Polo Ralph Lauren Corporation F4Q10 Earnings Call Transcript (Qtr End 04/03/10)

| About: Polo Ralph (RL)

Polo Ralph Lauren Corporation (NYSE:RL)

F1Q10 Earnings Call

May 19, 2010 9:00 am ET


James Hurley – Investor Relations

Roger Farah – President, Chief Operating Officer

Tracey Travis – Chief Financial Officer


Omar Saad - Credit Suisse

Liz Dunn - Thomas Weisel Partners

Bob Drbul - Barclays Capital

Kate McShane - Citi

Adrianne Shapira - Goldman Sachs

David Glick - Buckingham Research

Michael Binetti - UBS

Chi Lee - Morgan Stanley

Christine Chen - Needham & Company, LLC

Christopher Kim - J.P. Morgan


Good morning and thank you for the Polo Ralph Lauren’s fourth quarter fiscal 2010 earnings conference call. (Operator Instructions) Now for opening remarks and introductions, I will turn the conference over to Mr. James Hurley. Please go ahead sir.

James Hurley

Thank you. Good morning everyone and thanks for joining us on Polo Ralph Lauren’s fourth quarter and full year fiscal 2010 conference call. The agenda for the call includes Roger Farah, our President and Chief Operating Officer, who will give you an overview of the quarter and comment on our broader strategic initiatives; and then Tracey Travis, our Chief Financial Officer, will provide operational and financial highlights from the fourth quarter, in addition to reviewing our initial expectations for fiscal 2011. After that, we will open the call up for your questions which we ask that you limit to one per caller.

During today’s call we will be making some forward-looking statements within the meaning of the Federal Securities Laws including our financial outlook. Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements. Our expectations contain many risks and uncertainties. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.

And with that, I’ll turn the call over to Roger.

Roger Farah

Thank you Jim and good morning everyone. We’re pleased to be reporting outstanding fourth quarter and full year results this morning, results that exceeded our expectations on virtually every operating metric and that reflect significant broad based progress across products, channels and geographies.

The year was filled with some tremendous milestones for our company, including major strides in our international growth objectives as we assumed direct control of important Asian operations; made considerable progress with our accessory development efforts, retailing our first watch collections and having our first market for Lauren handbags; and we prepared for the opening of several important flagship stores in key global markets. And in spite of this high level of reinvestment back into our company, we substantially improved our profitability with gross profit margins expanding 380 basis points to a record annual level of 58.2, and earnings growing 18%, all during a period of considerable global turbulence that represented some of the most challenging issues our industry has ever had to face. And our fiscal 2010 results are not a function of easy comparisons. They come on top of gross profit margin expansion and EPS growth in fiscal ’09, which was yet another outstanding year for us considering broader market conditions and our sustained level of investments back into our business.

There is no question that this remarkable performance was, in fact, years in the making. It comes as a direct result of our selective investment in the consistent seeding and sequencing of our strategic growth initiatives, where we are leveraging efficiency gains in certain areas of the business to support growth opportunities in other areas; diversifying our operations on multiple levels in terms of brands, products, channel distribution and geography. Of course our results also reflect the strength of our brand, the desirability of our products, and the intense proactive operational discipline that runs through our organization, from supply chain and logistics to other corporate functions, as well as to our strategic merchandising initiative and meticulous, store level management.

The fourth quarter dynamics also suggest something of an inflection point of change in the marketplace. Worldwide, we are seeing our core and luxury customers returning to the stores with an openness to spend. While they are not spending at pre-recession levels, and they can be focused on value, they do recognize that product availability is limited. And there is no price resistance on unique or novel items. We also saw things get progressively better every month during the fourth quarter, and the rebound has been most pronounced in our women’s products.

Urban and tourist destinations are outperforming stores that cater to more regional or local customers. The dedication and hard work of our teams around the world are the other critical ingredients of our success. During the last 90 days, we have traveled to Europe, Asia and the Middle East and met with our teams. Their drive for excellence and desire to raise the bar on their own performance is inspiring.

I believe our performance over the last two years and in particular fiscal ’10 demonstrates the unique competitive advantage for us, our organization’s care about every single detail of our business, and work to maximize each and every opportunity and/or challenge. We are managing a tremendously complex and multifaceted mosaic across an astoundingly disparate disciplines, but we are united in our goal of elevating our brand, communicating our rich heritage and core values of quality, consistency, honesty and teamwork.

There is no better evidence of this than our newly opened Saint Germain flagship in Paris. This project was several years in the making and is our boldest brand statement to date, heralding a new era for us in France, across Europe and around the world. The store represents the culmination of tremendous progress our company has made over the last decade, from the balance of men’s and women’s merchandise, the breadth of product categories available, the powerful accessory presentations and the incredible restoration of this historic site. The richness of the Ralph Lauren brand and its unique lifestyle sensibility is accentuated further by Ralph’s, a restaurant housed within the store that has fast become one of Paris’ chicest restaurants.

The store is a true destination that reflects the excellent work of our European team that has repositioned our brand so meticulously over the last decade, resulting in a customer who understands the quality and value of our products. In Europe, the fashion expectation of our customers is higher than that in the United States, and we see this across all brands from Collection to Lauren to Polo Jeans.

As we’ve highlighted in the past, our performance in Europe has been spectacular over the last ten years, when we’ve grown revenues five fold, and the momentum continues to be with us. Notwithstanding the recent economic turmoil, we have a diverse, balanced, long-term growth strategy throughout the region, with early stage opportunities across brands and product categories. With only 20 directly operated and 8 licensed Ralph Lauren stores, and 24 factory stores, there is clearly room to expand our direct-to-consumer reach throughout Europe.

And an exciting new evolution in our European growth strategy this year is e-commerce. Based on the success of RalphLauren.com in the United States, and the growing importance of this channel worldwide, we intend to launch e-commerce capabilities in Europe beginning with the UK this fall. We expect other countries to follow over the next several years. There is no question that the customer around the world increasingly wants to shop online, and those who do tend to be more valuable customers for us, particularly if they also shop at our brick-and-mortar stores.

While our European e-commerce initiative will be managed in market, we are leveraging our RalphLauren.com team in the United States, and our existing technology and distribution partners, to help insure a successful launch. Although the investment we are making will be dilutive in the near term, we are excited about the long-term sales and profit potential of international e-commerce. It is consistent with our overall strategy, and we have had spectacular success with RalphLauren.com sales and profit in the United States, and we can use that as a benchmark.

Given our commitment to the Asian expansion, we are studying how and when it makes sense for us to launch e-commerce capabilities there. In Asia, our primary focus and concentration will be in two countries, Japan and China. As you are all aware, the Japanese economic market and retail remains challenging. The once seemingly insatiable appetite for easily identifiable luxury products has evolved into a value oriented customer with more sophisticated and individualistic mindset. We believe the scope of our various brands and products, supported by the broad iconic vernacular of the Ralph Lauren brand, present us with the unique opportunity to address these cultural changes and to grow in this market. We are already experiencing proof of our convictions across various channels of distribution in Japan, where performance at the Omotesando store, at our concession shops and at our factory stores, is outpacing industry trends, a dynamic that is maintained since taking back control of the market three years ago. The profitability of our Japanese operations has also improved in the same time period.

Our Japanese teams have done an excellent job with clienteling, innovative marketing and merchandising initiatives, and are consistently receiving strong editorial coverage in leading fashion publications. Our department stores have taken notice, and our near term focus is on strengthening our partnership with major department store operators, to work together to elevate our distribution, enhance merchandise presentations including new shops for Black Label, and accessory products in strategic locations. Even though apparel sales in Japanese department stores are contracting, the reality is there’s still a lot of footsteps walking through the door and they are generating very high absolute sales and productivity levels, and we know we can effect change. It will clearly take time for us to realize our goals in Japan, and we will need the economic environment to be more supportive for us to do so, but we are confident the customer receptivity is ultimately there.

Beyond Japan, we completed our first quarter successfully operating several new transition to Asian markets, greater China being one of them. As you know, we spent much of fiscal 2010 building a world class organization of over 700 employees, and putting in a new infrastructure to support the transformational growth our company expects in the long-term. With the leadership team in place, our strategy now focused on several initiatives, including training our employees, particularly our new sales associates, in our brand standards; refining our understanding of the customer’s tastes and preferences; accelerating of distribution of various channels and product categories; and elevating our visual presentation of assortments as we layer in new categories. We will simultaneously be supporting all of these efforts with advertising, marketing and public relations initiatives to evolve our brand awareness in the region.

Ralph and senior members of our executive leadership team recently toured Southeast Asia, where we met with various constituents including employees, manufacturers, real estate developers and others. Now that we have control of our distribution and the stores are looking better, our goal in elevating the brand has immediately become more tangible. We all came back incredibly inspired by our tremendous growth potential in this important, emerging region. Today we directly operate 17 freestanding stores, which are primarily concentrated in Hong Kong; 75 concession shops, which are concentrated in China and Taiwan; and licensing partners operate an additional 34 concessions, primarily in China and the Philippines. We are managing and servicing all of these points of distribution seamlessly, which is no small feat considering the unique characteristics of a concession based selling, where we are offering fresh product locally that sell through at high velocities and really are supported with very small stockrooms.

Our brand elevation and distribution expansion plans are well underway. Since assuming control of the region, we have opened several new concession shops and two freestanding stores, one central mall located in the new MGM Grand Casino in Macau and another in the New Peninsula Hotel on the Bund in Shanghai. These stores are our first proper luxury presentations in the region, with a balanced mix of men’s and women’s product and an emphasis on accessories, Collection, Purple Label and Black Label merchandise. These stores not only help to educate the consumer about who we are as a brand, but they also create excitement in the real estate community among developers who are looking for new and compelling concepts to support their growth.

We actually had several of the Asian real estate developers’ tour our new Paris store so they could fully appreciate the global scale of our brand development efforts.

Beyond greater China, our focus on the rest of the newly transitioned countries will mostly be on driving better productivity in existing doors through stronger assortment and shop refurbishments. While we certainly expect to grow our sales in this new part of the world at a double digit rate in the near term, it will take a few years for this region to become a significant driver of our consolidated sales and profit. It takes time to find, build and open new locations and our advertising and market efforts will begin in earnest once we have a more developed distribution network.

This cadence is consistent with our experience in Europe, which has obviously helped develop us into a large, highly profitable region, one where our brand image is impeccable and we have considerable growth opportunities in front of us. In the United States we’ve seen a dramatic rebound in the customer trends compared to last year. As I mentioned earlier, it is the core luxury customer and the return of the international tourist traveler that are driving much of the improvement. The aspirational customer remains cautious and has not returned to the stores in any meaningful way. Nevertheless, our products are performing strongly across channel and categories, given the enduring value of our brand and the exceptionally focused and strategic merchandising initiatives.

This applies to Club Monaco too, as you can see in their strong comps, which far outpace those of most specialty apparel retailers during the fourth quarter, thanks to its compelling women’s assortment and the revitalized men’s offering. Across our brand portfolio, the U.S. consumer is selectively replenishing basics and adding newness to their wardrobe.

We think with our potential in the U.S., given the breadth of our existing distribution, we expect growth to come primarily from sustained market share and productivity gains. We also have new and emerging product categories that are offering compelling incremental opportunity, the most substantial being with accessories. We had an encouraging response to our first market for Lauren handbags during the quarter. Our team has developed a truly iconic and differentiated assortment that incorporates a broad range of silhouettes, in keeping with the lifestyle orientation of the Lauren brand. The versatility and functionality of the product has garnered accolades from our wholesale customers and fashion editors alike.

The Lauren handbag product will initially be available in approximately 150 of the best North American department stores and select e-commerce sites beginning in August, with additional distribution already being planned for holiday and beyond. Key price points range from $150 to $400, and the introduction will be supported with product specific advertising, both at the national level and in conjunction with our various wholesale partners. We are excited about the growth potential of our Lauren handbags, particularly in light of the great success of the Lauren footwear.

Clearly, 2010 ended in a very different place than we could have imagined when we were building our plans a year ago. Remaining steadfast in our commitment to investing in our long-term strategic growth initiatives was absolutely the right thing to do. The consistent planting and harvesting of our various growth opportunities enabled us to manage through the toughest environment and drive strong earnings growth. The talent and discipline that have guided us through these challenging times remain intact as we look to the tremendous potential the future holds for us.

There is no question that the broader market conditions remain uncertain, from European debt concerns to exchange rate fluctuations, inflationary pressures on cost of goods and the persistent high unemployment. And while these issues will likely have an impact on our near term results, I believe we are uniquely positioned to benefit from any recovery in the global macro environment and their conditions, particularly as we continue to opportunistically invest to support sustained, long-term growth and shareholder value creation.

This is a strong, vital organization with a track record of success, and there is no better evidence of that than our fiscal 2010 results. With more than $1.2 billion in cash and investments, and net cash more than doubling from fiscal 2009 levels, we are reinvesting back in our business, buying back stock, reducing our debt and we still entered fiscal ’11 in exceptional condition.

With this as a backdrop, we are planning an aggressive acceleration of our investment in growth in fiscal 2011. We are seeding a new crop of opportunities with investments we are making in new flagship locations, in our support of Asia and with the growth of international e-commerce. Our organization has never been stronger and our mission has never been more clear.

And as Ralph said in this morning’s release, we are all inspired by what the future holds for us. Now I’d like to turn the call over to Tracey to discuss the financial and operational highlights of the fourth quarter, as well as our outlook for fiscal 2011.

Tracey Travis

Thank you Roger and good morning everyone. For the fourth quarter, consolidated net revenues were $1.3 billion or 9% above the prior year. The growth in revenues reflects strong, comparable store sales growth for the company’s retail segment; an extra 53rd week of sales due to our April 2nd fiscal year end; and incremental revenues from newly transitioned Asian operations that were partially offset by a modest decline in wholesale revenue.

The net positive impact of currency translation on our reported revenue growth for the quarter was slightly below 2%. Excluding the 53rd week, which happened to be Easter week for us and represented approximately $70 million in sales, consolidated net revenues for the fourth quarter increased 3%. Our gross profit rate increased substantially, rising 720 basis points to a record 59%, reflecting disciplined inventory management; improved product mix across all channels; reduced markdowns in our retail stores; and continued supply chain savings.

Operating expenses in the fourth quarter were approximately 4% greater than the prior year period. The higher operating expenses reflect the incremental costs associated with business expansion, including our newly transitioned Asian operations, as well as higher incentive compensation accrual.

Operating income for the fourth quarter was $172 million, 58% better than the prior year period, when adjusting for fiscal 2009’s impairment and restructuring charges. Our operating income also showed considerable improvement, reaching 12.8% from an adjusted 8.9% in the fourth quarter of fiscal 2009. The improvement in operating income and margin rate is primarily attributable to the improved gross profit rate.

Net income for the fourth quarter of fiscal 2010 increased 32% to $114 million from an adjusted $87 million in the prior year period. And net income per diluted share rose 31% to $1.13 from an adjusted $0.86 in the prior year period. The growth in net income and net income per diluted share principally relates to the higher operating income I just discussed, that was partially offset by higher taxes this year compared to the fourth quarter of fiscal 2009 when the company actually had a net tax benefit.

Before I discuss the segment level performance, I’d first like to provide you with a brief recap of how our actual results exceeded the previous expectations we outlined for you back in early February. Generally speaking, the upside was broad based, although the largest portion came from the strong performance of our retail segment worldwide, where both comparable store sales trends and the gross profit margin were substantially ahead of our expectations, especially in the United States where we experienced improved traffic trends, higher full price sales conversion, the return of some of our tourist customers, and outstanding dot com performance. Our domestic and Japanese wholesale operations also delivered stronger sales and profit contribution.

The dilution associated with our newly transitioned operations was in line with the $0.08 to $0.10 per share we provided you in February.

Before I begin the segment highlights for the quarter, as you read in this morning’s press release we are now reporting our Japan concession shops sales and profits, which had previously been captured in our wholesale segment, in our retail segment. This reclassification essentially affects about half of our sales in Japan this year. We made this change in our operating reporting results to better reflect the direct selling, expense and inventory ownership dynamics of the concession model, particularly since it is also an important channel for our newly transitioned Asian operations. You can see that this reclassification had no impact on our previously reported consolidated sales, margin and net income or EPS figures.

Now moving on to our segment highlights for the fourth quarter, let’s begin with our wholesale division, where sales declined 3% to $736 million, reflecting lower global apparel shipments that were partially offset by higher footwear sales, particularly for our men’s Polo brand. While aggregate shipments were down, we experienced progressive improvement from the third quarter, which reflects a more stable environment among our wholesale customers worldwide.

Consistent with what we’ve observed over the last several quarters at retail, our core apparel products continue to outperform overall store and department trends, and we experienced favorable basic stock replenishment trends across many product categories. We transitioned to spring a few weeks early and smoothly across most product categories, and the iconic appeal of our focused merchandising strategies has helped to drive our relative outperformance.

We also had incremental distribution related to our new RLX Active Apparel line and to our Winter Olympics merchandise, both of which were well received. Chaps exceeded sales plans and American Living continues to generate solid sell throughs on reduced inventory. In Europe, we continue to experience broad based strength at key accounts across the region, with notable growth in France, Germany and the UK, and signs of stabilization in Italy.

In Japan, our men’s business remains very strong, albeit on a relative basis. And we experienced improved trends for our women’s Blue Label and Black Label products during the quarter.

Our fourth quarter wholesale operating income was $183 million, and the operating margin rate was 24.9% or 280 basis points greater than the fourth quarter of fiscal 2009. The higher wholesale operating margin rate was primarily a result of improved wholesale segment gross profit, a function of product mix, particularly with the basic stock replenishment merchandise and stronger footwear margins; supply chain benefits and disciplined inventory management.

In addition, focused expense management helped to offset higher costs related to business expansion and new product development initiatives.

For our retail group, fourth quarter sales rose 31% to $554 million, reflecting a substantial increase in comp store sales at our freestanding stores worldwide; the benefit of a 53rd week of sales, which again being Easter was a high volume week; and the contribution from a newly assumed Asian store and concession shop business.

Higher RalphLauren.com revenues also contributed to the fourth quarter’s strong retail segment growth rate. Overall comp store sales, which are presented on a comparable 13 week to 13 week basis, and include reclassified Japanese concession shops, increased 16%, reflecting 17% growth at Ralph Lauren stores; a 9% in factory stores; and a 29% increase at Club Monaco stores.

RalphLauren.com sales increased 39% in the fourth quarter of fiscal 2010. Comp growth was primarily achieved through higher average dollar transaction values, mostly due to greater full priced selling activity and significantly reduced clearance inventory levels.

Traffic to our U.S. stores declined modestly during the quarter, although strong gains among international tourists partially offset the lower level of activity among domestic customers. The momentum at RalphLauren.com was supported by double digit growth in traffic and a higher conversion rate, thanks to strong merchandising assortments and interest in our Olympics related merchandise. Easter selling was also strong on RalphLauren.com. And at Club Monaco, expanded on trend fashion assortment support broad based gains across all women’s categories.

In Europe, geographic trends at our Ralph Lauren stores remained consistent with those we have articulated over the last several quarters, with the UK and Scandinavia remaining strong and some improvement in Italy. European factory stores have maintained their broad based strength across regions.

In Japan, comp trends at our Omotesando flagship store and at our factory stores were quite robust and clearly out performed the broader retail market. Our concession shop performance was also noteworthy, particularly for our men’s products. As expected, sales for our newly transitioned Asian stores and concession shops were somewhat inhibited by a lack of access fall holiday clearance inventory for most of the fourth quarter, although we are pleased with the current product sales mix for spring, which is better aligned with our strategic brand initiatives.

During the fourth quarter we opened three directly operated freestanding stores, closed two directly operated freestanding stores and assumed control of 16 freestanding stores in Asia, ending the year with 350 company operated freestanding stores. We also operated 281 concession shop locations throughout Asia, mostly Japan, at the end of the fourth quarter of fiscal 2010.

Our retail segment operating income was $18 million compared to an adjusted loss of $28 million in the fourth quarter of fiscal 2009. The market improvement and retail segment profitability reflects the substantial increase in comparable store sales and gross profit rate at all of our freestanding stores worldwide, primarily as the result of higher full price sales and lower clearance inventory as mentioned previously, as well as the disciplined operational management.

The favorable profit margin dynamics of RalphLauren.com also contributed to improved retail segment profitability.

Partially offsetting the retail segment profit improvement were expenses associated with our newly transitioned Asian operations.

Licensing royalties for the quarter were $47 million, equivalent with the fourth quarter of fiscal 2009, as higher domestic product licensing revenues were offset by a decline in international and home licensing revenues. However, operating income for our licensing segment increased 36% to $34 million, reflecting lower net costs associated with the transition of former licensed Asian operations to directly controlled operations.

With approximately $1.2 billion in cash and investments, and $940 million in net cash at the end of the year, which is more than double fiscal 2009’s level, our financial condition remains strong. The fourth quarter ended with inventory down 4% from the prior year period, and that does include the inventory associated with our newly transitioned Asian operations and the eight net new stores we added over the last year.

Our return on equity for fiscal 2010 was 18% and our return on investment was 33%. Net cash provided by operating activities in fiscal 2010 was $907 million, 17% greater than fiscal 2009, reflecting higher net income and improved working capital management. We spent approximately $201 million on CapEx during fiscal 2010 to support new retail stores, shop installations and infrastructure investments.

During the fourth quarter we repurchased 1 million shares of stock at an average price of $78, utilizing $78 million of our current authorization. For the full year fiscal 2010 period, we repurchased approximately 2.9 million shares of Class A common stock, utilizing approximately $216 million of our authorized share repurchase program. And at the end of the fourth quarter, we had approximately $550 million remaining under our authorized share repurchase program, inclusive of a new $275 million authorization recently approved by the company’s Board of Directors, that we announced in this morning’s earnings release.

We are obviously very pleased with our strong fourth quarter and full year results. The operational management and financial discipline that characterizes our company has enabled us to maximize sales and margin opportunities to mitigate the impact of the global recession in a remarkable manner.

There are, however, a few macro economic dynamics that present some considerable challenges for us in this fiscal year. One of the most impactful is currency exchange rates, particularly for the euro. Comparing yesterday’s 1.22 euro per dollar rate to the average 1.4 rate we experienced in fiscal 2010, which is a 13% decline, there is obviously a substantial translation impact. Based on our geographic sales mix, we currently anticipate approximately 250 to 300 basis points of negative currency translation on our sales, a portion of which will flow through to profits for the full year fiscal 2011 period, with more pronounced pressure related to exchange rates in the back half of the year. There is an additional and approximately equivalent amount of unfavorable transaction exchange rate impact on our operating profits in fiscal 2011.

Another profit headwind is higher sourcing costs, which we are beginning to experience with rising raw materials; freight and labor expenses; as well as tightened factory and freight capacity in our global supply chain. Historically we have generally been successful in our efforts to contain cost of goods inflation, although we appear to be up against the perfect storm in the back half of fiscal 2011, particularly with our spring 2011 merchandise deliveries.

As Roger mentioned, given the resilience of our performance and our strong financial condition, we intend to accelerate our investment in our strategic growth initiatives during fiscal 2011, particularly with our international expansion and direct to consumer efforts. We expect to incur higher expenses as a result. Among these is incremental costs associated with our newly transitioned Asian operations, which will be most pronounced in the first half of this year. Our investment in new flagship stores around the world and the launch of international e-commerce are also expected to be dilutive in the near term.

In this morning’s press release we provided our initial outlook for the year, which I’d like to review with you now. For the first quarter of fiscal 2011, we currently expect consolidated net revenues to increase at a low double digit rate. Our expectations are based on low, double digit growth in global wholesale shipments, with increases across all major regions, and high single digit comps which now include our Japanese concession shop locations on a comparable basis.

As a reminder, revenues for our newly assumed Asian operations are primarily reported in our retail segment, and those will be incremental sales compared to the prior year period.

Our operating margin for the first quarter is expected to be modestly above the 11.4% achieved in the prior year period, with gross margin improvement being mostly offset by higher operating expense de-leverage related to the continued investment in our various strategic growth initiatives across geographies, distribution channels and emerging product categories.

For the full year fiscal 2011 period, we expect consolidated revenues to increase at a mid single digit rate, led by our retail segment and mitigated by a low, double digit decline in licensing revenues, which clearly reflects the impact of our assuming more direct control over certain product categories and geographies. As a reminder, our revenue growth outlook for fiscal 2011 is for a 52 week period and compares with fiscal 2010, 53 week period.

We currently expect to achieve a low, double digit operating margin rate in fiscal 2011, the net effect of gross margin pressure that is more back half weighted and a modest de-leveraging of operating expenses that is more front half weighted, as we are currently forecasting a modest leveraging of our operating expenses in the second half of the year. Our fiscal 2011 tax rate is expected to be 34%. Again as a reminder, our fiscal 2009 and fiscal 2010 tax rates were advantaged by the favorable resolution of certain nonrecurring discrete tax items that we do not expect to have this year.

The higher level of investment that is flowing through the P&L is also reflected in our capital spending plan. We are planning approximately $280 million in capital expenditures in fiscal 2011 to support our retail, wholesale and infrastructure investments and initiatives that Roger and I have outlined on this call today. About half of our capital is allocated for 15 to 20 new stores and shops including a new 30,000 square foot flagship location to showcase our women’s and homes Collection merchandise across from the Rhinelander Mansion on 72nd and Madison Avenue in New York City. We are simultaneously renovating the former Women’s and Home store at the Mansion to accommodate additional men’s merchandise, including Double RL. We believe this expanded square footage for our men’s, women’s and home products allows us to properly showcase the breadth and scope of the world of Ralph Lauren in a manner that will resonate globally.

Much of the incremental capital investment versus fiscal 2010 is also concentrated in Asia, and for our global infrastructure. In fact, our capital spending in Asia is forecast to double this year in order to support our expanded distribution. As we have indicated before, a growing portion of our capital investment over the next several years will be allocated to international markets.

I’d like to reiterate that we are making this high level of reinvestment back in the business because we are confident it will deliver appreciable returns over the long-term. Our conviction stems from the success we’ve had with this strategy in the past, and especially in light of what we have been able to achieve over the last two years and our reporting on this call this morning.

We’ve had a lot to tell you thus far. At this point we’d like to open up the call for your questions. Operator, can you assist with that?

Question-and-Answer Session


Yes ma’am. (Operator Instructions) Your first question comes from Omar Saad - Credit Suisse.

Omar Saad - Credit Suisse

Roger, I wanted to ask you about the decision to accelerate kind of the SG&A investment in the business globally. You know, what gives you the confidence to do that now, especially given some of the speed bumps we’re seeing in Europe? And does that higher SG&A investment and capital investment, is it balanced globally? Is it more in Asia than Europe? Do you look at this as an opportunity to be investing in Europe, given the little bit of turmoil that we’re seeing over there?

Roger Farah

Yes, it’s a good question, Omar, and before I answer it let me just say we know our prepared remarks have run a little longer because we had a lot to talk about, but it was year end. So we’ll try to stay on the call a little bit extra time to make sure we get in as many questions as we can.

To specifically answer your question, Omar, I think you heard us talk about even in a difficult environment, we generated over $900 million of operating cash flow this year. So to bump up the capital from $200 million to $280 million, for us is still a very cautious statement about the use of funds, and we think is justified given our long-term strategies to develop two-thirds of our business outside the U.S. versus the approximately one-third it is now. In fact, you know Europe has its ups and downs and Asia has its ups and downs and so does the United States, to be fair. But the things we’re choosing to spend on, which are systems technology, infrastructure, logistics and distribution as a base, and then on top of that, shop in shops, freestanding stores or other direct-to-customer initiatives, we have to believe are the right long-term strategies to get at these opportunities.

Do we try to move them around globally or sequence them a little bit differently, given our own point of view about the next two or three years in the market? The answer is yes. But I think you can count on us for the next couple of years to spend at higher levels of capital, with more than half of that going into the international markets. And given our track record, which says we have an ROI north of 30% consistently, I think we’ve done a good job of earning against those investments. So it’s going to take a little bit more than the current headwinds to slow us down meaningfully, but we’ll try to be thoughtful.


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

Liz Dunn - Thomas Weisel Partners

My question relates to the wholesale business. I guess when we spoke earlier in the quarter it seemed as though you were looking for some improvement in that business and a return to positive sales trends more for the holiday period, and it seems like that’s happening a little bit earlier. So can you just sort of add some context there and what you’re seeing?

Roger Farah

Yes. I think that when we talked at the last call in February, I think we sequenced over the 12 months sort of what happened in the past and what we’re seeing going forward. It’s fair to say that our product has sold through well at retail and we continue to enjoy good market share gains this spring. So while the retailer is cautious, and I think has fallen a little bit in love with this lower inventory level improves their margin scenario, and I think they’re looking for manufacturers to be able to chase and react or replenishment a little bit more than up front buy than they did in the past, we are beginning to see some opportunities to get incremental wholesale business, somewhat offset by the currency exchanges that Tracey talked about. Because as you know, a lot of the wholesale business in Europe at least at the moment will be flying into a pretty significant exchange rate issue.

But under the heading of worldwide reaction we’ve had terrific men’s business and we seem to be picking up share. The Lauren business has gained strength as we’ve gone through the year. We’re enjoying a good spring in kids. We’ve had tremendous growth in some of our new businesses like footwear and dresses, and that’s part of what’s giving us a good feeling about the Lauren handbag launch that’s being carefully done and will be available for sale in August. We’re all very anxious to see how the customer reacts to that product. We think it looks good, the retailer thinks it looks good, and they’re obviously buying several seasons out already. So we think that is an opportunity for us in a sort of non-comp wholesale business.

So I think the retailer is cautious. I think they’re going to continue to look to speed up their inventory turns, but we are trying to maximize every opportunity where appropriate.


Your next question comes from Bob Drbul - Barclays Capital.

Bob Drbul - Barclays Capital

The question that I have is it’s also on the wholesale business but can you talk a little bit about the European wholesale segment versus domestic? And I was wondering if you’d be able to size up sort of the countries within the European business for you.

Roger Farah

The biggest markets for us in Europe in a wholesale manner continue to be Italy, France, Germany and England. Spain which has been large has suffered with the very high reported 20% unemployment, although every time I go there they tell me that that’s not really the unemployment, that’s the published number. But nevertheless in rank order those would be the highest countries; France, UK, Germany, Italy and then Spain. And I would say from a performance point of view, France, UK, Germany have been the best performing countries with some of the southern tier markets being more difficult, including Spain. We don’t do that much business in Portugal, but Spain, Italy and some of the southern tiers. Some of that is the macro economic issues there and some of it recently, quite frankly, has been affected by this volcanic cloud which has dramatically altered the tourist patterns in Europe, both in and intra Europe, both people who were caught or who are concerned about being caught. So there’s a huge slowdown in the last month or six weeks based on that and tourist’s destinations.

But fundamentally, the wholesale business again and a constant currency measurement is holding up nicely. We’re seeing increases in most of the core brands.


Your next question comes from Kate McShane – Citi.

Kate McShane - Citi

In your guidance for the retail comps for the rest of the year, are you incorporating an increase in traffic or is it just a higher average dollar per transaction like you saw this quarter?

Roger Farah

Our current comps and I think Tracey had touched on it or we’ve talked about it so much I thought she touched on it, are really seeing less footsteps quite frankly in our brick-and-mortar stores with a higher average sale and a higher conversion rate. So those customers that are coming in we’re converting more of them to a sale and we’re getting a higher sale from them. And we’ve modeled really until proven otherwise, that’s the rest of the year in the Ralph Lauren format. Club Monaco is experiencing higher traffic, higher conversion and higher average unit sale, and I think you could tell that in the 29 comp that we just reported on a comparable calendar basis is extraordinary. And that’s really just great product.

We are seeing online increased traffic. It’s not really footsteps. I guess that’s not the vocabulary you use, but we are seeing growth in customer there and higher average unit sale. And I think that’s reflected in the 39% comp that we reported for online.

The other piece of it, which you didn’t ask but I think is interesting is, the relatively small amount of crossover between the online shopper and the brick-and-mortar shopper. We continue to watch this carefully. We continue to try to educate ourselves about how this is unfolding. And while we’re learning a lot and it’s got a little bit of movement in it, it’s probably less than you would instinctively believe.

The other piece of that that I find interesting is that about 25% of our traffic on the site is coming from international customers who are not able to shop but are going through the website for information and product knowledge, and that is giving us some encouragement for our launch later in the fall with e-commerce in Europe.


Your next question comes from Adrianne Shapira - Goldman Sachs.

Adrianne Shapira - Goldman Sachs

Roger, you know, you just saw you reached a peak gross margin in the quarter and as you discussed we’re still seeing a value oriented customer; you’ve got some sourcing issues in the back half; and yet you’ve, you know, help us balance it out with the category opportunities, the geographic mix shift. How should we think about longer term where gross margins make sense as you stay relevant to an evolving customer and capitalize on markets and categories that potentially are more profitable?

Roger Farah

Adrianne, I’m actually disappointed that your question wasn’t revolving around your trip to Paris and our new store opening. I was expecting an eyewitness report from you about the restaurant and the excitement of the opening. But nevertheless.

Adrianne Shapira - Goldman Sachs

I was even in Shanghai, too.

Roger Farah

Well, I won’t say you’re stalking us, but I was looking for a little more positive feedback from on the ground reporting. But let me answer your question. We have absolutely made a dramatic sea change in the way goods are sourced and moved around the globe. And we were just talking with our board the other day. In the last ten years we’ve raised our gross margins 950 basis points, so this is not really a one year spike to either a quarter record or an annual record, quite frankly. This has been a strategic weapon that we’ve had as a company year after year, brick after brick. And with the number of brands and the complexity and the 85 countries we ship to, this absolutely turned into a key differentiator.

Having said that, last year because of the worldwide slowdown there were some unique opportunities in availability of production or raw materials or transportation that allowed us to accelerate the margin beyond even our plans or expectation. They are not a function of us raising prices; they really are a function of us elevating quality but managing cost of goods and then obviously the merchandising initiatives and planning initiatives help the sell throughs which reduce markdowns. So going forward, our belief is we are not looking to pass on cost of goods increase to the customer. We don’t think the market at this point is looking for that, particularly with customers still wanting to think about a value purchase.

So we will be facing, as Tracey talked about, cost of good increases in raw materials and transportation more because capacity has been taken out of the marketplace. There are planes in the desert being mothballed and there are ships sitting idle, and so the ones that are working are looking for increases as those people are looking to repair their margins from the devastation of the last two years.

But our long-term margin objectives are to maintain the highest quality of service level, but maximize the gross profit potential. Over a ten year period, that has been a very important part of our economic success and it has allowed us to generate incremental profit that we have used to reinvest back into the business and take on a lot of other initiatives. We’ve developed expertise in product categories that in the past, many people thought we couldn’t do like women’s or footwear or now accessories, as we were labeled very narrowly a men’s company. And I think that’s proven obviously not to be true.

So as we look to take on production in Japan, which obviously was put out third party when it was licensed, or we take on the production of Asia or new product categories like Lauren handbags, I think gross margin and gross margin expansion over a long-term is something we focus on. However, in the short run, there are some real headwinds as we look to price the back half of the year, and we’ll just have to deal with it. But I don’t believe we’re going to be able to look to pass that on to the consumer. I think that would be a short term decision that would be a long-term mistake.


Your next question comes from David Glick - Buckingham Research.

David Glick - Buckingham Research

Roger, a couple of category questions and then Tracey, a question on FX. It’s exciting to hear about the progress you’re making in women’s apparel, which I know has been a long haul and proving the business. I was wondering if you could give us a little more color on what’s driving that and roughly speaking, what the order book looks like. You’re seeing some increases in that business in the United States primarily. And then the home business we’re starting to see improvement in some other retailers and suppliers. I’m just curious what the challengers are there and the opportunities.

And then Tracey, if you could help us on the flow through of your, it was helpful on the sales end but what type of operating margin flow through from that negative variance in sales due to currency should we expect? I mean typically your flow through seems to be lower than some of your industry peers. Should we assume maybe 5 to 10% flow through on earnings and also a little bit on your hedging strategies would be helpful.

Roger Farah

Well, let me see if I can take the product issues and then Tracey can take FX and some of the rest of your extended questions. You know women’s as a category had been tough for a couple years as I think the female customer was bouncing back and forth between career and casual, and I think some of the sense of more women working at home needing less casual clothes, maybe not the fashion trends that stimulate buying. I think we’re beginning to feel that the women’s business is not only strengthening at retail, but across multiple price points. So whether it’s the higher end business or whether it’s the Lauren business or quite frankly for us, the Club Monaco business, you know, a product that’s a little sexier, a product that’s a little more feminine, a product that’s a little more novel; all of which seem to be getting a good reaction from the customer. Also, you know, the business which had migrated mostly to casual and denim, we’re seeing strengthening in more the wear to work product.

Some of that’s coming through in dresses, where the woman has now for several years accepted the dress as a viable alternative. And some of that is coming through in more polished products. So you know we’re encouraged, because that’s a big business that the industry has struggled with. And although I think prices have been sharpened and I think there’s a real consciousness about value at any of those prices, you know, the glut of inventory is behind the industry; there is more product scarcity; I think that’s allowing people to command more original retails, and I think that’s all healthy.

So as we head into fall and into the back half of the year, we are expecting that to continue. I’ve also seen some of the reports about the home trends that’s encouraging. That’s another business that has trailed for some number of years. Some of that is embedded in the housing starts and the problems in the mortgage markets. Some of it’s been those generally are bigger ticket decisions and those have been deferred. Some of the disruption in the market with some major retail chains going out of business and liquidating inventory, I think, have depressed that market. But I think as the channel has settled down and as the consumer has delayed purchasing, we’re beginning to see at retail some signs of that customer looking for some fresh fashion. Whether it’s freshening a master bedroom or whether it’s redoing a dining room or whether some of the firming in the real estate values is causing people to freshen their homes, we are seeing that begin to happen and we’re encouraged.

I think we’d like to see more of it over a longer period of time, but for now, it does seem to be firming and that’s a good sign. Tracey, you want to?

Tracey Travis

Yes, and in terms of your question on the translation impact for the first quarter, you’re right, David, we typically don’t see 100% flow through. We’re seeing a little bit higher flow through this quarter and this year because of hedging results, which was your other question and I’ll talk about that in a moment. So about 50% of the sales decline from a rate standpoint would impact us on an operating income basis as it relates to foreign exchange.

We also, I think as you’re probably aware, hedge a number of different things. The biggest thing that we hedge is inventory purchases and we hedge those anywhere between six and eight months out, primarily for our European business. But we also do hedge European product for our U.S. business. And given the rate that those hedges were taken out relative to where the euro was currently trading and what we expect to settle those transactions at, we also will have a transaction impact. So the foreign exchange flow through is impacted by that hedging the transaction impact as well as the translation impact.


Your next question comes from Michael Binetti – UBS.

Michael Binetti - UBS

Your comments on Japan were interesting. I think in recent quarters we heard you guys comment you might pursue more of an owned retail strategy in that environment if you didn’t see an improvement in the overall retail environment through your current distribution. It sounds like your comments today could mean you’re seeing sufficiently better trends at wholesale and the strategy may be shifting back a little bit in your minds towards focusing on maybe investing, you know, shifting that investment back to the department stores there. Is that a fair assumption? Is that how you guys are thinking about that market?

Roger Farah

I think yes, with a little modification. I would say the following. Finding a key, I’m going to use the word flagship locations in the handful of key cities in Tokyo is extremely difficult, so those opportunities don’t come around every day and they’re not easy to find. But we do have our eyes and ears open for something that’s appropriate. We do believe in Japan we will have a network one day of our own specialty stores, but we’re trying to get our arms around the existing distribution network, the in shop presentations which as Tracey’s talked to you about the conversion into concession models really means we’re buying the goods; we’re staffing the stores; we’re outfitting the shops; and we’re responsible for the inventory. So we are learning daily about the Japanese customer through that network of hundreds of stores, and I think we will eventually take that learning and use it to complement our own network with that.

Separately, perhaps a higher priority is our own network of stores in the Asia Pacific region, including China, Hong Kong and some of the countries where there is not a robust department store channel and we will have to build our own network of stores over time in order to get the infrastructure supported and the distribution that we’re desiring. So I would put it a little lower on the priority of freestanding stores in Asia Pac, and I would put it a little bit under the heading of learnings now that we’re running these businesses vertically in Japan until we translate that into store locations.


Your next question comes from Chi Lee - Morgan Stanley.

Chi Lee - Morgan Stanley

I just have a clarification question on the guidance. Tracey, it sounds like you’re looking for SG&A de-leverage in the first half, modest leverage in the back half. So is it fair to assume that what really gets us from what was closer to mid teens operating margin this year to a low double digit rate in fiscal ’11 would be primarily the gross margin compression you guys may be potentially looking for? And a related question is, are there any supply chain efficiencies or initiatives underway that we should be looking for that would incremental to the gross margin for fiscal ’11?

Tracey Travis

As it relates to the components of the P&L, yes, the primary portion of the [free] decline this year is gross profit. There is some de-leveraging full year as well from an SG&A standpoint, but the bulk of it is the gross profit decline.

You know as it relates to the supply chain initiatives, I think Roger spoke well about the fact that we really maximized some unique conditions in fiscal 2010. In addition to some of the things that we had described probably three quarters ago that we had started in fiscal ‘9 related to our work with transportation operators that we work with in terms of consolidating shipments and really trying to manage more efficiency into the supply chain, shifting from air to ocean and continuing that process. So we really maximized a lot of that opportunity in fiscal 2010. Some opportunities for that in fiscal 2011, but not nearly to the extent that we saw in fiscal 2010.


Your next question comes from Christine Chen - Needham & Company, LLC.

Christine Chen - Needham & Company, LLC

Wondering if you could talk about the product assortment in your concession shops in Japan and the rest of Asia. I know that when you had first taken over Japan you said it was highly concentrated in sportswear. Has that mix evolved since then? And what about in China and Hong Kong and Taiwan, etc.?

Roger Farah

Okay. The concession assortments are really presented in a classification and category way, so we have a men’s Blue Label sportswear shop in a store, we may have a men’s Black Label sportswear shop in a store; we’ll have a women’s Blue Label shop in a store, maybe a women’s Black; we’ll have a kid’s concession store. So really unlike our own stores where we integrate and mix brands around Ralph’s vision, the department store business in Japan and Asia at the moment, and the concession locations, are very much one brand oriented. And then within that, they’ve been very much key items, basics and commodity items.

So our first step in the process is really to represent a broader range of offerings and fashions in those categories. We will then try to get some of those shops repositioned to get better adjacencies to where the brand is today versus where it might have been ten years ago, when some of those locations were invested in. And we will try to add to that higher end products which traditionally have not been well represented in Japan or Asia Pacific in general. So it’s an upgrading of fashion content; it’s an upgrading of price points; we’re not going to walk away from the core items or the core basic, but we’ll give them slightly less visual representation and up the brand’s [clotion] of fashion and movement. I think we’ve felt that the business has looked a little static in that part of the world as licensees historically pursue the most simple product and the basic products.

We’ll wrap around that over time ongoing efforts to elevate public relations and marketing, which we think are critical. One of the interesting facts that we received when Ralph and I and the rest of some of the senior management team were in Asia, is how consistently we heard customers there getting their brand and product information from the Internet. And so part of the connection for us in moving our brand in Asia over time will be the ability to communicate to the customer through the online experience. And I think that will be a high focus for us as we try to remix our brand face in that market and how to get that message out.

You can get that message out online a lot faster than regional magazines or billboards or regional newspapers or any other media, so that’s an important learning for us as we try to go forward.


Your last question comes from Christopher Kim - J.P. Morgan.

Christopher Kim - J.P. Morgan

My question is on your inventory strategy. You know, you mentioned that I guess the lack of inventory was a nice driver in terms of a lack of pricing resistance. With this double digit restocking trend in wholesale, wanted to get your views on pricing and what looks like the rising inventory environment. Any color I guess on where you have a little more direct control at retail and how you’re planning the business there would be great.

Roger Farah

Okay, let me see if I can perhaps slightly reframe that. I believe that the last 18 months difficult environment has caused all retailers, whether they’re internal to Polo or whether they’re our wholesale partners, to be more cautious about inventory planning and to be focused on trying to sell through more at full price and turn the inventory faster. I think that is a piece of what every retailer today is looking to do. That then has to be coupled with appropriate sales planning, because if your sales exceed your plans, you’re going to be caught short of inventory and obviously if you miss sales you’re going to be hung with product that needs to be marked down.

So I think what’s happening is, from point of manufacture to ordering to delivery, there’s a lot of pressure on the entire supply chain to be very precise about the level of inventory and the sell throughs. Our inventory, despite a sales increase, is down and another one of those facts that we sort of tumbled on to over the last ten years we’ve added $3 billion in sales and we only have increased inventory by $110 million at Polo Ralph Lauren. So that’s a startling piece of our management effort, that it only took us $110 million more inventory ten years later to add $3 billion of sales.

So I think we’re all getting smarter, I think we’re all getting more demanding and I think we know that what we can’t do is give the customer excess inventory to pick through at discounted prices because based on her prior experience, if they continue to believe that’s possible, they’re going to wait and wait and wait until the products are marked down. So, I think our partners are being more careful, I think we’re being more careful, and I think that puts pressure on subjects like replenishment or chasing hot product, if it’s possible; if there’s raw materials and availability of production; but most of the wholesale models were not built on large amounts of that. So this is something that’s just beginning to evolve as perhaps a longer term trend, which will put pressure on the up front ordering and put more pressure on the supply chain to chase demand dictated by the customer.

So at this point I appreciate it. I’m sorry to have run 15 minutes late. I just thought the fourth quarter and the full year deserved a little fulsome conversation. Hope we’ve had a chance to answer all your questions. Thank you for your support. If you’ve got follow up questions, Jim and Tracey can attempt to answer them during the day. It’s been an incredible year for us. We’re very proud of it and the results we achieved, and we’re very mindful of what the next 12 months hold for us in terms of challenges. So, thank you for listening.


That concludes today’s conference. Thank you for your participation.

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