin rate expansion of 750 basis points.

Second quarter licensing royalties were slightly improved compared to last year, reflecting our continued success in Chaps for men, as well as improved performance in Asia, and that was partially offset by the absence of our footwear licensing royalty, now the best part of our wholesale group.

Licensing royalties in the first half were 120 million, and that's up slightly from last year, with operating income of 75 million, also up slightly from last year.

Now, let me spend just a couple of minutes on our outlook for the balance of fiscal '06.

First, we are reiterating our guidance for the full year, and we would expect earnings per share to be in the range of $2.85 to $2.92.

In the second half, consolidated revenue growth is projected to be mid single digits percent reflecting low single digit percent growth in wholesale sales, low double digit percent growth in retail sales, and licensing royalty down slightly compared to last year.

Operating margins in the second half of fiscal '06 are expected to increase in a range of 425 to 450 basis points on a GAAP basis.

And that really reflects expansion in our retail segment and a slight decrease in our licensing and wholesale segment.

And now let me turn the call over to Roger and then we'll open it up for your questions.

Thank you, Nancy and good morning.

We're obviously very pleased with the first half results.

It represents outstanding performance driven by great product and terrific execution, which has delivered short -- with strong profit margins.

What makes it even more exciting is that our strategies and results are working across all segments.

The significant gains are the culmination of several years of strategy that has focused on increasing full price sell through, improving presentation, and gaining market share.

We have made careful investments in our products and presentations.

And during this time, all of our partners have really elevated their game, whether it's specialty or department stores.

Both Ralph and I recognize that the best strategy in the world cannot be accomplished without having a talented team to work with.

We both feel we have the best team in the industry and we really want to thank our 14,000 employees since these strong results are really a reflection of their hard work.

Looking ahead, we're prepared for the holidays with the right merchandise mix, the right inventory levels that are properly positioned around a gift strategy that is supported in our retail stores, as well as with our wholesale partners.

For the balance of the year, we continue to expect growth in all of our core businesses, and since our business has been so strong, we plan to take a more aggressive plan of attack for the back half to accelerate our long-term initiatives.

As we've discussed, our past investments have driven our current success.

And we feel we are ready for the next level of growth.

We've spent a lot of time getting Europe organized and we're now ready to gain additional market share with that business.

We spent a lot of time and energy in moving our retail business from primarily branding exercise to strong specialty retail business that still showcases the brand in the most spectacular way.

We are continuing to invest in marketing and advertising and test new ways of interacting with our customers.

Our U.S.

Tennis Open partnership that began this year, not only gave us great brand exposure, it drove better than planned sales.

We will continue to make incremental investments in marketing and advertising, as both of those areas have shown strong return on investments by driving sales globally.

We will continue to invest in our people and their talents.

Building a global company means being able to attract and retaining the top talents that you can use to support businesses worldwide.

We are increasing our capital expenditures internationally to support our growing business.

We are investing in new luxury showrooms in Europe.

We also believe that our investments in corners and shop buildouts at such stores as Harrod's and Selfridge's our wide use of capital and we continue to see our wholesale brands gaining market share and adding to the improving gross margin.

Our investments in Europe continue to deliver strong results and we believe there's a great deal of opportunity there.

And although we've spent most of the past five years focused on Western Europe, we are beginning to expand in Eastern Europe next fall, when we open new stores in Moscow.

And we think this is only the beginning of our expansion.

We're also building a flagship in Tokyo that will open in March and we believe this store, which will feature our luxury labels, will offer a halo to grow our luxury position in Japan where we currently have a significant business.

We will also use the back half of the year to accelerate the reduction of offprice across all wholesale brands and we feel we will end the year with the right and ongoing ratio of full to off price.

We've never been more excited about our Company.

And as you know, we have a very complex business model.

It's unique because of the breadth and depth of brand and the ongoing balance of creativity and commerce.

It's unique because of the multiple categories, men's, women's, children's, fragrance, home and accessories.

The multiple distribution channels of our own luxury stores, specialty stores and department store, and the multiple geographies.

And we've also built an infrastructure that supports our changed business model that has been evolving from one of primary license to one of owned and operated businesses.

We've made two major investments in geographic expansion in Europe and Japan.

We've obviously begun to run new product lines like footwear, children's and better womenswear.

We've expanded from a U.S.-based operation to a business based in 65 countries representing $10 billion of annual retail sales now operated globally with 14,000 employees.

So I would say we have a great brand, a strong strategy, focused execution, and a business model that continues to work in less than robust economic environment.

As a management team, we believe we are making the right decisions both short and long term that will continue to support the growth of our luxury business.

And with that, we will field a few questions.

[OPERATOR INSTRUCTIONS].

Margaret Mager, Goldman Sachs.

Hi, good morning.

And fantastic results.

Congratulations on that.

Thank you.

It's really remarkable the dramatic improvement in profitability this Company is experiencing.

I do have a question.

A couple of things regarding the guidance.

Just wondering with the strong results that you've had in the first half, coming in ahead of what most of us would have expected, it's kind of curious why you're not willing to raise your guidance range.

Can you speak to what you're thinking on that front?

Margaret, you like to get right to it, huh?

We are absolutely pleased with the first half of the year and certainly exceeded our own expectations.

So really hats off to everybody.

I think what I tried to say, and maybe I wasn't as clear as I need to be, we are really excited about the back half of the year, and really next year.

Our spring bookings and on order wholesale are right on plan, so we really don't see storm clouds there.

I think the reason we did not take up our guidance is our decision with the results we've achieved so far this year, we think it's a great opportunity to step up our activity levels, that we might have spread out over the next couple of years, including increased capital spending which may not give us a bump in the back half, but is certainly the right thing to do.

Accelerate the clean-up of offprice, which may have dragged on into next year, but we will complete that in the next six months ahead of schedule, and we think that is the right long-term decision to make.

We have, in fact, added to expenses in terms of marketing and online direct and instore activity.

We've added to our HR capital, we think that building and investing in that team now to be ready to handle growth over the next couple of years is the right decision, but it does have a short-term impact.

And really, I think the last one is with Easter shifting from March into April, we're taking that as an opportunity to get some of the wholesale receipts more aligned with that, and pushed into April out of March.

So all of those give us some reason to stay cautious about the back half of the year, even though the early reads on holiday product are strong, deliveries are good, our retail performance with our key partners is very healthy, and as I said earlier, spring on order is really the plan.

So I wouldn't take it as any sign we're not confident in the back half.

We just have taken the management decision point of view that it's the right thing now while we are gaining market share and while we have so many pieces and parts of the Company working, to step on the gas a bit.

Just one follow-up and I have a bunch more, but I'll touch base you with after.

A follow-up, just the May/Federated merger, a lot of folks out there are commenting on that during this earnings season.

You really didn't say anything in your prepared remarks.

Can you talk about how you're thinking on that front and how that might be impacting your thought process in the second half and into 2006?

Sure.

We're actually very excited about the May/Federated merger.

Federated has been a terrific partner, have a propensity to focus on higher-priced goods and as I think as they learn and integrate and stretch out their merchandise philosophy to the new locations, it's only going to help us.

And we actually prepared by merchandise category, by door, a profile of every single May company door that we sat with each of the new Federated merchants and went through what we thought were the opportunities, which they supported, so I think in the long run, it's going to be a very exciting gain for us.

Of the doors that have been announced for closing, one, we were only in about half of those stores to begin with, some of that volume may in fact shift to the other door in the mall, the net of that is even if we lost all of that business in the doors we were in, it's about a 1 to 2% revenue hit, so it's not meaningful.

So I don't see the Federated/May impact, maybe some others are, I see as a long-term win for us.

Well, clearly you're critical to their strategy, if they want to upgrade the May department store doors, and given that you're the cornerstone brand for pricing in a lot of categories in the premium -- the premium position.

One of my biggest questions is do you want to support that?

Do you want more wholesale department store distribution?

Or would you prefer to have more into your own retail stores?

So how do you sync up your strategies and thoughts there?

Well, I think that's a good question.

Let me answer it and then we'll take some others.

We want to be in the right department store doors.

I think, Margaret, we've talked about this, we have spent a lot of time in the last couple of years paring back the doors we didn't want to be in, and getting the business rooted in just the key locations.

I think Nancy talked about the new shop we opened at Bloomingdale's, I think she talked about the new shop at Herald's Square which has performed beautifully.

I think we want to be in the right doors, and I think on our last conference call we even talked a little bit about a Washington strategy that had us opening three stores in the Washington market of our own, which would allow us to pull back on selected wholesale distribution in a very integrated way.

Two of those stores have opened in Tyson's Corner and Georgetown, Chevy Chase is opening pre-Christmas.

So I think you're right, our focus is clearly very selective distribution, whether it's our own stores, specialty stores, the shop we opened at Bergdorf's on the main floor is outstanding, or the right department store doors, but we're not looking to open more doors.

That is clear.

Okay.

I'll take the next question.

Liz Dunn, Prudential.

Hi, good morning.

Let me add my congratulations on the tremendous quarter.

Just to follow up a little bit on Margaret's question, so should we understand that the little bit -- the bit more conservative guidance for the back half is really you're taking the opportunity to just spend in some places because your business is so strong and you should sort of spend it while you got it?

That's my first question.

Well, that is one way of phrasing it, yes, Liz.

But I would say our business is flying, the products are well received, the decisions that we made over the last couple of years are really paying off for us, and this is our point of view that if business was tough and difficult, you'd be talking about pulling back, and where you could alter your plans to cut back.

I think we have the opposite.

I think we believe we've got a lot going for us, I think now's the time to make even more aggressive statements about how we want to run our business that will pay off for us over the next two or three years and with the first six months results in the bank, we think that's the wise way to go.

On the accessories front, can you talk a little bit about how you'll be positioning the footwear?

Because when Reebok had it they spent a lot of time on sort of athletic-inspired styles.

How will you be altering that?

And also as a related question, I'm noticing a bit more style in even in your department store handbag business, which is obviously a license.

Is there something going on there?

Is there a bit more collaboration that we should look for going forward with that license partner?

Or what's an update there?

Thanks.

That's a good question, Liz.

I think in footwear, we will clearly put a lot of time and energy behind the collection business, which will be primarily distributed to our own stores and high end specialty stores and it will mirror the distribution we have for our collection and runway product.

Beyond that, I think a major initiative for us will be the Lauren Footwear price points which we will be raising to better align with the Lauren apparel, which has been so well received.

We think that has broad-based appeal and there, the distribution strategy, again, will match where the apparel is.

I think below that, we will not be spending as much time and energy in the athletic business at this point.

Not that I don't think there's an opportunity there for sport and athletic, but I think we want to get established first the high end business, and the products that align with our existing ready to wear.

We also have a very interesting and sizable children's footwear business and we're going to continue to focus on that, because of the huge success we've had with our Ralph Lauren children's wear.

The other thing it does allow us to do is better coordinate on the international businesses, Europe and Asia, and I think you'll see that happening.

Our first efforts for new product will really be at the January shoe shows so I think you'll see at that point the product beginning to follow the direction I just articulated.

I think in handbags and other accessory category, I think our people are working closely with the key licensees in the Lauren price range for not only handbags, accessories, neck wear and other product categories, again, to better align that with the success we're having in our ready to wear.

So that the customer really sees it as one expression of their lifestyle needs.

And I think some of that is taking hold.

Okay.

Thank you very much.

Congratulations again.

Thanks are, Liz.

Lee Backus, Buckingham Research.

Yes, first let me add my congratulations.

And Roger, you could talk a little bit about the wholesale business in the second half and you've got -- your guidance is for the low single digit, plus you've got the footwear and the Chaps which is added to the second half so maybe you could just talk a little bit about full price sales, what you expect there, Xing out those, maybe discuss maybe what the offprice -- what kind of impact that has.

Well, first, we should congratulate you, Lee, you're moving on.

Is this your swan song for the conference call?

Well, I may be on the next conference call, bull it will be at a different role.

Well, okay.

Congratulations.

Thank you.

Our wholesale business is extremely strong right now.

I think you know you track the channels pretty carefully, we are getting tremendous sell-through with our products for fall and holiday really across the board.

Our low single digit guidance for the back half of the year is really wrapped up in two pieces, one is this significant decrease in offprice, so that our full price business is going to be the lion's share of it.

And therefore, we do expect margin expansion because if that.

The second piece of it is the shift of shipments out of March into April, with the later Easter, that particularly impacts kids and other key businesses.

I think those two factors take sales volume out of the back half of the year and probably the primary result is a slight expectation that reported dollars against constant dollars in Europe, because at this time last year the Euro was higher, is worth something, but it's not significant.

Okay.

Could you also discuss the Asian business in greater depth?

I know you're certainly opening a flagship store in Japan.

That's going to propel that business.

But other initiatives in that territory?

Well, it's interesting, I was in Japan last week looking at the store, understanding the consumer and the trends.

Our business through the Pacific rim is very strong in Australia, Hong Kong, Singapore, Taiwan, and China, and kind of flat in Japan.

Our business is very large in Japan but has not experienced the growth that the other parts of the Pacific rim have.

So it's curious to me because with such strong business domestically, in Europe and almost every country in Asia, I believe that the Japanese assortment and execution of our luxury strategy has been a little less than we'd like.

They have continued to stay much more of a casual sportswear position, and I think we've got to trade that business up.

I think the flagship will certainly start that process, but we have some real opportunities in the other distribution points to move that business along.

So the Pacific rim is actually a very strong part of our business right now, and I'm looking in the next couple of years to get the Japan business ramped up as well.

Thank you.

Jeff Edelman, UBS Securities.

Thank you.

Good morning.

Roger, some of the retail shops that we've seen within the department stores have been quite impressive.

Could you give us a sense how much your square footage has grown over the past 12 months in the host department stores?

I would say, Jeff, our square footage is probably down, because the doors you're seeing that look impressive are the doors we've chosen to focus on and invest in, offset by doors we've closed that we don't want to be in.

So if I took the total square footage in wholesale, I would say we're down in square footage and dramatically up in productivity, driving the results you've seen that are so pleasing.

Okay.

Good.

And then secondly, could someone touch on the growth in inventories relative to the expected growth in sales for the second -- for the second half?

Sure.

If you take the inventory at the end of the third quarter, which was up 12%, and the -- take out the footwear piece, which was incremental but certainly didn't add a lot to the sales line, we were probably up in inventory close to high single digits.

We think that that inventory for third and fourth quarter sales is appropriate.

Given the guidance that Nancy has articulated, I would say that part of that is a earlier receipt of holiday and resort into the end of second quarter, prepping us for the October, November and December selling period, versus last year, that inventory probably had a higher content of fall.

This year it's got a higher content of new receipts, so I think quantity and quality on a worldwide basis are in pretty good shape, and should deliver the sales we expect.

Great.

Thanks.

And nice quarter again.

Thanks, Jeff.

Elizabeth Montgomery, SG Cowen.

Hi, congratulations on a great quarter as well.

Thank you.

My question is about the retail business and your customer base.

I believe you guys have been doing a survey of your instore experience.

And I wondered what you'd kind of drawn from that, and also, if you had a sense for what was driving your business in your retail stores, whether you're getting new consumers or whether it's existing consumers purchasing more product?

Well, it's interesting, we have a very loyal customer following in our stores that spend a disproportionate amount with us, and we certainly track that carefully and look to get more from existing customers, and as we've expanded, new merchandise categories, we've seen a willingness to cross-shop different products across all channels.

I think the interesting thing is, is that Polo.com and some of our other marketing outreach programs have begun to bring new customers to us, or customers that shopped us less frequently.

Our best customers shop us once a month.

And so they are regularly in our stores, looking for what's new and different and challenging us to continue to excite them with new product and new presentation.

I think what we're working on hard now is really getting the once or twice a year customer to shop us more frequently, and/or the customer that only shops every other year.

And I think Polo.com has been a wonderful tool to introduce to the customer the world of Ralph Lauren, some of them obviously are shopping, as you saw with the 52% sales increase, but some of them are coming into the stores.

And it's been a wonderful communication tool that we're finding very effective as we gather e-mail addresses from the customers to communicate on all sorts of of issues.

So higher average sales and trying to drive a more frequent experience from those that are infrequent are probably the two primary things on our list.

Great.

Thanks a lot.

Thank you.

Omar Saad, Credit Suisse First Boston.

Thanks, good morning.

Good morning.

A couple of -- I just wanted to ask a couple of quick questions on the retail side and one sourcing question.

Looking at your comparisons and the comps you reported, I mean, did you feel like the comp store sales results were a little bit disappointing at -- given the fact that you were you going up against a little bit of an easier comparison?

Were you surprised to see a deceleration?

Well, actually if I decomposed the quarter's comp, and I think you're talking probably at the Ralph Lauren stores, it was an interesting quarter in that July and August were low, and then we had a double digit comp in September.

July and August, which tend to be more clearance months, we came out of spring/summer very clean and with such strong selling, didn't really have the kind of clearance that we had the prior year.

So our full price selling has been ahead all season on full and I think September, which is much more of a full priced month, even with Katrina and the weather, and all the other things that mother nature threw at us, we ended up performing very well.

So I think the absolute number may have what you call some deceleration, but I think the different pieces and parts would suggest that's not what happened.

Now -- good, that is really helpful, actually.

Now if you think about the profitability improvements you're seeing in that business, I mean, it's superb, and if you think about the -- where are you seeing that?

What's the bulk of that?

Is it the Ralph Lauren stores?

Are you getting that much incremental on the factory side of it?

As you look forward, the comps actually really decelerate the comparisons for the Ralph Lauren stores in the third quarter here which is obviously a key season for retail.

Well, I think that the profitability improvement, and -- we should have a moment of silence, because at least for the first six months we're over the 10%, which we've all tried so hard to get to.

The fact is, that it's the culmination of five years of hard work, on margin, on expense, on productivity, that just keeps building on itself.

And we're seeing it across really all families of business.

So I'm pleased that our retail strategies are producing and recognize that that is even in the face of start-up costs for Rugby and start-up costs for the Japanese flagship, which obviously are not producing profits, so really, the existing businesses are doing amazingly well.

I think when those businesses get online and begin to kick in, we'll be able to take the profitability even higher.

So we're not at all worried about the start-up costs.

It's just a fact of life.

I think the core businesses are performing very nicely and we're anticipating a good Christmas.

Right.

Right.

Now, in terms of the longer-term opportunity, I mean are you kind of still where you were in terms of the number of stores?

You kind of envision longer term in the specialty side of it, and what about on the margin side and where do you see those -- how high --

I think at this point sitting here in early November, we're really focusing on Christmas, and getting spring put to bed.

I think as we talk about future, we'll save that for the February call when we get to talk about the next fiscal year with you in some detail.

Okay.

Great.

Thanks a lot.

Thanks, Omar.

Gabrielle Kivitz, Deutsche Bank.

Good morning.

And congratulations on a fantastic quarter.

Thank you, Gabrielle.

So my first question actually was also on the retail business and sort of the outlook on operating margins and I understand you've made a lot of progress and done a great job of getting to the high end so far of your near-term stated goal, but maybe if you're able to comment more specifically on Rugby, longer-term, what sort of an operating margin contributor do you think that could be once you get beyond the kind of initial investment costs?

Do you have any thoughts on that?

And then I have another question as well.

Okay.

Well, we're obviously very excited about the early start with Rugby.

I think Nancy did encourage anybody who's in the New York area to go look at the store on University Place and she was clear have you to buy something, otherwise it's not quite the same.

The customer has voted yes, we have seen enormous response to both men's and women's and that store is just packed on a daily basis, so our plans to grow that business, accelerate the growth of that next year and beyond are really quite real.

The operating margins or profit margins for that business, there is no reason why it should not fair comparably to other vertical specialty chains.

This is a stand-alone vertical business, there is obviously a certain amount of investment in design and infrastructure that four stores is not going to absorb, but when we get the critical mass and beyond, I think those profitability goals should be comparable to other vertical specialty chains an that's what we're really modeling it on.

Okay.

Great.

And then my second question, you obviously have no shortage of growth initiatives and opportunities but we're also hearing about and seeing that department stores are uptrending some of the smaller and more contemporary brands and we're hearing that they're also in some cases using more of their open to buy dollars for those more contemporary brands, and you're obviously very well-positioned with your existing brands, but I was just curious to know if you had any thoughts on opportunities in the more contemporary segment in the wholesale channel?

Is this an area that have you any desire to go after in the wholesale segment?

Is this the kind of thing that maybe you could leverage the Club Monaco retail business into the wholesale area?

Just was curious on your thoughts there.

Well, I think you're right.

There is some strength in the department store channel in contemporary right now, which is very exciting for them.

I am very comfortable with our wholesale strategy and where we are and what we're trying to do, and the reaction our products are getting.

I don't think we're going to be looking to accelerate a contemporary wholesale strategy for us.

As you started we've already got a lot of growth initiatives on our plate right now that we're prioritizing and trying to put resources against, so at least for now, our plate's pretty full.

Okay.

Great.

Congratulations.

Thanks.

Thank you.

Jennifer Black, Jennifer Black & Associates.

Good morning.

And let me also add my congratulations.

Thank you, Jennifer.

How are you?

I'm great.

I just had a couple of questions.

I know that your accessory business is not huge right now, and I wondered where you would envision that in, say, three years?

Well, I think we would envision it growing.

I think we would envision it elevating.

I think we would envision it playing a much more prominent role in our stores, and key upscale distribution points in the U.S., Europe, and Asia.

I'm not sure we're in a race to get it huge quickly.

I think we want to get it right.

I think we want to get the collection and high end business properly positioned and I think we want to get the apparel labels we have properly accessorized.

I think over time, having said that, Jennifer, we're going to have a huge business, because there isn't a business we haven't gone into that hasn't developed in that manner.

But I don't know that we would put the burden of in three years, it's got to be X volume, I think in three years, it's got to be right, well made, properly distributed, and then the customer will drive us from there.

Could it be like 10 or 15%, do you think?

Sure.

And then I was just in Paris, and your store there looks great, by the way, and I wondered if you could talk about Europe and what areas of Europe are doing well and what areas aren't?

Well, it's an interesting story when you talk about Europe, because this's such diverse economic conditions by country and different distribution channels.

I would say, one, our specialty stores -- our own stores are doing very well.

We are doing well in places where the general economy's not great, like Germany, our business in England, and France, and Italy, are all very strong, and we continue to look for new locations in Europe to expand our own specialty retail.

Having said that, in a wholesale manner, our business is particularly strong right now in England, Spain, Italy, and Germany.

So we're really getting across all product categories.

With the only category not performing at that high rate really being the jeans business.

Otherwise, men's, women's, kids', all of which are doing quite well.

Okay.

And one other question, what are your thoughts on the dollar, and how are you looking at the dollar?

And I'm assuming that you hedge, and -- just do have you any thoughts?

Well, it's a good question.

Obviously, as we grow our business, the impact of the currency exchange, both the dollar, the yen, and whatever happens in China has an interesting effect.

Going into third and fourth quarter last year, certainly the Euro was higher.

The dollar was weaker than it is today.

And I think our guidance and forecast takes into account some of that anticipated constant and reporting dollar issue, because I think we will probably work through the third and fourth quarter with the dollar being a little stronger than it was this time last year.

We do hedge in terms of foreign purchasing to lock in for our manufacturing and goods, and I think that we've covered ourselves to give us certainty, which is really our objective, not to speculate in currencies but to get certainty.

I think the dollar is going to remain stronger than it's been over the last 18 months, and probably be in that 115 to 120 range.

Okay.

Great.

Thank you very much.

And good luck.

Okay.

Thanks.

Sarah Senatori [ph], Banc of America Securities.

Hi, thanks.

Actually I'm calling in for Robby Ohmes.

He's traveling.

But I had a couple of questions, kind of follow-up and I'll just sort of rattle them off and you can answer them in whatever order.

The first is just a follow-up, you mentioned that the denim -- the jeans business is the only piece not doing as well.

I just wanted to clarify it that was Ralph Lauren denim or the licensed Polo jeans business?

Second question --

Let me -- if you're going to rattle them off, let me rattle off the answer or I'll lose track.

As you know, the Polo jeans business which is licensed, Europe actually sells Polo jeans and Asia sells Polo jeans, but that product is the Polo jeans made here in the U.S.

So we are selling and distributing that product and it's really that product that has been a little more difficult for us, both in Europe and Asia.

Okay.

Thanks.

That's helpful.

So the second question is, just about -- I just wanted to clarify one thing on your release, with respect to -- I think you guided operating margins to increase 400 to 450, and that versus last quarter, when the guidance for the second half was 450 a to 500.

I just wanted to make sure that reflects the -- kind of the expenses were you talking about earlier with your more conservative --

Yes.

I think it reflects the sales from the first half which were higher, and the consistency about the sales, but then some of the investment spending we talked about which moved the margin improvement down slightly.

Okay.

Great.

And then the last question is more of a macro question.

Just in noting your outlooks actually comps high single digits, and kind of outcomps the other, retail formats, we'd heard from some other vendors that outlets struggled because of the economy and that kind of pressure on the consumer.

Are you seeing something different?

Is it because your brand is more of a luxury positioning?

Or is it just that -- your take on the macro environment may be a little more positive?

Well, I think our luxury brand and positioning and strength and results probably parallel other outlet luxury brands.

I think Coach did report very strong outlet sales as well.

I think the brands that did not fair as well in the outlets, probably it's more product-driven than it is macro.

Okay.

Great.

Thank you very much.

Christine Chen, Pacific Growth Equities.

Congratulations on another amazing quarter.

Thank you.

Just wondering if I could get an update on your tax rate?

Is it still expected to be what you had said in your previous guidance for the year in the second half?

Yes, it is.

And then with respect to the licensing guidance, and maybe it's just quibbling a little bit but previously you had said flat and now you're saying down slightly.

Is that just because footwear is moving into wholesale?

Or is there anything else going on?

Yes, I think that two things are going on there.

One, is obviously we lost the footwear royalty from licensing and now it's a wholesale business.

I think we're seeing strength in some product categories, like Chaps and even our fragrances which we launched this fall have been very well received and some of our other businesses, but we are seeing some softer business in the Japanese license as well as Polo jeans.

So there's mostly it's a movement out of the royalty category into own for footwear, and then there's some other movements forecasted for the balance of the year.

Okay.

Thank you.

Thanks.

Is this the last question?

Brad Stephens, Morgan Keegan.

Hi, good morning.

When we look at the operating profit at retail, can you break out -- is that a function of a stronger gross margins, better expense control, et cetera?

And then my second question is on the increased CapEx level.

What exactly is that going to, and should that be a normalized level we should expect going forward?

Okay.

Brad, the bulk of the improvement in retail is gross margin.

There is some expense flex but not a lot because of the incremental investments for Rugby and new stores.

So it's mostly a margin improvement story which is driven as Tracey and Nancy said by much better full-priced sell-throughs, and we hope that continues.

In terms of the CapEx, we are accelerating spending on additional luxury showrooms in Europe.

We are spending extra CapEx in terms of shops and in stores.

Jeff talked about it, and Nancy talked about it, Bloomingdale's, Bergdorf Goodman, Harrod's, Selfridge's.

They seem to be working very well for us and we'd like to continue that, as well as some infrastructure spending and some money to support the Chaps launch.

So I think all of those are good news stories that we probably would expect to continue, as long as our business continues to perform at the rate it is.

All right.

Thank you very much.

Okay.

Brad, thank you.

I think one more question, operator.

David Glick [ph], Buckingham Research.

Good morning, Roger.

Yet another congratulations to you and your team.

Very impressive.

Thanks.

Over the last year while your department store business, particularly men's, was gaining momentum at retail, some department store retailers were still struggling with higher Polo inventories versus their internal plans.

Now that the business has really accelerated in department stores really across the board from what we're hearing, are retailers feeling less pressure on their inventories in Polo, and therefore putting less pressure on your Company to adjust orders, and are they at the point where maybe they're trying to accelerate orders during the holiday season or early spring which could impact your second half revenue?

Well, I think our inventories are in line in stores and are driving terrific sales increases so the retailer is happy, and my understanding is they're experiencing higher margins because of the full-price sell-throughs and some of the other reasons we've talked about.

I think the area of upside there, if there is, would be in what I'm -- what we've always called basic stock replenishment.

We do hold inventories that allow us to replenish key items, whether it's here or in Europe, and we're seeing a nice pull on that.

So we expect that to continue.

I think in terms of accelerating forward deliveries, that would be more difficult because we've timed our flow of product into our receiving areas at a very precise level.

So the good news would be they're selling it through, and they're pulling it on BSR, basic stock replenishment, and they're anxious for the next delivery, I just don't think there's a lot of pulling forward of product in a major way that is meaningful over the next six months.

Great.

Last question's just a clarification.

The 1 to 2% worst teams revenue loss from Fed/May is, that 1 to 2% of wholesale revenues or total revenue?

Total revenue.

It's total revenue?

Yes.

And have you --

I'm not sure we're going to lose it, but that is in fact, if it all went away in half the doors that -- the doors we were in they're closing, my sense is we're not going to lose it all, but that's the maximum it could be.

All right.

And have you considered your -- the worst case exposure at Lord and Taylor?

Well, what is the worst case in Lord and Taylor?

It's not clear to me.

We have meaningful businesses with Lord and Taylor.

We've actually been doing very well with Lord and Taylor in men's and in women's, and in kids', it's one of our very strong performers for Lauren and all the products.

I think we're up in the air, as everybody else is, until we hear more about the future of Lord and Taylor.

Right.

Okay.

Thank you very much.

Okay.

So with that, I thank all of you for listening.

And all of your questions.

You can follow up with Denise and Nancy during the day.

We're excited about the holiday season.

And obviously the first six months has been a big down payment on our full year, and I just look forward to talking again in February and we'll see how it all worked out.

So thanks again.

And that will conclude today's conference.

We thank everyone for your participation.