雷夫·羅倫馬球 (RL) 2008 Q3 法說會逐字稿

Good day, everyone and thank you for calling the Ralph Lauren third-quarter fiscal year 2008 earnings conference call.

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

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

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

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

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

James Hurley.

Please go ahead, sir.

Good morning and thank you for joining us on Ralph Lauren third-quarter fiscal 2008 conference call.

The agenda for today'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 initiative.

And then Tracey Travis, our Chief Financial Officer, will provide operational and financial highlights from the third quarter, in addition to reviewing our expectations for the remainder of the year, and our preliminary view on fiscal 2009.

After that, we will open up the call for your questions, which we would like to limit to one question per caller.

As you know, we will 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.

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

Thank you, Jim, and good morning, everyone.

We are pleased to be reporting strong financial results today.

We met our expectations for the first nine months of fiscal 2008, even as we continue to significant investments in long-term initiatives, many of which are just being launched now in the final months of our fiscal year.

In the third quarter, we delivered 11% sales growth with solid retail comps of 5.7%.

With both of those metrics tracking to their respective year-to-date trends.

Internationally our wholesale and retail businesses continue to be strong across all regions of Europe.

Although we did see softening trends in the U.S.

and Japan.

There is no question that the third quarter was a difficult quarter period for our entire industry.

The abrupt change in consumer sentiment and spending patterns that began last Fall is almost unprecedented.

The impact was felt across all channels in the U.S.

While it is not immediately clear that the trends in the U.S.

will impact consumer discretionary spending overseas, the talk of a consumer-lead U.S.

recession is building, as is the speculation of how this might impact global growth prospect.

As we sit here today, the US consumer remains very tentative.

As a result, we, along with our retail partners, are being cautious with respect to sales planning, inventory planning and receipt planning.

And we intend to operate with this lens of prudence throughout the next year.

Our current outlook, which Tracey will walk you through later, reflects a more conservative view on consumer-discretionary spending across all channels and geographies.

In the context of uncertainty our strategies in focus remain in tact and we continue execute against our stated objectives.

Many of you already know what these initiatives are, but the breath of scope should not be unappreciated.

Since it includes the emerging retail concepts, new product initiative like American Living, Dresses and Watches and acquisitions like Japan and small leather goods.

I would like to give you an update on the progress with these initiatives.

Regarding our direct to customer efforts, as you know, we opened our customer service center and fulfillment center for Ralph Lauren.com in November.

Today, our contact center operation has exceeded our expectations on every service level metric.

We are currently taking 72% of the incoming customer contacts, which is ahead of our plan for this stage in the transition, and we are on track to assume full ownership of customer contacts by the end of the fiscal year.

The fulfillment center transition remains on schedule and we expect to be shipping out of the new facility in April with the first inventory receipt arriving in Mid-February.

Our investment in this dedicated facility for Ralph Lauren.com is an important milestone for the business.

One that provides a robust platform to support future growth, both in terms of anticipated sales volume and breadth of product that will be processed at the fulfillment center.

Our direct to consumer initiative include the evolution of our global retail store net work.

Our biggest project remains the opening of three Paris locations over the next 15 months.

Paris is a major European market that has been underdeveloped for us for some time and we have been working on a real estate strategy there for a number of years.

What we are doing in Paris is akin to what we have already successfully done in London and Milan.

This involved an integrated retail and wholesale strategy where we acted the market with a substantial directly operated retail presence that ultimately enables us to build a stronger wholesale business.

Our store development, creative services and public relations teams are working diligently to ensure the success of this major-brand relaunch in this important luxury market.

We continue to make strides with our integration of our newly-acquired Japanese business.

During the quarter, we allocated significant managerial resources to our transition efforts.

These resources were drawn across our organization, and we are excited about the interdisciplinary expertise we now have on the ground in Japan.

Earlier this week, we announced the appointment of a new president of impact 21, who will be leading both the strategic and day-to-day management of our Japanese business.

As we have communicated before, Japan is an opportunity where we hope to leverage our in-house design, merchandising and supply chain expertise to have a positive impact on sales and profit in what is one of the most important luxury market and our second-largest country, in terms of brand sales at retail.

Our integrated effort involves examining every aspect of the existing business model and taking the time to make the right strategic decisions for the long term benefit of the brand.

In reality, we are integrating organizations with different processes, objectives and cultures into one and this is very complicated.

At the same time, we are actively reworking our sourcing and distribution strategies for Japan, streamlining the legacy processes and bringing them more in line with existing global standards.

We are instituting best practices among our finance information technology and assortment planning functions.

I feel good about the road map we have laid out for ourselves in Japan, which we expect to evolve in a similar manner, as our European business did, when we made the transition from being licensed business to one that we directly run ourselves.

At this stage in the process, we are also changing the merchandise strategy and inventory management process, which means we will be liquidating excess Japanese inventory as quickly as possible to help facilitate our brand repositioning effort.

Over the next three years, all of the major Japanese department stores have large scale renovation plans and we hope to partner with our wholesale customers to more effectively position our brands within these stores.

This activity will offer us the opportunity to more appropriately tier our product presentations on a door by door basis.

In addition to our department store initiatives, we continue to explore specialty store distribution in Japan, especially since it has been one of the more dramatic channels of growth over the last several years.

With respect to remaining product licenses in Japan that are set to expire at the end of this month and we will update you on their status on the next earnings call.

Product-wise, we begun to ship dresses across Lauren, Chaps and American Living brands.

Response to the product has been positive and the launch is being supported by category-specific advertising.

As a reminder, this initiative was pursued to round out our product offering, what has proven to be one of the more compelling high-growth classifications over the last two years.

We expect our dress category to evolve organically over time.

Thanks to growing breath and assortment, as well as through addition a door count.

Regarding our accessory efforts, we have tested our revitalized Lauren footwear assortments during the quarter.

The early read on the customer response is encouraging with many styles selling through at weekly double-digit rate.

The buyer feedback is the most footwear markets also positive.

We look forward to the growth of our footwear category of the next few years, as we believe, we are now offering compelling products, with an equally compelling value proposition, all of which supported by an enhanced supply chain.

At the beginning of calendar 2008, we regained the rights to design, produce and market handbags and luggage in the United States due to the expiration of our agreement with our former license.

We are now actively committing resources to the development of this important emerging category for us and targeting wholesale distribution of both Lauren and Ralph Lauren handbags for Spring 2009.

In regards to our partnership with Ridgemont from the development of watches and fine jewelry, we expect to introduce a line of high-end luxury watches in Spring 2009.

The products initially would still be sold in a select number of directly operating stores and then rolled out to a broader network, inclusive of wholesale distribution later in calendar 2009.

We are also now just a few weeks away from the launch of our first brand under Global Brand Concepts, American living.

It will be distributed at 575 JC Penney doors, online, and in the JC Penney catalog.

American Living is a comprehensive life style brand whose scope of new product category introductions will evolve over the next 18 months.

And many of you have been very interested in learning more about the American Living product.

The J.C.

Penney stores are being prepped for the official February 24th launch, which will be supported by a major advertising campaign, beginning with the Academy Award Oscar telecast.

The product has been fully set up in a test store in Texas and various categories are slowly being rolled out in stores across the country, ahead of the official launch date.

Simply put, we are extremely proud of what we have developed for American living.

It was only one year ago that we announced the creation of Global Brand Concepts and soon thereafter, our intention to launch American living, exclusively at JC Penney in the United States.

In that short period of time, we have developed four different lines across nearly 50 product categories that span everything from apparel to silverware.

Needless to say, this has been a tremendous undertaking for us and JC Penney.

The fact that we are sitting here today having conceived, produced and delivered such a variety of excellent product in a short time is no small feat.

We are excited about this long-term partnership with Penney for a number of reasons.

First, it demonstrates our ability to offer a comprehensive full assortment for an entire new brand, that includes everything from the original idea to delivering finished product in the store.

That is complimented by a cohesive visual presentation, branding and marketing strategy.

Second, it helps diversify our business by reaching customers and new channels of distribution.

Finally, the strategy behind ouf Global Brand Concent is to leverage our work on a global scale, which is in line with our long-term goal to diversify our business by geography.

So that is your status update, although much of the start-up burden associated with many of these initiatives was concentrated in fiscal 2008.

We will continue to invest in all of these strategies in fiscal 2009 and beyond.

As you know, in the past two years, we have made significant long term investments in our international business, with the expansion of Europe and product categories, such as lauren and childrens, and channel expansion with our own retail stores and ecommerce, as well l as, infrastructure and investments to develop a world-class supply chain.

We are proud of the progress we have made and hopeful that our new initiative will deliver similar returns.

Even as we have invested for growth, our balance sheet and cash flows remained very strong.

Before we move on to the financial review, I want to reiterate the comments that Ralph made in this morning's press release.

The diversity of our brand portfolio, the strength of our lifestyle positioning, the talent of creative and managerial teams, and our increasingly global reach are all enviable assets that position us well for long-term growth.

We believe this provides us with a competitive advantage as we navigate through the volatile times.

At the end of the day, great brands with great products will perform, both in good times and in challenging conditions.

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

Thank you, Roger, and good morning, everyone.

First, I would like to highlight for you the drivers of our third-quarter net income in earnings per share performance.

Then, I will take you through our guidance for the remainder of fiscal 2008 and preliminary expectations for fiscal 2009.

For the third quarter, we achieved consolidate net revenues of $1.27 billion, an increase of 11% over the prior year's period.

Higher sales were achieved through a combination of organic growth and acquisition.

When we exclude the impact of a non-comp recent licensing acquisition and as a reminder, those are impact 21 in Japan and new campaign for small leather goods., Third-quarter net revenues still increased a healthy 6%.

Our strategy of diversification into international markets continued to be an important driver of top line growth during the third quarter.

As we experience strong sales across all product lines in Europe, and our mens wear product experienced strong sales globally.

In the third quarter, we were also able to support the phasing in of store setups for the launch of America Living at J.C.

Penney later this month, as Roger mentioned, by beginning to provide product to their distribution network earlier than we had originally planned.

Our retail stores also contributed to third quarter revenue growth.

Consolidated comps in our directly operated retail stores were up 5.7% for the quarter, which was achieved on top of a 7.4% comp gain in the third quarter of fiscal 2007.

Our gross profit dollars increased 10% to $677 million and our gross profit rate declined to 40 basis points to 53.3% in the third quarter, compared to 53.7% during the same period last year.

Excluding the full impact of the recent acquisition, our gross profit rate was 20 basis points higher than last year, as the benefit of higher European sales offset increased promotional activity in certain of our domestic business.

Third quarter operating expenses increased 18% to $506 million compared to $430 million in the third quarter of fiscal 2007.

Operating expenses as a percent of revenues were 39.8%, 220 basis points higher than last year.

The higher operating expenses primarily reflect the impact of the newly acquired businesses, both the noncash of purchase accounting, as well as their operating expenses.

Higher stock based compensation costs, higher advertising and public relations expenses and higher expenses with our overall growth in core businesses.

Our third quarter operating income declined 7% to $171 million.

Approximately $16 million of the decline in operating income is due to noncash amortization related to the purchase accounting for the recent acquisition.

This represents more than 100% of the year-over-year decline in our operating income.

Our third quarter operating margin was 13.4%, compared to 16.1% in the third quarter last year, representing a 270 basis point decrease.

Other drivers of the margin declined to include investments and new product launches and increase stock comps mentioned before.

Net income for the third quarter of fiscal 2008 increased 2% to $113 million and net income per diluted share increased 5% to is $1.08.

The increase principally relate to an effective tax rate of 31.1% in the third quarter of fiscal 2008, compared to a 38.9% rate in the comparable rate last year, which more than offset the decline in our operating income that we already reviewed.

The lower effective tax rate for the quarter was primarily due to resolution of discreet tax items in the quarter that were partially offset by higher tax expense associated with our adoption this year of fin 48.

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

Regarding our wholesale segment, sales grew 17% to $627 million or 5% excluding Japan and small leathergoods acquisitions.

The increase in wholesale revenues was primarily driven by American Living, as assessed earlier, Global Mens Wear growth and sustained momentum in Europe.

In the U.S., our Mens and Chaps product lines continue to experience growth in the quarter, while Lauren and Children's Wear product sales were more challenging.

Lauren Holiday and Resort introduced towards the end of the quarter had better sell through in both a difficult department store and retail environment this holiday season.

We shipped a fair amount of American Living product in the quarter to support the upcoming launch at J.C.

Penney.

European sales continue to show growth across all product categories in most regions with particular strength in Italy and the U.K.

In Japan sales, while not in our base last year due to the acquisition of the license occurring in the first quarter of fiscal 2008 have been more challenging.

Our wholesale operating income increased 14% to $104 million as a result of higher sales.

Our reported wholesale operating margin was 16.6%, 50 basis points below last year's operating margin of 17.1%.

The decline primarily reflects higher SG&A expenses to support new product lines, as well as, the noncash effective purchase accounting relating to the recent acquisition.

Excluding the impact of those acquisitions, the wholesale operating margin would have expanded 70 basis points to 17.8%, primarily due to shipments of American Living and strong European sales.

For retail, third quarter sales increased 9% to $589 million and overall comp store sales increased 5.7% reflecting an increase of 6.4% at Ralph Lauren stores, 6.2% at factory stores and flat comps at Club Monaco stores.

Ralph Lauren.com sales were up 23% over the comparable period.

Despite strong aggregate comps for the quarter, like many other retailers, our same-store sales trend did soften during December in both the U.S., as well as in Europe.

In the US and the Northeast region, excluding New York, the mid Atlantic region and the Midwest posted the weakest results, while the New York metro region and Texas were strongest sales areas.

Our New York stores clearly benefited from robust tourist shopping over the holiday season.

And in Japan, retail sales are also growing at an impressive double digit rate in our retail stores.

We opened 7 new stores during the quarter, one of which is a 14,000 square-foot store at Lennox Square Mall in Atlanta.

The store is located in the luxury wing of the mall and double the size of the store it replaced.

The store features a complete offering of every division of mens, womens, home and accessories.

We opened a free-standing men's store in Malibu, California that joins our other Malibu location for womens and double rl.

Internationally, our second London Children's Store on Fulen Road in London feature our full children's product assortment from layette to boys age 18 and girls up to age 12.

Retail operating income was $94 million compared to $95 million in the third quarter last year and retail operating margin was 16, versus 17.6% last year.

The declines in retail operating income and margin rate primarily reflect increased occupancy costs related to future tore expansion plans in our new Ralph Lauren.com fulfillment center.

Increased promotional activity at some of our retail formats, a modest noncash effective purchase accounting associated with the acquisition of the minority interest in Ralph Lauren media that we previously did not own and expense growth related to higher sales that we reported.

Licensing royalties for the quarter were $55 million, 19% below the prior year and operating income decreased to 39% to $26 million.

The decline in licensing revenue and operating income was primarily due to the Japan acquisition.

Excluding this effect of these acquisitions, licensing revenue declined 5% and operating income contracted 3%.

Primary due to receipt of a one-time accelerated payment of $8 million to exit a licensing arrangement reflected in licenses revenues in the third quarter of last year.

The declines in licensing revenue and operating income were partially offset by higher eyewear and fragrance sales, as well as growth in Chap license sales this year.

We ended the third quarter with $804 million in cash or $186 million of cash net of debt.

On a reported basis, we ended the third quarter with inventory up 20% over the comparable period last year.

The year-over-year growth in inventory is primarily related to recent acquisitions and new products, mostly Japan and American living in the quarter.

During the quarter, we invested $59 million in capital expenditures for new retail stores.

Our new retail Ralphlauren.com fulfillment center, new shop installation and other infrastructure investments.

Year-to-date, we have spent $152 million on capital expenditures for to support future growth plan.

We did not repurchase any stock and we continue to have approximately $298 million remaining on our existing share repurchase program.

Year to date during fiscal 2008, we have repurchased $320 million worth of our Class A common stock.

Now, I would like to address the outlook for the remainder of fiscal 2008 and outline preliminary thoughts on fiscal 2009.

For the full year fiscal 2008, we expect revenues to increase by a low ,double-digit percentage which compares to prior expectations of low-teens percentage growth.

The slightly more moderate outlook effectively takes into account recent sales trends that we saw materializing in the business during the holiday season.

We still expect our reported operating margin to be down be approximately 250 basis points compared to fiscal 2007.

Regarding our earnings outlook, we now expect fiscal 2008 diluted earnings per share to be at the low end of the range of $3.64 to $3.74 per share, compared to our prior expectation of $3.50-$3.60 per share.

I want to highlight that the higher range EPS range is entirely assumption of the third-quarters discreet tax items on the full year effective tax rate.

If we exclude the resolution of these discreet tax items in the third quarter, we are effectively maintaining our prior earnings guidance range of 350 to 360, but at the lower end of that range.

As we look forward to fiscal 2009 and as we have stated before, we believe we have positioned ourselves well for future growth.

As an organization, we remain committed to investing in long term growth initiatives.

Roger mentioned our Paris redevelopment strategy, where we expect to open three new stores over the next 15 months.

Two of which are flagships, that are real testaments to our luxury positioning of our brand.

We are excited about the prospects of our joint venture with Ridgemont and new premium watch line that will now be launched towards the end of fiscal 2009.

Japan still remains a tremendous growth opportunity for us in the future.

As Roger mentioned, we are currently working on the appropriate inventory management and remerchandising strategies to support growth in this market in the future.

In addition to revamping the business model to capitalize on sourcing and supply chain opportunity.

While over time these initiatives will position the Ralph Lauren brand to grow in this market, we are executing these initiatives in the context of weaker Japanese sales trends.

We are mindful of the macro economic trends in the U.S.

that are effecting discretionary spending and are therefore, cautious regarding our outlook for domestic market and for Japan as well in the near term.

We also want you to understand that our outlook today is a preliminary view being given in the context of much more macro economic uncertainty than we have faced for some time.

For fiscal 2009, we currently expect low to mid single-digit consolidated revenue growth and a preliminary diluted earnings per share range of 395 to 405.

Implied in this guidance is an expectation of a continuation of slower consumer traffic trends in our U.S.

wholesale and retail businesses during the year and the corresponding sales and comp trends that would materialize from this.

We have planned our business more conservatively as a result.

Our view of American Living, which is a new product line for us, with a new customer, remains consistent with our prior expectations.

Our tax rate is expected to be approximately 38% and we expect to maintain our diluted share count at approximately $106 million, so our share repurchase activity forecast to at least offset the expected delusion related to exercising options under our equity compensation program.

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

Okay, operator.

I think we are prepared to feel the questions at this point.

Well, thank you.

(OPERATOR INSTRUCTIONS) Question will take our first question from Brian McGough with Morgan Stanley.

Great.

Thanks a lot guys.

I have a couple questions.

The first is - just as it relates to the guidance on this one, Tracey.

It sounds like the revenue guidance for '09 is really, really light.

If I look at American Living alone, I know you guys have not given an exact revenue number, but if I make a reasonable assumption, that alone should get to kind -- kind of a mid-single digit, kind of top line growth rate and then you add on other initiatives, like dresses, handbags and small leather goods, etc.

It seems like we need to make some dire assumptions about the U.S.

consumer in order to get there.

Could you just talk a little bit more to that?

Are you assuming that the consumer actually turns down again from here over the course of '09?

I will actually let Roger respond to that.

Okay.

The hot potato has been passed.

Brian, I think our assumptions are the following and since many of you may have these questions, I will try to go through it carefully.

Our assumptions are based on strong sales in Europe and Asia.

Our assumptions are, as Tracey said, that the Japanese market will continue to be softer than we would like.

I think domestically, we have, in essence, planned our own retail businesses conservatively with comp store sale in low single digits, after running five, six, seven years at sort of mid six and seven percent comps, mid single digits.

And we are planning the core large department store wholesale businesses to be down low single digits.

So, in our planning with our partners based on their sales planning and a desire to get better sell through, and our desire to not have our brand promoted if there is excess inventory in the market.

We have planned those large, mens, Laurens, kids, kind of core businesses down domestically, low single digits.

Handbags, you know, really do not kick in until the back end of the fiscal year, so there is not a lot of incremental growth in that.

That sort of rounds out the headline issues on the sales numbers.

You know, what happened in the Fall season, as you all know, business reasonably strong through the Fall and through October, November, and post Thanksgiving, there was a real slow down.

So I am not sure we know exactly anything more than you do about what the consumer is going do over the next 12 months, but since we are making inventory purchases through holiday of next year as we sit here.

We started with a conservative point of view and see what the customer says as we get more of a clear read on Spring selling and then into summer.

At this point, really all the reads you get on the January business is a lot of clearance activity.

I am not sure we have insight yet as to whether Spring will sell at a different rate than the holiday results.

That is around the horn, the major pieces and parts that make up our guidance on the sales.

It turns out customer is more resilient, I think we will be prepared to react accordingly and we won't be caught short of inventory, that is for sure.

Okay.

On your retail business, if you kind of take a step back away from the quarter or the year, so overall, your margins have been lower than a lot of others.

You have expensive real estate, expensive staff because they are well trained.

You have sold apparel largely.

Now we are getting to the point of the evolution of the brand whereby you control distribution but now you are also controlling the content.

You have all these other lines coming on.

Could you talk about when we should see more of that product flow through your own retail stores, which should presumably start to take the operating margin at your own retail up onto the next, you know, the next leg up?

Yes, I think it is fair to say that the bulk of our business has been an apparel driven business and for the type of luxury products and the type of locations we have, as you said, I think our margins in retail are pretty darn good.

I think the beginning of product categories that we are going try to distort in the years to come are really the accessory categories.

Whether it is handbags, footwear, small leather goods, watches and jewelry, all of which, as you know from studying the industry.

carry significant margin opportunities as they begin to grow in your penetration to the total business.

I think that is particularly relevant in Europe and asia where the appetite for luxury accessories is greater than in U.S.

As those come online and add higher margins and add to the mix, that will give us the next wave of you know, operating margin growth in retail.

Okay.

I am sorry to sneak in a quick third one.

On the American Living line, as of now when you are dealing with like Bloomingdales, you really don't play the mark down game a whole heck of a lot, if at all, but you might take product back and put it in your own stores and you sell that at margin that is at least as good that you would have gotten at Bloomingdales?

You cannot really do that with American living.

Can you talk about where the product will be cleared to the extent there is excess?

Your question wandered around.

Let me focus on American Living for the minute.

The American Living launch, as we said, is a couple weeks away.

All of that product has been made to order, unlike a lot of other businesses, where we build product in anticipation of orders and then, you know, what ever the match is, the rest is excess.

In the case of American Living, it is all projected.

When the orders are placed in the buying process, we cut the order.

There is no excess in the manufacturing process.

Once it has been shipped to J.C.

Penney, as we have been doing, the merchandise is theirs.

The brand is theirs.

They are responsible for the sell throughs and clearance.

It is a different model than what we run on the other brands.

Okay.

Thanks guys, I appreciate you taking the questions.

(OPERATOR INSTRUCTIONS) We will take our next question from Omar Saad from Credit Suisse.

Thank you, Roger.

You mentioned at the beginning of your prepared remarks, how we have seen an unprecedented drop off in consumer spending.

You have obviously been in the business a long, long time.

Can you talk what about you are seeing in terms of consumer behavior in the business, mens, womens?

You have a lot of different tiers that you approach.

Are you seeing discernible trends there and what it might say about the customers health and how people are spending their money?

And U.S.

international mens, womens, what you are seeing in terms of this unprecedented change in the spending patterns?

First, I must respond to how long I have been in the industry.

You hurt my feelings.

It has only be 33 years.

I am just getting started.

I am using the word unprecedented and we picked it carefully because having gone through some of the ups and downs over the last 33 years, I would say this is unprecedented for a couple of reasons.

One, the swiftness of the deceleration of the business in the month of December, while not totally unexpected because there was softening in the Fall.

I think some of the comps were somewhat propped up by more promotional activities, so I think margins were coming down to drive some of those sales.

I say unprecedented because across multiple channels, whether it is the high-end luxury channel, whether it is more of the main stream, or whether it is really the Targets or the Wal-Marts, I think we all saw a deceleration across every channel.

I think the macro economic issues facing the consumer today are broad based and far reaching.

And I think if you look at the weak demand for consumer products, in a 3% interest rate environment and a lot of other downturns, there have been things to do to stimulate consumer spending that I think will be more difficult to enact in the current environment.

So you have consumers with maxed out credit cards who may be facing mortgage issues and I think those issues will be more difficult to wrestle to the ground.

So, it is sort of a new kind of slow down for all of us.

And are affecting broad categories.

So it is sory of a new kind of slowdown for all of us.

I think those companies that have great brands and managing balance sheets carefully and selective looking at the opportunities to gain share, I think are going come through it.

I think having said that, we talk about 12 months because that is about as far out as we are look to committing inventory.

I don't think we have an idea that 12 months from now, there is a specific reason for it to turn.

So, you know, you have got -- you have got election issues.

You have got international issues.

You have got dollar -- the weak dollar at the moment.

There is a lot of things that are depressing the customer and I think it is broader and deeper than I have seen in a while.

So that is my view.

We are preparing accordingly.

We are pursuing our multichannel, multibrand, multicountry strategy and so far, I think we have the right strategies.

I think we have the right team and we have the financial where with all to do it.

But we are definitely more cautious than February of last year.

Thank you.

Thank you.

We will take our next question from Liz Dunn from Thomas Weisel.

I want to say thank you for your very clearly worded press release and really frank discussion of the environment.

I guess, my first question is a follow up to Roger's comments on Europe.

I seems like you are a bit cautious on whether or not Europe follows the U.S.

trend.

Can you discuss that a little bit?

Is that just, you know, speculation that based on what has happened in the past or is there anything that you are seeing in Europe that causes you to be a little cautious?

And then, the second question, which I would also say is a follow up.

I know there are a lot of moving pieces impacting fiscal '09, can you talk about what your margin assumptions are - for the promotional environment, where we might see added spending needed in '09 as well - impacting the SG&A rate.

Thanks.

Okay, Liz.

In Europe we have had an unbelievable transformation of a licensed business to an owned business and really a consistently executed across the developed markets.

The consumer has voted yes for our products.

And as you all know our recent expansion into Moscow last Spring has been a tremendously exciting opportunity for the corporation.

So we really are very encouraged about the long-term opportunities in Europe.

Having said that, it is unclear whether the US issues will spread to the European customer.

Clearly, we saw a lot of European shopping in the U.S.

with the holiday season with the cheap dollar.

The only real signs of change in consumer spending probably centered around London, which also has a large financial community, and I think there was some reported slow up in the marketplace through the holiday season.

Our business actually continued strong through the holiday.

We did not see that but there are certain reports inside that some of these fiscal issues on the front pages here have the guns to spread - you obviously all know about the issue in the Key Bank in France last week or the week before.

We are looking for outsized growth in Europe.

We think our strategy of retail and wholesale are properly aligned.

It is too soon to tell whether Europe will see meaningful downturn.

But, I think there was a little blip in London in the holiday season.

We will see where it goes from there.

In terms of '09 in our margin expectations, I think that in the guidance that Tracey talked about, and Brian asked the first question, really, it starts with a more conservative sales assumption.

Based on all the reasons that I have articulated.

I think it does call for gross margins and operating expenses to be carefully managed in a difficult environment.

We certainly are investing in the initiative that we are talking about but any discretionary spending beyond that is either being postponed or eliminated.

I think we will be cautious in managing our own inventory.

Whether it is the wholesale inventory and the sell in or our own retail inventories.

It is not a time to get stuck with inventory.

I think, one of the realities of December, January for many people in the U.S.

is that products did not move so well, even on the first mark down.

So the size of the mark down and the reductions you have to take to move to move the goods is also a factor when looking at inventory planning.

Some of the accounting issues fall away.

There are start up costs obviously still going on in the businesses.

But starting with a more conservative sales and then working through, you know, more aggressive expense management, we think we are positioned, given the current forecast.

If business trends change, then we will adjust accordingly as well.

So you are planning Lauren mens and kids inventories down?

We are.

Okay.

Great.

Thanks.

Good luck.

We will take our next question from Virginia Genereux from Merrill Lynch.

Thank you, Roger and Tracey.

Let me ask you, it seems like part of the fiscal '09 view is also an assumption that is going be down, Roger, understoodably, I think.

Is that a macro issue, maybe it taking a little longer to get Japan where you want it to be?

Is that a macro issue or more of a cultural kind of specific to that situation issue?

That is a good question, Virginia.

.

There is really two things going on.

When we acquired Japan last May, you know, we based our three-year plan going forward on a flat environment in Japan and chose to do whatever we were going to do with the market to impact it based on our time table.

And I think that, you know that probably is -- was a little optimistic given that the market has been tough through most of the Fall.

That market is trending down slightly.

However, the bigger issues in Japan are really not whether the market is flat or up a couple points or down a couple points but it is our complete overhaul of that business.

That is a business that was licensed in 1978.

The business model has changed pretty dramatically since 1978.

We are looking at the kind of assortments we put into the doors there.

Those assortments as we have examined over the last nine months were very broad and shallow.

They were not at all merchandised like we do in the United States and now do in Europe.

We did not have as much of the aspirational product and the tiering of brands that we do here.

We think that is a real opportunity.

In fact, most of the infrastructure there was done through trading companies and third-party providers.

So not only are we dealing with a cultural issues of integration between, our licensed holding company, Polo Japan, impact 21, add on to that, we are dealing with third-party suppliers, who have provided manufacturing support, logistics and distribution support and IT support.

So we have got to unwind that and put it back together in the manner that we have done in Europe and will do with other major markets and then we have to plug it into our infrastructure, working through fairly significant language barriers.

While all of that is happening and we are finding large opportunities as we will anticipate plugging those infrastructures into our global network.

It will take a little time to unplug and put it back in.

We do have a team of people over there that are transiently working over the next six to eight months to accelerate the changes.

And even though we announced a new president in Japan this week, he will spend the next six months, part of his time here learning about the brand and culture and part of his time in Japan getting his feet wet on the ground.

We have a team of folks there.

We picked some of the best and brightest that we have in the company, who have taken on a six to eight month assignment to really hit the ground running.

I would say the Japanese have embraced the changes.

This is not about a resistance.

This is a lot of change going on there now to get that business positioned properly for the future, and we are very bullish on the future.

We are trying to lay the foundation

We saw that pay off in Europe.

Can you tell me how many retail doors you guys are opening?

Or you expect to exit fiscal '09 with?

We are planning a little over 20 new stores next year, Virginia.

And net -- is that maybe 15?

No, net it would be -- the net is 20.

Okay.

Great.

Thank you so much.

You are welcome.

And we will take our next question from David Glick with Buckingham Research.

Good morning.

Roger, I was hoping you could give a little more color on the size and scale of the American Living business.

Ideally, in term of your revenue expectation, but maybe compare it to the scale of some of your other businesses like Lauren wholesale business, for example.

Tracey, if you could give us an example what percentage of shipments planned for your fiscal Q4 did you end up shipping into Q3, so we can get a sense of what kind of impart that had on the fiscal third quarter?

I think -- I will go first.

I mean, you can tell from our full-year guidance how much shifted from the fourth quarter into the third quarter.

We do not give specific information as it relates to that as you know.

Try to calibrate the full-year guidance to get a sense for backing into that what that shift would be.

I was assuming that but wanted some confirmation, thanks.

You got it.

The reason we did that it, which is probably implied in your question, but you didn't want to ask, David, but that this involves millions of units across multiple categories.

In order to get that product into the countries, get it through the Penneys distribution infrastructure, get a store set up in early January and then each week, we rolled out another product category.

One week mens, one women's, one kid, one home, in order to hilt the start dates.

It is a pretty mammoth task.

As we were able to do that, I think we were all excited to get that running head start on the execution of this.

The size and scale of American Living is quite large.

I think Penneys has called it the largest launch they have ever had.

So that gives you some sense of scope and we would say it is the largest single launch that we have ever had, And the fact that it is across 50 merchandise categories all at the same time is really unprecedented.

We opened our showroom downtown in New York with mens, womens, kids, home, accessories, intimate - all of those shown at the same time, which is not the way most markets work.

In the normal market, it should have been January and womens in February and homes later in the Spring.

So to be able to do that and have it fully integrated.

Have all the advertising, marketing, TV, preprint, online and catalogs, all to coordinate at the same time has been a mammoth task.

The other thing I will repeat and I said it once before.

Before we sell piece one, we have now delivered to Penneys, product for their purchasing four different lines.

So we have delivered Spring to them.

We have shown them Summer.

We have shown them Fall and we are right on the cusp of doing holiday.

We have had to build four different product lines across 50 merchandise categories before they sold piece one.

So this is quite a large undertaking in the test store which is not one of their biggest stores outside of Plano, Texas, which is where they are head quartered.

We have had strong selling of the product at full price.

Too early to call, but with 1% of the electoral votes in, we are feeling encouraged.

Thank you, Roger.

If you could, now that you are four quarters into this from a development standpoint, the percentage of the business that is going to fall into the licensing income category versus your wholesale shipments.

Is that 75/25?

If you could give color on that?

That would be helpful.

I would say the large bulk of the business is owned and will be shipped as wholesale.

We really have two other ways we are doing business.

One is through normal license arrangement and categories that we have licensed and the third piece is really where we are working through key categories that J.C.

Penney has expertise in manufacturing.

We are designing it and they are having it made within their network.

For instance, curtains and draperies, which is one of their biggest categories.

That is not something we would make.

We are working through their manufacturing base executing our designs to ship that.

So that is really a third leg of the stool.

But the large bulk of it is straight wholesale business.

Okay.

Great.

Thanks very much.

Good luck.

Thank you, David.

We will take our next question from Rob Ohmes with Banc of America Securities.

Thanks.

Two quick follow ups.

Roger, a follow up on Virginia's question on Japan.

When you are looking at how the wholesale business is distributed, are you going go direct like some of the other luxury brands do in Japan and do in-store shops so that you would be moving totally away from other companies in distribution?

That is my first question.

The second question is, I was hoping you could - in this environment give insight into how the department store customers are changing their strategies?

And how that fits in for Polo and Chaps and American Living.

Meaning the department stores have clearly be talking about driving comps with higher AUR's.

How are they thinking about driving their businesses in this type of environment?

Thanks.

Go ahead.

Robbie, Let me start with the Japanese question.

Our distribution today is primarily through more or less 120 department store doors that then we may have multiple shops within.

We may have a shop for mens.

We may have a shop for womens.

We may have a shop for kids, and home, etc.

So we are now directly distributing mens, women's, and denim product through that network that we now are doing direct.

There is no more role for (Inaudible) -- which ended when we bought back the company in May.

The other key merchandise category like kids and golf and some of the other categories are still going from the licenses to those department store channels, and those licenses, as I said in the script, are coming to an end at the end of February.

So we own directly.

A little bit of a nuance in Japan is - in mens business, we actually run that business consignment model.

So we sell it in, we are responsible for the staffing and sell throughs, and that is different from womens where it is a straight wholesale model.

But there is no middle man in those businesses and we are distributing through those doors.

Over time, like other brands, we would like to compliment that with a net work of our own free-standing stores.

At the moment, we have only got two of those and they are trending well.

They have more luxury product in the department stores and they are creating a halo in that market of what Ralph Lauren can be.

But the distribution is through the department store doors and hopefully that is helpful.

In terms of the department store customers and what we are seeing, I think it is clear that there was a fall off in foot traffic in department stores last year, whether they be mall-based or in some cases, off-mall.

And I think the strategies that most people are trying to employ is to focus on and get more of a conversion rate.

The footballs that are coming in are converting at a higher rate and most mayor retailers track what their conversion rate is from people who walk in the store to what people buy.

People are probably focusing on units per transaction.

Which I think is an opportunity to get more share of wallet.

And I think for many years the focus had been on average unit retails, and I think that is probably taking a bit more of a backseat, given the current environment.

It is probably conversion rate number one.

Units per transaction, number two.

Average unit retail would be in third place, in my opinion.

That is very helpful, thanks to much.

We have one more question -- two more I am told.

We will take our next question from Jeff Edelman.

Please go ahead.

Good morning, Jeff.

Thanks.

Good morning.

My first question revolves around margins.

With the operating margin down about 250 basis points this year, I guess we have got about 100, which are acquisition costs, about 100 investment spending and let's say 50, 40 due to the slow down in the environment.

The implied margin for the new year and I know you are being conservative is a little less than 100 basis point increase give or take a little bit.

My question is, that is probably the elimination of the acquisition costs.

Are we going see the investment spending continuing at a pretty high rate?

And I guess there is also a higher mark down assumption?

Well, I will weigh in Jeffrey, and then let Roger weigh in as well.

You know, we talked about some of the investment spending related to Paris, related to some of the other initiatives, like handbags that will have - in the upcoming fiscal year.

In addition to that you know, with our revenue expectation, our revenue growth expectations next year - that is a pretty big slow down from where we have been over the last few years.

So it does factor in the realities of the U.S.

environment that does have a leverage impact on our expense base.

So I think you are seeing -- you are seeing the combination of those things, in addition to as you called out, the fall off of the purchase accounting - not having the level of operating margin expansion that otherwise we would have if the revenue growth was twice what it was.

Okay.

Thank you.

And secondly, as we look forward, what kind of an increase can we expect to see in total retail square footage over the next few years?.

How much did currency impact you during the quarter?

I will try the real estate square footage question.

I will generalize and give you an answer of low single digits, Jess.

I think what you have seen over the last four or five years is - we have done a pretty good job of opening stores that are highly productive and closing stores that are not as productive - or not positioned any more in the right location.

I think you are seeing other retailers taking, you know, very large positions on closing doors, and think we have probably done a better job of remixing that and getting growth in productivity per square foot.

Since we have started to talk about this, our sales per square foot of the company have grown by 100% in our retail network.

So our focus has not been necessarily on growing square footage 5% or 7% or higher, as some have been.

Our focus has been on trying to get sales per square foot and productivity measures to jump dramatically.

Given the higher real estate cost and higher customer service cost that we talked about earlier, we think that has been the best path for us.

With that said, I believe the future, Jeff, will have more real estate growth internationally.

I think you will see it in asia over time and in Europe over time.

As we are more comfortable and we are well positioned near in the United States.

That is really our philosophy as we sit here today.

And Jeffrey, on your question with respect to foreign exchange, primarily for us, the euro impact was about $23 million worth of revenue growth in the quarter, or about 2% of our growth rate.

And the margin impact?

The the margin impact was significantly less than that.

As we discussed on the margin, we have the conversion of profit back to U.S.

dollars, which helps us, but we have the negative of the cost of goods, you know, going the other way against us.

So it is a less compelling number than the sales number.

Great.

Thank you very much.

Okay.

Last question.

We have one more?

We will take our final question from Christine Chen with Needham & Company.

Wondering about Japan.

Are there seasonality differences in the wholesale business than in the US?

Are they two season versus four season?

How do the holidays have an impact?

And what about the seasonality of Easter in the U.S.?

In general, there is the same seasonality to the business.

There is definitely a longer Summer, warmer Fall.

Fabrics weight, loss of goods are all important in the Fall selling season.

The holiday pattern is different.

Issues like Golden Week and other holidays are, you know, not on the same necessarily calendar as the U.S., but more or less, at the end of the day, those are not meaningful differences in terms of how we will run and operate our business.

The trends years ago were for Japanese consumers to travel, buy a lot of gifts, bring them back, which was the custom.

The harmonizing of prices on a world wide basis have come into effect as major brands have positioned themselves in Japan differently than in the past.

I think the world is coming together.

So the good news for us, is that whether it is Europe or Japan or the United States, there is definitely a more common beat to business than not.

When you get into Southeast Asia, which has a much warmer climate issues year round and certainly when you get into the southern hemisphere, where the seasons are opposite, they require some operational maneuvering because when it is Winter here, it is Summer there.

So this gets a little complex when you talk about the southern hemisphere..

For us today, it is not a huge business.

I think the issues we will have to wrestle with in time are more the growth and opportunities in Southeast Asia and how do we wrestle with tropical or subtropical climate.

Almost on a 12-month a year basis.

So we are learning about that, but less meaningful to the Japanese business.

With that, I thank you all for your interest and support.

We look forward to updating you again at the end of our fourth quarter.

Thanks.

Thank you for your participation and have a nice day.