雷夫·羅倫馬球 (RL) 2010 Q3 法說會逐字稿

Good morning.

Thank you for calling the Polo Ralph Lauren third quarter fiscal 2010 earnings conference call.

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

All lines will be in a listen-only mode function today.

At the end of the conference, we will conduct a question and answer session.

Instructions on how to ask a question will be given at that time.

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

James Hurley.

Please go ahead, sir.

Good morning.

Thank you for joining us on Polo's fiscal third quarter conference call.

Including Roger Farah, our President and Chief Operating Officer, who will give you an overview of the quarter and comment on our broader strategic initiate; and then Tracey Travis, Chief Financial Officer, will provide operational highlights from the third quarter in addition to reviewing our expectations for the remainder of fiscal 2010.

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

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

Our approximate expectations may contain any risks and uncertainties.

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

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

Thank you, Jim.

And good morning, everyone.

We reported strong third quarter and year-to-date results this morning.

Year-to-date, our profits are at a record level, despite operating in the worst economic environment since the Great Depression.

And we have exceeded our own expectations on oil operating metrics.

We have been able to achieve this level of performance, even as we have intensified our investments and our long-term strategic initiatives, which for the first nine months of the year, include building an entirely new organization in Hong Kong to support our growth aspirations through Asia, investing in important new flagships in New York, Paris, and Greenwich, Connecticut; and developing a host of exciting new products.

We ended the third quarter with more than $1.3 billion in cash and investments, with net cash more than double last year's level.

And we continue to reinvest in our business, buy back stock, and reduce debt.

Of course we benefit from having exceptionally strong product and strategic merchandising initiatives.

As Ralph said in today's release, customers appreciate our unwaivering commitment to quality and invasion, and we are defining characteristic -- which are defining characteristics of our Company.

This brand and product excellence, coupled with superb worldwide execution by the team, has allowed us to succeed.

As much as our third quarter and year-to-date performances reflect the day-to-day operational excellence of our teams, they are also a result of many years of careful planning, investment, strategic decision-making that some times have a negative short term impact, but they have ultimately made us stronger and more profitable organization.

We would not be in the position we are today without these years of preparation and execution.

Two years ago, when the first signs of global financial crisis were emerging, we made a decision that our foremost priority was to protect our brand and our profits.

We executed this by developing focused merchandise strategies and calibrating our global shipment volumes with the expected customer demand trends.

We supported our efforts further by exploring supply chain initiatives that would allow us to capitalize on certain efficiencies, without sacrificing quality or service levels.

The net result of our actions have been strong retail sell throughs of our products across channels.

The benefit of which you see reflected in the 470 basis point improvement in our gross profit margins during the third quarter, and the 270 basis points improvements for the full year.

Both of which are on top of a margin expansion last year.

Across the board, our core products have exceeded their sales plans on significantly reduced stock, and tightly managed receipt flows.

We achieved this level of profitability while remaining absolutely true to our luxury brand positioning.

There aren't many brands or companies in our industry that could make a similar claim.

Our retail performance during the third quarter is particularly noteworthy.

We experienced a dramatic change in our world wide same-store sales trends, with comps rising 6%, after falling 7% in the first half of the year.

And ralphlauren.com maintained its double-digit growth rate.

Our tiered, multi-channel approach through our direct to consumer operations is a strategy that continues to serve us well, and by any measure, we had a strong holiday season.

The decisions we made to adjust our merchandising assortments to accommodate the new customer mind set, in addition to taking significant costs out of the business, helped drive the operating profitability of our retail segment to 17%, up 75% in dollar terms compared to last year and just 60 basis points shy of our historic third quarter peak retail margins.

The recovery in retail sales and margin was broad based across concept and region.

And particularly good for our factory stores, which have been especially strong in the current environment.

There is no questions that customers are increasingly shopping online, where traffic to ralphlauren.com continues to grow at double-digit rate, even as visitors to brick and mortar stores remain down.

We were a pioneer in selling luxury apparel online ten years ago, and continue to benefit from the multi-year investment we've made to develop a state of the art online business with cutting edge technology, distribution, and customer service capabilities.

The cumulative effect of our consistent investment in world class advertising, marketing, and public relations initiative, have also proven be valuable, particularly in the current environment.

Consumers clearly recognize that our brand stands for quality and exceptional value.

Our long-standing associations with premier sporting events such as the Olympics, Wimbledon and the US Open, not only convey the power of the Ralph Lauren brand, but they also accentuate our global visibility and allure.

We will also have very strong coverage at the Winter Olympics in two weeks.

We are proud to be associated with these events, and the world's finest athletes.

And we constantly explore for new ways of reaching customers to increase the visibility of our brands.

For example, rugby.com staged a successful virtual fashion show during the third quarter that significantly increased the amount of attention, and was highly effective in driving awareness of the site.

Given the strength of our brand and the consistent sell through performance, we believe we are well positioned to continue taking market share through sustained productivity gains of our core products.

In addition, we continue to pursue incremental growth opportunities, most importantly in accessories.

As you are aware, we have been working on developing a hand bag assortment for our Lauren brand, and we are currently in market with our first collection of Lauren hand bags.

We expect to deliver this merchandise in leading department store doors this fall.

The product looks fantastic, and we are excited about the long term growth prospect of this category.

The receptivity to our footwear product is expanding rapidly and the profitability of this category is following suit.

On January 1, we successfully assumed control of our business in several Asian markets, including China, that were formerly licensed territories.

I am pleased to report that transition was executed smoothly with no disruption to the business.

We are now directly operating a multi-channel business.

Our ability to execute that transition, which includes the creation of an entirely new locally-based organization, speaks not only to the operational sophistication of our Company but also to the tremendous opportunity we see in this part of the world.

Our efforts obviously require significant investment, some of which you see reflected in our operating expenses this quarter.

To give you some perspective on what we have accomplished over the last year in this region, we have hired and trained nearly 700 employees.

We have obtained lease assignments for all of our locations, we have built a new world class supply chain and logistics network to support the region, and we have built a constellation of management systems and corporate processes.

The net result is that on day one of the transition, our stores were open for business, with our own new POS system.

They were set with spring merchandise and they are receiving goods from our distribution center daily.

The store associates are now being trained and are selling in service cultures.

We did not have any of this infrastructure when we first spoke to you about our plans for this region last year at this time.

So we have clearly come a long way.

To make this kind progress in difficult market conditions really highlights the operational and financial strength of our organization.

With the first part of this transition now behind us, we will begin to develop this region in a measured way, as we focused on managing our existing points of distribution, and learning about tastes and preferences of our customers in this part of the world.

Our spring buys, which were made 12 months ago, already reflect our desire to elevate the brand and educate the customer about the breadth of our offering, by presenting a more balanced mix of men's, women's, fashion and icon product, as well as accessories.

For the first time ever, we are now in control of our destiny and the world's fastest growing region.

We believe this is a powerful position for us for a number of reasons.

It allows us to leverage global best practices in terms of inventory management, assortment planning, retail operations, and logistics.

In addition, our global advertising and marketing messages can be more appropriately aligned with our selling strategies, and perhaps most importantly, it allows us to leverage the incredible scope of products that we offer on a global platform.

We are uniquely positioned to capitalize on opportunities, with our clearly defined portfolio of life style brands, that span the consumer spectrum.

We are already doing a good job of leveraging that portfolio in the US today, but there is still considerable opportunity for us to do so in the rest of the world.

It will obviously take time and investment, but the opportunity is there.

Our year-to-date results demonstrate that we continue to operate from position of strength in a global marketplace that remains very uncertain.

Not surprisingly, our wholesale customers remain cautious about their initial orders, and all retailers, including ourselves, continue to focus on receipt management, trying to drive higher profitability with less inventory.

I believe our third quarter sales and profit results demonstrate we can accomplish this with our own retail operations and that we are effectively maximizing opportunities with our wholesale partners.

Regardless of the external environment, I believe our consistent performance over the last several years, and especially in the year-to-date performance, position us well for the future.

And as we have done historically, we will continue to investment in product innovation, broadening our international scope, and expanding our direct to consumer reach.

Making decisions that enhance the long-term positioning of our brand and profit prospects for our Company.

Now I would like to turn the call over to Tracey to discuss the financial and operational highlights of the third quarter, as well as an update outlook for the remainder of the year.

Thank you, Roger.

Good morning everyone.

For the third quarter, consolidated net revenues were $1.2 billion, less than 1% below the prior year period.

The decline in revenues reflect lower planned wholesale shipments, particularly in the US and Japan, which are partially offset by 8% revenue growth at our retail segment.

The net positive impact of currency translation on our total reported revenue growth for the quarter was approximately 2%.

Our gross profit rate increased 470 basis points to 58.2% in the third quarter, which was achieved on top of a 20 basis point gain in the prior year period, which as you know, was a noteworthy achievement considering the high level of promotional activity in the marketplace last year.

The expansion in this year's third quarter gross profit rate reflects improved wholesale and retail segment margins that were a direct result of the proactive and strategic decisions we made several months ago to calibrate inventory receipt plans to expected customer demand trends.

These decisions ultimately led to fewer mark downs in our own store and a favorable product mix across all channels.

We also had some continued benefit from supply chain initiatives and cost of goods and in freight.

Operating expenses in the third quarter were approximately 10% greater than the comparable period last year, in line with the guidance we provided last quarter when adjusted for some impairment charges.

The higher operating expenses reflect the planned acceleration in costs related to the transition of our Asia-Pacific operations in January.

Other drivers of the increased operating expenses include higher anticipated pay outs for incentive compensation and unfavorable foreign currency translation effects.

Operating income for the third quarter was $173 million, 4% greater than the prior year period, and our operating margins for third quarter was 13.9%, 60 basis points above that of the third quarter of fiscal 2009.

The growth in operating income and the expansion in operating margin rate were primarily due to the higher gross margin profit rate, the gross profit rate and company-wide cost control and restructuring initiatives that were partially offset by lower sales, and the higher operating expenses that I just discussed.

Net income for third quarter of fiscal 2010 rose 6% to $111 million, and net income per diluted share was $1.10, which was 5% greater than the comparable period last year.

The growth in net income and diluted earnings per share principally relate to higher operating income during the quarter.

Our effective tax rate was 33%, and approximately in line with that of the prior period last year.

Moving on to some additional insight into our segment level results for the quarter, I will begin with our wholesale division where sales declined 8% to $604 million were down approximately 11% in constant currency, primarily due to lower planned shipments for some of our domestic products including American Living.

Wholesale shipments were down modestly in constant currency.

A function of cautious specialty store orders in the context of sustained macro challenges throughout Europe.

Our Japanese wholesale volume was also down in the quarter, again a function of broader economic challenges in that market.

From a category perspective in the US, Polo Men's Sportswear continued to be a strong performer during the quarter, supported by focused assortments, compelling gift-giving ideas, and targeted marketing programs.

We continue to see improved trends in our women's businesses, a category that has been challenging for us and others over the last few years.

Our Lauren brand benefited from the increased representation of key sportswear items, and the continued success of the Lauren Jeans Company.

At Chaps, the women's classics program resonated particularly well with the customer.

Footwear shipments were very strong during the quarter for our Ralph Lauren, Polo, and Lauren brands, a function of both expanded assortments and additional points of distribution.

While our Lauren European specialty store customers have suffered disproportionately from the impact of the recession, our business at larger department store groups have been more resilient and offsetting system of the softness in the specialty channel.

We are driving higher productivity and expanding our assortment in several major department stores such as Harrods, Selfridges, and Galeries Lafayette, which also provides tremendous exposure to global travelers and local customers alike.

Our most elevated assortments are featured in their stores.

In terms of product performance, shipments of our men's and women's Blue Label products were the strongest sellers and men's Black Label remains one of our fastest growing brands in Europe.

In aggregate, the United Kingdom and Germany were our best performing European regions, while trends in Italy, which is predominately a specialty store market, remain weak.

Our third quarter wholesale operating income was $107 million, and the operating margin rate was 17.7%, compared to a historic peak third quarter wholesale margin of 19.8% compared to last year.

In addition to the challenging comparison, the 210 basis point decline in the wholesale operating margin rate was primarily a result of deleveraging operating business expenses on lower global shipments volumes and incremental costs associated with and related to business expansion including costs associated with formerly licensed operations.

For our retail group, third quarter sales increased 8% to $592 million.

Overall comp store sale, which include ralphlauren.com, were up 6%, or 4% in constant currency, reflecting 4% growth at Ralph Lauren stores, a 6% increase at factory stores, and 7% growth at Club Monaco.

Our third quarter comps were better than our expectations of a flat to low single digit increase, which we shared with you on the last earnings call, due to broad-based strength across all regions and all concepts.

Of course, we are comparing against a substantial comp decline in the prior year period, when the global financial crisis intensified and there was a very high level of promotional activity in the market.

Overall traffic trends in our stores remain challenging during the third quarter especially in the US, and despite a rebound in tourist travel to gateway cities.

Comp growth was primarily achieved with higher average dollar transactions, mostly due to higher full price selling.

We have slowly begun to see the gradual return of our core luxury customer, who purchases our collection and Black Label merchandise.

At ralphlauren.com, sales rose 13% in the quarter with childrenswear, menswear, and footwear being the top performing categories.

With respect to our European Ralph Lauren stores, the United Kingdom and the Benelux countries continue to be our top performing regions.

Even though we saw improved trends in Milan, France, and Germany, those markets remain challenging.

Our factory stores continue to experience broad based strength throughout Europe and across all product categories, although once again the United Kingdom had the largest comp growth in the region.

In Japan, we achieved positive sales growth at both our Ralph Lauren and factory stores, clearly out performing overall market trends, although we have a relatively modest Japanese retail network at this time.

We opened five directly-operated stores globally during the quarter, including our Ralph Lauren store in Greenwich, Connecticut; which Roger shared with you earlier, which primarily showcases our women's and home products in addition to the small collection of men's sportswear.

We ended the third quarter with 333 directly-operated stores globally.

Our retail segment operating income grew 75% in the third quarter to $101 million.

The retail operating margin was 17%, 650 basis points greater than the prior period last year, when profitability was significantly pressured by a sharp comp decline and elevated promotional activity.

This year's growth in retail operating income and the expansion in margin rate was a primarily a result of positive same-store sales growth and stronger full-price sell through rates across most of our retail formats in addition to disciplined operational and inventory management, including the benefit of restructuring actions that we took in fourth quarter of fiscal 2009.

Licensing royalties for the quarter were $48 million, 3% below the prior year period, due to a decline in fragrance and home product licensing revenues that were partially off set by higher international royalties.

Operating income for our licensing segment was down 12% to $24 million in the third quarter principally as a result of the lower licensing royalties and incremental Asia-Pacific related expenses.

We ended the third quarter with more than $1.3 billion in cash, cash equivalents, and investments, compared to $908 million in the prior year period.

Net of debt we had $1 billion in cash and investment at the end of the quarter, up from $489 million last year.

Inventory was down 7% from the third quarter last year.

This decline is a function of the work we have done to calibrate shipment volumes to expected customer demand trends, which was somewhat masked during the first half of the year, due to our strategic supply chain initiatives, which continued to result in higher in transit inventory which we have explained to you on prior calls.

We spent approximately $51 million on CapEx during the third quarter to support new retail stores, also shop installations and other infrastructure investments.

We also repurchased approximately one million shares of stock during the quarter, utilizing $78 million of our outstanding share repurchase authorization.

And we had $352 million of share authorization remaining at the end of the quarter.

In this morning's press release we outlined expectations for the remainder of fiscal 2010, which I would briefly like to review with you now.

Based on our better than expected year-to-date sales performance, we raised our top line guidance, and we are now looking for a low single digit decline in consolidated revenues for the full year.

Which compares to our prior expectation of a mid single digit decline for fiscal 2010 revenues.

This guidance implies a mid single digit decline in wholesale shipments in the fourth quarter.

As well as a low double digit increase in same-store sales for our retail segment.

Which does include an additional week of sales compared to the prior year period.

The 53rd week.

The impact of this additional week to our consolidated earnings is not expected to be material as we will have an extra week of expense for the balance of our enterprise offsetting any incremental retail profits.

Also beginning in the fourth quarter, please keep in mind the that sales results from our newly transitioned Asia-Pacific operations will now be reflected primarily in our retail segment.

As we have communicated on last few calls, incremental expenses related to our new Asia-Pacific operations are most pronounced in the fourth quarter.

As we now have the full cost of our infrastructure, inclusive of all store, and all shop locations with payroll for several hundred new employees, as well as full occupancy expenses for running all of our points of distribution.

In fact, the fourth quarter impact of the Asia-Pacific operations is expected to be dilutive to our earnings by approximately $0.08 to $0.10 per diluted share.

With sales slowly ramping up to the initial network of store locations.

The impact of incentive compensation accruals is also expected to yield additional expense pressure, as is the higher mix of retail sales in the quarter.

As a result, we are currently forecasting operating expenses for the fourth quarter of fiscal 2010 to exceed those of the prior year period, including last year's impairment and restructuring charges, by a mid single digit rate.

Let me close our prepared remarks by saying we are extremely proud as a management team of how we have navigated the business through these challenging global times, delivering $365 million of net income year-to-date, or 1% above the prior year period.

As Roger indicated, and Ralph continues to reinforce to us all, it is a testament to the strength of our brand, our global management team, our global partnerships, and to the strategic decisions we have consistently made over the last several years, that we have been able to deliver outstanding results under such challenges circumstances.

At this point we would like to open the call up to Q&A.

Operator, can you please assist us with that?

Thank you, Ms.

Travis.

(Operator Instructions).

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

Thanks.

Good morning.

I have one question and one follow up if that's okay.

My first question would be Roger, and/or Tracy, can you talk about the divergence in trends between wholesale and retail at -- you're obviously a very kind of diversified multi-channel Company.

Help us understand what you are seeing at retail both in our own stores as with well as in your partners you sale wholesale through and explain that divergence when you might see that flip.

Sure.

First of all, last year, at this time, if you remember, our third quarter, fourth quarter, and first quarter of the new year had been bought by our wholesale customers, before the events of September, which really accelerated the decline in the business.

So at least through third, fourth, and first quarter of next year, we really saw more normalized receipt flows and inventory purchases by your customer.

I think as the full impact of the September, October, November periods were felt, retailers began to cut back receipts, starting with fall of this year, into holiday, and continuing full 12 months into spring and summer of next year.

So in the wholesale channel, we are really still lapping very strong wholesale on orders by our customers, and their desire to correct their inventory and receipts really didn't take effect until fall of 2009.

In our retail businesses, we are obviously buying our own producing.

We corrected also our receipt flows, for starting fall, holiday, and now into spring, and what you are seeing in our retail results and the gross margins and operating profit improvements are the improved sell throughs.

So the products are in demand.

The inventories are in line, and the sell through versus improved, and the margins are up.

And I would expect our wholesale partners are experiencing this same phenomena.

But obviously for us, it is a lower sale-in and we will have to lap all of that until we begin to see on orders, anniversarying that and begin to move forward again.

So I think it is just the timing of the two, wholesale and retail segments, yet the sell through at point of sale for our wholesale customers was significantly better this third quarter, and I think that bodes well for on order going forward into the fall and holiday of next year.

Next week, Operator?

Our next question comes from Liz Dunn with Thomas Weisel Partners.

Hi.

Good morning.

Congrats on a good quarter.

I guess my question really relates to the expense in the fourth quarter.

I think previously, we had considered your guidance based on adjusted results for the fourth quarter.

And in the release you're highlighting that it should be based on what looks like a number of $594 million from last year.

And then, a mid single digit increase on top of that.

But it also looks like the guidance for the Asia dilution is about $15 million.

So could you sort of help us bridge the gap?

Is it different than your original expectations, or was it just a misunderstanding?

And how much is incentive compensation, and how much is sort of on going higher expense levels?

Liz, I am going to try a piece of that and then Tracy is going to try the other part.

The Asia-Pacific transition, which, as I spent a little time on the call talking about, was a January 1 cutover.

Our expectation when we took on that business is we would acquire at that point, the inventory of the licensee from fall of 2009 forward, and then the spring on order could be ours.

[Dixon], who is our license partner, really sold through that fall on order to to a very low level.

So it is normally a clearance period in Asia January and half way into February.

For us, it is a period of exciting new deliveries, spring goods, but very little clearance to offer in a marketplace that in the middle of January and February is promotional.

So what we have got is you heard is all of the employees, all of the expense, all of the infrastructure that was built, but the sales will only begin to ramp up as we work our way through the quarter, and we begin to get to the back end of the quarter, when they're more normalized spring selling periods.

So, it is really the six, seven weeks in the early days where the stores are getting new inventory and preventing that to customers or getting a nice reaction.

But obviously we don't have any of the fall holiday clearance that all other businesses in the region are liquidating.

So that affects the dilute in the transition quarter.

In terms of the expenses in the quarter, as you know, Liz, we did not give guidance for the quarter.

There is a fairly sizable difference in mix of sales in the quarter between wholesale and retail, and that obviously for us from an expense standpoint, has a fairly sizable impact on expenses in the quarter.

So if you think about the year-over-year difference in our expense and if you think about your model and how you model our business and the growth year-over-year, much of our growth year-over-year is coming from retail, our wholesale business is actually down.

So when you think about how to remodel quarter, from a growth standpoint, I would keep that in mind when you're reflecting that.

So a piece of it is the growth related to expenses, as Roger just talked about for Asia-Pacific.

And then a piece of it is the growth related to retail, of which has an extra week as well of expense, in there for us.

And that, those two alone represent almost two-thirds of the expense.

Next question, Operator, please.

Our next question comes from Bob Drbul with Barclays Capital.

Hi.

Good morning.

Morning.

Roger, I was wondering if you can comment on American Living and what you learned this holiday season and sort of how you are thinking about some of the refinements to that in 2010?

Sure.

American living has been an interesting journey.

We are now about ready to come up on two year anniversary this February when we launched.

Obviously we launched into a more difficult market than we had anticipated.

A couple of learnings over the last year or two have included customer preferences in terms of product content, whether it is men's, women's or kids.

The color pallets that the [Penny's] customer reacts to, the product offering in terms of fashion quotion as well as price.

We came out into the marketplace at a significant premium to the Penny's high end price points.

And again, we have moderated those so we still are positioned as the premium brand within their assortment.

But the delta between where we were priced and where the customer was willing to buy a new brand, I think, has been one of the big learnings.

I think we have also looked at our marketing and advertising messaging in an effort to launch a new brand that had no prior customer knowledge.

How we talk to that customer, how we shaped our message, the imagining we project, have all been looked, at studied, and I think for Spring 2010 we are heading into, and the fall season that we have already booked, I think you will see those product pricing, fashion, color changes reflected in all merchandise categories, and I think Penny's and Global Brand Concepts are all excited about where that's going to go.

Thank you.

Next question, operator?

Is from Adrianne Shapira with Goldman Sachs.

Thank you.

Good morning, just Roger, could we go back to the expense point.

I appreciate the color on the fourth quarter, and to why the dilution, perhaps help us think about preliminarily the right way to think about a run rate in 2011.

Your comments about the wholesale lag, should we expect that to continue into the first half of 2011 as a result, continue to see expense deleverage as it relates given the accelerated ramp in retail as it relates to Southeast Asia.

Some early color about how we should think about expenses in the near term given what is clearly continued pressure on the wholesale business would be helpful.

Thanks.

Okay.

We are going to save our more complete comments for May about next year, but let me just touch on a couple of the issues you raised.

Clearly, the lag in wholesale as I articulated earlier, we do expect as we go through fourth quarter and first quarter, again we are going against a different point of view by our wholesale audience, although we have come through with very strong holiday sell throughs.

We expect receipt dollars to be very tight, until the retail community really understands what the spring business will be.

So there will be a deleveraging on the core businesses.

Second, we certainly have investments in start up or a new concepts like Lauren hand bags, where the actual sales will not be reflected until we get into the fall shipping period, but we have incurred the expenses and the production and the inventory to support that, and so that's playing through our thinking for next year.

Additionally, Asia-Pacific, as we have talked about, the substantial commitment to that, and the long-term excitement.

We do have modest expectations about its contribution in the early years, as we look to grow and develop that business.

Lastly, I think it is also fair to say, that we are demonstrating stronger retail businesses, we are very proud of the fourth quarter comp when coupled with the gross margin improvement.

Certainly, there were opportunities to whip that comp a little harder if we were willing to be more promotional, and that was not the direction that our retail team took.

So with a blend of the comp sales and the higher margins we think served us well, and it is really the strategy going forward.

But, in a mix of retail and wholesale, we certainly make more money in wholesale than we do in retail, and the expense rates in wholesale are dramatically less than retail.

So some of it is a mix issue, and some of it is an investment issue, and some of it will be a timing issue, and that's how we are really thinking about our fiscal 2011 in total.

Hope that's helpful.

Next question, Operator.

Our next question comes from David Glick with Buckingham Research Group.

Good morning, Roger.

Just want to get this is a follow up on the wholesale business, I am still having a little trouble reconciling what I hear your commentary and what I hear in the channel about how strong your businesses are performing.

There's some pluses this spring, and I would have thought may have helped your wholesale trend, certainly your women's footwear business is growing in a very strong rate.

I'm hearing about a new sub-brand in sportswear.

Chaps is very strong, and your men's business is very, very strong.

I thought we might see a little bit more of a bounce back in March or June, and just wonder if you can comment on that, and then what kind of bounce back can we really hope to see given your strong performance.

You've had I believe some markets for fall already, and maybe some color whether you are starting to see sign where you could really see nice sales increase for the wholesale business in the US for the second half of calendar 2010.

Well, thank you for the paid political announcement.

You are right, we have experienced really terrific sell throughs with our wholesale partners in all of the areas you checked off.

In addition to which, I would add that the women's business, and I think Tracy touched on this, for the first time in our third quarter and now into the new year, is also beginning to perform, which as you all know, the women's category for a couple of years for industry has been a bit of a lagger.

So we are getting very strong sell throughs.

We talked last conference call about chase product, and reorders, but I would tell you that the spring buys and summer buys were really bought long before the reaction you just articulated for fall and holiday occurred.

And I think the retailer is very cautious about leveraging current results into more on order until they see how their overall business reacts.

With that said, David, the markets that we've had to date, which are the men's market and kids' markets, and as of this week, the beginning of the footwear and hand bag markets, retailers are coming in positive about the results.

We clearly out performed the market.

Some of that was careful sells in which resulted in better sell throughs, which helped the margins, and I think mood going forward into the fall buys and beyond that holiday buys, I think will begin to reflect that.

But it is premature to declare a conclusively that's that is going to happen.

I think we will talk more about that in May.

Next question Operator, please.

Is from Christine Chen with Needham and Company.

Thank you.

Wondering if you can maybe go into a little detail about Asia, and I know you said it was predominantly retail, but is it country specific thing, and what sort of impact are you expecting on gross margins?

Thank you.

Christine, I think the interesting fact about our Asia acquisition it that it is heavily dominated by distribution in Hong Kong and Taiwain.

We are very underpenetrated in mainland China, and I think we all know that over time will be the significant opportunity, and I believe that over time, mainland China will dwarf anything that we have today, as we start up day one.

And I think what Tracy said earlier is our reporting of that business will be primarily reported through our retail segment because the actual operating model over there really closely mirrors our retail business.

It really isn't as similar to a wholesale business.

It is where we buy the product.

We own the product, we staff the stores, we manage the inventory and we are responsible for the results and/or we have our own stand alone stores.

I think the current business as well as the future business will have characteristics that are more similar to our retail business than the wholesale business where you sell in, they sell it, they staff the stores, and then there's a wholesale margin.

So as we go forward and as as a matter of fact, we opened a store in [Macow] last week, we have two additional stores opening shortly, we will begin to manage the real estate process, future store locations and sites and our orientation will be more heavily to mainland China than the current network of stores we have acquired.

Next question, Operator, please?

Comes from Jeff Klinefelter with Piper Jaffray.

Yes.

Thank you.

Roger, just a quick follow up on Asia and also Japan.

The Japanese market has been very, very challenging in the last year, and I was just -- and also my understanding is transitioning quite a bit in the traditional department store channel.

Can you speak more specifically to your plans there, and some of you are still out performing that market overall, picking up some share, but can you talk about that and your plans to maybe expand more retail direct in that market as opposed to traditional shop and shop or wholesale?

You are absolutely right.

The market has been difficult, and I don't think it is just the economy or the season.

I think there is a shift going on in Japan that has significant long range consequences.

It is a market that has been dominated by department store distribution, very intent sales per square foot.

Shop and shops either directly controlled by the brand or closely controlled by the brand.

And that has been our primary channel of distribution.

Since we acquired the business, we have obviously been focused on improving that, and then integrating the Japanese business into our infrastructure, our supply chain, and collapsing the three license entities into one.

But going forward, I think we are going to have to look not only at the traditional channel of distribution, but more mono brand distribution, as we see that market evolving.

There is also a movement in Japan that is clear, that has the pure luxury players suffering, and customers looking for value, looking for faster fashion, looking for more youthful presentations.

That trend is clear.

And I think we are well positioned given our brand architecture to address many of those opportunities going forward.

I don't think it is going be an easy market in its traditional sense.

But it is the second largest luxury market in the world, and I think we have started, we have made good progress, we are picking up share as you said, but we have a long way to position that market in terms of where the customers are taking us.

Next question, Operator, please.

Comes from Michael Binetti with UBS.

Hey guys, good morning.

Good morning.

I just wanted to see if we can talk about Europe for a minute, that obviously recently became a $1 billion brand for you guys and you have had such a nice runway there over the years.

When you look out to calendar 2010, can you talk to us about what you think about as far as the composition of the growth in Europe in 2010?

Is it -- do you see a lot of growth with existing distribution or new geographies, maybe you could just give us a little color there.

Sure.

We've had tremendous results in Europe and this year has been much stronger than we had originally planned.

The recession and economic issues were felt there, but perhaps not as strongly as it was felt here.

The question is whether it will will last longer or whether there is a double dip in Europe, and I don't think anybody knows.

Our strategy, which has included a network of our own stores, shop and shops and department stores and specialty stores continues to be the backbone of what we are doing, but what we are seeing is a contraction in the small specialty store, many of which did not fair well in the economic downturn, and we have made decisions where we did not want to ship people who might be in more difficult financial straits.

We have also as we begun to improve our network of stores, have reduced distribution of some of those smaller stores in key markets.

We continue to invest in shop and shops and department stores, and we will use where we are putting flagships down, for instance, in Paris this April.

We will hub around that important presentations of key product lines in the departments stores or specialty stores in that market as well.

I think we have talked in the past using London as an example where we have our own stores, both flagship and neighborhood.

It also happens to be where we have tremendous positioning in department stores.

We are doing that now in Paris.

We opened a second store last October, we will open a third store this April that will be a terrific representation of the brand.

At the same time we are trying to elevate the market around it.

It worked successfully in London, it worked successfully in Milan, and we are now doing that in Paris.

I think our strategy is very clear in Europe, and I think as we have elevated the brand, I think the brand today is not only large, successful, and profitable.

I think it is viewed in a different light and I think that is allowing us to leverage relationships with other key customers to get the distribution we are looking for.

Next question, Operator?

Our final question comes from Chris Kim with JPMorgan.

Good morning, everyone.

Good morning, Chris.

You gave some pretty positive commentary around the sell through transition of your wholesale partners, but I was wondering if you could talk about the progress being made, and increase of penetration of either additional label, categories, into some of these key partners.

You talked about London.

I think historically you have given Bloomingdales at 59th Street as an example.

This especially as it relates to Europe and Asia.

Chris, I was positive in support of David's comments, because he was right, we have experienced strong sell throughs, and again our strategy has been to extend brands and merchandise categories, whether it is accessories, whether it is home, whether it is kids, whether it is any of the product extensions.

I think as we talk about Europe, we are about a year into the launch of Lauren Sportswear.

As we continue to learn and understand that business, an example would be an opportunity to extend accessory categories in that market, and once we have established the distribution points that are appropriate.

So we let the business grow incrementally as we move out.

I think the same thing over time will apply in Asia as we look to broaden and deepen the portfolio of labels that are distributed in those points of distribution.

So, we are looking forward to doing that but we are looking forward to doing it in a way that we hope will be successful.

I think the footwear example here in the United States, as you all know, we brought back that license several years ago.

We put it through a rehabilitation, we had to develop the sourcing, manufacturing, supply chain, to be experts in that.

We have got a terrific team of leadership, folks at both the Ralph Lauren collection level as well as the Lauren level, and we are gaining market share, and points of distribution on a worldwide basis.

That is all very exciting, and it is encouraging us, as we now are on the cusp of broadening the assortment of hand bags.

So, it is part of the Company's DNA.

We are trying to do it thoughtfully in this environment, and I think our wholesale partners are quite excited.

Okay.

At this point I appreciate your interest and involvement.

We look forward to the May call as we look to update you on our fourth quarter results.

And really sum up our thinking in terms of these new initiatives as we head forward.

Thanks.

That does conclude today's conference.

Thank you for joining.