雷夫·羅倫馬球 (RL) 2009 Q1 法說會逐字稿

Good morning, and thank you for calling the Polo Ralph Lauren' first quarter fiscal 2009 earnings conference call.

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

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

At the end of the presentation we will conduct a question-and-answer session at which time, please limit yourself to one question.

Instructions will be given at that time.

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

James Hurley.

Please go ahead, sir.

Good morning, and thank you for joining us on Polo Ralph Lauren's first quarter of fiscal 2009 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 initiatives and then Tracey Travis, our Chief Financial Officer will provide operational and financial highlights in the first quarter in addition to reviewing our expectations for fiscal 2009.

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

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

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

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

Thank you, Jim and good morning, everyone.

We are pleased to be reporting first quarter results that exceeded our expectations.

We delivered a 4% revenue growth with a solid retail comp of 4%, and our diluted earnings per share increased 13% compared to last year.

While the first quarter sales growth was in line with our expectations, the margin performance was better than we had anticipated.

I'm proud of the results we achieved, considering the fact that the domestic retail environment continues to be challenging.

Our first quarter reflects the successful benefits of our long-term strategic initiatives, primarily our commitment to new merchandise development and product innovation, our ongoing attempts to expand our direct to the consumer and our growing international presence.

This multi-pronged strategy is designed to diversify our businesses, reduce our exposure to any one region of the world or channel of distribution and give us more direct control over our brands.

We believe our strategy positions us well for the future.

At the same time, we have to focus on our short term execution, particularly in uncertain environments.

I believe our results over the last few quarters demonstrate that we are performing on a very high level.

Our inventories are very well managed as they are below last year and at the same time, our retail sell-through rates have been strong and our profit margins have benefited as a result.

Our cash flows have grown with more direct control we now have over our businesses, and we have made the right decisions in order to deliver a very strong balance sheet with large growing cash balances and very little debt.

Our entire management team has supported and delivered on these key short-term operating priorities.

Because of this cross-functional discipline, we are comfortable pursuing our long-term initiatives.

Beginning with our international expansion efforts, our brand sales throughout Europe and Asia continue to grow at a double-digit rate which is consistent with the trends we have experienced over the last several quarters.

Sales in high profile department stores such as Galleries Lafayette, Harrod's or Selfridges are particularly strong aided by the iconic styling of our spring/summer merchandise.

We have also seen continued strength in our men's, women's and kid's businesses across the international platforms.

In Japan, we continue to see encouraging results from our remerchandising efforts at target doors and we are refining our understanding of how to tier our products for specific points of sale.

As you read our press release this morning, we recently took direct control of our children's wear and golf apparel businesses in Japan from our former licensee Naigai, who will continue to hold the license for our Polo branded hosiery sales in Japan.

This is a major building block as we reposition our brand in this important market.

We now directly control product categories that account for approximately 75% of our wholesale volume in Japan.

With respect to our direct to consumer strategy, the comp store momentum at our directly operated stores is being complimented by new store openings and sustained double digit gains at ralphlauren.com.

I believe it is worth noting that our comps have remained healthy even as the overall domestic retail environment has deteriorated, something I attribute to the desirability of our brand and products and our growing skills as a retail organization.

As you know, we have a few very large store projects in progress in Paris and New York City.

We expect these stores will reset the bar for the luxury shopping experience and are important brand statements for us that will likely resonate on a global level.

We are also on schedule to launch rugby.com in the next couple of weeks in time for the back to school season, and we will leverage the customer fulfillment center we recently completed for ralphlauren.com to service this exciting new avenue of growth for Rugby.

Moving on to the last of our long-term strategic initiatives, our commitment to new merchandise development and product innovation.

New products have been a critical driver of consumer demand for us, and the momentum behind our Polo black label and purple label brands remains strong worldwide.

We will be opening new points of distribution for our luxury products in the fall season in cities such as Paris and Istanbul.

Domestically, the growth in our emerging product categories such as footwear, dresses and our expanding black label men's sportswear merchandise has helped to offset lower shipments for our core men's, women's and kid's products.

While the impact of lower shipments were planned for, our retail sales through for the quarter were very strong.

This is particularly true of our men's and children's products.

I believe this outperformance is not only a testimony to the strength and vitality of our brands, but also a function of the fact we are innovating, executing and merchandising at a higher and better level than ever before.

Speaking of innovation, we continue to deliver new and exciting products to JC Penny's American Living.

In early July, we shipped young men's assortments in time to capitalize on the back to school season and we remain very excited for the growth potential for American Living.

In addition to assuming more direct control over the design, production and management of our various products over the years, our global commitment to investing in advertising, marketing and public relations has helped to elevate our brand and increase its desirability around the world.

In the past few years, we have begun sponsoring high profile sporting events such as the Wimbledon and the US Open.

We are very excited as our role as an official outfitter of the US Olympic and Paralympic teams at the Beijing Summer Olympics which begin in two days.

Much of the product we have provided for the athletes is available to purchase in many of our stores.The outfits for the opening ceremony are consistent with our luxury brand and are true to our American heritage, and I hope you will be among the estimated 4 billion people who tune in to watch the opening ceremonies to witness the unveiling of Ralph's iconic designs for yourself.

While our new fiscal year is off to a good start, we continue to have a conservative view of the domestic retail environment.

That said, we are raising our outlook for fiscal 2009 which Tracey will walk you through a little later.

In the context of a challenging macroenvironment, we will continue to manage our businesses diligently.

I believe we are well positioned for the upcoming fall and holiday seasons.

We have planned our inventories conservatively for the balance of the year, and the initial read on sales of early fall merchandise is encouraging.

Of course, we will also stay the course investing in our long-term strategic growth initiatives as our past efforts have proven to be an excellent way for us to create value for our shareholders.

The strength of our management team cannot go unrecognized as it is their ability to execute against our various strategies that allow us to deliver for our shareholders.

The fact that they are able to do so in the context of such a challenging business condition is a true testimony to their skills and Ralph and I would like to thank them for their hard work.

Now I would like to turn the call over to Tracey to discuss the financial and operating highlights of the first quarter as well as our updated outlook for fiscal 2009.

Thank you, Roger, and good morning, everyone.

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

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

For the first quarter, we achieved consolidated net revenues of $1.1 billion, an increase of 4% over the prior year's period.

Higher sales were achieved as a result of strong international sales, particularly in Europe and growth in our global retail segment where consolidated comps rose 3.9% during the quarter and that was on top of a 7.6% increase in the prior year period.

Our ralphlauren.com sales also grew double digits.

Shipments of our newly launched American Living brand in the US were more than offset by lower shipments of our core domestic wholesale products.

Approximately half of our total revenue growth was due to the favorable euro exchange rate.

Our gross profit dollars increased 8% to $638 million and our gross profit rate increased two hundred basis points to 57.3% in the first quarter compared to 55.3% during the same period last year.

The growth in gross profit dollars and the expansion in gross profit rate reflect both our growth in sales as well as the benefit of the strong currency effect related to our international sales.

We did also have a small gross profit rate benefit compared to last year due to the drop-off of the purchase accounting impact from last year's acquisitions.

First quarter operating expenses increased 10% to $492 million compared to $446 million in the first quarter of fiscal physical 2008.

Operating expenses as a percentage of revenues were 44.2%, 250 basis points higher than last year.

The higher operating expenses primarily reflect the impact of the newly acquired and emerging businesses, as well as higher occupancy expenses for unopened stores.

Operating income for the first quarter was $147 million, approximately equal to the prior year period, and our operating margin for the quarter was 13.2%, 40 basis points below that of the first quarter of fiscal 2008.

The climb up in the operating margin rate reflects the higher operating expenses associated with business expansion that were partially offset by the higher gross margin rate.

Net income for the first quarter of fiscal 2009 increased 8% to $95 million and net income per diluted share increased 13% to $0.93.

The increase in our net income principally relates to a higher gross profit margin that was offset by increased operating expenses that I just discussed and to an effective tax rate of 35% in the first quarter of fiscal 2009 compared to a 39% rate in the comparable period last year.

The lower effective tax rate for the first quarter was primarily a result of lower income taxes principally relating to favorable statutory law changes, favorable geographic income mix as well as lower permanent differences.

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

Regarding our wholesale segment, sales of $575 million were essentially flat with those in the first quarter of fiscal 2008.

Revenues from American Living and strength in European sales were offset by lower domestic shipments of our core men's, women's and children's wear products.

The lower shipments reflect a planned reduction in orders from domestic wholesale accounts which came as a result of the sharp slowdown in its retail business trends last fall.

They also compare to strong orders in the year earlier period.

Our sell throughs at wholesale accounts were strong, as Roger mentioned earlier.

Consistent with the trend of the last few quarters, men's wear remains stronger than women's wear, although women's wear also performed well in the quarter.

In men's wear, knits and shorts were the best performing categories and customers responded particularly well to the color and novelty items in our assortment.

Our first quarter wholesale operating income of $107 million was flat with the prior year period and our reported operating margin was 18.7%, 10 basis points below the prior year's operating margin.

For our retail group, first quarter sales increased 9% to $492 million.

Overall comp sales increased 3.9% reflecting an increase of 5.3% at Ralph Lauren stores, 3.3% at factory stores and 2.9% at Club Monaco stores.

Ralphlauren.com sales were up 20% over the comparable period.

In general, stores that benefited from a high level of international tourism such as our New York City stores outperformed locations that are more reliant on US consumers.

Importantly, we are entering the fall selling season with lean current inventory.

We opened seven new stores during the quarter, including two new store locations in East Hampton, New York.

Retail operating income was $67 million in the quarter, 6% higher than the $64 million of retail operating income in the first quarter of fiscal 2008.

The growth in retail operating income was a result of revenue growth as well as a reduction in the purchase accounting effects associated with the RL Medium minority interest acquisition that negatively affected retail operating income in the first quarter of last year.

The retail operating margin declined 50 basis points to 13.6% in the first quarter of fiscal 2009, primarily reflecting increased occupancy costs related to future store openings and higher selling-related expenses.

Licensing royalties for the quarter were $47 million, up 1% compared to the prior year period as growth in our domestic Polo men's underwear and Chaps royalties and revenue from new American Living product licenses offset a decline in home licensing royalties.

Operating income for our licensing segment increased 11% to $24 million in the first quarter of fiscal year 2009 compared to $22 million in the prior year period.

The growth in licensing operating income was due to higher licensing royalties from Chaps and American Living that were partially offset by a decline in home royalties as mentioned earlier.

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

We had $711 million in cash, cash equivalents and short term investments compared to $626 million at the end of fiscal 2008.

Net of debt, we had $241 million in cash and short term investments at the end of the first quarter which compares favorably with a $53 million net debt position at the end of fiscal year 2008.

During the first quarter, we did pay back the short term loan used to finance the Impact 21 and new Polo Japan acquisitions last year.

We ended the first quarter with inventory down 6% from the same period in the prior year.

The year-over-year decline in inventory compares to our 4% sales growth in the quarter.

We are committed to proactively managing inventory in a disciplined manner as we have demonstrated the past several quarters, particularly in this difficult environment.

With respect to other balance sheet items, we achieved a return on equity of 19% for the last 12 months ending with the first quarter of fiscal 2009 and our return on investment was 28%.

We spent approximately $56 million on capital expenditures during the first quarter of fiscal 2009 to support new retail stores, also shop installations and other infrastructure investments.

Now that we are in our second quarter of fiscal 2009, we know the domestic retail environment remains challenging for us and for others.

Uncertain times are likely to persist as expectations for consumer spending in the US and some other major international markets continue to be scaled back.

As you are aware, we will be managing through a reduced level of domestic wholesale orders for most of fiscal 2009, and this pull back does compare to reasonably strong orders throughout most of fiscal 2008, especially in the first half of the year.

Wholesale accounts continue to be extremely conservative with their inventory, which is certainly understandable in this environment as we are conservative with our inventory.

While our first quarter results were better than our original expectations, we are maintaining a conservative view of the entire domestic retail environment.

In addition, as Roger mentioned earlier, we have acquired certain assets inclusive of inventory for children's wear and golf apparel in Japan from our former licensee, Naidai.

We expect to incur $0.08 to $0.10 of earnings dilution inclusive of non-cash purchase price amortization related to assuming more direct control of our children's wear and golf apparel distribution in the US.

We did acquire certain assets related to the acquisition of the transaction.

We invested approximately 3 billion yen, or $28 million to acquire these assets and those assets did include primarily inventory as well as some other assets, and all of that detail will be reflected in the 10-Q that we file tomorrow.

As you saw in this morning's press release, we are now guiding to full year fiscal 2009 diluted EPS of $4 to $4.10.

Our top line guidance of a low to mid-single digit increase in net revenues remains unchanged.

Our full year guidance also reflects the dilutive impact related to the Naigai asset acquisitions.

For the second quarter, our guidance is for net revenue growth of mid to high-single digits and an operating margin that is up 50 to 100 basis points compared to the earlier period.

And with that, I will conclude the company's remarks and we will open the call up for question and answer.

Operator, could you assist us with that, please?

Thank you.

(OPERATOR INSTRUCTIONS) Additionally, please limit yourself to one question.

We will take our first question from Omar Saad with Credit Suisse.

Thanks.

Good morning.

Good morning.

Roger and Tracey, wanted to see if you could elaborate on some of the economies on Europe and Asia and what you are seeing out there in these markets.

We know the US has slowed considerably over the last several quarters and probably will remain slow for some time, but there is a big fear in the marketplace that some of these other markets that have been favorite places to be are really going to experience -- become part of this global slowdown.

Are you seeing that at your business or are you at a stage where your penetration is still so low there is enough market share to be taken to offset any kind of overall macropressure in these markets?

Omar, it is a good question.

I think it has been floating out there for the last three months whether the rest of the world will experience some of what the US has been going through for the better part of a year.

Our business, which today which is not small in Europe, we are over $1 billion and broadly distributed across high end specialty, our own stores and key department stores, continues to perform very well.

And I think we said earlier, first quarter results were double digit and we are forecasting the balance of the year to continue to be strong.

If I broke that apart a little bit, there are differences by country.

Certainly, Spain is feeling a pull back in what had been a very robust construction business.

There was a lot of building and a lot of speculation there that is coming back down.

I think that is affecting the economy.

But in most of the other western European countries, our business continues to be strong, both for the locals as well as their tourist business.

Their tourist business may be down in terms of US visitors, but they are certainly getting a heavy dose of eastern Europeans, people from the Middle East and clearly the Russians who are, in fact, in Europe and buying aggressively.

So I think overall, there is some concern in Spain.

There is talk that maybe England would begin to catch some of the cold we have.

But as we sit here today, we have not seen that manifest itself in our business.

In Asia, and I think Asia needs to be split between Japan and the rest of the region, the marketplace in Japan is softer.

It has been for some time.

I'm not quite sure the issues there are literally the same ones affecting the US.

There is not really housing criseses and some of the other things that we are all dealing with, but I do believe the economy in Japan is softer and I've noted, as others have reported strength around the world, Japan continues to be more challenging.

With that said, our initiatives there in the first year of owning the business have been one of testing whether we could, in fact, with new product, remerchandising, retraining of salespeople, whether in fact we could move the performance of our brand in the marketplace.

At the moment, our distribution in Japan is primarily department store, so we are merchandising into a declining traffic pattern that's been going on for a while in Japan.

In the doors that we focused on for spring, we saw a 22% trend change in both men's and women's.

So we were very encouraged with our ability to reverse the trends in key locations in businesses we have been in for 30 years in that market.

So that definitely is encouraging.

The rest of the Asian market continues to be quite strong, whether it is China, Hong Kong, Singapore, Malaysia, Australia, all of those markets, while their financial stock markets have come down, actually the consumer has continued to spend.

So it's kind of a different answer for different parts of the world, but so far, so good for us.

Okay.

Great.

That's my one question.

Thanks.

Thank you.

Our next comes with Liz Dunn with Thomas Weisel.

Hi, good morning.

Congratulations on a good quarter.

My question relates to the wholesale business.

You talked about the domestic wholesale sell-in being down, and I think that was in line with your plan.

Could you talk about that relative to your expectations with it in line with your expectations.

And then you talked about the American Living sell in, but could you discuss that in terms of sell through versus your own expectations?

Sure.

Well, Liz, I think when business started to soften last -- early fall for many retailers domestically and then continued on to what people said was the most difficult Christmas in a long time, I think the buys that were made for fall and holiday last year were bought six and 12 months in advance with higher expectations of sell through.

So as the business results began to plane down, there definitely was too much inventory in the marketplace which caused a lot of promoting.

For the most part, early spring at that point had already been placed, so you really went from fall to holiday to spring with most retailers optimistic about selling trends, and then the disappointment that followed created this big gap of excess inventory in the marketplace.

The first real buy that retailers were able to correct started with the summer buys and into fall and have continued into holiday where most of the major retailers have taken a position of more conservative inventory position, holding tighter to open buys in anticipation of tougher sales trends, I think the belief is that maybe the natural margins will have a chance to rise and the sell throughs would improve.

With that knowledge, we did partner with all of our key retailers for a more carefully planned summer, fall, holiday buy and so the plan that Tracey talked about came to fruition.

So we weren't surprised.

We had no excess goods.

It was mutually agreed upon that we would sell in less in hopes of improving the sell through.

In fact, that's what happened.

Polo business in men's was quite strong.

Results compared to other men's brands or in fact, the total stores were significantly up.

So the natural margins and natural sell throughs were quite good.

It was on the back of very strong product.

I don't think it is just we lowered the denominator, it is the product itself sold through well, I think the retailers came through clean and we are now in great position heading into fall and the early read on fall product continues to be strong.

That is also true in the kid's business, where we sold in less, sell throughs were better, people came through it in a cleaner way and heading into back to school, I think there is some optimism.

I think the women's business, which for some time has been the softest, I would say had some ups and downs through the season with some strong deliveries and then maybe some weaker ones, but nevertheless, with the reduced buys, there is less clearance and the margins come up.

As we head into fall, the actual deliveries of Lauren in the store now have experienced very nice sell throughs in the last two or three weeks.

So we sit here feeling a little more optimistic.

The next tier down, which is really Chaps at Kohls where our business has been outstanding.

I think you have heard Kohls talk about that.

Our business there, men's, women's, kid's, home continues to run well ahead of plan and I think in our third year with Chaps, we really understand that customer and are getting the kind of sell throughs that everybody feels good about, even in a tough environment.

American Living, which as you all know, we started shipping in February this year.

So we have gone through a spring, a summer at this point, and we have begun to deliver fall and back to school, I think we had some very strong businesses then we had others that we have learned from and are now, next week, showing spring next year to JC Penny and I think that will incorporate a lot of our learnings.

One of the recent merchandise categories we delivered to Penny's, which is young men's, and it was a new initiative, has actually done rather well in what is traditionally a strong part of their business back to school.

So really, across the board, I think we have planned for and executed and gotten the expected results in a difficult environment.

Okay.

Great.

Congrats again.

Thanks.

Thanks, Liz.

Thank you.

Our next question comes from Bob Drbul with Lehman Brothers.

Hi, good morning.

Hi, Bob.

Some questions around the US retail business.

When you think about -- you said you saw some encouraging results the last few weeks.

How are you planning for tourism?

How much has tourism really helped your business?

Can you quantify that?

How strong was New York versus the rest of the US and how are you planning your comps exactly here in the domestic business for the remainder of the year?

Okay, Bob.

Well overall, as we said at the beginning of the year, we are sticking with a plan in retail that is about a 3% comp.

That's about half the run rate that we have experienced over the last five or six years when we have performed pretty consistently to 5, 6, 7 comp.

So we are planning, we are buying for, we are expensing for a comp rate at about 3.

As you can see, the first quarter was in line or slightly better than that.

So so far, so good.

Within that, there are definite pockets of strength and weakness.

I'm sure you realize the midwest, Detroit is not a particularly strong market right now.

There are for sure issues in Florida or California.

But there are also great strengths.

New York, for sure is being benefited by tourism.

I think it started around the holiday shopping season.

It has continued through the spring and the summer.

We have seen strong business in all of our channels of distribution in New York, whether it is Bloomingdales, or Bergdorfs, or Saks FIfth Avenue or our own stores, so we are getting a benefit of that.

One little statistic that might interest you, at Christmas time, the foreign credit card sales in New York were up 45%.

So that does give you some sense of the weak dollar and strong international currencies and the impact it is having.

While we did not plan the business that way in the holiday, I think our merchandise allocation by door is now anticipating for the balance of the year, there will be great strength in certain stores and markets and in some other places some weaknesses, so I think we have a chance to preplan the flow of product a little better to respond to that, and that's what we are doing.

Thank you very much.

Okay, Bob.

Our next question comes from Robbie Ohmes with Merrill Lynch.

Thanks.

I think my one question here is actually for Tracey.

Tracey, can you reminds us with your earnings guidance why we should be looking from flat to down earnings for the fiscal back half of this year and maybe tie into that the sourcing costs outlook.

Thanks.

I think that was two questions, Robbie, but that's okay.

I think certainly as we talked about ,we are very cautious as it relates to the remaining three quarters.

As we look at the environment, we did have a strong first quarter.

We talked about Naigai and the impact of that, which is dilutive.

We did have some expenses, Robbie, that were planned for the first quarter that will be probably happening later in the year, so that will impact us a little bit in the later quarters.

But I think primarily it is -- we are conservative in terms of looking at the remainder of the year and very cautious.

That is the best explanation that I can give you at this time.

As well as the Naigai impact for us.

As it relates to sourcing, all of our expectations on sourcing have been baked into our forecast.

So we have a tremendous sourcing team.

We have done all of our negotiations as it relates to the sourcing.

We are in the process now, obviously, of we have placed our buys for spring.

All of our negotiations have been planned and have incorporated all of the costing impacts related to all of the -- everything going on as it relates to China and all the negotiations that our sourcing team has done with the factories over there.

And they have done a tremendous job of negotiating the best costs possible.

But we are constantly reevaluating and negotiating and getting the best price that we possibly can, obviously, for all of our goods.

And Roger, I don't know if you want to add anything.

I would say to what Tracey is saying, that cost of goods is really made up of a variety of things.

It includes raw materials.

It includes the manufacturing and it certainly includes the -- what I'll call transportation.

So each one of those pieces has different variables to manage and at this point, we are locked in with our costing through the balance of this year.

We feel very strongly about what our team has been able to do on all three of those.

And so at least from a margin point of view, with the inventory position we have and we continue to manage, the improved sell throughs and our pricing expectations, we feel pretty good about the margin opportunity through the balance of the year.

And I would only add, Robbie, to the guidance question, you've followed the stock a long time, you know it is rare for us to increase our guidance after a first quarter.

It is the smallest quarter of the year.

So there is no doubt the bulk of the years ahead of us with false selling, holiday selling and spring.

So we will see what happens.

I think when we update in November, which is more traditionally our time for mid-year guidance changes, at this point, the first quarter was so robust that even in spite of the dilutive impacts of Naigai we felt the need to move it up somewhat.

But I think we want to see how fall sales and we want to see how the holiday begins to unfold, and then we will update more completely in November.

Great.

Thank you very much.

Okay.

Thank you.

Thank you.

Next we will take our question from Brad Stephens with Morgan, Keegan.

Hey guys, good morning.

Roger, could you drill down on Europe a little bit more for us?

I've looked through your K the last couple of years, in 2007 it said you had 2,350 wholesale doors.

Last year, you had 2,075.

The number of doors is going down, but your European sales keep going through the roof.

Could you give us some more color on that?

That is a very good question and very astute of you.

Not dissimilar to the United States strategy several years ago, we are closing doors in Europe that we think are no longer representative of the quality of the brand and the positioning we want to be in.

Many of those specialty stores in smaller markets could not give the band the representation we were looking for and were buying it in a limited way that we think undershot the market opportunity.

So we have been on a campaign to reduce the bottom tier of the distribution and increase the volume with those doors that we think can give the brand its full compliment, whether it is men's, women's, whether it is luxury or whether it is at the other price points.

So, quite frankly, our business in Europe has gone from $180 million when we bought it back to over $1 billion and we have less points of distribution today than when he back then.

Every one of those is a conscious decision to reduce those doors that we don't think are brand appropriate any more.

If I could just ask a quick follow-up then.

As you reduce stores, how do you think about growth going forward?

Is it taking Lauren to Europe?

Is it footwear?

More space in these door?

I think the announce announcement we made last quarter is that Lauren is going to Europe.

It will be part of the spring shipping commitments.

I think we have about a hundred major doors that we will be opening Lauren in in the back half of our fiscal year.

We are very excited, the retailers are very excited.

Over time, other merchandise categories like footwear and other accessory categories for sure will be a source of great growth.

I also believe mono brand stores, i.e.

stand alone stores will be a part of our growth strategy in Europe and the success we have had in Moscow and the ongoing demand of our product in those emerging markets is enormous.

So when you look at the Middle East, you look at the eastern European countries, you look at Russia, I think we are going to be seeing growth for many years to come beyond the traditional cities like London or Paris.

So I think growth is going to come in many forms and that allows us to cut out the bottom tier of distribution.

Alright.

Thanks, guys.

Good luck.

Thank you.

Our next question comes from David Glick with Buckingham Research.

Good morning and congratulations on the quarter.

Roger, just a follow up on the wholesale business.

Given the improved inventory situation at your retail partners in the US and the better sell through, particularly in men's and kid's and sounds like some early signs of life in women's.

Are there opportunities for maybe higher replenishment orders, reorders, maybe selling less to off price as we head into the seconds half of the calendar year, and if I if you could give us a sense of the flavor of conversations.

I know -- I'm sure you're talking to your retail partners about plans for spring '09 and given sort of the change in the dynamic of the performance of their business with you, could we see a reversal of the trends that you saw in the first quarter in your domestic wholesale business?

Okay, David.

Let me respond with again, you guys are on your game this morning because your questions are insightful.

We are partnering very aggressively right now with our key retailers about replenishment.

I think it is fair to say when the initial orders for new product is approached more conservatively, and the mandate goes out to manage inventories more carefully, one of the things that inadvertently gets hurt is replenishment, and I don't think there is a store in the world who wouldn't want to be in stock on replenishment items that really go out at high full price margins and really with reduced traffic, you want to make sure you get the best service to the customer.

So I think this spring, there is a recognition that one of the by products of trying to manage inventory down has been a fall off in the commitment to replenishment, and I think many of our retail partners in concert with Jackie and her team are working very hard on reinvigorating efforts this fall and into next year to be more diligent about staying in stock on key items.

There is no reason to walk a customer on a basic, and I think that's been a casualty of the inventory management initiatives.

So I do believe, and I think you are right, there is an opportunity throughout the fall and into next year to see the replenishment business, which is margin rich, to begin to move up in terms of priorities and I think will help drive sales for both of us.

I expect that to be an important part of the sales repair activities.

In terms of the spring plans for next year, we are not only deep into the planning, we have had many of the buys committed to.

And I think while our business has performed well, margins have come up and I think that there is a lot of excitement over what we are doing.

I believe stores are going to continue to be conservative in their buying until they see their retail trends begin to move higher.

I think the uncertainty and the inability to plan with clarity, sales performances for next spring are going to have the retailers continue to operate in a conservative manner.

Of course, we will begin to lap that, so on a comparable basis, it won't be the same as it is now and through the next nine months.

So it is fair to say you could see a stabilization, at least in your wholesale business X some of your growth initiatives like American Living and certainly the lift you're getting from Europe?

Could be.

Thanks a lot.

Thank you.

Our next question comes from Adrianne Shapira from Goldman Sachs.

Thank you.

Roger, what really impressed us in the quarter, obviously, that big spring in margin expectations.

You were looking for them to be down 3 to 400 basis points and came in down only 40 basis points.

Could you walk us through and perhaps deconstruct where the big surprises were relative to your plan?

Sure.

It's a good question.

I would say that the biggest change relative to our plan and forecast was really the merchandise margins.

And because in this quarter ,which is April, May and June and the back part of the quarter June really carries the burden for the cost of spring margin settlements and inventory cleanups.

We really came through the spring and early summer in much better condition, which allowed a 200 basis point improvement in margin, which is not what we planned for.

So certainly that was a major driver of the change versus the early guidance.

I think while expenses were up, we also did a good job of managing expenses in the quarter.

We are continuing to fund new projects, new initiatives, but I think the company really, like inventory, like our balance sheet, took a hard line on expenses and so we picked up some there to plan and I think that's the bulk of the delta.

Just to make sure, it sounds like it is more a function of the inventory management you have been talking about rather than the currency benefits or sort of mix across geographies, is that fair?

That's correct.

Thank you.

Okay.

Thank you.

Our next question comes from Jeff Klinefelter with Piper Jaffray.

Good morning.

This is Stephanie Wissink for Jeff.

Congrats on a strong quarter.

Thank you, Stephanie.

I would like to follow up on one question, Roger, that you made regarding Europe.

Could you just talk more about the productivity per door efforts that you have?

Maybe sticking to the retail price difference in Europe and Asia versus the US, and then your comment about mono branded doors.

Just curious if those would be directly operated, or if you are considering franchise and license agreements.

Thanks.

Interestingly enough, the productivity in Europe, whether it is our own doors, which we obviously know exactly, and you all know how productive we are in our stores in the US, the productivity of our stores in Europe is 50% greater.

So whatever we are doing here in the United States, which is about $1,000 a foot, we are doing $1,500 a foot in Europe.

So when you get it right because of the locations, the traffic patterns, the appetite for our product and our controlled distribution strategies, we are getting a 50% improvement in sell through.

So when we take that to the wholesale world and we look at Harrod's or Selfridges in a city like London, we have almost tripled the business in Harrod's in the last four years, and that's a result of an intensive effort on our European team to remerchandise it, trade it up, make it more luxury as well as rebuilding and expanding our presentations in all categories.

Men's, women's, and children's.

So, I think that what we are seeing is when we get it right, both presentation and assortments and service levels, all of the international markets including Japan, Asia and Europe have an ability to distort their performance with the product.

The sell throughs are higher, the full price sell throughs are higher, the margins are better and there is less left over for clearance, which keeps the brand elevated.

So it is a good news story when executed properly, and that's what we are trying to take out to the rest of the world.

I think generally, productivity in the United States is lower.

So to get an increase, you have to work harder and we are trying to balance that on a worldwide basis.

Okay, Stephanie?

Yes.

Could you just speak a little bit really quickly to the mono brand.

Would those be directly or through franchise?

Sorry, I forget.

Yes, at the moment, we have got both owned stores and licensed stores.

Certain territories like the Middle East are licensed.

The store we have in Moscow, the two stores and the third point of distribution are licensed.

We look by market, and we try to make a determination both from a brand point of view and an economic point of view, what is the right approach?

We think over time there is tremendous opportunity to have a more complete network of mono brand stores which would be indistinguishable to the customer, whether it is owned, licensed or joint ventured.

We would look to control the store design, we would look to control the location, merchandising presentations, how the products are presented and sold.

So it should be indistinguishable to the customer.

But we do think that's one of the opportunities.

Where we have done that well, when we open Milan, we certainly think Paris will be like that.

It not only does a lot of business, it elevates the level of the brand in that market and the wholesale accounts get a halo effect as well.

So it is really a multipronged strategy for Europe that has been time tested, and we are just going to continue to be aggressive about rolling it out.

Thank you.

That's very clear.

Good luck, guys.

Thank you.

And our next question comes from Christine Chen with Needham and Company.

Thank you, congratulations on another good quarter in a very difficult environment.

Thank you Christine.

Wanted to follow up, you mentioned that your guidance reflected the dilution from the acquisition in Japan.

Can you help us think about how we should be modeling it out in the quarters?

Is it evenly spread out?

Is it more concentrated in one particular quarter in the back half of the year?

Thank you.

You can think of it as evenly spread out.

Okay.

Thank you very much.

And we will now take our final question from Kate McShane with Citigroup.

Hi, thank you very much.

Most of my questions have been answered.

I was under the impression for the SG&A guidance you gave last quarter that a lot of that cost is coming from your real estate projects.

Did anything change with your expectations for those projects during the quarter and are some of those costs coming later in the year?

No.

The projects that we articulated earlier continued to track as planned, but we did have expense savings in other parts of the base of our expense base.

So those projects continue unchanged.

They stay on track, but we did have some other expense opportunities as we are trying to manage carefully in what is an uncertain time.

Okay.

Thank you.

Okay.

With that I would thank you all for participating.

We look forward to updating you in November with a more complete thought on fiscal '09, but obviously, we are off to a good start and I congratulate everybody at Polo for their hard work in this environment.

Thank you very much.

Thank you.

That does conclude today's conference.

Thank you for your participation and have a great day.