雷夫·羅倫馬球 (RL) 2009 Q3 法說會逐字稿

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

As a reminder today's conference is being recorded.

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

However at the end of the presentation we will conduct a question-and-answer session and 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 third 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 from the third quarter in addition to outlining our expectations for the remainder of fiscal 2009.

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

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

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

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

Thank you, Jim.

And good morning to everyone.

We're pleased to be reporting solid third quarter results today.

I believe these results demonstrate the resilience of our business during what has been the most challenging holiday season our company and the industry has ever experienced.

And they were achieved even as we continue to make important investments in our long-term strategic growth initiatives.

The proactive measures we've taken to scale back inventory levels across channels to manage our expenses, and to execute our day to day operations with a high level of precision and agility have helped to mitigate the dramatic pullback in consumer spending that occurred during the quarter.

I believe our year to date results with revenues growing 4% and diluted EPS up 19% confirm the vitality of our brand, the relevance of our strategy, and the world class capabilities of our management team.

Without this powerful combination, we would not have been able to achieve this level of performance in the face of such adversity.

Of course, we are not immune to the macro economic challenges and our recent business trends continue to be significantly affected by the global economic crisis that began last year.

The impact has resulted in considerable volatility with customers in all channels of distribution pulling back in their spending, and becoming increasingly selective when they do decide to shop.

And while we plan the year assuming a meaningful decline in consumer demand, the step function down that we and others experienced during the third quarter was beyond our original expectations.

As of now, our retail segment has been affected the most, particularly in the United States, but in other parts of the world as well.

As challenging as current circumstances are, I believe that we have operated from a position of strength and that our company is energized to manage through them.

We have a long term plan, a clear strategic road map to help us realize that plan, and the managerial talent to navigate that road map, and nearly $1 billion in cash on our balance sheet which we can use to support all of our efforts.

As many of you know, we have a three-pronged strategy to grow shareholder value over the long term that is focused on elevating our brand and is grounded in three key areas: growing our international presence, expanding our direct to consumer reach, and investing in new merchandise development and product innovation.

Our commitment to these three areas of growth remains unwaivering.

It is important for us to maintain our focus on the long-term returns we expect to achieve from them.

Of course, we balance this commitment with the realities of the difficult current operating environment, which will have an impact on how we prioritize the allocation of capital, inventory, and other resources to the various initiatives in the near term.

Growing our international presence would be the top of our list of priorities as we believe we are underpenetrated outside of the United States.

We've made a big commitment to the evolution of our Japanese business as we have taken control of the distribution of our largest product categories over the last year and a half.

During the third quarter, we expanded our target door program in Japan and those doors continue to outperform the broader market trends by a wide margin.

As a reminder, spring 2009 is the first season that we controlled the merchandise buy for the Japanese market, so we are still in the early stages of repositioning there.

Spring 2009 is also the first season the production of our products are integrated into our worldwide supply chain.

The response to the spring line opening, which aggregated the presentations of our core men's, women's and children's products, were encouraging.

Moving to Europe, our business continues to grow at a double digit organic rate, even as comps at our Ralph Lauren stores were negatively impacted by the global financial crisis and the pullback in tourism across markets.

After having successfully developed a strong (inaudible) presence in women's wear in Europe over the past several years we believe there is a large opportunity to attract new European customers to the world of Ralph Lauren with our Lauren brand, as we have successfully done in the United States.

We recently began shipping Lauren merchandise into selected European wholesale doors for spring 2009.

With respect to our direct to customer strategies, we've experienced a significant shift in comp trends during the third quarter.

The low teens comp decline compares to the 5% increase comp growth we achieved in the first half of the year.

And the mid to high single digit comps we've consistently achieved for the last six years.

Considering the unexpected severity of the market conditions, I believe our global teams have managed through them well.

In spite of weak traffic trends, our inventories were well managed and current at the end of the quarter.

The investment we've made in Ralph Lauren .com has enabled that emerging direct to consumer channel to flourish in terms of sales and profits, and we continue to draw new domestic and international visitors to our site each month.

Moving on to our last long-term strategic initiative, our commitment to new merchandise development and product innovation, we have a strong heritage as the design-led innovator and our new products have been a critical driver of consumer demand for us.

As you know, we offer premium products across a diverse array of brands, distribution channels and product categories.

Our lifestyle positioning is clearly understood by our various customers and we believe that it resonates with them strongly, which along with the quality of design and fabrication enhances the value of our products.

The uncertainty and volatility that has defined the last 12 months will most likely continue for the foreseeable future.

But it is times like these that really string the strong companies and strong brands.

By remaining true to our brand and committed to our long-term strategic growth initiative, ultimately I believe we are well positioned to emerge from this global recession even stronger.

This is a testimony to the hard work we've done to grow and manage the business over the last several years.

Today, we are far more diversified in terms of our geographic mix and the products we offer.

Our financial and managerial strengths have complimented our design and marketing excellence.

I believe that we have consistently made pro active decisions that while often difficult were the right things to do to bolster our long-term growth prospects, to maximize shareholder value and to prepare us for times like these.

We've made these decisions even as we have consistently funded investments for our growth as we are doing today in Japan and with emerging product categories.

As we think about the future, we will focus on remaining proactive about making prudent decisions to protect our brand, our profitability, and our growth initiative by continuing to control what we can.

Namely, by keeping inventories current, aligning our expenses with our revenue expectations, and prioritizing capital allocation.

This is part of our culture and our day to day management of the business.

We are confident that in tough times, the customer believes in our brand and the quality we offer.

Our history and our year to date financial results reflect this.

Now, I would like to turn the call over to Tracey to discuss the financial and operational highlights of the third quarter as well as our revised 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 third quarter net income and earnings per share performance.

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

For the third quarter, our consolidated net revenues were $1.25 billion, 1% below the prior year's period.

The decline in revenues primarily reflects a 13.5% reduction in global same store sales in our retail segment that was partially offset by higher wholesale revenues, principally as a result of assuming direct control of the distribution of our children's wear and golf apparel in Japan last August.

Our revenues in Europe were up double digits this quarter on a constant dollar basis, but the growth was entirely offset by the negative impact of the Euro.

The net negative impact of currency exchange rates on our total reported revenue growth for the third quarter was approximately 120 basis points.

Our gross profit rate improved 20 basis points to 53.5% in the third quarter, compared to 53.3% during the same period last year.

The expansion and gross profit rate reflects stronger margins for our international wholesale operations and the decline in purchase accounting amortization related to last year's acquisition that more than offset the lower profitability at our retail segment.

Our strategy to ship less inventory into most of our distribution channels resulted in better sell-throughs compared to the prior year, particularly at our wholesale accounts, and also left us with less excess inventory at the end of the season.

Some supply chain efficiencies also contributed to the gross margin expansion during the end of the quarter.

Inclusive of our continued investment in our long-term strategic growth initiative and reflecting our focus on expense management, third quarter operating expenses of $503 million were essentially flat with the comparable period last year.

Operating expenses were 40.2% of revenues, 40 basis points greater than the prior year period.

The higher operating expense ratio primarily reflects the decline in retail segment sales, but also the ongoing investment in products and geographic expansion and expenses at newly-acquired businesses.

All of which was partially offset by lower purchase accounting amortization, lower advertising and public relations expense, and lower stock compensation costs.

Operating income for the third quarter was $167 million, 2% below the prior year period, and our operating margin for the quarter was 13.3%, only 10 basis points below that of the third quarter of fiscal 2008.

The decline in the operating margin rate was primarily due to lower retail segment profitability that was partially offset by higher wholesale segment profitability and reduced purchase price amortization.

Net income for the third quarter of fiscal 2009 declined 7%, to $105 million, and net income for diluted share was $1.05 which was 3% below the comparable period last year.

The decline in our third quarter net income principally relates to our lower operating income, as well as to an effective tax rate of 33.4%, which was 230 basis points greater than the comparable period last year.

The higher effective tax rate for the third quarter fiscal 2009 was primarily the result of favorable tax audit settlements that occurred in the prior year period and that were partially offset by favorable geographic income mix this year.

Now, I would like to spend a brief amount of time providing more insight into our segment highlights for the quarter.

First, regarding our wholesale segment, sales increased 5% to $655 million.

Higher international wholesale revenues primarily related to the incremental children's wear and golf apparel distribution in Japan, higher shipments in Europe, and shipments of new products in the United States were partially offset by lower domestic shipments of our core men's, women's and children's wear products and the negative impact of foreign exchange.

As you will recall the lower domestic shipments reflect our planned reduction in orders from domestic wholesale accounts, which came as a result of the sharp slowdown in retail business trends that began in late 2007.

Consistent with our experience during the second quarter, and as I mentioned earlier, the recalibration of what was shipped resulted in improved sell-throughs and less excess inventory at our wholesale accounts during the third quarter.

Our planning teams are important strategic partners as we execute our business in the context of such uncertainty.

These teams work to ensure that our brand and our business objectives are inextricably linked and protected.

This means that as we proactively plan to have less inventory in the marketplace, we are still able to represent the world of Ralph Lauren with a focused mix of luxury, novelty, and key items that deliver an exciting message and offer broad appeal.

I believe our execution at retail, which is supported by our field organization, helped to distinguish our key item strategy this holiday season and supported our outperformance at many accounts.

From a category perspective, in the United States, we continue to see progressive improvement in women's wear, thanks to more focused assortments built around iconic key items, especially sweaters and knits, and our Lauren denim and active offerings continue to build momentum.

Our Chaps products were strong across all categories during the quarter and despite the challenging environment, the momentum behind Chaps continues to be solid.

And our domestic wholesale children's wear business continues to benefit from fewer, meaningful deliveries that not only offer more strong floor presentations, but are also yielding better sell throughs.

In Europe, sells of our core men's and womens' Blue Label merchandise were strong and we continue to experience solid growth for our you luxury apparel and accessories.

We had good sell-throughs at major European wholesale accounts during the quarter, although Spain continues to be a weak region in general for sales.

Roger mentioned, we began shipping our Lauren product in select European doors.

We did have one shop opened during the third quarter in the UK which experienced strong selling results.

In Japan, our wholesale volume grew with the incremental sales of children's wear and golf apparel this year, although sales of our other products declined in Japan during the quarter, given the challenging department store environment.

Our third quarter wholesale operating income of $130 million was 24% higher than the prior year period, and our wholesale operating margin was 19.8%, 320 basis points greater than the prior year's operating margin.

The improvement in wholesale profitability was primarily due to higher international revenues, and a decline in purchase price accounting associated with last year's Japanese acquisitions, which were partially offset by expenses at newly acquired and emerging businesses.

Having less excess inventory in the channel also contributed to better wholesale profit margins.

For our retail group, third quarter sales declined 7% to $547 million.

Overall, comp store sales were down 13.5%, or 11.4% in constant currency, reflecting a 21.7% reduction at Ralph Lauren stores, a 9.1% reduction at factory stores, and a 17.2% reduction at Club Monaco stores.

Our third quarter comparable store sales results reflect significantly lower traffic levels for both local and tourist customers at most of our retail formats worldwide, with our European factory stores being a notable positive exception.

RalphLauren.com sales were up 15% over the comparable period last year, a stand-out performance in absolute terms and certainly relative to industry trends for the quarter.

We opened five new stores and closed one store during the quarter, ending with 332 directly operated stores globally.

Retail operating income was $58 million in the quarter, 39% below the $94 million of retail operating income in the third quarter of fiscal 2008.

The retail segment operating margin declined 550 basis points to 10.5% in the third quarter of fiscal 2009, primarily attributable to the decline in customer traffic and higher promotional activity across all of our retail formats.

Licensing royalties for the quarter were $50 million, 9% below the prior year period as a decline in Japanese product licensing revenues related to children's wear and golf apparel, and partially offset by increased revenue from domestic product licenses, primarily new American Living product licenses.

Operating income for our licensing segment increased 8% to $28 million in the third quarter of fiscal 2009, compared to $26 million in the prior year period.

The growth in licensing operating income was due to the higher domestic product licensing revenues and a decline in purchase accounting and amortization.

We ended the third quarter in excellent financial condition with $880 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 $461 million in cash and short-term investments at the end of the third quarter, which compares favorably with the $53 million net debt position at the end of fiscal 2008.

We had no share repurchases during the quarter, as our focus has been on cash conservation, given the current market environment.

Therefore, we continue to have approximately $266 million remaining on our share repurchase authorization.

We ended the quarter with inventory up 1% from the same period in the prior year.

And excluding inventory associated with the Nigi transaction, our consolidated inventory actually declined 3%.

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

We achieved a return on equity of 19% for the last 12 months, and a return on investment was 28% over the same time frame.

We spent approximately $45 million on CapEx during the quarter, and -- to support new retail stores, wholesale shop installations and other infrastructure investments.

Indeed, our results for the first nine months of fiscal 2009 have proven to be resilient.

We proactively plan for a tough retail climate by controlling what we could.

We managed all elements of working capital, inclusive of inventory and receivables.

We focused on expense management.

We conserved cash.

And we provided the customers who did shop our stores and Internet sites with our normal selection of high quality timeless products.

However, the continued rapid deterioration in the global economic environment which intensified in our third quarter beyond our expectations, and is having a negative impact on our business trends in the fourth quarter to date.

As a result, as you saw in this morning's press release, we are updating our full-year fiscal 2009 diluted EPS guidance to $3.85 to $4.00, from our prior guidance of $4.00 to $4.10.

With this updated guidance, we now expect net revenues to be flat to down low single digits compared to fiscal 2008, and that compares to our prior guidance of lower single digit increases in net revenues.

Our outlook assume the continuation of the negative same store sales trends that we experienced in the third quarter into the fourth quarter, as well as our most recent sales experience in the fourth quarter.

With the lower level of sales growth, we would also expect reduced profitability for our retail segment, as we remain committed to managing our inventory in line with the softer demand.

I would also like to remind that you we will continue to manage through a reduced level of domestic wholesale orders for the remainder of fiscal 2009.

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

In addition, we are now anniversarying the initial shipments of American Living which commenced in December, 2007, to support the fill-in of 600 doors across nearly 50 product categories for the February [2010] launch of American Living.

These revenue dynamics are also expected to have a negative impact on wholesale segment operating profit in the fourth quarter.

Foreign exchange translation will also negatively impact our results in the fourth quarter, as the euro is anticipated to be 16% weaker than during our last year's fourth quarter.

The widening of our EPS guidance range for fiscal 2009 primarily relates to the increased volatility in our retail segment and with the foreign exchange rate volatility.

And while I know we have historically given guidance for our next fiscal year on this February call, at this point there is a tremendous amount of uncertainty regarding how long the current retrenchment in consumer spending will last or how much additional deterioration in personal consumption may occur.

Due to this uncertainty, and the subsequent difficulty in forecasting with any degree of comfort, we will not be providing specific fiscal 2010 guidance on today's call.

What I will say, however, as you might well manage in this environment, is that we will continue to work closely with our wholesale customers, retail buyers to recalibrate sales plans and inventory levels to account for reduced customer traffic.

As a result, we are expecting that net revenues next year will be slightly below fiscal 2009 levels.

We are also expecting a net negative impact from foreign currency translations as we are experiencing in the second half of fiscal 2009.

And as we continue to manage the things we can control, we are also prioritizing our capital allocation as Roger said, to reflect a proper balance between near term market reality, and our long-term growth objectives, which should result in a moderate reduction in capital spending next year.

With that, I will conclude the company's remarks and we will open the call up for question and answers.

Operator, could you assist us with that, please?

I certainly can.

Thank you.

The question-and-answer session is conducted electronically.

(Operator Instructions) We will pause for just a few moments to assemble that queue.

First off we'll go to Liz Dunn of Thomas Weisel Partners.

Hi, good morning.

I guess just a little bit more clarification on the retail business.

What was your gross margin experience in the quarter?

I mean obviously it was down, but if you could share the magnitude.

And what has been your philosophy on how to manage that business, markdowns in the retail business, both full price and the factory business?

Thanks.

Liz, this is obviously Roger.

We said in the script that the trend going into third quarter was plus [five] comp and obviously the trend in the third quarter itself was down, so the slowdown in consumer spending was quite rapid in the later part of September, and then on through the balance of the holiday shopping.

I think what we would say to that is that the highest level of price point, as you certainly saw with other retailers, the customer was the most reluctant, and then as you worked down through different merchandise price points and different product categories, some of that hesitancy was moderated.

So as we looked at the October, November, December period, our belief is that there are customers still looking for our products at the full price, and so I would attempted to manage through the inventory challenges and the sell-through challenges by an item and classification level as we worked through each of the formats, whether it is Ralph Lauren store, the factory stores, or whether it is RalphLauren.com.

The other factor that is imbedded in those numbers was a dramatic fall-off in the international shopper coming into gateway cities against last year's very high amount of international shoppers.

So as we were dealing with both the domestic fall-off and the tourist fall-off, I think we tried to manage the margins, the markdown cadence appropriately to end the quarter clean, which is what we've done.

So obviously merchandise margins were down as a function of more markdowns.

But somewhat less than they might have been if we didn't have the supply chain initiatives that we had in place to mitigate some of it.

So with that kind of deceleration in sales, an 18-point trend change, I think there is no doubt you will end up with more merchandise than the customer wants and that's what we had to clear through before the end of the quarter.

And Liz, this is Tracey.

Just to add on to what Roger said, I mean you can think of -- we talked about 550 basis points decline in operating margin for the operating segment, about two-thirds would be gross margin roughly with the expense deleverage.

That's helpful.

Are you trying to rely more heavily on the factory channel to clear going forward?

And how is your inventory position specific to your retail stores?

Well, we ended the quarter online with our expectations in all of the retail channels.

Obviously, we used the factory stores to clear excess or wholesale, retail, and RalphLauren.com.

We have a very well-run, very successful factory business.

And it is a piece of how we clear excess merchandise, whether it is in the United States, Europe, or we have in fact opened a couple in Japan, to deal with the excess that we have over there relative to the acquisitions.

So it is an important piece of our overall strategy.

Okay.

Thank you.

Good luck.

Thanks, Liz.

Thank you.

And next we will hear from Omar Saadd with Credit Suisse.

Thanks, good morning.

Tracey, I just wanted to clarify a comment you made at the end of the call, around the fact that you guys are not going to provide FY '10 guidance, given the uncertainty and lack of visibility, which is understandable.

But I believe you said something along the lines that you are expecting and kind of planning inventory appropriately, net revenues next year to be slightly below '09 levels.

And kind of given the implied guidance for the fiscal fourth quarter on the top line being down well into the double digits, can you help us understand how you're thinking about how the top line will evolve for you guys over the next six to 18 months?

Well, that's -- let me talk a little bit about the fourth quarter or the fiscal 2009 guidance.

This is just to share a little bit of clarity on that, because other than what we have provided, Omar, on fiscal 2010, we're really not prepared to share much more than that.

Last year, we had -- we are anniversarying a fair amount of American Living shipments.

And this is really the first quarter where we have more American Living shipments from last year than what we are experiencing obviously -- we have more American Living shipments from last year than what we had this year.

So from a wholesale perspective, we have seen a benefit of American Living shipments in the first three quarters that we're not seeing in the fourth quarter of this year.

So that is impacting us in the fourth quarter relative to the first three quarters.

We're still planning to have our domestic business down as we have in the first three quarters of this year as well, so that is impacting us in the fourth quarter.

And a continuation of the negative retail trends that we're seeing in the fourth quarter.

So last year, in the fourth quarter, you may recall that our retail comps were almost 9%.

We had a very strong fourth quarter, fiscal 2008, that we are anniversarying.

So all of that is impacting us as it relates to the fourth quarter and obviously our fiscal 2009 full-year results.

We are still migrating through our plan for fiscal 2010, but as we look at the first two quarters, and the strong performance that we have had the first two quarters, clearly if you think about the retail environment and what we're experiencing, it would suggest that planning sales volume down is the prudent thing to do, and that is certainly what we are doing for next year.

Beyond that, we're really not prepared to share anything as it relates to fiscal 2010, as we are still in our planning stages, as it relates to that.

Okay.

And then on the SG&A line, I noticed that your dollar spend was down for the first time, at least as far back, year-over-year as far back as my model goes.

And philosophically, sacrificing, how do you feel about sacrificing the near term to continue to invest for the long term, or the need to continue to invest, or is this an environment where it is really not worth making some of the investments that perhaps historically has been worth -- have been worth doing because the return is not there?

Omar, let me try it this way.

If you look at our performance year to date, and you look at the guidance Tracey gave, we have basically forecasted to hit the guidance we gave you a year ago February.

That is despite the unbelievable turbulence in the market, the exchange rate issues and all of the other things you all know well.

And nevertheless, with investing for the future being a big part of our success, we are going to more or less hit the guidance we started with a year ago, and I don't know many companies who can say that.

Having said that, on the go forward basis, '10 and beyond, we are going to continue to invest in those things that we think support our long-term growth initiatives, and will be much more diligent in scrutinizing those things in the short run that may not be as critical.

Because there is no doubt that we will adjust capital inventory expenses somewhat for the short term, but I think we have prepared ourselves with the balance sheet strength we have, with the way we've managed the business, to not take our eye off, or take our foot off some of the long-term opportunities that I think when this economic turbulence is over, we would be remiss if we hadn't continued to invest in.

So there is no doubt the short term we will see some cut-backs in those things that are optional, but the major initiatives which we've continued to invest in, which include our international expansion and include our direct to consumer, and new product categories, we're going to continue.

Got it.

Thank you.

Moving on we will take our next question Robert Drbul with Barclays Capital.

Good morning.

Good morning, Robert.

A question that I have is on the purchase price accounting, how much did that help you on the comparison and the wholesale segment?

And sticking with the wholesale segment, when you look at spring 2009, versus spring 2008, is there a dramatic change in door count domestically that you're selling into?

Well, Tracey will give you the purchase accounting.

The answer on the door count is no.

We are more or less in the same door count, whether it is the JCPenney, American Living, Kohl's, where we may be in some more doors because of their expansion, or the acquisition of some additional doors they've made, and then the main line department store, our door count is basically flat.

As you all know, we're not in every door of every one of our customers, and have been selective over the years of which ones we've participated in, but I think the broad-based answer would be we're in the same number of doors that we would have been in the spring of '08.

Tracey do you have the purchase --

Bob, on the purchase accounting, you're talking about on the margin line?

Yes, the wholesale segment, yes.

On the wholesale segment was about 20 basis points.

Okay.

And then one quick question is on the acquisition, Nigi, how much accretion did you get from that acquisition this quarter?

Well, I think if you remember when we announced that transaction in the summer, we told you it would be $0.09 dilutive, so that $0.09 dilutive was after we had given you the original guidance for the year.

So for us to still deliver the year that we're forecasting, with that being a mid-year decision to add $0.09 dilutive, I think that is a pretty good deal.

We think it will be accretive next year, but it continuing to be through the balance of this year, a short-term dilutive acquisition.

Thank you very much.

You're welcome.

And Kate McShane with Citi Investment has our next question.

Good morning.

Good morning.

How much do you Lotrel business do you think was hurt by the department stores during the holiday season.

That's a good question.

We have often wrestled with that as the main department store distribution had desires to close out inventory.

I think it had some impact.

But I'm not sure that I would say that was the headline issue in terms of the negative comps.

We did suffer a fall-off in tourism in key cities even in the factory business which is not an insignificant part of some of the stores and regions.

And I think the overall just cutback in consumer spending would have been the second issue.

In the past, we've looked at gas prices because as they've gone up and a lot of our factory stores, you have to drive to, we have felt the impact of rising gas prices.

But obviously, with gas falling through the fall and continuing to be lower, we haven't seen the boost that in the past that would have given us some extra lift.

So I think it was a factor but not a major factor.

And then can you give any more detail behind the sequence of what comps look like at outlets?

Were they better in December than they were in November?

I don't think we break out the comps by month.

I think the comps in the alled business sort of moved up and down in a band throughout the quarter, really post the late September period.

The December business, as most of you know, started with a strong Thanksgiving, then there was a couple of weeks in between where it was a little softer, and then as we got close to Christmas, the pre-Christmas and the Christmas to new year's business was quite strong.

So it was perhaps the tale of two cities in the month of December itself.

Okay.

Thank you.

And if I can squeeze in one more question.

What are you seeing with your wholesale customers in terms of cancelling orders?

How did that transpire during the fourth quarter?

Did you see a cancellation of orders?

And do you expect more cancellations or less cancellations in the first quarter, or inventories at wholesale better sized than now?

Well I think I would answer it this way.

Our inventories at retail, meaning in the wholesaler's channel are in line with our plans, so we don't -- we didn't end the fall season overinventoried in our customers.

And our inventories are in line.

That is really a function of, I think what Tracey mentioned, was a very thoughtful and well-managed pre-planning process that we do with our retailers, to try to align sales expectations with merchandise commitments.

If we do that properly, and then sales come through as expected, we don't have the imbalances, so we've started with way back when the fall orders were placed doing that, I think we've done that very well, for spring, and with about half the fall orders for '09 in, and we continue to work closely with the retailers on planning those inventories, which of course, they're planning conservatively.

There is no doubt that some of this fall heavy promoting in the industry was a function of slower sales, but some of it was trying to get inventories in alignment which I think as '09 plays out, retailers won't have that problem as much.

It will just be in an effort to stimulate demand.

So I don't really anticipate that being a big issue for us.

I think that the [onus] is on us and the retailers to plan properly and perhaps conservatively from the beginning.

Can we have the next question?

Certainly.

We will take our next question from Jennifer Black.

Good morning.

And let me add my congratulations as well.

I wondered --

Thank you, Jennifer, but you're the first one to offer congratulations, so you're adding it to nothing.

I thought other people have congratulated you, because you performed amazingly in this type of an environment.

Okay.

Well, with the tone of much less conspicuous spending, it seems as though your higher end brand may fare better than the competition, and I just wondered if you can speak to that.

Do you feel like you're gaining market share from some of these other more conspicuous brands as people tone down their purchases?

And then, too, I just wondered if you could talk about the designer world.

I've heard that designers are lowering price points by sourcing in different countries and that may not apply to you.

So if you could speak to those two things, that would be great.

Okay.

Well, let me start with the high end customer I think is feeling two things.

One, the market has been so volatile and obviously down, is both a real reduction in net worth or income, and there is the psychological impact of all of that.

And I think the highest end customer is feeling it the most, either because they don't have as much money as they had a year ago, or they don't feel like spending it.

And I think most of our products are discretionary.

And I think the customer has chosen at I highest level to delay or be more selective in their purchases.

I think the nature of our design, the fact that our product is more timeless, I think the fact that our products over the years have been more investment-like, gives us an advantage as that customer is selective.

But I think at the moment, that customer is a bit frozen in their willingness to spend.

And I think that is going to play out for a while.

I think we've talked about in the past, we today manufacture in almost 45 countries.

So we are not looking to move product to new geographies or trade down quality or fabrications.

Because we have a portfolio of products that range from the highest end down to more mainstream, I think there will be a different emphasis on where the customer wants to get a piece of Ralph Lauren.

But we're not going to look to trade down any of the individual brands or product categories or resource them from where we've been in the past.

Okay.

Great.

Thank you.

Our next question comes from Stephanie Wissink, Piper Jaffray.

Hi, this is Stephanie for Jeff Klinefelter.

Thanks for taking our question.

I would like to focus on the wholesale and retail if I could.

Could you walk us through an example the currency exchange in your hedging activities work through the model?

And could you give us insight into the regional performance both in Europe and Asia?

Thank you.

Yes.

Well, we -- in terms of -- let me start with the hedging activity.

We hedge inventory purchases, so we hedge our transactions related activity.

And so we do get some benefit in our gross margin performance, or detriment in our gross margin performance, depending on whether or not -- how our hedges perform during any particular period, and that's all called out in our financial statements.

As it relates to the foreign exchange, I mean we called out what the impact of foreign exchange was on our earnings in my portion of the script, Jennifer, so I'm not sure what specifically you -- your question is related to.

But from a revenue standpoint, our revenues were down 1.4%.

Actually, foreign exchange was a detriment this quarter, primarily related to the Euro and again was actually a slight benefit to us, the net impact of us, if you adjust that out, our revenues would have been down only .2%.

So we actually would have performed better year-over-year from a revenue standpoint without the benefits, or without the foreign exchange impact.

So I think the complexity of this is maybe captured when you think about from the beginning of the manufacturing cycle to the translation back to our balance sheet, we buy in one currency, we then sell in another currency, we then translate those results back to US dollars from all over the world.

So in an effort to forecast the impact of currency, plus or minus, you're really dealing with multiple currencies at multiple stages of the supply chain, wholesale and retail activity and then the conversion back to US dollars on the balance sheet.

So one of the strategies we have, which is to grow international business, which has worked so well for us, and will continue to be a strategy, it does add complexity in terms of the impact of variety of currencies around the world, all running through different parts of our P&L.

So we will continue to try to make that as clear as possible, as we navigate through this ever-increasing complex model.

Thanks.

That's helpful.

Just more detail on the regional breakout.

Europe and Asia, if you can.

Thanks.

Yes.

I think for the last five or six years, the retail results in Europe have exceeded the strong US rates.

But I think in the third quarter of this year, we did see a pull-back in spending in Europe, not too different than what we had in the United States in our Ralph Lauren stores, the factory stores in Europe did perform positively, and better than the US, and we don't have a lot of our own retail yet in Japan or Asia to be a meaningful number at this point.

Do we have another question?

We're slowly running out of time.

So we could ask if you really limit yourself to one question as we go forward.

So we will take the next question, please.

Wonderful.

We will move on to Adrianne Shapira, Goldman Sachs.

Thank you.

Roger, as you said, you've done an impressive job of controlling what you can, and it seems that if you cut back dramatically on wholesale inventory before retail softened in the US, but following up on your comments in terms of what you're seeing in Europe, that doesn't seem to be the case with wholesale still growing.

And yet we've started to see some softness in retail.

Perhaps, give us a sense, perhaps understand that rationale.

Is it a function of door count, or why a difference in strategy there?

Well, I think the wholesale business in Europe, as I said on my opening remarks, in constant currency was up double digit in the third quarter.

And I know we've talked in the prior couple quarters about whether we had seen a softening there.

And we have continued to outperform in my opinion the market and the competition.

So I think Europe has caught a lot of the same economic cold and is beginning to see the unemployment numbers rise and some of the banking issues, we are thinking about next year more conservatively for Europe, but I still think it has growth opportunity relative to the trends in the US.

Some of that is the way we positioned the brand.

And our distribution strategy, and I think on top of next year, we've got Lauren coming in as an incremental business in Europe, which we did not have there, and as we've talked about, as of February launch, in about 100 doors.

So as we've continued to dimensionalize our business in Europe I think we've gotten positive sell-throughs and positive responses, but we are anticipating a slowdown against that run rate in the new year.

The retail slowdown in the Ralph Lauren stores in Europe was a combination of the economic issues and also a pullback in tourism, because a lot of the business in Europe in the major capitals over the years has included an important part of the Russian tourists, and other parts of eastern Europe, which went through their own turmoil in the fall and we're seeing a fall-off in their purchasing as well.

So I think we're going to take the next fiscal planning cycle with a more conservative view than we've had in Europe, but still probably stronger than the US.

Okay.

Thank you.

And then I just have a follow-up, a quick question for Tracey.

In the retail performance, in the face of challenging retail comps, just perhaps give us a sense how were you able to control expenses so well?

And if we assume that retail comps remain challenging in the fourth quarter, to get to that implied fourth quarter guidance, should we assume continuation of that retail expense control?

Well, I think Adrianne, we said that actually, we delevered -- while we had overall good expense control in the quarter, we actually saw some deleverage in our retail segment in terms of expenses.

And that doesn't mean that we certainly didn't have expense control in retail, but obviously given the tremendous negative comp performance that we had in the segment, it was hard to offset that with expensed leverage.

So we did see deleveraging of the expenses.

Certainly, our retail, we are focused on overall from a company standpoint, looking at expense management in the discretionary areas that we can, and other areas as well.

Pulling back on travel, and other areas of control to try to mitigate the impact of lower sales, which we will certainly continue to do into this quarter as well, and all of that is reflected in the guidance that we've provided for the year.

Next question, please?

We will go to David Glick with Buckingham Research for our final question.

Yes.

Good morning.

Roger, just wanted to get your sense -- I'm trying to understand sort of the dichotomy of the performance of your brands and categories in your wholesale accounts, at the retail level.

It seems like your sell in trends were not as good as your sell outtrends and obviously your wholesale accounts have pulled back earlier in the cycle, and I'm just wondering, while it may seem counter-intuitive, whether it is even possible, as you head into next year, to see the same or even better trends in terms of a sell-in to your wholesale accounts, based on the outperformance of our brand in department store, maybe some replenishment opportunities.

And I'm just wondering, is that kind of a silver lining in here and perhaps an opportunity, outside of the American Living, since you're obviously up against a pipeline fill there.

But I just wanted to get your comments on that and I think it would be helpful.

I think you're right.

Our selling and planning of that in partnership with our retailers is more conservative, and I think our field organizations and our wholesale people worked very hard to improve the sell-throughs.

And I think probably counter to most people, our margin improvement year to date and third quarter, which is not insignificant in this environment, in a large part has to do with those kind of improved sell-throughs.

At the end of the day, if there is too much Ralph Lauren product in the pipeline and it has to be sold at distressed price, that is not in the long term interest of the brand.

We have continued that thinking in through the spring and summer selling of 2009, partly because that is proven to be successful and partly because I think everybody is cautious about consumer reaction.

That may in fact give us an opportunity to pick up share.

We will see how that plays out over time.

But I think our efforts over the years to invest in capital, invest in marketing, invest in insource support, in support of that sell-in, is partly responsible for the improved results.

So we think that will continue.

We think the conservative planning, justified itself with the results, and as we work through the next 12 months, I think that is going to be the hallmark, which is carefully managing supply and demand in a way that our brand can win.

The other issue which you mentioned which is basic stock replenishment, we do see as an opportunity.

With we have iconic products.

We have replenishment item in all of the key brands and all of the distribution points.

We have the infrastructure and the balance sheet to support that.

And we think those retailers, once they get their inventories in alignment, will begin to more actively participate in that, because those are some of the highest margin sales they have, and it behooves them to be in stock on basics, even if fashion is being shunned by the customer.

So I think you're right on both counts.

It represents opportunities for us, and we're going to try to take advantage of both.

So with that, I thank you all for listening.

It is obviously been a very interesting first nine months of the year.

We are pleased with where we are and how we're positioned.

What will prove to be a dynamic next 12 months.

We will talk to you at the end of the fourth quarter.

Thanks.

And that does conclude today's conference call.

Thank you all for your participation.

And have a great day.