雷夫·羅倫馬球 (RL) 2009 Q4 法說會逐字稿

Good morning, and thank you for calling the Polo Ralph Lauren fourth 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 will turn the conference over to Mr.

James Hurley.

Please go ahead, sir.

Good morning, and thank you for joining us on Polo Ralph Lauren's fourth quarter and full year fiscal 2009 conference call.

The agenda for the call today includes Roger Farah, our President and Chief Operating Officer, who will give you an overview of the year and comment on broader strategic initiatives, and then Tracey Travis, our Chief Financial Officer, will provide operational and financial highlights from the fourth quarter and full year in addition to reviewing some expectations for fiscal 2010.

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

As 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.

Today's discussion also includes non-GAAP financial measures.

A reconciliation between reported GAAP and adjusted non-GAAP financial measures can be found in our earnings release, a copy of which is available on our investor Web site and the SEC's Web site.

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

Thank you, Jim, and good morning, everyone.

We are pleased to be reporting strong financial results today.

Our fiscal 2009 revenues rose 3% and our adjusted earnings per diluted share increased 12%.

These results were, in fact, stronger than our initial expectation for fiscal 2009 which we articulated in November of 2007 when the world was clearly in a much different state.

We achieved these results even as we absorbed dilution related to the acquisition of our childrenswear and golf apparel license in Japan and as we continued to make significant investment in long-term initiatives and as global economic challenges intensified to unprecedented levels in the back half of the year.

Our sales and margins have held up remarkably well across channels and geographies as we gained market share around the world and took definitive action to protect our profitability.

We also ended fiscal 2009 in strong financial condition, with an excellent balance sheet characterized by more than $800 million in cash as well as managed inventories appropriately.

I believe our fourth quarter and full-year results demonstrate that we are navigating well through tremendous uncertainty.

We are able to do this as a result of the strategic diversity of our operating model, the power of our brand portfolio, the desirability of our products and the high level of operational control we have over our businesses.

Fiscal 2009 was really a year of two halves for us.

In the first half of the year we were prepared for weaker consumer demand trends thanks to the proactive measures we have taken to ship less product across our various channels of distribution after the first signs of a consumer slowdown that emerged in late 2007.

As a result of our actions, our sales and margin trends in the first half of fiscal 2009 were stronger than our expectations.

We gained market share at our core wholesale accounts, we successfully launched the American Living brand across more than 40 product categories, and we maintained our consistent mid-single-digit comp rates at our retail stores while preserving our profitability.

The unprecedented economic challenges that emerged in September and impacted our second half of fiscal 2009 were clearly a game changer for all industries around the world.

The corresponding pull back in consumer demand trends came fast and hard and we were not immune.

Interestingly, it was the core luxury customer and tourist who retrenched the most.

For us that meant our retail comps reversed their consistent multiyear mid-single-digit growth rate and declined at a double-digit rate as traffic levels dropped significantly and the environment became extremely promotional.

The challenges at our retail store were balanced with the strength in other areas of our Company.

Our products continued to perform strongly with our various domestic wholesale partners, and RalphLauren.com and our European business continued to grow.

We also responded to the rapidly changing environment by implementing strong expense and inventory disciplines throughout the organization including a Company-wide restructuring effort in the fourth quarter which we expect to benefit from as we move into fiscal 2010.

Even as we manage through such unsettled market conditions, we continue to execute against our long-term strategic objectives in fiscal 2009.

The investments we make in our future growth initiatives are critical and we have the balance sheet and cash flows to continue to support them.

In fact, it is the strategic investments we made over the last several years to expand our direct to consumer reach, grow internationally, and develop new products that have helped us offset some of the impact of lower domestic shipments of our core products during fiscal 2009.

RalphLauren.com is a pillar of our strategy to expand our direct-to-consumer reach.

The site sales grew 19% last year, approximately four times faster than total online sales, and is in the ninth year of consecutive double-digit growth.

The investments we have made in RalphLauren.com which include buying back total control of the business two years ago, building out a dedicated fulfillment and customer care center last year, launching rugby.com last summer and driving traffic to the site through some of the most innovative marketing initiatives in our industry is clearly paying off.

We continue to invest in the technology supporting RalphLauren.com and to enhance the customer shopping experience whether through energizing the site with rich editorial content, launching iPhone applications or growing our mobile commerce capabilities.

We expect many years of strong growth from RalphLauren.com, particularly as we contemplate rolling it out globally over the next several years.

Europe was another area of remarkable strength for us during fiscal 2009.

We maintained double-digit constant currency growth throughout the year even as macro pressures intensified in the back half.

Of course, this growth rate is even more impressive given that we have grown our European sales more than five-fold over the last seven years.

We believe there is still much room for our wholesale and retail segments to expand their reach throughout Europe.

We are in the midst of a market redevelopment strategy in France which includes some high profile flagship store locations as well as revitalizing presentations of all our brands in many leading department stores.

We just introduced Lauren, our largest women's brand in terms of sales volume, into about 80 European doors.

The global potential is only just beginning.

We have only just begun to explore eastern Europe primarily through licensing partnerships.

The incredible strides we have made in developing our European business has been supported by an outstanding leadership team based in Geneva.

We also continue to make progress building our organization in Japan.

The childrenswear and golf integration that began in the second quarter of fiscal 2009 and that we knew would be dilutive this year has gone smoothly.

We are pleased to have all core apparel categories managed by our Japanese leadership team.

Our long-term strategy to grow our sales volume in Japan will be supported by elevating the brand and refining the merchandise strategies to be more in line with the approach that has worked so well for us in the United States and Europe.

We also intend to nurture underdeveloped product categories particularly women's wear, childrenswear and accessories by supporting shop refurbishments and improving our adjacencies and we are now able to present a cohesive brand statement across many products.

We are partnering with our wholesale customers to capitalize on additional collective growth opportunities.

In order to support our Japanese growth strategies we have begun to roll out a series of information technology upgrades that will continue through fiscal 2010 and support the consolidation and integration of what was previously three different organizations.

Some of the benefits we expect to realize as a result of the Japanese system upgrade includes better inventory allocation, improved fulfillment tracking and performance reporting, as well as greater supply chain efficiency.

Some of the most exciting news during the fourth quarter was that we have reached a definitive agreement to assume direct control of our wholesale and retail distribution in southeast Asia beginning January 1, 2010.

On that date, we will not only have the rights to control our distribution in the region, which includes China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Taiwan and Thailand, we also will assume responsibility for approximately 40 free-standing locations and 100 shop-in-shops.

Dickson Concepts International Limited, our licensee for the region, will continue to operate the business for the next seven months.

This transition of our southeast Asia business marks a stride forward with respect to growing our international presence, particularly as it relates to achieving our long-term goal of having approximately one-third of our revenue come from the Asia-Pacific region.

While this goal is approximately double the current penetration of our Asia-Pacific region to our total sales mix, the market growth dynamics are very compelling and among the strongest in the world.

Even though we've had a presence in southeast Asia with a licensing partner for more than two decades, our business in this part of the world is relatively small, approximately $150 million in retail sales across all eight countries in the region.

And it is compromised of only a fraction of our various brands and product categories.

We believe the potential for our brands in China alone is tremendous.

The Chinese appetite for global luxury brands continues to grow rapidly.

In fact, the Chinese consumers are already among the largest customers of many European luxury brands, most of which who have had direct control of their Chinese operations for several years.

The work we will undertake to develop southeast Asia is not unlike what we have done successfully in Europe and are currently doing in Japan, mainly elevating the position of the brand, layering in our luxury products, further developing our women's, children's, accessory categories and refining our wholesale and retail distribution.

This is clearly a meaningful investment for us, not only in terms of the financial resources required in the near term, but also the transformational impact this investment is expected to have on our long-term growth profile.

There is a tremendous amount of work to be done.

We are building a world-class greenfield organization in terms of people, processes and systems to support the retail and wholesale network of our stores and shops in the region.

The timing of the transition allows us to begin building our Hong Kong-based team that will manage southeast Asia and to plan for IT system implementation and store development initiatives ahead of going live in the region.

We expect our most significant investment spending to be concentrated in the next two to three years as we grow from a handful of dedicated employees on the ground today to a couple hundred employees over the next three years.

In conjunction with our accelerated investment to pursue market share gains worldwide, we continue to refine our global operating standards.

We are a complex Company with respect to the breadth of products we sell, the channels through which we sell them and increasingly our global reach.

Our bandwidth spans the world's premier fashion runways with our Ralph Lauren brands to the main streets of America with Chaps and American Living brands.

We not only design the product, we are sourcing it, flowing it around the world, marketing and advertising it and often selling it directly to the customer.

Now that we have considerable more direct control of the various aspects of our business worldwide, we are identifying and researching opportunities to evolve our core processes and the way we work across divisions, brands and regions.

These efforts are designed to enhance our performance in a manner that will allow us to drive greater efficiencies, and best leverage our considerable growth prospects.

During the fourth quarter, we took definitive action to reduce costs by restructuring aspects of our organization.

Actions like this are often difficult, but they are consistent with the evolution of our Company and the unprecedented economic challenges that is have emerged over the last year.

Our actions were primarily focused on our domestic retail and wholesale operations, areas where the business trends have been most negatively impacted by the slowdown in consumer spending and resulted in the elimination of approximately 500 people from our organization.

Having to reduce the work force is a painful consequence of the external environment, but I believe we made the best decisions that balance the near-term market realities with our commitment to our long-term growth objectives.

One of the most important learnings that has come out of the experience of our industry through the last year have been that brands matter.

Customers want brands they can trust where they know they're getting high quality merchandise that has enduring value to them.

This phenomena plays directly into our Company's historic strength not only for our core Ralph Lauren brands but also for Chaps and American Living.

Our sustained investment in product innovation and marketing and advertising to support all of our brands differentiates our Company, especially since we are leveraging our leadership in these disciplined across a wide range of target consumers.

As we sit here today, the global consumer (inaudible) is very tentative.

While sales trends appear to have stabilized they're at lower levels and traffic remains depressed.

When consumers do shop they're doing so with a fixed amount of disposable dollars and they are not spending beyond that limit.

We are also finding that demand is strongest for need-now, wear-now merchandise.

There is very little "nice to have" buying or purchasing ahead of next season.

As a result, we, along with our retail partners continue to be cautious with respect to sales planning, inventory planning, and receipt planning throughout the next year.

Regardless of the near-term market dynamics, we have a clear and compelling growth plan ahead of us.

Our goal is to enhance shareholder value through strategic diversification, and capital allocation that is meant to yield higher returns while mitigating risks over the long term.

As I highlighted earlier, we are leveraging our financial and managerial strength to opportunistically accelerate our investment in the development of our international markets.

We have a track record of success.

We have proven our ability to do so in Europe, this work is underway in Japan, and we are in the early planning stages for southeast Asia.

We are driving productivity from more established markets and product categories as we aggressively investment in underpenetrated high-growth markets and product categories.

Our financial and intellectual capital will be allocated accordingly.

Our fiscal 2009 results demonstrate we can take appropriate action to navigate through whatever headwinds come our way while continuing to protect our long-term strategic agenda.

The desirability of our brands and products around the world, the diversity of our business model across channels and geographies and the exceptional high execution of our management team contributed to our performance this past year.

Just as we took definitive action to protect our profitability in fiscal 2009, we will continue to be proactive in positioning ourselves to emerge from the near-term challenges as even a stronger global brand and Company.

Before I turn the call over to Tracey, Ralph and I would like to thank all of our employees for their hard work in navigating through this difficult environment.

Your talent and dedication has really made a difference.

Finally, a special thanks to Judith McHale who resigned from our Board of Directors yesterday due to her recent appointment and confirmation as Under Secretary of Public Diplomacy and Public Affair for the State Department.

Judith was a valued member of our board since February 2001 and provided us with tremendous insight and guidance during her tenure.

We all wish her great success with her new position supporting Secretary of State Hillary Clinton.

Now Tracey will report the results.

Thank you, Roger.

Good morning, everyone.

First, I would like to briefly discuss the impairment and restructuring charges that we incurred during the fourth quarter.

Then I will highlight for you the drivers of our fourth quarter sales and earnings per share performance.

My commentary regarding our fourth quarter results will focus on the adjusted results that exclude the financial impact of the impairment and restructuring charges we incurred during both the current and prior year period.

You can find the reconciliation tables that bridge our reported and adjusted results in the supplemental financial information we provided in this morning's press release.

I will end my prepared remarks with our outlook for fiscal 2010.

So beginning with the fourth quarter charges, the $48 million asset impairment charge we incurred during the fourth quarter was associated with the net carrying value of store-related assets.

It is largely a function of the economic environment and the impact it has had on current and expected sales trends at some of the Company's directly operated retail stores primarily in the United States.

We also incurred a $21 million charge related to Company-wide restructuring efforts that were undertaken to better align our expenses with the slowdown in consumer spending.

The restructuring charge was primarily related to the head count reductions Roger mentioned earlier, but it also included certain costs associated with a small number of store closings.

The combined impact of these impairment and restructuring charges on our fourth quarter diluted earnings per share was $0.42 and inclusive of some charges incurred in the second quarter of fiscal 2009, the full-year impact of impairment and restructuring charges was $0.49.

Now let me move on to the overview of the fourth quarter's financial results which, again, will be discussed on an adjusted basis and exclude the impact of the impairment and restructuring charges we just overviewed.

Consolidated net revenues for the fourth quarter were $1.22 billion, 1% below the prior year period.

The decline in revenues primarily reflects a 15.9% reduction in global same-store sales at our retail segment that was partially offset by higher wholesale revenue.

The net negative impact of currency translation on our total reported revenue growth for the fourth quarter was approximately 160 basis points.

Our gross profit rate declined 250 basis points to 51.8% in the fourth quarter, a function of lower wholesale and retail segment margins and 50 basis points of unfavorable foreign currency effect.

Adjusted operating expenses in the fourth quarter were flat with the comparable period last year, reflecting some of the benefits of our focus on expense management as we also continued to invest in our long-term strategic growth initiatives.

Adjusted operating income for the fourth quarter was $109 million, 27% below the prior year period, and our adjusted operating margin for the quarter was 8.9%, 310 basis points below that of the fourth quarter of fiscal 2008.

The decline in adjusted operating income and adjusted operating margin rate was primarily due to lower wholesale and retail segment profitability, and the net unfavorable effect of foreign currency translation, all of which was partially offset by Company-wide cost control initiatives.

Adjusted net income for the fourth quarter of fiscal 2009 declined 19% to $87 million and adjusted net income per diluted share was $0.86, which was 17% below the comparable prior year period.

The declines in net income and diluted EPS principally relate to the lower operating income discussed that was partially offset by a net tax benefit in the fourth quarter of fiscal 2009 which was primarily a result of favorable geographic income mix, restructuring and impairment impact and year-end adjustments impacting the quarter.

Before I move on to our segment highlights I would like to frame our better than expected fourth quarter earnings results for you relative to the guidance we provided back in February.

We experienced stronger performance across all income statement line items, although the net tax benefit, better profitability in our international operations inclusive of exchange rates and disciplined expense management were the primary drivers of the actual results exceeding our expectations.

Moving on to our segment highlights for the quarter, let's begin with our wholesale segment where sales increased 3% to $812 million, primarily due to higher international wholesale revenues related to sales of childrenswear and golf apparel in Japan and double-digit constant currency growth in Europe.

In spite of the challenging sales trends reported in the U.S., our core men's, women's and childrenswear products continued to outperform in their respective categories during the fourth quarter.

We transitioned to spring early and smoothly, and the currency of our leaner inventories along with the relevance of our brands and a focus on key items helped to drive our relative outperformance.

Men's wear continued to be more resilient than women's wear, consistent with the trend over the last several quarters although our Chaps women's sales remained very strong.

Our American Living volumes were down this quarter as we anniversaried shipments to support the brand's launch last year and this is a trend we expect to continue throughout fiscal 2010.

As you may have heard from JCPenney earlier this month, American Living is experiencing better retail sell-throughs this spring based on the adjustments we have made to the merchandise assortments and the inventory level.

In Europe, the United Kingdom was strong for us across al product categories during the quarter, but in women's wear in particular.

France and Germany are trending better than average and Spain remains weak.

The first two months of Lauren sales in approximately 80 doors throughout Europe have been encouraging, particularly at larger urban locations and we have received a large amount of favorable publicity surrounding the launch.

In Japan, where overall retail sales continue to be quite weak, our men's wear products are fairing better than the overall department store trends while our women's and childrenswear merchandise is performing approximately in line with category trends.

Our fourth quarter wholesale operating income was $165 million and the operating margin rate was 20.3% compared to 22.6% in the fourth quarter of fiscal 2008.

The lower operating margin rate was primarily a result of expenses in newly acquired and emerging businesses and a shift in our domestic wholesale product mix.

The net unfavorable impact of foreign currency translation also had an approximately 60-basis-point impact on the wholesale operating margin.

For our retail group, fourth quarter sales declined 8% to $366 million.

Overall comp store sales were down 15.9% reflecting a 29.3% reduction at Ralph Lauren stores, an 8.8% reduction at factory stores and a 20.8% reduction at Club Monaco stores.

We have a high percentage of our stores located in major urban centers and popular tourist destinations worldwide and in the New York metro area in particular.

The decline in tourist traffic as a result of the stronger U.S.

dollar compared to last year has had a meaningfully negative impact on our traffic and sales trends across our domestic Ralph Lauren factory store and Club Monaco concepts.

We have experienced a drop-off in tourist sales throughout Europe as well, although our UK stores did benefit from increased tourist traffic as a result of the weaker British pound relative to the euro during the quarter.

These dynamics are another example of the impact of exchange rates on our financial results that obviously go beyond just the translation impact on our financial statements.

RalphLauren.com sales grew 12% in the quarter, another standout performance in absolute terms and relative to the online sales trends reported by other luxury retailers.

Once again, customer traffic grew at a strong double-digit rate although conversion and the average order value were below the prior year's levels as it was clear customers were comparison shopping online.

Sales of men's and childrenswear products continue to post the largest year-over-year gains on the site.

The response to rugby.com which was launched last summer has been better than expected with traffic and conversion trending ahead of plan.

We are obviously very pleased with the continued momentum at RalphLauren.com and we know there is a high level of customer overlap between our stores and our site.

Accordingly, beginning in fiscal 2010 we will begin to include our online sales in our total Company comparable sales figures while still independently identifying the sales growth performance of RalphLauren.com.

With respect to our European retail operations, the United Kingdom was our top performing region during during the fourth quarter for both our Ralph Lauren and factory stores primarily due to the increased tourism I referenced earlier.

Although we did experience stronger traffic among local customers in Italy and France overall sales trends were challenged by exceptionally weak tourism in these markets.

Adjusted retail operating loss was $26 million in the quarter, compared to a $1 million loss in the fourth quarter of fiscal 2008.

The deeper retail operating loss was primarily attributable to the decline in comparable store sales, increased mark down activity and occupancy costs associated with future store openings.

Since our stores that cater to tourists tend to be among some of our larger and more productive locations, lower tourist traffic has also weighed on retail segment margins as a general slowdown in traffic was the greatest challenge for our retail stores.

We were more promotional, but we managed our inventories to appropriate levels and finished the quarter in good inventory position.

Licensing royalties for the quarter were $47 million, 16% below the prior year period due to a decline in Japanese product licensing revenues related to the childrenswear and golf apparel acquisition and to lower fragrance licensing revenues.

Operating income for our licensing segment declined 6% to $25 million in the fourth quarter, as the lower licensing revenues more than offset a decline in purchase accounting amortization.

As Roger highlighted earlier, we have built a diversified business model that is designed to deliver profit and generate operating cash flow even as we make significant investments in long-term growth opportunities.

The high level of operational control that drove our better than expected fiscal 2009 sales and earnings also delivered a solid balance sheet.

We ended the year with $820 million in cash, cash equivalents and short-term investments compared to $626 million at the end of fiscal 2008.

Net of debt we had $414 million in cash and short-term investments at the end of fiscal 2009 which compares favorably with the $53 million net debt position we had at the end of fiscal 2008.

And the growth in our cash balance was achieved after paying back approximately $200 million in short-term debt, and repurchasing approximately $170 million of our Class A common stock during the year.

Throughout fiscal 2009 we managed all elements of our working capital aggressively.

We were able to do this in spite of having operating at a very high level in the past and in an environment where concerns about liquidity reached their highest level in recent memory.

We ended the quarter with inventory up 2% from the same period in the prior year.

Excluding the Japanese childrenswear and golf inventory our consolidated inventory actually declined 2%.

We remain committed to proactively managing inventory across all channels in a disciplined manner as we have consistently demonstrated over the last year.

On a consolidated basis, our inventory turns improved to 3.9 times in fiscal 2009 from 3.7 times in fiscal 2008.

And we improved our cash-to-cash cycle by five days.

We spent approximately $185 million in CapEx during fiscal 2009 which was 15% below fiscal 2008's level, to support new retail stores, wholesale shop installations and other infrastructure investments.

We do expect capital expenditures to be approximately $220 million in fiscal 2010 as we have large scale flagship store projects which we have discussed with you previously, St.

Germaine in Paris France, Madison Avenue here in New York and Greenwich, Connecticut as well.

Those projects are underway.

They are strategic locations and the capital spending for them is firmly committed.

Otherwise, and in general, an increasing portion of our capital is being allocated to high growth international markets and they represent approximately 50% of our fiscal 2010 capital spending compared to approximately 35% in fiscal 2009.

So our capital spending is increasingly being diversified into international markets.

We are now two months into fiscal 2010 and there is still tremendous uncertainty regarding how long the current retrenchment in consumer spending will last or how much additional deterioration in personal consumption may occur.

While there has been considerable dialog in the press about the domestic retail environment having troughed, the reality is that unemployment continues to rise, home values, which were just reported yesterday, continue to fall and credit is not only still difficult to get it is also more expensive.

There is also considerable variability in sales trends on a day-to-day basis which we certainly see and you certainly hear about.

Due to this uncertainty and the subsequent difficulty in forecasting with any degree of comfort we have decided not to provide annual earnings per share guidance on this call.

But as you saw in this morning's press release we have provided some color around our expectations for fiscal 2010 and in particular for the first quarter which I would like to briefly review with you.

With respect to our sales outlook we do expect consolidated revenues to decline by a high single-digit.

That would be 7% to 9% for the full year which would include a net unfavorable foreign currency translation effect for the year.

For the first quarter, we expect wholesale revenues to decline by a low double-digit rate and comparable store sales to decline by a mid-teens rate which essentially maintains what we experienced during the third fourth quarter of fiscal 2009 in our retail stores and what we just reported to you on this call.

I would also like to remind you we are comparing against several years of mid to high-single-digit comp gains in the various quarters.

So, obviously, the environment is continuing to have an impact and we are certainly seeing that in the first couple of months of this quarter.

You heard Roger speak about our accelerated investment to transition and build the Company's operation in southeast Asia which we are very excited about.

This multiyear investment is broad and deep as we are building a platform for long-term growth.

Our fiscal 2010 investment in southeast Asia is expected to be significant.

We will continue to invest in our new product initiatives as well in fiscal 2010.

We are making these investments in advance of the returns we expect to achieve from them, which is consistent with how we have invested in the past, although the current operating environment is obviously much more challenging.

Since we are will not have revenues to offset the cost of these investments for much of fiscal 2010 we are working to balance our spending with a continued focus on controlling our expenses and identifying ways to leverage global operating efficiencies.

We currently expect operating expenses for the first quarter to be modestly above those in the comparable prior year for the quarter.

The full-year of fiscal 2010 tax rate is estimated to be at 35%.

Again, we had a benefit from geographic mix in the fourth quarter and the fiscal year and the fiscal 2010 tax rate reflects the geographic mix of income that we are projecting in fiscal 2010.

Our fiscal 2009 earnings illustrate our ability to take definitive action and deliver strong results not only in good times but also in the face of significant challenges.

We have consistently demonstrated our discipline to deliver on our investment and all of the financial and managerial discipline that have supported our progress over the last several years remains intact as we pursue new transformational growth initiatives.

We are confident in the relevance of our strategy and of our brand portfolio, the dedication of our talented teams worldwide, the strength of our balance sheet, and our ability to continue to deliver strong profitable growth over the long term.

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

Operator, at this time could you assist us with that, please?

Absolutely, thank you.

The question-and-answer session is conducted electronically.

(Operator Instructions).

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

Please go ahead.

Thanks.

Good morning, congratulations on providing upside in a tough environment.

Thanks.

Roger, wanted to dig in a little bit more.

It sounds like some of the activities you're doing with the restructuring and closing some stores and you are maybe thinking a little bit differently about the U.S.

business.

Can you expand on the 500 people, what responsibilities are you eliminating in the internal infrastructure here in the U.S.

and am I thinking about that properly in terms of you are kind of looking at, kind of reallocating resourcing to the regions where you think there's growth?

No, Omar.

I think you are thinking about it exactly right.

We are clearly very excited about the opportunity to develop our business in Asia, southeast Asia, particularly with China being the lead country, has been a part of the world we have managed through a licensee for many, many years and at the end of this calendar year, January 1, when we get it back, we want to try to hit the ground running as best we can.

So we are putting a complete organization on the ground there as we speak, putting in the infrastructure technology to run that business, making the buys effective for January, February, and March as we speak.

And we expect to have a smooth transition of that.

Over the long term, we think China, particularly, and the rest of southeast Asia will be an enormous growth opportunity for the Company.

So we are managing our resources here domestically.

We are at least in the near term business it looks more challenging.

We have consolidated, asked people to stretch their responsibilities and eliminated jobs really throughout the domestic operation at all levels in an effort to free up resources to invest in southeast Asia and other parts of our growth strategies.

So, it is a very conscious effort to pull resources out of one part of our business and put them somewhere else.

Okay.

And then in terms of some of the things you are doing on the ground here, sounds like you closed some stores.

Are there plans for other store closures?

Is there anything on the horizon for Club Monaco in the domestic arena?

Yes, we, Omar we closed six stores.

So in the scheme of our portfolio, it is not really significant, and as I think you know, we have continued to close stores over the years, either as leases expired or markets changed.

So we don't anticipate any major store closing activity.

Obviously, the downturn in the business late September on has been very different than our experience over the last six, seven, eight years.

How long that lasts is anybody's guess.

So as leases come up for renewals we will certainly look to analyze whether we want to go forward or renegotiate or whatever the decisions will be, but I don't think the six stores were a meaningful number in the scheme of things.

Okay.

And then the store impairments, the tests that you do to test for that, what kind of stores are those?

Are we talking about the outlets, are we talking about the full price, or the domestic, is it international?

They were all full price stores, Omar.

It was a mixture between Club Monaco and Rugby and some of our Ralph Lauren stores.

So --

Primarily domestic.

Primarily domestic.

Yes, they were primarily domestic.

Okay.

Omar, we are going to have to move on to the next question.

Thank you.

Thank you.

Thanks, Omar.

We will go next to Liz Dunn with Thomas Weisel.

Hi, good morning.

Let me add my congratulations on navigating in a difficult environment.

Thank you, Liz.

Can you address your relationship with Macy's?

There has been a lot of chatter about potential reductions in that business and how should we think about that in the context of your wholesale, department store, your wholesale domestic business overall?

Yes.

Well, our relationship is intimate.

We have strategized with Macy's on a very, very close level.

We are one of their key vendors to partner many of their initiatives over the last year.

I think the centralization and the "My Macy's" efforts are really going to make an extraordinary difference in how Macy's runs their business on a national basis and we are fully lined up and aggressively supporting that.

Recently came out of a strategy meeting with Terry and his team last week and Jackie and all of her key presidents are actively engaged in maximizing the business there whether it is men's, women's, kids or any of the other businesses.

We are excited about it.

We are in close partnership.

We have aggressive plans to launch new product with them including the Olympics coming up.

They will be our key partner.

We have a lot of initiatives going on with Macy's and have married our organizational structure up with some of the changes they have made to better support them.

We are encouraged by their steps and what we're doing to partner growth initiatives.

So good things are happening there.

Thank you.

Moving on we will hear next from Robert Drbul from Barclays Capital.

Good morning.

Hi, Robert.

Roger, can you talk a little bit about as you look to the rest of this year, the trends in sort of your higher end Black Label, Purple Label type businesses and as a percentage, what they were last year and sort of how you would envision them being in fiscal 2010?

I can't give you the percentage, Robert, but I would say we talked about in the script those businesses are down, whether they're in our own retail stores or in our wholesale distribution.

Interesting in this environment, unlike a lot of other downturns that I have experienced over the last 35 years, the high end customer seems to be the one most affected, and that really started late September, even though, you know, 2007 and 2008, up until that weren't buoyant, but starting in the last part of September as the banks began to become front and center, the high end customer really around the world has pulled back, been more selective in their shopping and clearly is looking to buy at a discount.

I think the over inventoried environment this fall certainly allowed them to buy at a greatly reduced price.

I think that is moderating somewhat for this spring and then hopefully by next fall inventories and demand will be in alignment and full price selling will begin to strengthen.

But clearly those business are down for us as they are for really everybody else in that business.

We don't expect that to change in the next 12 months.

Our next question comes from Robbie Ohmes of Banc of America.

Thank you.

Good morning.

Hello, Robbie.

Thanks, Roger.

A few quick questions, I wanted to get a clarification on the wholesale guidance for the first quarter being down double-digit after being up 3% in the fourth quarter.

Is that all just the anniversarying of the Japanese children and golf business or is there a U.S.

or a European wholesale trend change there?

And then the other follow-up question --

That's a one-by-one.

The guidance we have given in the first quarter, and as you know, we have visibility at this point for about six to eight months out in wholesale, is a combination of domestic order contraction with most major brands as retailers have bought and planned for receipt flow in a much more conservative way.

It's clearly an attempt to not have the inventory overhang that plagued the industry and I think we have partnered with them to make sure that what we produce is what they want and that's baked into the guidance.

I think it also assumes a more conservative constant currency order file in Europe as well as some negative exchange rate impact that we are expecting in the first quarter.

So it's really a combination of all three plus the lapping of the first nine months of American Living shipments last year, where we were really filling the stores and filling the racks and now we are shipping more on a trend basis.

So, those are really the major pieces of the wholesale guidance.

And the Japanese childrenswear and golf license acquisition occurred in August of last year.

That's when we will be lapping that.

Moving on, we will hear from Kate McShane of Citi.

Hi, good morning.

Hi, Kate.

In trying to better understand your gross margins and the differences we saw sequentially, in the third quarter you had a slight major improvement during a very difficult promotional environment, whereas this quarter gross margins contracted because of decline in wholesale and retail margins.

Can you help us understand the difference between the two quarters?

And then how should we think about the allocation of your cost savings throughout the year?

In what quarter or half will we see the biggest benefit?

I will talk about the margins and let Tracey talk about the expenses.

If you remember, it seems like a long time ago, this is January, February and March.

So we sit here at the end of May and we are talking about the margins for the post-Christmas period.

And I think the largest issue is really one of retail margins to clear out the disappointing October, November, December sales.

So I would say that was the major impact on the margin compared to the prior quarter which was also a very strong wholesale quarter.

So part of it is mix.

Part of it is the actions that were required to clear out the post-Christmas retail inventories.

We do expect margins going forward to reflect the environment, but I don't think you will see what happened in the fourth quarter again.

In terms of the impact of the restructuring initiatives.

Those actions were taken at the end of the year.

So those actions will impact the full calendar year relatively equally from a calendarization standpoint.

Having said that, we also have called out that we will be investing in southeast Asia.

So we will have an investment impact and we haven't called out what that is.

That will be ramping during the year.

So you will see a smaller impact of that in the first quarter, a bigger impact of that in the second quarter, a bigger impact of that in the third quarter.

In the fourth quarter will be a larger impact of that, but you will also see the benefit of the sales benefit as we take over the license and the wholesale revenues associated with that.

So, it will be a bit difficult to calibrate.

That's why we tried to give you some color around the quarter in terms of our revenue and expense guidance is, at least for the first quarter, and we will try to give you some perspective.

But it will be a difficult year for us to try to guide you through with the currency movement, the investments that we are making in southeast Asia and just the general economic environment both here in the U.S.

as well as in Europe.

David Glick of Buckingham Research has our next question.

Yes.

Good morning.

Roger, I was wondering if you could give us an update on the progress you're making in the women's business at wholesale in the U.S., and that business got tougher before the economy turned down.

And it has been a pretty wide gap relative to men's.

I am just wondering how much progress you have made in closing that gap and how you see the prospects for 2010 for the women's business?

Yes.

That's a good question, David.

We have seen a softening of women's trends really across channels and across price points now for most of the last year or so.

That's whether it is Ralph Lauren or Club Monaco or any of the brands we have.

With the really exception of Chaps.

We continue to enjoy tremendous growth in all merchandise categories with Kohl's and Chaps and the women's business continues to trend well there.

I think the fundamental issue is that the career business has turned very soft, and it is a much more casual cycle.

Because of that, I think the woman has an easier time putting together a less expensive outfit to go to work in, and she's more comfortable in a casual outfit that she can refreshen with just a nice top or some accessories.

So I think the career business being soft is affecting all of our women's businesses as it is really the whole industry.

I think what you will find is strength in things like dresses.

I think you will find it in tops, but there isn't a suiting business, a career business that Lauren and other businesses enjoyed in the past.

I think it will come back, but right now it is in that cycle.

So we are focused very hard in, to your question the domestic wholesale business where Lauren is the dominant brand on that side of the business, whether it is door expansion or key item focus that will distort that business going forward and will work to manage the career side until that returns.

Our next from Jeff Klinefelter of Piper Jaffray.

Yes, congratulations, everyone on the great performance here in the quarter.

My question is really on the pricing trends and product margin dynamics across your major global regions.

Could you give us a sense for as you pursue your expansion in Europe and Asia, what are constant currency pricing differences with U.S.

in your sportswear categories and how are your margins impacted by your, your hedging strategies for cost of goods?

Well, I think you are all familiar with the fact that we do not employee a constant pricing across the globe.

We price appropriate to the marketplace whether that is Europe or different countries in Europe, the United States or Asia.

So the actual cost of goods, since we globally manufacture everything, is constant and then we price according to marketplace conditions.

So that brings with it a level of complexity in terms of currency fluctuations that when we translate it back to the U.S.

balance sheet provides some of the interesting forecasting challenges we have.

We have not lowered our prices on comparable items as we have heard and seen others do.

We have very broad choices in merchandise offerings, whether it is in a brand or between brands, so that our customers can assort product by category and price point to match their trends.

We also are doing that in our own retail stores whether it is assorting by brand or price point within our brands.

We have very full lines that range from opening price to very high prices and I think our customers are adjusting on a worldwide basis as they see fit.

It is consistent with what we are doing in our own stores as we see fit.

Clearly, customer traffic is down, but the average unit sale is down too.

So the customer is price sensitive in certain categories, and we are adjusting accordingly.

We do feel excited about the integration of our Japanese organization in terms of manufacturing.

So they are now part of our global standard.

So all of the major regions around the world are running through our integrated worldwide manufacturing group which really done a brilliant job of managing the complexity of this.

We ship today into 78 countries and manufacture in 45.

So the challenges of raw materials to a manufactured country and from there to a country of sale and then translating that all back to the U.S.

balance sheet is, makes for a pretty complicated puzzle.

But so far so good.

Adrianne Shapira of Goldman Sachs with our next question.

Thank you.

I had two questions really.

First, related to the factory performance, just wondering any, the decline there in, down 8.8%, given the fact that it does seem like the inventory clean-up is happening and it doesn't sound as if the aggressive promotions out there would hurt off-price, we have definitely seen some pickup in outlet and off-price.

So maybe some color as to why that division is still declining, and then the second follow-up I can ask after on expenses.

Right.

The factory performance quite frankly, just to remind everybody, was, in fact, impacted by the shift in Easter.

We do get a significant change when Easter falls from March to April, and I think that is a not insignificant part of the decline.

Our quarter, January, February, and March is different than what most retailers have now reported which include the Easter shift.

I think there will be some pickup in that trend in the first quarter we report.

Otherwise, the other major issue in our factory stores is really the tourist destinations which Tracey talked about.

We have significant volume in what has been historically strong tourist locations, and we are seeing the fall-off in that traffic as well as in the Ralph Lauren stores.

Those are probably the two major pieces of the factory performance.

What was your second question?

I'm sorry, Adrianne, if you would like to ask a second question, please hit star 1 again to reenter the queue.

Sorry.

Let's move on, operator.

Okay.

We will move on Chi Lee of Morgan Stanley.

Hi, good morning.

Roger, can you elaborate a little bit more on what the major merchandising opportunities are within the southeast Asia operation?

Is it similar to Japan where the assortments are very limited apparently?

Yes, I would say the southeast Asia really has been built on the back of men's Blue Label.

So we believe that there are opportunities in the women's areas across all brands.

There are definitely opportunities in kids in denim and also the most glaring would be the accessory business.

Whether it is Japan, whether it's China or whether it is any of the southeast Asia countries, we think all of those categories, but particularly accessories, represents unusual opportunity for us.

Most of our licensed territories have historically been built on men's Blue Label.

So this is not totally dissimilar to Japan or any of the other Asian countries.

We will move now to our final question coming from Jennifer Black of Jennifer Black & Associates.

Good morning, and let me add my congratulations as well.

Thanks, Jennifer.

I wondered, Roger, how you see the fashion world?

I know you talked about the missy category on the negative.

Are there any positive call-outs and then I wondered if you could elaborate a little bit more on accessories?

You have done a great job domestically, are there more opportunities domestically?

Thank you.

Let's talk about the accessories because we are very excited.

If you start with the shoe business, which we acquired several years ago back from Reebok, we have seen very strong growth whether it is at the Collection price point or in the Lauren price point, and that has been primarily domestic but we are now beginning to push that out into an international business opportunity.

We then brought back in small leather goods and belts, and actually belts is one of the better trends in the fashion business to your first question.

And that now is being integrated into the overall accessory strategies over the last year or two.

And our efforts in the handbag business which have been tremendously successful with the Ricky and other high end products.

We will be looking to launch a Lauren price point consistent with our female apparel business, our female accessory and footwear businesses in the fall of 2010.

So, we continue to invest and build talent and capacity and manufacturing strength in those categories.

And while they may be soft on a global basis, they are still enormous categories that are owed tremendous volume to us.

So we have a lot of investment going into that, and we have high expectations going forward.

In terms of the overall fashion world, my only reaction is that unique, interesting product that's differentiated continues to sell.

And I think the customer is looking for a reason to shop.

I think the mood has stabilized from what was sort of a panicked customer in September through maybe the end of February or March.

I think as things seem to be stabilizing there was certainly a sense that consumer sentiment yesterday is trending up a little bit.

So I think for the better customer, it is less about whether they have the money to buy or not, I think it is an attitude.

And I think as the attitude brightens, there will be a return to those products and brands that have a credibility and, obviously, we hope to be one of those.

So I think at this point, we thank you all for your interest and look forward to an update in August on how the fiscal 2010 year is unfolding.

Thanks.

This does conclude today's conference call.

Thank you, again, for your participation.