Roger Farah – President & COO
Tracey Travis – CFO
James Hurley –IR
Omar Saad – Credit Suisse
Liz Dunn – Thomas Weisel Partners
Robert Drbul – Barclays Capital
Adrianne Shapira – Goldman Sachs
David Glick – Buckingham Research
Christine Chen – Needham & Company
Jeff Klinefelter – Piper Jaffray
Michael Binetti – UBS
Chris Kim – JPMorgan
Polo Ralph Lauren Corporation (RL) Q3 2010 Earnings Call February 3, 2010 9:00 AM ET
Good morning and thank you for calling the Polo Ralph Lauren third quarter fiscal 2010 earnings conference call. (Operator Instructions) And now for opening remarks and introductions, I will turn the conference over to Mr. James Hurley. Please go ahead sir.
Good morning, and thank you for joining us on Polo Ralph Lauren's third quarter fiscal 2010 conference call.
The agenda for the call today includes Roger Farah, our President, and Chief Operating Officer who will give an overview of the quarter and comment on broader strategic initiatives. Then Tracey Travis, our Chief Financial Officer, will provide operational and financial highlights from the third quarter in addition to reviewing our expectations for the remainder of fiscal 2010.
After that, we will open the call up for your questions which we ask that you please limit to one per caller.
As you know, we'll be making some forward-looking comments today including our financial outlook. Our expectations may contain any risks and uncertainties. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.
And now, I'd like to turn the call over to Roger.
Thank you James and good morning everyone. We reported strong third quarter and year to date results this morning. Year to date our profits are at a record level despite operating in the worst economic environment since the Great Depression and we’ve exceeded our own expectations on all operating metrics.
We’ve been able to achieve this level of performance even as we’ve intensified our investment and our long-term strategic initiatives, which for the first nine months of the year include building an entirely new organization in Hong Kong to support our growth aspirations through Asia, investing in important new flagships in New York, Paris, and Greenwich, Connecticut, and developing a host of exciting new products.
We ended the third quarter with more than $1.3 billion in cash and investments with net cash more than double last year’s level and we continue to reinvest in our business, buyback stock, and reduce debt.
Of course we benefit from having exceptionally strong product and strategic merchandising initiatives. As Ralph said in today’s release, customers appreciate our [unwavering] commitment to quality and innovation and which are defining characteristics of our company.
This brand and product excellence coupled with superb worldwide execution by the team has allowed us to succeed. As much as our third quarter and year to date performances reflect the day to day operational excellence of our teams, they are also a result of many years of careful planning, investment, strategic decision making that sometimes have a negative short-term impact, but they have ultimately made us stronger and more profitable organization.
We would not be in the position we are today without these years of preparation and execution. Two years ago when the first signs of global financial crisis were emerging, we made a decision that our foremost priority was to protect our brand and our profits. We executed this be developing focused merchandise strategies and calibrating our global shipment volumes with the expected customer demand trends.
We supported our efforts further by exploring supply chain initiatives that would allow us to capitalize on certain efficiencies without sacrificing quality or service levels. The net result of our actions have been strong retail sell throughs of our products across channels, the benefit of which you see reflected in the 470 basis point improvement in our gross profit margins during the third quarter and the 270 basis point improvement for the full year.
Both of which are on top of a margin expansion last year. Across the board our core products have exceeded their sales plans on significantly reduced stock and tightly managed receipt flows. We achieved this level of profitability while remaining absolutely true to our luxury brand positioning. There aren’t many brands in our company or industry that could make a similar claim.
Our retail performance during the third quarter is particularly noteworthy, we experienced a dramatic change in our worldwide same store sales trends with comps rising 6% after falling 7% in the first half of the year. And RalphLauren.com maintained its double-digit growth rate.
Our tiered multichannel approach through our direct to consumer operations is a strategy that continues to serve us well and by any measure we had a strong holiday season. The decisions we made to adjust our merchandising assortments to accommodate the new customer mindset in addition to taking significant costs out of the business, helped drive the operating profitability of our retail segment to 17%, up 75% in dollar terms compared to last year and just 60 basis points shy of our historic third quarter peak retail margins.
The recovery in retail sales and margin was broad based across concept and region and particularly good for our factory stores, which have been especially strong in the current environment. There is no question that customers are increasingly shopping online where traffic to RalphLauren.com continues to grow at a double-digit rate even as visitors to brick and mortar stores remain down.
We were pioneer in selling luxury apparel online 10 years ago, and we continue to benefit from the multiyear investment we’ve made to develop a state of the art online business with cutting edge technology, distribution, and customer service capabilities.
The cumulative effect of our consistent investment in world class advertising, marketing, and public relations initiative have also proven to be valuable particularly in the current environment. Consumers clearly recognize that are brand stands for quality and exceptional value.
Our long standing associations with premier sporting events such as the Olympics, Wimbledon, and the US Open, not only convey the power of the Ralph Lauren brand but they also accentuate our global visibility and allure.
We will also have very strong coverage at the Winter Olympics in two weeks. We are proud to be associated with these events and the world’s finest athletes and we constantly explore for new ways of reaching customers to increase the visibility of our brands.
For example, Rugby.com staged a successful virtual fashion show during the third quarter has significantly increased the amount of attention and was highly effective in driving awareness of the site. Given the strength of our brand and consistent sell through performance we believe we are well positioned to continue taking market share through sustained productivity gains of our core products.
In addition we continue to pursue incremental growth opportunities most importantly in accessories. As you are aware we have been working on developing handbag assortment for our Lauren brand, and we are currently in market with our first collection of Lauren handbags.
We expect to deliver this merchandise in leading department store doors this fall. The product looks fantastic and we are excited about the long-term growth prospects of this category. The recent activity to our footwear product is expanding rapidly and the profitability of this category is following suit.
On January 1 we successfully assumed control of our business in several Asian markets including China that were formerly licensed territories. I’m pleased to report that the transition was executed smoothly with no disruption to the business. We are now directly operating a multichannel business.
Our ability to execute that transition which includes the creation of an entirely new locally based organization speaks not only to the operational sophistication of our company but also to the tremendous opportunity we see in this part of the world.
Our efforts obviously require significant investment, some of which you see reflected in our operating expenses this quarter. To give you some perspective on what we’ve accomplished over the last year in this region, we’ve hired and trained nearly 700 employees. We’ve obtained lease assignments for all of our locations. We’ve built a new world class supply chain and logistics network to support the region.
And we’ve built a constellation of management systems and corporate processes. The net result is that on day one of the transition, our stores were open for business with our own new POS system. They were set with spring merchandise and they were receiving goods from our distribution center daily.
The store associates are now being trained in our selling and service cultures. We did not have any of this infrastructure when we first spoke to you about our plans for this region last year at this time. So we’ve clearly come a long way. And to make this kind of progress in difficult market conditions really highlights the operational and financial strength of our organization.
With the first part of this transition now behind us we will begin to develop this region in a measured way as we focused on managing our existing points of distribution and learning about taste and preferences of our customers in this part of the world.
Our spring buys which were made 12 months ago already reflect our desire to elevate the brand and educate the customer about the breadth of our offering by presenting a more balanced mix of men’s, women’s, fashion, and icon product as well as accessories.
For the first time ever we are now in control of our destiny in the world’s fastest growing regions. We believe this is a powerful position for us for a number of reasons. It allows us to leverage global best practices in terms of inventory management, assortment planning, retail operations, and logistics.
In addition our global advertising and marketing messages can be more appropriately aligned with our selling strategies and perhaps most importantly it allows us to leverage the incredible scope of products that we offer on a global platform.
We are uniquely positioned to capitalize on opportunities with our clearly defined portfolio of lifestyle brands that span the consumer spectrum. We are already doing a good job of leveraging that portfolio in the US today, but there is still considerable opportunity for us to do so in the rest of the world.
It will obviously take time and investment but the opportunity is there. Our year to date results demonstrate that we continue to operate from a position of strength in a global marketplace that remains very uncertain.
Not surprisingly our wholesale customers remain cautious about their initial orders and all retailers including ourselves continue to focus on receipt management trying to drive higher profitability with less inventory.
I believe our third quarter sales and profit results demonstrate we can accomplish this with our own retail operations and that we are effectively maximizing opportunities with our wholesale partners. Regardless of the external environment I believe our consistent performance over the last several years and especially in the year to date performance position us well for the future.
And as we have done historically we’ll continue to invest in product innovation, broadening our international scope and expanding our direct to consumer reach, making decisions that enhance the long-term positioning of our brand and profit prospects for our company.
Now I’d like to turn the call over to Tracey to discuss the financial and operational highlights of the third quarter as well as an update outlook for the remainder of the year.
Thank you Roger, and good morning everyone. For the third quarter consolidated net revenues were $1.2 billion, less than 1% below the prior year period. The decline in revenues reflects lower planned wholesale shipments particularly in the US and Japan, which are partially offset by 8% revenue growth at our retail segment.
The net positive impact of currency translation on our total reported revenue growth for the quarter was approximately 2%. Our gross profit rate increased 470 basis points to 58.2% in the third quarter which was achieved on top of a 20 basis point gain in the prior year period which as you know was a noteworthy achievement considering the high level of promotional activity in the marketplace last year.
The expansion in this year’s third quarter gross profit rate reflects improved wholesale and retail segment margins that were a direct result of the proactive and strategic decisions we made several months ago to calibrate inventory receipt plans to expected customer demand trends.
These decisions ultimately led to few markdowns in our own stores and the favorable product mix across all channels. We also had some continued benefit from supply chain initiatives in cost of goods and in freight.
Operating expenses in the third quarter were approximately 10% greater than the comparable period last year in line with the guidance we provided last quarter when adjusted for some impairment charges. The higher operating expenses reflect the planned acceleration and costs related to the transition of our Asia Pacific operations in January.
Other drivers of the increased operating expenses include a higher anticipated payouts for incentive compensation, and unfavorable foreign currency translation effects. Operating income for the third quarter was $173 million, 4% greater than the prior year period and our operating margin for the third quarter was 13.9%, 60 basis points above that of the third quarter of fiscal 2009.
The growth in operating income and the expansion in operating margin rate were primarily due to the higher gross profit rate and company wide cost control and restructuring initiatives that were partially offset by lower sales and the higher operating expenses that I just discussed.
Net income for the third quarter of fiscal 2010 rose 6% to $111 million and net income per diluted share was $1.10 which was 5% greater than the comparable period last year. The growth in net income and diluted earnings per share principally relates to higher operating income during the quarter.
Our effective tax rate was 33% and approximately in line with that of the prior period last year. Moving on to some additional insight into our segment level results for the quarter I will begin with our wholesale division where sales declined 8% to $604 million and were down approximately 11% in constant currency primarily due to lower planned shipments for some of our domestic products including American Living.
European wholesale shipments were down modestly in constant currency a function of cautious specialty store orders in the context of the same macro challenges throughout Europe. Our Japanese wholesale volume was also down in the quarter, again a function of broader economic challenges in that market.
From a category perspective in the US Polo Men’s sportswear continued to be a strong performer during the quarter supported by focused assortments, compelling gift giving ideas, and targeted marketing programs.
We continued to see improved trends in our women’s businesses, a category that has been challenging for us and others over the last few years. Our Lauren brand benefited from the increased representation of key sportswear items and the continued success of the Lauren Jeans Company. At Chaps the women’s classics program resonated particularly well with the customer.
Footwear shipments were very strong during the quarter for our Ralph Lauren, Polo, and Lauren brands, a function of both expanded assortment and additional points of distribution. While our Lauren European specialty store customers have suffered disproportionately from the impact of the recession, our business at larger department store groups have been more resilient and offsetting some of the softness in the specialty channel.
We are driving higher productivity and expanded our assortment in several major department stores such as Harrods, Selfridges, and Galleria Lafayette, which also provides tremendous exposure to global travelers and local customers alike, our most elevated assortments are featured in their stores.
In terms of product performance, shipments of our men’s and women’s Blue Label products were the strongest sellers and men’s Black Label remained one of our fastest growing brands in Europe. In aggregate the United Kingdom and Germany were our best performing European regions which trends in Italy which is predominantly a specialty store market, remained weak.
Our third quarter wholesale operating income was $107 million, and the operating margin rate was 17.7% compared to a historic peak third quarter wholesale margin of 19.8% last year. In addition to the challenging comparisons the 210 basis point decline in the wholesale operating margin rate was primarily a result of deleveraging operating expenses on lower global shipment volumes and incremental costs associated related to business expansion including costs associated with formerly licensed operations.
For our retail group, third quarter sales increased 8% to $592 million. Overall comp store sales which include RalphLauren.com were up 6% or 4% in constant currency reflecting 4% growth at Ralph Lauren stores, a 6% increase at factory stores, and 7% growth at Club Monaco.
Our third quarter comps were better than our expectations of a flat to low single-digit increase which we shared with you on our last earnings call, due to broad based strength across all regions and all concepts. Of course we are comparing against a substantial comp decline in the prior year period, when the global financial crisis intensified and there was a very high level of promotional activity in the market.
Overall traffic trends in our stores remained challenging during the third quarter especially in the US and despite a rebound in tourist travel to gateway cities. Comp growth was primarily achieved with higher average dollar transactions mostly due to higher full price selling. We have slowly begun to see the gradual return of our core luxury customer who purchases our Collection and Black Label merchandise.
At RalphLauren.com sales rose 13% in the third quarter which childrenswear, menswear, and footwear being the top performing categories. With respect to our European Ralph Lauren stores, the United Kingdom and the Benelux countries continue to be our top performing regions. And even though we saw improved trends in Milan, France, and Germany, those markets remain challenging.
Our factory stores continue to experience broad based strength throughout Europe and across all product categories, although once again the United Kingdom had the largest comp growth in the region. In Japan we achieved positive sales growth at both our Ralph Lauren and factory stores clearly outperforming overall market trends, although we have a relatively modest Japanese retail network at this time.
We opened five directly operated stores globally during the quarter including our Ralph Lauren store in Greenwich, Connecticut, which Roger shared with you earlier, which primarily showcased our women’s and home products in addition to a small selection of men’s sportswear.
We ended the third quarter with 333 directly operated stores globally. Our retail segment operating income grew 75% in the third quarter to $101 million. The retail operating margin was 17%, 650 basis points greater than the prior period last year when profitability was significantly pressured by a sharp comp decline and elevated promotional activity.
This year’s growth in retail operating income and the expansion in margin rate was primarily a result of positive same store sales growth and stronger full price sell through rates across most of our retail formats in addition to disciplined operational and inventory management including the benefit of restructuring actions that we took in the fourth quarter of fiscal 2009.
Licensing royalties for the quarter were $48 million, 3% below the prior year period due a decline in fragrance and home product licensing revenues that were partially offset by higher international royalties.
Operating income for our licensing segment was down 12% to $24 million in the third quarter, principally as a result of the lower licensing royalties and incremental Asia Pacific related expenses. We ended the third quarter with more than $1.3 billion in cash, cash equivalents, and investments compared to $908 million in the prior year period.
Net of debt we had $1 billion in cash and investments at the end of the quarter, up from $489 million last year. inventory was down 7% from the third quarter last year. This decline is a function of the work we have done to calibrate shipment volumes to expected customer demand trends which was somewhat masked during the first half of the year due to our strategic supply chain initiatives which continued to result in higher in transit inventory and which we’ve explained to you on prior calls.
We spent approximately $51 million on CapEx during the third quarter to support new retail stores, wholesale shop installations, and other infrastructure investments. We also repurchased approximately one million shares of stock during the quarter utilizing $78 million of our outstanding share repurchase authorization and we had $352 million of share authorization remaining at the end of the quarter.
In this morning’s press release we outlined our expectations for the remainder of fiscal 2010 which I would briefly like to review with you now. Based on our better than expected year to date sales performance we raised our top line guidance and we are now looking for a low single-digit decline in consolidated revenue for the full year.
Which compares to our prior expectation of a mid single-digit decline for fiscal 2010 revenues. This guidance implies a mid single-digit decline in wholesale shipments in the fourth quarter as well as a low double-digit increase in same store sales for our retail segment, which does include an additional week of sales compared to the prior year period, the 53rd week.
The impact of this additional week to our consolidated earnings is not expected to be material as we will have an extra week of expense for the balance of our enterprise offsetting any incremental retail profits.
Also beginning in the fourth quarter please keep in mind that the sales results from our newly transitioned Asia Pacific operations will now be reflected primarily in our retail segment. As we have communicated on the last few calls, incremental expenses related to our new Asia Pacific operations are most pronounced in the fourth quarter as we now have the full cost of our infrastructure inclusive of all store and all shop locations with payroll for several hundred new employees as well as full occupancy expenses for running all of our points of distribution.
In fact the fourth quarter impact of the Asia Pacific operations is expected to be dilutive to our earnings by approximately $0.08 to $0.10 per diluted share with sales slowly ramping up through the initial network of store locations.
The impact of incentive compensation accruals is also expected to yield additional expense pressure as is the higher mix of retail sales in the quarter. As a result we’re currently forecasting operating expenses for the fourth quarter of fiscal 2010 to exceed those of the prior year period including last year’s impairment and restructuring charges by a mid single-digit rate.
Let me close our prepared remarks by saying we are extremely proud of the management team, of how we have navigated the business through these challenging global times delivering $365 million of net income year to date or 1% above the prior year period.
As Roger indicated and Ralph continues to reinforce to us all, it is a testament to the strength of our brand, our global management teams, our global partnerships and to the strategic decisions we’ve consistently made over the last several years, that we have been able to deliver outstanding results under such challenging circumstances.
At this point we’d like to open the call up for Q&A.
(Operator Instructions) Your first question comes from the line of Omar Saad – Credit Suisse
Omar Saad – Credit Suisse
Can you talk about the divergence in trends between wholesale and retail, you’re obviously a very kind of diversified multichannel company, help us understand what you’re seeing at retail both in your own stores as well as in your partners that you sell wholesale through and explain that divergence and when you might see that flip.
First of all last year at this time, if you remember our third quarter, fourth quarter and first quarter of the new year had been bought by our wholesale customers before the events of September which really accelerated the decline in the business. So at least through third, fourth, and first quarter of next year we really saw more normalized receipt flows and inventory purchases by our customers.
I think that the full impact of the September/October/November periods were felt retailers began to cut back receipts starting with fall of this year into holiday and continuing full 12 months into spring and summer of next year. So in the wholesale channel we’re really still lapping very strong wholesale on orders by our customers and their desire to correct their inventory and receipts really didn’t take effect until fall of 2009.
In our retail businesses, we’re obviously buying our own products we corrected also our receipt flows for starting fall, holiday and now into spring and what you’re seeing in our retail results and the gross margins and operating profit improvements are the improved sell throughs. So the products are in demand, the inventories are in line, the sell throughs have improved, and the margins are up and I would expect our wholesale partners are experiencing the same phenomenon but obviously for us it’s a lower sell in and we’ll have to lap all of that until we begin to see on orders anniversarying that and begin to move forward again.
So I think its just the timing of the two wholesale and retail segments yet the sell through at point of sale for our wholesale customers was significantly better this third quarter and I think that bodes well for on order going forward into the fall and holiday of next year.
Your next question comes from the line of Liz Dunn – Thomas Weisel Partners
Liz Dunn – Thomas Weisel Partners
Congrats on a good quarter, I guess my question really relates to the expense in the fourth quarter, I think previously we had considered your guidance based on adjusted results for the fourth quarter and in the release you’re highlighting that it should be based on what looks like a number of $594 million from last year and then a mid single-digit increase on top of that, but it also looks like the guidance for the Asia dilution is about $15 million, so could you sort of help us bridge the gap. Is it different than your original expectations or did we, was it just a misunderstanding and how much is incentive compensation, how much is sort of ongoing higher expense levels.
The Asia Pacific transition which as I spent a little time on the call talking about was a January 1 cutover, our expectation when we took on that business is we would acquire at that point the inventory of the licensee from fall 2009 forward, and then the spring on order would be ours.
Dickson who is our licensed partner, really sold through that fall on order to a very low level so what is normally a clearance period in Asia, January and halfway into February, for us is a period of exciting new deliveries, spring goods, but very little clearance to offer in a marketplace that in the middle of January and February is promotional.
So what we’ve got is, you heard is, all the employees, all the expenses, all the infrastructure that was built but the sales will only begin to ramp up as we work our way through the quarter and we begin to get to the back end of the quarter when there are more normalized spring selling period.
So its really the six, seven weeks in the early days where the stores are getting new inventory and presenting that to customers where we’re getting a nice reaction, but obviously we don’t have any of the fall holiday clearance that all other businesses in that region are now liquidating. So that effects the dilution in the transition quarter.
And in terms of the expenses in the quarter as you know we did not give guidance for the quarter, there is a fairly sizable difference in mix of sales in the quarter between wholesale and retail and that obviously for us from an expense standpoint has a fairly sizable impact on expenses in the quarter.
So if you think about the year over year difference in our expense and if you think about your models, and how you model out business and the growth year over year, much of our growth year over year is coming from retail. Our wholesale business is actually down so when you think about how to remodel the quarter from a growth standpoint I would keep that in mind when you’re reflecting it.
So a piece of it is the growth related to expenses as Roger just talked about for Asia Pacific and then a piece of it is the growth related to retail of which has an extra week as well of expense in there for us. And those two alone represent almost two thirds of the expense growth.
Your next question comes from the line of Robert Drbul – Barclays Capital
Robert Drbul – Barclays Capital
I was wondering if you could comment on American Living, what you learned this holiday season and sort of how you’re thinking about some of the refinements to that in 2010.
American Living has been an interesting journey. We’re now about ready to come up on our two year anniversary this February when we launched. Obviously we launched into a more difficult market than we had anticipated. A couple of learnings over the last year or two have included customer preferences in terms of product content, whether its men’s, women’s, or kid’s. The color pallets that the Penny’s customer reacts to, the product offering in terms of fashion quotient as well as price.
We came out into the marketplace at a significant premium to the Penny’s high end price points and again we’ve moderated those so we still are positioned as the premium brand within their assortment but the delta between where we were priced and where the customer was willing to buy a new brand I think has been one of the big learnings.
I think we’ve also looked at our marketing and advertising messaging in an effort to launch a new brand that had no prior customer knowledge. How we talked to that customer, how we shaped our message, the imaging we project have all been looked at, studied, and I think for spring 2010 that we’re heading into and the fall season that we’ve already booked, I think you’ll see those product pricing, fashion, color, changes reflected at all merchandise categories.
And I think Penny’s and global brand concepts are very excited about where that’s going to go.
Your next question comes from the line of Adrianne Shapira – Goldman Sachs
Adrianne Shapira – Goldman Sachs
If we could back to the expense point, appreciate the color on the fourth quarter and to why the dilution just perhaps help us think about preliminarily the right way to think about a run rate in 2011, your comments about that wholesale lag should we expect that to continue into the first half of 2011 as a result continue to see expense deleverage as it relates given the accelerated ramp in retail as it relates to southeast Asia, some early color about how we should think about expenses in the near-term given what is clearly continued pressure on the wholesale business.
We’re going to save our more complete comments for May about next year, but let me just touch on a couple of the issues you’ve raised. Clearly the lag in wholesale as I articulated earlier we do expect as we go through fourth quarter and first quarter again we’re going against a different point of view by our wholesale audience although we’ve come through with very strong holiday sell throughs.
We expect receipt dollars to be very tight until the retail community really understands what the spring business will be. So there will be a deleveraging on the core businesses. Second, we certainly have investments in start up or new concepts like Lauren handbags, where the actual sales will not be reflected until we get into the fall shipping period but we’ve incurred the expenses and the production and the inventory to support that.
And so that’s playing through our thinking for next year. Additionally Asia Pacific as we’ve talked about the substantial commitment to that and the long-term excitement we do have modest expectations about its contribution in the early years as we look to grow and develop that business.
Lastly I think its also fair to say that we are demonstrating stronger retail businesses, we’re very proud of the fourth quarter comp when coupled with the gross margin improvement. Certainly there were opportunities to whip that comp a little harder if we were willing to be more promotional and that was not the direction that our retail team took.
So with a blend of the comp sales and the higher margins we think served us well and its really the strategy going forward. But in a mix of retail and wholesale we certainly make more money in wholesale than we do in retail, and the expense rates in wholesale are dramatically less than retail.
So some of it’s a mix issue, some of its and investment issue, and some of it will be a timing issue and that’s how we’re really thinking about our fiscal 2011 in total. Hope that’s helpful.
Your next question comes from the line of David Glick – Buckingham Research
David Glick – Buckingham Research
Just wanted to get, just a follow-up on the wholesale business, I’m still having a little trouble reconciling what I hear, your commentary and what I hear in the channel that how strong your businesses are performing. There’s some pluses this spring that I would have thought may have helped your wholesale trend, certainly your women’s footwear business is growing at a very strong rate. I’m hearing about a new sub brand in sportswear. Chaps is very strong, your men’s businesses very very strong. I thought we might see a little bit more of a bounce back in March or June, and just wonder if you could comment on that and then what kind of bounce back can we really hope to see given your strong performance. You’ve had I believe some markets for fall already and maybe some color whether you’re starting to see some signs where you could really see a nice sales increase on the wholesale business in the US for the second half of calendar 2010.
Well thank you for the paid political announcement, you are right, we have experienced really terrific sell throughs with our wholesale partners in all of the areas you checked off. In addition to which I would add that the women’s business and I think Tracey touched on this for the first time in our third quarter and now into the new year, is also beginning to perform which as you all know the women’s category for a couple of years for the industry has been a bit of a laggard.
So we are getting very strong sell throughs. We talked last conference call about chase product and reorders but I would tell you that the spring buys and summer buys were really bought long before the reaction you’ve just articulated for fall and holiday occurred. And I think the retailer is very cautious about leveraging current results into more on order until they see how their overall business reacts.
With that said, the markets that we’ve had to date which are the men’s market and the kid’s markets and as of this week the beginning of the footwear and handbag markets, retailers are coming in positive about the results. We clearly outperformed the market. Some of that was careful sell ins which resulted in better sell throughs which helped the margins.
And I think the mood going forward into the fall buys and beyond that holiday buys I think will begin to reflect that. But its premature to declare conclusively that that’s what’s going to happen and I think we’ll talk more about that in May.
Your next question comes from the line of Christine Chen – Needham & Company
Christine Chen – Needham & Company
Wondering if you could maybe go into a little detail about Asia and I know you said it was predominantly retail but is it a country specific thing and what sort of impact are you expecting on gross margins.
I think the interesting fact about our Asia acquisition is that its heavily dominated by distribution in Hong Kong and Taiwan. We are very under penetrated in mainland China and I think we’d all know that that over time will be the significant opportunity and I believe that over time mainland China will dwarf anything that we have today as we start up day one.
And I think what Tracey said earlier is our reporting of that business will be primarily reported through our retail segment because the actual operating model over there really closely mirrors our retail business. It really isn’t as similar to a wholesale business. Its where we buy the product, we own the product, we staff the stores, we manage the inventory, and we’re responsible for the results and/or we have our own stand alone stores.
So I think the current business as well as the future business will have characteristics that are more similar to our retail business than the wholesale business where you sell in, they own the product, they sell it, they staff the stores, and then there’s a wholesale margin.
So as we go forward and as a matter of fact we opened a store in Macau last week, we have two additional stores opening shortly. We will begin to manage the real estate process future store locations and sites and our orientation will be more heavily to mainland China then the current network of stores we’ve acquired.
Your next question comes from the line of Jeff Klinefelter – Piper Jaffray
Jeff Klinefelter – Piper Jaffray
Just a quick follow-up on Asia, and also Japan, the Japanese markets obviously been very very challenging here the last year and also my understanding is transitioning quite a bit in the traditional department store channel, could you speak a little bit more specifically to your plans there, you’re still outperforming that market overall, picking up some share, but could you talk about that and your plans to maybe expand more retail direct in that market as opposed to traditional shop in shop or wholesale.
Yes, I think you’re absolutely right, the market has been difficult and I don’t think its just the economy or the season, I think there is a shift going on in Japan that has significant long range consequences. It’s a market that has been dominated by department store distribution, very intense sales per square foot, shop in shop either directly controlled by the brand or closely controlled by the brand, and that’s been our primary channel of distribution.
Since we acquired the business we’ve obviously been focused on improving that and then integrating the Japanese business into our infrastructure, our supply chain and collapsing the three licensed entities into one. But going forward I think we’re going to have to look not only at the traditional channel of distribution but more mono brand distribution as we see that market evolving.
There is also a movement in Japan that is clear that has the pure luxury of players suffering and customers looking for value, looking for faster fashion, looking for more youthful presentations, that trend is clear. And I think we’re well positioned given our brand architecture to address many of those opportunities going forward.
So I don’t think its going to be an easy market, in its traditional sense, but it is the second largest luxury market in the world and I think we’ve started, we’ve made good progress, we’re picking up share as you said, but we have a long way to go to position that market in terms of where the customers are taking us.
Your next question comes from the line of Michael Binetti – UBS
Michael Binetti – UBS
I just wanted to see if we could talk about Europe for a minute, that obviously recently became a billion dollar brand for you and you’ve had such a nice runway there over the years, and when you look out to calendar 2010 can you just talk to us about maybe what you think about as far as the composition of the growth in Europe in 2010. Is it, do you see a lot of growth with existing distribution or new geographies, maybe if you could just give us a little color there.
We’ve had tremendous results in Europe and this year has been much stronger than we originally planned. The recession and economic issues were felt there but perhaps not as strongly as it was felt here. The question is whether it will last longer or whether there’s a double dip in Europe but I don’t think anybody knows.
Our strategy which has included a network of our own stores, shop in shops, and department stores and specialty stores, continues to be the backbone of what we’re doing. But what we are seeing is a contraction in the small specialty store, many of which did not fair well in the economic downturn and we’ve made decisions where we did not want to ship people who might be in more difficult financial straits.
We’ve also as we’ve begun to improve our network of stores have reduced distribution of some of those smaller stores in key markets. We continue to invest in shop in shops and department stores and we’ll use where we’re putting flagships down for instance in Paris, this April, we will hub around that important presentations of key product lines in the department stores or specialty stores in that market as well.
I think we’ve talked in the past using London as an example where we have our own stores both flagship and neighborhood, it also happens to be where we’ve got tremendous positioning in department stores. We are doing that now in Paris. We opened the second store last October, we’ll open a third store this April that will be a terrific representation of the brand.
At the same time we are trying to elevate the market around it. It worked successfully in London, it worked successfully in Milan, and we’re now doing that in Paris. So I think our strategy is very clear in Europe and I think as we’ve elevated the brand I think today the brand is not only large, successful and profitable, I think its viewed in a different light.
And I think that’s allowing us to leverage relationships with other key customers to get the distribution we’re looking for.
Your final question comes from the line of Chris Kim – JPMorgan
Chris Kim – JPMorgan
You gave some pretty positive commentary around the sell through trends at some of your wholesale partners, but I was wondering if you could talk about the progress being made, I guess the increase of penetration of either additional labels, categories, into some of these key partners. You talked about London, I think historically you’ve given the Bloomingdale’s 59th Street as an example, especially as it relates to Europe and Asia.
I was positive in support of David’s comments, because he was right. We have experienced strong sell throughs and again our strategy has been to extend brands and merchandise categories whether its accessories, whether its home, whether its kid’s, whether its any of the product extensions. I think as we talk about Europe, we are about a year into the launch of Lauren sportswear.
As we continue to learn and understand that business, an example would be an opportunity to extend accessory categories or other product extensions in that market, once we’ve established the distribution points that are appropriate.
So we let the business grow incrementally as we move out. I think the same thing over time will apply in Asia as we look to broaden and deepen the portfolio of labels that are distributed in those points of distribution. So we’re looking forward to doing that but we’re looking forward to doing it in a way that we hope will be successful.
I think the footwear example here in the United States as you all know we bought back that license several years ago. We put it through a rehabilitation. We had to develop the sourcing, manufacturing, supply chain, to be experts in that. We’ve got a terrific team of leadership folks at both the Ralph Lauren Collection level as well as the Lauren level and we’re gaining market share and points of distribution on a worldwide basis.
That’s all very exciting and its encouraging us as we now are on the cusp of broadening the assortment of handbags. So, its part of the company’s DNA. We’re trying to do it thoughtfully in this environment and I think our wholesale partners are quite excited.
At this point I appreciate your interest and involvement. We look forward to the May call as we look to update you on our fourth quarter results and really some of our thinking in terms of these new initiatives as we head forward. Thanks.
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