雷夫·羅倫馬球 (RL) 2010 Q2 法說會逐字稿

Good morning, and thank you for calling the Polo Ralph Lauren second quarter fiscal 2010 earnings conference call.

(Operator Instructions)

And 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 second quarter fiscal 2010 conference call.

The agenda for today's call is a bit different from prior calls.

First, Roger Farah our President and Chief Operating Officer will give an overview on the quarter, and comment on broader strategic initiatives.

Then Tracey Travis, our Chief Financial Officer will provide operational and financial highlights from the second quarter, in addition to reviewing our expectations for the remainder of fiscal 2010.

We will then have Roger back to speak about some exciting near term developments regarding our international and new product development initiatives.

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

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

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

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

Thank you, Jim and good morning, everyone.

I apologize in advance if my voice sounds strange but I have been under the weather.

We are very pleased to be reporting second quarter and first-half results that exceeded our expectations.

Nearly $250 million in operating profit for the second quarter demonstrates we are clearly benefiting from superb execution across our entire organization.

I believe the quality of our results is particularly noteworthy.

The better than expected sales are a function of the desirability of our brands and products across all distribution channels.

The nearly 200 basis point improvement in our gross margin profits reflect higher sell-throughs and enterprise-wide inventory discipline that is further supported by sophisticated supply chain initiatives.

And we continue to manage our expenses in a manner that allow us to reduce costs in certain areas, while funding our long-term strategic growth objectives.

Our second quarter wholesale segment operating margins were very strong, at 27%.

And our double digit growth in retail segment operating profit, demonstrates our ability to adjust to considerable external challenges in a relatively short order.

Though even as second quarter revenues declined 4% on global shipments that were planned lower, stronger profit margins, disciplined operational management and a lower tax rate ultimately resulted in diluted earnings per share growth of 11%, which was achieved on top of a 45% gain in a prior year period.

These results are accentuated further by our very strong financial condition.

We ended the second quarter with close to $700 million in net cash and investments reflecting an eight-fold increase over the last 12 months even as we invest in the future.

I believable our year-to-date performance confirms we have a credible and resilient strategy to grow shareholder value over the long term.

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

One, growing our international presence.

Two, developing innovative products, and three, expanding our direct-to-customer reach.

Our focus on international development our business stems from the multiple areas of opportunity, we see to build brand awareness, expand distribution, and introduce new products and brands.

Year-to-date, we have benefited from the strong results of the major international territories that we control, with Europe and Japan, both performing well.

And in two months we will assume control of our distribution in eight high-growth Asian countries which I will speak more about later.

One of the competitive advantages that have helped to bolster and differentiate our performance, is our clearly defined portfolio of lifestyle brands, which range from the Ralph Lauren runway collection to Chaps and American Living, each targeted to a specific customer profile, and distribution strategy.

During the second quarter, we opened spectacular new collection of Black Label shops in Saks Fifth Avenue's New York city flagship and a Unique World of Ralph Lauren's women's in Bergdoff Goodman.

We launched wholesale distribution of our women's Blue Label product at select Saks Fifth Avenue stores throughout the country.

This is the first time women's Blue Label merchandise is being offered in the United States outside of our directly operated retail stores.

We also launched Lauren men's dress furnishings in a number of domestic wholesale accounts during the second quarter, and our Lauren jeans company continues to expand points of distribution.

Our chaps and American living products are performing well at retail, benefiting from strong sell-through rates.

There is no better testament to the desirability of our brands and products than our ability to expand distribution during a time when customers are extremely selective, given today's more discerning customer.

And there is no question, that our better than expected sales and stronger sell-throughs reflect the tremendous work of our design and merchandising teams, who have delivered some of the most compelling product we have ever had.

Our strategic merchandising initiatives across brands in our own stores and our wholesale partners is working to our advantage, particularly with iconic key items that are characterized by their high quality and enduring value.

Our direct-to-consumer efforts remain focused on the global expansions of our directly operated store network, and eCommerce initiatives that will allow us to present the full breadth of our merchandise categories.

As you know we have committed a significant portion of our capital to support this expansion.

During the second quarter we renovated important Ralph Lauren stores in Amsterdam, Frankfurt and Hamburg and opened a new Ralph Lauren store in Saint Moritz, in addition to factory stores in Spain, Germany and the Netherlands.

Upcoming store openings in the third quarter include Greenwich, Connecticut and (inaudible) Switzerland.

And our important New York City and Paris flagship projects are on track to open next year.

International direct-to-customer development is an important component of our long-term growth objectives.

We are also exploring international eCommerce opportunities to leverage the high growth dynamics of this evolving channel that been tremendously successful for us in the United States.

Our initial focus will be on Europe, but over the long term, we would expect our eCommerce capabilities to tend to Asia as well.

As you are aware an increasing portion of our capital spend is being allocated to international markets.

Approximately 50% this year versus 35% last year.

We are clearly encouraged by our second quarter earnings results, given the substantial market challenges we face.

There is no question that the consumer around the world, remains cautious.

But our ability to innovative and provide high quality products with enduring value has positioned us to withstand overall market weakness better than most.

The sophistication of our global supply chain organizations have allowed us to be very nimble and responsive to evolving demand trends.

You can see the impact in our better than expected sales and strong growth profit margins for the year-to-date period.

The holiday season is fast approaching and how that will ultimately play out is obviously a big question mark.

How we and others anniversary the sharp deceleration in sales trends that began in October last year will be critical in understanding how to plan for the new normal.

Tracey will comment in greater detail on how we're thinking about the balance of the year, but I think it is important to highlight that even as we navigate through uncertain times we have not altered our strategic objectives.

We continue to invest in initiatives that we expect to drive topline momentum over the long term.

And our year-to-date results confirm the unique strength that our brands, products and our management team and business model, provide us to do so.

And with that, I would turn the call over to Tracey.

Thank you, Roger and good morning, everyone.

For the second quarter, consolidated net revenues were $1.4 billion, and for 4% below the prior year period.

The decline in revenues reflects lower planned wholesale shipments, and a 6% reduction in same-store sales at our retail segment.

The net negative impact of currency translation on our reported revenue growth for the quarter, was slightly below 1%.

Relative to our expectations at the beginning of the quarter, our second quarter wholesale revenue performance in our retail comps both outperformed.

The stronger wholesale revenues were broad-based across regions and product categories, and reflect our ability to react and respond to demand trends, like chasing product, or accelerating deliveries where appropriate particularly in the United States.

The better than expected retail comps were similarly broad-based across regions and concepts.

Our gross profit rate increased 190 basis points to 57.1% in the second quarter, which was achieved on top of a 170 basis point gain in the prior year period.

The expansion in the gross profit rate, reflects improved whole sale and retail segment margins that were driven by supply chain initiatives, which yielded cost of goods and freight savings.

As well as continued inventory management which led to improved sell-throughs and fewer mark downs in the quarter.

Operating expenses in the second quarter, were approximately 1% below the comparable period last year.

The lower operating expenses in the second quarter were approximately 1% below the comparable period last year.

The lower operating expenses reflect the benefits of our expense containment, and the restructuring efforts we implemented and discussed with you during the fourth quarter of fiscal 2009.

However these benefits were mostly offset by the ramping up of incremental expenses related to the transition of our Asian operations, the net incremental expense related to our Japanese children's wear and golf operation, and the start of higher incentive compensation accrual.

We also incurred restructuring charges primarily related to the additional rescaling of our Japanese operations, which included the elimination of 142 positions, a result of our consolidation of the multiple licenses acquired over the past few years.

Operating income for the second quarter was $246 million, 1% greater than the prior year period.

And our operating margin for the quarter was 17.9%, 90 basis points above that of the second quarter of fiscal 2009.

The growth in operating income, and the expansion in operating margin rate, were primarily due to the higher gross profit rate, and the company-wide cost control and restructuring initiatives, that were partially offset by lower sales and higher operating expenses associated with our Asian business expansion efforts.

Net income for the second quarter of fiscal 2010, rose 10%, to $178 million.

And net income per diluted share was $1.75, which was 11% greater than the comparable prior year period.

The growth in net income, and diluted share earnings per share principally relates to a lower effective tax rate of 27%, compared to 34% in the prior year period.

The lower effective tax rate primarily relates to the resolution of certain discrete tax items in the quarter, as well as a slightly favorable geographic income mix.

As I mentioned in the last call, we also had an approximately $4 million gain related to the early partial retirement of debt that settled during our second quarter.

Moving to our segment highlights for the quarter, I will begin with our wholesale segment where sales declined 4% to $815 million, and were down 3% in constant currency, primarily due to lower planned shipments of most of our domestic products including American Living.

European wholesale shipments were down modestly in constant currency as well during the quarter, a function of a broader pullback in fall orders and response to the softening macro environment earlier this career.

The decline in wholesale segment sales was partially offset by incremental revenues related to our children's wear and golf apparel in Japan.

And as a reminder, this is the final quarter where there is non-comparability in our whole sale segment related to the Japanese children's wear and golf acquisition last year.

As I highlighted earlier our whole sale performance exceeded expectation, due to strong merchandising initiatives across all product categories, and our ability to read and react to end season sales trend through replenishment.

From a category perspective in the US, Polo men's sports wear continued to be a strong performer during the quarter.

And we saw broad-based momentum for Lauren and Chaps across multiple product categories.

In Europe, we experienced good retail sells-through in year-over-year growth at many of our largest European wholesale accounts during the quarter.

In terms of product performance.

shipments of our men's and women's Blue Label products, as well as our children's products were the most resilient.

The United Kingdom and Germany were our best performing regions, while trends in Spain remain weak.

In Japan we outperformed broader market trend in the second quarter, albeit in the context of declining department store apparel trends, due particularly to strong men's wear results.

And to our World of Ralph Lauren outpost strategy, where we have achieved incremental placements of core iconic product in highly visible locations within select doors throughout the region.

We continue to believe the Japanese market represents untapped potential for us, and our local team is mobilized to capitalize on those growth opportunities.

Roger will speak more about this later in the call.

Our second quarter whole sale operating income was $221 million, and the operating margin rate was 27.1% in our whole sale segment, compared to 25% in the second quarter of fiscal 2009.

This 210 basis point expansion in the wholesale operating margin rate was primarily a result of stronger international margins, broad-based supply chain initiatives, and overall -- expense discipline that offset lower shipment volume in the US and Europe.

For our retail group second quarter sales declined 3% to $513 million.

Overall comp store sales, which include Ralph Lauren.com, were down 6% or 5% in constant currency, reflecting an 18% reduction at Ralph Lauren stores, 4% reduction at factory stores and 3% reduction at Club Monaco.

As I mentioned earlier, accounts were appreciably stronger than expected across all concepts, reflecting improved trend relative to the first quarter.

Overall traffic trends in our stores remained challenging however during the second quarter, especially in the US.

The continued reduction in tourist travel in most of our major markets, and particularly in the New York metro area, continues to have a negative impact on our same-store sales performance for our domestic Ralph Lauren and factory stores.

However, Ralph Lauren.com has continued to grow revenues in this environment, with sales rising 12% in the second quarter, driven primarily by sustained double digit growth in customer traffic.

Children's wear and men's wear with solid growth performance in both apparel and foot wear categories boasted the strongest sales gains on Ralph Lauren.com during the quarter.

With respect to our European retail operations, the United Kingdom and the Benelux countries remain our top performing regions for our Ralph Lauren stores, while France and Italy continue to be challenged with significantly lower tourist traffic.

Our factory stores continue to experience broad-based strength throughout Europe.

Although once again, the United Kingdom had the largest comp growth in the region.

The UK stores are benefiting from an increase in tourism among continental Europeans, given favorable currency exchange rates.

We opened five directly operated stores, and closed two stores during the quarter, ending the quarter with 328 directly operated stores globally.

Our retail segment operating income grew 11% in the second quarter to $64 million.

The retail operating margin, was 12.4%, 160 basis points greater than the prior year period.

The growth we experienced in retail operating income, and the expansion in margin rate, was primarily a result of strong international performance, disciplined inventory management, and the benefit of restructuring actions that we took in the fourth quarter of fiscal 2009, all of which, more than offset the decline in retail segment revenues.

Licensing royalties for the quarter were $47 million, 10% below the prior-year period, due to a decline in Japanese product licensing revenues, and to lower fragrance and home licensing revenues, that were partially offset by higher Chaps related royalties.

Operating income for our licensing segment was down 12% to $24 million in the second quarter, principally as a result of the lower international licensing income.

We ended the second quarter, with more than $970 million in cash, cash equivalents and investments, compared to $528 million in the prior year period.

Net of debt, we had $663 million in cash and investments at the end of the second quarter, up from $88 million last year.

Inventory was down 1% from the second quarter, last year, and in line with expectations given the supply chain initiatives we are pursuing and discussed with you on our last conference call.

We spent $35 million on CapEx during the second quarter to support new retail stores, whole sale shop installations and other infrastructure investments.

We also repurchased approximately 900,000 shares of stock during the quarter, utilizing $60 million of our outstanding share repurchase authorization.

And we had $206 million of authorization left, at the end of the quarter.

We are now six weeks into the third quarter, of fiscal 2010, and have anniversaried the events of last fall, and the subsequent sharp immediate impact they had on consumer spending.

And while we have seen a modest improvement in industry sales, the reality is that sales and order trends still remain at depressed levels.

The overall macro environment continues to be weak.

unemployment is high, the housing market is soft, and access to credit remains challenging.

As a result, we had and will continue to plan our inventory, and order trends prudently.

As you would expect we would, preferring to position ourselves to chase product when we can and when appropriate.

In this morning's press release we outlined our expectations for fiscal 2010, which I would briefly like to review now.

Based on our better than expected year-to-date performance, we raised our top line guidance and are now looking for a mid single digit decline in consolidated revenues for the full year, which compares to our prior expectation of a high single digit decline for fiscal 2010 revenues.

For the third quarter, we expect consolidated revenues to decline at a low single digit rate, inclusive of a flat to low single digit comp increase for our retail segment.

As we have communicated to the last few calls, investments spending for our Asia-Pacific initiatives ramps up dramatically in the back-half of fiscal 2010.

The impact of incentive comp accruals is also expected to yield additional expense pressure in the second half.

As a result of these two, we currently expect operating expenses for the third quarter of fiscal 2010, to exceed those of the prior year period by a high single digit rate.

While this near-term growth in SG&A is particularly challenging on an expectation of lower consolidated sales for the quarter, it is important to understand we are making investments in growth that are expected to generate significant returns over the longer term.

And while investment spending for the Asia-Pacific region will continue for several years as we invest in new shops and stores in the region, we will begin to manage the store network and transition through remaining fall and new spring merchandise.

There are some additional considerations I would like to highlight, as you think about building your second half forecast.

The first relates to the evolution of our business over the last several years, and how that affects the seasonality of our profits.

As we have assumed more direct control of our wholesale distribution for various regions and products, in addition to the normal cadence of our retail operations, we have now begun to generate a large percentage of our annual profits in the first half of the year.

And our Asia-Pacific-related spending will be most pronounced in the fourth quarter, as we start up the business and have the full bath of the entire distribution network and infrastructure to absorb.

Of course we remain focused on managing all aspects of our operating expenses and working capital, to appropriate levels for the current global environment.

And with that, I would like to turn the call back to Roger.

Okay.

Thank you, Tracey.

As Tracey has outlined our results demonstrate, we are managing the business carefully even as we invest for growth.

This balance is a hallmark of our Company.

We have consistently reinvested our strong cash flows back into the business, including the acquisition of various geographies and product licenses.

Over the last two years we have assumed direct control of our brand in Japan through a series of acquisitions that reacquires -- required the consolidation and integration of what was previously three different organizations.

While we acquired some level of infrastructure, we have since built a unified organization with strong local management, we have upgraded our operations by investing in information technology, revamping our manufacturing base and stream-lining our supply chain and logistics activities.

Separately, we have eliminated redundancies by reducing head count.

We simultaneously worked to elevate the positioning of our brand by implementing new merchandise strategies and refining our wholesale and retail distribution.

Our objective to nurture underdeveloped product category is still it's early stages and we are confident the Japanese consumer will respond favorably to our efforts, in the same way our European consumers have since retook control of that region several years ago.

The tactical measures necessary to assume control of our Japanese operations are very different than those underway, for the January 1 transition of our distribution rights in eight Asian countries.

As a reminder, the eight countries are China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Taiwan and Thailand.

With this transition, we are not inheriting any infrastructure or service platform.

We are assuming approximately 100 points of sale with 500 existing store level employees that are doing approximately $150 million in sales at retail value.

Ahead of the actual transition date, we are building a world class infrastructure in terms of people, and process,across our merchandising, IT, finance, HR, legal and other corporate functions that is designed not only to manage the existing operations, but to support larger business over time.

I just visited the region and came back even more excited about this unique opportunity in front of us.

On our last call I said we would provide an update on accessories, a category we broadly define to include hand bags small leather goods foot wear, watches and jewelry and eye wear.

Over the last four years we have assumed control of most categories, and have selected best in class global partners for the more technical products with specialized distribution Richemont for watches and jewelry and Luxottica for eye wear.

We're fortunate to have one of the world's strongest most iconic and trusted brands to leverage with our accessory efforts.

Innovation, quality and timeless designs are the hallmark of our Company, and they also happen to be among the most important attributes of a successful accessory business.

I'm happy to report we're making progress on all categories, particularly in developing comprehensive brand statements that are aligned with Ralph's design aesthetic, and that complement the life style characteristics of our existing apparel and home products.

In order to maximize this important opportunity, we have bifurcated our approach to the market, establishing a luxury tier with Ralph Lauren products and a better tier focused on Lauren and Polo brands.

We have aligned our people, processes and products to sync with this strategy across all merchandise categories, to be sure we maintain the clarity of our offering by channel.

We have successfully executed this strategy with our revitalized foot wear business.

Our Ralph Lauren foot wear is now in selected high profile doors around the world, including Bergdorf's, Neiman's, Saks, Isitan in Japan and Galeries Lafayette.

And during a period of time when department stores were trimming their open to buy and eliminating resources, we successfully established ourselves as a true foot wear resource, and secured space in hundreds of department store doors for our Lauren brand.

And we have been getting strong reorders this season for both brands.

We are now concentrating on evolving our hand bag and small leather goods assortments.

This spring we expanded our Ralph Lauren handbag offering to better address our customers' entire life style.

The early reads on our new products have been encouraging, particularly for our Bohemian collection that is characterized by a softer silhouette in suede or (inaudible) fabrications for everyday use that offers a more accessible point of entry.

You should expect to see the breadth and depth of our comb hand bags and small leather goods assortments continue to evolve.

And over the long term the distribution of these products will likely including the world's premier department stores and retail locations where appropriate.

We are also developing a line of Lauren hand bags.

Prototypes have been designed and supply chain is in place.

Initial distribution is expected to be focused on the top Lauren US whole sale doors, with a gradual rollout beyond that as we read and react to customer feedback.

As the leading better branded apparel resource and domestic department stores we're excited about the long term potential Lauren handbags, especially if we use the receptivity to the foot wear as a proxy.

The opportunity is more compelling as we look to leverage international distribution of the Lauren brand which is just beginning.

Before we open the line for questions I would just like to highlight that we're increasingly leveraging our capabilities on a much larger global platform.

All with the goal of creating substantial shareholder value over the long term, while still delivering best-in-class results in the near term.

And with that, I'll conclude the Company's remarks and we'll open the call for questions.

Operator, can you assist us please?

Absolutely.

(Operator Instructions)

We will go first to Omar Saad of Credit Suisse.

Nice quarter, guys, congratulations.

Thank you.

Just two quick questions here.

One is -- if we look at what -- how you have been thinking about the second quarter coming in, on the -- from a top line perspective and kind of how it shook out.

I know you mentioned replenishment and some of the other factors, can you help us understand the upside in terms of where trend improved relative to your own expectations, and how this replenishment plays a role in that your ability to replenish kind of in season what is going on.

How important of that -- how much of the upside did that factor really drive it versus a macro improvement relative to your expectations coming in?

All right.

Omar, you know the time period of July, August, and September, if you remember back, did not include some of the improved trends that some of the people are talking about in the last six weeks, so really, early placements in the wholesale channel were conservative as retailers cut back their buys, and tried to get stock in sale expectations and alignment.

And our early guidance on the quarter really reflected that.

What happened, in particularly as the quarter began to unfold, new product selling was strong.

And, I think that our ability to service that, with either replenishment, which was up double digits in the quarter, or accelerate shipments of wanted merchandise.

Or read and react which is a -- a strategy that Jackie and the team have been pursuing now for a couple of years, which gives our supply chain the opportunity to take merchandise that is performing well and get it back into the stores in season.

I think all of that reflected in the quarter is better than originally forecasted results.

And I think it gives us another strategic weapon in terms of servicing during this very skittish time.

I mean, we expect to -- read and react and chase goods where necessary as we work our way through the back half of this year.

Okay.

Thank you.

(Operator Instructions)

And we will hear next from Bob Drbul of Barclays capital.

Hi, Good morning,.

Hey, Bob.

The question I have is on the southeast Asia investments.

So when you look at the -- the level of investment plan for the upcoming quarter -- this quarter the third quarter, can you give us a little bit more of a flavor around that dollar investment necessary?

And I guess sort of what I am looking for is the level of profitability or run-rate of the business once you actually assume the business, in 2010.

Tracey, you want to try that.

Yes, well, Bob as you probably know, we don't actually assume the running of the business until the fourth quarter.

So when we talked about the third quarter expenses up single digit partially driven by southeast Asia, you can think about that about a third of that -- of that expense is driven by southeast Asia.

About a third of it is driven roughly by the incentive comp, that we called out, and about a third is -- is all other.

Some of it is negative exchange rate variance versus prior year and a few other items.

So that's the way to think about it.

We assume running of the business in January and will take over the store and shop network then.

And when you think about it, we will be assuming running the business, and we will have fall merchandise and spring merchandise that we will have in the stores.

We will be assuming as Roger indicated 500 employees, as well as 250 office employees to run the business.

So there will be start up as it relates to running this -- this operation.

And this is an operation that will service a -- the southeast Asia business.

But also is anticipated to had service other -- and the expansion of the region as well as we grow the region.

So I would think of it that way.

Yes, Bob, not in response to the answer Tracey gave, but again as I said on the call earlier I just got back from a trip there we were on.

And I can't tell you how exciting that part of the world is in terms of future opportunity for us as a company.

So we want to be careful about the infrastructure we're building, and what we're sending back in the transition.

But as we elevate the brand and expand the merchandise categories that are not properly represented there, I just think that it is an enormous business potential for us, and while we want to be prudent, we really need to go after that.

So that's what is playing out as we speak.

Next question, operator, please?

Okay we will move next to Adrianne Shapira, Goldman Sachs.

Good morning, thank you.

I have a two part question, Roger and Tracy.

First on the guidance, you talk about the full year revenue guidance down mid singles in the third quarter, we should be expecting down low singles, seems to suggest some deceleration in the fourth quarter.

Given the easy year ago comparison, is there something you see out there that is less evident to us that to suggest that deceleration, or is it continued conservativism in the fourth quarter?

And then my second question relates to just wholesale trends, clearly you're seeing improvement, domestically and internationally.

Just give us some color, as you see opportunities coming out and heading into the new normal, as you talk about share opportunity opportunities, expansion into new categories -- how we should be thinking about the wholesale coming out of this.

Thank you.

Okay.

I will start and Tracey can add in.

I think our -- our forecast going forward, reflect the ongoing retailers' point of view that they went into last spring with too much on order, that even when the business changed in September and October, they couldn't recalibrate the upfront bookings.

So I think most of our wholesale accounts have taken a cautious view, for next spring, and into the summer in terms of their initial on orders.

Obviously if business continues to be better than anticipated, we will have to see what we can do to service what we think is growing market share on our part.

A lot of resources, and Adrianne this slips into your second question.

I don't think a lost resources have the wherewithal, either the products, the brand recognition, or the organization to chase the opportunities as they develop.

And I think at the -- we are picking up share in the wholesale channel, whether it is here in the United States or in Europe or in Japan as we are outperforming our competitors in most merchandise categories.

And so the challenge will be with cautious upfront orders, and still the bulk of the business is done through upfront orders, we have to be able to react to the business trends and work with our wholesale accounts to pursue that.

I think those that are under capitalized or were struggling with financial pressures, maybe had to play their inventories even more close to the vest, or people who are looking to generate cash by excessively bringing their inventories down, I think they will have more trouble, chasing the business, if it -- if it moves forward.

And I think that gives us another competitive advantage.

So I think for lots of reasons, the guidance reflects what we know today.

But I think it is the business trends are better, I think we're prepared to pursue them, aggressively in all product categories.

(Operator Instructions)

And moving on we will hear next from Liz Dunn,Thomas Weisel Partners.

Hi, good morning.

Just a brief point of clarification on the last question, and then my real question.

First a clarification.

Your guidance doesn't necessarily seem to suggest a deceleration in the fourth quarter, because if you were down 6% in the first half, and you model a low single digit for both the third and fourth quarter, you still come out for a mid single digit for the full-year.

I just want to make sure I understood that right, because I wasn't getting to necessarily a deceleration in the fourth quarter.

And then my real question is could you just sort of discuss your plans for retail over the long term?

The growth has been fairly slow, and deliberate there.

But as you move into these international areas, it seems like there is a bit more of a high-street shopping mentality there.

How should we had think about retail growth, and what percentage of your business do you think will retail become over the long term?

Thanks.

Oh, and also congratulations.

Oh, thanks.

Let's get that in reverse order, Liz.

Thank you, Liz.

And you're right, we're not planning a deceleration.

And Roger you can take the other question.

Oh, thanks.

I would say Liz we're very bullish on retail.

If you remember back it wasn't that -- wasn't that long ago where the retail business was a small fraction of we did, and not very profitable at that.

Today, even what is acknowledged in the very difficult retail quarter we produced an 11% increase in profitability in that segment, and a double digit operating profit.

So we have come along way in our retail business.

And it is getting a disproportionate amount of capital going forward.

I think the other thing that I would say is today, retail is 40 something percent of our business and is trending to a much higher place.

We also come out of the most recent trips to Asia-Pacific realizing that direct-to-customer is the primary way you reach your audience, whether it is Japan or southeast Asia, or any of the major countries.

Whether they are shop and shops which are run by you meaning you buy the inventory, you build the staff, you train them, you sell the product, those in essence are retail, or they are stand-alone stores that you build in high streets or in the appropriate malls.

I think southeast Asia is going to be heavily about direct-to-customer.

The other thing I would add to the retail piece, Liz, is really the internet.

So, whether you want to came brick or mortar or, just direct-to-customer, there is no doubt that the ongoing growth online shopping is here to stay.

Whether it is in the United States, whether we have been at it for over 10 years and very successfully.

I know a lot of people today are trying to catch up to that.

Or internationally, I said in my openings remarks we're actively exploring the online business for Europe, and eventually will get to Asia.

And we think it is a tremendous waive reaching the customer directly, and a complement to everything else we do in wholesale and retail.

So, we are pushing hard, what we're not doing, is just opening stores to get a store count number up there.

We are strategically opening up in key places around the world that we think have the kind of customers that respond to our products.

So, it is a good call out, and I think you will see as we continue to move through the next couple of years it will continue to grow in importance in our overall segment reporting.

Okay, operator.

Moving on, we'll hear next from David Glick of Buckingham.

Good morning, and add my congratulations, Roger, to you and the team.

Wonder if you could get us more to the mind set of your big customers in the U.S.

and Europe, in terms of how they are reacting to and planning to the business.

Clearly they are in a chase mode.

And I would imagine they are looking at there projected inventory levels at the end of the season which could potentially be well under plan.

And I am wondering at what point, do they start to step up and be a little more aggressive in their forward orders?

And are there trigger dates you have set for spring to react in a more meaningful way given the lead times that you deal with?

I think, David, if you go back to mid-to-late September last year when so much of the financial crisis came to a head, and we also saw a change in the consumer, I think retailers have been scrambling ever since.

They have been first challenged to liquidate inventories last fall that were well in excess of customer demand, which put tremendous pressure on margins.

And then there were expense reduction efforts.

And then, how much can we pull back on spring?

And then, clearly, the fall buys were looked at through the lens of fairly pessimistic retail expectations.

I think while all that was playing out daily, people were waiting to see how the customer would react and how they would move through this.

As we have anniversaried that as an industry, and everybody, lapped the September numbers, and now into October.

I think the question mark was, will the business continue to fall, will it flatten out against last year's depressed levels, or will in fact we begin to move ahead?

Perhaps somewhat misleading because we're going against smaller numbers, but nevertheless will the customer begin to return.

I am of the opinion the customer has begun to move back into a more balanced point of view, those that have money are beginning to spend it again.

Those that probably ove rreached good, did it on borrowed money, whether or not credit cards or home equity loans probably have moved to the side lines to replenish savings, and that is probably appropriate.

So I think when you say when is the retailer going to begin to react, so I think when there is a more certain trend that is more predictable.

When you're buying inventory six and 12 months out I think you have to have a certain confidence in your ability to forecast the revenue.

And I think in the short run you're seeing margin improvements in those retail formats that were going against big clearance numbers.

But I don't think the go forward orders will start to reflect that until maybe fall of '10.

And I think the balance of spring and summer will be one to chase product if more product is needed.

There just aren't that many resources that have the wherewithal to chase product, so I think it gives us a strategic advantage in that we have developed the capabilities to do that better than most.

Long answer for a sick person.

Moving on our next question will come from Michael Binetti of UBS.

Thanks guys, and congrats on a great quarter there.

If I could ask a few house keeping items before I ask my question.

I don't know if you said it, we got dropped off the call there for a second, but how much in the raise in revenue guidance was related to change in FX rates since the last time we talked to you guys?

And then also on Europe, if you could just remind us when you saw trends start decelerating in France and Italy markets that have been a drag for some time now?

Tracey, do you want to handle those?

In terms of the guidance, did you ask?

Yes.

We didn't --

We didn't give FX guidance.

Yes, we didn't give FX guidance.

Yes, we talked about the impact in the quarter in terms of FX rates but not in terms of guidance.

The business in France and Italy, really starting in the summer, has continued to be softer than prior trends.

And Europe today has very strong countries and some countries that are struggling.

I think Tracy even mentioned the the very high unemployment that is hanging over Spain, as a market.

So -- we have recently in the last two or three weeks seen a much improved trend.

Maybe it is the weather changing.

I'm not sure.

But we're very bullish on where Europe is going.

I think they had a little dip for a brief period of time.

Did you have a bigger question, Michael?

My apologies.

Mr.

Binetti, if you could press star 1 again?

Oh well, let's keep going and we will put him back in the queue.

His line is open again, sir.

Hey, sorry.

Sounds like I got cut off there for a second.

I wonder if I could ask a bigger question on the Japan business, please.

It has been about two years since you brought in the majority of licensing there.

If we think about the moving pieces after you acquire a license agreement, I believe there are quite a few parts to the business that can take a few years for you to bring up to your corporate global standards, like retail presentation and taking over some of the manufacturing to your factories.

Or margins should theoretically be better than you had with your licensed partners.

It seems like you have profit drivers in that market regardless of what some people think could be relatively sluggish retail environment for Japan.

And I was hoping you could help us think about the impact of improving profits in Japan on corporate results in the next few quarters.

And maybe if there is a few trigger dates that we should think about, that there could be an inflection point in profitability there, thanks.

Yes, it is a good question.

We have different situations depending on what the license arrangement was.

And you are correct, in Japan where we have now over the last couple years put together most of the licenses, we have been on a process of centralizing and building one organization that will plan and allocate the business, in a more global way.

And we also have IT systems rolling in there now, to help them run the business better.

Manufacturing has been moved into our global manufacturing group, same for supply chain and logistics.

So we have made a lot of changes to integrate the Japanese business into the bigger global platform, which will begin to play out, really next year and then from then on.

So while the market is challenged, and there is no doubt that the overall market in Japan is not buoyant.

We do expect improvement in the profitability of Japan.

And we expect it to be one of the most profitable countries we have.

It has a market cadence that really has extended full price selling, very little promotional activity, and it really should be a high-margin business once we get all the pieces and parts running.

So I thinkin fiscal -- our fiscal '11 and beyond, I think we're expecting to see the Japanese business make meaningful contributions.

And they are successful now, but I think it will go to another level.

Our next question comes from Stephanie Wissink of Piper Jaffray.

Hi, thank you for taking our question.

Congratulations as well.

I just want to focus on Europe, Europe, Roger.

If you could just give us a sense with respect to the real estate environment.

Are you seeing deals improve?

And has that changed your strategy about thinking of going direct in some of these markets?

Is there a reduction in key moneys, and how would you prioritize the markets of opportunity?

Well, I think the fair statement is that whether it is the United States, or Europe, there -- there has been a -- at least a flexibility exhibited in discussing real estate now, where perhaps there was an inflexibility prior to September of a year-ago.

And so what we are seeing is, more properties are available.

Certain brands have contracted or pulled back on their stores.

So there are some key markets that in the past, you would have waited years and years and years, to at least have available properties, now it is coming up.

The question is, who you're bidding against, who wants it, what the use is for, and ultimately what you think you can do with it.

So I do believe the environment is more favorable now, to finding the right kind of properties, whether it is key money, or the rent, or any of the other particulars enthusiastic go into it.

I think those are more open now for discussion than they were in the past.

I think in other parts of the world Asia has continued to to be a red hot market for the right kind of real estate.

I think you have to be careful there about getting too hungry to get a space, and then find out you have got the wrong one.

But the rent terms in Asia are much shorter, generally three to five years, versus longer terms in the United States and Europe.

So I think properties do turnover more quickly in Asia, albeit I haven't seen a softening in the pricing yet.

It appears our final question today will come from Christine Chen, Needham & Company.

Congratulations on a solid quarter in a really tough environment.

Thanks Christine.

I was just wondering.

You are moved around the timing of your charity event that I guess used to be a friends and family event.

And then I just noticed that private sale is actually starting a little earlier this quarter than it normally is.

And I am just wondering what the rationale is behind that, thank you.

Sure, we -- we actually eliminated our friends and family, which we didn't think we needed last year.

It was bigger and longer.

And while we had an event, it was designed to be more gross margin friendly and shorter in duration, primarily driven by strong full-priced sell-throughs in the fall product.

Then we aligned the private sale, to be on the same timing as our wholesale customers.

So that -- there wasn't a misalignment in timing between what our wholesale accounts are doing and retail.

So, with those alignments, both of which should be gross margin friendly, we have come through the fall selling period pretty well.

And fortunately, the customer was not shy about buying product during the early part of fall when they saw something they liked.

So those two changes, I think, were thoughtfully done, and have proven to be positive, both in terms of sales and margin.

Operator, was that the last question?

That was the last question, yes.

Okay.

Thank you all for listening in.

We appreciate your interest.

And we look forward to reporting holiday results in early February.

Thank you.

And thank you, again, for your participation in today's conference call.

This does conclude the event.