雷夫·羅倫馬球 (RL) 2009 Q2 法說會逐字稿

Good morning and thank you for calling Polo Ralph Lauren's second quarter fiscal 2009 earnings conference call.

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

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

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 would like to turn the call over to Mr.

James Hurley.

Please go ahead, sir.

Good morning and thank you for joining us on Polo Ralph Lauren's second-quarter of fiscal 2009 conference call.

The agenda tor today's call includes Roger Farah, our President and Chief Operating Office, who will give you an overview of the quarter and comment on our broader strategic initiatives; and then, Tracey Travis, our CFO, will provide operational and financial highlights from the second quarter in addition to reviewing our expectations for fiscal 2009.

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

As you know, we will be making some forward-looking statements today, including our financial outlook, the principle risks that could cause our results to differ materially from our current expectations are detailed in our SEC filings.

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

Thank you, Jim, and good morning everyone.

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

We delivered a 10% revenue growth with a solid retail comp of 5% and our diluted earnings per share increase of 45% compared to last year.

Our year to date results are equally strong and even more compelling, when we consider the market challenges that have persisted for the last year and intensified during the second quarter.

I believe these results confirm the vitality of our brand, the relevance of our strategy, the world-class capabilities of our management team and the passion of our employees around the world.

All of which is supported by the strength of our balance sheet.

Without this powerful combination, we would not have been able to achieve this high level of performance.

Of course, we're not immune to macro challenges and our recent business trends have been affected by the global financial crisis that began to unfold in September.

The impact has resulted in considerable volatility with customers in all channels of distribution pulling back in their spending.

But in the content of tremendous uncertainty, there are a few things I know for sure.

First, we have one of the world's most desirable brands and customers have consistently chosen our products over others.

Second, our business has endured through good times and bad over the last 40 years and we've always emerged stronger from any challenge.

And finally, we have a solid strategy to grow shareholder value over the long-term.

This strategy is focused on elevating our brand and is grounded in three key areas.

One, growing our international presence.

Two, expanding our direct-to-consumer reach.

And, third, our new merchandise development and product innovation.

While these initiatives are primarily focused on creating long-term value for our Company, we are obviously executing them on a daily basis and have reaped some near-term benefits which have contributed to our very strong year to date results.

I would like to provide an update on what we accomplished with these initiatives during the second quarter.

Beginning with our international expansion efforts, as many of you know, we assumed direct control of our Japanese men's, women's and jeans products last year and children's and golf apparel this August.

This gives us control over the majority of our Japanese product categories.

We have licensed distribution rights through the rest of Asia.

I was recently in Asia for a two-week trip and came back incredibly excited about the long-term opportunities for our Company in that part of the world.

There is tremendous appetite for global status oriented lifestyle brands given the considerable amount of wealth creation that has happened throughout Asia.

Even though we have had a presence in this part of the world for many years, it is relatively small and generally reflects only a fraction of our various brands and product categories.

This has certainly been the case in Japan where our business has been heavily skewed towards men's casual sportswear.

Since we have assumed control of our Japanese business, we have begun to elevate the Ralph Lauren brand by introducing new labels and focusing on the right points of distribution.

We have put a transition team on the ground to help jump start these initiatives and integrate Japan into our global organizational structure.

Along with our new locally-based management, the transition team has helped train our new Japanese employees in a manner that is consistent with our global operating procedures.

We've already seen some encouraging results.

The performance of our target doors in the Japanese department stores continue to outpace overall industry trends by several hundred points.

Evidence that are direct control over merchandising assortments can have a meaningful, near-term impact on sales and profit, even as we execute our long-term strategy.

We'll continue to expand our target-door program in Japan and further refine our assortment planning on a door-by-door basis as we do in the United States.

Our progress on the merchandising front in Japan is being supported by brand advertising and public relations activity, as we leverage our supply chain expertise.

So far, we have consolidated three distribution centers into one and beginning in Spring 2009, we'll be sourcing product for Japan through our own global manufacturing network.

Moving away from using third-party trading companies.

All of the strategies we are executing in Japan were key ingredients of our successful development of Europe.

A region that has grown five-fold to over $1 billion, during the last six to seven years.

Speaking of Europe, our business there continues to grow nicely across both wholesale and retail channels and we achieved double-digit organic growth in the region for the first half of the year.

During the quarter, we opened our largest women's-only store dedicated to our collection in Black Label merchandise on Avenue Montaigne in Paris, which is a key market for us.

A few weeks ago, we opened our first Ralph Lauren store in Istanbul through a licensed partner, marking another important step towards establishing a presence in Eastern Europe.

Having successfully developed a strong luxury presence in women's wear throughout Europe over the last several years, we are excited about the introduction of Lauren merchandise into selected European wholesale doors for Spring 2009, including House of Fraser in the UK and [Alcoring] Glaze in Spain.

We believe this is an opportunity to attract new European customers to the world of Ralph Lauren with our Lauren brand as we have successfully done in the US.

With respect to our direct consumer strategy, the year-to-date comp momentum at our directly operated stores has been complemented by new-store openings and a double-digit gains at RalphLauren.com.

Our retail stores represent the best expression of our lifestyle positioning and create an important halo over all of our products and channels of distribution.

The stores carry the widest assortment of our luxury products and are highly regarded for the exceptional level of customer service they offer.

The resilience of our second quarter comps was achieved not only on top of several years of good growth but also as the overall domestic retail environment continues to deteriorate.

I believe, we have particularly strong product this fall.

Some of our best ever.

And we experienced positive early customer reaction to our merchandise.

In spite of these good initial trends, traffic in the stores slowed towards the end of September.

RalphLauren.com is another direct to consumer focus for us.

Since it's launch in 2000, we have continued to innovate and invest in the business and we are now benefiting from those critical long-term strategies.

Our most resent investment is a dedicated RalphLauren.com distribution center, which is working seamlessly and receiving high customer-service ratings.

RalphLauren.com is posting impressive gains, as we add new product categories, including the successful, create-your-own customization feature and energizing the site with editorial content.

RalphLauren.com really leveraged our Olympic involvement this summer, as it was home to one of the widest selections of Ralph Lauren Olympic-related merchandise and had broad Ralph Lauren Olympic game content, including videos.

and interviews with athletics.

Consistent with the spirit of entrepreneurship and innovation that defines our Company, we launched mobile commerce capabilities during the quarter.

While still small in terms of sales, customers can now shop RalphLauren.com from their cell phones using quick response or QR codes found in our ads or in-store windows.

We are the first luxury brand in the United States to embrace this cutting-edge technology, which is proven to be successful in driving sales in other parts of the world.

The launch was executed flawlessly and supported by 360-degree marketing plans that leveraged our sponsorship of the US Open, our email marketing efforts, our print advertising and our brick and mortar stores.

The publicity received around this new technology was significant.

Today, customers can buy a wide range of products using end commerce, including Ralph Lauren collection accessories, men's Black Label merchandise, classic Polos and even our new women's fragrance, Notorious.

Building on the RalphLauren.com platform further, we launched Rugby.com in the middle of the quarter.

The initial reaction in terms of traffic and sales has been much better than expected, which is certainly encouraging given the market environment and the fact that we have not invested a major advertising for Rugby.

So far, over 70% of rugby.com customers are new to the brand.

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 innovation has become increasingly important, as customers have been more discerning with their apparel spending.

In fact, it's the novelty product that's been the primary driver of our topline momentum this year and our Olympic-related merchandise was a notable standout during the quarter.

Especially, the create-your-own-flag Polos, which allowed customers to design their own combination of shirt colors and country flag.

Our revitalized women's footwear business continues to add new doors and has been performing above our expectation registering impressive full price weekly sell throughs.

Our men's business is also very strong during this quarter, again, due to some of the best merchandise I think we've ever had.

The color, novelty and execution at retail has been stellar and the wholesale interest in our men's Black Label sportswear continues to grow.

Over the years, you have heard me speak at length about the strength of our management team.

During the second quarter, we announced important new hires and the promotion of several executives to new roles in the organization.

These talented managers are focused on areas of great strategic importance for us.

Laura Hall recently joined our Company as President of Accessories and Frank Guzzetta joined us as President of Ralph Lauren Home.

Both Laura and Frank have many years of senior executive experience with their respective product categories and we are thrilled to have them on board.

Internally, we promoted George Hrdina as President of Asia Pacific, and he'll be located in Hong Kong.

He'll be leading the strategic direction and identifying growth opportunities for our owned and licensed businesses in Japan, the rest of Asia, Australia, South America and Central America.

George has a long history with Polo as the former President of our children's wear business and most recently as the leader of our Japanese integration effort.

Matthew Youngs was appointed as president of children's wear having led the children's sales efforts for the last ten years.

In our retail division, Wayne Meichner was promoted to President, Chief Operating Officer of the Polo Retail Group responsible for the strategic management and development of our domestic retail concepts, including Ralph Lauren stores, Polo factory stores, RalphLauren.com, Rugby and Double RL.

Wayne spent the last six years as President of our domestic Ralph Lauren stores, which are now being led by Susie Coulter, who has ten years of experience working in many different capacities within our retail divisions around the world.

I think our ability to attract new talent and to promote from within allows us to select the most experienced global leaders to execute on our strategic initiatives.

With the added benefit of maintaining continuity and building on institutional knowledge as we expand around the world.

We have achieved a lot in the first six months of fiscal 2009 and our belief, I believe our results are impressive by any measure.

We've certainly worked very hard to achieve them.

And we are bolstering our position as a design-led innovator and we are proactive about the protecting of our brand and our profitability when first signs of a slow-down materialized last year.

As a result, our inventories are very well managed comfortably below last years level, even as sales have grown by double digits.

At the same time, our retail sell through rates have been strong, which has led to stronger profit margin.

We know in tough times the customers believe in our brand and quality we offer.

And our year to date financial results reflects this.

Of course, our efforts were supported by exceptional brand marketing and advertising, and I think our association with world-class sporting events, such as the Olympics, Wimbledon and the US Open really accentuated our global exposure.

As you all are aware, the second half of the year presents some pretty astounding macro challenges for all consumer-oriented businesses.

The world has been changed by a severe financial crisis whose ramifications have been intense and continue to evolve on a daily basis.

With respect to consumer spending, global market conditions have deteriorated faster and harder than anyone expected.

Our business has also been affected by the slow down.

Currently, we are seeing reluctance among customers to spend across channels and price strata.

During the month of October our comp trends in our retail stores are very different than our year-to-date results.

Since the middle of September, promotional activity has escalated across the entire retail sector.

And the consumer is looking for compelling value.

We continue to work closely with our wholesale customers so that sales plans, inventory levels and on orders are in proper alignment.

For these reasons, we have assumed a more conservative view of the global retail environment for the back half of the year.

With a strong first half of the year and our expectations that the second half will be more difficult, we are still holding our earnings per share guidance for the full fiscal 2009.

Quite frankly, the current market trends and the reality of a global recession make forecasting our business, particularly our retail segment, a real challenge.

And we will have to evaluate how the global consumer continues to react to these unprecedented times after the holiday season.

Tracey will comment in greater detail on how we're thinking about the balance of the year.

But I think it's important to clarify that our outlook is colored by the macro factors that are beyond our control and not a matter of Company-specific issues.

For this reason, we remain committed to our long-term strategic initiatives.

As our multi-pronged strategies were designed to elevate our brand and diversify our businesses, reducing exposure to any one region of the world or channel of distribution.

This strategy has served us well over the last several years.

We've delivered solid returns by assuming more direct control over our business.

Whether in Europe, with products such as Lauren or children's or with our retail development in e-commerce efforts.

Our cash flows have grown, even while we're investing in the business.

And we have established a very strong balance sheet with large growing cash balances and very little debt.

We have the financial wherewithal to stay the course.

And as we evolve our existing businesses and pursue new growth strategies, for high margin opportunities such as Japan or various accessory categories.

Of course, we'll be focusing on maintaining our high level of execution across all channels.

Vigilant and keeping our inventories current and making sure our expenses are in line with our revenue expectations.

Our management team has a track record of navigating through difficult times, as evidenced by our year-to-date results and I remain confident in our ability to continue to do so.

Now, I would like to turn the call over to Tracey to discuss the financial and operating highlights of the second quarter, as well as our outlook for the remainder of the year.

Thank you, Roger.

And good morning, everyone.

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

Then, I will comment on our outlook for the balance of fiscal 2009.

For the second quarter, we achieved consolidated net revenues of $1.4 billion, an increase of 10% over the prior year's period.

Our higher sales were achieved as a result of growth in global retail sales where our comps rose 5.1% on top of a 4.5% comp in the prior year period.

The strength of our international wholesale business, particularly in Europe, and the shipment of new products, including American Living merchandise.

These increases were partially offset by lower domestic shipments of our for men's, women's and children's wear products.

Approximately 2.6 points of our 10% total revenue growth for the quarter was due to favorable currency exchange rates, primarily the euro.

Our gross profit dollars increased 13% to $788 million and our gross profit rate improved 170 basis points to 55.2% in the second quarter, compared to 53.5% during the same period last year.

The growth in gross profit dollars and the expansion in gross profit rates reflect our higher sales, a decline in purchase accounting amortization related to last year's acquisitions, as well as, strong full-priced sell through at wholesale and retail stores globally.

Second quarter operating expenses increased 8% to $545 million compared to $503 million in the second quarter of fiscal 2008.

Operating expenses as a percent of revenues were 38.2%, 50 basis points below last year.

The operating expense leverage primarily reflects revenue growth and a decline in purchase accounting amortization that was partially offset by our ongoing investment in product expansion and new store development.

Operating income for the second quarter was $243 million, 26% higher than the prior year period and our operating margin for the quarter was 17%, 220 basis points greater than that of the second quarter of fiscal 2008.

The improvement in operating margin rate is primarily due to lower purchase price amortization, the profit contribution from new products and leverage on corporate expenses that was partially offset by lower operating profitability in our retail segment.

Net income for the second quarter of fiscal 2009 increased 40% to $161 million and net income per diluted share increased 45% to $1.58.

The increase in our net income principally relates to our higher operating income, as well as to an effective tax rate of 34% in the second quarter of fiscal 2009 compared to a 39% rate in the comparable period last year.

The lower effective tax rate for the second quarter and the first six months of fiscal 2009 was primarily a result of statutory law changes, favorable geographic income mix, and the resolution of some discrete tax items.

Now, I would like to spend some time providing insight into segment highlights for the quarter.

First, regarding our wholesale segment, sales increased 10% to $846 million.

Revenues from new products, strength in our European sales, particularly in the United Kingdom and Italy and growth in Japanese revenues, primarily related to children's wear, golf and other transition product licenses were partially offset by lower domestic shipments of our core men's, women's and children's wear products.

The lower domestic shipments reflect a planned reduction in orders, which we've discussed before from our domestic wholesale accounts, which came as a result of the sharp slowdown in retail business trends that began last Fall.

The recalibration of what was shipped resulted in strong sell through at our wholesale accounts during the quarter that Roger spoke about earlier.

From a category perspective in the United States, men's wear continues to perform well across the board and women's wear is showing progressive improvement thanks to more focused assortments build around iconic key items, especially sweaters and knits.

Our domestic wholesale children's wear business is also benefiting from fewer more meaningful deliveries that are focused on iconic key items like our mesh Polos.

In Europe, our women's Blue Label, Black Label and Collection sales were all up double digits during the second quarter.

Wholesale volume of our men's Purple Label and Black Label merchandise more than doubled during the quarter.

In Japan, sale of Polo's men's wear is strong and both our men's and women's Blue Label products are outperforming the overall market trends in department stores in Japan.

Our second quarter wholesale operating income of $212 million was 21% higher than the prior year period and our operating margin -- reported operating margin was 25%, 220 basis points greater than the prior year operating margin, primarily due to high revenues, a decline in purchase price amortization and improved full-price sell throughs of our merchandise that was partially offset by expenses at newly acquired businesses and for emerging product categories.

For our retail group, second quarter sales increased 12% to $531 million.

Overall comp sales increased 5.1% or 4.2% in constant currency reflecting an increase of 0.3% at Ralph Lauren stores, 8.2% at factory stores and a 3.7% decline at Club Monaco stores.

RalphLauren.com sales were 31%, up over the comparable period last year.

Our second quarter of comparable store sales growth benefited more from full price selling, a function of the desirability of our brand and more focused inventory assortments.

Men's apparel and accessories, children's wear and women's accessories were the best performing product categories in our Ralph Lauren stores during the quarter.

In general, stores have benefited from a high level of international tourism, such as our New York City or London stores continue to outperform locations than more reliant on local consumers.

We opened 12 new stores during the quarter, including the Paris store that Roger mentioned earlier.

And Robertson Boulevard in Los Angeles.

And ended the quarter with 328 directly operated stores globally.

Retail operating income was $57 million in the quarter, 10% higher than $52 million of retail operating income in the second quarter of fiscal 2008.

Retail segment operating margin declined 30 basis points to 10.8% in the second quarter of fiscal 2009, primarily attributable to impairment charge related to certain retail store assets.

Regarding licensing, our licensing royalties for the quarter were $52 million, 2% below the prior year period as revenue from new American Living product licenses and growth and domestic Polo men's underwear royalties, offset a decline in Japanese product licensing revenues.

As a reminder, the decline in Japanese product licensing royalty is a function of our assuming direct control of certain product categories in Japan.

Operating income for our licensing segment increased 18% to $27 million in the second quarter of fiscal 2009, compared to $23 million in the prior year period.

The growth in licensing operating income was due to higher domestic product licensing revenues that more than offset a decline in Japanese product licensing royalties associated with the Company assuming direct control of certain product categories in Japan.

We ended the quarter, as Roger said, in excellent financial condition and with a very strong balance sheet.

At the end of the quarter, we had $510 million in cash, cash equivalents and short-term investments on the balance sheet compared to $626 million at the end of fiscal 2008.

Net of debt, we had $71 million in cash and short-term investments at the end of the second quarter, which compares favorably with a $53 million net debt position at the end of fiscal year 2008.

As a reminder, our current net cash position is after retiring the $197 million short-term loan that was used to finance last year's Impact 21 transaction, which we repaid in the first quarter of this year.

During the quarter we also repurchased approximately 1.7 million shares of stock for $118 million.

We currently have approximately $266 million remaining under our share repurchase authorization plan.

We ended the second quarter with inventory down 3% from the same period in the prior year.

Excluding inventory associated with Naigai transaction, and American Living inventory, our consolidated inventory declined 8%.

The year-over-year decline in inventory compares to our 10% sales growth in the quarter.

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

In addition to earnings growth, improved working capital management was an important driver in our 53% improvement in operating cash flow for the first six months of the year.

We also achieved a return on equity of 21% for the last 12-month period and our return on investment was 29% over the same time frame.

We spent approximately $29 million on capital expenditures during the second quarter of fiscal 2009 to support new retail stores, wholesale shop installations and other infrastructure investments.

So as Roger commented earlier, our results for the first half of fiscal 2009 are strong by any measure you would like to use.

And clearly ahead of our expectations.

Now that we've begun our third quarter of fiscal 2009, we already know the global retail environment has become far more challenging for us and for others.

Holiday sales are expected to be the weakest in several years and tourist travel has slowed considerably, as the dollar has strengthened and global economies have weakened.

The idea of a consumer-led global recession is increasingly becoming the consensus viewpoint of leading economists.

And if that were to become true, or if it is already true as some believe, it will certainly have an impact on our business.

For these reasons, we continue to be cautious with our sales, planning and inventory buying, as do all of our customers around the world.

As you saw in this morning's press release, we are maintaining our full year fiscal 2009 diluted EPA guidance to $4 to $4.10.

By maintaining guidance, we obviously expect a deceleration in our business the back half of the year relative to what we have experienced in the first half.

While we are not providing specific third-quarter guidance at this time, I would like to mention some of the factors you should consider as you think about our business for the second half of our fiscal year.

As it relates to our full year guidance, we currently expect net revenues to grow at a low single-digit rate for fiscal 2009, which compares to our prior guidance of low to mid-single digit increase in net revenues.

Our outlook assumes a deceleration in global retail sales growth in the second half of the year, relative to what we've experienced in the first half of the year.

And this is based on our most recent sales trend.

This would imply negative same-store sales trends for the remainder of the year.

With a lower level of sales growth, we are obviously also projecting a lower level of operating margin and profitability for our retail segment, as we remain committed to managing our inventory in line with softer demand.

The recent strengthening of the US dollar against the euro has also had an impact on our sales outlook for the second half of the year.

While this is expected to affect both our retail and wholesale channels, the impact is more pronounced for our wholesale segment given the size of our European wholesale business.

So these are the items that have affected our outlook for the remainder of the year.

It is important to also remember that we will continue to manage through a reduced level of domestic wholesale orders for the remainder of fiscal 2009, as we have year-to-date.

These lower-planned orders compare to relatively strong orders in the year earlier period.

In addition to managing through the reduced orders, we will also begin to anniversary the initial shipments of American Living, which commenced, I'll remind you, in December of last year to support the fill in of 600 doors across nearly 50 product categories for a February 2008 launch.

And we do continue to expect $0.08 to $0.10 of full-year dilution related to assuming direct control of our Japanese children's wear and golf apparel in fiscal 2009.

Finally, we also believe that with the favorable tax matters that we have settled today and our current geographic mix of income, our full-year tax rate will be approximately 35.5%.

At this point, we're not making changes to our capital spending plans for fiscal 2009, as our cash flows and financial position are well in excess of our near-term capital need and our projections -- and our projects are all, support our long-term strategic growth initiatives.

However, we have a re-evaluated project's planned for fiscal 2010 and expect to communicate our capital earnings outlook for fiscal 2010 on a future call.

So once again, we are obviously proud of the Company's second quarter and year to date results and we are pleased with our ability to maintain our earnings guidance in this environment, albeit with a weaker second half.

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

Operator, could you assist us with that, please.

Absolutely.

Thank you.

The question and answer session will be conducted electronically today.

(Operator Instructions) We'll first hear from Omar Saad, Credit Suisse.

Thanks.

Good morning.

Roger and Tracey, the stepdown implied by your guidance kind of raises some questions around and the nature of the business around the health of the luxury consumer.

We've been seeing what's been happening in some of the higher-end department stores, monthly comps in this environment and you obviously have a view, you have insight into even a more global view of that consumer.

Can you help us understand how that consumer is behaving?

What you're noticing and how they are behaving?

And is it different in the US versus Europe versus Asia?

And how you think though that that part of the business will play out over the next 12 to 18 months?

So, Omar, nothing on the second quarter.

Just get right into the go for it.

I love it.

I think your observations on the luxury consumer are correct.

While the last 12 months have been a difficult economic environment, I think the last 45 days have seen an extraordinary series of issues that have affected both the psychology of the luxury consumer, as well as their desire to spend on a discretionary level.

So whether it's the high-end large specialty stores in the US that have reported difficult September trends and will report, I guess tomorrow, their October trends or it's some of the smaller specialty stores, I think the luxury customer has contracted their spending in the last 30 or 45 days, differently than the last 12 months.

I think they're being more selective about purchasing.

I think they're looking for something new and novel and different.

And where you have it, they are reacting positively.

I think the United States was probably the first to feel that.

But the recent reaction of the luxury customer in Europe or even some of the markets like Russia, where there has been great turbulence in the stock market there.

I think the luxury customer around the world has become more careful with their spending, And even in the Middle East, which was riding the boom of very high oil prices.

I think a lot of that has made people at least psychologically more cautious.

So it is something new and different, unusual.

Spending continues.

But we're approaching the back half of the year with a sense that the luxury customer is going to behave differently than they have up until now.

So Asia, I would say Japan is feeling it more than the other parts of Asia where growth continues unabated.

And so it's really a country to country or market-by-market situation.

And that's how we're viewing our business and reacting accordingly.

All right.

And just one follow-up, if I may.

The comp spread between your factory outlets and your full price stores, do you think there's anything to read in that, vis-a-vis where customers are shopping for Polo Ralph Lauren?

The full price Ralph Lauren stores had a very strong July and August and then the back half of September softened.

And so what I just said earlier about unique and distinctive product on one end and perhaps value on the other end is sort of a barbell effect of what we're seeing with the customers.

We'll see what happens through the holiday shopping period.

We think we have good assortments.

We think we are well staffed and ready and to go.

We have compelling marketing.

But I think you're seeing value shopping, whether it's through our own stores or through our wholesale channel and distribution.

And then on the high end, you're seeing novelty with the luxury customer being the motivator.

So I think that is probably embedded in the second quarter numbers.

Great.

Thanks.

Congratulations on a very nice quarter.

You're welcome.

Thank you.

We'll now here from Liz Dunn, Thomas Weisel Partners.

Hi.

Good morning.

Congratulations on a good quarter in a tough environment.

I guess, can you give any sort of specific example about what you're seeing in the channel in terms of the deceleration in the various channels in terms of the deceleration in trend?

Maybe in your own retail stores, if you're not comfortable commenting on your -- your retail partners.

I think, Liz, what we've seen through any of the channels that we have distributed product is a slowdown in footsteps.

More than a reduction in average unit sale or a reduction in the number of units per transaction, both of which we track very carefully.

As a matter of fact, even in the second quarter, we increased our units per transaction and total value of transaction to offset some of the slow down in footsteps.

So I do think the issues the customers are reacting to is just less traffic.

And in some cases, that's a reversal of the tourist.

In some cases it's the local customer.

Clearly, the strengthening of the dollar or the weakening of the euro, depending on how you want to look at it, will affect holiday shopping patterns.

As you all remembered last year, the holiday season and key markets was distorted with traffic from international buying.

And I think that's going to be moderated.

So I think it depends on the format and the channel.

The one thing that we're also seeing is ongoing strength in the online shopper.

And I think you could see that in the 30% increases that we've run to date.

So some of the slowdown in footsteps may be transferring to an online customer.

And thank goodness, we've invested eight years in building that up into the powerhouse it is.

But we'll see for the holiday period, whether that's gift giving or whether that's self purchasing.

I don't think it's always clear to people how much of the November/December shopping trend is self purchasing, while somebody is in to buy a gift.

So it may be that the gift purchasing holds up better but there may be some reduction in self purchasing going on during that experience.

So that's our thinking based on our own results and through our third-party distribution.

Do you think with the slowdown in sales trends in the wholesale channel that your sell in, your inventory position at retail is still conservative enough to allow you to see what you've seen for the first part of this year which is improved rates of full price sell through?

Well, I think Jackie and the whole wholesale team, domestically for sure, worked closely with our partners to get the inventory in alignment with sales expectations.

Which as you heard Tracey and I talk about, did help improve our second quarter sell throughs.

We've continued to approach this time period with the same logic.

I don't think anybody has clarity about what November/December will bring.

But I think we feel good about the inventory we sold in and our expectations on sell throughs are still strong.

Okay.

And then is there anyway I can get an update on handbags?

I don't think you mentioned what was going on with the handbag business.

I think Fall was supposed to be the relaunch, right?

Yes.

I think that's a good question.

And then after Liz, we'll try to stick with one question per caller.

Okay.

I'm sorry.

Since you got three in, Liz.

The accessory business, I think, for us represents large opportunities.

And I think I did touch on the results of our footwear relaunches, both at the Collection level and at the Lauren level, and our growing excitement over the success of that.

Handbags is trailing that since we just got back the license or the rights to do business there at the end of the year.

And we probably will not launch women's handbags until late in calendar '09 or early 2010 in our efforts to get it right.

And I think the addition of high quality leadership there will help put us on that timetable.

And I think many of you have said the accessory business has been slowing and, therefore, does make it a more difficult category to enter.

And I think on some levels, it may have people looking for new resources or new product categories.

While it may be slowing, it's still an enormous merchandise category that has a lot of potential.

So timing of that is closer to end of '09, early '10.

And we think we'll be ready for exciting launches at that point.

Great.

Thanks.

Okay.

And we'll now hear from Robert Drbul, Barclays Capital.

Good morning.

Questions around the gross margin.

Can you maybe give a little bit more on the buckets over the gross market expansion.

How much was from the sales mix benefit or how much was the decline in purchase accounting and how much was just from the core business overall?

For the second quarter?

Yes.

I think while Tracey is getting the specifics, I would say that the interesting phenomena about the margin beyond purchase price accounting is the cost of goods efficiency that we're getting out of our manufacturing and our supply chain initiatives, which have continued to allow us to manage cost of goods in a world that was seeing some inflation and expense.

I think mix is also a part of it as is the full price sell throughs given the lower sell ins.

With that said, we can't predict the go forward positions other than the slowdown in demand worldwide has created some capacity opportunities in factories which have, in fact, helped manage what has been predicted as a cost-to-goods pressure problem for next fiscal year.

So I think all of the pieces and parts of that have helped both for the quarter and for the year-to-date.

I think we'll try to get you those numbers offline if we could so we can keep moving, Bob.

Okay.

And I guess hopefully, I get another question then, Roger.

Sure.

I only gave you half an answer.

Okay.

The other question that I have is when you look at American Living, can you maybe just discuss what you've learned so far and sort of as you anniversary it like the biggest changes that you're making going into next year?

Sure.

We launched American Living, as Tracey said, in 50 merchandise categories last February.

Which means that product had been in the design process for the 12 months prior to that.

So really, our concept and our product development was stretching out through '07, launched in '08.

So the first feedback we've received was Spring of '08, Summer and now Fall.

And I think there was a great deal of excitement by the JC Penney customer for both product, marketing and brand positioning.

I think we've learned a lot about their desire for novelty and fashion.

I think that we have learned a lot about the basics needing to be competitive with other core product categories on the JCPenney selling floor.

I think we've also realized that in a market that has eroded in Spring, Summer and early Fall, the JCPenney customer is very price conscious.

While they have reacted very well to product, design and quality, I think, we have to get some of those things in alignment and that will take place for this coming Spring, as it's the first time we've been able to react to what the customer has told us in Spring of '08.

So a lot of great things.

A lot of excitement.

A lot of learnings.

All of which will be baked into the Spring '09 and Summer and Fall products.

Thank you.

Bob, 100 basis points.

That was 100 basis--?

For the purchase price accounting.

Got it.

Okay.

Thank you very much.

Okay.

We'll now hear from Robbie Ohmes, Merrill Lynch.

Thank you.

Actually two quick questions, if I may.

The first question, Roger or Tracey.

The tougher environment that you're talking about to everybody heading into here.

As you plan more conservatively, are you looking for domestic core to go even more negative than it's been in the last few quarters, say relative to Europe?

Do you see Europe still holding up because you're in a rollout process there with Lauren, et cetera?

Or do you see Europe wholesale really stepping down?

And then the second question is just on Japan and China, how soon could both of those become growth markets, either with owned stores in Japan and maybe a strategy being executed in mainland China?

Thanks.

Well, let's deal with the first question first.

The projections we have going forward in our assumptions are based on the domestic businesses and I think you were referring to the wholesale side of domestic businesses.

Continuing in the core merchandise categories to be aligned with what domestic partners are saying about their sales trends.

There is no doubt that our sell ins this Fall have resulted in higher sell throughs and higher natural margins, I think all of which everybody is very excited about.

So we expect that to continue, and that is a part of our thinking.

I think the European business which for several quarters now people have asked about, and really had a very strong second quarter and we continue to believe that business has real growth.

I think the things that temper our view of Europe are either country-specific issues, where there has been a meaningful slow down in a country like Spain and/or exchange rates.

So the European story of growth and high quality growth continues to be exciting and obviously the Lauren launch will help.

But the exchange rates have changed pretty radically from this time last year.

As far as Japan and Asia, I go back to our headline strategy, which is, we believe, one day Asia will be a third of our worldwide business.

Europe will be a third of our worldwide business and the United States will be a third.

With Asia today being only 17% of our total, that implies really rapid growth over the near term.

And we think, while we're getting our sea legs under us in Japan, certainly China, which I didn't need a reminder of but when I was there several weeks ago, is an explosive opportunity as is Hong Kong, Macau, and all of the other parts.

But so is Korea, so is Vietnam, so is a lot of the countries in that part of the world.

So I think you'll see distortion in effort, in focus, in capital spending and resources in that part of the world for a long time to come.

And so we're actually quite excited about the long-term opportunity there.

Okay.

Next question.

So we don't run out of time.

Our next question will come from Adrianne Shapira, Goldman Sachs.

Thank you.

Roger, you pointed to very impressive inventory management across your own planning and with your customers.

I'm just wondering in light of the change in the recent weeks and trends, could you share with us any sort of cancellation in orders?

How they compare to historic trends in light of obviously a pretty sharp drop-off in business in recent weeks?

Yes.

I think that's a fair question.

And it's come up a lot.

Really for the holiday and us in Spring at this point, we really are working closely with our customers and our business is intact and we don't anticipate much change.

As you probably are aware, Adrianne, we work very closely with our customers in advance of markets opening to plan sales and receipts and inventories by door, by account.

So we're not really opening the door to a new line and hoping they like the line and having people come in and view it.

We have done extensive work with our customers around those.

So we are feeling good about where we are, our forecast for the balance of the year include our best thinking on that subject.

And at this point, we think we're fine.

Okay.

Thank you.

And if I may follow-up, Tracey, just a question on corporate expense.

It looked quite impressive, down about $5 million, a reversal from the last few quarters.

Can you give us any sense in terms of how we should be thinking about that line going forward and anything you see in in terms of opportunities in the back half there?

Well, we're obviously given the softness in sales.

We're obviously looking at controlling corporate expenses and managing corporate expenses on a go-forward basis.

And I'm looking at discretionary expenses and where we can cut back.

And we've done that.

I think if you look at the first couple of quarters, you will see that our expenses have been better than what has been anticipated.

So I would -- we certainly plan to continue to manage that on a go-forward basis.

Thank you.

Moving on, we'll now hear from Evren Kopelman, JPMorgan.

Good morning.

Thank you.

Very impressive quarter.

Thank you.

My question is, it sounds like your guidance assumes that the trends of the last 45 days continue into the next six months and my question is could you be too pessimistic?

Because October was an extraordinary month in the world financial market.

Where could you be wrong and you're being a little too pessimistic?

Maybe if you could touch on some categories or segments?

I think your question is what we hope.

Which is October was a tsunami of sorts both in the financial markets as well as with consumer spending.

I think having done this now for 30 plus years, I've never seen a world economy or financial crisis resonate on a worldwide basis with customers.

So the fact is, it's premature to decide whether October was an unusual month or more of a permanent trend.

As managers of the businesses, the only thing we can really do is make assumptions and use our best judgment to protect our long-term strategies and then adjust where appropriate to inventories or capital spending or expenses.

And if it we turn out to be wrong and the customer is more resilient, post election, there's a sense of optimism about change.

That would be good news and we'll be prepared for that.

But as stewards of the business, I think managing the balance sheet and managing the expenses and inventory, as we've done, and we have certainly intensified in the last twelve months is the right strategy for us to take and that's what we're going to do.

If I can add a quick one, are you assuming for the next six months the euro around the current level is about $1.29.

Yes, we are.

Thank you.

All right.

Operator, we'll take one more question because I think we're out of time now.

The question will come from Kate McShane, Citigroup.

Hi.

Good morning.

Thank you.

Good morning.

I was wondering if you could just remind us, can you lay out the new product introductions over the next two quarters.

For example, when the shipments of Lauren merchandise in Europe will impact your sales and if there are any new incremental new categories for American Living as well over the next two quarters?

Well, I think there's no new categories that are launching in the third quarter.

Right.

So any new product categories we're talking about really start in our fiscal fourth quarter.

The major one in that case is the beginning of Lauren in Europe.

We'll also launch Watches at the Basal Watch Fair in Switzerland.

But the products for that category will not start shipping until later in the Spring.

So it will not affect fourth quarter.

So really it's just the Lauren in the European arena that's incremental in the fourth quarter.

Offset by, obviously, the start up of American Living last year in the December through March period.

So not dramatic incremental launches in the fourth quarter.

Okay.

Thank you.

Thank you.

So with that, we appreciate everybody staying on.

It's obviously an important time of year for all of us.

Our second quarter and first half of the year results, in my opinion were extraordinary.

I think, we're well prepared and are taking the right action given the uncertainty of the consumer spending and the difficulty in predicting that.

But I think, we are well along the way in terms of managing all the manageable parts of our business and we're actually feeling like the back half of the year could be an opportunity to gain share in a difficult environment.

So thank you for your time and attention and we'll speak to you again in February.

And that does conclude today's conference.

Thank you everyone for participating.

Have a great day.