雷夫·羅倫馬球 (RL) 2006 Q3 法說會逐字稿

Good morning and thank you for calling the Polo Ralph Lauren third quarter fiscal 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. [OPERATOR INSTRUCTIONS]

Now for opening remarks and introductions, I'd like to turn the call over to Ms. Nancy Murray.

Please go ahead, ma'am.

Good morning, and thank you for joining our third quarter fiscal '06 conference call.

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

Tracey will review our third quarter and first nine months consolidated financial performance, and then I'll review our segment performance and our outlook for the remainer of '06 and our initial thoughts on fiscal '07.

Then Roger will be on the call to give you an update on our long-term strategic initiatives, and of course, to answer your 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 '06 performance to restated fiscal '05 numbers.

And to remind you, fiscal '05 was restated for items such as the consolidation of Ralph Lauren Media, which is our Internet e-commerce site, as well as for an adjustment to our accounting for leases.

We are pleased to report that we had another very strong third quarter which followed a very strong first half and represents a continuation of the solid execution in our businesses.

Total net revenues in the third quarter were $995 million, a 10% increase to last year's $902 million.

Our net revenue growth was driven by a 15% increase in sales in our retail stores based on both strong comps, as well as the performance in our new stores.

And a 6% increase in wholesale sales, driven primarily by womenswear, childrenswear, our European and the inclusion of footwear in this year's wholesale number.

Our total net revenues were $2.775 billion, a 16% increase to last year's $2.043 billion.

This net revenue growth was driven by a 16% increase in sales in our retail stores and a 17% increase in wholesale sales, driven primarily from menswear, womenswear, our European business, and the additional inclusion of both footwear as of the second quarter of fiscal 2006, and childrenswear as of the first quarter of 2006, due to the timing of those acquisitions.

Our gross margin performance in the third quarter continued to be strong, as gross profit increased 19% to $531 million from $446 million last year.

This increase was due to our combined revenue growth and gross margin rate expansion of 390 basis points to 53.4% of net revenues versus 49.5% last year.

The increase in gross margin rate is a result of higher full-price sell-throughs and the continued success of our sourcing initiatives, resulting in higher initial markups.

Our gross profit for the first nine months of the year increased 24% to $1.497 billion from $1.208 billion last year, with a 370 basis point expansion in gross margin rate in the first nine months to 54% of net revenues, versus 50.3% last year.

Again, increases in full-price sell-throughs in our wholesale and retail channels combined with continued sourcing efficiencies contributed to this performance.

Regarding our selling expenses, SG&A dollars increased 18% in the third quarter, largely driven by spending to support our growing Retail business, ongoing investments in talent, increased branding support in Europe, and costs associated with the closing of all five Club Monaco stores, and the disposition of our eight Caban home stores.

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

In the first nine months, SG&A dollars increased 16%.

As a percent of revenues, SG&A was flat to last year.

All told, we generated a 24% increase in operating income during the third quarter to $144 million, and the resulting operating margin of 14.4% represents a 150 basis point operating margin expansion over last year's operating margin of 12.9%.

Our nine month results were $401 million in operating income, up 55% compared to last year's $258 million.

This performance represented a 370 basis point improvement in operating margin expansion to 14.4%, compared to 10.7% last year.

Our operating margin or operating performance yielded a net income in the third quarter of $91 million or $0.84 per diluted share, compared to $0.72 last year.

For the nine-month period, net income was $246 million or $2.30 per diluted share, compared to $167 million or $1.61 per diluted share last year.

Please note that our shares outstanding for the nine months were 106.9 million shares or 3.3 million shares more than last year.

And at 37.2%, our tax rate is 200 basis points higher than last year in the comparable period, due to income growth in higher tax regions.

Looking at our balance sheet, we ended the quarter with $644 million in cash and $261 million of Euro bond debt, which has been reclassified this quarter to short-term due to its maturity in November of 2006.

We are currently evaluating our future debt requirements and should be able to update you on our plans later this year.

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

At the end of the quarter, our inventory was $443 million, essentially flat to last year, and that supported an 11% increase in wholesale and retail sales.

And in the third quarter, our DSOs improved, due to our ongoing focus on accelerating the collection of receivables.

Inventory turn and improved DSOs will continue to be a priority focus area for us.

We continue to utilize our strong operating cash flow to reinvest back into the Business in areas of strategic importance to our long-term growth strategy.

On our last call, I mentioned our technology investments, in particular, a new worldwide global supply and demand system for our Wholesale business.

Our Lauren and childrenswear lines have been fully converted to the new system beginning this January.

We will continue to roll it out to other wholesale product categories throughout fiscal 2007 and fiscal 2008.

And we are extremely pleased with the performance of our recent acquisitions.

Our childrenswear business, which we acquired 18 months ago, continues to deliver excellent results.

And although our footwear acquisition has been largely diluted this year due to transition costs and rationalizing distribution channels, we are excited about the upcoming fall '06 collection, which opened at market this week to positive customer response.

This is the first season where we have been fully in control of both the product quality and the distribution of footwear.

And in keeping with our long-term strategy of gaining greater control over our brand by bringing certain licenses in-house, we closed on the acquisition of the Polo Jeans business last Friday for a purchase price of approximately $255 million from cash on hand.

Regarding Cap Ex, our year-to-date capital expenditures were $116 million, compared to $127 million in the first nine months of last year.

For the full year, we expect our capital spending to be approximately $210 million, in line with the projections we talked about last quarter.

This investment level is designed to support our key growth initiatives, such as investing in the presentation of our products at wholesale via shop and shop upgrades, increasing the number of our own specialty retail stores, and enhancing our corporate infrastructure to support growth.

So we continue to make investments in our future, while at the same time, delivering near-term solid performance.

And now, I'd like to turn it over to Nancy.

Thank you, Tracey.

Let me review some of the highlights of our segment results and our financial outlook for the balance of this year and, as I said earlier, our initial thoughts on '07.

As Tracey said, this was a great quarter and a terrific nine months.

Let me start with Retail.

Our Retail revenues in the third quarter increased 15% with comps up 7.4%.

We posted a 10.2% comp in our Ralph Lauren stores, and that really represents strong performances in both our U.S. and European Ralph Lauren stores.

And that was a result of full-price sell-throughs of unique merchandise assortments in men's, women's, children's, accessories, and our home collection.

Our women's collection was particularly strong this season, ranging from apparel to accessories with terrific demand for our holiday and cruise assortments.

Our Blue Label line, which as you know, is exclusive to Ralph Lauren stores domestically, had a great quarter with double-digit percent increases against last year.

The strength was really in the fashion items and particularly in the gift sweaters.

The trend toward dressing up in menswear is continuing, and we experienced very good performance in suits, dress trousers, and outerwear.

Our Black Label for men and Made to Measure drove increases across all categories.

And our RLX activewear for both men and women has been very strong, particularly in our cold weather stores, where we saw increases of 50% over last year.

We intensified our focus on our gift assortment, including leather goods, cold weather for both men and women, and several home categories such as vintage, table top, and stationery items, which were sales leaders in our stores this holiday season.

We had strong comps in our European stores, driven by luxury merchandise and focused store planning.

Regionally, we had good performance in France and Germany.

We posted a 6.3% comp in our factory stores with good performance across all categories in apparel, as well as strong operational and store line execution.

Also in the third quarter, we continued the expansion of our Rugby stores with the opening of our fifth Rugby store in New Canaan, Connecticut.

Women's knits, dresses, skirts, and sweaters outperformed, and every category in men's beat plans, ranging from accessories to knit to fleece.

Ralph Lauren Media, or polo.com, was also a strong performer with a 27% sales increase.

And I just wanted to remind you that we report Ralph Lauren Media on a one quarter lag in our consolidation, so those results are really from the September quarter.

But to give you a flavor for how they did during the holiday season, it was more impressive, with a 50% increase over last year.

At Club Monaco stores, comps were 7.1%.

And this represents growth in our menswear, particularly in bottoms and sweaters, as well as all categories for women.

And our accessories business was significantly ahead of last year.

At Club Monaco, we've been focusing on the performance of our core business and are seeing the results of our positioning.

The Club Monaco concept stores continue to deliver solid comps and improved inventory turns.

We have developed an international store roll-out through several licensing partners.

And we plan to open 23 stores and shop-in-shops in Hong Kong, Taiwan, South Korea, and Dubai in fiscal 2007.

We feel it's the appropriate time to take additional steps in streamlining the Club Monaco business.

With our better managed inventory, we longer need the outlet stores as a means of disposing of excess merchandise.

At its peak, we had 14 Club Monaco outlets and have closed all but five in the past few years.

We will close the remaining five prior to the end of this calendar year.

In addition, we plan to dispose of the eight Caban home stores in Canada that generate approximately $20 million in sales.

The home stores do not fit with the strategic apparel and accessories plan for the Club Monaco brand.

And as we stated in our press release, we have incurred incremental costs in our third quarter and expect additional costs in our fourth quarter to exit these businesses.

Our Retail operating income in the third quarter increased 30% to $64 million this quarter, from $49 million last year.

Our retail operating margins improved 150 basis points to 13.3%.

This growth reflects significant increases in gross margin, which was driven primarily by higher initial markup, more full-price selling, and lower markdowns.

For the first nine months, Retail revenues were up 16% to $1.224 billion compared to $1.057 billion last year.

Our retail comps were 7% overall with a 7.4% increase at Club Monaco -- I'm sorry, at Ralph Lauren stores, a 7.3% at Club Monaco, and a 6.8% in our factory stores.

Retail operating profit in the first nine months increased 50% to $139 million compared to $93 million last year.

And our retail operating margin improved 250 basis points to 11.3% in the first nine months.

Now let me spend a few moments on our Wholesale division.

We reported a 6% sales increase in Wholesale over last year's third quarter.

The primary growth drivers were our domestic childrenswear, womenswear led by Lauren, and our European business.

Our new footwear business is also included in our Wholesale segment.

We had strong performance in menswear during the holiday season, as we continue to focus on presentation and more fashion items.

We've enhanced the store support, we now have focused distribution, and we've reduced the off price; all of which have helped sell-through and improved margins.

In children's, we're very pleased with our results and are making important investments in new luxury showrooms, wholesale systems, and higher price point product; all of which have contributed to improved sell-throughs in the U.S. and in Europe.

Our European business continues to exceed last year with strong product assortment with the marketplace responding very well to our line.

For this past fall, we upgraded men's stores in Harrods and Selfridge's in London, and will open new women's locations there this spring.

We continue to aggressively invest in Europe to support in-store shops, the luxury showrooms I mentioned, and additional marketing and advertising.

We consider the Lauren line to be a huge success as it continues to outperform and gain market share.

We had strong fall sell-throughs, and we've had a good early reaction to spring.

And our petite and women's size assortments were particularly strong in the fall.

Our other new initiative, Chaps, we're very excited about, and we've already made our first shipment of Chaps for women, Chaps for boys, and Chaps footwear to Kohls for the launch in their stores yesterday.

We are working with Kohls in an exclusive one-year arrangement to deliver merchandise to all of their locations, which now number 700 stores in 40 states.

This is an extraordinary accomplishment performed by experienced and talented professionals in our Lauren, childrenswear, and footwear organizations, who are now responsible for the Chaps line as well.

All of these strong performances across our Wholesale product categories resulted in an $82 million operating profit for the third quarter or a 33% increase, compared to $62 million last year in our wholesale segment.

The margins in this group improved 370 basis points to 18.1% in the third quarter, compared to 14.4% last year.

We had very strong gross margin improvement in Wholesale, driven by sourcing improvements, better sell-throughs, and strong inventory management.

For the first nine months, Wholesale sales increased 17% to $1.369 billion, reflecting strengths in all of our Wholesale businesses.

Wholesale operating income in the first nine months increased 71% to $272 million with a margin of 19.8%, and that's compared to $159 million last year at 13.6%.

And that's a margin rate expansion of 620 basis points.

Our third quarter licensing royalties increased 8% to $62 million, and that's primarily from strength in our domestic Chaps for men's line.

Licensing royalties in the first nine months were $182 million, and that's up 3% from last year.

Operating income was $114 million, up from $112 million in the same period last year.

And if you'll recall, this segment no longer has royalties for childrenswear and footwear as a result of these acquisitions.

And as of last Friday when we completed our Polo Jean's transaction, royalties from that business will not be in the Licensing segment going forward, as it is now recorded as a Wholesale business.

Let me spend a couple of minutes on our fiscal '06 outlook.

After adjusting for the closing of the Club Monaco outlet stores, the disposition of the Caban home stores, and the effect of Polo Jeans acquisition, earnings per share are expected to be in the range of $2.80 to $2.85, compared to the $2.85 to $2.92 range that we indicated last quarter.

Let me bridge those numbers for you for a moment.

The Club Monaco initiative is expected to be dilutive by approximately $0.10 for the year, and Polo Jeans is expected to be dilutive by approximately $0.05 in the fourth quarter.

Excluding these items, we would have expected earnings to be to be approximately $2.95 for fiscal '06.

These initiatives are consistent with our efforts to reduce off-price sales, rationalize the distribution channels, and focus on our core apparel and accessories business.

And we firmly believe they're the right long-term decisions for our Business.

Now let me give you some brief comments on our initial outlook for fiscal '07.

And that begins this year on April 2nd.

We expect fiscal '07 to be another strong year, as we continue to consistently execute our growth strategy.

In the full year fiscal '07, consolidated revenue growth is projected to be low double-digit percents.

Including the expensing of stock options or stock compensation, we would expect operating margins for fiscal '07 to be flat.

As a result, we expect earnings per share for '07 to be in the range of $3.00 to $3.10, including the expensing of stock compensation of approximately $0.15 per share.

If you exclude that stock compensation expense, earnings per share would have been in the range of $3.15 to $3.25.

Our guidance today includes the impact of the Polo Jeans acquisition, which I said we completed on Friday, and consistent with our strategy, we will focus on quality sales while cutting back on off-price sales.

In '07, we would expect Polo Jeans sales of approximately $200 million.

And we expect this to be neutral to earnings, due to transition service agreement costs and our investments in the future positioning of a global denim business.

In addition, we would expect our capital expenditures to be flat to this year, as Tracy said, would be approximately $210 million.

And now, I'll turn the call over to Roger.

Okay.

Good morning.

As Tracy and Nancy said, the performance of the first nine months was truly outstanding, delivering a 15% sales increase with both Wholesale and Retail contributing equally.

A 55% increase in operating profits with a 370 basis point improvement, driven by strong gross margins and high quality sales.

Our strategy to elevate the product and to refine the distribution channels is really paying off.

In fact, in the third quarter alone, $94 million in incremental sales produced $85 million in incremental gross profits, a 90% flow-through.

We've had many successes this year.

The range of accomplishments is dramatic, from developing new products, to elevating the merchandising and presentation of our luxury brand, to opening new retail stores, to our ongoing expansion internationally, to the infrastructure and sourcing upgrades.

All are in-line and consistent with our long-term strategy.

We have accomplished this with a very high return on investments.

Just to recap some of the successes over the past year; we continue to expand Ralph Lauren stores in key locations such as Chicago, Washington, Saint Bart's and Cannes, France.

We continue to push out new Rugby locations in New York and New Canaan.

We drove strong comps in our retail stores at 7% on top of last year's 7.4% comps for the first nine months, all with strong full price sell-throughs and significant margin expansion.

We continue to grow Polo.com.

Polo.com is usually successful.

It's successfully both commercial and as a brand builder.

Our stores are increasingly more productive.

We have dramatically improved sales per square foot at retail.

We also continue to upgrade the shopping experience in all of our direct-to-consumer formats.

In the Wholesale areas, Lauren continues to outperform its peers, and we have upgraded shop-in-shops in key locations such as Bloomingdale's 59th street and Macy's Herald Square.

We've invested and integrated our childrenswear business into the Ralph Lauren businesses with strong results.

We've rationalized the men's Polo brand distribution, reducing off-price, expanding placement in high-end retail locations such as Bergdorf Goodman; and all of this serves to elevate the brand and improve profitability.

We also launched a very exciting luxury accessory initiative, including the acquisition of our footwear license.

And last Friday, we brought back Polo Jeans.

Internationally, we continue to leverage the early work in Europe from the consolidation of our offices and distribution, to the rolling out of common systems, to building a luxury brand supported by our flagship in Milan, and our luxury showrooms in Italy and France.

We've also upgraded shop-in-shops in premium locations such as Harrods and Selfridges in London.

In Asia, we've developed the plans and executed on time for the opening of our Tokyo flagship next month, and we've added key personnel to work with our licensees.

All designed to elevate our brand in that important and growing part of the world.

We continue to invest in developing a state-of-the-art global infrastructure with both systems and people.

As Tracy mentioned earlier, we are in the middle of a transformational global supply chain investment.

Our solid performance generates strong cash flows and we've put us in a position to continue to invest in our Company.

Our investments are thoughtful and disciplined, and it shows in our results.

Interesting to note from fiscal '01 to fiscal '06, we have invested approximately $1.6 billion in our Business between capital investments and acquisitions.

At the same time, we've seen our market cap grow from $1.2 billion to more than $6 billion.

We plan to take the same thoughtful strategy forward into '07 and beyond.

We have a long-term plan, and we are making decisions in that context with consistent execution.

All with the focus of controlling our luxury brands around the world.

We have a wholesale strategy that we consistently apply to our businesses, whether it's to existing businesses such as menswear or Europe, or successful new businesses such as childrenswear or Lauren, or the development and growth of our footwear business as a key part of our luxury accessory initiative.

As you know, we completed our Polo Jeans acquisition last Friday and are very excited about the possibilities of our jeans and denim business on a global scale.

Beginning in fiscal '07, we will cutback the distribution to $200 million in sales.

We believe reducing the off-price business is paramount to improving the brand.

As we all know, the Polo Jeans business has not been performing very well for a while now.

We will take the proper steps to improve the business over the long-term.

Our strategy is consistent with our overall proven wholesale strategy, which is to elevate the product, rationalize the distribution, and reduce the off-price.

This approach has supported the increased profit in this segment on a worldwide basis.

Another exciting part of the acquisition is it allows to us really enhance our denim business through multiple brands.

Based on contractual issues in the past, that growth was limited.

We expect the denim category to be accretive in fiscal '08.

Our second area of focus in fiscal '07 continues to be unlocking the luxury accessory business.

As we have discussed, we've launched our luxury handbag business last fall and have seen strong consumer response, but we are still in an investment phase as we develop our global strategy.

In addition, our footwear business, which we acquired last summer, will be neutral to earnings this year as we continue to cutback a significant amount of off-price this business previously supported.

We opened our collection footwear line at market here in New York this week, and the consumer response from leading specialty department stores has been overwhelming.

We would, however, expect that footwear business will be accretive in fiscal '08.

Our third major product initiative focuses on the Rugby business.

While the consumer response has been very strong, we'll need a much larger store base for this business to be profitable.

We have a clear real estate strategy for Rugby and are executing on it as a priority.

In fiscal '07, we expect to add 10 stores.

In the past few years, we spent a lot of time and energy in moving our Retail business from primarily a branding exercise to a strong specialty Retail business that still showcases the brands in the most spectacular manner.

Our new Tokyo flagship opening next month will feature our luxury labels, and we expect there will be a halo effect to elevate our luxury position in Japan, as well as the Pacific Rim.

And we have made great strides in western Europe and plan to increase market share there, as well as expand into Eastern Europe with the opening of two Ralph Lauren stores in Moscow this fall.

Our strategies are working.

Fiscal '07 has several major investments to drive growth over the long-term.

The successful execution of these initiatives position us for the next phase of sales and profit growth, and we're looking forward to another great year.

I think at this point, Operator, we'll be happy to field some questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll first hear from Robert Samuels, J.P. Morgan.

Hi.

Good morning.

Just wondering if there are any new thoughts on department store comp consolidation this year and how it might impact your business?

And also, if you can just discuss your international business a little bit more, particularly the strength in Europe during the quarter, that would be great.

Okay.

The plans for consolidation in the department store field are quite complex, whether it's the Federated-May or the Sax Fifth Avenue disposition of their divisions, some absorbed by [Belts] than others, but we think that we have planned adequately for all the transitional issues that are facing the next 12 months.

I think we believe in the long-term success of the Macy's and Bloomingdale's nameplates.

I think we've worked very hard on a bi-door location plan.

We have extensive histories of every door that we sell in America and have developed bi-merchandise categories, men's, women's, kids', home; very detailed plans to work with Federated on individual door conversions and upgrades.

I think both our spring shipments, as well as our fall and holiday plans, have been done to a level of detail that -- we're very satisfied our Business is planned accurately for next year.

I think the only one that's still up in the air is obviously the future of Lord & Taylor.

And as soon as we all know what that will be, we can plan for that as well.

But at this point, while I do believe -- as Federated announced last week, this will be a transition year for them.

I think we're well-positioned and have pretty aggressive plans for the transfer of business in the closed stores, about half of which we were in.

As well as where we think capital investments in new shop staffing -- shop managers is necessary, we will continue to hopefully deliver good results.

The European business, I think you've heard all of us mention, has been very successful.

We have seen, in the face of somewhat turbulent economic marketplaces with unemployment running over 10% in some countries, we've seen a phenomenal success to our merchandise, our strategy to trade-up, our focus on improved presentation and receipt flow.

And because of the consolidation, we've also seen growth in the reorder business, which I think we've discussed in the past, is a bigger part of the European business.

So we think both the quality of the business in Europe, as well as the raw numbers -- every season, we have made terrific progress, and our spring and fall bookings continue to reflect that.

So we're very pleased with that business.

I think you heard Nancy talk about at Retail -- we had a terrific retail store performance for holiday, and that's continued into the new year as well.

So we're seeing the Retail and the Wholesale performing in Europe beyond plan, and we're just excited about where that can take us.

Some of that leads us to our enthusiasm for Asia.

As you know, Asia has been a partnership with multiple licensees in different countries.

We think there's enormous opportunity over time to trade that business up successfully.

We think it will be a new source of growth for us in the years to come.

And the Tokyo flagship, which we've talked about frequently, is really just the beginning of what we think is going to be a rebirth in that very important marketplace.

So the international side of our business looks bright, and we look to push ahead in -- really in all upscale markets.

Great.

Thank you.

You're welcome.

And we'll now hear from Robby Ohmes, Banc of America Securities.

Hi, Robby.

Oh, hi.

Thank you.

Listen -- a couple of quick questions.

First, can you give us a little bit more detail on the Chaps roll-out?

Footwear, I think, was a little bit of a surprise.

I think you announced that's going to be coming out as well.

Is that President's Day weekend?

And also, how big do you think Chaps could be for you guys this year and in fiscal '07, in what other categories?

How soon should we expect girls to come out, et cetera?

And then the other question I had was just on the potential -- what you're doing with Club Monaco?

It sounds like you're doing more with it internationally and you're closing down the outlet stores.

It was a division that I thought you felt didn't fit in with the long-term strategy of Polo Ralph Lauren.

Has that changed?

Thanks.

Okay, Robby.

Let me start with the Chaps question.

We talked about our repositioning Chaps in that channel, taking Ralph's name off it, which had the double effect of clearing product line out of department stores that was confusing.

The men's product, which you know, was part of a [Warnica] license, has been successful to date.

But we launched and delivered the women's product during the month of January, the boy's product during the month of January, and men's and women's footwear in January, all which were consolidated and held for a launch on, what I'm told by Kohls, is the biggest launch they've ever had, yesterday.

That product was in the stores, on time, complete to the piece.

The product looks spectacular.

And what I'm told, you can get onto the Kohls system daily and actually read sell-throughs.

So we're all very anxious to see the daily sell-through.

But I think we're all very excited, because it represents a quality and a level of styling that Kohls and our executives believes have not been available.

So -- we'll let you know as that continues to get customer reaction.

We will follow those categories with a back-to-school delivery of girl's, which we think is the appropriate sequence, and will be part of a major back-to-school push by Kohls in the kids' business.

And so that business really has enormous potential.

We don't break out the volume of the business, but at this point, we're delivering millions of units.

We think we've got something there that could be very important and reflect well on the Chaps name.

Club Monaco, we had a very strong holiday season.

The concept stores continue to perform.

I think you could tell by Nancy's report on the comp store sales, the margins continue to expand.

We've had a tremendous amount of interest internationally, which we are beginning to capitalize on with the partnerships she articulated.

That gives us an opportunity to take the product into some new markets.

We did open a store in Hong Kong during the fall, which is running well above its plan with our partners.

Without putting capital into it, we can push the brand out.

It does have an international cachet.

And now that we have a clarity about the concept stores, we felt comfortable with that.

Separately, because of the much improved inventory management, we really don't need the outlet stores and it's time to get out of it.

We can clear the business naturally in the regular stores.

And really ,a very small home concept, which we were not going to move forward with and was a distraction.

So I think we've really cleared the decks for a very strong '07 for Club Monaco.

And just a quick clarification.

On Chaps, there were no shipments that hit your December quarter?

They were all January shipments?

Right.

Terrific.

Thank you very much, Roger.

You're welcome.

And we'll now hear from Virginia Genereux with Merrill Lynch.

Thank you and congratulations.

Thank you, Virginia.

How are you?

Thank you, Roger.

Nancy and Tracey, can you tell me quickly how much of the Club Monaco closure charges hit the December quarter -- of the $0.10?

Virginia, $0.05 hit the third quarter.

So half was this quarter.

Yes.

Just following on that, did you guys -- if I look at your full year outlook and what it implies for March, it looks like the March number relative to where people were is going to come in a little bit -- even more than adjusting for the Club Monaco and Polo Jeans dilution.

Was there -- did December benefit somehow at the expense of March?

Did you guys ship some stuff early, anything like that?

No.

I think, Virginia, the fact is our business trends through the first nine months obviously, are off the charts, but we also feel like we're heading into a very strong fourth quarter adjusted for the two issues.

I think the other thing that's probably worth noting that makes the numbers even more compelling is, we are dropping $60 million of off-price business out of the fourth quarter that was in last year's numbers.

I think we talked about this over the last couple quarters.

Based on our business results and our desire to accelerate this, we are, in our forecast, not shipping $60 million that we had in last year's numbers.

So the results pre Polo Jeans and Club Monaco are really a representation of a very strong underlying trend.

And you take that and the shift Easter into April out of March last year, which we're one of the few companies that that impacts, because our quarter ends in March, I think the underlying trends in the fourth quarter continue to be very good.

That's great, Roger.

And then just lastly, on the preliminary fiscal '07 outlook; if I add back these charges this year around Club Monaco and Polo Jeans, you're kind of at nearly -- at about $3.00.

And then the business is growing.

The top line is going to grow low double-digits next year.

And footwear will be neutral, you said, to earnings, but it was $0.08 or $0.10, I think, dilutive to this year.

Is there some other -- is there some other pressure in fiscal '07 or some other investment that you guys are making in the Business that wouldn't -- that would cause margins not to expand?

Sort of ex-options, ex all these other one-time movers?

Yes, I think there are some things, Virginia, and I think -- I mean, your math on the balance of this year is pretty close to what ours is.

I think the fact is, we talked about a variety of initiatives in '07 that we think are absolutely right and for the long-term are going to help, some of which do not help us, from an earnings point of view, in the short run.

The Tokyo store and investments in Asia are dilutive in the near-term, but I think not unlike Europe and the startup there, is going to pay off for us extremely handsomely over the long-term.

I think our investments in Rugby, as we continue to expand, are going to pay off for us in what could be a powerhouse brand.

But because we're only doing it as a retail concept, it really needs enough critical mass to produce positively.

I think the accessory investment beyond footwear is another investment that over the long haul is going to prove to be another powerful lever, but in the short run is going to prove to be an upfront cost.

And I think what Tracey and I referred to as global logistics and supply chain initiatives, we are going through a very complicated one world system initiative to put all of our businesses around the globe on one state-of-the-art platform.

That is -- in order to do that right, that is going to cost us in the short run but deliver very powerfully in the long run.

And as we look at what that is going to do for us in long-term payoff, we think it's worth it.

That system is going to give us the ability to reduce from what today is 32 systems down to seven.

We're going to be able to add aggressively with acquisitions, right now our legacy systems make that very difficult and expensive.

I think you can see in some of our first year, where we have transition agreements, whether it was with Schwab or Reebok or Jones.

Those are very expensive until we can cut over to our system.

We will be able to match-up, and this is really the big lever point, worldwide supply and demand for our products.

Today, we could be oversold in Europe and undersold in the U.S. or vice versa or anywhere in the world, and we can't match-up where we're over and under, so it creates inefficiencies.

It will allow us to increase order fill, reduce excess, get more full-price sell-throughs.

That is an expensive investment, time-consuming, but we think it will pay off.

There are a variety of those initiatives that we think are the right things to do.

But they temper the near-term '07 numbers, but we'll try to do better.

You certainly demonstrated that your investments payoff, Roger.

Thank you.

Thank you, Virginia.

And we'll now hear from David Glick with Buckingham.

Good morning.

Another congratulations on a great quarter.

I just have a follow-up on the revenue assumptions, ignoring the bottom line but just focusing on the topline for a second.

It looks like without Polo Jeans, your revenue assumption for '07 is up mid-singles.

And currently, you're running up double-digits.

You've got footwear rolling in '07, Chaps adding to the top line; it implies that you have a very conservative guidance for the core business in Retail and Wholesale.

I was just wondering if you could give us a little bit of color on some of the assumptions you're using in some of those businesses.

And then, just a quick -- if you could give us some quick comments on Polo Jeans and walk us through the timeframe of your strategic repositioning.

How you're working with department stores, the timeframe there, and the development of a potential retail strategy in Polo Jeans?

Wow.

Okay.

If I don't remember all of that, you'll remind me.

Okay.

Let me start with the basic underlying assumptions for our sales guidance for next year.

I would say that fundamentally, without Polo Jeans, we're probably in the mid to high-single digits.

That's really driven by approximately a 4 to 5% comp in Retail with less stores on a bigger total -- impacting the total sales.

We think Retail will be in the high-single digits all in.

On a Wholesale basis, excluding Polo Jeans, we've got conservative plans in a number of business categories based on some of the uncertainty over the earlier question, which was consolidation of businesses and the ongoing reduction of off-price.

We have completed the large majority of that work this year.

And as I said, with a very aggressive fourth quarter decision, we'll reduce it for further $60.

But I think we see more of that coming out of the next year and therefore, have Wholesale at a low single digit without Polo Jeans, and that sort of adds back up to the total.

Licensing is somewhat flat, as we continue to acquire license businesses which reduce license royalty.

That business -- I think we've done a good job of holding the license royalties flat.

What we really tried to do with licenses is in those businesses where we've wanted a maintain and have ongoing license relationships, we're worked hard to enhance the economics of those deals.

And I think that's allowed us, despite the loss of kids and jeans, footwear, Lauren, and others;

I think we've managed to keep the royalty income coming in.

So that's a directionally -- a sense of that.

I think in terms of Polo Jeans, our current thinking there is to take the approximately $300 million business and reduce it to $200.

That is driven almost exclusively by a third of the business being off-price.

And while we will honor outstanding-on-order, we are looking to be very aggressive at getting that out of the marketplace.

We think it's detrimental to the brand.

We think it's detrimental for the Company.

And we will take aggressive action to reduce that.

Post that, we obviously are inheriting the spring on order from Jones.

And the fall markets are upon us, so we will continue on that path.

I think you'll see new product beginning to hit the marketplace for holiday and spring, which will be the product that we will be heavily involved in the design.

I think the other issue with Polo Jeans that maybe got lost in the very long preamble, was the fact that we now have the opportunity to pursue more aggressively the denim opportunities in existing brands like Polo, like Lauren, like Rugby.

These brands were somewhat inhibited by contractual issues in the Polo Jeans license which placed restrictions on what we could do with denim.

So I think it's a multi-faceted opportunity to pursue what is an enormous merchandise category, which is the category of denim and jeans and related products.

So we're very excited about its impact in '08 and beyond.

But that's really our thinking for '07.

Any possibility for a retail strategy with the Polo Jeans brand?

I think there's always that possibility, as soon as we get comfortable with the merchandise strategies and the products.

I think you know, we actually have a couple Double RL stores at the very high-end of the denim business, which have performed well.

We'll look to upgrade our existing denim and lifestyle businesses with Polo Jeans.

As we get further into this, you'll hear us articulating that more clearly.

Thank you.

[OPERATOR INSTRUCTIONS] We'll now hear from [Randall Connick], Goldman Sachs.

Hi.

It's actually Margaret.

Quick question on Japan, in particular.

I know you have a big event coming up with the new store opening, but what's happening in Japan now?

And how would you expect this store to change things, if at all?

If you could just give us a little bit more depth on Japan and then perhaps, put it in the context of Asia, generally?

Thanks.

Okay.

Let me back up and start with Asia in general.

We have had and continue to have very strong business in Asia, in Australia, in Korea, Singapore, Hong Kong, Taiwan, Malaysia, and the Philippines, have all experienced strong growth.

The business in Japan itself has been kind of flat for the last couple years and it obviously is our biggest market.

We think through many, many years of this brand being positioned in Japan, that it's actually positioned as casual American sportswear.

And it does not have any of the dynamic merchandising initiatives have that gone on on a worldwide basis that we've exhibited, even at our own stores, or through the right wholesale distribution.

So we think the Japanese store, and this Tokyo flagship specifically, is going to be the first time that the Tokyo market will see the full compliment of collection in Black Label and Purple Label and accessories and the better part of Polo and clothing and all the exciting products that we do.

Which today, are not really aggressively positioned.

We think the advertising and marketing that will be around this store and the excitement it will generate will absolutely reinvigorate the brand and raise the bar.

We've already had key retail partners looking to enhance their merchandise assortment to piggyback.

And we think not unlike, at one point, a London or a Milan did for our European business -- because this is similar to what we looked like in Europe five or six years ago.

I think we're going to see an entire new face on the brand that is just the beginning.

We know the Japanese customer is attracted to the better products, that they're shopping at our stores in the U.S. and they're shopping at our stores in the -- in Europe, so we just have not been very good at delivering that product to the Japanese market.

Having said that, after Louis Vuitton, we're the second largest luxury brand in Japan, so we think we're well-known.

I think we just have to elevate that radically, and I think this store is at least the starting point, Margaret.

I don't think it's the end game, but at I think it's the starting point.

Okay.

Well, very exciting.

By the way, the show yesterday was terrific.

The clothes actually outshone the models, which I was surprised by.

But terrific show.

We saw you taking notes on the models, Margaret.

We're not --

Some nice looking ones.

But the clothes are even better looking.

They were great.

And really Ralph has a unique ability to put Purple Label and Double RL and Polo down a runway and make it look so exciting.

I think the retailers I was next to were stunned.

Yes.

That bodes well for next fall.

And when you think denim is done, it looks like it can go to a whole new level.

Very interesting.

I think that's why we're excised about the acquisition of the business.

Thank you, Margaret.

Talk to you soon.

[OPERATOR INSTRUCTIONS] We'll now hear from Omar Saad, Credit Suisse.

Thank you.

Good morning.

Couple higher level questions, if I may.

I wanted to ask you if you've seen any impact or if you expect any impact as interest rates rise?

I think there's been some speculation that there's been trading up going on out there in the consumer world, refinancing -- cash-out refinancing, things like that.

I was just wondering if you have got any feel with your consumer base, if there's been any impact there?

Or if you would expect any impact as a result of those macroissues?

Let me just say that, interestingly, our customer has exhibited no impact from either interest rates rising, mortgage payments perhaps growing, or gas, oil, energy prices rising.

We have seen nothing that would say the better luxury customer is cutting back at all.

I think the only thing that impacts that customer in any major way is when there's radical movement in the stock market, and that's as much psychological as it is real asset issues.

Clearly, '00 and '01, when there was great turbulence in the market, I think the customer was a little skittish.

But I don't believe good rates or energy uncertainty will hurt us.

I think the other thing that's interesting to note is that our comp store performance in the outlet business, even with the energy issues and transportation issues this fall, continues to excel.

So I think we believe, if we've got the right products and we've got it presented right, the better customer will not be impacted by that.

That's great, thanks.

And one more quick question.

What is your take on -- retailers continue along this push of exclusive products.

I know you're doing something with Chaps with Kohls on the women's side, at least a temporary kind of exclusive.

What's your take on that -- any implications for your brand or business, if any?

Well, I think retailers are trying to differentiate.

I think there was years and years of people saying that the assortments looked the same, and stores were hard to identify.

And I think all retailers, whether it's through private label or exclusive brand development, are looking for an edge.

I think our commitment to Kohls on Chaps is an indication of the kind of power they can put behind the business if they believe in it.

And I think we're anxious to see what this first year brings us.

When you have businesses that have 700 stores in 40 states growing at 100 stores a year, they've got the buying clout to make it worthwhile to have a very narrow relationship.

It's also, by the way, very efficient for us only to do business with one customer.

So we'll see how that goes.

We'll see what year two brings us.

Right now, I want to get the reaction to today's launch and then we'll see where we go.

But I think it's a move you're going to see ongoing.

None of it matters, in my opinion, if the product isn't good.

Exclusive and bad product is not a winning formula.

So I think what we've demonstrated with Chaps -- and again we'll see what kids and women's and footwear bring us -- is that we can distill the design essence and bring it to that consumer.

Our hope is that they react very fairly.

We think it's a win/win, but we'll let you know as we get through the February, March selling.

Thanks, Roger.

Appreciate your insights.

You're welcome.

Liz Dunn with Prudential has our next question.

Hi.

Let me add my congratulations, as well.

As we look at the Polo Jeans opportunity and some of the areas that you believe you can expand it, will that include higher price points?

More premium?

Will it include international?

Can you just give us some additional color there?

And then I also had a question on international systems, just where you are relative to the rest of your business and what opportunities still remain?

Liz, I think our history with these acquisitions of licenses has been such that we, in all cases, have looked to elevate the product, both from a design point of view and a price point.

I think it's fair to say we'll do that with Polo Jeans, as well.

I think that in addition to reducing and eliminating the off-price, critical to us is that we want to be in the better priced denim business.

I think we also said that the restrictions in the contract made it difficult to fully exploit in Polo or in other product categories, and I think we'll look to do that.

One of the things that I'm not sure everybody understands is that this is a domestic business.

We actually sold and wholesaled the Polo Jeans line internationally in Europe and Asia and paid a small reverse royalty back.

The products that the Asian market and the European markets are demanding are higher quality, higher price point, more forward fashion.

And I think that that business can blossom as we get some of these product initiatives accelerated.

But the international business was already in our numbers.

The domestic business is the incremental $200 million we're planning.

In terms of the international systems, we have converted Europe over the last couple years to all of our existing systems, and it's certainly helped their performance and helped their results.

I think, as we go forward, we have now completed our retail systems conversions, our financial systems conversions, our HR systems conversions -- and this last push that we've talked about is really the backbone of our business.

Which is the systems that will take us from design and merchandising through manufacturing back through the supply chain delivery to customers.

We left it to the end because it's the biggest, and it touches the core of what we do.

We started it with Lauren and kid's.

As we prepared this fall, first shipments for January and February are going out in this new configuration.

We will add over time the rest of the businesses, both domestically and internationally.

When we get it fully installed, which will take through fiscal year '08, we will then have a system that connects us globally to all businesses.

So again, the kids' business, whether it's Asia, United States or Europe will all be on one global system that will allow us to get supply and demand, eliminate even more excess, turn inventories faster, and really take a lot of people away from the busy work that they're doing now on Excel spreadsheets to get all this done and get it done systematically.

So it's a significant investment of time, energy, and money, but at the end of the day, it is what we need to do to support our strategy to be a global company.

Okay.Thank you.

Jeff Edelman with UBS has our next question.

Thank you.

Good morning.

Two questions.

Roger, as we think about footwear, could you walk through your thoughts on distribution, in terms of channels, your stores, department stores?

And also, what are the implications for Lauren footwear at this point?

Okay.

Well, that's a good question since we broke the line this week.

We really see the footwear business breaking out into a couple segments.

One, the collection business at the high-end, which is Ralph Lauren footwear.

That's both men's and women's.

We see that distribution really, Jeff, on a worldwide basis, being our stores as well as the Saks, the Niemans, the Bergdorfs or Nordstroms in footwear.

Happy to report that at this point in the week, we've already had very successful appointments with each of those major customers.

I think customers like that will also be who we're targeting on the international basis.

Underneath that -- and that business has everything from evening, dress, casual, and sport.

We will then go to the Lauren business.

That line also launched this week.

And we see the distribution there being similar to our approximately 900 door Lauren apparel strategy.

We will not look to place shoes at all 900 doors at the beginning, because we think we want to move through this first at a slower pace.

But early reaction to that product from that channel has also been good.

So we've clarified the lines and the distribution channels, and that is what we are selling into with this market for fall delivery.

In the men's side, we also have the high-end, which is Ralph Lauren, which parallels our Purple Label business.

That will also pursue a limited distribution strategy at high-end stores, our own, specialty and the Saks and Neimans.

And then we have the Polo shoes, which are also aimed at a very sophisticated customer, but are one notch down.

Each of those lines have dress shoes, casual, sport, and some athletic.

So that's how we're tiering those brands.

It is a much cleaner line of demarcation versus where we were with Reebok.

And the product -- and if you haven't seen it, you should arrange to get to see it with Nancy or Denise; the fit, the quality, the make, we're in the best factories in the world.

We're really very excited, and we expect to begin to move forward.

Great.

Secondly, would you give us some sense of fourth quarter revenues?

And how much of the outlet business have you -- I'm sorry -- the off-price business have you walked away from this year?

And roughly how much is left?

Nancy will give you the sales in a minute.

I don't have a full-year number on the off-price, but $60 million in the fourth quarter alone is a pretty startling number.

And I would say that we have made enormous progress over the last couple of years, Jeff.

And I think a lot of the reason we're seeing the ongoing margin improvement is an elimination of this off-price.

And our decision to accelerate that in the fourth quarter, I think is a good one.

One of the interesting things, I went back and looked just for curiosity's sake.

When we went public, we had a 45% gross margin.

Today we're tracking to 54%.

We've had a 900 basis point margin improvement.

And that's really a pretty startling number when you look at it.

Much of that has come through the clear execution of strategies in both Wholesale and Retail.

While we've seen huge improvements, we expect to see some ongoing gains as we go forward.

But I think, for the long-term health of the brand, getting rid of this off-price is mission critical.

And I think this is really the final phase of that being done in any significant way.

Nancy, do you have some fourth quarter guidance?

Sure.

Jeff, on the revenue line, we're looking at a mid-single digit as the consolidated revenues.

And breaking into the segments, you would look at Wholesale as the low-single digit, Retail low double-digits.

And the Licensing business actually would be down year-over-year, due to the acquiring of the various businesses we've spoken about.

Okay.

Great.

Thank you.

Thank you, Jeff.

We'll now hear from Gabrielle Kivitz, Deutsche Bank.

Hi, good morning.

Congratulations on another fantastic quarter.

Thank you, Gabrielle.

First question is on Rugby; how many stores do you need for the Rugby business to reach profitability?

And then I had a second question on the margins, as well.

Thanks.

36.

36 stores to reach profitability.

That's it.

We've done the model.

And then my second question is; for fiscal '07, you went over the investments that you're going to be making that are going to pressure the margins, and thanks for breaking that out, but you'll also likely benefit from both improved full-price selling and IMU as a result of sourcing initiatives and also anniversarying all the liquidation of the off-price product that you've done.

Your guidance just maybe looks to be somewhat conservative.

There's obviously going to be some jeanswear liquidation.

But does your guidance also assume additionally license acquisitions and associated inventory liquidation?

Can you give us a little more detail on what the gross margin and SG&A assumptions are to make up that operating margin improvement, excluding the stock option expense?

Thanks.

Well, I think the guidance, at this point I would give you, is directional; which is, yes, we do continue to expect some gross margin improvement.

We think it will be obviously smaller than what we've seen over the last couple of years, but we do see some improvement.

We will be liquidating the excess jeans inventory.

But really have come through the bulk of the off-price.

I think the flatness of the operating margin rate, part of that is the stock option expense, and part of that is the expense of the business initiative to support all the things we said we're doing in '07.

So ex the option expense, we would see -- would be forecasting margin expansion.

With that, it kind of comes at flat.

Again, we've had such success, everybody wants to say we're being conservative.

Lord knows, I hope we are.

Time will tell.

So far spring is off to a good start, both Retail and Wholesale.

When we talk at the end of the fourth quarter, we may feel differently.

At the moment, we think investing in those initiatives are absolutely critical for the long-term health.

And our track record to date has been pretty good at delivering on those.

So slight uptick in gross margin, slight uptick in expense gets us to the guidance.

Thanks.

And should we expect both the Wholesale and the Retail gross margins to be up then also?

I'm sorry.

Say that again?

Should we expect both the Wholesale and the Retail growth margins to be up?

I think we'll see continued margin expansion in both businesses.

Thanks so much.

Good luck.

You're welcome.

We'll now hear from Christine Chen, Pacific Growth Equities.

Congratulations on another great quarter.

Thank you.

I just had one housekeeping question, since most of my questions have been answered.

Your tax rate did go down versus the previous quarters.

What's the rationale behind that?

And should I just use the run rate for '07?

Yes.

We had actually said on the last call, because this question came up, that the full-year tax rate will be 37.2%.

So what you saw in the third quarter was a true-up to get our year-to-date tax rate to 37.2%.

Okay.

And then just to clarify, the $0.10 from Club Monaco; $0.05 in Q3 and $0.05 in Q4.

So is the $0.05 already in your $0.84 number?

Yes.

Yes, it is.

Wow.

Okay.

Thank you.

And we'll now hear from Jennifer Black, Jennifer Black & Associates.

Good morning.

And let me add my congratulations.

Thank you, Jennifer.

How are you?

I'm good.

How are you, Roger?

Good.

I was curious to know, with the strength of your brand -- brands, I should say -- I wondered if you would do any kind of testing -- like do any smaller concept stores with Blue Label or with accessories?

Or in any area of the world, have you thought about doing anything like that?

And secondly, what percent does accessories represent at this point?

Jennifer, I think that, if you were a fly on the wall, you would see the amount of time we spend on various discussions about retail and specialty retail.

I think our results over the last four or five years have gotten us a lot more comfortable with our ability to be successful retailers.

We have some specialty concepts today, not the least of which are Rugby and Double RL, which are small.

Hopefully, we'll grow to bigger parts of our business.

As accessories expand, I think the first level of improvement we'd like to do is get that better presented in our existing stores.

Where today, we don't give it as much space and footage as we'd like.

But as the product expands we'll certainly look to do that.

But then I think, any of our brands or any of our merchandise categories does have the potential to be considered vertical retail concepts.

Certainly the Blue Label women's line that Nancy told you how successful we've been with domestically, and how well that's done internationally, is a prime example of a business that at some point in partnership with the men's Blue Label, might make for a very compelling stand-alone concept, as well.

There's a lot of ideas.

We're just trying to make sure we can handle all the things that are on our plate and execute well.

As you can tell, '07 represents a lot of challenges already.

So we're certainly mindful of that, and we're working through those opportunities in terms of priority.

Well, you certainly don't have any shortage of ideas.

And what percent of your business is accessories, right now?

You know what?

I don't have that.

I think we're going to have to get that to you.

It's in the annual report, but we'll dig it out.

Thanks, Jennifer.

Thank you.

Okay.

At this point, I'd like to say we appreciate everybody's time.

We've run a little over today, I guess as we add more businesses, we add more conversation.

It's clearly been a terrific nine months, and we're very excited about '07.

It's off to a good start.

And we'll certainly see how the spring begins to play out in February and March.

But we appreciate your interest, and you can follow-up with Nancy and Denise.

Thanks.

And that concludes today's conference.

We do appreciate your participation.

Have a great afternoon.