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Polo Ralph Lauren Corp. (NYSE:RL)

F4Q09 Earnings Call

May 27, 2009 9:00 am ET

Executives

James Hurley – Investor Relations

Roger Farah – President and Chief Operating Officer

Tracey T. Travis – Chief Financial Officer

Analysts

Omar Saad - Credit Suisse

Lizabeth Dunn - Thomas Weisel Partners

Robert Drbul - Barclays Capital

Robert Ohmes - BAS-ML

Kate McShane - Citigroup

David Glick - Buckingham Research

Jeffrey Klinefelter - Piper Jaffray

Adrianne Shapira - Goldman Sachs

Chi Lee - Morgan Stanley

Jennifer Black - Jennifer Black & Associates

Operator

Good morning and thank you for calling the Polo Ralph Lauren’s fourth quarter fiscal 2009 earnings conference call. As a reminder today’s conference is being recorded. (Operator Instructions)

Now for opening remarks and introductions, I will turn the call over to Mr. James Hurley. Please go ahead sir.

James Hurley

Good morning and thank you for joining us on Polo Ralph Lauren’s fourth quarter and full year fiscal 2009 conference call. The agenda for the call today includes Roger Farah, our President and Chief Operating Officer, who will give you an overview of the year and comment on broader strategic initiatives, and then Tracey Travis our Chief Financial Officer will provide operational and financial highlights from the fourth quarter and full year in addition to reviewing some expectations for fiscal 2010. After that we will open up the call for your questions which we ask that you limit to one per caller.

As you know we’ll be making some forward-looking comments today, including our financial outlook. The principal risks that could cause our results to differ materially from our current expectations are detailed in our SEC filings. Today’s discussion also includes non-GAAP financial measures. A reconciliation between reported GAAP and adjusted non-GAAP financial measures can be found in our earnings release, a copy of which is available on our investor website and the SEC website.

And now I’d like to turn the call over to Roger.

Roger Farah

Thank you Jim and good morning everyone. We are pleased to be reporting strong financial results today. Our fiscal 2009 revenues rose 3% and our adjusted earnings per diluted share increased 12%. These results were in fact stronger than our initial expectation for fiscal 2009 which we articulated in November of 2007, when the world was clearly in a much different state.

We achieved these results even as we absorbed dilution related to the acquisition of our children’s wear and golf apparel license in Japan, and as we continued to make significant investment in long term initiatives and as global economic challenges intensified to unprecedented levels in the back half of the year. Our sales and margins have held up remarkably well across channels and geographies as we gained market share around the world and took definitive action to protect our profitability.

We also ended fiscal 2009 in strong financial condition, with an excellent balance sheet characterized by more than $800 million in cash as well as managed inventories appropriately. I believe our fourth quarter and full year results demonstrate that we are navigating well through tremendous uncertainty. We were able to do this as a result of the strategic diversity of our operating model, the power of our brand portfolio, the desirability of our products, and the high level of operational control we have over our businesses.

Fiscal 2009 was really a year of two halves for us. In the first half of the year, we were prepared for weaker consumer demand trends thanks to the proactive measures we have taken to ship less product across our various channels of distribution after the first signs of a consumer slowdown that emerged in late 2007. As a result of our actions our sales and margin trends in the first half of fiscal 2009 were stronger than our expectations. We gained market share at our core wholesale accounts, we successfully launched the American Living brand across more than 40 product categories, and we maintained our consistent mid-single digit comp rate at our retail stores while preserving our profitability.

The unprecedented economic challenges that emerged in September and impacted our second half of fiscal 2009 were clearly a game changer for all industries around the world. The corresponding pullback in consumer demand trends came fast and hard, and we were not immune. Interestingly it was the core luxury customer and tourists who retrenched the most. For us that meant our retail comps reversed their consistent multi-year mid-single digit growth rate and declined at a double digit rate as traffic levels dropped significantly and the environment became extremely promotional.

The challenges at our retail store were balanced with the strength in other areas of our company. Our products continued to perform strongly with our various domestic wholesale partners and RalphLauren.com and our European business continuing to grow.

We also responded to the rapidly changing environment by implementing strong expense and inventory disciplines throughout the organization, including a company wide restructuring effort in the fourth quarter which we expect to benefit from as we move into fiscal 2010. Even as we’ve managed through such unsettled market conditions we continue to execute against our long term strategic objectives in fiscal 2009. The investments we make in our future growth initiatives are critical and we have the balance sheet and cash flows to continue to support them. In fact, the strategic investments we made over the last several years to expand our direct to consumer reach, grow internationally and develop new products that have helped us offset some of the impact of lower domestic shipments of our core products during fiscal 2009.

RalphLauren.com is a pillar of our strategy to expand our direct to consumer reach. The site sales grew 19% last year, approximately four times faster than total online sales and is in the ninth year of consecutive double digit growth. The investments we have made in RalphLauren.com which include buying back total control of the business two years ago, building out a dedicated fulfillment and customer care center last year, launching Rugby.com last summer and driving traffic to the site through some of the most innovative marketing initiatives in our industry is clearly paying off. We continue to invest in the technology supporting RalphLauren.com and to enhance the customer shopping experience whether through energizing the site with rich editorial content, launching iPhone applications or growing our mobile commerce capabilities. We expect many years of strong growth from RalphLauren.com particularly as we contemplate rolling it out globally over the next several years.

Europe was another area of remarkable strength for us during fiscal 2009. We maintained double digit constant currency growth throughout the year even as macro pressures intensified in the back half. Of course this growth rate is even more impressive given that we have grown our European sales more than five fold over the last seven years. We believe there is still much room for our wholesale and resale segments to expand their reach throughout Europe. We are in the midst of a market redevelopment strategy in France which includes some high profile flagship store locations as well as revitalizing presentations of all our brands in many leading department stores. We just introduced Lauren, our largest women’s brand in terms of sales volume, into about 80 European doors. So the global potential for that brand is only just beginning.

And we have only just begun to explore Eastern Europe, primarily through licensing partnerships. The incredible strides we’ve made in developing our European business has been supported by an outstanding leadership team based in Geneva.

We also continue to make progress building our organization in Japan. The children’s wear and golf integration that began in the second quarter of fiscal 2009 and that we knew would be diluted this year has gone smoothly. We are pleased to have all core apparel categories managed by our Japanese leadership team. Our long term strategy to grow our sales volume in Japan will be supported by elevating the brand and refining the merchandise strategies to be more in line with the approach that has worked so well for us in the United States and Europe. We also intend to nurture under developed categories particular women’s wear, children’s wear and accessories by supporting shop refurbishments and improving our adjacencies.

And we are now able to present a cohesive brand statement across many products. We are partnering with our wholesale customers to capitalize on additional collective growth opportunities.

In order to support our Japanese growth strategies we have begun to roll out a series of information technology upgrades that will continue through fiscal ’10 and support the consolidation and integration of what was previously three different organizations. Some of the benefits we expect to realize as a result of the Japanese system upgrades include better inventory allocation, improved fulfillment tracking and performance reporting as well as greater supply chain efficiency.

Some of the most exciting news during the fourth quarter was that we have reached a definitive agreement to assume direct control of our wholesale and retail distribution in Southeast Asia beginning January 1, 2010. On that date we will not only have the rights to control our distribution in the region which include China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Taiwan, and Thailand; we also will assume responsibility for approximately 43 standing locations and 100 shop-in-shops. Dickson Concept International Limited, our licensee for the region, will continue to operate the business for the next seven months. This transition of our Southeast Asia business marks a stride forward with respect to growing our international presence, particularly as it relates to achieving our long term goal of having approximately one-third of our revenue come from the Asia-Pacific region. While this goal is approximately double the current penetration of our Asia-Pacific region to our total sales mix, the market growth dynamics are very compelling and among the strongest in the world.

Even though we’ve had a presence in Southeast Asia with a licensing partner for more than two decades, our business in this part of the world is relatively small, approximately $150 million in retail sales across all eight countries in the region. And it is compromised of only a fraction of our various brands and product categories. We believe the potential for our brands in China alone is tremendous. The Chinese appetite for global luxury brands continues to grow rapidly. In fact, the Chinese consumers are already among the largest customers of many European luxury brands, most of which have had direct control of their Chinese operations for several years.

The work we will undertake to develop Southeast Asia is not unlike what we’ve done successfully in Europe and are currently doing in Japan. Namely elevating the position of the brand, layering in our luxury products, further developing our women’s, children, accessory categories and refining our wholesale and retail distribution. This is clearly a meaningful investment for us not only in terms of the financial resources required in the near term but also the transformational impact this investment is expected to have on our long term growth profile.

And there is a tremendous amount of work to be done. We are building a world class Greenfield organization in terms of people, processes and systems to support the retail and wholesale network of our stores and shops in the region. The timing of the transition allows us to begin building our Hong Kong based team that will manage Southeast Asia, and to plan for IT system implementation and store development initiatives ahead of going live in the region. We expect our most significant investment spending to be concentrated in the next two to three years as we grow from a handful of dedicated employees on the ground today to a couple hundred employees over the next three years.

In conjunction with our accelerated investment to pursue market share gains worldwide, we continue to refine our global operating standards. We are a complex company with respect to the breadth of products we sell, the channels through which we sell them and increasingly our global reach. Our bandwidth spans the world’s premiere fashion runways with our Ralph Lauren brands to the main streets of America with Chaps and American Living brands. And we not only design the product, we are sourcing it, flowing it around the world, marketing and advertising it and often selling it directly to the customer.

Now that we have considerable more direct control of the various aspects of our business worldwide, we are identifying and researching opportunities to evolve our core processes and the way we work across divisions, brands and regions. These efforts are designed to enhance our performance in a manner that will allow us to drive greater efficiencies and best leverage our considerable growth prospects.

During the fourth quarter we took definitive action to reduce costs by restructuring aspects of our organization. Acts like this are often difficult, but they are consistent with the evolution of our company and the unprecedented economic challenges that have emerged over the last year. Our actions were primarily focused on our domestic resale and wholesale operations, areas where the business trends have been most negatively impacted by the slowdown in consumer spending, and resulted in the elimination of approximately 500 people from our organization. Having to reduce the workforce is a painful consequence of the external environment but I believe we made the best decision that balanced the near term market realities with our commitment to our long term growth objectives.

One of the most important learning’s that has come out of the experience of our industry through the last year have been that brands matter. Customers want brands they can trust, where they know they are getting high quality merchandise that has enduring value to them. This phenomena plays directly into our company’s historic strength, not only for our core Ralph Lauren brands but also for Chaps and American Living. Our sustained investment in product innovation and marketing and advertising to support all of our brands differentiates our company, especially since we are leveraging our leadership in these disciplines across a wide range of target consumers.

As we sit here today, the global consumer remains very tentative. While sales trends appear to have stabilized, they are at lower levels and traffic remains depressed. When consumers do shop they are doing so with a fixed amount of disposable dollars and they are not spending beyond that limit. We are also finding that demand is strongest for need now, wear now merchandise. There is very little nice to have buying or purchasing ahead of next season.

As a result we, along with our retail partners, continue to be cautious with respect to sales planning, inventory planning and receipt planning throughout the next year. Regardless of the near term market dynamics, we have a clear and compelling growth plan ahead of us. Our goal is to enhance shareholder value through strategic diversification and capital allocation that is meant to yield higher returns while mitigating risk over the long term.

As I highlighted earlier we are leveraging our financial and managerial strength to opportunistically accelerate our investment in the development of our international markets, and we have a track record of success. We have proven our ability to do so in Europe, this work is underway in Japan, and we are in the early planning stages for Southeast Asia. We are driving productivity from more established markets and product categories as we aggressively invest in under penetrated high growth markets and product categories. Our financial and intellectual capital will be allocated accordingly.

Our fiscal 2009 results demonstrate we can take appropriate action to navigate through whatever headwinds come our way while continuing to protect our long term strategic agenda. The desirability of our brands and products around the world, the diversity of our business model across channels and geographies, and the exceptional high execution of our management team contribute to our performance this past year. Just as we took definitive action to protect our profitability in fiscal 2009, we will continue to be proactive in positioning ourselves to emerge from the near term challenges as even a stronger global brand and company.

Before I turn the call over to Tracey, Ralph and I would like to thank all of our employees for their hard work in navigating through this difficult environment. Your talent and dedication has really made a difference.

And finally a special thanks to Judith McHale who resigned from our Board of Directors yesterday due to her recent appointment and confirmation as Undersecretary of Public Diplomacy and Public Affairs for the State Department. Judith was a valued member of our board since February of 2001 and provided us with tremendous insight and guidance during her tenure. We all wish her great success with her new position supporting Secretary of State Hillary Clinton.

And now Tracey will report the results.

Tracey T. Travis

Thank you Roger and good morning everyone. First I would like to briefly discuss the impairment and restructuring charges that we incurred during the fourth quarter. Then I will highlight for you the drivers of our fourth quarter sales and earnings per share performance. My commentary regarding our fourth quarter results will focus on the adjusted results that exclude the financial impact of the impairment and restructuring charges we incurred during both the current and prior year periods. You can find the reconciliation tables that bridge our reported and adjusted results in the supplemental financial information we provided in this morning’s press release. I’ll end my prepared remarks with our outlook for fiscal 2010.

So beginning with the fourth quarter charges, the $48 million asset impairment charge we incurred during the fourth quarter was associated with the net carrying value of store related assets. It is largely a function of the economic environment and the impact it has had on current and expected sales trends at some of the company’s directly operated retail stores primarily in the United States.

We also incurred a $21 million charge related to company wide restructuring efforts that were undertaken to better align our expenses with the slowdown in consumer spending. The restructuring charge was primarily related to the headcount reductions Roger mentioned earlier, but it also included certain costs associated with a small number of store closings. The combined impact of these impairment and restructuring charges on our fourth quarter diluted earnings per share was $0.42 and inclusive of some charges incurred in the second quarter of fiscal 2009. The full year impact of impairment and restructuring charges was $0.49.

Now let me move on to the overview of the fourth quarter’s financial results which again will be discussed on an adjusted basis and exclude the impact of the impairment and restructuring charges we just overviewed. Consolidated net revenues for the fourth quarter were $1.22 billion, 1% below the prior year period. The decline in revenues primarily reflects a 15.9% reduction in global same store sales at our retail segment that was partially offset by higher wholesale revenues. The net negative impact of currency translation on our total reported revenue growth for the fourth quarter was approximately 160 basis points.

Our gross profit rate declined 250 basis points to 51.8% in the fourth quarter, a function of lower wholesale and retail segment margins, and 50 basis points of unfavorable foreign currency effect. Adjusted operating expenses in the fourth quarter were flat with the comparable period last year, reflecting some of the benefits of our focus on expense management as we also continue to invest in our long term strategic growth initiatives.

Adjusted operating income for the fourth quarter was $109 million, 27% below the prior year period, and our adjusted operating margin for the quarter was 8.9%, 310 basis points below that of the fourth quarter of fiscal 2008. The decline in adjusted operating income and adjusted operating margin rate was primarily due to lower wholesale and retail segment profitability, and the net unfavorable effect of foreign currency translation, all of which was partially offset by company wide cost control initiatives.

Adjusted net income for the fourth quarter of fiscal 2009 declined 19% to $87 million and adjusted net income per diluted share was $0.86 which was 17% below the comparable prior year period. The declines in net income and diluted EPS principally relate to the lower operating income discussed that was partially offset by a net tax benefit in the fourth quarter of fiscal 2009, which was primarily a result of favorable geographic income mix, restructuring and impairment impact, and year end adjustments impacting the quarter.

Before I move on to our segment highlights I’d like to frame our better than expected fourth quarter earnings results for you relative to the guidance we provided back in February. We experienced stronger performance across all income statement line items although the net tax benefit, better profitability in our international operations inclusive of exchange rates, and disciplined expense management were the primary drivers of the actual results exceeding our expectations.

Moving on to our segment highlights for the quarter, let’s begin with our wholesale segment where sales increased 3% to $812 million primarily due to higher international wholesale revenues related to sales of children’s wear and golf apparel in Japan and double digit constant currency growth in Europe. In spite of the challenging sales trends reported in the U.S., our core men’s, women’s and children’s wear products continued to outperform in their respective categories during the fourth quarter. We transitioned to spring early and smoothly and the currency of our linear inventories along with the relevance of our brands and a focus on key items helped to drive our relative out performance. Men’s wear continued to be more resilient than women’s wear, consistent with the trend over the last several quarters, although our Chaps women’s sales remained very strong.

Our American Living volumes were down this quarter as we anniversaried shipments to support the brands’ launch last year and this is a trend we expect to continue throughout fiscal 2010. As you may have heard from J.C. Penney earlier this month, American Living is experiencing better retail sell throughs this spring based on the adjustments we’ve made to the merchandise assortments and inventory levels.

In Europe, the United Kingdom was strong for us across all product categories during the quarter but in women’s wear in particular. France and Germany are trending better than average and Spain remains weak.

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

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

Our fourth quarter wholesale operating income was $165 million and the operating margin rate was 20.3% compared to 22.6% in the fourth quarter of fiscal 2008. The lower operating margin rate was primarily a result of expenses in newly acquired and emerging businesses and a shift in our domestic wholesale product mix.

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

For our retail groups, fourth quarter sales declined 8% to $366 million. Overall comps to our sales were down 15.9% reflecting a 29.3% reduction at Ralph Lauren stores, an 8.8% reduction at factory stores and a 20.8% reduction at Club Monaco stores. We have a high percentage of our stores located in major urban centers and popular tourist destinations worldwide, and in the New York metro area in particular. The decline in tourist traffic as a result of the stronger U.S. dollar compared to last year has had a meaningfully negative impact on our traffic and sales trends across our domestic Ralph Lauren factory store and Club Monaco concepts.

We’ve experienced a drop off in tourist sales throughout Europe as well, although our UK stores did benefit from increased tourist traffic as a result of the weaker British pound relative to the euro during the quarter. These dynamics are another example of the impact of exchange rates on our financial results that obviously go beyond just the translation impact on our financial statements.

RalphLauren.com sales grew 12% in the quarter, another standout performance in absolute terms and relative to the online sales trends reported by other luxury retailers. Once again customer traffic grew at a strong double digit rate although conversion in the average order value were below the prior year’s levels as it was clear customers were comparison shopping online. Sales of men’s and children’s wear products continued to post the largest year-over-year gains on the site. The response to Rugby.com which was launched last summer has been better than expected with traffic and conversion trending ahead of plan.

We are obviously very pleased with the continued momentum at RalphLauren.com and we know there is a high level of customer overlap between our stores and our site. Accordingly beginning in fiscal 2010 we will begin to include our online sales in our total company comparable sales figures while still independently identifying the sales growth performance of RalphLauren.com.

With respect to our European retail operations, the United Kingdom was our top performing region during the fourth quarter for both our Ralph Lauren and factory stores, primarily due to the increased tourism I referenced earlier. Although we did experience stronger traffic among local customers in Italy and France, overall sales trends were challenged by exceptionally weak tourism in these markets.

Adjusted retail operating loss was $26 million in the quarter compared to a $1 million loss in the fourth quarter of fiscal 2008. The deeper retail operating loss was primarily attributable to the decline in comparable store sales, increased markdown activity and occupancy costs associated with future store openings. Since our stores that cater to tourists tend to be among some of our larger and more productive locations, lower tourist traffic has also weighed on our retail segment margins. As a general slowdown in traffic was the greatest challenge for our retail stores, we were more promotional but we managed our inventories to appropriate levels and finished the quarter in good inventory position.

Licensing royalties for the quarter were $47 million, 16% below the prior year period due to a decline in Japanese product licensing revenues related to the children’s wear and golf apparel acquisition and to lower fragrance licensing revenues. Operating income for our licensing segment declined 6% to $25 million in the fourth quarter as the lower licensing revenues more than offset a decline in purchased accounting amortization.

As Roger highlighted earlier, we have built a diversified business model that is designed to deliver profit and generate operating cash flow even as we make significant investments in long term growth opportunities. The high level of operational control that drove our better than expected fiscal 2009 sales and earnings also delivered a solid balance sheet. We ended the year with $820 million in cash, cash equivalents and short term investments compared to $626 million at the end of fiscal 2008.

Net of debt we have $414 million in cash and short term investments at the end of fiscal 2009 which compares favorably with the $53 million net debt position we had at the end of fiscal 2008. And the growth in our cash balance was achieved after paying back approximately $200 million in short term debt and repurchasing approximately $170 million of our Class A common stock during the year. Throughout fiscal 2009 we managed all elements of our working capital aggressively. We were able to do this in spite of having operating at a very high level in the past and in an environment where concerns about liquidity reached their highest level in recent memory.

We ended the quarter with inventory up 2% from the same period in the prior year. Excluding the Japanese children’s wear and golf inventory, our consolidated inventory actually declined 2%. We remain committed to proactively managing inventory across all channels in a disciplined manner as we have consistently demonstrated over the last year. On a consolidated basis our inventory turns improved to 3.9 times in fiscal 2009 from 3.7 times in fiscal 2008. And we improved our cash to cash cycle by five days.

We spent approximately $185 million in CapEx during fiscal 2009 which was 15% below fiscal 2008’s level to support new retail stores, wholesale shop installations and other infrastructure investments. We do expect capital expenditures to be approximately $220 million in fiscal 2010 as we have large scale flagship store projects which we’ve discussed with you previously, [Place de la Madeleine] in Paris, France, Madison Avenue here in New York and Greenwich, Connecticut as well. And those projects are underway. They are strategic locations and the capital spending for them is firmly committed.

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

We are now two months into fiscal 2010 and there is still tremendous uncertainty regarding how long the current retrenchment in consumer spending will last, or how much additional deterioration in personal consumption may occur. While there has been considerable dialog in the press about the domestic retail environment having troughed the reality is that unemployment continues to rise, home values which were just reported yesterday continue to fall, and credit is not only still difficult to get it is also more expensive. There is also considerable variability in sales trends on a day to day basis which we certainly see and you certainly hear about. Due to this uncertainty and the subsequent difficulty in forecasting with any degree of comfort, we have decided not to provide annual earnings per share guidance on this call.

But as you saw in this morning’s press release we have provided some color around our expectations for fiscal 2010 and in particular for the first quarter which I would like to briefly review with you. With respect to our sales outlook we do expect consolidated revenues to decline by a high single digit. That would be 7 to 9% for the full year which would include a net unfavorable foreign currency translation effect for the year. For the first quarter we expect wholesale revenues to decline by a low double digit rate and comparable store sales to decline by a mid-teens rate, which essentially maintains what we experienced during the third and fourth quarter of fiscal 2009 in our retail stores and what we just reported to you on this call.

I’d also like to remind you that we are comparing against several years of mid to high single digit comp gains in the various quarters so, but obviously the environment is continuing to have an impact and we’re certainly seeing that in the first couple of months of this quarter.

You heard Roger speak about our accelerated investment to transition and build the company’s operation in Southeast Asia which we’re very excited about. This multi-year investment is broad and deep as we are building a platform for long term growth. Our fiscal 2010 investment in Southeast Asia is expected to be significant.

We will continue to invest in our new product initiatives as well in fiscal 2010. We are making these investments in advance of the returns we expect to achieve from them, which is consistent with how we’ve invested in the past, although the current operating environment is obviously much more challenging. Since we will not have revenues to offset the cost of these investments for much of 2010, we are working to balance our spending with a continued focus on controlling our expenses and identifying ways to leverage global operating efficiencies. But we currently expect operating expenses for the first quarter to be modestly above those in the comparable prior year for the quarter.

The full year fiscal 2010 tax rate is estimated to be at 35%. Again we had a benefit from geographic mix in the fourth quarter and the fiscal year, and the fiscal 2010 tax rate reflects the geographic mix of income that we are projecting in fiscal 2010.

Our fiscal 2009 earnings illustrate our ability to take definitive action and deliver strong results, not only in good times but also in the face of significant challenges. We have consistently demonstrated our discipline to deliver on our investments and all of the financial and managerial discipline that has supported our progress over the last several years remains intact as we pursue new, transformational growth initiatives. We are confident in the relevance of our strategy and of our brand portfolio, the dedication of our talented teams worldwide, the strength of our balance sheet and our ability to continue to deliver strong profitable growth over the long term.

With that I will conclude the company’s remarks and we will open the call up for question-and-answers. Operator, at this time could you assist us with that, please?

Question-and-Answer Session

Operator

Absolutely. Thank you. (Operator Instructions) Your first question comes from Omar Saad - Credit Suisse.

Omar Saad - Credit Suisse

Congratulations on providing upside in a tough environment.

Roger Farah

Thanks.

Omar Saad - Credit Suisse

Roger wanted to dig in a little bit more. It sounds like some of the activities that you’re doing with the restructuring and closing some stores and you’re maybe thinking a little bit differently about the U.S. business. Can you expand on the 500 people, you know, what kind of responsibilities are you eliminating in the internal infrastructure here in the U.S.? And am I thinking about that properly in terms of you’re kind of looking at kind of reallocating resources to the regions where you think there’s growth?

Roger Farah

No, Omar, I think you’re thinking about it exactly right. We are clearly very excited about the opportunity to develop our business in Asia, Southeast Asia particularly with China being the lead country has been a part of the world that we’ve managed through a licensee for many, many years, and at the end of this calendar year, January 1, we’ll get it back. We want to try to hit the ground running as best we can so we are putting a complete organization on the ground there as we speak, putting in the infrastructure technology to run that business, making the buys effective for January, February and March as we speak. And we expect to have a, you know, smooth transition of that.

Over the long term, you know, we think China particularly and the rest of Southeast Asia will be an enormous growth opportunity for the company. So we are managing our resources here domestically, where at least in the near term business looks more challenging. We’ve consolidated, asked people to stretch their responsibilities and eliminated jobs really throughout the domestic operation at all levels in an effort to free up resources to invest in Southeast Asia and other parts of our growth strategy. So it’s a very conscious effort to pull resources out of one part of our business and put them somewhere else.

Omar Saad - Credit Suisse

And then in terms of what some of the things that you’re doing on the ground here, it sounds like you closed some stores. Are there plans for further store closures? Is there anything on the horizon for Club Monaco and the domestic arena?

Roger Farah

Yes. Omar we closed six stores. So in the scheme of our portfolio it’s not really significant. And as I think you know we’ve continued to close stores over the years either as leases expired or markets changed. So we don’t anticipate any major store closing activity. Obviously the downturn in the business, late September on, has been very different than our experience over the last six, seven, eight years. How long that lasts is anybody’s guess, so as leases come up for renewals we will certainly look to analyze whether we want to go forward or renegotiate or whatever the decisions will be. But I don’t think the six stores were a meaningful number in the scheme of things.

Omar Saad - Credit Suisse

And then the store impairments? You know the test that you do to test for that. What kind of stores are those? Are we talking about the outlets or are we talking about the full price or the domestic? Is it international?

Tracey T. Travis

They were all full price stores, Omar. And it was a mixture between Club Monaco and Rugby and some of our Ralph Lauren stores. So.

Omar Saad - Credit Suisse

Domestic?

Tracey T. Travis

Yes.

Omar Saad - Credit Suisse

Primarily domestic.

Tracey T. Travis

They were primarily domestic.

James Hurley

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

Operator

Your next question comes from Lizabeth Dunn - Thomas Weisel Partners.

Lizabeth Dunn - Thomas Weisel Partners

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

Roger Farah

Thank you Liz.

Lizabeth Dunn - Thomas Weisel Partners

Can you address your relationship with Macy’s? There’s been a lot of chatter about potential reductions in that business. And how should we think about that in the context of your wholesale department store, you know, your wholesale domestic business overall?

Roger Farah

Yes, well our relationship is intimate. We have strategized with Macy’s on a very, very close level. We are one of their key vendors to partner many of their initiatives over the last year. I think the centralization and the My Macy’s efforts are really going to make an extraordinary difference in how Macy’s runs their business on a national business, and we are fully lined up and aggressively supporting that. Recently came out of a strategy meeting with Terry and his team last week, and Jackie and all of her key presidents are actively engaged in maximizing the business there whether it’s men’s, women’s, kids or any of the other businesses. So, you know, we’re excited about it.

We’re in close partnership. We have aggressive plans to launch new product with them including the Olympics coming up and they will be our key partner. So we’ve got a lot of initiatives going on with Macy’s and have married our organizational structure up with some of the changes they’ve made to better support them. We’re encouraged by their steps in what we’re doing to partner growth initiatives. So good things are happening there.

Operator

Your next question comes from Robert Drbul - Barclays Capital.

Robert Drbul - Barclays Capital

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

Roger Farah

Yes, I can’t give you the percentage, Robert, but I would say you know we talked about in the script that those businesses are down, whether they’re in our own retail stores or in our wholesale distribution. Interesting in this environment unlike a lot of other downturns that I’ve experienced over the last 35 years, the high end customer seems to be the one most affected. And that really started, you know, late September even though you know ’07 and ’08 up until that weren’t buoyant, but starting in you know the last part of September as the banks began to become front and center, the high end customer really around the world has pulled back, been more selective in their shopping and clearly is looking to buy at a discount.

I think the over inventoried environment this fall certainly allowed them to buy at a greatly reduced price. I think that’s moderating somewhat for this spring, and then hopefully by next fall inventories and demand will be in alignment and full price selling will begin to strengthen. But clearly those businesses are down for us as they are for really everybody else in that business. And we don’t expect that to change in the next 12 months.

Operator

Your next question comes from Robert Ohmes – BAS-ML.

Robert Ohmes - BAS-ML

Just a few quick questions. I wanted to get a clarification on the wholesale guidance for the first quarter deemed down double digit after being up 3% in the fourth quarter. Is that all just the anniversaring of the Japanese, you know, children and golf business or is there a U.S. or European wholesale trend change there? And then the other follow up question.

Roger Farah

That’s a one by one. You know the guidance that we’ve given in the first quarter and as you know we have visibility at this point for about six to eight months out in wholesale is a combination of domestic order contraction with most major brands as retailers have bought and planned for receipt flow in a much more conservative way. It’s clearly an attempt to not have the inventory overhang that plagued the industry and I think we’ve partnered with them to make sure that you know what we produce is what they want. And that’s baked into the guidance. I think it also assumes a more conservative constant currency order file in Europe as well as some negative exchange rate impact that we are expecting in the first quarter.

So it’s really a combination of all three plus the lapping of the first nine months of American Living shipments last year, where we were really filling the stores and filling the racks and now we’re shipping more on a trend basis. So those are really the major, you know, pieces of the wholesale guidance.

Tracey T. Travis

And the Japanese children’s wear and golf license acquisition occurred in August of last year, so that’s when we will be lapping that.

Operator

Your next question comes from Kate McShane – Citigroup.

Kate McShane – Citigroup

I’m trying to better understand your gross margins and the differences we saw sequentially. In the third quarter you had a slight margin improvement during a very difficult promotional environment whereas this quarter of course margins contracted because of decline in wholesale and retail margins. So can you help us understand the difference between the two quarters? And then how should we think about the allocation of your cost savings throughout the year? In what quarter or half will we see the biggest benefit?

Roger Farah

Well I’ll talk about the margins and let Tracey talk about the expenses. You know if you remember it seems like a long time ago, this is January, February and March. So you know we sit here at the end of May and we’re talking about the margins for the post-Christmas period. And I think the largest issue was really one of retail margins to clear out the, you know, the disappointing October, November, December sales. And so I would say that was the major impact on the margin compared to the prior quarter which is also a very strong wholesale quarter. So part of it’s mix. Part of it’s the actions that were required to clear out the post-Christmas retail inventories.

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

Tracey T. Travis

In terms of the impact of the restructuring initiatives, you know, those actions were taken at the end of the year so those actions, you know, will impact, you know, the full calendar year, you know relatively equally, you know, and from a calendarization standpoint. Having said that, you know, we have also called out that we will be investing in Southeast Asia. So we will have an investment impact and we haven’t called out what that is, but that will be ramping up during the year. So you’ll see a smaller impact of that in the first quarter, a bigger impact of that in the second quarter, a bigger impact of that in the third quarter. In the fourth quarter will be a larger impact of that but you’ll also see the benefit of the sales benefit as we take over the license and the wholesale revenues associated with that. So it’ll be a bit difficult to calibrate. That’s why we’ve just tried to give you some color around the quarter in terms of what our revenue and expense guidance is at least for the first quarter and we’ll try to give you some perspective. But it will be a difficult year for us to try to guide you through with the currency movement, the investment that we’re making in Southeast Asia and just the general economic environment both here in the U.S. as well as in Europe.

Operator

Your next question comes from David Glick - Buckingham Research.

David Glick - Buckingham Research

Roger I was wondering if you could give us an update on the progress you’re making in the women’s business at wholesale in the U.S.? And that business, you know, got tougher before the economy turned down and, you know, there’s been a pretty wide gap in the performance relative to men’s. I’m just wondering how much progress you’ve made in closing that gap and how you see the prospects for 2010 for the women’s business.

Roger Farah

Yes, that’s a good question, David. We have seen a softening of women’s trends really across channels and across price points now for most of the last year or so. And that’s whether it’s Ralph Lauren or Club Monaco or any of the brands we have with really the exception of Chaps. We’ve continued to enjoy really tremendous growth in all merchandise categories with [Cole’s] and Chaps and the women’s business continues to trend well there. I think the fundamental issue is that, you know, the career business has turned very soft and it’s a much more casual cycle. And because of that I think the woman has an easier time putting together a less expensive outfit to go to work in and she’s more comfortable in a casual outfit that she can refreshen with just a nice top or some accessories.

So I think the career business being soft is affecting all of our women’s businesses as it is really the whole industry. I think what you’ll find is strength in things like dresses. I think you’ll find it in tops. But there isn’t the suiting business, the career business that Lauren and other businesses, you know, enjoyed in the past. I think it will come back but right now it’s in that cycle. So we are focused, you know, very hard and to your question the domestic wholesale business where Lauren is the dominant brand, you know, on that side of the business whether it’s store expansion or key item focus, that will escort that business going forward and we’ll work to manage the career side until that returns.

Operator

Your next question comes from Jeffrey Klinefelter - Piper Jaffray.

Jeffrey Klinefelter - Piper Jaffray

Congratulations everyone on the great performance here in the quarter. My question is really on the pricing trends and product margin dynamics across your major global regions. Could you give us a sense for as you, you know, pursue your expansion in Europe and Asia what are constant currency pricing differences with U.S. in your sportswear categories? And how are your margins impacted by your hedging strategies for cost of goods?

Roger Farah

Well you know I think you’re all familiar with the fact that we do not employ a constant pricing across the globe. We price appropriate to the marketplace whether that’s Europe or different countries in Europe, the United States or Asia. So you know the actual cost of goods since we globally manufacture everything is constant and then we, you know, price according to the marketplace conditions. So that brings with it, you know, a level of complexity in terms of currency fluctuations that when we translate it back to the U.S. balance sheet, you know, provides some of the interesting forecasting challenges we have.

We have not lowered our prices on comparable items as we’ve heard and seen others do. We have very broad choices in merchandise offerings whether it’s in a brand or between brands so that our customers can assort product by category and price point to match their trends. We also are doing that in our own retail stores whether it’s a sorting by brand or price point within our brands, we have very full lines that range from opening price to very high prices. And I think our customers are adjusting on a worldwide basis as they see fit. And it’s consistent with what we’re doing in our own stores as we see fit.

Clearly customer traffic is down, but the average unit sale is down too. So the customer is price sensitive in certain categories and we’re adjusting accordingly. We do, you know, feel excited about the integration of our Japanese organization in terms of manufacturing so they are now part of our global standard. So all of the major regions around the world are running through our integrated worldwide manufacturing group, which has really done a brilliant job at managing the complexity of this. We ship today into 78 countries and manufacture in 45, so the challenges of raw materials to a manufactured country and from there to a country of sale and then translating that all back to the U.S. balance sheet makes for a pretty complicated puzzle. But so far so good.

Operator

Your next question comes from Adrianne Shapira - Goldman Sachs.

Adrianne Shapira - Goldman Sachs

I had two questions really. The first related to the factory performance. Just wondering any, you know, the decline there and down 8.8, given the fact that it does seem like the inventory clean up is happening and it doesn’t sound as if the aggressive promotions out there would hurt off price, we’ve definitely seen some pick up in outlet and off price. So maybe some color as to why that division is still declining. And then the second follow up I can ask after on expenses.

Roger Farah

Right. The factory performance quite frankly just to remind everybody was in fact impacted by the shift in Easter. We do get a significant change when Easter falls from March to April and I think that’s a not insignificant part of decline. Our quarter, January, February, March is different from what most retailers have now reported which include the Easter shift. So I think there will be some pick up in that trend in the first quarter we report. Otherwise the other major issue in our factory stores is really the tourist destinations which Tracey talked about. We have significant volume in what has been historically strong tourist locations and we are seeing the fall off in that traffic as well as in the Ralph Lauren stores. So those are probably the two major pieces of the factory performance.

What was your second question? The?

Operator

I’m sorry. Adrianne if you’d like to ask your second question please hit star one again to reenter the queue.

Roger Farah

I’m sorry. Let’s keep moving Operator.

Operator

Your next question comes from Chi Lee - Morgan Stanley.

Chi Lee - Morgan Stanley

Just Roger can you elaborate a little bit more on what the major merchandising opportunities are within the Southeast Asia operation? Is it similar to Japan where the assortments are very limited currently?

Roger Farah

Yes, I would say the Southeast Asia business has really been built on the back of men’s blue label and so we believe that there are opportunities in the women’s areas across all brands. There are definitely opportunities in kids and denim, and also the most glaring would be the accessory business. Whether it’s Japan, whether it’s China or whether it’s any of the Southeast Asia countries we think all of those categories but particularly accessories represents unusual opportunity for us. Most of our licensed territories has had historically been built on men’s blue label so this is not totally dissimilar to Japan or any of the other Asian countries.

Operator

Your next question comes from Jennifer Black - Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

Good morning and let me add my congratulations as well.

Roger Farah

Thanks Jennifer.

Jennifer Black - Jennifer Black & Associates

I wondered Roger how you see the fashion world? I know you talked about the missy category on the negative side. Are there any positive call outs? And then I wondered if you could elaborate a little bit more on accessories. You’ve done a great job domestically. Are there more opportunities domestically?

Roger Farah

Yes, well let’s talk about the accessories because we are very excited. If you start with the shoe business which we acquired several years ago back from Reebok we’ve seen very strong growth whether it’s at the collection price point or in the Lauren price point. And that’s been primarily domestic but we’re now beginning to push that out into an international business opportunity.

We then brought back in small leather goods and belts and actually belts is one of the better trends in the fashion business to your first question. And that now is being integrated into the overall accessory strategies over the last year or two, and our efforts in the handbag business which have been tremendously successful with the Riki and other high end products. We will be looking to launch a Lauren price point consistent with our female apparel business, our female accessory and footwear businesses in the fall of 2010.

So we continue to invest and build talent and capacity and manufacturing strength in those categories. And while they may be soft on a global basis they are still enormous categories that, you know, are owed, you know, tremendous volume to us. So we have a lot of investment going into that and we have high expectations going forward.

In terms of the overall fashion world, you know, my only reaction is that unique interesting product that’s differentiated continues to sell. And I think the customer is looking for a reason to shop. I think the mood has stabilized from what was sort of a panicked customer in September through maybe the end of February or March. I think as things seem to be stabilizing there was certainly a sense that consumer sentiment yesterday is trending up a little bit. So I think for the better customer it’s less about whether they have the money to buy or not. I think it’s an attitude. And I think as the attitude brightens there will be a return to those products and brands that have a credibility and obviously we hope to be one of those.

So I think at this point we thank you all for your interest and look forward to an update in August on how the fiscal ’10 year is unfolding. Thanks.

Operator

This does conclude today’s conference call. Thank you again for your participation.

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Source: Polo Ralph Lauren Corp. F4Q09 (Qtr End 03/28/09) Earnings Call Transcript
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