雷夫·羅倫馬球 (RL) 2012 Q1 法說會逐字稿

Good morning and thank you for calling the Polo Ralph Lauren first-quarter fiscal 2012 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.

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

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

James Hurley.

Please go ahead, sir.

Thanks, Kelly.

Good morning, everyone and thanks for joining us on Polo Ralph Lauren's first-quarter fiscal 2012 conference call.

The agenda for today's call includes Roger Farah, our President and Chief Operating Officer, who will comment on our broader strategic initiatives.

Jackie Nemerov, our Executive Vice President, will provide some product commentary and Tracey Travis, our Chief Financial Officer, will provide operational and financial highlights from the first quarter in addition to reviewing our expectations for fiscal '12.

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

During today's call, we will 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.

With that, I will turn the call over to Roger.

Thank you, Jim and good morning, everyone.

We are reporting excellent first-quarter results today with consolidated sales rising 32%, operating income increasing 62% and earnings per diluted share up 57%.

Our performance reflects strong global momentum across merchandise categories, channels and regions and comes on top of equally strong results in the comparable prior-year period.

We are expanding our marketshare in multiple dimensions as our wholesale, retail stores and e-commerce operations are all achieving strong rates of growth.

We believe the broad-based nature of our sales growth is a direct function of the clarity of Ralph's luxury lifestyle vision that runs through all that we do from design, to world-class marketing, to our spectacular in-store presentations.

We are leveraging this clarity of vision and purpose with an expanding range of merchandise in store environments around the world.

Our results also demonstrate the relevance of our strategy as we consistently innovate new product, we are expanding our international presence and we continue to extend our direct-to-consumer reach, which is all supported by our ongoing infrastructure investments and the focused development of our worldwide talent.

These strategies have enabled us to deliver consistent double-digit sales and earnings growth over the last 1, 5 or 10-year periods.

The extraordinary profit flow-through we achieved on the quarter's better-than-expected sales highlights the power of our operating model, one that leverages the incredible strength and appeal of the Ralph Lauren brand while respecting the uniqueness of each customer we touch in a particular channel or region of the world.

The sustained double-digit growth of our domestic operations across all channels is noteworthy, especially when we consider the scale of our business in the United States.

The team continues to raise the bar and maximize the opportunities with our largest merchandise categories while driving excellent productivity gains and incremental distribution of exciting new products.

As we continue to make significant progress with our international development efforts, international revenues rose 60% during the quarter, accounting for 36% of our consolidated sales, a 600 basis point gain from the prior-year period.

Our business is growing along many dimensions in Europe, including new wholesale and retail distribution, the expansion of existing and highly productive locations and the contribution of new merchandise categories such as Lauren and accessories.

We are also growing our presence in Eastern Europe and the Middle East through partnerships with strong, locally-based experts.

There is a lot of excitement planned for the remainder of the year in Europe.

We intend to launch e-commerce in France and Germany in the next three months and Club Monaco and Ralph Lauren Denim and Supply will be introduced into leading department stores this fall and we are also opening our first European Rugby store in London's Covent Garden in a few weeks.

In Asia, we are exceeding our sales and profits plans in all major regions.

Every day, we are learning more about this dynamic emerging region and we are steadily improving our operational capabilities.

We have made the most impactful progress in Japan, which we've directly operated for four years.

In that time, our sales trends have consistently outperformed the overall market.

Our profitability has also improved substantially as we integrated Japan into our global sourcing and distribution organizations, we have invested in system upgrades and we have leveraged our best practices with respect to planning and merchandising.

A recent transition of the South Korean operation was executed seamlessly and the team has already begun relocating and renovating shops as part of our long-term market development strategy.

We also commenced our multiyear brand repositioning efforts in greater China, closing a handful of shops while simultaneously opening more appropriate points of distribution that support our luxury merchandise strategies and that can accommodate our growing accessory assortments.

We are very pleased with the customer response to our elevated merchandising assortments throughout Asia.

The ready acceptance of Ralph Lauren handbags and watches when they are appropriately merchandised in dedicated space is very encouraging, especially since these categories are expected to be an important driver of our growth aspirations in the region.

In the near term, our locally-based management teams remain focused on brand elevation efforts, expanding distribution for new and existing merchandise categories and identifying ways to leverage the shared services throughout the Asia-Pacific region as the scale of our operations there expand.

Our global direct-to-customer efforts are accelerating as evidenced by our impressive sales growth and substantial profit improvement of our retail segment.

Exceptional merchandise and customer services drove stronger conversion rates and higher full-price sell-throughs in the quarter.

Sales trends were strongest at stores located in the world's major cities and destinations, which typically service both local and tourist customers.

These stores tend to have the most compelling and complete representation of the world of Ralph Lauren and it is increasingly clear that customers want access to our full range of products and lifestyle sensibilities, especially accessories.

The strength of our first-quarter operating results is effectively an extension of the strategies that have supported our momentum over the last 12 to 24 months, but as you are all aware, the retail landscaping is changing greatly as higher prices emerge with the fall floor sets.

We will not know the full impact of our pricing actions until mid to late September.

By then, the customer has probably had enough time to digest the new pricing paradigm and we should have some sense of how recent macroeconomic uncertainties have affected the global consumer sentiment and consumption trends.

Over the last several weeks, it has become increasingly clear that the global macroeconomic environment is very fragile and that we are operating in the context of tremendous uncertainty and volatility.

Austerity measures in the US and Europe are a necessity, but the complexity and magnitude of these measures is unknown.

Since the US and Europe are important regions for us, we are very focused on monitoring how the customer reacts to these macro dynamics.

We have set the bar high with respect to our sales plans for the year, but we are confident in the rigor of our planning process and our ability to proactively navigate through emerging challenges.

The sophistication of our sourcing, supply chain and logistics operations enable us to better read and react to changes in market dynamics than ever before.

We are also confident in the strength of our merchandise assortments and we believe our unwavering commitment to the integrity of our products and our value propositions will remain a competitive advantage for us.

The diversity and resilience of our operating model across channels, regions has typically served us well in turbulent times, which is why we remain committed to investing in our growth initiatives and infrastructure, particularly for the Asia-Pacific development and international e-commerce.

This is consistent with the strategies that we have supported over a sustained period of time, including the last downturn when we are able to grow earnings despite the ongoing investment in our growth initiatives.

By staying the course, we believe these investments will yield incremental returns for our shareholders over the long term.

And now I would like to turn the call over to Jackie for some merchandise highlights.

Thank you, Roger and good morning, everyone.

There is no question that the tremendous momentum we are experiencing across all channels worldwide is a function of best-in-class product and compelling merchandising strategies.

Ralph's commitment to product innovation has enabled us to continually satisfy our customers and gain meaningful global marketshare.

We have leveraged the sustained success of our most iconic products to gain traction with exciting and fast-moving new merchandise categories such as dresses, footwear and accessories.

This morning, I would like to take you through some key highlights of our home, children's wear, denim and accessory initiatives.

Today, we are delivering the world of Ralph Lauren in a more consistent, more comprehensive and more impactful way than ever before, taking the vision from design, to production, to merchandise, planning and ultimately to the in-store presentation.

This consistently applied approach has supported the extraordinary growth we are experiencing across all product categories on a global scale.

The clarity of our merchandising initiatives, which focus on targeted assortments that offer outstanding value and unique channels of distribution, has allowed us to achieve growth across all channels worldwide from our own stores, to leading department stores, specialty stores and of course, the rapidly expanding online space.

The strong customer appetite for our products is a testament to the vitality and desirability of the Ralph Lauren brand.

In fact, the remarkable performance of our men's product, the foundation and origin of our entire Company, is perhaps the best example of the brand's appeal around the world, the expansion of our assortments across Purple Label, Black Label, Polo, Golf, RRL and RLX not only give the loyal customer something fresh, but also attract a new customer into the world of Ralph Lauren menswear.

Last quarter, I highlighted some strategic changes in how we are managing our home category.

I am pleased to report that with more direct control over our bed and bath merchandise, which is our largest classification in terms of sales, we are already experiencing improved operating efficiencies, customer satisfaction and sell-through rates.

We look forward to expanding our distribution and strengthening our productivity across all home product categories worldwide over the next several years.

Since acquiring our children's wear license in 2005, we have developed a meaningful global presence that includes wholesale distribution and standalone stores.

We recently opened a children's wear store in Ocean Terminal in Hong Kong, which joins our other stores throughout the US, Europe and Middle East.

We are excited about the global growth prospects for children's wear, particularly as we continue to apply merchandising strategies and operating disciplines that have worked so well for us in other categories.

This fall, we are introducing a new active dimension to our boys apparel that takes its inspirations from the sporty heritage of Polo and the contemporary aesthetic of RLX.

With our leadership in the more polished aspects of boys dressing, this active line really nicely rounds out our total offering.

Denim and Supply, our new denim-based lifestyle collection for men and women, is launching now.

Merchandise is being set in leading department stores worldwide and will be available on RalphLauren.com on August 11.

Denim Supply was developed to speak to a twenty-something customer in a fresh and distinctive way that is still grounded in the heritage and authenticity of Ralph Lauren.

Based on the demographic, we will have a strong online presence to drive awareness and interest in the brand.

Wholesale customers around the world have responded favorably to the merchandise.

Orders for the fall season were strong, confirming the ease in which we expect to replace and significantly upgrade the former Polo Jeans Co.

brand throughout Europe and Asia.

The product and in-store environments are spectacular and the quality, authenticity and distinctiveness of the brand really shine.

There is truly no other denim line quite like this and we believe customers will respond very favorably.

Consistent with our overall corporate focus, accessories are an integral part of the overall assortment.

Denim and Supply is the latest component of our tiered denim strategy that includes our women's collection denim business, Black Label denim for mens, as well as denim in the existing RRL, Polo and Lauren lines.

The progress we are making with accessories each season is very exciting as the Ralph Lauren luxury handbag and footwear assortments expand, global customers' interest and appetite have been strong.

We are experiencing the same success in the wholesale channel with our Polo and Lauren accessory brands and we intend to meaningfully expand global distribution of these products over the next few years.

Our increasingly diverse global sales base and product mix, our ability to continually gain share in our largest markets and product categories, our success of expanding into new merchandise categories and of course, the unrivaled power and prestige of the Ralph Lauren brand are enabling us to build strong new platforms for future growth.

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

Thank you, Jackie and good morning, everyone.

As Roger highlighted earlier, we reported excellent first-quarter operating results.

Consolidated net revenues were $1.5 billion, 32% greater than the prior-year period and better than the mid-20s sales growth expectations we outlined for you in May.

The increase in net revenues reflects double-digit gains in our wholesale and retail segments, both exceeding our original expectations for the quarter.

Sales of our core apparel merchandise categories, particularly our men's product across all channels of distribution, our strong e-commerce growth and performance at our factory stores worldwide surpassed even our robust initial expectations.

Sales in Japan also stabilized more quickly than we anticipated following the earthquake and tsunami events in March.

And of the 32% net revenue growth, favorable currency translation did impact our total reported revenue growth by approximately 4 percentage points.

Our gross profit margin of 63%, which was 120 basis points greater than the prior-year period, was driven entirely by our retail segment and reflects strong full-price sell-throughs and higher penetration of international store and concession sales.

These benefits more than offset the negative impact of cost of goods inflation across all wholesale and retail formats.

The improvement in the first-quarter gross profit margin was another contributor to our outperformance relative to the expectations we communicated in May.

As Jackie mentioned, the strength of our merchandise assortments across apparel and accessories combined with our in-store presentations continue to support highly profitable sell-throughs across all channels of our business.

Operating expenses of $679 million were 26% greater than the prior-year period.

The increase in operating expenses were driven by overall growth in our core operations, an increase in our retail channel mix, incremental costs associated with the newly transitioned South Korea and home operations and continued investment in our other strategic growth initiatives, including international e-commerce, new store openings and infrastructure support.

Currency translation also impacted expense growth by approximately 4%.

We were able to achieve 210 basis points of operating expense leverage during the quarter, primarily as a result of better-than-expected sales growth and this was another important contributor to our outperformance relative to our first-quarter expectations.

As a result of our strong sales growth, our operating income of $282 million was 62% greater than the prior-year period.

We achieved a record operating margin of 18.5%, which was 340 basis points above the prior-year period.

Net income for the first quarter of fiscal 2012 increased 52% to $184 million and net income per diluted share rose 57% to $1.90.

The higher effective tax rate of 33% this year compared to 29% in the prior-year period primarily reflects the favorable resolution of discrete tax items last year and is consistent with our guidance to you on fourth quarter.

Regarding our segment highlights for the quarter, our wholesale segment reported sales increased 29% to $673 million and constant dollar sales increased 25%.

As I mentioned earlier, shipments of our core apparel and accessories merchandise sold through at exceptionally strong rates, which allowed for increased replenishment across several categories.

In Europe, strength in sales in the UK, Germany and France across virtually all brands offset the continued softness we have experienced in sales in Italy.

Wholesale operating margin and operating income in the first quarter rose 40% to $151 million and the wholesale operating margin expanded 190 basis points to 22.5%.

The substantial improvement in wholesale operating income and margin rate was entirely a result of higher global shipment volume and expense leverage on the better-than-expected shipment growth, which more than offset the impact of cost of goods inflation.

For our retail group, first-quarter sales rose 37% to $814 million and were up 33% in constant dollars, reflecting strong comparable store sales growth across all retail concepts, the contribution from newly opened stores and incremental sales from our newly assumed South Korean operations.

Retail sales also benefited from a late Easter this year, which we estimate contributed approximately 2% to total segment growth for the quarter.

Overall comp store sales increased 19%, reflecting 14% growth at Ralph Lauren stores, 20% increase at factory stores and 16% growth at Club Monaco stores.

RalphLauren.com sales continued to expand at a double-digit rate, increasing 28% in the first quarter.

Our [comp] gains were achieved through a mixture of transaction growth and average dollar sales growth with the latter mostly due to higher full-price sales in our stores.

Urban markets in key tourist destinations, particularly in the US, continued to outperform average traffic trends and concession shop sales across Asia were exceptionally strong in the quarter.

We opened seven directly operated freestanding stores, closed six stores and assumed control of three formerly licensed locations during the quarter, ending the period with 371 company-operated stores.

We also operated 535 concession shop locations globally at the end of the first quarter.

Retail segment operating income grew 67% to $173 million in the first quarter and the retail operating margin increased 380 basis points to 21.3%.

This substantial improvement in retail operating income and the expansion in margin rate comes as a result of strong comparable store sales growth, as I mentioned earlier and higher full-price sell-throughs, which drove broad-based profit improvement across most retail concepts, particularly in the US and in Asia.

Retail operating income also benefited from the inclusion of the South Korean acquisition this year.

The improved retail segment profitability was partially offset by cost of goods inflation.

Licensing royalties for the quarter were $40 million, 6% greater than the first quarter of fiscal 2011 and primarily due to increased fragrance royalties that were partially offset by lower international licensing royalties related to the transition of formerly licensed South Korean operations.

Operating income for our licensing segment rose 6% to $25 million as a result.

Our financial condition remains strong as we ended the quarter with approximately $981 million in cash and investments and $677 million in net cash and that was after investing over $300 million in share repurchase activity within the quarter.

Consolidated inventory was up 42% at the end of the fourth quarter on a reported basis.

In-transit inventory was an important driver of the overall increase as we have taken ownership of certain key items of our merchandise earlier than normal.

We made this decision in an effort to minimize any potential supply chain disruption that could have been a potential risk when we were placing our fall orders last year when both factory and transportation capacity was extraordinarily tight and cotton prices were at peak levels.

Approximately half of the increase in dollars is to support the anticipated sales growth and shipment cadence of comparable product categories, geographies and channels.

Approximately 30% of the increase is attributable to cost of goods inflation and foreign currency impacts and the remaining 20% of the increase is related to new merchandise categories or new business operations such as South Korea, home textile, Denim and Supply in the US and international e-commerce.

And with the assumption of realizing our current sales projections, we remain comfortable with the content and currency of our inventory.

We expect inventory growth to become progressively more aligned with sales trends throughout fiscal 2012 as we cycle through changes in year-over-year shipment cadence.

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

We also repurchased 2.5 million shares of stock utilizing $302 million of our current authorization.

At the end of the first quarter, we had approximately $670 million remaining under our authorized share repurchase program.

We informed you back in May that our first-quarter results were expected to be a continuation of the strong performance we experienced in the second half of fiscal 2011 prior to the full impact of fall price increases.

And our first-quarter results are truly exceptional by any measure and they were achieved on top of very strong operating performance in the prior-year period, as Roger mentioned.

While we have begun this new fiscal year with broad-based momentum across all regions in our business, we have incurred, as we anticipated, four substantial cost of goods inflation with fall shipments in the second quarter and have made thoughtful and selective pricing adjustments by brand and by region to help mitigate some of the intensifying inflationary pressures.

This is expected to have a negative impact on our balance of year fiscal 2012 gross margin, particularly as we make large fall shipments at wholesale in the second quarter.

And although the price of cotton and other commodities have recently retreated from peak level, initial cost projections for our spring 2012 merchandise are aligned with the expectations embedded in our initial fiscal 2012 outlook which we provided you on the last call.

As Roger highlighted earlier, it is unclear how the recent and extraordinary volatility in the global equity and credit markets might affect global consumer sentiment and demand.

At this point, we intend to continue executing against our original strategic objectives and sales plans for fiscal 2012.

We are closely monitoring trends across all channels and regions in order to proactively address any material changes that could affect our plans and outlook for the year, which I would like to review with you now.

For the second quarter, we currently expect consolidated net revenues to increase at a high teens to a low 20%s.

Our expectations are based on a mid-teens increase in global wholesale sales and a mid-20% increase in retail segment sales.

And as a reminder, the acquisition of the South Korea license is non-comp for us until the fourth quarter of this year and is driving approximately 3% of the overall year-over-year sales growth I just mentioned.

Our operating margin for the second quarter is expected to be approximately 300 basis points below that achieved in the comparable year period.

This decline is a relatively equal mix of gross margin pressure from cost of goods inflation and higher operating expenses.

The anticipated deleverage in our operating expenses is primarily related to the timing of costs related to additional channel distribution expansion, including preopening costs for a portion of the 34 new stores and 47 shops we intend to open worldwide during fiscal 2012, e-commerce investments for Ralph Lauren sites in France and Germany and for Club Monaco in North America, and the incremental expense of our South Korean operations.

So based on our strong first-quarter performance, we have raised our full-year fiscal 2012 sales and profit outlook and for the full year fiscal 2012 period, we now expect revenues to increase at a mid to high teens rate, which compares to our prior expectation of mid-teens growth.

Our full-year operating margin outlook is now estimated to be down 50 to 100 basis points from the prior-year period, which is an improvement relative to our initial expectation of a 100 to 150 basis point decline.

In addition to the investments we are making throughout Asia and in international e-commerce, we currently still intend to support our growth expectations with incremental advertising and marketing, which we believe is critical to generate more awareness for new and emerging categories and to raise our profile in international markets.

We have revised our expectations of the restructuring charges associated with our greater China repositioning efforts to $8 million to $12 million for the full year and those costs are not included in the operating margin outlook I just provided you.

The exceptional profit flow-through on our better-than-expected first-quarter sales reflects both the innovation and executional discipline of our organization, particularly as we continue to invest in strategic growth initiatives.

And while the challenge of the near-term economic uncertainty is real, we will continue to balance this reality with the investments that we believe are appropriate to continue to drive long-term shareholder value creation.

We have a clear compelling growth strategy ahead of us and our Company has a long-standing track record of success in executing against our strategy.

At this point, we would like to open up the call for your questions.

Operator, can you assist us with that?

(Operator Instructions).

Omar Saad, ISI Group.

Should we move to the next question?

We will go ahead and move to the next question.

We will bring Omar back on.

Kate McShane, Citi Investment Research.

Hi, thanks, good morning.

I was wondering if you could give us any more detail behind what type of price increases we will be seeing for the brand in the upcoming fall season and if there has been a different strategy implemented internationally versus domestic.

Yes, Kate, the point of view we took when the dialogue began to heat up over cost of goods was really based on a couple foundational principles.

One, we would not alter the quality, make, materials or findings of any of our products and we chose very specifically to make sure our customers maintain the quality they have come to expect.

Having made that decision, the price increases are different by merchandise categories and different merchandise categories play out also geographically differently.

So what we really tried to do was take the product categories and the regions and come up with an overall point of view about what to pass on and what not.

I think embedded in the second-quarter guidance reflects some margin pressure because the cost of goods in general are higher than all the prices we passed on.

But not unlike the first quarter, our strategy of quality first and merchandising of pricing we think drives sell-throughs and marketshare opportunities again that the first-quarter exemplified the kind of flow-through we can get.

By market, by merchandise categories, some sensitivity to channels of distribution, midtier versus luxury were baked into the matrix of pricing that second and third quarter reflects.

I think as Tracey talked about, while we are seeing raw materials come down for next spring, there is a lot of merchandising of old higher priced yarns and materials with new pricing that will play out through spring.

So if raw materials stay down, by summer and next fall, I think we will begin to see overall cost of goods come down.

By then, we will know how the customer has reacted to the price increases and where we go from there.

Next question, operator.

Omar Saad, ISI Group.

Thank you.

Can you hear me now?

Yes.

Great execution this quarter.

Congratulations.

Roger, with international up 60%, and now 36% of the mix and the retail business, you are executing really well on that front too, especially on a global basis.

Help me kind of understand -- marry those two pieces and the role that retail is going to play internationally and especially if we think about flagship versus other kind of owned retail, whether it is concession or smaller footprint stores, how we think the brand could look at the consumer level, at the retail level and globally a few years down the road.

Thanks.

Well, it is a very important question.

Let me try to answer it this way.

Our model is an integrated model and whether it is Europe, the United States or now Asia, we have gotten much better at trying to think through channels of distribution and appropriateness of how we speak to the customer, whether it is brick-and-mortar retail, freestanding stores or concession, or whether it is online and e-commerce.

We try to marry that by market against the wholesale points of distribution that we feel are appropriate.

Clearly, in this quarter, with the addition of important business in Asia, retail was larger than wholesale, which is kind of new for us.

I think we will see a similar phenomenon in our third quarter and then second and fourth quarters for us are larger wholesale quarters; retail being a bit smaller.

But the success that you are seeing in the numbers and you see in the stores is really a result of many, many years for those who have followed the story of investing in talent, in products and presentation and very innovative marketing.

The car show we have going on in Paris has been extraordinarily successful and has helped build the brand awareness in that market where we have important retail and we also have important wholesale.

So the entire model is a mosaic of integrated pieces.

Clearly, direct-to-consumer, brick-and-mortar or online is a growing part of our business and will be the dominant part of our Asia business.

There is no doubt that each country has a different distribution model, but in Asia, the bulk of the business will come through flagships, dedicated freestanding stores, either by men or women or accessories.

We have opened recently a kids store that has been extraordinarily successful.

So the opportunities in Asia are almost unlimited and most of that will be approached through our ability to execute at retail.

Today, our retail profitability in the merchandise categories that we are in I think stand second to no one.

And as we grow the accessory business and that becomes an increased part of our direct-to-consumer, I think it is only going to get better.

Where we have given accessories space to our own stores, whether it is Madison Avenue or Bal Harbour or our recent store we opened in Hong Kong in The Peninsula, the reaction to accessories, whether it is handbags or watches or belts or scarves, has been truly satisfying.

So we really think we are on the right trend and the combination of accessory growth, Asia growth and the success in US and Europe I think will continue to push the retail to higher heights.

Adrianne Shapira, Goldman Sachs.

Thank you.

Roger, just following on that, pushing retail to higher heights, the guidance for the second quarter, it looks as if we are looking for that reversal in operating margin down 300 basis point on the heels of a spectacular quarter.

And just help us think -- we can appreciate the shift, the mix shift as wholesale is a bigger part of the quarter, but given the incredibly strong momentum in retail, kind of walk us through how perhaps we could be overly conservative in the second quarter.

Well, first of all, as I realize higher heights is probably not good English, but you got the gist of it in retail.

Our second quarter -- I think I was saying to Omar -- the penetration of wholesale to retail begins to flip.

So with that, we get a different kind of margin mix and the impact of cost of goods hits the markup.

What worked so extraordinarily well in the first quarter was the full-price sell-throughs and that was true at wholesale or retail or online.

And that really drove the extraordinary margin performance that allowed us to ride over the cost of good increases.

If that were to repeat itself in the second quarter, and at the moment our forecasts do not include a 19% comp store retail increase, but if that were to occur, my guess is that the guidance would look conservative in hindsight.

But I think at this point sitting here in the early part of August, we really haven't gotten enough of a read on fall products and we haven't gotten enough of a read on the new pricing to make that kind of prediction.

So more to follow as the customer begins to react to products.

What we have delivered for fall, whether it is in Ralph Lauren brands or Club Monaco, that does seem to be resonating with the customer is really wear-now fabrics, silhouettes in fall colors.

So we are getting a good read on those new deliveries and that is a good sign for what second quarter may bring us.

But at this point, it is really based more on the mix than anything else.

Michael Binetti, UBS.

Hey, guys.

Good morning and congrats on an outstanding quarter there.

Thank you, Michael.

Two quick questions.

I am still having trouble -- just one modeling question first.

If you can help me understand, I'm still trying to figure out why gross margins go down from here sequentially.

I understand the mix shift in the second quarter being a big wholesale sell-in quarter.

You'll see cost inflation in that part of the business, but it sounds like pricing is about to take hold and the current trends you are seeing -- your gross margins are up while most of your peers are seeing them down.

I'm having a hard time figuring out how to model that lower from here.

And then, secondly, on denim, there has been a category where I think the Company has had mixed success in the past.

It is a huge category in the US and one that I am surprised that we aren't sitting here today seeing you guys have a bigger share.

Is there something structurally that gives you more confidence as you refocus on it now versus how you've approached it in the past?

And what do you think has maybe caused the results to fall short of your expectations in the past to help us think about it as you re-enter that category?

Thanks again.

Okay, Michael.

Those are two questions, so let me start with the first.

Interestingly enough, historically, first quarter is our highest gross margin quarter of the year.

And that is not only driven by the growing retail penetration, but it is really about the product mix because the April, May, June period for us is heavily a key itemed, classificationed, high margined, strong sell-through time of year.

And those products tend to come with higher margins.

So even though we are off to a record-setting level this first quarter, we have historically run higher margins in the first quarter than the rest of the year.

The second, third or fourth quarters tend to be more similar as we work our way through the year.

Particularly second and fourth quarter tend to be more collection deliveries and then first and third quarter tend to be more key item and classifications.

So there is a lot of product mix within the channels and within the segments that do alter meaningfully the gross margin by quarter.

The denim question, we agree with you.

We think it is an extraordinary opportunity.

We think no one has a seat at the table larger than Ralph Lauren, and I think we are now very comfortable with the pyramid of denim that we are representing to the customer.

So at the high end RRL where we've just opened a new store downtown, if you haven't seen it, but we are very pleased with how that is performing.

Whether it is in the 72nd Street store or whether it is in our freestanding stores, we are really looking for that business to not only halo, but grow into a business of size and scale as it is already the hottest item we have in Japan and we will later this fall open a store in London.

From there, we actually have, this fall, Black Label denim coming, which we think is an important extension of the Black Label customers and sensibility.

You will see that in our stores later this year and we think that speaks to a very specific audience.

And then as Jackie talked about, the relaunch of a broader-based denim, which will not only replace here in the United States the Polo Jeans business, but in Europe and in Asia, we think profiles us against that business beautifully.

So that for us is the beginning of a worldwide opportunity in men's and women's and then, of course, there is a trickle-down at the kids.

So we don't disagree the denim business is an enormous opportunity and there are no structural or brand barriers to have that succeed.

David Glick, Buckingham Research Group.

Yes, good morning.

Congrats on the quarter.

Roger, I think what is on everyone's mind is obviously the market volatility and how the luxury consumer is going to react.

Obviously, you gave a very strong top-line outlook.

I was just curious if you have seen any change in behavior on the part of consumers or your customers in the US and Europe, which are the regions where obviously there is more concern.

And then secondly, just wondered at what point -- on the retail side, I know this whole category presentation or classification presentation of accessories was a big philosophical discussion at Ralph Lauren and you've made obviously a very smart decision to go after that business.

When are we going to see that in more of your retail stores?

Okay, well, David, the issue that you articulated about volatility is clearly on all of our minds.

I am not sure at this point we can do anything about it other than watch it play out.

We have not seen yet any impact on our customers both here in the United States or Europe, but as Tracey said, we are watching it carefully.

A lot of the issues that seem to be behind the volatility are not new issues.

So the uncertainty over debt in Europe, some of the issues here in the United States, are not ones that have just come up in the last week.

So what is creating the volatility, where the consumer begins to be impacted by it, we really don't know.

So we are, until proven otherwise, pressing ahead with our plans.

We feel good about the trends.

First quarter was clearly a big down payment on the year.

The business in Asia, while in its infant state, is still very strong and we are seeing good strong global tourism.

So at this point, we are watching carefully, but our forecasts reflect our best thinking.

The retail accessory question that you mentioned, I think if you go to the 72nd Street store where we have devoted the entire main floor to our accessory businesses, if you went to Paris, if you went to The Peninsula in Hong Kong or any of the new stores, you can see the distortion we have given accessories and our thoughts are now to circle back on many of our key flagships and look at how to make those stores similarly reflect our commitment and belief.

Having gotten back the footwear business and then the accessory business, small leathergood belts over the years, I think we have built extraordinarily talented teams of people.

We have developed the sourcing capabilities and I think you are now beginning to see that reflected in the products that the customers are seeing and where we have given it proper representation, they are voting yes.

So that is an exciting opportunity for us as we push forward.

Bob Drubl, Barclays Capital.

Hi, good morning.

Just have a couple questions on the inventory.

I was wondering if you could maybe discuss it in a different way than you have presented it during the prepared remarks.

Can you talk about the inventory levels either by region or sort of wholesale inventories versus your retail inventories?

And can you talk a little bit about the transparency that you have at the retail level for your customers both in Asia and in Europe?

The transparency of the customer?

Like where the levels are at retail.

Oh, yes.

Well, we have detailed inventory by brand, by region, by channel, by season down to the item and SKU level.

So we have got total visibility to all of our inventory worldwide.

As a matter of fact, I think in somewhat of a pioneering investment, we also have visibility into raw materials, where it is in the manufacturing cycle, where it is in the transportation cycle and so any part of that that you want to review, you can.

One of the things we chose to do when there was concern about factory capacity and transportation capacity was to pull forward inventory in order to minimize disruption.

That also allowed us to be most efficient in our transportation and distribution costs.

So one of the things we were able to do with that pull-forward, which we used our balance sheet to carry heavier inventories coming out of June, is ensure timely deliveries, which are driving sales and I think the cost of goods is somewhat impacted positively by more thoughtful transportation and logistics, which did save us some on the margin component.

So we do have it by region, channel, brand and we are managing that carefully.

I think as Tracey said, by the end of the second quarter, I think you will see some of this in-transit and some of this pull-forward on the fall level back out.

So we are very comfortable with where we are given our sales forecast at the moment.

Jeff Klinefelter, Piper Jaffray.

Yes, thank you.

Just a couple quick follow-up questions; one on Europe.

In terms of Italy, you noted that that had remained weak as in prior periods.

Any updated thoughts there on trends and what you are forecasting into the second half?

Are you forecasting further deterioration for Southern Europe or consistent performance?

And then just on Asia, as you get further into your plans to roll out and expand Mainland China, are you coming across any opportunities to adjust your pricing either up or down and how would that compare to your pricing in the European markets?

Thank you.

Okay, well, Italy remains challenged.

It is a market that the distribution is almost exclusively through small, multi-brand specialty doors.

Those local merchants are really feeling the squeeze of the difficult economic environment.

It is not a market that has meaningful department store exposure.

[Irina Shente] in Milan is probably the one exception.

So you are really distributing through either mono brand stores or through a specialty distribution and I think they are not only feeling it, they are struggling with their own cash flows.

So at least for the moment, we are looking at a fall that is probably more of the same and while it is an important country to us, I think you can see in the overall international results and particularly the European results, the strong countries, i.e.

France and Germany, the UK, the Scandinavian markets, are all so extraordinarily strong that we are managing the softness in Southern Europe, whether it is Italy or to some degree Spain.

In Asia, we are really in our infancy in our ability to work with the existing networks that we took back from our licensees, reposition those and move forward.

As we are elevating product and content, we are also looking at pricing.

So we are trying to take a more global point of view on the appropriateness of price differentiation, whether it is Japan or China or South Korea.

The Asian customer is very savvy and cross-shops, whether they cross-shop within Asia-Pac or whether they travel to Europe.

So I think the subject of global pricing, excluding for a moment the duties, is going to be one of the future.

In general, we were priced through our licensed distribution too low.

So we think we have found opportunities by merchandise categories to get better alignment with the market conditions.

Great.

We have time for one more question.

Faye Landes, Consumer Edge Research.

Hi, just a quick question on CapEx.

Can you just -- you had guided to higher CapEx this quarter -- this year and the CapEx in the quarter was approximately in line with last year.

So is that a timing issue or is something else going on?

No, it is a timing issue.

We expect that we are going to spend the full-year's CapEx (inaudible) of $320 million that we had communicated to you on the fourth-quarter call.

So it is just the timing between quarters.

And the buyback?

How should we -- what should we read into that?

Well, we have quite a bit of authorization for share repurchases as we always do.

We time those opportunistically and we have $670 million left.

So I think you can expect that we will continue share repurchase activity over the next few quarters.

Okay, thank you, everybody, for listening and extraordinary hard work on the part of 24,000 employees around the world.

We are really looking forward to the fall season and a strong holiday.

So we will be back to you in November.

That does conclude today's conference.

We thank you for your participation.