雷夫·羅倫馬球 (RL) 2008 Q4 法說會逐字稿

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

As a reminder today's conference is being recorded.

(OPERATOR INSTRUCTIONS) At the end of the presentation, we will conduct a question-and-answer session.

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

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

James Hurley.

Mr.

Hurley, please go ahead, sir.

Thanks.

Good morning and thanks to everyone for joining us on Polo Ralph Lauren's fourth quarter and full year fiscal 2008 conference call.

The agenda for the call today includes Roger Farah, our President and Chief Operating Officer, who will give you an overview of the year and comment on broader strategic initiatives.

And then, Tracey Travis, our Chief Financial Officer, will provide operational and financial highlights from the fourth quarter and the full year, in addition to reviewing our expectations for fiscal 2009.

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

As we'll 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 turn the call over to Roger.

Thank you, Jim.

And good morning, everyone.

We are pleased to be reporting today strong financial results.

We exceeded our expectations for fiscal 2008, even as severe macro economic challenges emerged in the back half of the year, and we continued to make significant investments in long-term initiatives.

During the year, we integrated newly acquired businesses, new territories and created an entirely new lifestyle brand.

We ended fiscal 2008 in a strong financial condition, with an excellent balance sheet characterized by a sizable cash position, very little debt and well managed inventories.

I believe our fourth quarter and full year results demonstrate the high level of operational control we have over our businesses.

The results are also a testament to the relevant and vitality of the Polo Ralph Lauren brand and the hard work of all of our employees who I'd like to personally thank for their efforts.

Highlights of the fourth quarter performance include 20% revenue growth, approximately 9% comps at our directly operated retail stores and diluted EPS growth of 47%.

For the year, we delivered 14% sales growth, with solid retail comps of 6% and our diluted EPS increased 7% to $3.99, which include the negative short-term impact of our recent acquisitions.

As we highlighted to you when we provided our original guidance for the year, our earnings growth was weighted to the back half, as many of our new product initiatives came online and we cycled through the impact of purchase accounting.

Internationally, our wholesale and retail businesses were strong across all regions of Europe and most parts of Asia.

And as we communicated last quarter, business trends softened in the U.S.

and Japan in the back half of the year.

Fiscal 2008 was a year of milestones for each of our core long-term growth strategies.

All of which we will continue to invest in during fiscal 2009.

As a reminder, our three core strategy include new merchandise and product development, expanding our direct to consumers and growing our international presence.

Our success is largely dependent on the strength of our product and we made significant strides in merchandise development during fiscal 2008.

Including; expanding our highly successful black label collections for both men and women; Introducing our revitalized Lauren and Ralph Lauren Collection footwear to selected U.S.

wholesale accounts; Creating a new dress division to support our Lauren, American living and Chaps brand; Assuming direct control of our small leather goods products; And we also successfully integrated our denim product offerings into a variety of brands from a stand-alone business, allowing us to elevate the product and improved profitability.

Our biggest news on the merchandise front was the launch of American Living at J.C.

Penney.

American Living is the first brand developed by global brand concepts group and represents a major evolution of our channel diversification strategy.

In February 2008, we successfully delivered and installed all of the fixtures and merchandise to support the 575-door launch that included more than 40 product categories such as men's, women's, children's, home and accessory products.

As the launch was supported by an extensive print and television media advertising campaign that we created to communicate the full lifestyle positioning of American Living.

We will continue to introduce new product categories over the next year, including young men's, infant, layette, toddlers and men's and women's outerwear, sleepwear, socks and slippers for fall 2008.

You've heard me speak about how proud we are of American Living.

I think it's worth repeating why.

First, we have demonstrated our unique ability to offer a comprehensive lifestyle assortment across many product categories for an entirely new brand that includes everything from the original idea to the timely delivery of finished products.

All of which is complemented by a cohesive visual presentation, branding and marketing strategy.

It is an impressive package to be able to offer a retail partner.

One that leverages the multiyear investment we have made in assuming direct control over various product categories.

Second, creating an offering like this helps to diversify our business by reaching consumers in entirely new channels of distribution.

Finally, the strategy behind our global brand concepts groups is to leverage our work on a global scale, which is consistent with our long-term goal to diversify our geographic revenue mix.

Of course, the opportunity to introduce American Living outside the U.S.

remains untapped at this point.

As we look forward to future, new merchandise development plans, evolving our global presence in luxury accessories remains a strategic priority.

During fiscal 2009, we'll be building out our in-house product development, design and supply chain capabilities for handbags, which follow the expiration of our domestic handbag license at the end of calendar 2007 and the completion of the buyback of our license for men's and women's belts and small leather goods at the beginning of fiscal 2008.

We're also preparing for the launch of Ralph Lauren watches with our partner Richemont, which is expected to occur in the spring of 2009.

Of course, we expect to introduce exciting new eyewear collections for men and women with Luxottica, our global licensing partner, as we build on the success of our initial product launches from last year.

As we're very excited about the worldwide long-term growth opportunities we envision from our brands in the accessory area, which still remain underdeveloped for us.

The second of our three long-term growth drivers is the expanding our direct to consumer reach.

In addition to our products, our retail stores are a critical part of our brand expression and we continue to grow our retail presence in the world's premier shopping districts.

We opened 21 net new stores during fiscal 2008 and have plans to significantly evolve our directly operated store network over the next few years.

We are currently working on several high-profile store projects in New York City, Los Angeles and Paris that will undoubtedly reset the bar for the in-store luxury shopping experience and bolster our lifestyle branding message.

Apart from opening new stores, we continue to drive higher productivity on our existing stores.

The sustained strength of our retail comps is the best evidence of this and comes as a result of great product, sharp assortment planning, exciting visual presentations, and exceptional customer service, all of which help to inspire customer loyalty.

We also continue to evolve RalphLauren.com into what is the premier online destination for our customers to experience the world of Ralph Lauren.

Revenues at RalphLauren.com grew 26% during fiscal 2008 and were up an impressive 36% in the fourth quarter of the year.

In addition to offering the most comprehensive array of Ralph Lauren product, RalphLauren.com posts proprietary editorial comment that has been an effective way for us to deepen our engagement with our customers.

Key RalphLauren.com highlights during fiscal 2008 include the launch of the video style guides, the introduction of men's Black Label apparel, and the opening of a dedicated customer service and fulfillment center in High Point, North Carolina, which went fully operational in April.

This new customer service and fulfillment center is expected to service our growing eCommerce operation for the next several years.

Rugby also launched an information-only Website during the year and we look forward to introducing eCommerce for Rugby during fiscal 2009 back to school.

The last of our core strategic growth drivers is the international development.

As one of our long-term goals is to further diversify our geographic revenue mix.

Today, the United States represents approximately 65% of our branded sales, with Europe accounting for 17% and Asia and the rest of the world representing the remaining 18%.

Ultimately, we'd like to have the United States, Europe and Asia each representing approximately 1/3 of our revenues.

Today, our Asia business is divided into two parts.

One that is directly operated by us and Japan and another that is licensed, which is essentially the rest of Asia outside of Japan.

Asia, x-Japan, is segmented into three regions for us, Korea, southeast Asia and Oceania.

Each of which is managed by a separate licensing partner.

All of our licensing partners in this region reported double-digit growth in branded sales during fiscal 2008.

Much of the success we have achieved with our Asian license partners is a function of the close working relationship and our ability to have more input into the building of merchandise assortments and visual merchandising presentations.

We are encouraged by Asia's compelling long-term growth prospect for us, especially as we continue to develop our luxury accessory products.

Regarding Japan, as we assumed direct control of our brand there at the beginning of fiscal 2008 when we acquired Impact 21, our largest Japanese product licensee and the remaining 50% interest in our Japanese master licensee.

Regarding our Japanese product licenses that expired at the end of February, we are still reviewing strategic alternatives and we'll update you once our decisions have been finalized.

We have already made great strides with the integration of our newly acquired Japanese business.

On the management front, we have announced the appointment of a local President for the Region and we recently hired key finance, human resource and supply chain leaders.

Our transition team, which has been on the ground since January, has made significant progress across many dimensions.

In March, we began operating out of one distribution center compared to the prior three locations, which has resulted in lower costs and greater efficiency.

With respect to the merchandising and planning process we are actively testing product that is more reflective of how we intend to position the brand over the long term.

And we've already received positive customer feedback on what we have done with our targeted doors.

We are clearly in the early innings in Japan as the work we intend to do there is a multiyear effort.

I am confident the Japanese consumer will respond favorably to our efforts to bring the Ralph Lauren brand more in line with the luxury status we enjoy in the rest of the world.

Our goal is to see he the Japanese business flourish in the same way our European business has since we took direct control of it several years ago.

Speaking of Europe, the momentum in our business there has been spectacular and we are excited about our future prospects in this region of the world.

During fiscal 2008, our growth in Europe was broad-based throughout the region and was driven by contributions from all of our product categories.

We've grown our European sales to almost $1 billion today from about $200 million when we assumed direct control of the region several years ago.

We achieved this growth by focusing our efforts in three key areas.

First, by elevating the product and its presentation, by investing in wholesale shop in shops and our own retail stores.

Second, by investing in brand advertising and public relations activities.

And third, by building out the appropriate organizational structure and supply chain to support long-term growth.

As I mentioned earlier, we plan to double the European penetration of our overall sales mix over the long term.

Our two new Paris stores are expected to significantly increase our profile in that important European market.

And building on the success of our Moscow stores, we plan to open a store in Istanbul, Turkey, an emerging eastern European luxury market through a license partner in fall of 2008.

We are also in the final discussions with selected European wholesale accounts for the introduction of our Lauren brand to the European market during spring 2009.

The first time Lauren merchandise will be made available in Europe.

We are also excited about the international exposure our brand is expected to receive as the official outfitter of the U.S.

Olympics and Paralympic teams for the upcoming Beijing Summer Olympic Games, as an estimated 4 billion people are expected to watch the August 8 opening ceremony.

As I mentioned at the beginning of the call, our financial position remains strong.

We ended the year with a considerable cash balance, very little debt and very well controlled inventory.

Our cash flow remains robust, allowing us to continue to invest in our core strategic initiatives during fiscal 2009.

And of course, there will be heightened focus on discretionary spending in the face of the uncertain consumer environment.

We have consistently demonstrated our discipline to deliver on our investments and our track record is strong.

Over the past five years, we have invested approximately $1.9 billion back into the Company to support our acquisitions, retail expansions, wholesale shop in shops, and to upgrade our infrastructure.

Over the same period of time, we have grown both our revenues and earnings at a double-digit compounded annual rate.

We further underscored our commitment to shareholders by repurchasing $476 million of Class A common stock during fiscal 2008.

There is no question that in the United States the back half of fiscal 2008 was an exceedingly difficult period for the retail industry.

Sitting here today, I don't believe it would be reasonable to expect things to be materially better in the near term.

There is still talk about a consumer-led U.S.

recession and we believe the potential negative impact this could have on our global growth prospects is very real.

So as we enter our new fiscal year amidst a lot of uncertainty, much of which we cannot control.

But with that said, I am confident of the relevance of our strategy and of our brand portfolio, the dedication of our talented team and the strength of our balance sheet, and our ability to deliver sustained strong profitable growth over the long term.

So with that, let me turn the call over to Tracey to discuss the financial and operating highlights of the fourth quarter, as well as our outlook for fiscal '09.

Thank you, Roger, and good morning, everyone.

First I would like to highlight for you the drivers of our fourth quarter net income and earnings per share performance.

Then I will take you through our guidance for fiscal 2009.

For the fourth quarter, we achieved consolidated net revenues of $1.24 billion, an increase of 20% over the prior year's period.

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

When we exclude the impact of the non comp license acquisitions we've been discussing all year, and to remind you, those are Impact21 in Japan and new campaigning for small leather goods, our fourth quarter net revenue still increased by 14%.

We experienced strong sales across all distribution channels in Europe.

In the U.S., deliveries for the launch of American Living at J.C.

Penney also contributed to our revenue growth.

And consolidated comps in our directly operated retail stores were up 8.9% during the quarter, which was achieved on top of a 6.3% comp gain in the fourth quarter fiscal 2007.

Our gross profit dollars increased 21% to $674 million and our gross profit rate increased 20 basis points to 54.3% in the fourth quarter, compared to 54.1% during the same period last year.

Excluding the full effect of the recent acquisitions, our gross profit rate was 50 basis points below last year, as increased promotional activity in certain of our domestic businesses occurred to achieve clean inventories at the end of the season.

Fourth quarter operating expenses increased 21% to $530 million, compared to $438 million in the fourth quarter of fiscal 2007.

Operating expenses as a percent of revenues were 42.7%, 20 basis points higher than last year.

The higher operating expenses primarily reflect the impact of the newly acquired businesses; both the noncash effect of the purchase accounting, as well as their operating expenses; higher stock-based compensation costs; and higher expenses, commensurate with the overall growth in our core businesses.

Operating income for the fourth quarter increased 20% of $144 million, including approximately $8 million in noncash amortization related to the purchase accounting for the recent acquisitions.

Our operating margin for the quarter was 11.6%, flat to prior year.

Excluding the effect of purchase accounting related to the recent acquisitions, our operating margin would have expanded 100 basis points during the fourth quarter to 12.6%.

Net income for the fourth quarter of fiscal 2008 increased 41% to $104 million, and net income per diluted share increased 47% to $1.

The increase in our net income and diluted EPS results principally relates to growth in operating income, as well as an effective tax rate of 28% in the fourth quarter of fiscal 2008, compared to a 39% rate in the comparable period last year.

The lower effective tax rate for the fourth quarter was primarily due to the resolution of discrete tax items that were partially offset by higher tax expense associated with the adoption of FIN 48 earlier this year, as well as a great portion of earnings generated in lower tax foreign jurisdictions, as compared with the U.S.

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

Regarding our wholesale segment, sales grew 25% to $786 million or 13% excluding the Japan and small leather goods acquisitions.

In the U.S., the increase in wholesale revenues was primarily driven by American Living, as well as growth in Chaps women's wear and our expanded footwear assortment.

U.S.

shipments of men's sportswear and Lauren product were down in the quarter, reflecting the impact of both slowing traffic to U.S.

department stores, as well as a more conservative U.S.

consumer.

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

Our wholesale operating margin increased 28% to $178 million.

And our reported wholesale operating margin was 22.6%, 50 basis points higher than the prior year's operating margin.

Excluding the impact of recent acquisitions, the wholesale operating margin would have expanded 130 basis points to 23.4%.

For our retail group, fourth quarter sales increased 16% to $400 million.

And overall comp store sales increased 8.9%, reflecting an increase of 5.6% at Ralph Lauren stores, 10% at factory stores, and 12.5% at Club Monaco stores.

RalphLauren.com sales were up 36% over the comparable period.

Our comp growth in the U.S.

during the fourth quarter was heavily impacted by promotional activity during January and February, as we were clearing fall holiday merchandise to end the season with clean inventories for the start of the spring selling season.

We opened five new stores during the quarter including a children's store at the Short Hills Mall in New Jersey and a new Las Vegas location at the Palazzo Resort.

The operating loss for our retail segment was $6 million in the fourth quarter, which compares to an operating loss of $2 million in the fourth quarter of fiscal 2007.

The decline in retail operating income reflects increased occupancy costs related to future store openings and the cost of our new RalphLauren.com fulfillment center, as well as the increased promotional activity I mentioned before.

Licensing royalties for the quarter were $55 million, 2% below the prior year period.

And operating income decreased 26% to $27 million.

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

Excluding the affect of those acquisitions, licensing revenue increased 18% and operating income grew 16% as a result of higher international licensing revenues, as well as new product licenses for American Living and Chaps.

As Roger mentioned we ended the year in excellent financial condition and with a very strong balance sheet.

We had $626 million in cash, cash equivalents and short-term investments at the end of the fourth quarter, compared to $564 million at the end of fiscal 2007.

On a reported basis, we ended the fourth quarter with inventory down 2% from the same period in the prior year.

The year-over-year decline in inventory compares to our 20% sales growth in the quarter and includes the inventory associated with our Japanese and small leather goods acquisitions.

Excluding the inventory associated with those acquisitions, which occurred after the end of our fiscal year last year, our inventory balance this year would be down 11% year-over-year.

We were proactive about clearing through inventories in a controlled manner during the fourth quarter, which allowed us to enter the spring selling season in both the U.S.

and Europe with fresh merchandise in our stores.

In Japan we continue to work through the excess inventory we assumed through our acquisition of Impact21.

With respect to other balance sheet items, we achieved a return on equity of 18% for fiscal 2008 and our return on investment was a healthy 28%.

We spent approximately $217 million on capital expenditures during fiscal 2008 to support new retail stores, wholesale shop installations and other infrastructure investments, including the buildout of our new fulfillment center for RalphLauren.com.

We repurchased 2.5 million shares of Class A common stock in the fourth quarter, totaling $156 million.

For the full year of fiscal 2008, we repurchased approximately 6.1 million total shares of Class A common stock for approximately $476 million.

We currently have approximately $392 million available under our share repurchase program, and this includes a new $250 million authorization recently approved by our Board of Directors.

As Roger highlighted earlier, we made meaningful progress on many of our long-term strategic initiatives in fiscal 2008.

What started for us primarily as an investment year, with the acquisitions and the preparation for the launch of American Living and dresses at the end of the year, very quickly became a year of doing those things but also navigating through increasingly turbulent times, controlling inventories and managing discretionary expenditures.

We are proud of the accomplishments of our global teams have made this year, responding to a rapidly changing environment.

And I believe our fourth quarter and fiscal 2008 results are a testimony to their hard work.

As we enter fiscal 2009, the domestic retail environment remains challenging for us and others.

Uncertain times are likely to persist, as expectations for consumer spending and economic growth in the U.S.

and major international markets have moderated considerably.

Most of our customers have telegraphed a very cautious view of their businesses this year.

In the first part of fiscal 2009, we will be managing through a pull-back in wholesale orders.

This pull-back compares to very strong orders for us for the early part of fiscal 2008.

Leaner retail inventories are expected to emerge in the back half of fiscal 2009 something, we believe could support a healthier sales margin.

Especially compared to the high inventory levels and resulting promotions that occurred in the second half of fiscal 2008.

But current customer demand and the lack of clarity regarding the length of this current economic cycle in the U.S.

continues to make us very cautious on near-term business trends.

Even with the this economic uncertainty, we remain committed to investing in our long-term strategic initiatives, which we believe position us well for future growth.

Roger has already mentioned some of the initiatives we had this year, including our Paris redevelopment strategy and our joint venture with Richemont.

While we will be incurring expenses associated with these initiatives throughout fiscal 2009, we do not expect to recognize revenues associated with them until the back half of the year and for some, not until fiscal 2010.

Of course, we will continue to invest in our organizational infrastructure in Japan, as we believe that market offers a compelling growth opportunity for us.

As you are well aware, the Japanese apparel markets has been soft over the last few years.

Although we are seeing encouraging signs with our targeted remerchandising initiatives, we still expect the overall market to remain relatively soft as we proceed with our repositioning efforts.

With that as a backdrop, I'd like to address our sales and earnings outlook for fiscal 2009.

As we mentioned in our press release, we are affirming the annual diluted EPS guidance we provided to you in February and are offering some specific guidance for the first quarter of the year for the first time today.

For the first quarter, we expect consolidated revenues to grow at a low to mid single-digit rate and our operating margin is expected to be down 300 to 400 basis points.

For the full year fiscal 2009, we continue to expect low to mid single-digit consolidated revenue growth and diluted earnings per share in the range of $3.95 to $4.05.

And with that, I will conclude the Company's remarks and we will open the call up for Q and A.

Operator, could you assist us with that?

Certainly.

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

Thanks, good morning.

Congratulations on a great quarter, in obviously what's a very difficult environment.

Thank you.

Two quick questions.

Roger, last quarter you talked about an environment here in the U.S.

that you had never really seen before.

Has there been any changes in your view in the last 90 days on that?

And are you seeing anything that's making you either more comfortable or less comfortable about what we're seeing here?

Well, I would say that when we talked last in the early part of February, we were really had a chance to reflect on the fall and Christmas holiday business, which I did characterize, and I continue to believe, was the most difficult I had ever seen.

I think the liquidation of that excess inventory through January and February for many people did not even provide a sales increase.

And the customer was really very selective about buying product.

And that continued, as you all saw, with March comps.

I think April and May has seen a bit of a stabilizing of the business as we've headed into the late spring, early summer.

I think while the customer is continuing to be selective, and if you have the right fashion, they want it.

Otherwise, they are looking for price.

But I think the last 60 days, perhaps more than the last 90 days, Omar, has seen a bit of a moderation in the trend.

So it gives us some sense that the fall holiday business may have been the low point.

Okay, great.

And sort of switching gears, I just wanted to ask you a question on China.

I know you're very focused on Japan as you think about the Asian business and the opportunity there to grow it to one day to kind of equate to potentially the size of the U.S.

business.

Where do you stand on the China license?

It seems like there's a lot of European luxury brands going, there's a lot of nice retail opportunities.

It's obviously, a generally different marketplace, with the department store format being different, a lot more mono-brand retail.

But given the growth there and the slowness that we're seeing in the U.S.

market, what are your thoughts there?

Can you give us kind of an update on that?

Yes, we think the opportunities in China are enormous.

And I can't underscore enough how important that market will be into the future.

Not only in China, but as the Chinese begin to travel, we can see the impact of that travel throughout Asia.

Whether it's travel into obviously Hong Kong, that then spills over into places like Vietnam or Australia or other destinations, the Chinese business is going to be a dominant force in the world for luxury goods for years to come, in my opinion.

We have a licensed relationship with Dickson Poon that's based in Hong Kong.

They have the rights to Hong Kong, China, Singapore, Taiwan, Malaysia and others.

That license has a relatively short term to go and I think we have to look at that marketplace and decide how we want to proceed to take advantage of the opportunity that you're correctly calling out.

Perfect, thanks.

You're welcome.

We'll take our next question from Robert Drbul with Lehman Brothers.

The first question I have, Roger, can you maybe elaborate a little more on the business in Europe, maybe the run rate of the business throughout the quarter and thus far in the first quarter in terms of, are you seeing any bit of a slowdown from when the fourth quarter started to where you are thus far in the first quarter by categories or by country?

I'm sorry, Robert, were you talking about Europe or in general?

In Europe, specifically.

In Europe?

Yes.

The business in Europe has continued very strong.

I think the western European markets, which for us are very much a focus, whether that's England or France or Italy, Germany, Spain, et cetera, have all shown good growth and continue to perform well from fourth quarter into first quarter.

I would say the only real exception to that at the moment is probably Spain.

Where you're probably familiar, they're going through some pull-backs in the construction industry, which are a big part of their growth story in the prior couple years.

And I think that's put some pressure on the consumer there.

And so we are seeing some slower trends in Spain versus prior quarters or years.

The rest of the markets there have continued very strong, whether it's our own retail stores or whether it's our key specialty customers or our key shop in shop locations.

So we're planning that business for the balance of fiscal '09 to be very strong and at this point, haven't seen any signs of a slowdown.

They also, are getting some interesting tourist business, not only from the Asian customer but some of the Middle East and emerging eastern European countries, whether it's Russians or others, which today are prevalent in many of the major markets looking for luxury product.

So as we push out in Moscow, or we push out in Istanbul and further establish ourselves as a luxury retailer in those markets, I think it's going to help even the more developed western countries.

So at this point, whether it's men's or women's or kids, we're seeing strength continued through the European businesses.

Great.

And then, the second question I have is on American Living.

Can you talk about maybe some of the early learnings that you guys have come across in terms of how you're thinking about any adjustments into the back half of 2008?

And the other question I have is, when you think about start-up costs from last year versus the benefits of operating the business on a full-year basis this year, how should we think about that from a profitability perspective?

Okay.

Well, last year, as you know, we had 12 months of expense and we had four months of shipping.

So the impact over the course of the year was to carry the expense, more or less, on an even basis over the 12 months.

And then, as you know, we started shipping in December and shipped steadily through January, February and March.

As we head into the new year, expenses and shipments obviously are in alignment.

Although, I'm not sure that the December, January, February, March shipments will equal last year's, as we were obviously filling all the stores with all the products at the same time.

So there is some offset in the back four months of the year when you want to think about how that will run through the P&L.

Some of the early learnings, I would start with, is a very simple statement, which is we can do it.

I'm not sure when we started February a year ago that we were absolutely certain we could execute 40 merchandise categories in a new resource base, a new supply chain strategy and launch a new brand as well as we did.

So my hat is off to our people and to the J.C.

Penney people who pulled that off.

Early customer reaction has been very positive, particularly in products that are fashion or novel or are different than what Penney's has.

I think where it's more basics or more solids, I think in the Penney's customer, which is obviously squeezed with the economic downturn, I think that's where price becomes more of an issue in their decision making process.

So as we look to the balance of this year, recognizing that we had already made product for the entire year, that the first time we'll have a chance to adjust the new product really more completely is spring.

When we got customer feedback this spring, we'll really be able to put that into spring next year.

But we're seeing unusual strength in things like dresses and kid's and key parts of the business that the customer has reacted well to, particularly as we went through the pre-Easter and Easter period.

I think J.C.

Penney is known for their back to school business and their dominance in that category.

So the kid's business strength should serve us well there.

Plus the launch of our new young men's business, which is being delivered for this back to school.

So I think the first three months have been an interesting time of learning and I think all brands that are this complete will take time for each of the merchandise categories to mature but so far, so good.

Great.

Thank you very much.

Moving on, we'll take our next question from Liz Dunn with Thomas Weisel.

Hi, good morning.

Let me add my congratulations.

Thank you, Liz.

Looking at the magnitude of the fourth quarter beat and understanding that some of that was obviously related to tax rate.

But can you just help us get a sense of where you were -- you saw the most outperformance versus your own internal plan?

Was any part of it sort of an earlier shipping of American Living orders versus your expectation?

And then, looking out at the first quarter, can you walk us through the factors that will result in margins being down sort of more significantly than your full year outlook?

Yes, sure.

Let's talk about the fourth quarter.

The beats clearly were a stronger continuing trend at our international businesses, particularly in Europe.

We obviously planned for a strong business but they outperformed even the strong plan.

We certainly did not plan for a comp performance of 8.9% in our own retail stores.

That clearly exceeded our own internal planning forecasts.

As we talked in February, with the trends coming out of October, November, December, I don't think we would have had a right to believe we would have hit the 8.9%.

I think the performance of the key Asian markets, whether it's the licensed markets that we talked about, or even the early reads in Japan outperformed our expectations.

So, I would put all of those under the headline of beats.

Clearly a 36% increase in Polo -- or RalphLauren.com was not originally baked in our plan and exceeded our run rate for the year.

So we saw some strength in interesting ways from a lot of the new businesses and the diversification we've been working on over the last couple of years.

We did not ship American Living early.

The only thing there we did was, when we originally laid out January, February and March receipts, as you know, since some of it was ready and since Penney wanted it, we moved some of that into December.

So, we clearly didn't ship any that early.

So the tax rate aside, the 20% operating earnings improvements I think were driven by those factors.

If I look at the first quarter and the original -- the preliminary guidance we've given, I think it's with a view of a more conservative retail performance.

I think we believe that our plan for the year, which we've planned retail closer to 3% comp for the year, off of the run rates we've had in the last five or six years, which have been 5%, 6%, or 7%, is the prudent thing to do, given the environment.

We think that the domestic wholesale businesses, the major categories, including men's, Lauren, and kid's, are heading into a very cautious buying cycle by our retail partners.

I think they came out of a difficult holiday season, with a lot more fall holiday than they wanted.

And I think as they came into the buying markets in January, February, and March, I think they decided to take a very cautious stance on fall product, and I think that's reflect in the May, June, July, August shipping cycles.

And I think we'll see that begin to moderate as we get into the back half of the year.

And I think that some of the start-up expenses of the businesses that we've now lapped, which didn't exist last year, are part of the projected higher expenses in the quarter.

With all that said, we still, with some ups and downs by quarters, feel good about the annual guidance, which we've affirmed, both the revenue and the EPS and there's a lot of room in the year left.

So I think we'll update again in August and we'll continue to monitor more carefully probably than we ever have in terms of where the business is going by category, by channel of distribution, or by geography.

A lot of room in the year meaning a lot of conservatism in your guidance?

Is that how --?

Well, I think there's a lot of time left in the year.

Okay.

I see.

All right.

Our fiscal year, Liz.

Okay.

Got it.

Thanks, good luck.

So aggressive this morning, Liz.

Thank you.

We'll hear next from David Glick with Buckingham Research.

Good morning.

Congratulations on the quarter.

Most of my questions have been asked and answered.

Just a little bit of color on footwear.

It sounds like you're being -- you're a little more optimistic and it sounds like there's more energy in your voice, talking about the footwear business.

Can you give us some color on the traction you're getting and the opportunities in that business going forward?

Yes and I appreciate you noticing that.

We are feeling better about the footwear business.

We started shipping new product in the November/December period to selected accounts, which has then been increased in distribution with the spring shipments in January and February.

We're seeing very high sell-throughs, very strong desires for reorders and that's then manifesting itself in go forward orders that are more aggressive and more broadly distributed.

So as you know, we had to sort of pull that business down, get rid of the off-price part of that business, and then begin to rebuild it.

And the good news is we're now beginning to see product at retail being positively received, both at the Ralph Lauren Collection level, which is a more limited distribution product, or the Lauren footwear level product, which is more broadly distributed.

The other good news is, David, as we talked earlier on the call about the distribution of Lauren in Europe, over time we will obviously be able to add the other pieces and parts of the Lauren sportswear business to further support that brand in a new part of the world.

So we are feeling optimistic about footwear.

It is one of the strong trending categories in the industry right now, in the women's side particularly, and we think we're beginning to play in a meaningful way there.

Great.

Thanks for the color.

And just a quick follow-up on the Lauren women's business.

Clearly, the women's business has been more challenging.

You've discussed that on prior calls.

Any signs of improvements there, of maybe closing the gap between the performance of men's and women's?

Yes, well, the men's business continues very strong, which is interesting.

It's been awhile since the men's business outperformed the growth in women's.

I think the Lauren business, when we deliver product with color, we actually are getting a more significant read and positive trends but I think that business has sort of stabilized and spring sell-throughs have been better than fall holiday.

And I think as we head into the fall season, we feel better about the product, although the retailer has bought it more cautiously, given the overall environment in particularly the women's business.

So it's too early to say that it's turned for sure but the more casual aspects, the more active aspects, the denim aspects of that business are all experiencing strong results.

The career side of that business is the piece that's still softer.

Thanks a lot and good luck.

Okay.

Thanks, David.

We'll take our next question from Brad Stephens with Morgan Keegan.

Congratulations on a very impressive quarter.

Thanks, Brad.

A couple of questions.

Can you give us an idea of how much currency impacted your comps this quarter?

And then to that, noticing -- backing out charges that retail profitability was roughly flat on the comp and you're planning for 3% comps next year.

How should we think about profitability in the retail segment?

Well, I'll try the retail comps and then Tracey will give you the currency issues.

We've run strong retail comps throughout the last really seven or eight years and I think it's prudent to plan about 3%.

Some of the charges in retail that hurt us, you know about.

I think it's also fair to say that we were clearing out goods in January and February, probably more than we would have wanted to in a perfect world and I think it impacted some of the gross margins in retail.

So while we've planned the retail performance, from a comp point of view, more conservatively, we are planning for some margin recovery in that business and would expect retail over the course of the year to show some improvement in their results.

So we'll see how that goes but with the inventories being so in line and our buying being in line with the 3% comp, we should be okay.

Tracey, do you want to?

Brad, you asked in terms of the fourth quarter, the foreign currency impact on comps was about 2%.

So the 8.9% would have been 6.8%, adjusting for foreign currency impact.

And then, the second part of your question, can you just repeat that?

I think Roger hit with it the operating margin performance for next year.

Okay, terrific.

All right, thanks.

Thanks.

We'll take our next question from Jeff Klinefelter with Piper Jaffray.

Yes, also congratulations on a great fourth quarter.

I wanted to jump in a little bit to Europe a little bit further.

Looking at that time country trends, you gave us a little color on the strongest market, but anything else you could share on your shop in shop strategy by country, kind of door expansion strategy?

How do we think about in this terms of modeling future growth as you try to double the percent of the total Company's revenue?

And then secondly, would be on the marketing strategy and marketing spend.

Do you look at this as like sort of three or four distinct strategies, a U.S., a Europe, and Asian strategy, maybe splitting Europe and Asia out a little differently in terms of how much money you're investing or investing with your partners in marketing and what the overall marketing in terms of medium really is?

Okay.

Well, let me see if I can get all that out.

The strategies in Europe that have driven the growth and we believe will continue to drive the growth really include, really a door concentration strategy, less about new doors.

So in the developed western markets that we're in, it's not that we're going to double the distribution points we have in a Spain or Italy or a Germany or a France or an England.

It's about getting the volume per door up.

We've gone from a nice resource in a Harrods to probably one of their top two or three.

We are seeing that kind of movement in every one of our major large customers, as well as growing importance in our specialty doors.

As a matter of fact, we've probably dropped more points of distribution in the last couple years than we've added, in an effort to be very focused on who we would approach.

Having said that, we've seen unusual growth in Italy, unusual growth in England, we've seen unusual growth in the Scandinavian markets.

So there are plenty of places where, even with the growth we've had to date, we really think we're underpenetrated in the luxury and high end product.

Secondly, for the first time, we are beginning to bring brands that we have not had in Europe over there, like Lauren.

So if you know how important Lauren is here, we are just beginning the distribution of that in Europe with spring of '09.

So it will be a combination of focus on the existing doors, plus some incremental in western Europe, certainly a growing interest in appetite in the Middle East and eastern Europe, as new markets of wealth open up.

And it is in the development of new product and new product categories.

In terms of the marketing spend, we really look at the U.S., Europe and Asia holistically in terms of the branding, imaging and the advertising, which is all done centrally here in the U.S.

However, the spend rate by market and by country are individually developed and budgeted for based on where that market is and its development and the focus that we're trying to put on it.

Initially, when we were trying to grow Europe off a smaller base, we were investment spending in the marketing at a rate higher than the sales would have justified.

As sales have grown, we've been able to bring the spend rate in line, in addition to continuing to add incrementally.

And I think that's going to be the same in Japan.

We will begin to incrementally invest there as we look to jump start a transformation of customer perception.

And then, as the business grows, we'll grow into that spend rate.

So we do look at it individually by market.

So in total, Roger, do you look at your marketing or branding spend last year, this coming year, over the next few years, as fairly stable, in terms of a percent of your total corporate revenue or has that changed, has that fluctuated with all these new initiatives?

Well, we've actually continued to add to our marketing, advertising and PR spend every year for the last seven or eight years.

In some cases, in advance of getting the sales.

And we've then turned around and gotten the payback because whether the advertising helps retail or wholesale or helps the licensed product category, it almost doesn't matter.

We have been willing to spend in advance of the sales, even though with the sales growth we've had, I would say the percentages haven't varied that much.

Great.

Thank you.

You're welcome.

And we'll take our final question from Christine Chen with Needham & Company.

Thank you.

I wanted to delve a little deeper, I think, on Liz's question.

The 300 to 400 basis points of OM deterioration in Q1, is any of that attributed to continued investments in the newer businesses?

I think that the three main issues that I outlined for Liz are the three main issues, which are clearly a more conservative point of view about consumer spending and a more conservative retail comp plan.

Two, the large core domestic wholesale businesses seeing a pull-back in the initial orders by our large customers.

And I would say the annualizing of expenses that we put in over the year to support some of the new businesses that are now hitting the first quarter, that didn't hit it last year, in what is a low shipping quarter.

So, that would be certainly the third but a piece of it as well.

Okay.

And then, I think we'll see, as the rest of the year plays out, if it plays out as we've expected, that will not be a factor in our full year guidance we're comfortable with.

And then as far as Japan is concerned, for the year, do you still expect it to be accretive?

Yes, yes we do.

And then the final question, there's a new line item on your income statement, impairment of retail assets.

Could you just describe a little bit what that actually is?

That's normal impairment.

Every year, we go through testing of stores and so, that's store impairment.

So, that's what that is.

Okay, it's just the first time it's been broken out separately that I've seen.

So thank you for clarifying.

Good luck and congrats on great quarter.

Thank you.

And I thank you all for your interest.

We look forward to updating you in August with our first quarter.

But really congratulations to the whole organization for a spectacular year in a very difficult environment.

So we look forward to further updates.

Thank you.

That does conclude today's conference.

Thank you all once again for your participation and have a wonderful day.