雷夫·羅倫馬球 (RL) 2008 Q1 法說會逐字稿

Good morning.

Thank you for calling the Polo Ralph Lauren Corporation first quarter fiscal year 2008 earnings conference call.

As a reminder, today's conference is being recorded.

(OPERATOR INSTRUCTIONS) Now for opening remarks and introduction, I will turn the conference over to Mr.

Jim Hurley.

Please go ahead, sir.

Good morning, thank you for joining us today on Polo Ralph Lauren's first quarter fiscal 2008 conference call.

The agenda for the call includes Roger Farah, our President and Chief Operating Officer who will give you an overview of the quarter and comment on our broader strategic initiative, and then Tracey Travis, our Chief Financial Officer will provide operational and financial highlights from the first quarter and in addition to reviewing our expectations for the remainder of the year.

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

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

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

Now I would like to turn the call over to Roger.

Thank you, Jim and good morning.

We're pleased to be reporting strong financial results today.

We delivered 12% sales growth with a strong retail comp of 7.6% and we reported 11% diluted EPS growth during the first quarter.

We're pleased with our first quarter performance both in wholesale and retail given the more challenging domestic environment.

Internationally, our business continues to be strong across all regions of Europe and most parts of Asia.

Our first quarter results reflect underlying growth in our core Ralph Lauren businesses, the near-term dilutive impact of recent acquisitions that position us for strong long-term growth, and sustained investment in new initiatives, whether it be emerging resale concepts or new product initiatives like American Living, dresses or watches, as well as acquisitions like Japan and small leather goods.

Even as we invest for growth, our balance sheet and cash flows remain robust and we achieve an LPM ROI of 32% at the end of the first quarter of fiscal '08.

As I stated before, fiscal 2008 is very much an investment year, both financially and operationally as we continue to execute on three main strategies.

One, expanding our direct to consumer businesses, two, growing our international businesses and three, developing new merchandise categories with discrete channels of distribution.

The expansion of our direct-to-consumer businesses is clearly paying off.

Evidenced by our strong same-store sales gains and the continued growth of Ralph Lauren Media.

We're investing capital for new store openings and a new distribution center for Ralph Lauren Media which should be up and running by the end of calendar 2007.

On the international front, the momentum in Europe for both our wholesale and retail operations across all product categories is encouraging.

Sales in France and Italy, perhaps two of the most competitive luxury markets in the world, were very strong during the quarter and we opened two very successful Moscow stores that cater to elite luxury customers.

We still believe that we're underpenetrated in Europe relative to other luxury brands.

And while we still assimilating our recent Japanese acquisition, we have made progress organizationally since taking full ownership of Impact 21 in late May, as we have begun to identify efficiencies across our logistics and sourcing operation.

Japan has great potential for us and our primary focus remains on improving merchandising and planning, the benefits of which we hope to see materialize over the next few years.

We believe the opportunities in Japan will mirror the success we have achieved in Europe.

Global brand concepts is a new business that was created early this year and is something we believe can grow into into a big business since it plays into our industry-leading strength of branding, creativity, and world-class execution.

We're very excited about the positive feedback we received from JCPenney as we just completed our first American Living market last week.

This is a massive undertaking for our organization and I am extremely grateful to all the employees who really went the extra mile to ensure the American Living launch was spectacular.

We presented the entire collection of men's, women's, childrens, home and accessory in one presentation that really set the tone in lifestyle direction for this new brand.

The products look fantastic and we're eager for JCPenney customers to be introduced to the product with the first delivery expected in stores Spring 2008.

Of course, we're already working on Fall 2008, American Living merchandise, but we could not be happier with how we have executed on this important new initiative.

Our organization is unique in its ability to strategize and execute on such a large-scale, multi-category launch.

This is really a competitive advantage.

The clarity of products we create for discrete channels of distribution from luxury to global brand concepts is unmatched.

As I mentioned in this mornings earnings release, we're engaged in strengthening the foundation of our business to support long-term growth.

As always, we've remained focused on executing with excellence throughout the entire company.

I echo Ralph's statement in today's release that even as we enter our 40th anniversary and 10th year as a public company, our prospects of long-term growth are getting stronger.

Now, let me turn the call over to Tracey to discuss the financial and operational highlights of this quarter.

Thank you, Roger and good morning, everyone.

I know you have seen our press release.

So let me just highlight for you the drivers of our first quarter net income and earnings per share performance.

For the quarter, we achieved consolidated net revenues of $1.07 billion, an increase of 12% over the prior-year's period.

As you are aware, during the quarter, we completed our Japanese business transactions and our small leather goods acquisition, and those businesses are now reflected in our GAAP reported results.

Excluding the impact of these non-comp acquisitions, first quarter net revenues increased 7%.

International markets continue to be important drivers of top-line growth, especially in Europe and our menswear product experienced strong sales performance globally.

We also benefited from sustained momentum in our directly operated retail stores where consolidated comps were up 7.6% during the quarter.

Our gross dollars profit increased 11% to $592 million and our gross profit rate declined 40 basis points to 55.3%.

The decrease in the gross profit rate is due to the effect of purchase accounting related to our recent acquisitions.

Excluding the impact of recent acquisitions, our gross profit rate increased slightly, primarily due to our European wholesale performance in the quarter.

First quarter operating expenses increased 12% to $446 million, compared to $398 million in the first quarter of fiscal 2007.

As a result, operating expenses as a percent of revenues were 41.7%, relatively flat to last year.

The higher operating expenses primarily reflect costs incurred in connection with our recent acquisitions, including the non-cash effect of purchase accounting.

They also include start-up expenses related to new products launching in the fourth quarter, as well as overall growth in the core businesses.

Operating income increased 9% to $146 million.

Operating margin was 13.6% compared to 14% in the first quarter last year, representing a 40 basis point decrease due to the effect of purchase accounting related to the acquisition.

Excluding the impact of the recent acquisitions, our operating margin increased 100 basis points to 15%, driven primarily by the gross profit rate expansion in Europe, as well as some leveraging of expenses on our sales growth.

Net income for the quarter of fiscal 2008 increased 10% to $88 million, and net income per diluted share increased 11% to $0.82.

The growth in net income and diluted EPS results principally relate to the increase and operating income I have already highlighted and includes the aggregate net dilutive effect of approximately $11 million or $0.10 per diluted share relating to all recent acquisitions, including Ralph Lauren Media, which was acquired at the end of the fourth quarter and the Company's adoption of FIN48 in the quarter, a new accounting standard for income taxes.

So those are the total company results.

Now I would like to spend a few minutes providing more insight into our segment highlights for the quarter.

Beginning with our wholesale segment, our wholesale sales grew 17% to $574 million or 5% excluding the Japan and smaller leather goods acquisition, which now fall into our wholesale segment and our non-comp.

Our wholesale operating income increased 19% to $108 million as a result of the higher sales, and the margin flow-through from the sales were somewhat mitigated by incremental SG&A expenses to support new product lines, as well as the non-cash affect of purchase accounting related to the Japan and small leather goods acquisition.

Our European wholesale business was strong across all product categories in both men's and women's, resulting in improved operating profitability in the region.

In Japan, our menswear business is strong across all brands, although womens have exhibited more mixed performance.

As you know, we're actively working on improving the merchandising and presentation of our product in the Japanese wholesale doors, something we believe will have a beneficial impact on both seal sales and margins over the longer-term.

Shifting to our retail segment, our retail group sales increased 9% to $450 million and overall comp store sales increased 7.6%, reflecting an increase of 10.4% at Ralph Lauren stores, 6.4% at factory stores and 8% at Club Monaco stores.

Consistent with the broader strength and the luxury marketplace, Purple Label, Women's Collection, Black Label, and Luxury Accessories were strong worldwide.

Ralph Lauren Media sales were up 22% over the comparable period, driven primarily by strong menswear sales.

In June, we rebranded the name of our E-Commerce website from polo.com to Ralphlauren.com, to better represent the broad array of luxury products now offered under the Ralph Lauren name.

Retail operating income was $64 million compared to $65 million in the first quarter of last year.

And retail operating margin was 14.1% versus 15.7% last year.

The declines in retail operating income and margin rate reflect the non-cash effect of purchase accounting associated with the acquisition of the minority interest in Ralph Lauren Media that we previously did not own.

Licensing royalties for the quarter were $46 million, an 8% increase, and operating income decreased 17% to $22 million.

The decline in licensing revenue and operating income was due to the effective acquisitions, primarily relating to the Impact 21 acquisition which is now consolidated as a part of the wholesale segment due to the successful tender offered we accomplished in May of this year.

Excluding the effect of acquisitions, licensing revenue increased 11% to $56 million and operating income grow meaningfully over that time period.

The underlying growth in licensing operations is principally related to an increase in eyewear related royalties associated with our new Luxotica license launch.

Our focus on building the business and improving margin performance as we have been over the past few years has resulted in our generating significant increases in operating cash flow.

Which, as we have mentioned before, we have used to fund acquisitions, support the capital needs of our business and more recently, repurchase our own stock.

During the first quarter, we invested $45 million in capital expenditures for shop installations, new stores and infrastructure investment.

We also, as I mentioned, completed the tender offered of our Impact 21 Japanese business and our small leather goods business for a gross combined acquisition cost of approximately $370 million, including transaction costs related to those transactions.

We expect to complete the Japan transaction by the end of the year for a total net cost of approximately $180 million including Impact 21 cash on hand.

During the quarter, we also repurchased approximately 1.7 million shares of stock for $170 million.

And we ended the first quarter with 643 million in cash or 74 million in net cash.

As Roger said, we're pleased that the investments we made in our business yielded a return on investment of 32% as of the end of the first quarter.

Regarding our earnings outlook for the year, we continue to expect revenues for fiscal 2008 to increase by mid-teen percentage.

Our fiscal 2008 effective tax rate is estimated to be approximately 39%, compared to our prior guidance of 38% due to the impact of the company's adoption of FIN 48 which was finalized in the quarter.

The estimated unfavorable impact from the prior guidance, due to the higher tax rate is approximately $0.06 per diluted share.

As a result, we now expect fiscal 2008 diluted earnings per share to be in the range of $3.64 to $3.74 compared to our prior expectation of $3.70 to $3.80, incorporating the effect of the tax rate change.

Our full-year diluted EPS guidance still includes a $0.27 per share preliminary estimate of the unfavorable impact of the recent acquisition due primarily to the non-cash amortization expense associated with purchase accounting for the transactions.

Keep in mind we expect this negative impact to be more pronounced during the first three quarters of the year and in the second and third quarters in particular.

Roger spoke of fiscal 2008 as being one of investment, the year of investment for the Company and we expect this to be reflected in our earnings results for the year.

In terms of our earnings cadence for fiscal 2008, you should expect to see investment related to new business initiatives throughout the entire year with the first signs of revenue related to some of those investments beginning in the fourth quarter and continuing into fiscal 2009.

This will result in suppressed earning in first three quarters of the year with our full-year earnings growth disproportionately weighted to the fourth quarter.

We provided more specific guidance on our second quarter expectations in this morning's press release but I would like to review that guidance now.

For the second quarter, we expect consolidated revenues to increase at a high single digit percentage rate.

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

Operating margins are expected to decline approximately 450 basis points as a result of the full effect of the purchase accounting related to the Japanese acquisition and Ralph Lauren Media, and related to the sustained investment in now business initiatives, such as American Living and dresses.

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

Okay.

Before I take questions, I just want to thank Nancy Murray for the last eight years.

She's been a tremendous asset to the Company and a tremendous partner to both Ralph and I.

She has worked extremely hard with integrity passion, and has played an important role in the increased value of Polo Ralph Lauren.

We will miss her and wish her the best in her new endeavors, and we thank her for her tireless committment.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question today we'll hear from Brian McGough with Morgan Stanley.

Hi, thanks a lot, guys.

Morning.

I have a couple of questions.

One is actually on the retail business.

The comps actually looked really good yet the sales don't seem to really represent that, and I was wondering is there anything having to do with like new store additions and where they were, where or when they were opened in the quarter that would cause new store productivity to maybe come off a little bit during the quarter?

Well, the comps as I -- as you said, Brian, were very strong at 7.6.

I think the net store counts for the quarter is impacted by the closing of the Polo Jeans chain, the closing of the remainder of the Club Monaco outlets and Caban stores.

The comp number is really reflective of the business.

The new stores that we opened were fine.

They were offset against last year where we were beginning the closing process on some of the other concepts.

Okay.

And then I guess on the up front costs you guys are putting in now and it sounds like over the next, you know, two or three quarters, so you're front loading the costs of investments to fund the outer years, then I guess in the fourth quarter you start to shift American Living, I think you get more of the wholesale sales from your new Japanese business.

Right.

Starting relatively soon.

So is it fair to say that the costs are more front loaded and benefits are back loaded and as the year moves forward we should see an accelerating operating profit growth?

Well, I think it's a good question.

Let me separate the accounting issues from the investment side of your question.

You know, American Living, which we have been working on for the last six months and launched last week in a spectacular market week.

We had over 200 people in the showroom when we unveiled it on Wednesday, spent all day Thursday and Friday with the JC Penney folks who left their orders and then we spent the weekend Saturday and Sunday gathering those and putting them into work on Monday.

So we really had a well-old machine.

The fact is, that product that they saw in this market will not start shipping until our fourth quarter.

While that's happening, we're also building and incurring the expense of a summer line and a fall line, all of which are being built behind it for September and November markets, so in essence, we're running multiple developments for multiple lines, all of which don't start seeing the first revenue shipments until Spring.

So that scenario is also playing out in new businesses like dresses and some of the others.

Yes, we are incurring the development startup costs, really, for the entire 12 months and it's not just the development cost for the spring line.

It's three and four lines of products that are being developed so that we can hit the timetable we need to.

Once we start shipping in January, then we start shipping every month for the next 12 months and for thereafter, and that plays out in dresses also.

The businesses we acquired, i.e.

Japan or small leather goods, are kind of a different story.

Those businesses have revenues and they've got ongoing operations, but they're significantly impacted by the accounting issues with which Tracey can take you through.

And Brian to follow up on what Roger has said, we talked on the last call about the purchase accounting and the magnitude of what our estimate of that would be for the year.

About 75% of that will occur in the second and third quarter related to the Japan acquisitions as well as Ralph Lauren Media.

So that is really suppressing in particular, second and third quarter results for us, related to the purchase accounting.

And now just how should we think about that accounting?

Is that a one-time adjustment or is it something that is going to flow through that we're going see forever?

Well, there are different elements to the non-cash purchase accounting related to the acquisitions.

There are shorter-term elements like the purchase, excess purchase price as allocated to the license as well as the step-up in the inventory and those tend to be shorter-term amortization items.

In this case and in both -- in this case, it's about six months for Japan, which is the biggest impact we're having this year.

Then there are ongoing impacts related to purchase accounting, all of which we call out in our SEC financial results related to customer lists and et cetera.

And those are amortized over longer periods of time.

We will expect to see, as we do, related to some of our former acquisitions, Brian, ongoing purchase accounting but nothing look this year.

Okay, just one last one.

When we look at the Japanese business and we look at their filings out there, they had at one point a couple of years ago, I think, four or five years ago, had, I think they had their gross margins near 50, they operating margins in the low 20s and now they have both lived 6 or 7 points to the point where they're at trough, you know, trough margins right now, which is, I guess, exactly when you want to be buying them back.

I guess my question is, it seems like you're investing the capital into them now when the businesses are at trough margins.

Is it a safe assumption to assume that your goal is to get the margins well above where they are now and closer to if not above where they were when they were operated by a licensee who was presumably under-investing in them?

The answer is yes.

We do expect the margins over time to come up.

The margins have come down from their peak, quite frankly.

Some of that was their operating results, and some of that was a royalty rate that was increasing over the last couple of years that was coming to us anyway.

But the investments that we plan on making, time, energy, money and focus in Japan, we think is going to drive both top-line and margins, you know, back or surpassing prior levels.

Yes.

Okay.

I appreciate it, guys.

Thank you so much.

Thanks.

Next we'll move to David Glick with Buckingham Research.

Good morning and Nancy, good luck to you.

Great working with you.

And just, Roger, moving on to just a quick follow up questions on Q1, a couple of things stood out.

The top-line came in a little bit light relative to your guidance, particularly in licensing income, your guidance was mid-single digits and it came in at minus 8%.

Retail question you answered.

Also, looking forward to Q2, the high-single digit top-line is a little bit light relative to our expectations, at least and a little bit lower than your Q1 results.

Just one and clearly from your commentary earlier, from Tracey's commentary, the Q4 is going to be a big quarter top on the top-line.

I was wondering if you could give us color on why the topline is going to be short in Q1 and a little bit of deceleration in Q2, perhaps it's the U.S.

wholesale market, but color on that would be very, very helpful.

David, I'll let Roger answer the U.S.

wholesale question and I'll talk to your question with respect to licensing royalties in the first quarter.

I mentioned in my remarks that if you would adjust out the impact of Japan, licensing revenue actually increased 11%.

So when we gave our initial guidance, it included the licensing revenue associated with Impact 21.

Because we were able to, upon the successful completion of the tender offer, consolidate Impact 21 and back out the difference that we didn't own during the quarter in minority interest, we accounted for it differently, therefore, you see that pick-up from the loss in -- from the difference in the licensing revenue in our gross margin.

So there is just a flip between licensing revenue and gross margins actual versus our guidance.

The gross margin line is actually flat, relatively flat to the guidance that we gave.

So there is no bottom-line impact related to that.

Okay.

I should let Tracey answer the rest of it but she's insisting.

I actually think the sales both reflected in our comp of 7.6 and our wholesale, when you strip out the acquisitions of 5 was a pretty solid quarter, given the turbulence in the market.

I feel very good about the core strength of our businesses, putting aside the new initiatives.

But, again, it was an interesting spring, summer.

For the first time in a long time, really mens as a merchandise category, led the charge with women being in a secondary role.

I think womens has led the charge for many, many years before that.

That I think there was great strength in accessories around the industry.

With home probably being the weakest business, you know, across all merchandise categories.

But it was really the first year in a while that our business in men's, whether it was our own stores, polo.com, now ralphlauren.com, Europe, or even Club Monaco where the men's increases outpaced the women's increases.

I think there was a shift in the women's business to more casual, less career and there was a growth in the dress business, both of which lead to lower average unit sales or lower outfit costs than a career purchase.

So, the little bit of a shift in the paradigm in the female business.

Nevertheless, we ended up with an increase in women's anyway.

I think against the backdrop of a spotty domestic market, with the shift that Tracey's talking about in licensing, we actually delivered pretty nicely our revenues for the quarter.

And really expect the core businesses to continue to perform.

The wholesale visibility we have into forward bookings for fall and next spring are very solid and in loan where we expected.

Clearly the American Living was the home run and exceeded expectations and I think Penney's was just shocked by the lifestyle representation of all merchandise categories being shown in one location at the same time and that is unheard of.

Normally the markets come at different times during the summer.

So, I think we feel pretty good about the underlying certainty of the business and where we are and to see this year as lots of noise in the numbers, but so far so good.

Okay, great.

And one last question on denim, just curious how you progressing there and reaction of the product for spring and your hopes for fall in that category.

The denim category an important one as it runs through really men's, women's and kids and is now running through American Living and Rugby.

It will continue to grow as a penetration in terms of our assortments.

You know, it's actually in the middle of sort of a trend change in the denim business away from the low rise and skinnier fits and some of the washes are changing and usually change in direction brings business, because people's closets are somewhat out of date.

So we're hoping fall and into next spring begins to see the payoff for both Lauren Denim, Polo Denim, Double RL at the high end, and then American Living at the new channel where we're distributing product.

Great.

Thanks, Roger and good luck.

Okay, thank you.

Our next question, we'll hear from Virginia Genereux with Merrill Lynch.

Thank you, maybe Tracey, just to follow up quickly on the revenue guidance and I think folks are asking about it because, you know, you gave us for the first quarter, you gave us the guidance at the end of May.

And I think you said at that time wholesale was going to be up high teens and understandably it sounds like all the Japan business went from licensing into wholesale.

If I back out Japan, wholesale came in lighter.

Is that, totally understandably, is wholesale coming in a little lighter given some of the trends you cited, Roger, it sounds like JCPenney, American Living mean an offset to that but is it -- is that the case?

I would have to break out the numbers in a level of detail I don't have in front of me, Virginia.

I don't really think either domestic or international wholesale business came in lighter.

I think the Japanese, putting that aside, or the small leather goods, putting that aside, the organic 5% small growth, maybe it's a tick light.

but I don't think it's a fundamental issue.

In many cases because of the 53rd week with the department store calendar has caused some havoc in the monthly cutoff of shipments, because when the 53 weeks are falling in their fiscal calendar versus our fiscal calendar, is causing something shipments by a week moving from one quarter to the next.

I don't so it as more than some of that going on.

Some geography.

Okay, thank you, Roger.

Tracey, maybe on the purchase accounting side.

On the last call, it was helpful giving us the flow by quarter.

I think on the last call you said, and in this release, preliminarily, a $0.27 impact and I think you said that $0.25 or so of that would fall off in fiscal '09.

Is that still a fair -- does that still match your best thinking?

Yes, it does at this point in time.

Okay, the majority of it goes away.

Yes.

And if I further try to quantify that, if I take your $0.27 in purchase accounting and say, all right, that is a $47 million kind of hit to EBIT and the offsets to that by my math as I look at the Impact 21 numbers, that business did 33 million last -- it's last fiscal year, 20% of which you owned.

So, you guys were -- that business is going to contribute an incremental 26 million assuming things are flat and my estimate of the other half of RL Media that you now own was 11 million in profit.

So --

So you're already modeling next year, Virginia?

No, I'm just trying to figure out -- my question, Roger, is going to be -- the purchase accounting is leaving the acquisitions dilutive this year, right?

Right.

Be why -- yes.

Okay.

The 20 -- just to remind everybody the $0.27 was a net number.

It included the purchase accounting and it also included the impact of the business, the pick up from the business was the net impact to us related to the elimination of the minority interest and the consolidation of the business.

That was the net number.

I also called out on the last call, Virginia, a $61 million number.

That was the pure purchase accounting estimate at the time.

The number is still reasonably close to that.

Then as I motioned earlier in the remarks about 75% of that purchase accounting impact, not the $0.27 net impact but the purchase accounting impact will be occurring in the second and third quarter.

Okay.

And thanks, that's helpful And then about 40, low 40s of that 61 million will fall away next year.

Yes.

Based on your -- okay.

Got that.

Thank you.

And back to the core, back to sort of the score operations of Japan and RL Media, what do you need to do.

Roger, you mentioned we knot's new DC for Polo -- for ralphlauren.com.

How quickly can the margin expand in those businesses and can you talk about each one, sort of, Japan and --?

Yes, sure.

The RL Media again, Tracey has covered the accounting issue.

The big issue for us in RL Media, we were third party distribution in customer service and call center.

So that was an efficient but expensive way of handling customer orders.

When we decided to bring all of that function in house, call centers, customer service and distribution, we embarked on an analysis of how to do that and put that into play.

That begins in October, November through March of next year and that begins to come online in pieces and parts.

That will reduce the cost of handling the customer order significantly because we'll be doing that in-house as opposed to the third party where it was a profit center for somebody else.

We're very comfortable starting next fiscal year the RL Media piece.

Not only will it be 100% owned by us versus 50, but the dramatic change and cost of servicing a customer will add very specifically to the profit margins of that business.

We've obviously also built it to service what we hope will be ongoing compounding of occurring growth rates, which have been in excess of 30%.

That is a unique advantage and that ability to ship an individual customer order is very different than the way the rest of our logistics and distribution is set up, where it's designed to service large shipments to our own stores and wholesale distribution on a worldwide bases.

That adds pretty dramatically to the profit margins of RLM and should come online in fiscal '09.

The Japanese question, you asked, again, putting aside the purchase accounting and all of that, the integration has begun.

We have realized opportunities and logistics and distribution where that was third party and over time we'll be able to bring that in-house as we work through the service agreements.

The manufacturing and sourcing, we will roll into our international sourcing group.

Today that is handled through different third parties and that should enhance the margins as well.

and against that backdrop will make investments in the right kind of shop environments, the right kind of presentations, the right kind of marketing, and as we said in the prepared remarks, getting the sales and merchandising assortment right is really the rocket fuel for Japan, given the very high productivities and the limited number of points and distribution.

That will begin to play out in '09 and really, we think, will come to fruition in fiscal 2010 in a major way.

Okay.

Thank you, Roger.

It sounds like you would look for margin expansion from current levels in both of these businesses, more maybe at RL Media in fiscal '09 and even more the bigger Japan leverage should come really in fiscal 2010.

Yes, I thank is fair.

Okay, I still have RL Media, based on your disclosure, as a very profitable business, like high double digits.

Is that fair, Tracey?

High double digits means like 90 or 95% -- .

No, no, I'm sorry.

High teens.

High teens.

It's very profitable.

Okay.

Okay.

And then just lastly, if I may, Tracey, what is still in minority interest?

For the first quarter, the portion of the Japanese business that we did not own for the quarter is in minority interest.

RL Media is no longer in minority interest and that is it.

You still had two months of the Japan business?

Yes.

Okay.

Thanks so much.

Okay.

Margaret Mager with Goldman Sachs will have our next question.

Hi, good morning.

Good morning.

A couple of questions.

First of all, with regard to the men's and women's business where you commented that men's actually outpaced women's.

Yes.

Did it actually accelerate or is it just that women's have -- has softened and mens kept a steady pace?

And is there anything in the merchandising of your women's area and more in Ralph Lauren in particular that needs to be addressed and I have a couple more.

Thanks.

Okay, the first part of your question.

It's a pretty good men's season all the way through, Margaret and there was not really too much movement there.

I think the change in the women's business is really characterized by this.

The early parts of spring historically are when people buy more careers, they're setting up their wardrobes for the season and later into the May, June, Julys, generally become more casual spending anyway.

Uh-huh.

As a natural pattern to the business.

I think this year because career was softer and casual side of the business are a less expensive dress was sufficient, I think you just saw that trend picking up earlier in the season.

You know, which pulled down the average unit retails which made for a softer spring.

I think what you have for most people is when you go to June, July clearance activities, if the product was not in demand, it's a more expensive and slower movement of that product when you get to the clearance month.

Uh-huh.

And I don't have the benefit of a July comps store sales but my guess would be they not going to be different than the trends out there, you know, mid-spring on.

And the real sea change becomes the middle of August with back-to-school and the fall business that runs from the middle of August through September.

There has been a lot of shifts in the back-to-school calendars with certain states going back later that shifts the tax free weeks and the early part of August has been a harder period to read back to school and we really need to get into the middle of the month before we see how those trends from spring carry forward.

Right.

In the department store arena, you know, you're clearly the leading brand in both men's and womens.

On the women's side, it would seem like there is an opportunity to increase your market share maybe through large footprints in the department store channel, given the falloff and some of the other branded products in that channel of distribution.

I am wondering what is your attitude and strategy towards increasing your footprint in that channel at this time?

Well, it's a good question, Margaret.

As you know, we have been trying to grow our woman's business as a percent to our totals anyway.

We have been underdeveloped, but with the softness in the women's market with some of the key competitors, we do see it as an opportunity to increase footprints, square footage, not so much door counts because that is not really where we're looking to expand, but really in the doors we're in, even in the Lauren business where we have had it active the last few years, where we've added denim the last couple of years, where we expanded our commitment to special sizes, where we will be launching dresses next year, we are actively looking to gain share in that channel with our female business.

Following on the heels of that, we came off a very successful Las Vegas shoe show, so we're feeling good about the direction of the footwear business, and hopefully next year we'll begin to follow that up with other accessory categories.

Yes, we're looking to expand the penetration of our women's business, vis-a-vis, its historic division and the landscape changing.

You think that plays out in a noticeable way in the next 12 months or is that longer than that?

I think we'll see some movement in the next 12 months.

Okay.

Moving around the department store footage is a cumbersome process.

It requires capital on both sides and even with business being soft, I don't think that results in change the next day.

I think with our consistent strength, our unique product positioning and as you said, our leading really each merchandise category we're in is an unusual time and opportunity for us over the next couple of years to gain share.

Okay if I could shift to the retail piece, in our model, we're looking for something in the low to mid-teens growth rate for retail for the full-year, more or less in line with your fiscal year guidance.

And now with the first quarter and second quarter looking to be more in the high single digit range, can you talk about how the second half will accelerate in order to move toward that mid-teens guidance?

I understand on the wholesale business what you're doing.

What is it in retail that is going to accelerate it into the second half.

Thanks.

Okay, well we have talked about the first quarter net store effect.

A lot of that drops off as we get into the second half, so that the new stores in the second half are more pure incremental as opposed to the net effect.

We feel very strongly about our direct-to-consumer at polo.com and believe where mall traffic may have been off in spring and summer, we believe online shopping will continue to accelerate through the back half of the year and we're pretty bullish on comps.

I think our first quarter, which is generally not our strongest quarter but I think we're expecting comps to maintain themselves through the year and obviously this is the least predictive business we have versus wholesale and licensing.

Nevertheless, we think the fall assortments look great.

There is going to be tremendous amount of advertising, and public relations and energy behind the 40th anniversary on a worldwide basis starting this fall, so we think there is going to be a lot of excitement in the marketplace.

Clearly the mid-August through September back to school and into fall will be critical and if that goes well, I think we'll feel strongly about the year.

If that is not as robust as we would like it to be, it may effect the holiday shopping.

Okay.

Too early to tell.

All right, and last on repurchase, just wondering can you update us on your thought process of buying back stock and how you might approach that, especially giving your stock selloff today.

Well, we have 198 million left on our prior Board authorization, Margaret, so we will, as we have in the past opportunistically look to invest our cash in the best way and we believe that it will be stock repurchase, then we will do that.

Okay.

Thanks and good luck.

Talk to you soon.

Okay.

At the request of the speakers, please limit yourself to one question only, to allow others in the queue to ask their question.

Next, moving on to Bob Drbul with Lehman Brothers.

Good morning.

Morning, Bob.

Question that I have around levels.

Inventory is up 15%.

Can you break out or provide some granularity, how much of the inventory increase was exactly associated with the Japanese business and small leather goods and can you provide your retail division inventories full-price outlet and/or your wholesale numbers what the breakdown is within your inventory level?

Just wait a second.

We'll give you the incremental inventory that was associated with the acquisition.

Excluding the various acquisitions, inventory up about 8.9%.

So 15% versus the 8.9 is the difference for the businesses.

I don't have it in wholesale and retail, but that's what you can work the math on.

Okay and Roger, can you maybe give us commentary around the inventory levels at retail on your -- at your wholesale customers, are you comfortable out there right now as you go into the fall selling season?

Well, I think our wholesale-retail customers were pretty aggressive of clearing inventories in general in the spring, summer.

Our inventory levels of our products are in line with our plans, so we are receiving fall and comfortable with what came out this summer at this point.

Thank you very much.

Okay.

Next, we'll move on to Omar Saad with Credit Suisse First Boston.

Hi, one quick question, Roger, wanted to get your perspective on and the comfort level with the spending at the high-end luxury market.

I know, with some of the volatility in the stock market, I think a lot of people take for granted the high-end spending.

I wanted to get your thoughts on that, and how you feel at this point.

The high-end customer, the luxury customer has continued to shop.

The last two or three weeks as you know, the markets have been very volatile in general, there are lots of business articles about the potential impact of subprime and the various tentacles of that into the marketplace.

At the moment, the luxury customer continues to shop.

If their portfolios or psychological view of the world changes, I don't know that that will cause them not to spend because they don't have the money, but it may attempt to dislodge their confident view of the future.

I think there has just been a lot of volatility and until it settles down and people understand how it's going to play out, you know, how to react from a consumer point of view.

But whether it's the new store in Moscow, whether it's our key markets in Europe or our own retail where we ran a 10% comp, I think the better customer continues to spend.

Okay and can you give us a little bit of historical perspective the last time you saw it.

The last time you saw a weakness in that segment in around the September 11th period, or how did it play out historically if and when you saw --

Well, the September 11th period aside, I think that has unique impact on the world and particularly the New York market, when the stock market was struggling in the post tech boom and went through a couple of tough years, we were also in a period of redoing some of our retail and I think even in that period, the customers with money continue to spend.

It's the middle class customer or the customer at the lower end who tightens their belt and anxious to see how that plays out in the different channels.

Interesting to me is the Kohls and the Penny's in the world continue to nicely through the spring, summer turbulence, and we'll see what happens.

We're back to school and fall selling starts cranking up in August and September, but I think the better customer is going to continue to spend money.

Very good, thank you.

Okay.

Next, we move on to Lizabeth Dunn with Thomas Weisel Partners.

Miss Dunn, please go ahead.

Your line is open.

Hello, can you hear me?

Hi, Liz.

I guess (inaudible)

Can you spoke up a little, Liz?

I can barely hear you.

Okay.

My question is related to the global brands team.

Right.

It's entirely in place with what you have done with American Living, such that if you have other partnership, you'll be in a position to leverage what you already built fairly significantly or how should we think about that?

And then I'm assuming that the American Living launch is the biggest bucket of investment spending outside of what you're doing with acquisitions.

Are there any others we should be aware of?

And if I could sneak in one quick, could we have an update on Rugby.

I don't think we have heard anything about that for awhile.

Okay, well, Global Brand Concepts, which we do believe is a big idea in American Living which is the first iteration of that, that project has had almost 400 people in all parts of the company working on it, and I think the original thinking was to make sure that we had our best and our brightest in all categories working on that so we used a lot of our existing talent.

Over time, we will begin to populate some of the key jobs in American Living to supplement the fact that people can't work day and night jobs on a prolonged basis.

We will build some talent around the existing group that launched those categories in order to handle other initiatives post-American Living.

Our current thinking is to get American Living not only developed in the three or four lines underway but get it positioned in Penney's, get a reaction from the customer so we learn from that, and then look at some of the numerous people have called looking for discussions about, can they participate in global brand concepts and then we'll look to add to the business model after that.

What was your second question?

I was wondering if there were other categories of investment spending that didn't relate to acquisitions that we should be aware of, just big buckets.

There is, of course, Japan which we talked about which is acquisition, but there is a combination of transition service agreements running through, which as you know, are more expensive as well as our investment to try to overlay and begin to move forward.

There is certainly the distribution call center investments in RL Media which I talked about earlier.

There was the start up of the watch and jewelry, joint venture in Richmont which has us splitting the cost of that.

We will be shipping products in fall of calendar '08 so that is running through the pipeline as well as the early work on dresses.

Those are the most significant of the initiatives going through.

In terms of Rugby, Rugby is well-positioned for the start of back to school, which for them is an important business.

As you know, that customer is very oriented towards buying today so they can wear it tonight.

It's not like our luxury customer who is buying today to wear it in September.

That business begins to open up, getting the media feedback on product and assortments.

We have learned a lot about the real estate strategies that work and ones that don't and as you know, we on a couple of stores that were in the college only towns.

I did not think that was a viable or economic model on a go-forward basis, but have enjoyed great success in towns like Greenwich or New Cainen which have both a street location, as well as some exposure to high school and college kids.

We're pleased with where we are this back to school and fall will teach us a lot and we'll move forward from there.

Okay, thank you.

Okay, thank you.

Next we'll move on to Gabrielle Kivitz with Deutsche Banc.

Good morning.

Roger, question on the retail segment.

It seems to play out repeatedly with the apparel retailers that I cover that it can be tough for retailers to comp solidly positive when they begin to anniversary increasingly difficult multi-year comparisons.

Seems like retailers can sometimes have inherent cyclicality or comp gross limitation given the sales per square foot productivity constraints in the existing boxes.

I guess my question is, with that said, how can we get comfortable that the retail business and more specifically Factory and Club Monaco, can sustain positive comp trends and not become victims of their own success?

In other words can you help us understand specifically what opportunities there are going forward within the box and that could help drive increases and possibly continue to offset some of the softness in just general mall traffic and patterns that have been seen recently.

Thanks.

It's a good question.

Of course there are no guarantees that tomorrow's going to bring a positive comp.

We have experienced now for almost five years running ongoing strong comps.

They go up and down a little up and down per quarter, but generally ongoing strong comps and really ongoing productivity gains.

We have been careful about new stores and we have seen dramatic improvements in our productivity per door.

And I think you have seen that and we have talked about the Ralph Lauren concepts now being at $1000 a foot and the tremendous turnaround in comps that we've had at Club Monaco.

It really comes down to, do you have pricing power to allow you to appropriately raise prices for the right kind of merchandise?

Can you add merchandise categories that are incremental, as opposed to replacement categories.

Are you trend right in those businesses that carry more of a trend burden and can do you that well and sustain it?

A lot of what helps us is having a consistent design, merchandising and buying teams who really know the nuances of each door and each opportunity.

With all that said, there are no guarantees but it certainly improves your odds of compounding year after year if you have those in place and I think we have all three in place, but we'll see.

We're not immune to macroeconomic issues, we're not immune to external issues.

The things we can control, I think, we're constantly looking for ways to raise the bar on ourselves and that is what we have been able to do.

We'll see what the fall brings.

There are no guarantees but that is what we're focused on here.

Okay thanks and good luck for the remainder of the year.

Okay, thank you.

Christine Chen with Needham and Company will have the next question.

Thank you.

I wanted to see if you could talk a little bit about, you held trunk shows at the end of June in your full-price retail stores.

Granted that is early on, it probably gives you some indication of what product is going to work and what isn't.

What was the feedback you got from that and historically has that been a good indication for how retail performs going forward?

And for footwear, do you still expect it to be neutral on EPS this year and denim accretive?

Thank you.

Okay, Christine in terms of trunk shows, you know, they a good indicator of what the top customers are reacting to from a fashion and style point of view.

Also, attitudeinally what they bring to a trunk show is important.

As pre-lines have grown in importance, it's both a pre-line and then it's the runway product that business is sort of migrated into a much more even 12 month a year business as opposed to the crescendos that used to exist when it was runway product.

At this point, our fall product has been very well-received, there was a lot of enthusiasm before the runway itself and I think deliveries are on time.

People like the quality and fit, so if that turns out to be an indicator, we'll have a strong collection year, both here and in turn Europe and the beginnings of that business in Asia.

In terms of the footwear and denim businesses, I think our guidance from the beginning of the year holds.

The Vegas shoe shows which just concluded were encouraging for us and that is really the next spring shipping cycle.

We'll see but we're off to a good start.

And denim is still expected to be accretive for this year?

Slightly.

Yes.

Okay, great.

Good luck.

Okay.

Thank you.

We'll move on to Jeffery Klinefelter with Piper Jaffray.

Good morning, this is Stephanie for Jeff.

We'd echo the comments on Nancy's departure.

Roger, if you could just speak a little more to your optimism surrounding Europe?

What markets rank greatest in terms of contribution, where are the key opportunities, what have your licensing partners said about their store opening plans for the balance of the year?

Well, Europe continues to delight us.

Many of you know we put a lot of time and energy into reorganizing and getting that business prepared for growth over the years and we now reaping the benefits for that.

We're seeing our strongest growth in the major markets of Italy, England, France, and Germany, really are getting the distortion in growth.

And our retail business there, even blended in with the comps, is outpacing the United States and whether it's the new store in Milan, or some of the other stores we have, it's giving us the encouragement to push forward with our retail expansion.

As a matter of fact, we have committed to two large pieces of real estate in Paris that we're paying rent on that won't open next year.

Those are not a drag in the short-term in the order of magnitude as some of the things we have talked about, but they are appropriate decisions for the long-term retail strategy there and it's what you have to do when you find great real estate.

We're making, and continue to make ongoing commitments to Europe.

We said before we think it could be as much as a third of the business and we continue to see the customer feeding back.

It's interesting not only were the Moscow stores successful but the Russians with money are now traveling Europe extensively, and they're positively impacting business in most of the European capitals.

So that is an interesting new wrinkle to the European business and even with the high exchange rates, tourism continues to be pretty strong in Europe.

We're excited there and we continue to reinvest, that's what we think will be a bright future.

That is interesting, thank you.

Just a follow up.

As you're looking at Japan and touch on the assortments, the store environments that you're focused on, was Impact selecting from an edited assortment as a distributor or did they have exposure to the entire assortment.

Any changes there in terms of opportunity and assortment categories, non-apparel/apparel?

That would be helpful.

Thank you.

Well, in Japan as many of you know, we had a master license for many years with the [Sabu] department stores.

They in turn sub-licensed out the merchandise categories that they thought were appropriate for Japan to different sub-licensee.

Impact 21 over the course of time ended up with mens, women's, denim and accessories and then we had other sub-licensees for other merchandise categories.

Their interpretation of what was right for the market what,y that brought there in terms of lines and/or merchandise assortments within the lines, were their best judgement of what would sell.

I think our view and what we have learned through Amant Assando store opening, which have now anniversaried and is performing well, is what we think the customer is willing to receive from us.

We believe that is true not only based on what we are seeing in the Japanese market but what we're seeing with Japanese buyers in other worldwide markets that we're servicing.

We're going to add to what they're brought over, we're going to alter the assortment, we're certainly going to alter the distribution and planning expertise, and we expect that will pay out positively for us.

I think we have one more question?

Two more questions, Nancy says.

Operator, two more questions?

We'll move with Jeff Edelman with UBS.

Good morning.

Morning, Jeff.

This question is for Tracey, after the last conference call, you talked about the investment expenses which, as I remember, roughly 100 basis points hit to learnings this year.

The inference was that that would go away in fiscal '09.

But now as you talk about starting to cover some of those expenses in the fourth quarter, it seems to me it's going to be more of a drawn out period and you would have ongoing investment for new initiatives for '10.

Okay, there are -- good question, Jeff.

There are a couple of different types of investments that we're making this year.

Let's talk about the acquisitions, which are the ones that are the most extreme this year as it relates to the non-cash amortization.

Which is short-term non-cash amortization, the bulk of it.

Some of that amortization will continue forward into 2009.

As I said earlier in the call in response to Virginia's question, much of that will go away after this year.

So we'll have some non-cash amortization and we disclose it in our financial statements what the amortization line is, but not to the level that we're seeing this year.

There will be a $40 million pick up, roughly, year over year as it relates to -- and again, purchase price allocation is preliminary right now.

That piece will go away.

As it relates to American Living, that is the other investment that we talked about, American Living and dress, we have (inaudible) the watch joint venture that we also entered into this year and those investments will be ongoing.

The sales related to dresses and American living, we will ship in the fourth quarter and we will see, start seeing sales revenue against those expenses in the fourth quarter and continuing forward into 2009.

Okay, but the level of expenses is not going to go away.

Just a question of leveraging those with incremental sales.

Right.

Not on the new product initiative.

Thank you.

Our final question is from Jennifer Black with Jennifer Black and Associates.

Good morning and congratulations.

You have done an amazing job.

Thank you.

I wanted to know, I have two questions.

Are you happy with how the retailers are displaying or merchandising your products as a whole and are there opportunities where dual exposure is not being done, that's my first question.

The ongoing dialogue between us and every point of distribution around the world is heavily focused on assortments and presentation.

We as a company put a lot of time and energy into merchandise presentations whether it's our own stores, polo.com, or our wholesale distributions.

We spent a lot of money on shop build outs, we spent a lot of money on coordinators.

We spent a lot of money on propping, but with thousands of distribution points around the world, Jennifer, I think there is always an opportunity to improve.

And as we travel and we do aggressively travel, when we see those opportunities, we work with the customers to improve that.

Properly presenting our product is a big part of our success.

We never underestimate what we can impact when we get it right and/or when it's not right, you know, the drag it can have on the sales.

Are any of the retailers today, excluding your stores, do they have accessories, handbags, shoes, in the apparel department?

The whole accessory opportunity, whether even in our own stores where I don't think were yet presenting it to the fullest potential.

Certainly at the wholesale distribution points whether it's classification, presentation, i.e.in the accessory departments or footwear departments or in the shops, that is a tremendous opportunity for us to improve.

In Asia, they do put the handbags in the shops.

The shops are highly productive but I think we're in the infancy on getting that on right on a worldwide basis.

That is a great opportunity.

Yes.

And as far as accessories as a whole for each of the brands, what opportunities do you feel exist?

There is really -- with small leather good and belts coming in house and footwear in house, with the expiration of a handbag license at the end of the year, with the repositioning of eyewear and a long term relationship with Loreal, I think we have most of the merchandise areas covered and positioned the way we want in terms of the go-forward.

We really felt that with Richmont as a partner in fine watches and jewelry, we needed that expertise and that partnership is off to a good start in terms of product development.

So, I think we have sort of thought out and strategized and now executed the key components of accessories.

We just have to get it executed on a worldwide base.

A right.

Thanks very much and good luck.

Okay.

Thanks, Jennifer and thank you all for your interest.

I know it's been a long call.

Obviously there is a lot of noise in the numbers offsetting what I think is very strong organic business, both at retail and wholesale.

We look forward to talking to you at the end of the second quarter when we have more back-to-school and fall selling to report, but we're very excited about the new initiatives at this point and think you'll see the benefits of that in '09 and beyond.

Thanks again.

Bye.

That will conclude today's call.

We thank you for your participation.