雷夫·羅倫馬球 (RL) 2007 Q4 法說會逐字稿

Good morning, and thank you for calling the Polo Ralph Lauren fourth quarter 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, and 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.

And now for opening remarks and introductions, I would like to turn the conference over to Ms.

Nancy Murray.

Please go ahead.

Thank you, and good morning, everyone.

And thank you for joining us on our fourth quarter and full year 2007 conference call.

Roger Farah, our President and COO, will give you an overview of the year and discuss some of our new initiatives, and then I'll be on the call to highlight our fourth quarter performance, and then Tracey Travis, our CFO, will take you through the details of the next year and our expectations.

After that we'll open up the call for your questions.

As you know we'll be making some forward-looking comments today, including our financial outlook.

The principle risks that is could cause our results to differ materially from our current expectations are detailed in our SEC filings.

And now let me turn the call to Roger.

Thank you, Nancy.

Good morning.

This has been a spectacular year as we delivered results in excess of our plan, but consistent with our strategies.

Our success has really been achieved through the consistent execution of our global strategies of, one, expanding our direct to customer business, two, growing our international businesses, and, three, developing new merchandise categories.

Over the past five years we have transformed our business model, and our strong results affirm our execution.

Just a few years ago we were primarily a men's domestic wholesale and licensing business.

Today we operate more than 25 divisions that include men's and women's and children's wholesale, a growing 300-store specialty business, and we have a significant and fast-growing presence in Europe.

We have diversified and expanded our products, price points, distribution, and geographic regions.

We have increasingly taken more aggressive control of our brand, and at the same time been more selective regarding its distribution and positioning.

This has resulted in a 30% increase in net income in the past year, and a doubling of earnings in the past three years.

We have accomplished this with a conservative balance sheet and have invested our significant cash flows back into our growing business.

We have brought back appropriate licensing, and we have used our financial strength to invest in new stores, new retail concepts and shop within shops.

We have also invested in our infrastructure including: show rooms, office space to house our growing operations, and new technology to support our global business.

We have continued to significantly increase our return on investments and our return on equity.

And there is still much more to accomplish.

We will continue to develop new products, elevate the merchandising and presentation of our luxury brands, expand our retail businesses, and expand our brand internationally.

We are pleased with how we are positioned and excited about the opportunities we have in the next three to five years.

Fiscal year '08 will be a transition year based on the number of new opportunities we have identified, but they will have an impact -- they will positively impact us in fiscal '09.

And as I mentioned earlier, our strategy is consistent and one that has proven results.

Our ongoing investments in new stores have been important part of our direct to consumer initiative.

We are encouraged by our European business which is performing well and with the strength of our U.S.

portfolio of stores.

We began fiscal year '08 with two stores -- two licensed stores launched in Moscow.

The stores have been well received by the Russian customer who has embraced, not only the luxury apparel, but our expanded offering of accessories.

We believe our internet business will be an important part of our growth in our retail segment.

We acquired the remaining 50% interest of RL Media from NBC to really position us for the future growth.

And now that that business is fully owned, we will integrate their operations with our global retail businesses.

To support these growing businesses, we have invested in a distribution center and a new customer service center that is scalable for future needs, needs, both domestically and internationally.

The center is coming on line in November and will fully transition our fulfillment operations to a new center by April 2008.

We have begun the exploration for international opportunities for RL Media, and we believe it will be a large growth initiative in the future.

We have been developing an infrastructure that allows us to successfully run a global business, and we have changed our business model from one that internationally was mostly licensed to one that is more directly operated.

Since acquiring our European business seven years ago, we made great progress in the business and how the brand is presented and in the process realized in that region.

Europe now represents nearly $900 million in sales and it is our fastest-growing geographic region.

We're using our success there as a template for our Japanese business.

Now that we have successfully completed our Japanese transaction, we'll begin to execute on our long-term initiatives that are consistent with how we operate our business worldwide.

We will elevate the brand through product assortment and presentations that support our luxury positions around the world.

We will refine our distribution and key location, and we'll look to selectively expand our portfolio of Ralph Lauren stores that best showcases Ralph's vision.

In addition, we'll continue to look at opportunities to expand our advertising and marketing messages which are consistent with our global view, and we will invest in talent and their development in the Japanese market.

All of this will be integrated with our world-class infrastructure.

Japan is an important country for our brand as it represents the second largest area of sales outside the United States.

And we are currently reviewing the other Japanese licenses that expire in February '08.

We also see as an important stepping stone to growing our business throughout Asia and the Pacific Rim.

As we continue to successfully develop new categories of merchandise, it is what makes us unique in our ability to take Ralph Lauren's design direction and interpret it through multiple lifestyles.

Our Lauren business which we took back four years ago is the number one brand in its category and continues to have strong retail sell-throughs.

Our children's wear business, an important category we brought back in 2004, has also delivered strong global results.

Our more recent denim acquisitions is in the early stages of development.

Early this year we launched our Lauren and men's denim initiatives.

Early response has been positive, and our retailers responded to our current fall denim market was strong as we thoughtfully bring this category into the domestic department and specialty stores.

We believe this category represents enormous global opportunities for all the brands in the world of Ralph Lauren.

We will launch dresses in spring 2008 in Lauren Chaps and in the new American Living brand as important classification extensions of those brands.

Over the past two years we have added and expanded key categories to our growing luxury accessory business.

We began our development of this business with our footwear acquisition.

And while this business requires a longer rehab that some of our other license buybacks, we continue to believe it has tremendous long-term growth.

We signed a new partnership for eyewear in the past here with Exotica, a company with a global reach appropriate for our company.

The new optical and sun products are beginning to ship to Ralph Lauren stores, and Exotica retail portfolio, and we're pleased with the assortment.

In early February we formed a Ralph Lauren watch and jewelry company, a joint venture with Ridgemont.

This is our first expansion into the precious jewelry and luxury watch business which we believe will be a growing and important aspect of our global accessory businesses.

The first products will launch in fall of 2008 in selected Ralph Lauren stores as well as independent jewelry and luxury watch retailers worldwide.

We also recently acquired our small leather goods business to better build this category of business across multiple price points from exclusive collection pieces to American Living.

And our handbag license expires at the end of calendar 2007, and we anticipate bringing that category inhouse at the close of this year.

At that point we will have direct control over the major accessory businesses and would expect to see an integrated push on a global basis.

We also began executing our channel diversification strategy two years ago with the launch of Chaps products for Kohl's.

In addition to our successful men's, women's, and children's Chaps business we recently launched our Chaps home business earlier this month.

The customer is responding very well to our fashion offerings, and we're pleased with the first phase of our growing home business in this channel.

In addition to the textile category, we also added Chaps women's plus sizes to the offering at Kohl's which has had a very strong retail sell-through.

And we see more categories to launch in this fiscal year.

We'll add bath accessories and fashion table linens this fall with tabletop to follow in spring of '08.

In apparel we'll launch Chaps newborns and Layette children's wear this fall, and Chaps women's petites in spring of 2008.

We continue to gain expertise in this broad-based distribution channel both from a product standpoint as we now have more than 50 merchandise categories under the Chaps brand, as well as operationally and logistics, marketing and in-store presentations.

We believe this will serve us well with the most ambitious launch with the premiere of American Living at JCPenney in spring of 2008.

Our first initiative of Global Brand Concepts Group, American Living is a major undertaking this year.

The launch from men's, women's, children's to accessory and home is slated to be the largest brand launch -- brand launch in JCPenney history.

We will design, manufacture and ship product for spring 2008 to approximately 600 doors.

We'll also control and direct the brands marketing, imaging and in-store presentation.

And we are broadening our merchandise categories for American Living from our original plan.

In the next two years we'll launch more than 50 categories of men's and women's apparel, accessories, children's and home.

So we continue to see new opportunities in each of our key strategies, and we'll continue to support them with the appropriate resources to deliver increased sales and profits.

We are excited about these new initiatives and diverse opportunities.

While they will have a short-term impact on earnings, I believe the important additions to supported our growth for the next five years.

We also are aware that our company has numerous initiatives we're executing concurrently in multiple geographies, and Ralph and I believe we have the right management team in place to execute on these ambitious plans over the next couple years.

We also wanted to welcome our newest board member, Bob Wright.

He brings a wealth of knowledge to our board, and we know he will make a meaningful contribution.

So on many levels 2007 represents a milestone for our company.

We celebrated our 40th anniversary this year and our 10th year anniversary as a public company.

The brand has never been healthier, and our opportunities for growth remain strong.

In closing, our year's results and the significant accomplishments over the past two years would not be possible without the talented employees of Polo Ralph Lauren.

And Ralph and I would like to thank the 14,000 world-wide employees for their work and dedication as they continue to deliver the brand message on a global basis and strong results.

So at that -- at this point I would like to turn it back to Nancy to discuss the details of the fourth quarter.

Thank you, Roger.

So let me just highlight the drivers of our fourth quarter performance.

For the quarter we achieved consolidated revenues of $1 billion, and that represents an increase of 6% over the prior year's period or a 5% increase excluding the effects of the Polo Jeans transaction which we acquired in the fourth quarter of last year.

Revenues increased as a result of the strength of the brand in Europe as well as domestic gains in children's wear, men's wear and Lauren, and a 6.3% comp store increase in our retail segment.

These increases were slightly offset by an 11% decrease in licensing royalty due to the elimination of Polo Jeans in this year's results because of its acquisition, and a decline in eyewear royalties due to the transition to a new licensee.

Our gross profit dollars increased 6% to $558 million, and our gross profit rate improved 10 basis points to 54.1%, and that's as a result of improved merchandise margins across the wholesale businesses, slightly offset by licensing royalty reduction.

Our fourth quarter expenses increased 7% due to $7 million of incremental stock compensation expenses, higher selling costs due to higher retail sales, and investments in new businesses such as men's and women's denim during the quarter.

Our operating income increased 4% to $120 million while operating margin decreased 30 basis points compared to last year as a result of the investments in our new growth initiatives.

Our net income increased 17%, and that's as a result of the 4% increase in operating income and our tax rate was 410 basis points lower than last year, and that's as a result of changes related to the quarterly refinement of our effective tax rate for the full year.

As a result, we reported earnings this morning per share of $0.68 for the fourth quarter, and that compares to $0.58 last year.

Let me just spend a few moments now on our segment highlights.

Our wholesale sales grew 10% to $629 million or 7% growth excluding the jeans acquisition.

Our wholesale operating income increased 10% to $139 million as a result of improved merchandise margins and expense management in men's, children's, and Europe, and that was partially offset by our expense investments in denim, dresses and American Living as well as lower operating profits in our footwear business as we continue to align -- realign that category.

For our retail group, sales increased 3% to $346 million with a 6.3% increase in comp store sales comprised of a 6.7% increase at Ralph Lauren stores, 6.3% at factory stores, and 5.3% comps at Club Monaco.

Ralph Media sales were up 27% over the comparable period.

However, on a reported basis Polo.com sales were down 32% due to the impact of conforming Polo.com's fiscal year in the fourth quarter last year.

Retail had an operating loss of $2 million for the fourth quarter compared to an operating income of $1 million in the prior year.

If you exclude the favorable effect last year of conforming Polo.com's fiscal year, retail would have incurred a $6 million loss in the fourth quarter of last year.

Licensing royalties for the quarter were $56 million, and that represents an 11% decrease, as a result of the loss of Polo Jeans royalties this year, as we now own that business, the transition of our new eyewear licensee to Exotica, and ongoing softness in major home categories.

And now let me turn the call to Tracey who is going to discuss our recent investments and their impact on our current year outlook.

Thank you, Nancy.

Good morning, everyone.

As Roger said, the fiscal 2007 results we announced this morning are an affirmation of the successful execution of our business strategies over the past few years.

We grew revenues double-digits for the full year 2007 at 15% and drove a 140 basis point improvement in operating margins through both expansion of our gross margin across all product categories and leveraging of expenses.

We accomplished these results with outstanding performance in our core wholesale and retail businesses while expanding our Chaps product lines in Kohl's, as Roger mentioned, continuing to reposition our footwear and denim product lines and continuing to go evolve the Rugby store concepts.

We also began as Roger indicated to position ourselves for even greater growth in the future by beginning to invest resources in newer product categories like Global Brand Concepts via American Living, dresses, expanded luxury accessories via small leather goods, and luxury watches and fine jewelry via our Ridgemont joint venture.

Our global expansion beyond our European business where we have experienced tremendous improvements in profit growth and cash return to our shareholders began first with our investment in our own retail store in Japan Omodesando and culminated in the successful tender offer to acquire our Impact 21 Japan sublicensee and the acquisition of New Polo Japan, our master licensee.

Building the business as we have done over the past few years has generated significant increases in our operating cash flow, which we have used to fund acquisitions, support the capital needs of our business and more recently repurchase our own stock.

During the fourth quarter we invested $80 million in capital expenditures, completed our acquisition of the remaining 50% equity interest in our own media, RL Media, Ralph Lauren Media, for $175 million or Polo.com, as we refer to it, and we purchased approximately 500,000 shares of stock for $40 million.

And we ended the fourth quarter with $564 million in cash or $165 million of cash net of debt.

Our historical investments have generated an aggregate return on investment of 32% as of the end of fiscal year 2007.

And subsequent to the quarter's end, we successfully completed the tender offer for shares of Impact 21 and New Polo Japan our master licensee for an expected combined cash -- expected combined funding of $150 million to $170 million net of cash acquired in the transaction.

Because of our recent business developments subsequent to when we gave you our initial fiscal 2008 guidance in February, and as we promised when had we announced those transactions, I want to provide you with an updated outlook for the year including the impact of these transactions.

First, let me state that there has been no change in the fiscal 2008 base projection for our core business since February.

As you can see from our fourth quarter results, the trend of the business is very strong.

Since the guidance was announced and as you are aware, the Company has announced several acquisitions which are accretive beyond fiscal 2008, but are expected to result in high noncash amortization expense in the current year.

At the risk of repeating myself I will list those transactions for you now, the first being the acquisition of 50% of RL Media, the Company's internet site not previously owned, the acquisition of Polo Ralph Lauren leather goods, or new campaign as it was previously referred to, the acquisition via sender offer for the outstanding shares of Impact 21, the Japanese sublicensee, and the acquisition of 50% New Polo Japan, the master licensing in Japan.

While all much these transactions are supporting the future growth of the company and expected to be net accretive to earnings post fiscal 2008, the net impact related to the noncash amortization expense associated with the purchase accounting for the transaction is expected to have a diluted effect on the current fiscal 2008 reported earnings per share of approximately 27% -- $0.27.

Accordingly, we are revising our initial guidance for the year to be in the range of $3.70 to $3.80 per share to reflect this noncash amortization impact.

The majority of the short-term purchase accounting impacts the first three quarters of fiscal 2008, due to the allocation of the excess purchase price to shorter-term items like inventory.

This guidance reflects expectations of revenue to increase mid-teen percentage with wholesale sales growing high-teen percentage, retail growing low-teen percentage and licensing royalty decreasing by low-teen percentage.

As a result of the above mentioned investments, operating margins are expected to decrease approximately 200 basis points compared to fiscal 2007, but resume expansion in fiscal 2009.

The tax rate is estimated to be 38% for the year, but is subject to change once the Company's assessment of FIN 48 is complete.

Diluted shares outstanding are expected to be 109 million.

The Company plans to invest approximately $240 million in capital expenditures in fiscal 2008 to support our growth initiatives, including the buildout of a new leased RL Media distribution facility in North Carolina and expansion of our retail stores by a net 24 to 316 stores from 292 stores at the end of fiscal 2007.

For the first quarter we expect consolidated revenues to increase mid-teen percentage.

This reflects high-teen percentage growth in wholesale, low-teen percentage growth in retail and mid-single-digit growth in licensing.

Operating margins are expected to decrease approximately 50 basis points.

Although these investments represent near-term dilution and start-up phase, we expect the transactions I discussed to be not only accretive but strong contributors to our growth as early as fiscal 2007.

Our previous investments in Europe, Lauren and children's wear, combined with our core business performances have generated great returns for our shareholders, and we look forward to updating you on these new investments as the year progresses.

And with that I will turn the call back to Roger for questions.

Operator, I think we're ready for the question and answer.

Thank you.

The question and answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) And we'll take our first question from Omar Saad with Credit Suisse.

Please go ahead.

Thanks.

Good morning.

Good morning.

Roger, I was hoping you could give us an update on the retail strategy.

It looks like your net store openings were relatively flat to last year, and you're going to -- looks like you're going to accelerate the net openings this year.

Is there any change in the strategy in terms of you look at the retail portfolio across the different concepts, and how you're thinking about it for this year and beyond?

Omar, I think last year's net number's a little misleading because in the year we closed all of the Polo Jeans outlet stores, there were 10 or 11 of those.

As we exited this business domestically, we closed the outlets, and as you know, we closed all of the outlets in Club Monaco and the Caban stores, so there was an unusual amount of closing out those concept that is we did not want to pursue which netted down the store opening number.

In terms of the go-forward position, I think we're very excited about the kind of real estate we're seeing, really on a global basis, and the kind of reaction we're getting from customers.

I briefly talked about the opening in Moscow, which is a licensed, I know, but it really speaks to the appetite of the customer for our luxury product.

We actually opened that main store there with accessories as the entire main floor, women's as the second floor, and men's on the third floor, which as you know for us is an unusual way to do it, and the overwhelming reaction we got from the customers there for accessories and women's really reinforced the growing expertise we have in that category.

So I think we'll continue to look to grow the 25 to 30 stores we're -- we've got on the board for this year.

That's spread out over Ralph Lauren stores globally, as well as Rugby, and I think that at the moment we're seeing the pipeline of deals that we need.

I don't think you'll see anywhere close to that kind of closures this year, so we -- the true net should be very different than fiscal 2007.

Okay.

Great.

If I could follow up on a slightly different vein, some of the others brand and apparel vendors out there have run into problems in the moderate channel and faced difficulties there.

What's -- what do you think has been the key to your success with the Chaps business and that's given you confidence for the American Living rollout in an area where -- where traditionally there has been a little bit more of a struggle for the vendors to really develop a product offering and a brand that resonates with the consumer, as the retailer as well?

I think it is a terrific question because as you read the comps and you read the last couple years, certainly that channel is growing rather dramatically, and the amount of stores that are being added by both Kohl's and Penney's is pretty amazing.

I think it comes down to one simple thing, Omar, which I would call great product.

Great product wins.

Having been a retailer most of my life, you can talk about brands.

You can talk about private label.

At the end of the day the one thing a retailer needs when they're running 100,000 square foot stores and up is great product.

And I think our Chaps products and the category that is we directly handle has be outstanding.

I think the early product we've seen at Ralph and team are working very hard at American Living is going to be unbelievable, and I think having the clarity of a brand in a store and that relationship has worked to our advantage.

So, in the current success with Kohl's, their appetite for us to do new merchandise categories, expand distribution, is supported by terrific sell-throughs and I think that comes in a great product.

I think when the JCPenney merchants come in August to see the product presented to them in a fully integrated fashion in New York, I think they're going to be overwhelmed with not only the look, but the quality for the price that we've been able to engineer and deliver, so I think it comes back to great product.

And do you think -- do you begin shipping American Living this year in the third or the fourth quarter?

We begin shipping it in our fourth quarter which just to remind you is January/February.

Yes.

Thanks very much.

Okay.

Thanks, Omar.

And we'll take our next question from Marg -- Margaret Mager with Goldman Sachs.

Hi, it is Margaret.

And congratulations on 10 years as a public company.

Yes.

There you go.

Thanks, Margaret.

We're topping the ginger ale right now as we speak.

Yes.

And it has been an eventful decade, that's for sure.

The -- let me ask a question.

Can you talk a little bit about the Global Brand Concepts business?

Who is the team there?

How are you tackling a launch on so many fronts across multiple product categories?

If you could just talk about the staffing and the process and how it -- how it differs from what you're doing with Kohl's, and then I have a couple follow ups.

Thanks.

Well, the Global Brand Concepts which when we announced it we quite frankly were overwhelmed by the number of people calling to find out more about it and find out how they could participate.

In the end as we said we've chosen to focus on the JCPenney launch as our first initiative, and as I said earlier, 50 merchandise categories is a daunting task.

So at the moment we are organized really for the core wholesale teams and the core design teams to be developing the initial products and the initial resources are really just supplements to that core team, as well as the manufacturing group, as well as logistics and distribution, as well as advertising.

We are trying to get a little bit of that DNA into the launch.

I think over time as we look to take on perhaps other concepts under that heading, we'll probably have to separate and pull those groups out and continue to add resources depending on the level of the project, so at the moment it is sort of everybody's working hard plus some incremental costs in each of the major support groups, in each of the major manufacturing groups, and then once we launch we'll look to back fill behind it.

Is there a head of the global brands segment or -- besides Jackie?

Ralph, Jackie, me, everybody.

We all have a lot invested in making sure this is right, and I think we have a lot on our plate, and Japan and some of the other things we articulated, but certainly this one to launch hopefully on a day, 600 of the best JCPenneys across this many product categories is kind of an interesting challenge, and I think the experienced team we have is deep into it and feeling pretty good about where we are.

Okay.

Could you talk a little bit about your business with Federated?

I know it is about 17% of our total company revenues, and what's happening there?

How should we be thinking about your business opportunities with them going forward, and then I would also like to ask about April same-store sales, for your retail segment.

Will there be any drag on your first fiscal quarter of '08, because April was such a difficult month broadly at retail?

Thanks.

Okay.

Let me start with the last first.

Really, April and May are tracking consistent with our prior trends, so there is really no new news to report.

I did see that April in general was a difficult month around, and I read all the reasons why, but at this point we didn't experience that, and through the first two months of our three-month first quarter we're tracking consistent with prior trends.

In terms of the Federated business, it has been an interesting journey over the last two years, and the renaming of the stores and the transformation of the merchandise and marketing strategies, not without some predictions has been challenging, and I think that's to be expected.

I think we continue to believe that they will work their way through the issues of transition and the strategies will be adjusted, and the national strategy will roll out successfully.

As our business with them is very carefully planned by door, by location, down to the assortment and SKU level, we're very active participants in each of our major categories, men's, women's, children's, etc.

We've continued to perform well at Federated.

We're clearly the lead brand in each of the major merchandise categories.

We're in regular contact with the senior leadership at Federated to make sure we're on top of developments and strategies.

I think the home business there has been reported has been more problematic.

The combination of the centralizations shortly followed by the May company acquisition has put that business under some pressure which has put our home business under some pressure, but I think they're going to come through the back side of that, and we will be the recipient of that newly constituted national brand.

So working hand -- hand-in-hand together, I think we're getting through it.

Okay.

Last question.

Any goal you want to share on your operating margins either looking out over the next couple of years?

Well, I think we've talked about a year ago or so, Margaret, we thought there were a couple hundred basis points still to go, and I don't think the noncash amortization charge really influences that at all.

That's an accounting issue as a result of the acquisitions.

I think the base businesses, and I think you've seen the tremendous improvement in our retail margin where we've gotten through our goals and beyond and we continue to see upside, the tremendous improvement in our wholesale businesses even with the lower margin addition of denim and footwear in the last year or two, the acceleration of our growth in Europe and what we've hoped to be a template for Japan, I think we have margin expansion once you look through the noncash charges in a meaningful way.

I think we're all focused on it.

I don't think the global brands will deter us from getting there.

I think there will be a meaningful contributor, so at this point we still feel pretty bullish about the margin upside excluding some of these noncash amortization charges.

Okay.

Well enjoy your 40th anniversary and all the best in the next decade as a public company.

Thank you.

Okay.

Take care.

And we'll take our next question from Virginia Genereux with Merrill Lynch.

Thank you.

First maybe, Tracey, I'll ask, you talked about $47 million in amortization if I kind of quantify that $0.27 amortization-related purchase accounting.

When did that fall off, may I ask?

No, that's a good question.

That is a net number, Virginia.

So that includes the incremental profit related to the new businesses offset by the amortization.

That's what the $0.27 after tax represents from an EPS perspective.

We expect that the purchase price amortization impact year-over-year change, and again the Japan purchase price allocation is very preliminary at this point in time.

It has not been finalized.

But we expect a swing of $0.25 per share very early estimate between fiscal '08 and fiscal '09.

So you will see a dramatic difference in fiscal '09.

Okay.

You will basically get back to zero?

You'll get back to a net zero contribution?

No.

There will still be some purchase accounting, I mean related to the transactions, but it will be significantly less, and both Japan and Ralph Lauren Media will be accretive to earnings in fiscal '09.

Okay.

And sort of following on that, I guess, looking at the Impact 21, their last sort of annual which is a fiscal '06 I think filing, Tracey, that was -- that business kind of loosely translated to dollars was generating over $40 million in EBITD, so are the purchase accounting charges so great that you're more than offsetting that from a dilution perspective?

Well, again, our fiscal '08 projections for Impact 21 and New Polo Japan are different obviously from what they reported last year, but, yes, the purchase accounting impact is fairly significant for Japan.

Okay.

Is it fair, if I look at -- Roger, and I know you said you were going to invest in it and you've done a great job with us historically, if I look at Japan as a $500 million wholesale business, maybe trending a little less than that today, but that that should be as Europe has been for you, an earnings opportunity that approaches high teens, operating margins maybe better over time, over a couple years, is that fair.

Yes.

Okay.

Great, Roger.

Following on Margaret's question, it looks, Tracey, like in your operating margins this year were 15.2%, they're going to be down 200 bips in fiscal '08, looks like about half of that was related to the acquisitions in the purchase accounting, so the core business -- core margins are still probably down 100 bips.

I would say a lot of that is mix with less licensing.

Is that -- you still -- when, Roger, you say you see margin opportunity, you see margin opportunity beyond the trailing 15.2%, right, that will sort of get back over the coming years?

Yes.

I think that if you take the 15.2%, Virginia, to sort of reframe your question as this year's number, I think we have an opportunity to go well beyond that.

And I would discount the 200 basis point number that we spoke about for this year, because not only does it include the purchase price accounting, it includes the start up of fairly serious business -- several serious businesses that is don't have revenue to the last month of the year.

So if you look at the core apples-to-apples businesses that we've had, those businesses actually will develop margin improvements this year.

It is the addition of the American Living and all the start ups we talked about and the start up of watches and fine jewelry and some of the other initiatives that bring with it some expenses, but don't bring with it any revenue until our fiscal '09.

So I think if you take the 15.2% as the base, I think we have -- all feel very confident that we should be experiencing post this year margin that is begin to grow on top of that.

That's great.

Very well put.

And just lastly, following on Omar's question, did you say, Roger, you're -- are you accelerating the door growth -- the retail door growth in fiscal '09?

No.

I just said that the net number that we had in '07 was impacted by our decision to close Polo Jeans stores and close the Club Monaco outlet and Caban, so we netted to a smaller number.

The incremental stores will eventually grow, because we're now adding Japan and Asia and look to go expand in Europe aggressively, but '09 real estate is already deepened the discussion.

You have to be at least a full year out.

I think if you're talking about sheer door count, it would probably be 2010 and beyond.

Okay, so for fiscal '08, fiscal '09, we shouldn't assume that the acceleration in the door growth relative to kind of trend?

Right.

Okay.

Thanks so much.

Great job.

Thank you.

And we'll take our next question from Robert Ohmes with Banc of America Securities.

Thanks.

Just a couple of quick follow-up questions.

The -- Tracey, can you give us just the total amortization or sort of a rough range of the total amortization?

In terms of the purchase price amortization, again, it is preliminary for Japan, pretty final for Ralph Lauren Media.

The cumulative amount in fiscal '08 is roughly $60 million.

And that also includes a small amount for Ralph Lauren leather goods new campaign.

Got you.

So ex amortization, everything you acquired is neutral to accretive in fiscal '08, correct?

That's correct.

And then when you look at that $60 million rough amortization, what was the largest driver to that?

Was it the master license or was it RL Media, was it Impact 21?

Was there one that was dramatically more significant to driving that?

Well, it was the Japan transaction, and it was Impact 21.

Okay.

Great.

And then last question also on Japan.

I think, Roger, you mentioned at the beginning of the call that Feb '08, the other Japanese licenses expired.

Can you remind us what's out there and what's expiring that you don't own right now?

Sure.

All the rest of the licenses we did not acquire expired concurrently in February of 2008, so that's about seven, eight months away.

And that's about $190 million of sales.

The bulk of that is in the kids' business, in the golf business, in the hosiery business and in the home business, and those merchandise categories, and there are smaller ones, do expire in the next eight months.

So we're exploring right now those categories and have not come to a final conclusion, but obviously our investment in Japan is real and serious and is not limited to just Impact 21.

Terrific.

Thanks a lot.

You're welcome.

And we'll move onto our next question from Bob Drbul with Lehman Brothers.

Please go ahead.

Hi.

Good morning.

Just a couple of questions.

Can you talk about the level of investment in marketing advertising across the U.S., Europe, and in Asia, and sort of how they vary and sort of the trends on the investment that is you have planned?

Yes.

It is a good question, Bob.

I don't have the raw numbers in front of me.

I think it is fair to say that at least in the United States and in Europe over the last three years we've incrementally added to our advertising and marketing at a more accelerated rate than our sales, so we have added as a percent of sales advertising and marketing.

And I think it is really worked to our advantage, because I think as others have pulled back or used marketing and advertising as an easy way to govern their expenses, we made the commitment to continue to find savings operationally around the Company that we can reinvest back into advertising.

I think that we've more than doubled in three years the investment in Europe, so as a percent of sales we are now tracking much closer to other luxury brands in that marketplace, and I think we're going to have to look at the investment spend level in Asia either in Japan where we made the significant investment, or in fact in other license territories and work with our partners to look to elevate there.

I think it is particularly relevant as you talk about the broad-based commitment to our accessory business and all the initiatives we've done to bring in-house all the major parts there.

We think that that business will require advertising and marketing, so we continued to add.

We've added aggressively in Europe, and I think today our spend levels are very appropriate given the size and growth of our business, but we've found savings in other parts of the country in order to fund incremental spend in brand building, imaging and business getting.

I also would not be responsible if I didn't tell you that I think the internet has been a huge marketing tool for us although it has absolutely been a terrific (insight) both in sales and profits, but I think today there is a lot of talk about how people are getting their information and how they're making decisions.

I think if you haven't spent time on our Ralph Lauren.com site, you should.

It is a wonderful branding and marketing tool and customer acquisition too many as well as a commerce site, and I think as we talk about making an investment from that on an international basis, it will be one of our weapons in terms of how we push the businesses out globally.

Okay.

And then, in Japan, just two questions.

Can you talk a little bit and elaborate upon the opportunity to partner with the wholesale businesses there and your opportunity for free-standing stores in terms of where you see the potential for that business?

Sure.

Now the Japanese business today is made up mostly of wholesale business, and there is about 280 doors in Japan that do the bulk of the business.

Now within each door we can have a men's shop and a women's shop and a kid's shop, so we have a lot more doors -- a lot more shops than 280, but there are 280 major doors of distribution in a fairly tight geographic region, which means the productivity per door is extraordinarily high, even in what would be called B and C doors.

So we believe that the opportunity to upgrade, expand, or relocate those doors, the ability to remerchandise and retrain the sales staff can be incredibly productive given the very high sales per square foot that those doors already achieve.

I'll contrast that with Europe where we have over 2,000 points of distribution, many specialty doors obviously included, so the opportunity in Japan is to work with those individual partners, and distinguish and distort our presentations.

When I was there with Scott Bowman for the completion of the deal, we met with every single CEO of every major retailer in Japan the morning after, just to make sure that everybody was aligned with the strategy and where we're going, and I know we'll be spending a lot of time there getting that organized.

Separately the marketplace is more and more beginning to accept stand-alone brand or designer stores.

As Tracey alluded to, our Omodesando store we launched the end of last year is really the beginning of an important retail expansion that complements the wholesale business in that community, and I think you will see more and more, we'll look to work the two in concert, not only in Japan, but around the world.

Thank you.

Thank you, Bob.

(OPERATOR INSTRUCTIONS) And we'll take our next question from David Glick with Buckingham Research.

Good morning.

Good morning.

Hi, Roger.

How are you today?

Good.

The handbag business.

Yep.

Sounds like you're getting it back the end of this year.

I assume as you built up your accessory business for your own stores at the higher end that you have been anticipating this day coming, and I was wondering how much of your infrastructure have you built for a handbag rollout?

Can you give us a sense of the timing and the scale of entering in that business?

I am assuming you're going to be taking it back in-house, and if we can confirm that assumption, and just give us a sense of how quickly you can ramp up in this business.

Okay, David.

I think with the license due to expire in about six months I think we had made the decision to bring that in-house.

I think what we learned about the manufacturing and the support of this business through the footwear acquisition, what we'll learn through the small leather goods and belt acquisition, I think this is another piece of the puzzle, and it is obviously been a huge merchandise category for luxury companies in the last 10 or 15 years.

We think we've made nice progress on the luxury side.

Anecdotally for what it is worth, we sold 15 Ricky bags, over $20,000 opening day in our Moscow store, which is a staggering number given it is an 8,000 square-foot store.

The appetite at the high-end is beginning to build, and we're very excited about that, and we've got an organization that is in place that has developed the expertise from a design and manufacturing point of view.

I think the expiration of the existing license gives us an opportunity to build on that business and then explore the various handbag price points and distribution channels that could be available to us that was more difficult through the licensing partnership.

So, I think more to follow, lots of opportunity in all of accessories, but as you know particularly handbags, and I think we'll see that playing out into the future years.

Obviously the department store channel, the Federateds of the world would certainly be one of those targets?

Yes.

I think our point of view would be not unlike footwear, Lauren as a brand should have the appropriate leather goods assortments, whether it is footwear, whether it is small leather goods, whether it's belts, or whether it is handbag, and I think that's the channel that will receive it the best, and they're anxious for us to get after it.

So spring '08 wouldn't be out of the question.

Might be a little quick.

I think at this point we've got a lot on our plate as we spent a lot of time this morning discussing, but we'll get at it appropriately, and with our best effort as soon as possible.

Great.

Any other color you can give us on the footwear business, some of the challenges you've been facing there, and some of the repositioning or corrective action you have been taking?

Sure.

The footwear business we bought back was almost entirely off price and discount, and we had to clean that up.

We had to develop the sourcing and manufacturing strategies, and then the initial executive hire we made turned out to be not a good one, and we had to change correction and move forward with some new leadership that's working extremely well at this point.

So we're excited about where it is going.

We'll see how it unfolds over the next couple seasons, but it is a huge merchandise category.

It never ceases to amaze me when I walk through stores around the world whether it was Moscow or stores in Europe, the busiest departments continue to be the women's footwear departments, so there seems to be almost an insatiable appetite for that merchandise category, and we expect to play in a serious way.

Certainly getting into the handbag business won't hurt that dynamic of what you look at what Coach is doing in footwear along with handbags, do you see that as helping you?

Well, I think there's always been a coordination with handbag and food wear businesses properly merchandised, so I think getting those aligned from a design, from a product point of view, from a quality point of view, from an advertising and marketing point of view will help both businesses.

Great.

Thanks very much.

Good luck.

And we'll take our next question from Melissa Otto with WR Hambrecht.

Please go ahead.

Hi.

Good morning.

Most of my questions have been answered, but I did have a couple of quick followups on the Japan business.

It would be great to just kind of get a snapshot in terms of your vision for how we should imagine that business to evolve over the next two years?

Well, the next two years, Melissa, I would say that with the transaction just complete we're beginning the indoctrination period, getting to know the details of that business and orienting them directly to Polo Ralph Lauren.

I met many of the key executives there, and they're all very excited about the change in ownership structure and our desire to invest and grow that business.

I think it will follow a similar pattern to what we saw in Europe which was a licensed business for many, many years.

When we acquired it in 2000, we had a much more difficult challenge because we had to consolidate that into one central office in Geneva, very different than regional offices spread out in Japan.

Part of what we're acquiring is the ongoing business, the ongoing infrastructure.

We think we have some ideas on how to improve that, but more importantly it is really what the customer sees.

So we want to make sure the product assortment for next spring where we'll have an active role, the training and presentation of product next spring, where we have an active role, we'll begin to reflect more consistent execution of our global strategies.

We think the customer will respond.

Where we've had an active hand in some of the big doors in the last year or two just by overmanaging the licensee, we've seen positive results from the customer, so we're encouraged.

We will then begin to look to supplement the group over there with some extra talent and look to elevate and enhance the marketing and advertising.

So it is not a dissimilar exercise to what went on in Europe, and I think the potential is enormous.

That's great.

In terms of the doors, do you see within the next year or so entering new department stores, aggressively going into secondary and tertiary cities?

Could you give more color in terms of the door strategy?

I think the focus over the next couple of years will be to enhance the doors we're in.

I think that is where the bulk of the business today is done in Japan.

I think as we toured the stores, there is some good ones, and then there is some ones that is need work.

I can't overstate the sales per square foot productivity, and when your time and energy is invested in a door doing $1,000 a foot versus a door in the United State's that's doing $150 a foot, the upside is enormous.

A 10% increase is $100,000 perhaps in doors doing $1 million, where in the United States it could be $15,000 or $20,000, so really leveraging the existing doors will be the key, and then beginning to find and identify the right real estate for stand-alone retail in complement to that, and we'll be working on both fronts.

There aren't a lot of secondary or tertiary doors that we're not in that we want to be in.

Great.

In terms of the retail opportunity, do you -- any ranges in terms of potential doors, maybe 25 to 50 over the next two years?

No, and I think so it is a little premature on the retail side because I want to make sure we've got our strategies properly identified, but we will certainly articulate those as they become more clear.

Fair enough.

Thank you so much, and congratulations on a great quarter and year end.

Thank you, Melissa.

And our next question comes from Robert Samuels with JPMorgan.

Yes.

Hi.

Good morning.

Most of my questions have been answered, but can you just comment a little bit more on Rugby, what you're seeing there?

Do you still think that it is a viable growth chain for you guys?

Yes.

We've enjoyed a nice spring with Rugby.

We continue to look at unique neighborhoods, and as we have found real estate locations that profile well against the Rugby customer, whether it is Newbury Street or Greenwich or New Canaan, we get a tremendous reaction from a wide range of age groups.

I mean it's all the way from the 15 and 16 year old and their parents.

And so what we're getting is a wider range of customers than perhaps we originally anticipated.

I think they're responding to the look of the product and the fit and the price points, and I think we'll continue to look at what is the right real estate strategy going forward that will build that business to significant scale.

Because it is the only true vertical retail business we have in the Ralph Lauren brand, we don't have a wholesale business to support the early manufacturing issues of trying to build product for 10 or 15 stores, but we've gotten through that and continue to feel very bullish about its future.

How many new stores will you add this year?

I think the current plan is five.

Great.

Thanks.

You're welcome.

We have one last question, operator?

Yes.

Our next question is from Jennifer Black with Jennifer Black & Associates.

Please go ahead.

Hi, Roger, congratulations.

Thank you.

As a followup to the footwear question, I wondered if you could give us your vision as to how large you see the footwear business in the long-term?

I know you must have a vision.

Thanks.

We have a vision.

That vision question, Jennifer.

That sounds like a modeling question to me disguised in sheep's clothing.

Look, it is a huge business.

I am telling you what you know.

I still have on my desk the shoe you gave me when we visited your offices six years ago on a road show.

I just can't overstate how important the footwear business is to the female shopper, less so the male, but certainly the female shopper, and our strategies, whether it is at the collection price point or Lauren price point, I think are going to be aimed at identifying that.

One of the things we did with the leadership change is split the leadership into two different heads, because the manufacturing design issues for collection, the distribution issues for collection are very different than they are at a Lauren price point, and I think by focusing on those two businesses, rather than rolling them all into one leadership, we will effectively capture the opportunities in both.

The collection business should closely marry the distribution of our own collection which is our own store, high-end specialty, a Neiman's or a Bergdorf's or a Harrods, and I think the more broad-based price point will marry directly with the distribution we've chosen for that apparel.

And obviously that leaves open subjects like footwear for Kohl's or footwear for JCPenney, but at this point I just think the footwear business is sort of an unlimited opportunity, but I don't want to scale it for you.

Okay.

Thank you very much and good luck.

Thanks, Jennifer.

Okay.

So at this point I appreciate you all staying on a little longer.

I know it was a year-end call, and certainly had a lot of new news about the accounting treatments and the amortization treatments for the acquisitions.

We're very excited about where we are and the strategies we're working on.

I think the organization has been energized by our recent success and has fully bought into what we're trying to accomplish over the next couple years.

And we really do believe '08, '09, and '10, which we recently presented to our Board and has been unanimously supported, is a very aggressive plan to move us further into a global positioning at the luxury tier.

And we look forward to updating you shortly on first quarter earnings in August.

Thank you.

And that concludes today's teleconference.

Thank you for your participation.

And you may now disconnect.