雷夫·羅倫馬球 (RL) 2007 Q1 法說會逐字稿

Good morning, and thank you for calling the Polo Ralph Lauren first-quarter and fiscal year 2007 earnings conference call.

As a reminder today's conference is being recorded.

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

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

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

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

Please go ahead, ma'am.

Thank you, and good morning everyone, and thanks for joining our call.

With me today is Tracey Travis, our CFO, and she is going to review our consolidated financial performance.

Then I will review our segment results and our outlook for fiscal '07.

And then Roger Farah, our President and COO will give you a business update and also answer your questions.

As you know, we will be making some forward-looking comments today which include our financial outlook.

And the principal risks that could cause our results to differ materially from our current expectations is described in our SEC filing.

And now I would like to turn the call over to Tracey.

Thank you, Nancy, and good morning everyone.

We are quite pleased to report our first quarter results which as you are aware exceeded our initial expectation.

In the first quarter we generated $80 million in net income or $0.74 per diluted share compared to $51 million or $0.48 per diluted share last year.

Effective with the beginning of fiscal 2007 we have been required to comply with FAS 123(R) and as a result are expensing all stock compensation costs.

Our first quarter results reflect $2.6 million of incremental stock compensation expense or a penny per diluted share based on our fiscal 2007 June issuance of equity award.

For the full year we expect incremental stock compensation expense to be approximately $18 to $25 million or $0.10 to $0.15 per diluted, share.

Regarding our top line, stronger world-wide demand for our products generated increased full price sell-throughs in our retail stores and through our wholesale partners which resulted in a 27% increase in total net revenues to $954 million from last year's $752 million.

Excluding the impact of the Polo Jeans and footwear acquisitions in the quarter, total net revenues still increased a healthy 19%.

Wholesale sales the results were driven by the successful introduction of the new Chaps women's and kid's productline at Kohl's, as well as very solid performance in our domestic men's, Lauren and children's wear spring and summer line.

Europe showed tremendous strength across all brands and in all countries with the exception of Spain, adding to the wholesale segment increase.

And we had a 15% increase in total retail sales driven by increased sales in all of our retail formats including stellar performance at polo.com.

Our gross profit in the quarter increased 28% to $532 million from $414 million last year with a gross profit rate expansion of 60 basis points to 55.7% of net revenues versus 55.1% last year.

Gross profit in the quarter benefited primarily from better full price sell-throughs of spring and summer '06 merchandise, disciplined inventory management and the positive effects of our ongoing sourcing initiative.

While we reported a 19% increase in selling expenses, SG&A in the first quarter compared to last year, we drove a 270 basis point expense rate improvement, 41.7% this year compared to 44.4% last year.

The expense dollar increase was driven by costs associated with the newly acquired footwear and Polo Jeans businesses and to support the incremental retail sales in the quarter.

Our expense rate improvement was primarily due to leveraging of the incremental sales volume over our existing infrastructure.

Last quarter we described our intent to dispose of all eight Canadian Club Monaco Caban home stores.

In the first quarter of this year we recorded a $2.2 million charge relating to the closing of these stores.

At this time we estimate an additional charge of approximately $1 million will be reported in the second quarter relating to the final closures.

In the first quarter we generated a 66% increase in operating income or $133 million compared to $80 million last year.

The resulting operating margin of 14% represents a 330 basis point margin improvement from last year's operating margin of 10.7%.

Regarding our balance sheet we ended the quarter with $429 million in cash or $138 million of cash net of debt.

We have approximately $291 million of Euro debt which as mentioned previously we currently intend to refinance at or before its maturity in November of this year depending on favorable market conditions.

Our debt compared to market cap is 5% as of the end of this quarter, and the ratio is among the best in our industry.

Recently our credit ratings were upgraded by Standard & Poor's from BBB to BBB+ because of our strong business position in the industry as well as the Company's continuously improving trends in revenues, margin and credit protection measures, despite the highly competitive operating environment.

We ended the quarter with inventory of $526 million, up 12% over last year's $467 million, primarily reflecting the additional inventory related to the Polo Jeans and footwear acquisitions.

Of note, wholesale and retail sales excluding licensing royalties increased 30% on this 12% inventory increase.

We continue to utilize our strong operating cash flow to make reinvestments into our business with appropriate returns.

For the quarter our capital expenditures were $35 million comparable to our first-quarter fiscal '06 spend of $33 million.

We also repurchased in the quarter approximately 1.2 million shares at a cost of $68 million.

As a result, we now have approximately $32 million left on our existing share repurchase authorization.

And our diluted shares outstanding were $108.1 million in the quarter, an increase of 2.6 million shares over the first quarter last year.

We continue to invest prudently in our retail and wholesale businesses and in the infrastructure to support our growing global franchise.

Our initiatives have resulted in steady increases in our shareholder return.

At the end of the first quarter we had a pretax return on investment of 32% compared to 22% last year while our return on equity rose to 19% from 16% for the same period last year.

And with that, I would like to turn the call back to Nancy.

Thank you, and as Tracey said this was an outstanding quarter in which we exceeded expectations and continued to reinforce Polo Ralph Lauren as the world's premiere luxury lifestyle brand.

Our retail revenues in the first quarter increased 15% with comps up 7.2% reflecting increased sales in all of the Company's retail formats including polo.com.

Polo.com was a very strong performer during the quarter with a 49% sales increase.

Driven by strength in men's and women's with particularly strong growth in children's wear.

We posted a 3.7% comp in our Ralph Lauren stores globally.

We had strong comps once again in Europe due to the growth in all major product categories, primarily driven by our new Fashion product.

In women's Blue Label experienced strong ongoing demand throughout the quarter, and our Black Label suiting for men had a good performance and in Europe our children's business continues to grow.

In our domestic retail stores women's Blue Label also had an excellent quarter performing over plan with Blue Label fashion items really driving the sales increase.

Ralph Lauren Home and men's Polo sportswear also performed well for our Ralph Lauren stores.

Our Rugby stores are meeting our expectations with good performance in both men's and women's apparel.

This quarter we opened two Rugby stores, one in Palo Alto and the other in Georgetown bringing the total to seven stores.

As we previously announced we plan to open an additional six Rugby stores in fiscal '07 in key locations such as Seattle, Chicago, Dallas and Greenwich, Connecticut, and all of those stores are on track with our original opening plan.

At Club Monaco we have repositioned the business with a focus on fashion apparel and accessories.

Strong customer reaction to the spring and summer product, particularly women's sportswear, dresses and accessories drove 9.4% comps.

And fall is off to a good start despite our New York heat wave.

Additionally we are expanding the Club Monaco Brand internationally with strategic licensing agreements.

In fiscal '07 we will open 26 stores in the Asia-Pacific and Middle East.

The closing and disposition of the Caban stores and Outlets is on plan with the final closings completed by mid-September.

In our worldwide factory stores we posted an 8.4% comp which was a result of our increased focus on our women's and children's lines and the shift of Easter to April this year.

Adding to this very strong performance was our focus on assortment, distribution and store productivity.

Our retail segment had an amazing first-quarter generating operating income of $65 million compared to $36 million last year, representing an 81% increase over last year.

Correspondingly we delivered a 15.7% operating margin, and that compares to 10% last year, a 570 basis point improvement.

This gain was driven by stronger full price sell-throughs and solid expense management offset by the initial investment for the Tokyo flagship and the Rugby retail concept.

In wholesale we reported a 46% sales increase over last year's first-quarter; excluding the sales of Polo Jeans Company and footwear lines revenues in wholesale increased 26% primarily due to a successful spring season for the Chaps for women and Chaps for boy's lines at Kohl's, and increased sales in men's wear, Lauren women and children's wear line.

As I mentioned earlier, Europe had another terrific quarter as we continue to elevate the brand abroad and drive strong margin performance across all of the brands.

We opened shop in shops in key doors such as Harrods, and Selfridges for Collection and Black Label.

Our women's clothing performed exceptionally well in Europe, particularly Blue Label for women.

Children's wear was also highly successful this quarter, particularly in the UK, Germany and Spain.

Our groundbreaking sponsorship of Wimbledon generated significant public relations exposure globally and really positioned the brand in an elevated manner with free-standing shops in Harrods, windows in Collette's in Paris and as I mentioned a tremendous amount of media coverage about our sponsorship.

For the first quarter our wholesale operating profit was $90 million, and that compares to $46 million last year, a 95% gain.

Operating margins expanded 470 basis points in the first quarter to 18.4% and that compares to 13.7% last year.

Those results were driven primarily by improvement in gross profit and strong expense leverage in the core productline, which was slightly offset by lower margins and the newly acquired Polo Jeans Company and footwear.

Our first-quarter licensing royalties were $50 million this year compared to $57 million last year.

For the quarter operating income was $26 million compared to $35 million last year.

The decrease in licensing royalties and operating income was primarily due to the elimination of royalty from the former Polo Jeans Company and footwear licenses.

Now let me provide you with an update on our outlook for fiscal '07.

Based on our strong first-quarter results, we expect the full-year consolidated revenues will increase in low to mid double-digit, and we expect operating margins for fiscal '07 to increase slightly, and that includes the incremental expense of stock compensation that will range from $18 million $25 million for the full year.

As a result we expect earnings per share for fiscal '07 to be in the range of $3.25 to $3.35, and that includes the dilution of $0.10 to $0.15 per share for the incremental stock compensation.

I would also like to remind you that this outlook also includes the neutral effect on EPS of Polo Jeans which we acquired in February this year.

For the second quarter fiscal '07 consolidated revenue growth is projected to be low double-digit, reflecting mid teen percent growth in wholesale, low double-digit percent growth in retail and a mid single percent decrease in licensing.

Operating margins for the second quarter are expected to be slightly lower than the comparable quarter last year, including incremental stock compensation expense of approximately$6 to $8 million.

And now I would like to turn the call over to Roger.

Thank you, Nancy and good morning.

Obviously it was a terrific quarter with very strong performance across all business segments around the world.

I think Ralph said it best when he said "one of the keys to our success is that we convey our passion in a clear point of view in everything we do."

We have a powerful organization that is focused on the success of our brand long-term.

We will continue to focus our management efforts and investments on the long-term initiatives with accelerated retail expansion to further elevate our brand through the appropriate channels of distribution and to build and leverage our global infrastructure.

Tracey and Nancy had given you the numbers on the quarter, but let me add some color to the segment.

In retail the strong comp continues as we focus on driving higher sales per square foot.

During the last four years we've raised our sales per square foot from approximately $500 to almost $900 a square foot.

We are really concentrating in all formats in improving the flow of new fashion product and how we present them to the customer.

We continue to tailor our assortments by region and by door, and we're getting improved gross margin rates from better sourcing and better full price selling.

We continue to focus our merchandising and growing women's, accessories and the children's businesses, and this will continue over the next couple years and we're getting the benefits of that.

Additionally sharing best practices across divisions has given us good expense leverage on this incremental sales.

These common themes really run across all of our retail concepts and is paying dividends with growing sales and margins worldwide.

In wholesale we clearly had an outstanding quarter with terrific flowthrough and tremendous improvement in profit rates despite the transitional costs and impact of Polo Jeans and footwear which we expect to contribute positively in fiscal '08.

The creative teams have given us unbelievable products.

In every area of our business the level of product just keeps getting better as Ralph's vision is being executed across all productlines and price points.

We continue to refine our line plans and focus our assortments by customer, by region, by door.

We are improving the flow of fresh fashion at the right time, and this has in addition to the tremendous improvement with our sourcing group, is giving us a strategic advantage.

We are leveraging our growing scale for efficiencies in transportation and logistics where we are seeing real savings and speed to market despite the growing gas prices.

Obviously that is leading to better sell-throughs, faster inventory turns and improved profits.

Internationally, as Nancy said, Europe had a powerful quarter both in retail and wholesale.

All distribution points benefited from our long-term strategies, which are very consistent with the same key points in retail and wholesale I just mentioned.

High sell-throughs of spring/summer, careful focus on individual doors and developing the fashion and high-end businesses particularly Collection and Black Label.

We continue to elevate the luxury products in our own retail stores and key points of distribution through the wholesale network in Europe.

Additionally we are adding significant money to the marketing and PR efforts in Europe, and as Nancy said, the success of the Wimbledon investment has been tremendous.

We are also receiving tremendous leverage from the Systems and supply chain investments we've made in Europe over the last few years to flow fashion product at the right time to our customers at a lower cost.

In Asia we had resources to improve the oversight of this license business.

We want to elevate the luxury and fashion assortments in all of our key doors in Asia which we believe will begin to pay off for us in fiscal '08 and '09.

Operationally we've made major investments and spent a lot of management time on improving our ability to handle new businesses and geographies.

We continue to drive for best-in-class operation performance.

Sourcing and manufacturing improvements of both existing product and new merchandise opportunities have been the backbone of our improved margin.

Logistics and distribution have taken on all the new businesses without any real investment in brick-and-mortar using cross stocking and third parties, where we now handle twice as many units as three years ago, at a lower cost per unit.

We are about halfway through the system changes that will impact all of our wholesale bookings, shipping and manufacturing worldwide.

Chaps, Lauren and kid's are up and running and we will be adding men's, footwear and denim this fall.

Europe will come online next year and at that point we will really see some of the full benefits that we hope to achieve.

All of these changes have been made with little disruption to the existing businesses.

We believe we are uniquely positioned among luxury and apparel companies with global reach, breadth of product and multiple channels of distribution.

Our operating success has been driven by our focus on six objectives; creating diverse businesses centered around one core and heritage driven brand, diversifying and expanding our product, prices, distribution channel and geographies, improving the control of our brand and its positioning, focusing on selective strategic partners and funding our expansion through strong operating cash flows and getting us the infrastructure improvements that we need to support a worldwide business.

These six key objectives will continue to be our focus as we strive for long-term brand elevation, growth and high returns for our shareholders.

Operator, I think at this point we will be happy to field a couple of questions.

(OPERATOR INSTRUCTIONS).

Liz Dunn, Prudential.

Congratulations.

As we look at the guidance for the balance of the year certainly the pace of sales growth and operating margin expansion is slowing.

Can you just walk us through some of the items that we should consider when doing our models in terms of how Chaps will flow, how Polo Jeans will flow and the footwear acquisition?

Because I know that there are a lot of moving pieces.

That is my first question.

And then my second question relates to Polo Jeans and footwear.

You mentioned in the prepared remarks that the margins there were somewhat of a drag on wholesale.

Are those permanently lower margin businesses, or is it just as you get the businesses sort of up and running?

And I know the jeans thing is transitioning.

Those are my two questions.

Thanks.

It didn't take very long to get right into the guidance, so let's jump in.

Obviously first quarter was spectacular on all fronts and really exceeded our own internal expectations.

The guidance we've given is really based on Q2, 3 and 4, really tracking close to our original thoughts.

It is very rare for us to give guidance increases after only the first quarter as many of you know; it has historically not been our largest quarter although the last two years have seen it grown dramatically.

Generally we wait until after the fall receipts have been in and we've got a selling reaction, and we've had a more complete reaction to the spring/summer lines of next year.

And so we've traditionally given guidance in November.

Having said that the first quarter was so strong we chose to up it and leave the rest of the basic fundamentals in place for the rest of the year.

Chaps is a positive Q's 1, 2 and 3.

We will anniversary the first deliveries in Q4, so at least for the first couple quarters that is incremental.

We are coming around the bend on the footwear acquisition, and that now becomes comp.

And obviously the early February acquisition of Polo Jeans will mean that is incremental to Q's 1, 2 and 3 and then a month of the fourth quarter.

The way we've looked at our businesses are I think as we talked about at the beginning of the year we've tended to plan our comps and retail for the year in the 4 to 5 range on a worldwide basis.

So obviously when we have delivered something better than that and we've run our businesses properly you can see the flowthrough impact, which 15.7 operating profit in the first quarter is pretty dramatic for us, as you know our long-term goal for many years was just to get to 8 to 10.

So we've clearly smashed through that and if we continue to deliver sales above our comp guidance you should see some incremental flowthrough.

But I would like to see how fall unfolds over the next couple months first.

It is a critical selling season for us.

Separately the first quarter benefited in wholesale with very strong European spring/summer deliveries plus reorders.

As you know first and third quarter have not traditionally been big quarters in Europe.

We are beginning to fill in that trough with thoughtful deliveries that are being well-received by the customer.

We also had good transitional deliveries in men's, Lauren and kid's in the first quarter as opposed to really waiting for the second-quarter call.

That coupled with ongoing strong replenishment orders, I think gave us the upside in the first quarter which at this point we can't predict for the balance of the year.

I think I would choose to wait until the November conference call and at that point give you more complete guidance on the full year.

But we are very pleased today to be able to raise the guidance significantly based on this first quarter.

Polo Jeans as we talked about last time, we are completing and shipping the balance of the on order that was existing when we bought the business in February.

That product will continue to ship through the fall.

It is coming through at lower margins.

It is based on a different point of view of our sourcing, a different point of view about margins than we will employ.

We expect those businesses as our new product comes online in January to begin to move to a more normal Polo Ralph Lauren margin structure, and there is no reason that business can't operate at the same margins we run our apparel businesses at.

We opened the men's fall line a couple weeks ago to very strong reaction by the retailer, and are seeing the brand be repositioned in some point of distribution that had been eliminated under the former Polo Jeans strategy such as Bloomingdale's and others.

So we're very pleased with that initial reaction.

The Lauren women's jeans will open in September, early commitments even without the line being viewed has been positive, so we're feeling very good about our strategy and all of that product will start shipping in January and February as we wind down the old and ramp up the new.

Additionally as we discussed the denim business has been expanded in the kid's line which was shown to retailers over the last couple weeks and I think there again we got a reaction that it was our best line ever.

So sitting here today we're feeling good about our strategy to transition the business and we're feeling good about winding down what existed and kind of ramping up the new.

And I think you will see that playing out in the fourth quarter and into next year where we expect to get more normal margins.

Did I cover everything, Liz?

I think you did.

Thank you.

Congratulations again.

You are welcome.

Thank you.

Robby Ohmes, Banc of America Securities.

Just a couple of quick comments, I was hoping to get out of you, Roger, the first one is just a comment on why or why not we could see a potential collaboration with you guys at JC penny?

And then the follow-up question would be can you, the way you sort of gave us a lot of timeline on all those businesses for Liz, could you give us more of a timeline on what you expect to see happen in Japan over the next three, four quarters now that you got that flagship open?

Thanks.

Let me start with your first question.

It was something in the trade papers about a possible collaboration with JCPenney, and there was plenty of speculation about that.

At this point we don't have any relationship with JCPenney.

I'm very pleased with the resurrection of that business and the direction they are heading.

I think we actually are learning a great deal right now through the Kohl's relationship and have learned a lot about product and product flow and sourcing and pricing.

We are only about six months into that, and really in close collaboration with them.

We are getting the product delivered on time.

They are very pleased with the average price that it is selling, it is significantly higher than their totals.

We have extended the exclusivity through fall of '07 based on our mutual desire to keep going that way.

And so at this point we are very pleased with how the Chaps business has been transformed into that channel, and then we will evaluate from there.

The timeline that Liz talked about, Robby, in respects to what?

Sorry, I thought you did a great job answering Liz Dunn's question sort of laying out -- how you look at your different businesses how certain things roll in or off by quarter.

And if you could sort of just look at Japan and help us understand, hey we opened this flagship store in March and then this is the steps or things that we expect to see happening over the next twelve months or so on the wholesale side of the business, etc.

That is a good question.

Sorry.

We opened the Japanese flagship at the end of March.

Interestingly enough in many key categories it is tracking as the second largest seller of key products after the Mansion.

The Japanese customer is responding very positively to newness and to fashion.

So we are very excited about the reaction we're getting.

What we've also done not only in Japan but throughout the Asia-Pacific region, is we've added expense to our staff and added organizational talent, which is working much more closely with the key licensees in Japan to up the amount of fashion and high-end product that is going to be offered to the customer starting this fall and more importantly into next spring.

We feel for many years we undermanaged that part of the world; they ended up selling large quantities of basics and core product, which is fine, but all of the upgrading we've done in the United States, all of the upgrading we've done in Europe we've just been slower in delivering that fashion and that newness and that luxury to the Asian market.

So we've begun to work much more closely in directing the assortment plans, controlling more carefully the manufacturing, reviewing shops, buildouts, locations with a much more hands-on approach in Japan and the rest of Asia.

And we expect this fall and into next year to see some payback for that.

It is a little more complicated doing it through licensees, but the licensees at this point are very enthusiastic having seen the Omotesando flagship, I think the whole region has been energized.

Terrific, thank you very much.

Virginia Genereux, Merrill Lynch.

Thank you, and hello Roger.

Maybe just quickly for Tracey and then I have one or two for you Roger, if you don't mind.

Tracey, the share repurchase in the quarter, a nice almost $70 million, was that opportunistic given the price weakness, or do you guys have some goal to sort of offset the options dilution this year?

No, Virginia, it was very much opportunistic.

Unfortunately we couldn't take advantage of the lowest price over the last few months because of the blackout period but it was definitely opportunistic.

And as we said we have 32 million left on that authorization.

So we will enter into the market opportunistically over the balance of the year, and repurchase shares.

Thank you, that's helpful.

And then Roger, can you just go through again if you don't mind the supply chain opportunity here?

You gave us, you had some good remarks on that and it sounds like that was a big contributor to the margin expansion.

But just again where -- you said you're halfway through this systems change, just exactly what those changes are again.

Let me take this sort of step-by-step.

One of the things that has been obvious is our manufacturing and supply chain five or six years ago was mostly built around the support of immense wholesale business and a smaller retail business.

As we've added merchandise categories like women's, as we've added children's, as we've dramatically grown our retail business, polo.com, Europe, now accessories, we have really begun to develop one, manufacturing expertise on a global basis to make a broader range of products at a very high quality but in increasingly efficient ways.

And I think the last two or three years of margin improvement the Company has enjoyed, much of that has come from those efficiencies.

We've also taken a very aggressive point of view about what I will call broadly logistics, which is the movement of goods from its manufacturing point to its final destination whether it is our own stores or wholesale customers.

Heretofore much of that product ran through Greensboro in North Carolina, which is a very large facility that we own.

The first step in moving that product more quickly was cross stocking.

So we began to pack and organize merchandise in its point of manufacturing to be able to come through the distribution center in and out in one day without opening the box.

That was step one.

What we've now gotten to is where that product can leave its manufacturing point, be cross stocked in California or Florida, whatever the entry point is, and not even come to Greensboro; thereby saving us the transportation back and forth and handling.

So that is really playing out now particularly with new product categories like Chaps and others.

Additionally, we've been able to through strong inventory management, which Tracey talked about, continue to free up space in Greensboro as we've been able to add acquisitions and bring that product in house and run it through a somewhat fixed cost brick-and-mortar investment.

While all that has been going on domestically, as you know we've rebuilt the entire European infrastructure, 14 distribution centers down to 1.

Where today the cost per unit of the product going through that facility is about 75% less expensive than it was a couple years ago.

So I think, and this is a subject that we could go on and on about, the last major leg of that stool is really the systems initiative that we talked about that will tie the front of house, the middle and the end together on a worldwide basis for every brand.

And that conversion which is extremely complicated we've executed the domestic Chaps business, we've executed domestic Lauren and kid's.

Footwear is coming up, denim will come up, Men's will come up this fall, and then Europe.

And once we are up on it worldwide we will be able to develop a whole new level of efficiency and savings in manufacturing and the management of inventory which should reduce excess, speeding our turns and hopefully capturing more sales.

We've gone through that transition now for the last couple years without any major disruptions to our business, and we are pretty proud of that and we have a lot of people working on it, but we are coming around the bend on that.

We should see the real leveraging of that on a global basis over the next 12 to 15 months.

So very major work being done on a behind the scenes basis, much of which is underpinning our ability to acquire and integrate going in new merchandise categories, new geographies and/or deliver some of the stellar margin improvements that you're beginning to see.

Thank you, Roger.

That's great and you made it very understandable.

A quick follow-up to that.

You mentioned I think you plan your full price comps in the 4 to 5% range in your own retail stores.

This quarter they were a little shy of that and yet you still delivered tremendous margin expansion.

Everybody is worried about the consumer, if comps and the full price stores are a little slower, can you still deliver that sort of margin plan given all the other tools in the toolbox?

Let me be clear.

We talk about 4 to 5 comps for total retail so for the quarter we were at 7.2, and therefore we did slow incremental sales over the total comp.

The Ralph Lauren stores were slightly below, but the Club Monaco and Factory stores were slightly above, so on average we came out fine.

If, however in total we would have missed those comp numbers, based on our tight control of the inventories, based on the higher margins we're getting, I think we still should be able to deliver those unless business really fell off the table.

So that's why I'm cautious about waiting till we get a better read on fall.

It has been a very hot summer.

We came out of spring/summer very clean and with very little clearance, so we're looking for fall product to sell.

It has been a little interesting in 100 plus degree weather, but the product looks beautiful.

I think we're going to deliver stronger fall results, but I would rather wait till November to have that dialogue.

Well, it's cooling off.

Thank you, sir.

Margaret Mager, Goldman Sachs.

Good morning, and great results.

Congratulations on that.

I wanted to ask you, Roger, about what's going on with the department store channel.

There has been questions about pressure put on brands and requests for extra discounts for conversions of May Company doors.

Can you talk about how you fit into that picture?

And two other questions, a little bit different.

CapEx, what is your plan for CapEx this year versus last year?

And how does that tie back into your comments that the ultimate goals for your company are to elevate the brand, grow and to provide good returns to shareholders?

So if you could talk about how you think about returns vis-a-vis CapEx.

And lastly, I just have a question about sourcing because you did highlight that as one of the things that helped your margins in retail in particular.

But what do you think the impact would be if the Chinese currency were to appreciate materially against the U.S. dollar, and how flexible is sourcing to move to other countries?

Just how do you think that would impact your sourcing or perhaps the industry more broadly?

Thanks.

Those are three juicy questions.

Let me start at the beginning.

The department store industry, which we went into the year with a lot of question marks, I think there has been some positives.

And let me just say I am pleased with Lord & Taylor finding a supportive owner and hopefully that business, which there was a great deal of uncertainty about where it was heading, is good news for them and for all involved.

I think the purchase of Parisian by Belk's and their ability to integrate and know the Southeast is also a positive.

And I think Federated/May are moving through their transitional issues in a very focused way, and hopefully the concern over disruption in the fall will be minimal.

So I'm feeling positive about a lot of those developments in the last month or two.

Our strategy in working with the department stores has been consistent, Margaret.

We actually sit down and review and work on every door that we have distribution, and by door with our partners.

We review assortments; we review capital spending by them and us; we review staffing if appropriate by them and us; and we review advertising.

And then we look at our full investment with each retail partner in order to try to help them move their business in the most productive way possible.

So when we sum up all of the things we do to mutually drive results, I think we both feel very good about our commitment to Polo Ralph Lauren, whether it is men's, women's, kids, home or any of the license businesses.

So we've worked very hard particularly with Federated and May to work through the transition, and so far goods for fall that we've delivered and gotten into the stores and the new doors seems to be doing well.

So I am confident we're doing everything possible to be good partners and make sure that product sells through to the end consumer.

I'm going to skip over CapEx which Tracey will talk about in a minute and go to the sourcing.

The leverage we've gotten out of our sourcing group and our continued expectation to receive ongoing efficiencies is very real.

We source around the world, whether it is Europe, South America or Asia, and the United States.

Clearly China is becoming a larger and larger player on the sourcing, for apparel particularly.

A currency movement there has what I will call modest potential ramifications.

We review where we place our product before every season and have flexibility to really go almost anywhere in the world.

So whether it floats or whether it is (indiscernible), I don't think we're smart enough to figure out, but I think we're prepared and flexible enough to deal with it.

Tracey, do you want to talk about CapEx and return expectations?

Yes, sure, Margaret.

Right now, Margaret, our forecast for the year for CapEx is around $210 million.

About one-third of that will be invested in our retail segment.

We plan to open 21 stores this year.

Our net store opening this year will be 10 stores.

But we plan to close 11, the bulk of those being the 8 Caban stores that I spoke about earlier.

So our retail stores are a big portion of our capital investment this year.

Another chunk of that investment will be in the wholesale segment, both in Europe as well as in the U.S. to invest in shop in shop.

Obviously we've seen a very good return in our shop in shop investment and will be investing across brands as it relates to shop in shop investments, both here and in Europe.

And lastly in the corporate area Roger talked about our Movex system implementation, which we are in the middle of right now.

So we do have capital investment relating to that, as well as some capital investment down in our distribution center as well as we expand our product assortment.

We look at certainly returns on every project during the course of the year; we have expectations of 15% to 20% on most of our CapEx projects depending on the project and the payback life.

And as I had mentioned earlier and Roger has mentioned as well, we feel good about the investments that we've made over the last few years even though our capital spending this year is expected to be higher than in previous years.

We have consistently grown our return on investment, and as of the first quarter earned a 32% return on investment.

But we are very prudent about where we spend capital and the return that we expect on it.

Thank you.

Gabrielle Kivitz, Deutsche Bank.

Good morning and congratulations on another very strong quarter.

I have two questions, the first is on the retail business, the second is on the margin outlook.

So first on the retail business Roger you mentioned the substantial progress you've made in sales per square foot productivity for your retail division.

Can that still go higher?

How much higher do you think that can go?

And which segment of the retail business has the most opportunity to improve sales per square foot?

And then still on the retail question, just wondering the last couple quarters it looks like you've seen somewhat slower comp store sales increases at the Ralph Lauren stores relative to the other retail segments.

Just wondering if there is any concern of any kind of slowing in spending at the higher end if you feel like you're seeing any evidence of that at all.

Okay, well our retail sales per square foot as I said earlier have grown from in and around 500 to in and around 900, and I would say we are comfortable we will deliver $1000 a foot plus.

I think we've talked in the past that Europe is higher than that and the domestic business is slightly lower than that.

But certainly our strategy to be careful about new stores and look for increasing productivity in the real estate and fixed costs we have I think has paid off for us in terms of significant profit and margin expansion.

So we will continue to look for that even as we begin to add stores around the world in markets we feel strongly about.

That incremental sales per square foot is very profitable and flows through to the bottom line.

As you know, we build very expensive stores so driving incremental sales through that existing brick-and-mortar is very important to us and I think we should see $1000 a foot as we go out.

The margin growth that we exhibited in the first quarter, 15.7, I don't expect that to be the run rate for the full-year.

But I think as we talked about last year having gotten to our goal of 8 to 10% or actually 9% last year, we are looking for substantial improvement on top of that.

And I think the first quarter is a down payment against that.

The Ralph Lauren stores in the first quarter are slightly below our goal.

Really that is against two very strong prior first quarters.

I think that was really just a function of strong spring/summer sell-throughs and not a lot of clearance at the end of the quarter, which for us is the sale usually breaks end of May and then into June.

So I don't think it is a sign of slowdown at the high-end.

Our business in Europe is very, very strong where we had more complete sell-throughs and deliveries.

I think we will wait and see what happens with fall.

That's helpful.

And then on the margins if I could just ask another question, I wanted to understand the gross margin improvement.

It was nice in the first quarter.

I think your anniversarying the liquidation in men's wear, children's, footwear etc. and obviously that is somewhat offset by your current liquidation in jeanswear.

Can you just help us understand how much of a benefit you may have had from anniversarying the liquidation in Q1 and why we would not expect to see continued benefit in subsequent quarters especially as the jeanswear liquidation tapers off?

I think the way we planned the year we had planned the year with margins down in Q1 and Q2 and then beginning to rise in Q3 and 4 as the impact of Polo Jeans and footwear begin to soften and begin to rise, particularly in the fourth quarter as we ship our new product.

I think the fact that we actually had a slight increase in margin in the first quarter is more an indication of the strength of the core businesses than it is in any different and expectations of our Polo Jeans and footwear.

They tracked as expected.

It was the core businesses that really beat the plan.

The current expectation is really impact in second quarter, still slightly negative with third and fourth quarters expecting to rise, and that is the way I think we still see the year.

With next year fiscal '08 beginning to show the full impact of positive Polo Jeans, positive footwear margins and what we think is more margin opportunity in our core businesses.

So that was our anticipation.

I'm not sure the liquidation per se of excess is a major driver in either this quarter or any of the subsequent quarters.

I think it is a combination of winding down the Polo Jeans inventory plus the on order that is still coming in and being shipped under the old strategy, is just coming through at lower margins.

Great.

Thanks very much.

Omar Saad, Credit Suisse.

A couple quick questions.

Roger you mentioned in the prepared remarks a little tidbit, something about you are changing the way you are presenting new fashion product to consumers.

I was hoping you could elaborate on that a little bit, give us a little more color on what you're talking about.

Okay.

As you know, we really take our inspiration from Ralph and how he designs, and Ralph's commitment to lifestyle and building brands.

And so what we've tried to do is make sure we are capturing the essence of that so it goes from the showroom and the way it is rigged and the way it is presented to the advertising which has been incredible and really captures the flavor of that.

Almost like watching the movie, we want to replicate that as close as possible in our stores worldwide.

So we are making a commitment to increasing the time, energy and money we put into that visual merchandising which we think is one of our distinct advantages in terms of how we run our retail stores.

It really helps us drive up multiple units sold per transaction, which is a key measure of the health of our business.

It helps suggest the lifestyle that the brand was built around, and so whether it is our stores in the U.S. or our stores in Europe or the new store in Tokyo, more and more we are trying to make sure we are as best we can, replicating the design inspiration that was behind each delivery.

And as you can imagine at any given time in our stores we could have as many as 20 different deliveries on the floor at the same time between men's, women's, kids, multiple price points, winding down spring/summer, new fall.

So the challenge of visual merchandising is a real one, and I think we have some of the talents in the industry working on this so we're feeling pretty good about the value added there.

When you look at your retail business and the returns on opening new stores, do you account for the notion that the stores act as marketing tools?

Yes we certainly do; particularly when the first year performance doesn't look too good.

Then we really call it marketing.

Look, we have a very clear point of view that retail done to its best, is not only good for the brand and the brand image, but it is profitable.

And I think our results speak to that.

So do we try to find the best locations and build the best stores we humanly know how?

Absolutely.

Do I think they are some of the best stores if not the best in the industry?

Absolutely.

But we do task ourselves to make a return on investment that is a positive for the shareholder.

And I think Tracey rattled off pretty impressive numbers, and so as we look to spend capital we certainly balance that against other alternatives.

I think in the last couple years we've spent $1.4 billion back into our business, roughly half of that on acquisitions and roughly half of that back into retail shop in shops or infrastructure.

I think again Tracey called out some numbers that says we've been pretty smart about that and we're getting a good return.

We will continue to do it on a worldwide basis.

And then quickly one more question, you mentioned extending the exclusive Chaps license with Kohl's through fall '07.

Wanted to get your thoughts on how you think about the exclusive brands for retailers.

You hear a lot of retailers clamoring that they want to have different merchandise than everybody else and unique merchandise.

When you think about your portfolio and how retail is evolving, what is your philosophy on that?

As you go forward?

I think I would say the following.

Ralph is very clear on what the message is of each line and each brand.

And I think we all work hard to figure out the absolute right channels of distribution, whether it is our own stores, specialty stores, department stores and our ability to match that up with increasing professionalism I think has helped our overall business.

Because we've been very disciplined about where we put lines.

I think a lot of retailers are looking for differentiation and exclusivity, and I think that's fine.

I think it is fine as long as the product is really different.

If it is really the same product as what is down the hall with a different label on it, then it is really just a promotional tool.

So we believe in what Kohl's is trying to do.

We're excited by their commitment to open 500 new doors.

We think that is quite an ambitious door expansion plan in today's world, and I think the way they handle Chaps and their commitment to it across multiple categories plus their commitment to grow, has encouraged us to continue the relationship as it is.

So we are trying to do what is right for our Company, not really sure I know enough about what other people are doing to comment on that.

Perfect.

Thanks.

Nice work.

David Glick, Buckingham Research.

Good morning and another congratulations.

I wondered if you could discuss the potential for the denim business and give us some sense for how conservatively you're going to be starting in the spring '07 in terms of door count.

How you see that expanding for fall '07 and then beyond, and when could potentially we see something in the specialty retail format in denim come online and how big is big in the denim business as you look ahead?

David, let me start by saying our specialty retail expression at the moment is RRL, and we are beginning to roll out selectively those stores in unique and unusual shopping experiences.

We also had a shop in shop in the Tokyo store for RRL which happens to be one of the hottest product categories in Japan.

So we think that has a worldwide opportunity.

Separately, our strategy for Polo, the men's line and the Lauren line is to be careful with distribution.

We want dedicated space, we want additional dedicated space in most cases.

We want shop buildouts and the enthusiastic reaction we've gotten from the retailers says they feel the same way.

So we will roll out men's and women's this coming spring on a door-by-door basis assuming the commitment for space and shop and staffing is there.

We certainly delivered product that has been very exciting to them.

I think that will continue to grow into fall of '07 and beyond, and as somebody asked at margins that we think are more consistent with our overall wholesale margins right now.

So fact of the matter is Lauren, which will be showing in September, has gotten verbally a lot of commitments from the retailers but we'll wait for that until we see the line reacted to in September.

So we think it is a big opportunity.

Care to comment on potentially looking down the road how big that business could be?

I really don't like to throw around numbers when we haven't even gotten through the first market week.

I think it is a valid question;

I would ask you give us a couple seasons and then let's rediscuss it.

Okay and just a quick follow-up on the Ralph Lauren retail comps; how much were they impacted by ongoing remodels if at all?

Well, that is a good question.

For those of you who are living in New York, we have gone through extensive renovation with the Mansion, which is reopening later in August.

It has been extremely disruptive as parts of the store have been closed and vertical transportation has been disruptive.

So the last three months continuing through July and part of August have seen significant disruption.

Some of that business we've been able to capture across the street in the sports store, much of it I think is being delayed into after Labor Day.

So that is not an insignificant call out.

And their other stores or is that just the most significant?

That's really the most significant.

Thanks very much.

Christine Chen, Pacific Growth Equities.

Congratulations on another fabulous quarter.

Most of my questions have been answered but I did have a question about the tax rate.

I seem to recall that you had said that the tax rate for the year was going to be about 38.8 and for the quarter it came in below that.

And last year the tax rate moved around a lot and I am just wondering what we should be using in our models for the year as well as if you see fluctuations happening among quarters.

Christine you remember correctly, that we did give guidance for the year 38.8% and that was based on our fiscal 2006 FAS 109 analysis, which we discussed on the last earnings call.

Where we identified the need to increase reserves due to the shifts in income in our domestic business model from licensing to wholesale.

And that resulted in higher state taxes than previously anticipated.

So of course in fiscal '07 we will maintain that business shift, but in addition to that in the first quarter we had exceptionally strong growth in some of our international jurisdictions, and that is what led to the lower tax rate of 37.6% in the quarter.

For the year I think we are comfortable lowering the tax rate slightly to 38%.

That's what we're using in our models and certainly you guys should feel comfortable using that in your models as well.

Thank you.

And then could you share with us the breakout in your sales outlook?

I know you had given new guidance for the total sales number.

Could you update it for the segments?

For the year?

For the full-year really you're looking at kind of a mid to high teens in the wholesale business, low double-digit in retail and continuing the high mid single digit decrease in licensing due to the acquisition of some of our previously licensed businesses.

Okay, great.

Thank you.

Good luck.

Elizabeth Montgomery, Callan & Co.

Roger, I had a question for you, now that it looks like we are going to see I guess two really good years of operating margin expansion, I wondered if you could address kind of the longer-term margin potential of the business, particularly since some smaller competitors seem to be able to do margins around 20%.

I wondered if you could give any kind of level of the longer-term upside from here.

Okay.

Well, I really can't speak to competitors.

I think our business model, as we've talked about in the past, was going to end up coming to a sort of a midpoint between the pure accessory luxury guys and really what used to be called the department store suppliers.

And we've certainly demonstrated over the recent past that a lot of our decisions, investments and management skills have begun to raise the margin and we expect that to continue over the next couple of years.

I don't think we'll have a pure guidance number at this point at the end of the first quarter, but I think the business model that we are employing is not only giving us sales on a worldwide basis, but giving us margin and margin expansion.

The other thing, is as you've all pointed out, is we continue to invest, and a lot of the things that we've done over the recent past are based on long-term expectations, consistent with what we did with Lauren or kid's or Europe or retail, and I think they will provide the growth both in sales and profit in '08, '09 and 2010.

So we are blending a desire to raise the profitability as fast as we can and make the right kind of thoughtful investments that take a couple years to pan out in terms of doing them right.

So I think we all expect the margins to go up.

We are seeing that.

I think the first quarter was truly outstanding, but wouldn't expect that to go on every quarter this year in terms of that improvement.

But we have high expectations and pretty aggressive goals for ourselves in terms of where we think we can go.

Probably get into that later in the year when we talk about '08 guidance.

That would be great.

And if I could ask a follow-up on the accessories business, I really like the collection accessories in the stores, although the price lines were I thought anymore comparable to something like Hermes.

I wondered if there was any plan to introduce a line of accessories that might be slightly more affordable to some of the shoppers in your full price stores.

One I thank you for acknowledging the beautiful accessories they are at the high end.

I think Ralph believes very strongly that the way to establish that business is to start with the best and then you can begin to move down from there, rather than trying to trade up from middle or moderate point.

I think we're very aware of where the sweet spots are in terms of price points in the industry and materials and all of the different options that are available to the customer.

And I think you'll see in the years to come we will look to be offering a more comprehensive assortment and price scale.

I look forward to it.

Thank you.

Jennifer Black, Jennifer Black & Associates.

Good morning.

Let me add my congratulations.

Thank you, Jennifer.

How are you?

I'm great.

How are you?

It looks as though you're getting the prime real estate as Federated converts May into Macy's, at least out where I live.

And I just wondered if you could speak to that.

It's an amazing difference, and it seems like your productivity in the department stores could really do well, just by the changes.

Is that true across the country?

Yes, I think Jennifer it is an astute observation.

We have worked very hard on a door by door analysis by brand, and the doors we've chosen to be in, and again that is not all doors and we've been very careful about that.

We want to make sure we are making the best presentation possible for the customer.

So that analysis, that homework and now what you are seeing the execution of that, I think is working out across the country and is delivering positive growth even in a difficult transition.

So we continue to be the lead in men's.

NPD now has us as the best and largest women's with Lauren; kid's continues to outperform as others fall back.

Home continues to work very carefully with a centralized buying group.

So I think what you've just articulated is correct.

We have a very detailed door by door plan.

We've built assortments by door, looked at capital spending and staffing by door.

And I think at this point we are excited about what that future could bring for us.

It seems like it could be rather meaningful.

Well, we hope so.

Okay, and then my second question is kind of a more longer-term question.

I'm kind of curious if you were to envision the business over the next three to five years, where would you expect operating margins to be or where would you hope that they would be?

For the whole business?

Uh-huh.

I think I would reserve a complete answer for a different call.

Certainly higher than they are now.

We think there are several hundred basis points that we can attain over time.

We think we have the strategies and the wherewithal to get there.

Again, I think you've seen some remarkable improvements in the operating profit rates in the segment this quarter.

Don't expect that to continue at that rate but certainly see this business, this brand on a worldwide basis continuing to distance itself from lower margin rates.

So we'll see.

Good luck, and awesome job.

Thank you.

Robert Samuels, JPMorgan.

Thanks.

All my questions have been answered.

Thanks, Rob.

We were expecting you to bring the pizza if we went on much longer.

Any other questions operator?

Brad Stephens, Morgan Keegan.

All my questions have been answered, too.

Thank you, Brad.

Anybody else operator?

Jeffrey Edelman, UBS.

Good morning.

Just one quick one, Roger.

As we look out over the next couple of years realizing the phenomenal record you have put together, could you kind of share your thoughts in terms of capital expenditures for the next several years, what kind of reinvestment rate we can see and your longer-term goals beyond this year in terms of topline growth?

Sure, Jeff.

I think that the current expectation we have is in and around $200 million a year for CapEx.

It really covers the existing businesses, as Tracey said earlier that supports retail.

That supports wholesale shop in shops and the infrastructure investments we think we need.

So as a modeling tool I think we would be comfortable using a number around that.

Obviously with the performance of the business we are throwing off significantly more cash then that as we manage the inventories and the balance sheet and the P&L very carefully.

So that does give us opportunity beyond CapEx to think about how we would invest back into the company for the kind of high shareholder returns we have delivered, Jeff.

Again, like the margin questions I think I'd reserve long-term growth rates, long-term margin expectations for the '08 discussions.

At that point I think we'll have a much more comprehensive answer as to expectations perhaps as far out as a couple years.

Because I think we feel comfortable with what we are doing and how the customers reacted and I think that would be an interesting conversation do have at that point.

Great.

Thank you.

Okay, Jeff.

Thank you.

I know the call has run a little long.

I apologize.

We are obviously very pleased with the start of the year.

But as I said I want to get deeper into fall and expect to be back in November with a more complete answer on the back half of the year.

Appreciate the hard work of everybody in the company for delivering this, and I think we are all excited about what is still in-store for the balance of this year.

Thank you for your interest.

And that does conclude today's conference.

We thank you for your participation.