雷夫·羅倫馬球 (RL) 2008 Q2 法說會逐字稿

Good morning and thank you for calling the Polo Ralph Lauren second quarter fiscal year 2008 earnings conference call.

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

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

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

Instructions on how to ask a question via your touch-tone phone will be given at that time.

Now for opening remarks and introductions, I will turn the call over to Mr.

James Hurley.

Please go ahead, sir.

Good morning and thank you all for joining us on Polo Ralph Lauren's second quarter fiscal 2008 conference call.

The agenda for this morning's 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 initiatives, and then Tracey Travis, our Chief Financial Officer, will provide operational and financial highlights from the second quarter, in addition to reviewing our expectations for the remainder of the year.

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

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

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

And now I'd like to call -- turn the call over to Roger.

Thank you, Jim, and good morning, everyone.

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

We met our expectations for the first half of fiscal 2008, even as we're making significant investments in long-term initiatives.

In the second quarter we delivered an 11% sales growth, with solid Retail comps of 4.5% against very challenging one and two-year comparisons.

Internationally our Wholesale and Retail businesses continue to be strong across all regions of Europe and most parts of Asia.

Our second 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 investments in new initiatives, whether it be emerging retail concepts or new product initiatives like American Living, dresses, or watches, or acquisitions like Japan and small leather goods.

Even as we invest for growth, our balance sheet and cash flows remain robust and we achieved a trailing 12-month ROI of 30% at the end of the second quarter.

As I look at the underlying trends that drove our first half results, and that would be excluding the impact of the acquisitions, I see a great deal of consistency between the first quarter and the second quarter.

Our underlying Wholesale revenues were up 7% in each quarter, our Retail comps maintained mid to high single digits, and our gross margin rates were higher than last year at the same time.

Our inventories have consistently been in good shape and reflect our sales growth.

Of course, on a reported basis, we've had a negative impact from purchase accounting relating to the recent acquisitions, and a higher tax rate, but I am pleased with the underlying strength and consistency we've achieved in the first half of the year.

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 discreet channels of distribution.

We remain very focused on these initiatives and are excited about their potential to meaningfully enhance our global brand positioning and continue to deliver long-term incremental shareholder value.

I'd like to spend a few minutes updating you on the progress with each of these initiatives.

In our direct-to-consumer businesses we are tracking to have our new 330,000 square foot customer service and fulfillment center, dedicated to Ralph Lauren Media, fully operational in spring 2008.

We recently celebrated an important milestone for this major investment.

We took our first call on November 1st, last week.

We are looking forward to the benefits of being in full control of our e-Commerce operations, especially as we look to leverage this business on a global basis.

With respect to growing our international businesses, we continue to benefit from ongoing strength in Europe and Asia, especially for our luxury products.

We have invested in prestigious and high-profile locations to support the increasingly global focus of our directly-operated retail store development.

Next year, for example, we'll be opening multiple locations in Paris that should certainly help us reposition the brand in that important European market.

At the same time we continue to develop and integrate new systems that allow us to operate like a truly global organization, and this involves everything from management information systems to supply chain rationalizations.

The integration of Japan is proceeding nicely and its potential opportunity -- and it's a potential opportunity where we can leverage our in-house design, merchandising, and supply chain expertise to have a positive impact on sales and processes.

And this is one of the most important luxury markets and it's our second largest country in terms of brand sales at retail.

On the product front we successfully integrated our small leather goods business into our supply chain and distribution platform, and that transition went smoothly.

The investment the dresses, one of the strongest-growing classifications over the last two years, is being successfully leveraged across our Lauren, American Living, and Chaps brand, and the initial response to the product for next spring has been very encouraging.

We're also on track to launch a collection of high-end watches and fine jewelry for fall of 2008, which will initially be sold in our directly-operated stores and then rolled out to third-party distribution in 2009.

During the second quarter we also presented the summer line for American Living to the JCPenney buyers, and once again the response was very favorable.

We are now just a few months away from the launch of American Living at Retail, which has the makings of a very strong, long-term partnership with JCPenney.

I'd like to spend some time on the current environment, and specifically as it relates to our revised earnings outlook for fiscal 2008, which we addressed in this morning's press release and which Tracey will walk you through later on the call.

Despite the strong first half results, we are taking a more conservative view of discretionary spending among U.S.

consumers for the back half of the year.

The macro economic headwinds of the weak housing market and consumer credit concerns, all of which have been discussed at length in the news, along with the unseasonable warm weather this fall, make us more cautious about the traffic patterns in all domestic channels for the holiday season.

In general, the Women's business is trending softer then Men's, which has been the case for most of the year.

The high-end luxury accessory businesses, like handbags, shoes, watches, and jewelry, have been strong, but is currently a relatively small portion of our overall business.

While I believe we have a compelling holiday assortment that will be supported by a strong advertising campaign, we thought it was prudent to recalibrate our expectations for the back half of this fiscal year with a more cautious view on sales and margins for our domestic operations.

Despite a more conservative view of the near-term spending in the U.S., nothing about our strategy has changed.

We continue to execute against our stated objectives and our expectations for return on our investments remain the same.

In the past few years we've made significant long-term investments in Europe, Lauren, kids, Retail, e-Commerce, and others, as well as infrastructure investments to develop a world-class supply chain.

All of these decisions have paid off with tremendous returns for our shareholders.

We continue to view the current strategies and investments as the right direction for our Company.

Now let me turn the call over to Tracey to discuss the financial and operational highlights of the quarter, as well as our revised outlook for the year.

Thank you, Roger, and good morning, everyone.

First, I'd like to highlight for you the drivers of our second quarter net income and earnings per share performance, then I will take you through our revised guidance for fiscal 2008.

For the quarter, we achieved consolidated net revenues of $1.3 billion, an increase of 11% over the prior-year's period.

When we exclude the impact of the non-comp recent licensee acquisitions, and those are Impact 21 in Japan and New Campaign Inc.

for small leather goods, second quarter net revenues still increased a healthy 7%.

As a reminder, two other recent acquisitions, Ralph Lauren Media in the fourth quarter of fiscal 2007 and New Polo Japan in the first quarter of fiscal 2008, were already 50% owned by Polo prior to the acquisition, and therefore were already consolidated into our results last year.

International markets continue to be important drivers of topline growth during the second quarter, and especially our European business.

Regarding merchandise category, our Menswear product experienced strong sales globally and our Chaps product lines were also strong performers.

Regarding our Retail business, consolidated comps, in our directly-operated retail stores experienced 4.5% comps during the quarter, which was achieved on top of a 9.3% comp gain in the second quarter of fiscal 2007 and a 6.2% comp gain in the second quarter of fiscal 2006.

Our gross profit dollars increased 10% to $695 million and our gross profit rate declined 70 basis points to 53.5% in the second quarter compared to 54.2% during the same period last year.

The decrease in our overall gross profit rate is entirely due to the effect of recent acquisitions.

Excluding the full effect of recent acquisitions, our gross profit rate was 40 basis points higher than last year.

Second quarter operating expenses increased 20% to $503 million, compared to $418 million in the second quarter of fiscal 2007.

Operating expenses as a percent of revenues were 38.7%, 290 basis points higher than last year.

The higher operating expenses primarily reflect the impact of the newly acquired businesses, both the non-cash effect of the purchase accounting related to the transactions, as well as the business' ongoing operating expenses.

We also experienced higher stock-based compensation costs due primarily to an approximate 80% appreciation in our stock price versus last year's, start-up expenses related to American Living and dresses, which both launched in the fourth quarter, and costs related to our 40th anniversary celebration, in addition to the overall growth in the core businesses.

Our second quarter operating income declined 10% to $193 million.

I'd like to highlight that approximately $20 million of the decline in operating income is due to the non-cash amortization of intangible assets and inventory related to purchase accounting for the recent acquisitions.

This represents 90% of the year-over-year decline in operating income.

Our second quarter operating margin was 14.8% compared to 18.4% in the second quarter last year, representing a 360 basis-point decline.

Other drivers of the margin decline include the investments in new product launches and the increased stock-compensation expense I mentioned earlier.

Net income for the second quarter of fiscal 2008 declined 16% to $115 million and net income per diluted share decreased 15% to $1.09.

The decrease in our net income and diluted EPS results principally relates to the decline in operating income I've already highlighted, including the $20 million of non-cash amortization related to purchase accounting, as well as to a tax rate of 39.4%, which is 350 basis points higher than the prior year, primarily reflecting our adoption this year of FIN 48 as we've discussed before.

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

So beginning with our Wholesale segment, our Wholesale sales grew 17% to $772 million, or 7%, excluding the Japan and small leather goods licensee acquisitions, which now are included in our Wholesale segment.

The increase in Wholesale revenues was primarily fueled by strong global Menswear sales and growth across all product categories in Europe.

Sales in Italy, our largest European market, were especially strong during the quarter.

As I mentioned earlier, Chaps was also a driver of Wholesale revenue growth, with both Women's and Children's performing well.

Our Wholesale operating income increased 12% to $176 million, primarily as a result of the higher sales.

Our reported Wholesale operating margin was 22.8%, 100 basis points below last year's operating margin of 23.8%.

The decline primarily reflects higher SG&A expenses to support new product lines, as well as the non-cash affect of purchase accounting related to the recent acquisitions.

Excluding the impact of the recent acquisitions, the Wholesale operating margin would have expanded slightly.

For our Retail segment, second quarter sales increased 7% to $474 million and overall comp-store sales increased 4.5%, reflecting an increase at 5% at Ralph Lauren stores, 4.2% at factory stores, and 5.5% at Club Monaco stores.

Ralphlauren.com sales were up 28% over the comparable period, driven by double-digit gains in all major product categories.

Our comparable store sales were strong in July and August, but as Roger mentioned, softened in September.

The unseasonably warm weather presented a challenge for us in selling fall merchandise.

In Europe our retail stores continued to post very healthy total sales and same-store sales gains.

Our Japanese retail stores are also growing at an impressive double-digit rate, thanks to broad-based interest in all of the luxury products carried in these stores.

Retail operating income was $52 million compared to $67 million in the second quarter last year and the Retail operating margin was 11.1% versus 15% last year.

The declines in Retail operating income and margin rate also reflects 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, increased occupancy expense related to future store expansion plans, such as the planned Paris stores that Roger mentioned earlier, and gross margin declines at some of our retail formats.

Licensing royalties for the quarter were $53 million, 14% below the prior year, and operating income decreased 39% to $23 million.

The decline in Licensing revenue and operating income was due to the effect of recent acquisitions, and this primarily relating to the Impact 21 acquisition, which is now consolidated as part of the Wholesale segment, as I mentioned earlier.

Excluding the effect of the recent acquisitions, Licensing revenue and operating income was up, primarily due to eyewear and fragrance sales.

We ended the second quarter with $473 million in cash or $130 million in net debt, which reflects short-term borrowings to complete the Impact 21 acquisition.

During the second quarter we invested $48 million in capital expenditures for new stores, new shop installations -- particularly in Europe -- and infrastructure investment.

We also repurchased approximately 1.9 million shares of stock for $150 million during the quarter.

We currently have approximately $298 million remaining under our existing share repurchase program.

As Roger said, we are pleased that the investments we've made in our business this year have continued to yield a last 12-month return on investment of 30% as of the end of the second quarter.

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

In terms of our earnings cadence for fiscal 2008, I want to remind you of what we have said before, that 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 these investments beginning in the fourth quarter and then into fiscal 2009.

Additionally, we have the impact of purchase accounting related to the two Japanese acquisitions, Ralph Lauren Media, as well as small leather goods.

This will result in suppressed earnings in the first three quarters of this fiscal year, with earnings growth disproportionately weighted to the fourth quarter.

This is not new news, but I thought it was worth revisiting since there's a fair amount of investment and associated impacts this year, which we have tried to lay out for you.

As mentioned in our press release, although we met our expectations for the first half of fiscal 2008, we are concerned about the impact the current U.S.

macro environment will have on consumer spending over the next several months.

Accordingly, as Roger said, we believe it is prudent to recalibrate our expectations for the back half of the year, and I'd like to review our revised outlook with you now.

For the first full year of -- for full year -- excuse me -- of fiscal 2008, we now expect revenues to increase by a low-teens percentage, which compares to our prior expectation of mid-teens percentage growth.

The more moderate top-line outlook effectively assumes a weaker consumer spending in the U.S.

across all of our distribution channels for the back half of the year.

We expect our reported operating margin to be down by approximately 250 basis points compared to fiscal 2007, the majority of which can be attributed to the non-cash impact from purchase accounting, but some of which is a function of our slightly-lower sales growth outlook.

Our fiscal 2008 tax rate should continue to track to the year-to-date trend, which is approximately 39%.

The net result of all of this is that we now expect fiscal 2008 diluted earnings per share to be in the range of $3.50 to $3.60 per diluted share compared to our prior expectations of $3.64 to $3.74.

And as a requirement, this includes an estimate of approximately $60 million of non-cash purchase accounting impact, and that's a before tax number.

We also provided more specific guidance on our fiscal third quarter expectations in this morning's press release, so I would like to review that guidance now.

For the third quarter, we expect consolidated revenues to increase at a mid single-digit percentage rate.

This reflects mid to high single-digit percentage growth in Wholesale and high single-digit percentage growth in Retail.

It also reflects a low 20% decrease in licensing, due both to the impact of the acquisitions I mentioned previously and to a one-time accelerated payment to exit a licensing arrangement that we received in the third quarter of fiscal 2007.

Operating margins are expected to decline approximately 500 basis points in the quarter as a result of the non-cash purchase accounting related to the Japanese acquisition and Ralph Lauren Media, continued investment in new business initiatives, and to the more conservative view of domestic sales.

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

Okay, operator, I think we're ready to take the first question.

Great.

(OPERATOR INSTRUCTIONS) Our first question comes from Christine Chen of Needham & Company.

Ms.

Chen, your line is open.

Hello, operator, we can't hear anything.

Maybe you should move to the next question.

Yes, we're going to the next question, which is Omar Saad of Credit Suisse.

Thanks, good morning.

Good morning.

Roger, hoping you could expand a little bit on the U.S.

consumer environment, how you think about it given the breadth of your business across channels and across price points?

We'd love to hear some of your unique insights, whether it's the outlet business and is that being impacted by gas prices, or the luxury business and some of the consumer market -- stock market fears that are out there.

In the Wholesale channel it seems like Women's has been weak for some sometime, I don't know if you have any particular insight you could share with us on that, as well?

And how you think about this as we head into the holiday season, which traditionally has obviously been the biggest season for the industry?

Yes, it's the headline question for all of us, I think, on the macro economic levels and I'd make sure we're really focused on the U.S., because the international business is a whole different set of discussion points.

But domestically, we saw a reasonably strong July and August and then a significant slowdown in September, so the quarter itself, while in total we delivered our plans, it had some extreme parts to it.

And I think we saw the domestic customer really slowing down their discretionary spending late August and into September.

How much of that was weather, hard to tell.

When you look at the regional maps, for our performance, the northeast, the Midwest definitely were weaker, which we do think was the primary part of the country that was impacted by weather.

California, southwest, southeast, less of a weather issue, our businesses were stronger in those markets.

And then the New York business is experiencing tremendous growth, given a very high level of tourist traffic and that has continued on unabated.

So the country itself had different reactions over the last six, seven, eight weeks.

I believe the high-end customer continues to spend, we're seeing in our business domestically and internationally and I believe they will continue to spend through Christmas for themselves and for gift giving.

I also believe that if the financial headlines and news that keeps coming out of Wall Street gets worse, that may or may not provide a psychological depressant to the consumer more than it is they can't afford to buy a sweater or a coat, so we'll have to watch that carefully.

But at the moment, the high-end consumer continues to shop at a pretty high rate on a worldwide basis.

I think Tracey alluded to double-digit comps in Europe and double-digit comps in Asia and they have continued to trend well into October and November.

I think it's the middle customer that is being squeezed with mortgages being reset, maybe borrowed against the equity in their home and as that equity value has fallen in many parts of the country, they are forced to cut back their discretionary spending, and I think that's the one, perhaps, we're most worried about as we look at the third and fourth quarters for us where discretionary spending is really squeezed.

Gas prices, which continue to be talked about, it's hard for me to really see how that is impacting it.

We have not seen that as an impact in the factory business.

That business continues to be pretty solid, so I think that's less of an issue.

I think the channels that are below that, whether it's a Kohl's or a Penney's, I think have seen some of that turbulence, I think they obviously picked up a lot of market share over the last two years during the Federated-May merger, but the last three or four months, they've seen some turbulence in their comps, even though Chaps continues to perform extremely well at Kohl's and the American Living product that we've now shown through two market have a huge enthusiastic following now with the Penney's merchant team.

My net on all of that -- and it's a long answer but I think it's the heart of what's going on -- is that the middle customer is the one being squeezed the hardest.

In terms of product category, I think Women's has been soft really throughout the year, and that's really all formats for us, whether it's the very contemporary part of Club Monaco or whether the Women's businesses in Lauren price points, or really across the board, and I think that's just fashion and trend as opposed to any serious permanent change.

Men's business has continued to perform reasonably well, really on a global basis, and so that pattern is unchanged.

I think the weather did hurt the apparel businesses, particularly in those regions I'd talked about, and now that the weather's changed, we'll see what happens.

And how do you plan for the -- how do you deal with it in your planning, this consumer overarching slowdown?

Do you pull back on inventory, are you being more -- your inventories are obviously in pretty good shape.

Are you being a little bit more promotional in your businesses to work through that or how do you deal with that?

It's interesting because the -- what's turned into the shortest selling cycle of the year now has become fall.

You ship it in July and August and hopefully you sell it by September and by October you want to start moving out of it to make room for holiday cruise and resort, which is now coming into the stores in the first week in -- two weeks of November.

So what used to be the largest and most profitable delivery cycle for really all manufacturers has now become the shortest.

The holiday cruise, which then bleeds into spring, which bleeds into summer allows you much longer selling times to sell through goods at full price.

So when the weather doesn't come -- as it didn't this year -- there is more promotional activity late September into October to try to clear those goods to position the holiday cruise/resort product that comes in in early November, so we've taken some action.

I think Tracey said one of the issues on the operating margin rates in Retail in the second quarter reflected some aggressive attempts to move through some of that fall a little earlier than we might like.

But as you commented, our inventories are in great shape, we're flowing fresh product, and we think we're well-positioned with a slightly more conservative point of view about sales and margin, and to whatever degree, we've got flexibility in our expense structure without impacting our initiatives.

We'll look at that through the back half of the year, just to be cautious.

Great.

And one last quick question, do you think -- this year aside with a lot of the investments you're making, do you feel confident you can get back to that 15% operating margin level next year and beyond?

We started the conference call by saying, we feel very good about those investments and there's nothing in the short-term domestic pullback that would convince me otherwise.

So much of that investment is positioned around very long-term strategies, including our growth internationally and I think the European example has worked beautifully.

We're rapidly approaching that $1 billion target we all talked about a couple years ago.

We think the investments in Asia over the long-term are the right things to do, direct-to-customer, and these new businesses that address the discreet channels, so I don't believe any of those have changed.

I don't believe any of our operating margin rates, or targets will change, But sitting here today, I don't know whether the fall weather pattern/economic pattern will bleed into summer or not.

But fundamentally our goals and our objectives and our return expectations are unchanged.

Thank you.

Best of luck.

Okay, thanks, Omar.

Our next question comes from David Glick of Buckingham Research.

Good morning, Roger.

A little bit of follow-up on the Wholesale channel.

Can you give us -- your inventories obviously are in great shape.

Can you give us some color on the inventory levels in your retail partners, in the department store channel?

And maybe your evaluation of the Q3 assortments from a fashion perspective in Men's versus Women's versus what you're seeing in early selling on holiday ,and are you seeing any pressure from your partners to pull back on goods, or are goods flowing smoothly into the channel?

Okay, just to be clear, are you talking about our third quarter or their third quarter?

Their third quarter.

Okay.

Well, I'm interested to see what's reported tomorrow for comp-store sales for October myself.

But absent that piece of information, I think, David, what I would say about our Men's assortments -- and I said it earlier -- our Men's business has held up very nicely around the world, and domestically it's been the strength of the year to date.

I think our fall deliveries, which for us were second quarter, their third quarter, generally tend to be heavier in weight.

And I think with the warmer weathers that we've experienced and the record-breaking heat, I think we didn't moved through those as we planned.

and I think the stores are taking more aggressive action to clear that through.

As we've begun to receipt cruise, holiday, transition product in early November, the business on that product has started to pick up.

So we're encouraged about the quality of what we're delivering, the early consumer reaction, and feel like moving through that fall product aggressively, both in our stores and in the wholesale channel, is the right decision.

And are they -- is there any pressure on pulling back on goods on your retailers' part, are their inventories under control for the most part?

Yes, I think the retailer sees Ralph Lauren product in Men's, Women's, Home, Kid's, all of the categories as the backbone of their business.

We've worked very hard to edit the doors we're in, build the right kind of shops, put in the right support, the right kind of selling, so we're comfortable with the on order through the -- our third and fourth quarter and the plans that are in place to have that product sold through.

And if you were to do that same critique in the Lauren assortments for fall, what kind of feedback could you give us?

Well, I would say against the backdrop of a softer Women's year in general, I think that is applied to Lauren as well.

Here again, the fall product, which tends to be heavier, we're working hard to sell that through and receipt the holiday cruise.

The first two weeks of November, depending on how you count your calendars, that product has begun to check at retail better than the fall product.

I also think as we have developed the Lauren Jeans line and attempted to create clarity between where one line starts and the other ends, I think we left a middle range of product there that we're readdressing with the holiday product and into spring that I think will better capture that piece of the business, which I think may have gotten lost in our attempts to bifurcate the two lines.

So we're feeling better about the go-forward position there as well.

Last question.

As weather has cooled off last week, particularly in the Midwest and Northeast and into this week, are you starting to see more footsteps, are you getting color from your partners that the traffic levels are starting to rebound as the weather normalizes?

Yes, we have.

Great.

Okay, thanks and good luck.

Thank you.

We'll take our next question from Brian McGough of Morgan Stanley.

Yes, thanks.

It's Brian McGough.

Hi, everybody.

Hi, Brian.

I thought I heard this right, but when you talked about the Wholesale margins, excluding the non-cash amortization, were the margins up?

Yes, first quarter and second quarter.

How?

I mean, with everything that's happening out there at retail, where did you -- where did you see margin strength?

You guys have moved to a model over the past two, three years where you basically took your markdowns close to zero, really.

I'm going to assume there's been pretty much no change there?

We have great management, what can I tell you?

I think, Brian, the reason we isolated in operating margins there, which are very high to begin with, and really to credit to Jackie Nemerov and her team who have many years of experience.

I think it's also a great testimony to the supply chain improvements we've made over the last four or five years from sourcing through logistics and distribution, through how we deliver product to the customer.

So even with the integration of the Chaps business, which I know initially there was a concern that might delude the profits of our Wholesale business, I think you've seen and will continue to see not only healthy margin rates, but the expansion that I think that business can provide.

So that is one of the true examples of the integration of what's going on here, even in difficult times.

It's also fair to say, Brian, that we had strength in our European business, where the business has not experienced any of the issues we've just spent some time talking about domestically, and as you know, that comes with a higher margin.

So the combination of all that -- and my hat's off, really, to the people managing that here at Wholesale and our supply chain people -- it's really quite impressive given the environment.

Okay, great.

A couple more.

Just -- I was hoping, Roger, you can just talk a bit more strategically next year.

I mean, you guys have a lot coming down the pike.

You go -- hello, you there?

We're experiencing technical difficulty.

Please stand by.

I'm sorry, Brian.

If you can hear me, we got cut off on this end for the last few minutes and you were in the middle of asking a follow-up question to the Wholesale margin, so if you're still there, could you repeat the question?

Mr.

McGough, please go ahead and press star one again please.

Okay, your line is open.

Okay, am I on?

Yes, sorry, Brian.

Don't worry about it.

Actually I spent the past couple of minutes just talking about the broader audience about what your plan is for the next few years.

(LAUGHTER)

Thank you for doing that.

We didn't pay our bill, we got cut off.

Question, I think on the --

You said we had a lot on our plate and then you got cut off.

Yes, so just next year, from more of a strategic standpoint, you got what you're doing on the footwear side, you have dresses, you have American Living, dot com, I mean there's -- would you talk a little bit more about a few of the other call options you have out there, like handbags and also your other Japanese license and anything else that you're eyeing from a strategic standpoint and where you might be headed?

Okay.

Well, again, I apologize for the line going dead.

The two major additional call-outs that we've talked about before and we continue to look towards is the end of the long-term handbag license that runs out at the end of December with [Lofney], at which point we'll be able to wholesale and third party the collection handbag business that we've been doing at this point in our own stores only, as well as we're free to develop other brands and other product categories of handbags, such as would relate to our apparel businesses.

We're definitely committed to doing that and we'll talk in February about where when that product will launch.

It will not launch in spring.

We will look to wholesale selectively and are negotiating, hopefully successfully, for those key locations on a worldwide basis for fall of calendar 2008.

We are also looking very hard at the other licensed Japanese business, the bulk of which are really the kids business and some smaller other businesses.

Those licenses expire at the end of February, which is an opportune time for to us look to bring that into our Japanese business model.

So all of those will be looked at for our fiscal '09 planning and we'll talk about those in more detail in February.

Okay.

Last very, very quick question.

As far as your tax rate goes, your tax rate is really high, and as I look at other -- at other multinationals, it's hard to find one that even has a tax rate even over 32%, even over 30%.

As you guys move forward with your plan for the next two to three years and a greater portion of your profit comes from Europe and Asia, shouldn't your tax rate start to approach 30% instead of upward now where it is now near 40%?

That sounds great, Brian.

Yes, as you know, the federal tax rate is 35%.

As we have discussed previously, and as disclosed in our 10-Q filings, FIN 48 obviously is a big piece of the tax rate increase for us and we are doing some tax planning as it relates to our Asia business as we expand there and certainly hope to do some tax planning, there both as well as in the U.S.

So it is a primary focus of the organization to overtime, as we expand globally, realize some of the other benefits that other multinationals realize.

Thanks.

And our next question comes from Liz Dunn of Thomas Weisel.

Hi, good morning.

Wanted to get an update on some of the other initiatives.

What's going on with the jeans business?

And just as a follow-up to Brian's question, the launch of handbags, why are they not launching until fall?

Is it just so much on your plate that you wanted to give it to full attention, so it's going to be full.

And with that, do you risk, potentially, losing some of the existing floor space?

Okay, Liz.

I would say in answer to the handbags question, your assessment is correct.

We have so much on our plate.

In order to organize ourselves to conduct a wholesale handbag business is a lot of time and energy that at the moment is going into a lot of other subjects that we've detailed here this morning and in the past calls.

So for us, it's a matter of capacity.

In our effort to do it right we think that's the right timing.

The jeans business is an interesting business where we discontinued the Polo Jeans in the U.S.

market and have worked our way through that.

We have been building and pushing Lauren Jeans for comparable distribution points to the Lauren sportswear, and I think that line in general has been well-received, but I think going forward we've got some points of view about getting it more narrowly focused for that customer profile in the doors we're in for spring and beyond.

I also think in the Men's business, where we were doing Polo Denim under the heading under our Polo Sportswear, I think we've gone through some iterations there about fit and washes and prices, all of which has been very helpful to us in shaping where we want to go in the future with that business.

So I think both Men's and Women's, as it relates to that, remain big opportunities and we're pushing forward.

At the same time, we've also expanded the denim representation in our Kid's business, in Rugby and in Blue Label, so we've got components of denim running through all of the businesses.

At the very high end, we've got RRL, where at the moment we're retailing it in vertical-owned stores, and we're looking to expand that and we have it wholesaled in selective, high-end specialty stores.

So from the top of the pyramid down through some of the more moderate price points, we are seeing the positive impact of the denim business we rolled back into the Company.

Okay, and then just my second question relates to Japan.

Can you talk about where you are in terms of building the infrastructure and staffing and just all the things that you need to do from a more qualitative standpoint?

What are you, what have you learned from how you proceeded with Europe, and when do you expect to be fully staffed up, and from an infrastructure perspective, where you need to be to really execute on that business?

Well, the update on Japan, since the acquisition, is as follows.

I think we've done all the homework we needed to do in terms of the current business, the points of distribution, the quality of the inventory and the way the brand is positioned.

I think we have a lot of activity right now in the sourcing area and are looking at how we transition the manufacturing of that goods into our worldwide manufacturing network.

We've done a lot of work and are moving quickly through the logistics and distribution of how goods come into the country, how they're processed.

There are different laws in Japan in terms of inspection levels and content labels, but we're working through that and think we are moving quickly, particularly based on what we learned in Europe.

We're moving from three distribution centers in Japan down to one and we think we'll begin to see some efficiencies there.

We've relocated our European IT head to Japan, since he went through all the systems conversions that we did in Europe over the last five or six years, to help jump-start IT conversions to our global network.

And now we are working on a group of people who will help integrate the merchandise strategies -- by-door planning strategies that we've used effectively, both in the United States and Europe, to really go door by door and work on the assortments, which for the most part will impact fall of next year.

So we are using the playbook that has worked for us, both in the United States and in Europe.

We are looking to take learnings from our Omotesando store, which Tracey talked about, and is running strong, double-digit increases and we're playing through that the rebuilding of the management team, their priorities, their focus, and that will dictate the capital spending as we go forward.

At the same time we're looking to position our platform to be able to expand as these new licenses expire at the end of February, as Brian asked earlier, so, there's a lot going on in Japan.

Nevertheless, it's a challenge sometimes with the language barriers to work through interrupters and all the cultural issues.

But I think they're very enthusiastic in Japan about the changes, and I think we're going to play that out over the next planning period pretty aggressively.

And longer term you still feel that your business can be a third Asia, a third Europe, and a third U.S.?

I do.

Okay, great.

Thanks.

Good luck.

Okay, thank you.

Our next question comes from Margaret Mager of Goldman Sachs.

Hi.

Good morning.

Good morning.

A couple questions.

Let's see, as far as the outlook for the second half of the year and the adjustment in your sales guidance, can you -- are you also making adjustments in how you're going to launch the American Living initiative and could you talk about that?

Will there be fewer doors, less merchandise, how are you -- how are you -- what kind of adjustments are you making?

And then second question related to that, I don't think you made any expense adjustments in your outlook, and I'm just wondering what are you doing on the expense side and what is your contingency plan if the environment doesn't meet your revised expectations?

Thanks.

All right.

Good question.

Margaret, is this still your swan song?

Yes, this would be it, so I think --

I don't know whether to have a drumroll or --

I think for you guys --

-- put extra emphasis into my answers here.

This is 40 consecutive quarters, so --

Gosh, all right.

-- so congratulations on your ten-year anniversary.

Well, thank you.

And our ten-year public anniversary and our 40th year in business, it's been quite a year, but let me answer the American Living question first, Margaret.

We are making no changes.

The door count, the merchandise plan, the merchandise presentation initiatives, the advertising and launch characteristics and the first-year media plan are all unchanged.

As a matter of fact, I think that Penney's is viewing this launch even more enthusiastic, given the environment has been a little up and down, and I think their enthusiasm has grown, particularly after we showed the summer line, which backed up the spring line.

So all systems go on American Living.

We are obviously hard at work, since it's early November and a lot of that product has to be coming through the supply chain now in order to be here to deliver that February launch, and hats off to our wholesale and manufacturing people who have been able to pull that off.

At this point everything is tracking on time and looks good.

The second piece of your question, which is the expense piece, I don't think we've directly talked about that in terms of the back half of the year.

I think what we're trying to do in terms of dealing with our concern about a softer environment, perhaps, is look at things that would be called discretionary or flexible spending in order to try to work against the sales and margins issues.

What I don't think we're doing, Margaret, at this point, is making any radical decisions that would cut into the muscle or the fiber of the Company.

I don't think a slight softening in the environment is going to cause us to do that.

And as all of you have pointed out, given all the things we have on our plates and all the resources that are being applied to that, I think that would be incredibly short-term and imprudent.

If the environment, God forbid, continued on this way for a long time, I think we'd come up with some different answers, so at this point, that's our approach.

Okay.

So as far as the change in the outlook from a high-teens fiscal year revenue to low teens -- or mid teens down to low teens for the full year --

Right.

-- the adjustment is all from the U.S.

market --

Yes.

-- and it's not from American Living, so therefore it's all from the wholesale department store channels?

Wholesale and retail.

I think, Margaret, we have taken a view of our own retail and taken our sales forecast down a tick and we'll see what happens.

We don't know from day to day, but we'll see what happens.

Our original plans were built on a comp that was in the 5% to 7% range, domestically, which is consistent with what we had been running, and I think we're looking more at a 3% to 5% comp-store number domestically.

So we'll see what happens, but that's the view we've taken in terms of third and fourth quarters.

Okay.

Europe and Asia remain unchanged and American Living remains unchanged.

Okay, that's very helpful.

Thanks.

If you wouldn't mind one bigger picture question, the e-Commerce strategy, which is highlighted as one of your key go-forward initiatives, the business is trending up 28% as we speak.

Is it actually big enough to move the needle on the overall Company top line?

Is it contributing 1%, 2%, to the total, say, that low-teens aggregated revenue increase you're expecting?

And if you could talk about just the -- as you see this strategy unfolding, when does it actually become big enough to become a needle mover in terms of sales?

Thanks.

Okay.

Well, it's a good question because we made a very early commitment to the online business back in 2000 and we spent a couple years really learning and investing in how that would operate, so we're very proud six, seven years later of what that business has become.

In terms of size, it's still only about 4% of the Company sales, so despite the fact that it's experiencing terrific top-line growth, its impact on the overall Company result at this point is relatively small .

I think our desire to see that as a huge platform of the future speaks to why we bought the 50% back from our partner that we didn't own.

I think it speaks to our commitment to building a state-of-the-art call center and customer service center in Greensboro, North Carolina, which has the capacity to be doubled in size in the future if we need it.

All of that is because we believe it is here to say and we've got a running head start on that business.

Unlike any others who are now trying to get into it, we think it's integral part of branding, of communicating and doing business.

There is no doubt that in future years people are going to get their information and make their decisions more off of various online communications, whether it's a computer or a cell phone or any other media, and I think we're positioned and believe it's going to be a big business.

At the same time, because of the strong foundation we've built here, we are looking at the international opportunities and studying those to better see how it reflects on our global ambitions as a Company.

So with the strength of Europe and the strength of our business there and the investment we've made, we're looking hard at what role e-Commerce can be in that market, both for commercial sales and profit, as well as promoting the brand.

So a lot of very exciting things going on there, but as you know, that keeps changing and that business keeps evolving and we're trying to stay on top

Well, you already have a great Web site, so --

Thank you.

-- good luck with all of that going forward and I appreciate the well wishes, Roger.

Thank you.

And best of luck to you guys.

Good luck.

Take care, thank you.

Our next question comes from Robert Drbul of Lehman Brothers.

Hi.

Good morning, Roger.

Hi, Robert.

Just -- the question that I have right now is, when you look at the third quarter and the fourth quarter, what's the contribution from the acquisitions expected to the wholesale part of the business versus what we've seen in the last -- even in the most recent quarter?

What's the organic growth and then how much on top of that?

Yes.

Is the --

What are the -- in the high single-digit wholesale assumption, how much is the organic versus what you're getting on the acquisition side?

Because I think we saw ten points of acquisition --

You know what, I think we'll have to break that out offline and get back to you.

We don't have it in front of us.

Okay.

Do you have a second question.

No.

That'll be it for me.

Okay.

Thank you.

Thank you.

We'll take our next question from Virginia Genereux of Merrill Lynch.

Thank you and good job in this difficult environment.

Hi, Virginia.

How are you Roger and Tracey?

Hi.

Hey.

A question on owned retail, if I may.

Can you guys tell us how many -- or what percent of sales of the 303 stores are -- or two stores -- are international?

And follow on to that, Roger, if you -- it looks like Retail margins will be down a little bit this year, even adjusting for the acquisitions, noise --

Yes.

Yes.

And I know some of that is, Roger, the investment in the fulfillment center for RL Media and stuff.

You're also, I think, opening more stores.

As you look out to next year, Roger, do you think Retail margins can improve from this year's level, weighing the dot com fall-off and investment fall-off and excel -- against accelerated door growth?

Okay, well the first part of your question, about 10% of the doors at the moment are international retail doors, the rest are domestic.

So of the 302, call it 30 to 35 are in the -- either Europe or Asia that are owned, and we --

Thank you, right.

-- and we would look to expand that going forward.

In terms of the Retail margins, when you take out the dot com fulfillment center and you take out the accounting charges that come with the acquisition of the 50% of RL Media -- because that's running through the Retail P&L -- and you look at some expense of real estate that we've committed to in Paris that won't open until the fall of '09, but in order to secure these unique locations, we had to commit to that at the early part of this year and we're now going through the permitting process, because they're historic buildings -- if you net all that out, I think what you're seeing is a slight dip in the gross profit rate due to markdowns in the second quarter and/or depending on the customer, third and fourth quarter reactions.

I think we're going to see more markdowns this year than last year when we were running at seven to nine comps.

So if our forecast of three to five comp comes true, some of that will result in product we'll have to clear in the third and fourth quarter, so there'll be some margin dip.

Assuming next year doesn't have those one-offs with Ralph Lauren Media and the fulfillment center and the accounting and some of this real estate, I'd like to think the margins are going to come back to more normalized levels.

That's great.

Thank you.

You're coming from a great year last year, too, in terms of no door openings and stuff.

Secondly, if I may, Roger, if I think about the business pro forma, I think that this year we're kind of 75% U.S.

and Canada and 25% international, and next year maybe it's a little more international, but I've tried to include the Japan.

My question is, can you segment the U.S.

business?

Roger, you mentioned you thought the middle customer was tougher, high end holding up, but if I take that 70%, 75%, say, that's kind of U.S., how do you guys think about your customer exposure?

Well, I think, Virginia, it's a good question.

We think we are balanced in the way we're touching customers at different price points and different channels.

Our own stores plus high-end distribution like a Saks or a Neiman's or our on-line business all represents the best way for the high-end customer to touch us and for us to touch them, and so continue to invest in that because we think that's an important part of the market and we think that's where our growth is.

At the same time, you've all read about the door count expansions at a Kohl's, the number of doors that are being talked about at Penney's.

I think between the two chains in the next five years --

Please stand by.

Again, ladies and gentlemen, we are experiencing technical problems.

Please stand by.

Virginia?

Can you hear us?

We got cut off again.

Virginia, just press star one again, please.

Press star one again?

No, Virginia.

Can you guys hear me?

Yes.

Thank you.

I don't know why we keep getting cut off.

I'm now standing 15 feet away from the phone, so it must be haunted.

What I was saying when I think I got cut off -- correct me if I'm wrong -- is the Kohl's and Penney's announced door expansion, which if I add it up right are about 750 doors over the next five years represents significant opportunities and I think we're uniquely positioned to give them full lifestyle brands.

There isn't anybody else I can think of that can cover Men's, Women's, Home, Kid's, Accessories, and all the pieces and parts, so I think our opportunity to position ourselves in that channel is going to pay great dividends for the corporation.

I think in the middle channel, the question is, was get done with integrations and mergers and nameplate changes, I think that channel can win, I think they've just been going through a lot of upheaval in the last couple years.

They quite frankly have Ralph Lauren well positioned in key departments.

So I think -- to the domestic question, I think we are well positioned in the merchandise categories we want to be in and I think we're well positioned in the channels of distribution we want to be in.

We're obviously adding incremental investment to the high end of that pyramid and we think that's the right place for us to be, not only domestically but on a worldwide basis, so that's the strategy we've embarked on and we feel good about it.

That's great.

Just last one, I think, following on Bob Drbul.

Tracey, I think -- your guidance at least for the next quarter by our math, implies that the core -- ex acquisitions that the wholesale business will be down actually, versus the 6% or 7% year-to-date growth, but maybe there's some shipping dynamic going on there.

Is that indicative of retailer dema -- or are orders getting cut like that or is there --?

Do you know what I mean and should we think about that -- does that have implications for the rate of growth over the next couple of quarters?

Well, Virginia, you're right, it does -- given the fact that Japan for the first three quarters is relatively the same in terms of sales volume, it does imply that the wholesale channel will be flat to slightly down.

As Roger said, it's not a matter of cancellations on our part as it relates to the wholesale orders.

It is a more conservative outlook in terms of sell throughs.

Obviously we had some incremental markdowns in our third quarter numbers from a wholesale standpoint, so that's really what's driving the softness.

I think, Virginia, the only thing I'd add to Tracey's comments is that the 7% we've been running through the first six months of a relative flat third quarter and the a spike in the fourth quarter, some of that's affected by the shipping patterns in Europe, because Europe has a very small first and third quarter and then has very large second and fourth quarters.

So the growth of Europe, which is embedded in the second quarter numbers, lessens in the third quarter because they have a very small quarter and then is projected to come on strong again in the fourth quarter.

So some of that's the ebb and flow of the international businesses running against the more steady domestic business.

Thanks.

That's what I was thinking.

Thank you all.

Okay.

We'll take our next question from Jeff Edelman of UBS.

Thank you, good morning.

Good morning, Jeff.

Would you discuss the growth that the European businesses had in the quarter, what that contributed overall, and what kind of currency impact we might have seen, both at the top and bottom line?

Yes.

I would say that the European wholesale business, which represented during the quarter about 30% of our business in the quarter, ran at about an 11% increase, so you can do the math on the total business.

It was better than the 7% normalized number and it's contributed -- its contribution is growing.

The currency impact, which Tracey can give you, is relatively modest and also is relatively modest on our bottom line, because what we get as a positive through the conversion of the profit back into U.S.

dollars is offset by the increase in the cost of goods for all the products, whether it's raw material or finished products we make out of Europe that's going the other way and hurting us.

So the net profit impact is relatively modest in Europe at the moment.

It's about 2% of the growth, Jeff.

Okay, thank you.

In the Wholesale segment.

Right.

Okay, thank you.

Of revenue growth.

Tracey, again, as we think about the fourth quarter revenues, I know what you said about shift in timing of European shipments, but it looks at if the year-over-year growth in your third quarter up about $50 million, fourth quarter up about $200 million.

Well, in the fourth quarter, we're shipping American Living.

Right, okay, so that's still a good chunk of that in the fourth quarter.

It's not apples to apples.

Right.

Yes, it's not apples --

Okay, just wanted to clarify that.

Thank you.

The only other thing --

-- dresses and other products, Jeff.

Yes, the only other thing I'd say about these quarterly numbers, because of the 53rd week at Retail, that last week in the quarter does shift meaningfully from quarter to quarter against prior-year comparisons, so while it's certainly a number to look at, I wouldn't get too invested in it.

Okay, great.

Thank you.

Thanks, Jeff.

I think we're going to ask for a couple more questions since the phoneline got disconnected twice.

Are there just a couple more questions, operator?

There are a few more questions.

We'll take our next one from Christine Chen.

Thank you, sorry about the technical difficulties.

You're back.

I'm back, yes.

Not sure what happened.

I'm sorry?

We caught your telephone cold.

Yes, exactly.

Wanted to ask if you could help clarify -- there was some speculation going on in the investor base at the end of September surrounding either a change in Friends and Family or your employee discount policy.

Just wondering if you could share what changed and when you begin to anniversary that and what impact that has for the second half of the year.

And then if you could give us an update on footwear.

Is it still expected to be neutral for this year and then accretive next year?

I'll answer the footwear question first.

We're very excited about the results coming back from the Las Vegas show and I think your assessment of that is correct, so we're feeling good about next year's impact.

Two points on the employee discount and the Friends and Family.

One, we added an employee discount to every full-time employee in the Company so that they can now shop in our stores to make sure that all the benefits and perks of the Company were even across all levels of the organization, and that was a change we've been studying for several years.

Up until that point, we had a discount policy, but at a very limited basis, partly because of the number of employees we have and the relatively small number of stores we have that they could shop in.

We were afraid that the large New York population all within discount could swamp and blow holes in our inventory in a handful of stores.

We don't have a Macy's Harrold Square or a Bloomingdales 59th Street for employees to shop at.

But we think we got to the point where that was the appropriate decision and so we made that and that's a change that we've contemplated for a long time.

Separately, we did put a Friends and Family back in to the end of September that we had dropped last year when the business was running so strongly and we did it in an effort to move through some of the fall goods that based on weather were not selling as well.

And we continue to look at that as an occasional way to move through goods, if necessary.

And then Rugby, can you comment on how Rugby performed during the quarter?

We were very excited to get one in San Francisco.

Oh, boy, have you been in the store yet?

Oh, we spent money.

Good, we like that.

The store we have opened in San Francisco has done very well.

It's sort of central casting for a Rugby location and we've had strong results since that store has been open.

I think Rugby performed well given the same weather issues and the fact that the bulk of the stores are northeast and Midwest in nature.

We continue to be very positive and enthusiastic about where that business can go and the reaction to the San Francisco store is encouraging.

Would you ever consider breaking out same-store sales for Rugby separately.

Yes, I think when the comp number gets big enough to mean something.

I think in its embryonic stage it's not that meaningful, given it will small store count, but eventually we will, sure.

Okay, great.

Well, thank you.

Good luck.

Thank you very much.

We'll go now to Kate McShane of Citigroup.

Hi, good morning.

Good morning, Kate.

Just one quick question.

Most of mine have been answered already.

There were a few comments about the second quarter Retail gross margins being --

Second quarter what?

I'm sorry.

Oh, I'm sorry.

Second quarter Retail gross margins being down.

Yes.

It was mentioned before that markdowns is the reason for the outlook for the rest of the year, but was it markdowns in the second quarter, or was it more product mix that weighed on gross margins for this category?

The gross margin or the operating profit?

You talking about gross margin?

Gross margin, yes.

For Retail, right?

For Retail.

It was slightly related to markdowns.

Again, as Roger said before, with the more conservative comp outlook for Retail for the back half of the year, if that materializes, then obviously with that will come a greater level of markdowns.

So that's what you're seeing in the actual -- for the second quarter as well as the forecast.

Okay.

Thank you.

All right, operator, we'll take one more question, if there is one?

Yes, our last question comes from Jeff Klinefelter of Piper Jaffray.

Yes, good morning.

Thank you for this one last question.

Just very briefly, Roger, on your European and Asian businesses, any quick thoughts on the pace of growth, the structure of that growth?

We know it's very different in the mall-based environment and even some of the street real estate here in the U.S.

Are you looking at your own stores, are you looking at shop-and-shops in department stores, any franchise opportunities to accelerate the real estate strategy a little bit in either or both of those global markets?

Yes, it's a great question to ask and end on, because one of the realities is each of those markets are different and they're different from each other.

So we're trying to operate with the philosophy that where we can own and control and run it ourselves we will.

Where we think we need partners, which we thought we did in Moscow -- there are other parts of eastern Europe, Istanbul and places like that we're looking at where we may need partners-- then we will look to work with somebody who has unique local expertise that can add value.

And I think given the nature of the distribution in Europe being more specialty store, there are definitely high-end specialty stores in markets that behooves us to partner with.

They have the real estate, they have the customer contacts, they've got the selling associates, so we'll look to do that in a way to accelerate our business, since we've been so well received by the European market.

Where you're talking about major commitments in markets like Paris, I think those are ones that we want to own and operate ourselves.

I think in Asia -- and Asia is also a complex part of the world -- the issues in Japan are quite different than China, which are quite different than Australia, so each market brings with it a different strategy.

But the headline is, where we can own and operate it and think we can deliver the value to the customer and our shareholders, we'll do it.

If not, we'll look to accelerate with the right kind of more creative business model.

So with that, thank you all for staying on the call a little longer.

I'm sorry we got cut off twice.

Not quite sure why that happened.

Hope everybody goes out to the stores and shops aggressively.

So we'll look forward to talking to you at the end of the third quarter in February.

Thanks.

We appreciate your joining us for today's Polo Ralph Lauren second quarter fiscal year 2008 earnings conference call.

Have a great day.