雷夫·羅倫馬球 (RL) 2011 Q1 法說會逐字稿

Good morning and thank you for calling the Polo Ralph Lauren's first quarter fiscal 2011 earnings conference call.

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

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

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

(Operator Instructions) 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 first quarter fiscal 2011 conference call.

The agenda for the call today includes Roger Farah, our President and Chief Operating Officer, who will give you an overview of the quarter and comment on broader strategic initiatives and then Tracey Travis, our Chief Financial Officer, will provide operational and financial highlights from the first quarter in addition to reviewing our expectations for fiscal 2011.

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

During today's call, we'll be making some forward-looking statements within the meaning of the Federal Securities Laws, including our financial outlook.

Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements.

Our expectations contain many risks and uncertainties.

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

And now I'll turn the call over to Roger.

Thank you, Jim, and good morning, everyone.

We are reporting terrific first quarter results today with consolidated sales up 13%, operating profits increasing nearly 50% and our diluted EPS rising approximately 60%.

With better than expected sales and gross profit margins in addition to discipline expense management, we delivered very strong profit flow-through.

We experienced broad base improvements across all business segments and in most major merchandise categories.

And the profitability of our wholesale and retail segments is at or near historic high levels.

In our wholesale segment, global sales increased 11% in the first quarter.

Sales and profits trends were particularly strong in the United States and in Europe, where we are clearly gaining market share.

This is especially true for the Polo men's sportswear brand.

Our Lauren apparel merchandise had a strong season across most product categories, as a result of our key merchandising initiatives.

Emerging product categories such as footwear and dresses continue to benefit from expanded distribution and productivity gains at existing locations.

Internationally, our European wholesale performance was good throughout the region.

Japanese trends were somewhat softer, a function of market dynamics and our proactive measures to ship less wholesale inventory into the department stores.

Building on our wholesale momentum, Lauren handbags will be available in 150 of the top North America department store doors and on ralphlauren.com in less than two weeks time.

National advertising campaigns to support the launch will run in several September magazines.

Our teams have developed very compelling iconic merchandise, the price points that range from $150 to $400.

We believe we are offering excellence in design and value to the customer.

Of course, we've sold three seasons worth of merchandise before the end-consumer has even seen the first product.

So, we will update in November how the early deliveries are received by the consumer.

At our retail segment, consolidated same-store sales were up 7%, reflecting excellent growth in all markets except Japan.

But Monaco's performance was especially noteworthy since its 25% comp was supported by broad base improvements in all key performance indicators and ralphlauren.com continues to deliver outstanding results, growing 15% during the quarter.

We're in the final stages of launching e-commerce in the United Kingdom in early-October.

The launch is really a first step in a broader European rollout that is expected to include several other countries over the next few years and will eventually include Asia.

The development of international e-commerce will allow us to reach a meaningfully larger audience than we are able to do with brick and mortar stores only.

Of course, we continue to open brick and mortar stores in strategic locations worldwide.

During the first quarter we opened a magnificent new Paris store on St.

Germain.

There are several events in advance of the opening of that store that allowed us to reinforce to the customers the luxury lifestyle aspects of the Ralph Lauren brand.

Store sales have been trending well ahead of expectations and accessory performances have been particularly strong.

This is our third store in Paris, but more than 70% of the customers shopping there are totally new customers to us.

The momentum we have coming off of the St.

Germain opening builds this fall as we're prepared to unveil two global flagship stores in New York City.

One is a new 40,000-square foot structure that will allow us to showcase an expanded assortment of women's apparel and accessory products as well as our home collection merchandise.

The second is the renovation of the existing Rhinelander Mansion, which will become exclusively men's apparel and accessory products.

We've worked for several years to develop these multi-store flagship complex, which also includes our two children's stores on Madison Avenue between 71st and 72nd Street.

We are very excited to be able to appropriately present the breadth and scope of the world of Ralph Lauren in such a comprehensive and impactful way.

Expanding and elevating our international presence is one of our highest strategic priorities.

The best example of executing on this is the evolution of Europe, which has grown dramatically over the last several years and where we continue to gain market share.

And despite the considerable news flow of economic and consumer instability throughout Europe, we had an excellent spring season with our men's, women's and children's products across most countries and channels of distribution.

We believe there is still considerable growth opportunity for us in Europe as we introduce new brands and merchandise categories into the market.

Two weeks ago, we announced that we will assume direct control of our distribution in South Korea beginning on January 1, 2011.

Assuming control of South Korea is another important milestone in our broader Asia growth strategy.

Once that transition is made, we will fully control our distribution throughout Asia, arguably the fastest growing consumer market in the world for luxury goods.

It enables us to directly operate all of Asia with greater consistency across all markets and channel, in a manner that is more closely aligned with our global brand positioning and objectives.

Today, with our brand sales across Asia at approximately $850 million, concentrated primarily in Japan and South Korea, our long-term goal is to have the region represent one-third of our global sales which implies significant growth from its current levels.

We've been working on this goal progressively over the last several years.

We started by taking control of our Japanese operations about three years ago.

Since then, we've made major strides in enhancing the organizational capabilities of our operations.

In the context of challenging department store trends, we are gaining market share and we're meaningfully improving our profitability.

Seven months ago, we assumed control of our operations in eight Asian countries, most notably China, Hong Kong and Taiwan.

As many of you know, we have since built a Hong Kong-based hub that is not only meant to support our current and rather modest distribution in these newly transitioned countries, but also to act as a platform for transformational growth throughout Asia.

With South Korea coming on board, we will be assuming a customer base that has been developed over the last 12 years.

The market currently represents $230 million in revenue through a network of 175 shop and shops and five freestanding locations, making it the third largest single country for us in terms of sales volume.

South Korea has developed strong appreciation for our iconic lifestyle sensibility and we're excited to build on this success, leverage best practices as we grow our presence and build brand awareness in other parts of Asia.

The first quarter results are strong by any measure and we achieved this performance even as we intensified our investment in strategic growth initiatives across channels, geographies and merchandise categories.

The operational discipline of our global teams and the robust sell-throughs, which we consistently referred to over the last several quarters, delivered excellent margins and yielded incremental market share opportunities for us.

As we assess the outlook for the rest of the year, there's no question the overall operating environment remains uncertain.

Traffic trends are lackluster and consumers are still being selective with their purchases.

A strong value orientation continues to prevail and the mood remains subdued as evidenced by the recent decline in consumer sentiment.

In Europe, the overwhelming belief is that economic growth will continue to slow.

Wholesale customers remain conservative with their initial orders in the United States.

Foreign exchange rates are dynamic, and cost of goods inflations are substantial challenges that begin to merge for us in the second quarter and are expected to persist the remaining of the year.

They are key drivers in the difference between our first quarter results and our full year expectations.

In spite of these external challenges, we are confident in our ability to execute against our strategic objectives for the balance of the year.

Our portfolio of brands and products and exceptional merchandise strategies allow us to be responsive to market dynamics in a manner that is consistent with our goal of elevating and protecting our brands.

The importance of trusted brands and compelling product is critical, and our unique competitive advantage in this area has enabled us to continue to perform at a high level around the world.

There is no better proof of this than our first quarter result, and really our performance over the last couple years.

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

Thank you, Roger, and good morning, everyone.

For the first quarter, consolidated net revenues were $1.2 billion, 13% greater than the prior year period and in line with the expectations we outlined for you in May.

The growth in that revenues reflects double digit gains for our wholesale and retail segments, that were partially offset by lower licensing revenues.

As a reminder, Japanese concession shop sales and profits which had previously been reported in our wholesale segment, are now included in our retail segment along with our newly acquired Asian concession shop business.

Our press release and financials related to the press release reflect the impact of this change in our Japan segment classification both for the current quarter and the comparable prior year period.

The net negative impact of currency translation on our total reported revenue growth for the first quarter was less than 1%.

Our gross profit rate increased 310 basis points to a record level of 61.8%, reflecting improved profitability across most major merchandise categories and geographic regions, primarily as a result of continued disciplined inventory management and higher full price selling, as well as favorable geographic, product and channel mix.

Continued savings from our sourcing and supply chain initiatives also supported our gross profit margin expansion in the first quarter.

The broad based improvement in the first quarter gross profit rate was a significant driver of our outperformance relative to our expectations on our last call.

Operating expenses in the first quarter were approximately 11% greater than the prior year period.

The higher operating expenses reflect incremental costs associated with newly transitioned Asian operations and continued investment in our strategic growth initiatives, such as European e-commerce, new store openings and infrastructure support.

Despite this higher level of investment spending, we were able to achieve 70 basis points of operating expense leverage during the quarter as a result of strong sales growth and continued core business expense discipline.

Our ability to leverage operating expenses was another important driver of our outperformance relative to our first quarter expectations.

Operating income for the first quarter was $174 million, 49% greater than the prior year period.

Our operating margin also showed considerable improvement expanding 370 basis points to 15.1%.

The growth in operating income and expansion in the operating margin rate reflect improved profitability across all channels of distribution and most geographies, and was partially offset by incremental expenses associated with the business expansion.

Net income for the first quarter of fiscal 2011 increased 57% to $121 million, and net income per diluted share rose 59% to $1.21 compared to the prior year period.

The growth in net income and net income per diluted share principally relate to the higher operating income I just discussed, as well as a lower effective tax rate of 29% compared to 33% in the first quarter of fiscal 2010.

The lower tax rate this year reflects the favorable resolution of discrete tax items in the quarter

Regarding our segment highlights for the quarter, our wholesale segment sales increased 11% to $523 million.

The increase was supported by double digit shipment growth in the US and in constant currency in Europe.

From a product perspective, shipment of our core men's, women's and children's apparel merchandise were particularly strong during the quarter, as were domestic shipments of Polo and Lauren branded footwear.

Our first quarter wholesale operating income rose 41% to $108 million and the wholesale operating margin expanded 440 basis points to 20.6%.

The substantial improvement in wholesale operating income and margin rate were primarily a result of higher global shipments and improved wholesale segment gross profit rates, a function of strong sell-throughs at retail supported by continued inventory discipline, favorable product mix, particularly with basic stock replenishment merchandise, and continued sourcing and supply chain benefits.

Expenses during the quarter including investments for strategic initiatives such as handbags were leveraged with the higher overall segment sales.

For our retail group, first quarter sales rose 16% to $593 million reflecting incremental sales from newly assumed stores in concession shops in the Asia region, solid comparable store sales growth and the contribution from newly opened stores.

Overall comp store sales increased 7% reflecting a 2% decline at Ralph Lauren stores, which was primarily a function of lower Japanese sales, an increase of 8% at factory stores and an impressive 25% increase at Club Monaco stores that was accomplished with the support of a strong women's and accessories department.

Ralphlauren.com sales increased 15% this quarter.

The growth and retail segment sales is particularly noteworthy as the comparable prior year period included Easter, which shifted this calendar year into our fiscal fourth quarter 2010 results.

Our 7% comp growth was primarily achieved through higher average dollar transaction values, mostly due to greater flow price selling activity.

Traffic to our US stores was essentially flat with the prior year period, and urban markets and key tourists destinations continue to outperform the average comp trend.

In Europe, our retail concepts benefited from an increase in transactions in addition to higher average dollar per transaction sales.

European factory store performance was particularly strong across regions during the quarter, and Japanese factory store sales grew at a strong double digit rate.

Sales for our newly transitioned Asian stores and concession shops demonstrated progressive improvements throughout the quarter.

We continue to learn about the unique characteristics of each of our regions in terms of customer taste and preferences and are evolving our merchandise allocations to better address the needs of each market.

During the first quarter, we opened eight directly operated freestanding stores and closed five stores, ending the quarter with 355 company operated stores.

We also operated 293 concession shop locations throughout Asia at the end of the first quarter.

Our retail segment operating income grew 50% to $104 million in the first quarter and the retail operating margin increased 400 basis points to 17.5%.

The substantial improvement in retail operating income and the expansion in margin rate comes as a result of broad base profit improvement across most retail concepts, particularly in the US and in Europe.

Sales growth and reduced mark downs due to a continued focus on aligning inventory levels with sales trends, were the primary drivers of the improvement, which was partially offset by incremental expenses related to our newly assumed Asian operations.

Licensing royalties for the quarter were $38 million, 8% below the first quarter of fiscal 2010, primarily due to the transition of formally licensed Asian operations and lower home licensing revenues.

Operating income for our licensing segment declined 7% to $24 million.

We ended the quarter with approximately $1.1 billion in cash and investments and $801 million in net cash.

Inventories were up 3% from the prior year period, inclusive of the incremental inventory to support the nearly 100 newly transitioned Asian concession shops and stores, and the 12 net new stores we added over the last 12 months.

Excluding the incremental Asian inventory, consolidated inventory declined 4% in the first quarter of fiscal 2011, compared to the comparable prior year period last year.

For the last 12 months, a return on equity was 18% and our return on investment was 35%.

We spent approximately $39 million on CapEx during the first quarter to support our new retail stores, shop installations and infrastructure investments.

We also repurchased 2.7 million shares of stock, utilizing $231 million of our current authorization.

At the end of the first quarter, we had approximately $319 million remaining under our authorized share repurchase program.

We are very pleased with our first quarter results, recognizing that in the first quarter of last year we were still experiencing negative comps due to challenging retail traffic trends.

Our profit performance reflects the operational discipline of our organization, particularly as we continue to invest in strategic growth initiatives this year.

The trends have been better than we initially anticipated back in May, and this momentum supports our committment to continuing to invest for long-term growth.

During the remainder of fiscal 2011, we will be managing the launch of our UK e-commerce websites and the launch of Lauren handbags.

We will also continue to manage the startup of our Hong Kong-based operations while assuming the additional startup of the South Korean operations.

Due to the additional investment related to these startups and the sales and distribution build required for our new products, new channels, and new geographies, these initiatives won't have an immediate positive impact on profits this year.

However, we do expect them to be meaningful future contributors to profit growth for the Company.

In this morning's press release, we provided our updated outlook for the year.

Apart from the continued momentum we are experiencing for our core business, there are a few important differences between the first quarter trends and our expectations for the remainder of fiscal 2011.

But first, as an unfavorable foreign currency exchange rate impact, which will depress reported sales and gross profit margins, another is the evolution of our consolidated Asia strategy, which will result in some near-term deleveraging of operating expenses in order to pursue the considerable sales and profit potential we expect from this region over the long-term.

And we continue to anticipate cost of goods inflation relative to rising labor and raw material costs in the latter part of our fiscal year.

For the second quarter of fiscal 2011, we currently expect consolidated net revenues to increase at a high single digit rate.

Our expectations are based on a low single digit increase in global wholesale sales, which reflects continued growth in the US and in constant currency in Europe, that is partially offset by meaningful negative currency translation and a decline in wholesale shipments in Japan, to better align with sell through trends in the department stores.

For our retail segment, we currently expect mid-single digit comps, which also reflect softness in our Japanese store concession sales due to sales trends and reduced clearance inventory.

The negative impact of foreign currency translation on our reported sales is expected to be most dramatic during our second quarter.

Our operating margins for the second quarter is expected to be 100 to 150 basis points below that achieved in the prior year period.

This decline is a function of both gross margin pressure, due almost entirely to foreign exchange impact, and incremental expenses and reduced profit associated with our various Asian investment initiatives, inclusive of Japan.

Costs associated with preparing for the transition of the South Korean operations are expected to be diluted by $0.02 to $0.03 in the second quarter.

Partially offsetting the dilution is continued growth in the US and Europe in constant dollars, as I mentioned previously.

For the full year, fiscal 2011 period, we expect consolidated revenues to increase at a mid- to high-single digit rate, led by our retail segment and partially offset by a high single digit decline in licensing revenues, which primarily reflects the impact of our assuming more direct control over certain geography.

Included in our expectations is approximately 150 to 200 basis points of net unfavorable currency translation impact on our sales for the full year fiscal 2011 period.

As a reminder, our outlook for fiscal 2011 is for a 52-week period and compares with fiscal 2010's 53-week period.

The fourth quarter's extra week of sales and profit will not be anniversary.

Based on the first quarter's better than expected profitability and in spite of higher investment spending and uncertain global economic trends that we expect to impact us for the remainder of the year, we have raised our outlook for the full fiscal year.

We now expect to achieve a low teen operating margin rate in the fiscal 2011, up from our prior expectation of low double digit operating margin rate.

Our outlook still assumes a decline in operating margin from fiscal 2010's level, and that's primarily due to gross margin pressure and unfavorable foreign currency.

The negative impact on our gross profit margin attributable to exchange rate dynamics is estimated as approximately 100 basis points in each of the remaining quarters of fiscal 2011.

We also continue to manage cost of goods inflation, particularly as it relates to the fourth quarter of fiscal 2011, a function of rising raw materials, labor and freight costs, as well as tightened factory and freight capacity, which could limit our flexibility in our global supply chain.

Accelerated investment in our growth initiatives, most notably in Asia, international e-commerce and flagship stores is also expected to weigh on our full-year operating margin rate.

Dilution related to the transition of south Korea is explanated at approximately $0.08 to $0.10 per share in full fiscal 2011, reflecting the impact of transaction expenses and other costs associated with the transition of the business.

Most of the anticipated South Korea dilution in fiscal 2011 is one-time in nature.

We continue to expect a fiscal 2011 tax rate of 34%, primarily due to the anticipated geographic earnings mix for the balance of the year.

We will continue to manage our business with operational discipline while making what we believe are the right investments to create additional shareholder value over the long-term.

We are pleased with the progress we have made with our strategic growth initiatives thus far, and we are excited about the many milestones fiscal 2011 will bring on that front, the expansion of handbags, the integration of Asia, and the launch of European e-commerce.

And with that, I'll conclude the company's remarks and open the call up for your questions.

Operator, would you assist us with that, please.

Operator?

Thank you.

At this time we will conduct a question-and-answer session.

It will be conducted electronically.

(Operator Instructions) And our first question comes from Omar Saad from Credit Suisse.

Your line is open.

Thanks .

Good morning.

Congratulations on a nice quarter .

I actually want to follow up on the SG&A comments that you made on the call and looking at the numbers.

It actually looks like the leverage that you reference, it's probably the first time that you've leveraged SG&A in the last couple years, and it's pretty exciting for us to see from an investors standpoint, I know you've got a lot of initiatives still going on, but is this something we should come to expect going forward?

Kind of broader term over the next couple of years, when do you think you'll start to be able to cycle some of the heavy investments that you've been making and generate longer term sustainable leverage in that

That's a good question, Omar.

I don't think that we will expect the balance of the year to see the kind of leverage that we saw in the first quarter.

Obviously, our sales performance in the first quarter drove a portion of that leverage and the calendarization of some of our expense initiatives also affect us more heavily in the second through fourth quarters than they do in the first quarter.

So, it's certainly our goal as we make investments and strategic initiatives, to maximize on those in future years and leverage SG&A.

We have done that on prior investments and so, we do expect to see is in the future.

But, the balance of this year will be a challenge from an SG&A leverage standpoint given some of the initiatives that we have in place.

And our next question comes from Bob Drbul with Barclays Capital.

Your line is open.

Hi, good morning.

With the 61% gross margin and some of the comments you made around sourcing cost pressures, can you maybe give us some insight in terms of how you're thinking about pricing and the margin over the next 12 months with those pressures?

Yes.

I think, Bob, that the concern we called out in the May call and we've continued to talk about is based on our experiences with the various manufacturing partners we have around the world.

Raw materials if you start with that, be it cotton or wool or any of the raw materials, have seen meaningful jumps from last year at this time, although on some levels last year's was somewhat depressed.

But still, this year last year comparison is worth note.

The second issue is really the labor situations, whether it's the real cut make in trim or the scarcity of labor that is going on around the world as a result of capacity reductions and perhaps rising labor in countries like China.

And then the third piece would be the transportation around the world.

I think we're going to see that slowly rising as the year goes on, but the real impact will be most critically felt in the spring merchandise, which for us will be fourth quarter.

We've looked at global pricing, whether it's in Asia, Europe or the United States, and where appropriate we've been willing to take some price increases.

But we're very mindful of the economic conditions and a skittish customer and really there is no way we're going to take the full cost of goods increases and pass them on.

So, it's a merchandise category, an item carefully thought through by region, is the way we're looking at it, and that would really come into play for spring calendar '11 and on.

And, again, I'm not sure how everybody else is treating these increases, but that's our point of view.

And our next question -- our next question comes from Adrianne Shapira with Goldman Sachs.

Your line is open.

Thank you.

Clearly an impressive quarter over all.

Roger, I was just wondering if you could help us think about in the quarter there is a lot of interquarter volatility as related to the market performance, currency, perhaps give us your thoughts in terms of interquarter any trends you're seeing across channels, across geographies that change and then maybe a segue into, you know, given the Ralph Lauren comps down too, it sounds like much of that deceleration related to Japan.

If you could help us think about and provide some color how trends were ex-Japan.

Thanks.

Sure.

Adrianne, we spent a lot of time recently not only on the budgets for this year, but the quarter-by-quarter outlook.

And one of the conclusions we've reached upon reflection in the first quarter results is the extraordinary performance that you've noted was really driven by the core businesses in constant currency really outperforming.

And I think the headline on the quarter is not that the things we identify that might be short-term drags didn't drag down.

The answer is they did.

It was really the core businesses outperforming either our competitors, our own expectations that powered us through the quarter.

Whether it's retail or wholesale, whether it was online, whether it was Ralph Lauren product or even Club Monaco, which had an extraordinary quarter as you can see, it was the core businesses that we've invested and managed so carefully over the years outperforming and the new initiatives keep going.

So, whether it's the start up of handbags or the start up of e-commerce, whether it's the start up of Asia and now our very exciting announcement over Korea, all of those short-term impacts actually occurred.

It was the core businesses outperforming.

Now, the only business that I would say didn't outperform were the Ralph Lauren stores, although the number we reported which is a blend of Ralph Lauren stores and concession stores in Japan, is a little misleading because the concession business in the department stores in Japan was down and really worldwide, the Ralph Lauren store business was up in the single digits.

So, it's really a rolled up number that is a little misleading.

But we are seeing the high end customer in apparel stay more cautious than the customers in other product categories and other channels of distribution.

I think based on what I'm seeing around, the high end accessory customer has perhaps come back a little stronger than the high end apparel business.

So, we're very mindful of that as we head into the fall selling and are watching that very carefully.

And the only thing I would add to that is the foreign exchange impact in the first quarter was minimal.

It is expected to ramp up, as I mentioned before, pretty significantly in the second through the fourth quarters, given the currency exchange last year, particularly for the Euro which is the biggest impact for us.

Next question, Operator, please.

Our next question comes from Michael Binetti with UBS.

Your line is open.

Hey, thanks.

And congrats on a great quarter, guys.

Thank you.

So, I just want to maybe touch on the wholesale revenues and ask you a quick follow up on the operating margins.

It looks like the wholesale revenues have come in maybe a little bit below where you guys thought for a couple quarters in a row and the guidance for the second quarter looks like a pretty good inflection point in the two-year growth rate.

And I'm seeing the inventories are starting to build a little bit for the first time in awhile.

It seems like you have pretty good confidence in that number going in this time, but then I just look back and see maybe it's come in a little short of where you were hoping for.

So, maybe you can just talk about what's different in your confidence now in the growth rate you gave for the second quarter today and then following up just quickly on the operating margins.

Also there it seems like you guys update your guidance to be low teens from low double digits so maybe a couple of percentage point increase, but since first quarter you're also adding in some operating cost related to Korea.

So, it seems like ex-Korea you're feeling maybe a little more better than, I'm sorry, maybe a little better than the improved guidance would imply.

Maybe you could give us some detail on ex-Korea and some of the moving parts since you're thinking about the SG&A spend for the year.

Thanks.

Okay, Michael.

Let me make sure I remember all of that.

I'm going to ask Tracey to pick up the second part of your question.

As to the first part , it is clear to us that the retailer continues to be very proud of themselves for managing inventories carefully and seeing margin recoveries as people have reported spring and summer results.

I think you've all seen that.

I think that's also led them to continue to be more cautious about open to buys going forward than probably the sell throughs and the results would indicate.

However, as I said to Adrianne, we did have a very strong buy brand, buy merchandise category performance for spring.

We do believe we're taking share in many of the major categories.

And while the retailer is being cautious, and some of that sales for spring were based on chase product or reorder product or replenishment products, we are beginning to feel better about the retailer putting a little more open to buy on the table up front.

I believe it's probably coming from some other part of their assortment, so they're not incrementally adding a lot to their total inventory, but I think we're picking up share.

We have reasonable visibility through fall holiday and beginning to develop more visibility into spring.

So we are feeling better about that in the domestic business and the Europe business.

As you know, most of Asia today is not run through the wholesale model, so that is more a function of how our stores will perform over there over time.

So net-net coming out of spring summer, we're feeling a little more bullish than maybe we did halfway through the spring, and I think we're picking up some

And to your other question, and I would address it both from an SG&A standpoint and a gross profit standpoint, the balance of the year incorporates revised thinking as it relates to some of the supply chain and sourcing savings that we've been able to achieve in the prior year and certainly in the first quarter and a moderating of that more quickly than what we had anticipated before, as well as a newer outlook on Japan in light of our planned reduced shipments to make sure that we are aligning our inventories with the sales trends in the market.

Next question.

Our next question comes from Sean Norton with Piper Jaffray Your line is open.

Thanks for taking my question and congrats on a nice quarter.

My question is on Europe.

Obviously, Europe has been a source of significant trepidation for many investors and companies, as you mentioned earlier.

Maybe you can talk about some of the strengths and weaknesses you may have seen by geography.

I think specifically on the last call you had talked about the UK and Scandinavia had remained relatively strong and Italy was showing some signs of stabilization.

So, any updates on those areas would be helpful.

Thanks.

Okay.

You know, I think you're right, we continue to hear difficult economic news out of Europe, although the last couple weeks or month has shown some signs of stabilizing as people better digested the issues in Greece and some of the other countries.

But as a headline statement, our business, I think it's fair to say, is outperformed the marketplace.

We do have excellent management and excellent strategies that are operating very efficiently, but it continues to be a story of some countries are softer, ie Italy and Spain, although there has been a little bit of a pick up in Spain recently.

And the more northern and central countries have outperformed, be they France, Germany, the UK or Scandinavia.

And that's remained pretty consistent through the spring season.

The Italian business, particularly, is based on specialty store distribution, and those specialty owners after several years of difficult conditions are really people that have to manage tightly their own personal cash flows and we've got to manage the credit risks.

So, I think we'll see turbulence in the Italian market for a while until that market gets better macroeconomic results.

So, overall, strong results in Europe powered by those big countries.

We've also seen a return to key markets like Russia, like the Middle East, like Istanbul which are all running strong increases versus a year ago where that business got particularly banged around.

So, very pleased with the results out of Europe, particular strengths in menswear, strong seasons in women's, kids and jeans, and improving and growing business in Lauren, where we distributed women's products for the first time there a couple years ago, and we're beginning to get some nice traction.

So, that is really the summary of Europe.

And I think the Paris store opening, while you could say is specifically Paris, I do believe the marketing, the advertising, the brand focus did have a halo effect not only on all of the French market but really across the western countries.

Next question.

Our next question comes from Chi Lee with Morgan Stanley.

Your line is open.

Good morning, everybody.

Roger, can I follow up on your commentary in terms of gaining share within the department stores.

Where do you think that share is coming from?

Clearly, you guys have strong brand equity, but is it also a function of just your logistical capability as you go into the fall that is helping to gain that share?

And quickly, Tracey, the revenue guidance for the year, does any of the increase have to do with, perhaps, a more constructive FX outlook given where the Euro is today?

Thanks.

Well, I'll address the currency question.

It is a slight impact in terms of the improvement, but not significantly just given how our calendarization flows.

But it is a slight part of the improvement.

You're correct.

Let me try to take on the department store share.

I think as a starting point for this, you have to look at what the stores did in response to the contraction over the last two years, where they eliminated perhaps smaller brands, more marginal brands as a compelling proposition to the customer.

Certainly they've been growing private label.

So, I think it created an opportunity for all Polo Ralph Lauren products that we are so carefully managing from a product and merchandising point of view and a responsiveness.

I think we've been very good at responding to consumer trends on much shorter lead times than perhaps in the past.

So, I think the overall brand equity as we continue to raise our global profile, we continue to make investments in things like e-commerce and/or 72nd Street, that brand elevation I think makes the product even more appealing to a department store customer who is buying a piece of the lifestyle dream through those products in that channel.

And the teams are very carefully going merchandise category by merchandise category looking for distortion opportunities with appropriate products.

Our ability to sell through at more full price sell throughs, which allow the stores to make higher margins, our sales per square foot which in some cases are two or three time the department average, so obviously the gross margin dollars per foot are extraordinarily different than peers or competitors.

I think all of that is playing out to our advantage, even in a channel that is experiencing low single digit growth.

I think we're picking up share.

Next question.

Our next question comes from Christine Chen with Needham and Company.

Your line is open.

Thank you and congratulations on another great quarter.

Thank you.

I wanted to ask about South Korea being your third largest country.

What is the product assortment under the distributor and how might you evolve it?

Is it highly concentrated in sportswear like Japan was?

Is it more men's, is it more women's and what changes?

That's an interesting question, Christine, because we've been working on trying to get South Korea back in the fold for a while and therefore have spent a variety of market visits.

And not unlike other licensed international territories, their orientation has been to men's casual sportswear.

And the $230 million that we talk about, is heavily oriented towards that product.

And it does remarkably well.

There is definitely an opportunity in that market to develop other product categories over time to much more important positions, whether it's women's, whether it's kids', whether it's accessories or denim.

They are very tilted toward casual men's sportswear.

And what we observed in our multiple trips there, is that South Korea is also a major shopping mecca for the Chinese.

And the Chinese are very smart about arbitraging price throughout the region and throughout the world.

And so, getting the brand to be consistent to what they see in a Paris or what they see in a New York, or what they're going to see in a Tokyo, Hong Kong, Shanghai, in Seoul, Korea and other parts, is critical, we think, to support the network, not just South Korea.

But it's a distorted country.

As we've said, it's the third largest single country in the world for us.

And so, our ability, starting January 1, to begin to move the assortments to a more elevated tiered and broader merchandise category, we think is one of the real exciting opportunities of Asia-Pacific.

Okay.

And our last question comes from Brian McGough with Hedgeye Risk Management.

Your line is open.

Great .

Thanks so much.

I appreciate you taking the question.

So, I have a question on e-commerce.

So, since you bought that business back from JE, I think it's established itself as being one of the most successful online businesses in retail.

I think it's around 10% of retail revs, but a far greater portion of profits.

And I don't mean to back you into the corner here on specific numbers, but if I'm looking at retail overall, corporate accounts for reasonable margin over outlets, you can also make an argument that the in line and the flagship and Club Monaco aren't making a whole lot of money, which would either strike me just as a huge opportunity or a decision on your part to make more of a structural tradeoff in between the in store profits versus online.

So, could you give us just a little bit a color, Roger, how you're thinking about that from a long-term, just a long-term vantage point as far as how you trade off one versus the

Yes.

That's a good question.

And the reality is that e-commerce for us has been extraordinarily successful, and I appreciate you acknowledging not only the content of it but also the economic contribution e-commerce is making.

It's one of the reasons that we're so excited about the Europe launch.

We expect to learn quickly and then move out through the rest of the countries there.

It's why I said on my opening remarks that we will research and then figure out how we want to do business in Asia and Japan.

It's also why you read today a lot of pundits talking about 70%, 80% of the future growth in retail could come out of e-commerce as a general headline.

So, the fact that we're ten years into this, we've got a very talented team, it's important for us, we've figured out not only the front end but the service equation, and commit to very high standards, gives us a lot of encouragement.

It also is relatively low capital investment compared to brick and mortar stores.

And, therefore, if you get it right and you get the necessary infrastructure right, it's really about keeping up with the technology and the ability to stay current with customers' expectations or, in fact, lead them with some new ideas, which we've done.

The other interesting aspect of e-commerce is it has been proven that its impact across channels, whether our wholesale channel or our own retail channel, is compelling.

So, you would not be wrong in saying that as we go forward, focus on retail will have a heavy component of e-commerce.

I don't think it replaces doing appropriate brick and mortar retail, and I think our challenge will be by market to figure out the mix, and the ROIs and the how to reach customers, and what the messaging will be.

But there is no doubt that e-commerce from here on out will grow in its penetration to retail and, in fact, will grow in its penetration to our total distribution strategy, and should provide very nice profit returns and ROI returns as we expand and open around the world.

There are obviously some startup costs opening in Europe and there will eventually be in Asia, but I think our willingness to stay with this business in the early years and figure it out for a single brand site that has distribution around the world, I think it's been a remarkable success for us and we're going to look to grow that as a percent of our total business and particularly retail.

So with that, I think we've concluded the first quarter remarks.

I appreciate the support and interest on all of your parts.

First quarter was clearly beyond our expectations and we'll see how the rest of the year plays out.

Thank you.

That concludes our call for today.

Thank you for your participation.