雷夫·羅倫馬球 (RL) 2006 Q4 法說會逐字稿

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

As a reminder today's call is being recorded. [OPERATOR INSTRUCTIONS] And now for opening remarks and introductions I would like to turn the call over to Ms. Nancy Murray.

Please go ahead.

Good morning and thank you for joining our Polo Ralph Lauren fiscal '06 fourth quarter and year-end conference call.

Tracey Travis, our CFO, will review our consolidated financial performance, then I'll review our segment performance and our outlook for fiscal '07 and then Roger Farah, our President and COO will give you an overview of our long term strategic initiative and also answer your questions.

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

The principle risk that could cause our results to differ materially from our current expectations are described in our SEC filings and now I'd like to turn the call over to Tracey.

Thank you, Nancy, and good morning, everyone.

We are pleased to report our fourth quarter results exceeded our expectations and our full year results reflect strong execution in all of our areas.

Total net revenues in the fourth quarter were $972 million, an 8% increase to last years $902 million.

This growth was the result of a 15% increase in sales in our retail stores as well as in polo.com which as you may recall was included in our retail segment.

And a 6% increase in wholesale sales driven primarily by the inclusion now of Polo Jeans and footwear in our wholesale segment post-acquisition.

The launch of Chaps for women and boys and increased sales in Lauren.

In the fourth quarter we also had a meaningful reduction in off price sales as planned and communicated to you last quarter.

Our total net revenues for the full year were $3.75 billion, a 13% increase to last years $3.31 billion.

This net revenue growth was the result of a 16% increase in sales in our retail stores and polo.com and a 13% increase in wholesale sales, driven by growth across all of our wholesale product lines and the inclusion of Polo Jeans and footwear acquisitions made in the fourth and second quarter of fiscal '06 respectively.

Our gross profit in the fourth quarter increased 10% to $525 million, from $477 million last year.

This increase was due to the combination of our 8% revenue growth as well as gross margin rate expansion of 110 basis points, to 54% of net revenues versus 52.9% last year.

Gross margin in the quarter benefited primarily from higher full price sell-throughs in our wholesale and retail segments as well as the reduction in off price sales in our wholesale segment.

Our gross profit for the full year increased 20% to 2.02 billion from 1.68 billion last year with a 300 basis point expansion in gross margin to 54% of net revenue versus 51% last year.

We experienced increases in full price sell-throughs throughout the year in both our wholesale and retail segments and combined with the success of our sourcing initiatives were able to significantly improve margin rates for the business.

Before I move on, I want to point out that our results for last year's fiscal 2005 included a one-time charge of approximately $100 million in SG&A, associated with our litigation at that time with Jones Apparel which has now been settled.

So I will address our SG&A and profit results both with and without the litigation charge.

Our reported SG&A dollars decreased 6% in the fourth quarter compared to the fourth quarter of last year which included the litigation charge.

Excluding this charge, SG&A in the fourth quarter increased 22% over the prior year.

Fiscal '06 fourth quarter expenses reflected increases to support the growth of the business.

These expenses related to incremental products like Polo Jeans and footwear, new stores including Omotesando, our new Japan store, restructuring of Club Monaco and other expenses to support the growth of our business.

Reported SG&A dollars increased 9% for the full year compared to last year excluding the litigation charge, SG&A for the full year increased 17% over the prior year.

In the fourth quarter we generated $116 million in operating income compared to 42 million last year.

The resulting operating margin, 11.9% represents a 730 basis point operating margin improvement from last years operating margin of 4.6% in the comparable year.

Again, excluding the litigation charge, we would have reported operating income for the fourth quarter last year of $140 million with a 15.5% operating margin.

Our full year operating margin was $517 million, up 72% compared to last years $300 million.

This performance represented a 470 basis point improvement in operating margin to 13.8% compared to 9.1% last year.

And again, excluding the litigation charge, we would have reported operating income for the full year last year of $400 million with an operating margin of 12.1%.

In the fourth quarter net income was $63 million, or $0.58 per diluted share compared to 23 million or $0.22 per diluted share last year.

Excluding the litigation charge, net income and EPS would have been 86 million and $0.82 per diluted share respectively.

For the full year, net income was $308 million, or $2.87 per diluted share, compared to to 190 million, or $1.83 per diluted share reported last year.

Excluding the litigation charge, net income and EPS last year would have been been $254 million and $2.44 per diluted share respectively.

For the fourth quarter, our diluted shares outstanding were were 108.1 million, an increase of 2.8 million shares over the fourth quarter last year.

For the full year diluted shares outstanding were 107.2 million or 3.1 million shares more than last year.

Our full year effective tax rate was 38.8% which is higher than our previous guidance of 37.2%.

Our year-end tax reserve estimate included the impact of a continued shift in growth to our domestic wholesale and retail businesses which resulted in a higher state tax rate impact than previously anticipated thereby effecting an increase in the overall effective tax rate.

Regarding our balance sheet, we ended the year with 286 million in cash after funding from cash on hand, the acquisitions of Polo Jeans for 255 million, footwear for 110 million, and the $100 million settlement of all outstanding claims in the litigation between Polo Ralph Lauren and Jones Apparel.

We have approximately 227 million euro bond debt which we currently intend to refinance at or before it's maturity in November of this year depending on favorable market conditions.

At the end of the fourth quarter, our inventory was 486 million, up 13% over last year, primarily reflecting the addition of Polo Jeans and footwear acquisitions.

We continue to improve inventory turns in both our wholesale and retail segments, and in the fourth quarter our DSO's improved slightly due to our continued focus on accelerating the collection of receivables.

We are very pleased with the results generated by carefully executing our long term growth strategy.

Reinvesting cash back into the business with appropriate returns is a key priority for us.

In fiscal 2006, our pre-tax return on investment was 30% compared to 25% last year after adjusting for the litigation charge.

Moving on to capital expenditures, our full year capital expenditures were $207 million, this compares to our projected fiscal '06 spend of of 210 million and 176 million last year.

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

We project capital spending for fiscal '07 to be at approximately the same level as fiscal '06. around $210 million.

We are extremely proud of the returns we have generated for our shareholders this year through the successful execution of all of our initiatives as well as proven fiscal management of our business and investments, and with that I'd like to turn the call back over to Nancy.

Thank you, Tracey.

Let me review some of the highlights of our segment results and then our financial outlook for '07.

As Tracey said this was a great quarter and a terrific year in which we met or exceeded our goals and continued to reinforce Polo Ralph Lauren as one of the world's premier brands and premier companies.

Let me begin with the retail segment.

Our retail revenues in the fourth quarter increased 15% with comps up 3% and this was despite the shift of Easter into April this year compared to March last year.

We posted a 1.2% comp in our Ralph Lauren stores.

Women's accessories were particularly strong generating double digit percent sales increases over plan and last year.

Women's Blue Label had another great quarter, also with double digit percent increases against last year.

And it was really fashion items that drove this performance in Blue Label.

And ROX active wear for women continues to be strong.

We had strong comps once again in Europe for the growth in all major product categories compared to last year.

Regionally, we had good performance, particularly in our large stores, in Paris, London, and Milan.

Our Rugby stores are exceeding our plans with strong performance in both mens and women's.

We currently have 5 stores and we expect to accelerate the store openings with 8 new stores in fiscal '07.

Ralph Lauren Media, Or polo.com, was a very strong performer during the quarter with a 73% sales increase.

And let me just point out that polo.com has been consolidated on a one quarter lag previously but in fiscal '06 fourth quarter we adjusted the consolidation to eliminate that lag so now they are on the same fiscal calendar as the rest of the Company.

The impact on the financial performance in the quarter was really immaterial.

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

The comps were 10.6% in the fourth quarter and this represents growth in all categories for women where we continue to see strength in dresses and accessories and in sweaters and knit wear for men.

We're expanding the Club Monaco brand internationally with strategic licensing agreements.

In fiscal '06, we opened 2 stores in China and through licensees, we will open 26 in fiscal '07 in Asia Pacific and the Middle East.

As you'll recall, last quarter we said that because of our improved inventory slow, we would no longer need the Club Monaco outlook stores as a means of disposing excess merchandise.

During the quarter we closed 4 outlet stores and we'll close the 1 remaining store before the end of this calendar year.

And we are seeking to dispose of the 7 Caban home stores in Canada since as we said before these home stores really do not fit with the strategic apparel and accessories plan for the Club Monaco brand.

You'll note that we incurred a 9 million restructuring charge in our fourth quarter to exit those businesses, and we anticipate an additional 2 million charge in the first quarter of fiscal '07.

In our factory stores, we posted a 2.8% comp, and that was with good performance across all categories with the largest increases in mens sportswear and dress furnishings as well as women's and boy's apparel.

We also executed very well operationally, and we transitioned to spring product earlier this year than last year.

Our retail segment had a profitable fourth quarter generating operating income of 1 million.

This compares to a $10 million loss last year in the fourth quarter.

Correspondingly, we delivered a 380 basis point improvement in retail operating margins this year.

This growth really reflects significant increases in gross margin which were driven primarily by our higher initial markup, more full price selling, and of course lower markdowns.

In our full year for retail, the revenues were up 16% to 1.56 billion compared to 1.35 billion last year.

For the full year, retail comps were 6.4% and that represents a 6% increase of Ralph Lauren stores, a 6.3% in factory stores, and an 8.1% at Club Monaco.

For the full year, retail operating income increased 69% to 140 million and that compares to 83 million last year.

We are very proud to report that our retail operating margin improved 290 basis points for the full year to end at 9% and that compares to 6.1% last year.

Now, let me give you a few highlights in our wholesale business.

We reported a 6% sales increase in wholesale last year -- over last years fourth quarter and the primary sales drivers were the inclusion of Polo Jeans and footwear, the successful launch of Chaps for women and boys, increased sales in Lauren, and our continued full price menswear selling.

These gains were partially offset by a reduction in off price that we discussed on our last quarter call.

We had strong performance in our spring menswear, we benefited from better management of receipt flow of seasonal merchandise and we're very pleased with our progress to date there.

We continue to be extremely pleased with the performance of the Lauren for women line.

Lauren continues to be a strong brand that has outperformed both planned and last year and it's also a clear industry leader with strong average unit retails in the department store channels.

As you know, we launched our Chaps boys and women's lines at Kohls this quarter.

This was a huge undertaking from designing, manufacturing, and delivering product for women and boys to all Kohls stores which number more than 700 locations.

We're very proud of the execution and the team responsible for making this happen.

Turning to Europe, we had another strong quarter as we continued to elevate the brand abroad.

We opened a 2000 square foot women's collection shop in Harrods during the quarter and it's spectacular and we'll open a Black Label shop in June at Selfridges.

For the fourth quarter our wholesale operating profit was 127 million this year, compared to 140 million last year.

The operating margins were lower this year, 22.1% compared to 25.9% last year and that's really due to the diluted inclusion of Polo Jeans and footwear.

For the full year, wholesale sales increased 13% to a record $1.94 billion, reflecting increases in all of our divisions.

This also reflects the inclusion of footwear and Polo Jeans.

Wholesale operating income for the full year increased 33% to 398 million and that compares to 300 million last year with a margin of 20.5% compared to last years 17.5%.

That's a margin rate expansion of 300 basis points for the full year.

Our fourth quarter licensing royalties were 63 million this year, compared to 68 million last year.

This number reflects the positive impact of our strong mens Chaps business offset by the lost royalty from footwear and Polo Jeans as they transition now to our wholesale segment.

For the quarter, operating income was 40 million compared to 48 million last year.

For the full year, licensing royalty was 245 million which is flat to last year.

Operating income was 154 million and that compares to 160 million in fiscal '05.

And please keep in mind that the licensing segment no longer has childrenswear, footwear, or Polo Jeans royalties as a result of our now direct ownership of these brands.

I'd also like to just provide you now with an update on our outlook for fiscal '07 which began on April 2, of this year.

As we continue to consistently execute our long term growth strategy, we expect fiscal '07 to be another strong year and I'd like to reiterate the guidance that we gave you back in February.

We continue to expect for the full year fiscal '07 consolidated revenues will increase in low double digits, including the expense of stock compensation, we expect operations, operating margins for fiscal '07 to be flat compared to fiscal '06 and we reiterate that we expect earnings per share for fiscal '07 to be in the range of $3 to $3.10.

We anticipate that the expensing of stock options will be in a range of $0.15 to $0.20 per share in fiscal '07 and I'd like to remind you that this outlook also includes the neutral effect on EPS of Polo Jeans which we acquired in February.

Now, looking at the quarter, which ends July 1, 2006, we expect Q1 fiscal '07 consolidated revenues to increase high teen to low 20's percent.

This reflects mid 30% growth in wholesale, high single digit percent growth in retail, and a mid teens percent decrease in licensing, and you'll recall that revenues in our wholesale segment will now reflect the addition of Polo Jeans and footwear.

For the first quarter, operating margins are expected to be slightly lower than the first quarter last year because it will now reflect the effect of expensing stock options that I just mentioned, the impact of footwear and Polo Jeans, and the anticipated $2 million restructuring charge for the Club Monaco Caban stores and now I'd like to turn the call over to Roger and then he will open it up, the call, for your questions.

Okay, thank you, and good morning.

As Nancy and Tracey said, we had a terrific quarter and a record breaking year.

We have certainly stayed focused on our long term strategies and are consistent in our execution of those initiatives to support our growth.

I think our results speak for the growing demand of our luxury products that appeal to multiple geographies and lifestyles.

It's exciting for all of us to see Ralph's broad global vision come to life.

As we have discussed, we are a unique company with a unique business model.

We serve multiple channels of business across mens, woman's, children's, accessories, fragrance and home.

We serve multiple channels of distribution from specialty and department stores to our own luxury stores, and we certainly service multiple geographies including 65 countries around the world.

We have undertaken transformation initiatives, set aggressive goals, and held ourselves to demanding timetables over the past few years.

I think our numbers speak to the ability of our team to embrace and execute these activities and then to manage the resulting complex global business model.

Let me just call out a few of these outstanding accomplishments.

With nearly 300 stores worldwide, we are consistently building a business that is a leader in the ultimate shopping experience, with luxury products, aspirational lifestyle presentation, and knowledgeable sales associates.

We have also built a growing profitable model for both our stores and our online shopping experience.

In the past 5 years, our operating margins have expanded 700 basis points.

We set out a few years ago to ago to rebuild and restrategize our business in Europe.

Today, that business is a good model for us on how to position and execute our brand overseas.

We have elevated the brands through the right distribution and we've expanded the offerings abroad to truly position our mens, woman's, and children's brand in the luxury arena.

Having accomplished all that, we are well positioned to reach our goal of 1 billion in sales over the next 2 years.

The women's business a few years ago was a very small part of our total, really represented just by collection and Black Label.

Today, those businesses continue to grow and we have used the design inspiration to build a strong Blue Label business globally and a Lauren business that continues to outperform and is clearly the leader among it's peers and now we are building a Chaps women's business that enables us to further use the creative design to reach a broader customer base.

Today, our woman's business in many of our owned retail stores is larger than our men's business.

In the men's area, we've spent considerable time over the past few years focusing on the right product in the right doors.

With more limited distribution, elevated product and assortments, increased focus on large doors, we have changed how we've worked and supported our partners in a different way, all of which is paying off for us.

The children's acquisition has really spawned vertical and horizontal growth in our integrated business.

It has driven sales and margins at our own retail stores and at polo.com where it is the fastest growing merchandise category.

It's also a part of our growth story in Europe and has continued to grow profitably in our domestic channels in specialty and department stores.

Our ability to weave this category successfully throughout our company speaks to the uniqueness of our business model.

The repositioning of our brands from woman's to mens to children's to home has continued to improve our full price sell-through in margins.

This strategy and our sourcing efficiencies have been the driving force in our margin expansion and will be applied to our new businesses as well.

We have made phenomenal progress and in only 5 years we've improved our gross margin by over 600 basis points.

Our strategies for individual businesses are working and they are supporting the companies total objectives.

At the same time we've made tremendous investments back into the Company.

Over the last 5 years we've invested $1.8 billion on acquisitions and capital expenditures.

During this period our sales have doubled and our profits have more than doubled.

Yet we've taken a disciplined approach to our investments and continue to believe that our shareholders have received good returns on their investments as evidenced by our 30% pre-tax ROI in the past fiscal year.

We have a pristine balance sheet that represents no net debt even after acquisition and investments.

We have improved the quality and productivity of our inventories through more disciplined planning and assorting.

Our turns have doubled over the past few years enabling us to invest back into growth vehicles.

It is with this strong foundation that we enter another exciting year with a continuum of initiatives that show remarkable growth for the Company and the brand.

We recently reacquired footwear in July '05 and brought to market in February of this year new products for mens and women's.

This fall, we will launch the Lauren footwear in the top 250 Lauren apparel doors.

We've also placed our collection shoes in key specialty doors.

Already, we have made terrific progress in upgrading the quality and construction.

We've built a team with some of the industries best to expand and grow this business, and we are taking the same approach with footwear that we have with our other brands.

Limited distribution elevate the product and assortments, and expand our world class designs over tiered product lines.

We recently acquired Polo Jeans in February where we stated the acquisition gave us a new opportunity to expand our denim business globally.

As we all know, the Polo Jeans business has not realized it's full potential under our former licensing agreement.

Now that we have acquired direct control over the business and have begun to integrate it, we can better develop the denim category for the long term.

Our approach to denim is similar to our other branded strategies with tiering of mens and women's lines.

Beginning spring '07, we will increase our Double RL denim products at our highest price points.

We will also expand the denim categories by introducing new product offerings in men's Polo led by Joy Herfel, and in Lauren denim in under the direction of [Kim Roy].

In addition, we will increase our denim offering in our Rugby brand as well as our Chaps brands for mens, women's, and children's.

For spring '07 we will stop distributing Polo Jeans branded merchandise domestically while the international brand remains unchanged.

We believe denim and products under all of these labels creates another major opportunity for us to pursue.

In our retail segment we continue to invest in our own stores.

We plan to open 8 Rugby stores and 3 new Ralph Lauren stores all with a careful thought on the approach to real estate and the building on our former success.

Internationally, our store expansion is expected to include the introduction of our Ralph Lauren Brand in Moscow through a licensed partner.

We expect to have a flagship store opened in February '07 and two other stores to support the brand in that important growing market.

When we first began to focus on creating a profitable retail portfolio, we set a mid-term goal of 8 to 10% operating profit margin.

With today's report, we have achieved that target.

Over the next few years, we believe we can push that higher to a 10 to 12% operating profit.

We've successfully tiered the brands with the launch of Chaps, and we'll expand into girls for holiday '06 and spring '07.

We'll complete the Chaps children's launch with Layette, boys and girls in fall of '07.

The strength of this line has encouraged us to take the label into home and accessories.

We've been able to develop, design, and efficiently shift this product to more than 700 Kohls stores utilizing existing infrastructure from systems to supply chain to human resources.

And in licensing while we've spoken of our desire to directly own many of our brands we continue to believe that the licensing model is the right one for certain product categories and geographic regions.

Even with all of the businesses we have in house, we still maintain a very significant royalty income.

I think it really speaks to the strength of the brand that we now command substantially stronger licensing economics.

Our new agreement with Luxottica certainly speaks to that.

The long term agreement covering the design, production, and worldwide distribution of prescription frames and sunglasses.

We see this as a key strategic step in the further development of our worldwide luxury accessory business and another opportunity to build a Ralph Lauren brand through Luxottica's extensive retail distribution system.

They really are an ideal partner for us.

They are the leader in the sector and stand apart because of their extensive international presence.

Currently distributing products in 120 countries with nearly 5500 stores.

The agreement is effective as of January 1, of '07 and provides us not only with higher royalty rates, but with 200 million in cash up front on January '07 to cover projected minimum royalty payments.

All of this work has come on top of tremendous amount of work on our infrastructure with a focus on systems that supported divisions, whether it was wholesale or retail, consolidation of Europe, and common systems for finance, HR, and distribution.

The next phase is really developing the manufacturing and sourcing capabilities for the new business categories such as jeans, footwear, and accessories.

This is an important program as it will allow us to move away from our current expensive transition service agreements.

Looking forward, we will be building global systems that allow us to deliver to all points of the globe from front end design to planning, transportation to distribution, the systems must support our worldwide businesses.

The benefits are numerous and tangible.

The systems will allow us to continue to decrease our cost of goods, reduce excess inventory, and will help us deliver the products consistently on a worldwide basis.

It will also reduce the number of times products are handled thereby reducing expense.

We're very excited about our initiatives for '07 and beyond and in closing I would just echo that we are very pleased with last years performance.

We developed a sound and effective strategy that guides us and it's working.

Before closing and taking your questions I think Ralph and I would really like the thank the 14,000 employees in dozens of countries around the world who have contributed to this success every day with their passion and dedication.

So I think, operator, at this point we'll be happy to field questions if there are any?

Certainly. [OPERATOR INSTRUCTIONS] We'll take our first question from Margaret Mager Of Goldman Sachs.

Hello.

Good morning.

And congratulations on getting to your operating margin goal in retail.

Yes, that's exciting.

It seems like a long time ago we talked about that?

Yes, and it's very gratifying and that was a great outline of all of your accomplishments.

So now we move on to the next thing, right?

Right.

That's old news.

What's new?

Yes.

Okay, a couple questions.

First of all, with regard to the goal on the operating margin for the retail segment, now, elevating that to 10 to 12% can you just talk us through a little bit on what -- how you see that playing out?

Is there a gross margin opportunity?

Is it leverage on expenses?

What's the outline for how you get there?

Thanks.

Okay, well, let me say the following.

The pathway that got us to the 9% operating margin from really very low numbers many years ago, I think will be similar to what drives the next 200 basis points.

We are seeing very strong reaction to product around the world, particularly in Europe.

We think the margin rates in Europe and the sales per square foot in Europe will outstrip the United States.

We today, Margaret, on a worldwide basis, are running at north of $900 a foot in sales per square foot which has come a long way from where we were, so merchandising, comping at a similar run rate, and we think the continued increase of full price selling, I think the bulk of the 200 basis point growth will come out of margin improvement.

I think we will see some expense flex as we continue to leverage a global structure, but I think it's 60/40 margin to expense will get us that next push.

Okay, and I guess I just want to confirm.

Did I hear you say that you're going to stop making product under the Polo Jeans label in the U.S?

We're transitioning out of the Polo Jeans label for spring of '07.

We will be shipping summer and fall as planned.

We have worked extensively with all the key retailers who are very excited about what our plans are.

We'll be showing the men's product at the July markets and we'll be showing the Lauren product in the September markets, and that product is planned to move into the retailers for spring '07.

We believe that the label Polo Jeans over the last couple of years was probably run down a bit, overpromoted, overdistributed, and we think that we have exciting product offerings to build on our denim base that it will be at a much higher price with a much higher fashion quotient, higher quality, so it's not dissimilar to a lot of the other businesses where we've brought it back in house, cleaned up the distribution, elevated product, and the reaction we've had from all the key retailers is overwhelming.

So we're very excited about transitioning this business and so is the retailer.

Internationally, because the brand has traded at a much higher level and with very different distribution patterns, in Europe, in Asia, we will continue with the Polo Jeans label, but we will certainly be introducing some of the new product we're introducing here in those markets as well, so the whole category of denim or denim-related products, we think is an enormous growth opportunity.

I think it's also fair to say that the margins that we anticipate making under the new strategy should be better than -- in the price points and the way the business was running in the past so I think we'll begin to see that in the spring of '07 as well.

It's always amazing how you manage to reinvent yourself so impressive.

Good luck in the year ahead and we'll see you soon.

Thank you, Margaret.

Is there another question?

Yes, we'll take our next question from Virginia Genereux of Merrill Lynch.

No more questions, Roger.

I was going to get away so easily.

I was thinking wow.

What a day.

Exactly.

You deserve a break.

You mentioned transition service agreements.

Yes.

Can you tell us, Roger, in what businesses you're paying those and maybe any sense of what they're costing you and how much of that can go away when you sort of establish your new -- when you get fully ramped on your new stuff into

I think it's a good question because usually when we buy a business, in order to effect as smooth a transition as possible, we enter into a transition service agreement that has different pieces and parts ranging from 6 to 12 to even sometimes as much as 18 months.

Generally, those services can be for manufacturing, they can be for supply chain issues, warehouse distribution, they can be for computer services, in some cases they can be for payroll services but it's designed to have a smooth transition.

I would also say at the spirit of that is it's supposed to be just a passing along of existing costs without it being a profit center.

Having said that, in the end, we can do it a lot cheaper when we move away from those transition service agreements, so within the first 12 months after we made the kids acquisition, we were able to move away from the Schwab systems and have now fully incorporated that business into our portfolio.

Footwear, with that acquisition, last July, was an 18 month agreement, but with Reebok's new owners and with the issues at Jones, I'm not sure that we would say we want to count on those transitions services agreement being a weapon for us.

So we're looking to move through those transitions as quickly as possible and different parts of them run at 6, 12, 18 month intervals.

And Roger, to your point, how much cheaper -- how much more cheaply can you do it yourself?

Is there any way to think about that?

Well, we use the word less expensive, not cheap.

Yes, pardon me.

I think that it's a question of those services are probably 20 or 30% higher than what we would pay for them.

That's great.

Thank you.

And then secondly if I may, on the licensing economics, a bunch of great deals recently.

Can you give us a magnitude?

You said the economics are getting better because the brand is in a great position.

Can you give us a sense of that magnitude?

Well, I think that Nancy said revenues for the year were flat at 254 million.

I think when you consider all the businesses that we've brought inhouse, and the fact that we still have the same revenue that we had last year, I think what that speaks to is with our brand strength on a global basis and with our partners desire to grow with us on a global basis, the economics that we get today because of the success of the brand and the size of the impact we have on an international basis, we are just getting increases on royalty rates when licenses are up for renewal that are more than offsetting in many cases the licenses that we're choosing to bring in house.

So we're very careful about where we're signing licenses, we're very careful about who we're signing them with, but we want to make sure we're getting full value for what we think is the number one brand in the industry.

Thank you and then just lastly, if the strong growth in June and I know that that's a relatively smaller quarter, I guess why would revenues for fiscal '07 not be a little better than low double digits, given the strength in June and particularly your wholesale commentary?

I know you don't have footwear after -- I know footwear anniversaries but by our math that's not that big a contributor.

I think that's right.

I think as you note because you follow the story, we try to plan retail conservative because that's where you're making forward commitments.

We've actually -- part of our success in retail is we've outrun the comp numbers we've planned.

I think once we get through the balance of the first quarter , we'll reevaluate the sales number.

The first quarter is certainly driven by the additional businesses Nancy talked about in wholesale and the strength of current businesses as well as Easter shifting into April out of March.

Yes.

So I'm not sure that would be the run rate I'd use for the full year.

Thank you.

Okay, Virginia, thank you.

Thank you.

We'll take our next question from Robbie Ohmes of Banc of America.

Thank you very much.

Hi, Roger, hopefully you can hear me.

Yes.

A couple of quick questions.

First, can you give us a little bit more detail on how the Japan flagship is doing and then also, , the follow-up strategy over the next couple of years in Japan because I imagine there's a pretty big 1 given you opened that store, and then second and maybe work into that, , accessories and how you're doing on bringing that Business back inhouse, and when we should see, you know, something larger on that side and then just third is just, , Rugby.

Why not more than 8 stores and will we see mall stores next year?

Thanks.

Okay, Robbie let me see if I can get it in the order you asked me.

The Japanese store which opened at the end of the month of March was phenomenal.

We had crowds and people mobbing Ralph.

It was his first appearance in 25 years and it was really quite scary on one hand because of the reaction.

I think between the store opening, the advertising, the public relations efforts that were built around that store, it really accomplished what we wanted to primarily is to reestablish the brand at a much higher level in that marketplace.

It was a spectacular looking store as well as the level of merchandise in there.

It's not the product level that the consumer has seen in Japan for the last 30 years where we've primarily been more Blue Label-type product in department stores.

I also think that as Ralph toured the stores, he came away very excited about the opportunity to add fashion and add higher level products.

Some of the early successes, perhaps not surprising, were things like Double RL and the vintage products, some very expensive handbags, some very high end men's and women's apparel and I think that's an introduction to a market that over time is going to react very well to that product.

We also had in the store the big pony shirt which was an absolute blowout so the Japanese appetite for our product is very high and I think it's going to accomplish what we set out to do which is to elevate the brand in that market.

Financially, it's running about 10% ahead of our plan which is also good news too.

Oh, great.

On the accessory question, clearly, the Luxottica deal which is a piece of accessories I think you should anticipate Ralph will be doing some very high end products that we're going to get worldwide distribution on.

We think that business is a fashion business and we think we can push that business out on a worldwide basis and we have very detailed plans by brand, by channel of distribution what's going to happen after January 1.

We've also clearly pushed the high end of the leather goods businesses and I think you'll see that with footwear, the collection footwear and the men's footwear looks spectacular.

The philosophy has always been once you create the demand at the high, you could certainly bring price point down and leverage that, but if you start at the low end it's very hard to move up later, so I think not only now with the footwear acquisition, with Luxottica, I think over the next couple years you'll see us continuing to try to be very aggressive behind marketing and distribution of accessories.

Rugby, which Nancy alluded to is performing very well.

We do have 8 stores already committed to.

We have a three year plan that would get us up to 50.

In fact, the first 5 stores gave us a real education about which kind of real estate locations work, which ones didn't, and now we're much more comfortable in terms of the go forward position on the type and quality of real estate.

We will see mall stores.

We will see street and neighborhood stores.

We'll also see the right kind of community stores, so the good news is the University Place store has been an astronomical success. [Inaudible] has been a phenomenal success.

Blueberry street in Boston has been terrific, I think we're ready to go much more aggressively after this business both male and female customers seem to be reacting very well.

So it could be more than the 8 but that's what's currently on the board.

Certainly, had a three year plan presented to our Board yesterday and they're very bullish about our ability to roll that out more aggressively if we can find the right real estate.

That sounds great and just a quick follow-up on accessories.

Handbags?

Could you just update on where that business is going for you guys?

Yes.

Well, we have a license arrangement with [Botny].

They continue to run that business for us, we continue to work with them on design and marketing and advertising, and we think that it's an opportunity and we're working with them to pursue it.

Terrific, thanks a lot, Roger.

Okay.

Thank you.

We'll take our next question from Liz Dunn of Prudential.

Hi, good morning and let me add my congratulations as well.

Good morning, Liz, how are you?

Good.

I guess my first I'll ask them all at once.

The question on Europe, can you discuss where you are on margins in that business and what the wholesale-retail mix is?

The second question is on the tax rate.

What should we be modeling going forward and is there any way we can feel like there will be some more stability around that because it was much higher than we anticipated in this quarter and took quite a chunk out of the bottom line even though you guys did beat by a nice amount?

And then my final question is on denim.

So the 200 million that you intend to do in denim this year, is that the domestic number in Lauren, the Polo Ralph Lauren and Rugby and Chaps?

Those are my three questions.

Okay, I'll do the Europe and denim and Tracey will do the tax question for you.

Okay, thank you.

I'll be listening carefully to the tax answer too.

The European Business has been spectacular as we've said.

We're getting terrific sales growth, we're getting it both in wholesale and retail.

Right now, the split between wholesale and retail is about 2/3 wholesale, 1/3 retail.

We think retail over time will continue to grow as the reaction to our products and new stores have been terrific.

The actual margins in Europe are much higher than the United States, but so are the expense rates.

It's a much more expensive place to do business.

Therefore, the operating margins of that market are higher than the U.S., but it's with a substantially higher gross margin and a higher expense rate and nevertheless, it's return on investment now is quite strong.

Inventories, supply chain issues that we invested so much time and energy and we've spent a lot of time talking about are working beautifully and we continue to elevate the brand.

We also bought back our Scandinavian prior distributorship last year as we began to take on new territories and I think Europe is really a bright spot for us.

The denim business and the 200 million that we talked about, let's remember that when we bought the business it was a $300 million business which we clearly articulated we were going to drop $100 million of the off price business and task ourself to deliver 200 million in the first year.

We are right on track for that and we are right on track to deliver our forecast, but that business will be shifting as I talked about into these new product lines.

The men's business, women's business as we talked about tiering, but to your question, the 200 million is the domestic piece.

Separately, we do through licensed partners about 85 million in the Asia Pacific region and we do about the same amount of that business owned in Europe.

So there's $170 million internationally, the $200 million is really the domestic business.

Tracey will talk you through the tax rate.

Hi, Liz.

Hi.

Yes, as we spoke last year, we were saying a fairly significant shift in our business model and we certainly exceeded expectations in both of our domestic wholesale and retail businesses this year.

And licensing was flat and there are differential tax rates related to the various segments of our business.

So what we did in the fourth quarter was really true-up our tax reserves related to all of -- a number of different items, one of which was the shift in the business to more wholesale, domestic wholesale and retail.

And out of licensing, so, in addition to that we had spoken last year about higher state and local tax rates in some of the areas where we have our businesses flowing through from an entity standpoint, New York and New Jersey in particular.

So that has had effect on us as well.

In terms of your question for fiscal '07, the 38.8% tax rate should be a good rate to use for fiscal '07 in light of the acquisition of Polo Jeans, footwear growing now from a profitability standpoint, again those being in our domestic wholesale business so that should be a safe rate to use.

Okay, thank you very much and congrats again.

Thank you.

Thank you.

We'll take our next question from Omar Saad of Credit Suisse.

Thanks, good morning.

Good morning, Omar.

Roger, I wanted you to and I know you've got a couple questions about it already, but I wanted you to address the retail business a little bit more specifically in terms of, you're raising your long term operating margin target for that business.

Just wanted to get a little better sense why the store growth on the Ralph Lauren side of the retail business is -- seems to be decelerating versus last year.

I think you mentioned 3 new stores upcoming.

Is it, what are the key drivers there?

Is it just the real estate opportunities or a holistic view?

Well, let me talk about retail a little bit more fully and then we can get into store openings.

Obviously, as Margaret who's been following the story from the beginning knows for us to be producing operating margins at 9% represents getting close to top quartile performance and if you really looked at it on an EBITDA basis even higher, so we are now performing at a rate of a serious retailer and the time, energy, and money we've invested in that has paid off handsomely.

We are very selective about where we put stores.

We do not have a cookie cutter mall-based stamp it out approach, so the store count that we have and the store count we've grown to domestically plus what we're building in Europe, has always been on a 1 by 1 location basis.

So whether it's a flagship in Tokyo, whether it's a flagship in Moscow, whether it's a new store in Milan, or whether it's a store in [Confran], we really are pursuing the best of the best locations and I think that number is flexible based on what we see.

I think there's plenty of room for Ralph Lauren stores.

We continue to surprise and amaze ourselves with the productivity of those stores, our sales per square foot are now approaching $1,000 domestically and well over that in the European field, so with that kind of productivity, we have plenty of places we can go.

We're seeing that whether it's in Aspen or whether it's in New Canaan so it's not just a Madison Avenue distorting the number and I think you'll see us continue to look for more U.S. and European locations.

Obviously the Asian market over time will represent the largest opportunity for new store growth and we're just getting our toe in the water with the flagship in Tokyo, so we're very bullish on this, we think it's a very complementary strategy to the wholesale and licensing strategy.

We've done interesting work.

I think we talked about it a couple years ago on balancing wholesale and retail in a market.

We talked about Washington, probably haven't updated you in awhile but since we opened the store in Tyson's Corner, Georgetown and 1 in Chevy Chase, there's spectacular retail experiences.

Each one is different.

Each one has a Ralph Lauren feeling and our business in that market and wholesale is that much stronger too, so we're really seeing a very thoughtful, interactive real estate strategy between wholesale and retail working for us.

Rugby, quite frankly, can over time go anywhere and should be hundreds of stores, we're just getting started.

We've really spent the bulk of the time getting the product right, the look of the store right, that may require a bit more of a formula to stamp those out more quickly, but each one of those is a unique shopping experience and we're finding not only is it hitting the 18 to 25-year-olds, we're getting their mother in the store as well, so it really has reached out to a broader range of customer than even was originally contemplated, so we're bullish on the territories we're in.

We chose to work with a license partner in Moscow.

It did not, after several trips, look lake a market we wanted to go alone.

We think we've got the right partner, we'll design and build the store, and we'll assort the products so it will have the exact look and feel of any of our worldwide stores and we think there's a real appetite for our presence in Moscow.

So I think that the retail story is getting more interesting by the day.

That's a very helpful answer, thank you.

And then one more if I may.

When you look at the overall mix of business men's I think, at least the last time you reported the numbers which may have awhile ago but men's apparel is still close to double the size of women's.

How do you think about the female consumer, where your brand is positioned, and what's your plan to kind of capture that just given the fact that women obviously are somewhat significantly bigger shoppers than men in general.

Well, I think Omar, the fact is starting out in the men's business our mens, whether you measure it in retail or wholesale has always been bigger but womens is catching up quickly.

There is no doubt that over the long haul I think womens could be bigger than mens and I said in my preamble the fact is in our own stores where we represent them in most cases on an equal basis, the women's business is larger than the men's business, so I think as we've really done an outstanding job at Lauren, I think as we have done an amazing job with Blue Label on a worldwide basis, I think as we've looked at and defined and then executed the Chaps business for women's which I understand is the number one performing resource at Kohls, I think that we're seeing enormous growth in women's and I think it will continue.

I think that there is no doubt on a worldwide basis that demand for women's products is higher than the demand for men's products and I think that's true of apparel and I think that's true of accessories, so, I think it's very clear.

We have to continue to work on and develop and distort and space the women's business because I think that it's where the future real growth is going.

At the same time, we've got the world's biggest men's business so not to set up internal competition.

We would never think of doing that, but the fact is the women's business is going to continue to accelerate and outperform.

Great.

Thanks.

Great job.

Okay, thank you.

Thank you.

We'll take our next question from Gabrielle Kivitz of Deutsche Bank.

Good morning and congratulations on another very strong quarter.

Thank you.

So I have two questions.

The first is on Chaps.

The second is on the accessories business.

So first, quick question on Chaps.

Could you just discuss the distribution plans?

Will you expand or broaden distribution beyond Kohls once the one year exclusive agreement is up and also is there a retail opportunity for this brand some time in the future?

And then the second question is on accessories.

Wait let me just answer that one first.

The Chaps distribution right now is in women's and kids and all of the new categories, we have been willing to work with Kohls on a one year.

They are obviously very anxious to continue that exclusivity and we are in discussions with them, really no decision has been reached at this point.

Interesting to us is the immediate reaction by the customer.

We were somewhat mutually nervous about whether the price points we were going to try to sell would fit in with the average price points they had experienced and I think we commented in February when we only had a very short selling history under our belt, but today, we continue to run twice the average retail out the door price that they have experienced in women's which is phenomenal and they're very excited about, so all of the plans to date with Kohls have been about how can we do more?

How can we expand this?

What are new merchandise categories, and with their growth plans, at least they've announced recently the opening of hundreds of stores over the next couple years, we are in serious discussion with them about the future of that exclusivity so we'll keep you posted as we know more about it.

The accessory question was what?

Sure and actually before I move on to the accessory question, is there a retail opportunity for this brand some time in the future, your own retail opportunity?

I think that with all of our brands, we always think retail first and we certainly have a lot of ideas on the table but I think in this case, we probably have a lot of other priorities in terms of expanding our retail and extending our brands through retail networks before we think about Chaps.

Great.

You certainly have no shortage of opportunities.

And then the question on accessories, at what point do you start to leverage some of the design and infrastructure investments in the accessories business, or I guess if I ask the question in another way at what point does the portion of the category that you own become higher margin than the core business and how much higher can it be?

I'm going under the assumption that this can be a higher margin business as accessories typically is higher margin than apparel, and then ultimately, how much of the mix or how high can the penetration of accessories be and what percentage of that would be owned versus licensed?

Thanks.

Wow.

That's a big question.

I would say that historically, people who are both in the apparel and accessory business report accessories can have higher margins so I think over the long haul we would look for that too.

I think we're a little ways away from that being a reality for us.

We have invested heavily in design, heavily in product development, for us, we have to develop a brand new manufacturing and sourcing base which we've done with footwear that did not come out of our core competence in apparel, so we are probably in the early stages of building the talent and building the infrastructure, even logistics.

It's different shipping a box of shoes than it is apparel, but one of the interesting things that has happened is the impact we've had on some of the license businesses.

We have spent a lot more time with the Lauren accessory licenses and working much closer to coordinate that with the successful Lauren apparel, so even in a license business, where we're playing a more active role, we're seeing very good reaction to categories like belts or scarves or things like that because they're much more closely aligned with the apparel.

I think this is a long term play for us, quite frankly.

I don't think we're going to see huge incremental margins in the short run, but I do believe, after women's, this is the second largest merchandise category available to us and should come through at very high margins.

Wonderful.

Thank you.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our next question from Jeffrey Edelman of UBS Financial.

Thank you, good morning.

Roger or Tracey, is it possible for you to quantify some of the start-up expenses and costs for new initiatives in the fourth quarter as well as potentially in the first quarter?

I don't think we could give you, should we call you Jeff Edelman or Jeff Meddelman?

Anything you want.

I just want to make sure it was still you.

I don't really think we can do that, but let me give you an example that might capture the flavor of it.

As you can imagine, the cost, time, and energy to open a flagship in Tokyo was quite extensive and we had five days of sales, so normally if you apply, clearly a quarter's worth of expenses to something like that and you had a quarters worth of sales it would be a better economic reality, but when we only had five days of sales and we had a quarter's worth of expenses that becomes a very negative impact on the business.

Obviously, Polo Jeans which we got back into February, there are a lot of transition costs, accounting issues that go into that business as we begin to offer new thoughts and yet we only had less than two months sales, so on a lot of these categories, there is not even a full quarter of sales against start-up expenses, and that begins to moderate as you move through the future quarters where legitimate sales begin to come online whether it's Omotesando, whether it's some of the transformation of Polo Jeans and as we begin to deliver our new fall footwear, we begin to deliver normal sales hopefully with improved margins then really the clean up of that business which has been going on for nine months.

So without being able to give you a hard number, the facts are clear that the investments we're making in the future are somewhat in the short run negatives.

But our track record says every time we've done this and the way we've done it has worked out pretty well.

So we're confident.

Could you help us out a little bit, we look out over the next several years and you said you presented some of the objectives to the Board, how do we think of next several year top-line and bottom line growth?

Obviously you've made some great inroads in gross margin.

Will we see these ongoing expenses and initiatives to continue to grow and expand business categories?

Or is it going to be like you're going to all of a sudden catch up and they won't be there?

Well, I think the answer would be over the next couple of years, I think our plans anticipate a growth in margin but less robust than the last five years, certainly we've had amazing margin improvement over the last five years, we do not expect that rate of growth to continue, but we do expect margin improvement.

I think, separately, Jeff, as the sales volume continues to push higher and higher then some of the start up expenses have less individual impact on the P&L and I think we would expect to see some expense leveraging going forward, so the reality is some margin improvement, some expense leveraging we think is what will drive the operating margin improvements, and most of the last couple years have been higher start-up expenses and spectacular margin improvements.

So the tone and the mix of where we're going begins to change.

I think we're in the early stages in terms of growth internationally.

I think we've been bullish on that for awhile, we've seen the return on our hard work in Europe and we expect that to continue, so I think while the domestic market certainly has issues with mergers and consolidations and other subjects which we're all very familiar with and have talked about over and over again, I think the fact is for this brand, for this Company, with the kind of management team we have, with the kind of product we have and the reception to the brand we have, I think we'll continue to see the international opportunity to be a very large one for us and I think we're all very excited, both the executive team, the employees and the Board.

Okay, great.

Thank you.

Thank you, Jeff.

Thank you.

We'll take our next question from Elizabeth Montgomery of Cowen and Company.

Hi, guys, congratulations on the good quarter.

Thank you.

Two quick questions and Roger I guess the first one, I was always under the impression that the Polo Jeans shopper was a little bit younger, and do you think you'll lose some of those consumers when you transition out of the label in the U.S?

Or is Rugby really meant to address that consumer going forward?

I think you're right about the Polo Jeans was always aimed at a slightly younger customer.

And I think as we transition Lauren which is clearly an older customer or Polo which can span ages, we expect to backfill that with Rugby and we expect to backfill that with Rugby on a basis of vertical retail.

So some of that young trendy denim business where you see resources that are hot for a year or two and then they fade and the next one hot for a year or two and then they fade, I don't think that's the business we are interested in pursuing.

Those people come and go like meteors.

I think we're looking for denim and denim related categories will be a much more important and stable part of our tiering of existing brands, and I think we'll pick up that younger customer that leaves the kids business and is not yet into the adult business with Rugby where we're getting great reception to the denim products we have now.

Okay, great.

Thank you.

Thank you.

I also wondered if you could just address briefly what the size of the Blue Label business may be, preferably in the U.S. and maybe internationally as well since it's grown so much over the past several years?

Yes, we really don't break that number out.

Just to remind you we sell it exclusively in our own stores domestically, it is certainly the fastest growing part of our women's business right now, internationally in Europe and Asia it has been wildly successful, so we are well on our way to hundreds of millions of dollars, but we don't break the individual figures out.

Could I ask this way then, in your own stores, is Blue Label and RLX a bigger portion than Collection?

No.

Actually the largest volume single brand we have is Black Label.

Black Label and Collection together are 65% plus of the business, so while Blue Label is growing, in our stores we are absolutely oriented to sell the luxury customer and that's Collection and Black Label.

Okay, great.

Thank you.

Thank you.

Thank you.

We'll take our next question from Christine Chen of Pacific Growth.

Thank you.

Congratulations on another wonderful quarter.

Thank you, Christine.

I was just wondering you had mentioned on your last call there would be about $0.05 due to the disposition of Caban and it looks like it was only $0.04 and I guess there's $0.02 in Q1 and you had also mentioned about $0.05 dilutive impact of Polo Jeans.

Was that actually the case for Q4 that it was about $0.05 due to the jeans acquisition?

It was slightly better than that, Christine.

It was more in the neighborhood of $0.04 for Polo Jeans in the fourth quarter.

And in the first quarter, the carry forward for Caban which relates to a lease termination and it's actually it's not Caban, it's Club Monaco and it's one of the outlet stores that we'll be closing, it's $2 million.

It's not $0.02.

So that's?

More like $0.01.

Okay.

And then, as far as the Rugby stores, I think you'd previously said that you needed about 36 of them to be break even.

Is that still the case?

Yes.

And your plans for the number of Rugby stores in 2007 is still at around 10?

Well, we have 5.

We're planning right now to open 8.

Okay.

So we're up to 13 and then I think the work is already being done to leapfrog this year into '08 and '09 and we're aggressively looking to rollout more quickly after that.

More in the neighborhood of 20 stores a year.

Okay.

When you're in the start up, you only have a 5 or 10 store base, if you try to open 20 at a time, you swamp the base business because you're basically opening a store every other week and that can swamp the business so we're trying to not only find the right real estate, but do it at a pace that we can continue to manage it.

This year's portfolio of projects have already been put to bed so we are working on '08 and '09 right now as we speak.

And then have you seen any discrepancy in the performance of the stores between your street locations such as in New York City versus maybe at the mall like at Stanford mall ?

Well, at this point, with Rugby are you talking about?

Yes, with Rugby.

We're not in any malls yet.

The only thing I could tell you is that the stores that we've opened have been spectacular.

The only learning we have which we will factor into future real estate is stores that are solely based on college towns that don't have a business beyond the student population are probably not locations that can command a 12 month a year store.

So where we thought there would be an attractiveness for the college students, there certainly is, so on a Newberry Street you get a lot of college students, but there's also an urban environment, University place, we certainly get a lot of NYU students. but there's also an urban environment.

Where we've looked at stand alone college towns based on their schedules, summers off and their pattern of shopping, probably don't see that as a big part of the real estate portfolio going forward.

Okay.

And then my last question, just want to clarify, so you had previously said for '07 that operating margins would be flat, excluding the impact of options expense, but now you're saying, flat including options expense; is that correct?

I'm not sure about the first part of it.

It is flat including the expense and we are estimating the expense at $0.15 to $0.20 depending on the stock price.

Right.

That's correct.

Okay, great.

Thank you and good luck for the rest of the year.

Okay, thank you all.

I'm sorry the call ran a little longer, but we are very excited about the upcoming year.

As Margaret said, on with the new and we are deep into the new, so any other additional questions you can follow-up with Nancy or Denise during the day but we appreciate your staying focused and listening.

Thank you very much.

This will conclude today's conference.

We would like to thank you all again for your participation and wish you a great day.