Polo Ralph Lauren Management Discusses Q4 2011 Results - Earnings Call Transcript

| About: Polo Ralph (RL)

Polo Ralph Lauren (NYSE:RL)

Q4 2011 Earnings Call

May 25, 2011 9:00 am ET


Tracey Travis - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance

James Hurley - Director of Investor Relations

Roger Farah - President, Chief Operating Officer and Director

Jackwyn Nemerov - Executive Vice President of Wholesale Brands, Licensed Products, Sourcing, Merchandising, Home and Asia Pacific and Director


Marie Driscoll - S&P Equity Research

Christine Chen - Needham & Company, LLC

Robert Drbul - Barclays Capital

Kate McShane - Citigroup Inc

Faye Landes - Consumer Edge Research, LLC

Adrianne Shapira - Goldman Sachs Group Inc.

Michael Binetti - UBS Investment Bank

Jeffrey Klinefelter - Piper Jaffray Companies

Robert Ohmes - BofA Merrill Lynch

David Glick - Buckingham Research Group, Inc.


Good morning, and thank you for calling the Polo Ralph Lauren's Third (sic) [Fourth] Quarter Fiscal 2011 Earnings Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions] Now for opening remarks and introductions, I would like to turn the conference over to Mr. James Hurley. Please go ahead, sir.

James Hurley

Good morning, and thank you for joining us on Polo Ralph Lauren's Fourth Quarter and Full Year Fiscal 2011 Conference Call. The agenda for the call includes Roger Farah, our President and Chief Operating Officer, who will give you an overview for the year and comment on our broader strategic initiatives; Jacki Nemerov, our Executive Vice President, will provide some product commentary; and Tracey Travis, our Chief Financial Officer, will provide operational and financial highlights from the fourth quarter in addition to reviewing our initial expectations for fiscal 2012. After that, we will open up the call 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 now I'll turn the call over to Roger.

Roger Farah

Thank you, Jim, and good morning, everyone. We're pleased to be reporting fourth quarter and fiscal '11 results that were much better than the expectations we articulated to you during the last year. We responded to a rapidly changing environment by pursuing additional market share opportunities and working to protect margins in the face of unprecedented inflationary pressures for our industry. At the same time, we made excellent progress on each of our strategic growth objectives and delivered the best operating results in our history, continuing the 5- and 10-year trends of double-digit sales and earnings growth and generating for the first time over $1 billion in EBITDA.

Tracey will provide more complete commentary on our financial performance later on, but I did want to highlight some of our key achievements. The 14% increase in annual revenues was double our original outlook, fueled by the excellent momentum of our core apparel offerings, particularly in the U.S. and in Europe, where revenues rose at a double-digit rate. Diluted EPS growth of 22% was achieved after substantial reinvestment back in the businesses, including the startup of Southeast Asia and Greater China, the transition of South Korea and the development of international e-commerce. We also managed the initial onslaught of cost of goods inflation in the second half of the year and the negative impact of several calendar and holiday shifts, including a 53rd week last year that had more than a distorted impact on our fourth quarter results. And there were extraordinary items such as restructuring and store impairment charges and the disruption in Japan.

The quality and consistency of our results, reflecting the clarity of our strategic focus and our ability to execute with excellence as we now have more direct control of our operations and key merchandising categories around the world. The strong results enabled us to enhance shareholder returns by repurchasing nearly $600 million of stock and doubling our quarterly dividend during the year.

I'd like to take this opportunity to acknowledge the incredible spirit and resilience of the Japanese people following the devastation caused by the recent earthquake and tsunami there. I'm pleased to report that all 1,500 of our Japanese employees were safe and accounted for within hours of the disasters, and we continue to support them in their time of great need with various fundraising efforts. The long process of rebuilding is just beginning and will obviously have an impact on our fiscal '12 outlook for the region, but we are happy to see the nation on a path to recovery.

Moving back to the year. Our operating results were achieved in a manner that was totally consistent with the key strategic initiatives that we've been executing against for the last several years, namely the elevating of our brand as we expand our international presence, the innovation of new merchandising categories and extending our direct-to-customer reach. These objectives are supported by world-class advertising and marketing, the continued development of our leadership teams, investments and operational infrastructure and prudent financial management. Over the next 3 years, we intend to invest over $1 billion in total capital to continue advancing our strategic objectives. About half of that will be allocated to new stores, concession shops and additional e-commerce development, all with an emphasis on international markets.

We made major strides in our international growth objectives during fiscal '11, assuming control of our distribution in South Korea during the fourth quarter and completing the last phase of our multi-year mission to bring our Asian operations in-house that began with Japan in 2007. The South Korea transition process, which includes the on-boarding of 200 employees, multiple systems integration was very smooth. After operating South Korea for 5 months now, we are encouraged by the early business trends, sales, gross profit margins, operating expenses, all of which have been favorable to plan. We look forward to executing our growth strategies in this vibrant luxury market over the next several years.

We also completed our first full year with additional control of our distribution in Southeast Asia and Greater China. We've learned a lot in the last year. First and foremost, we are pleased with the local customer acceptance of our luxury products, particularly our accessories. The new shops we've opened are performing well ahead of our expectations, primarily due to our more elevated merchandise mix, but also to more appropriate locations and adjacencies.

Our experience in the last 12 months has provided us with excellent clarity on our future brand positioning and real estate strategies in this important market. As we consider the modest size of our existing distribution network and assess our long-term outlook for the Greater China region, we believe we have a once-in-a-lifetime opportunity to reposition and upgrade our market presence. We intend to do this in a manner that is in sync with our existing global brand elevation strategies. The multi-year process will include more concentrated expansion of our elevated apparel and accessory products. Our real estate strategy will include flagship stores in key cities and more appropriate formats for additional points of distribution and secondary markets, similar to the hub-and-spoke approach we've used in New York and London.

Over the next 12 months, we intend to exit approximately 65 points of distribution that do not support our global real estate and merchandising strategies in this market. We believe these accelerated actions will allow us to deliver a clearer brand message to this critical customer, one that is better aligned with our presence in the rest of the world. The Chinese are poised to become the world's largest consumers of luxury goods, and they are already driving a substantial portion of the industry growth outside of China as they travel around the world, which is why the consistency of our global presence is so important.

As we've indicated before, the playbook is similar to what we've accomplished in Europe, where our local team has meticulously positioned our brand over the last decade by educating the customer about quality and the value of our products. We’ve supported this with considerable investment in upgrading our distribution across the continent. Today, we have a well-balanced representation across a range of formats, including our own retail stores, e-commerce in the U.K., mono-brand licensing stores, as well as department stores and specialty stores. Europe continues to yield excellent sales and profit growth for us. We expect sustained double-digit sales growth in this region over the next 3 years.

We believe we can achieve this ongoing growth with our core apparel merchandising that is accentuated by the introduction of new merchandise categories and brands, including Club Monaco into selected wholesale accounts this fall, the rollout of e-commerce to additional countries and new store growth. Our focus on brand elevation is perhaps most apparent with our direct-to-customer efforts. The investments we've made in our stores and in the growing of our e-commerce platform showcase our commitment to the global luxury customer. Our stores in the world's premier gateway cities typically have a mix of locals and tourists. Similar to our advertising and marketing efforts, they're important vehicles for us to reinforce the clarity and consistency of our brand expression. They also provide a halo for merchandise we sell across all distribution channels and set the stage for a long-term growth potential across lifestyle ranges and product categories. We will continue to grow our retail presence with a focus on the world's most dynamic markets.

Of the approximately $500 million in capital we intend to invest over the next 3 years for new stores, concession shops and the continued development of global e-commerce, nearly 70% of this capital will be allocated to international markets. Shortly, Jacki will be commenting on the progress we've made with key merchandise categories and some exciting new launches for fiscal '12.

Our company's success obviously begins with the appeal of our product, and that is why we continuously invest in merchandise innovation. The integrity of Ralph's design process and our high production quality standards is an important part of our heritage, and our customers expect nothing less than the best from us.

As we began navigating unprecedented cost-of-goods inflation in the second half of fiscal '11, a bedrock principle for us was that we would not compromise the quality of our products or the continuity of our execution. We also determined not to make material pricing adjustments to our spring/summer merchandise. We believe these decisions have supported our strong spring sell-throughs and market share gains across channels.

As cost pressures intensify into fiscal '12, we made a thoughtful pricing adjustment by brand and region to help mitigate inflationary pressures. In general, these adjustments do not fully offset our higher costs, and this is expected to have a negative impact on our fiscal '12 gross margin, particularly as we make large fall wholesale shipments in the second quarter. We are confident in the strength of our merchandising assortments, and we believe our unwavering commitment to the integrity of our product and the value proposition will be a competitive advantage for us, but we will not know the full impact of our actions until the customer reacts to the new pricing in the fall.

Sitting here today, we enter fiscal '12 with excellent momentum in our business. We are accelerating growth where our market share is already strongest, and we're investing in emerging opportunities that we believe will offer the most compelling long-term shareholder value creation. It is a continuation of the strategy that has delivered consistent mid-teen sales growth and even better earnings growth over the last 5- and 10-year periods. We expect that momentum to be maintained as we assess our outlook over the next 3 years, when the investments we've made in fiscal '11 and the ones we plan to make in fiscal '12 bear fruit in fiscal '13 and beyond.

We believe we'll generate over $3.5 billion of EBITDA over the next 3 years, which is a testament to the high-quality growth we are pursuing. In recognition of our strong cash flow, yesterday, our board increased our share repurchase authorization by another $500 million. And with over $1 billion in cash and investments already on our balance sheet, we are confident we have the financial strength to pursue all of our growth aspirations, and we are very excited about the future.

With that, I'd like to turn the call over to Jacki.

Jackwyn Nemerov

Thank you, Roger, and good morning, everyone. Fiscal 2011 was an exciting year for us with respect to the expansion and development of our products. We gained market share in most merchandise categories around the world. The double-digit growth we experienced in the U.S., Europe and Asia clearly demonstrate that customers not only responded to the compelling design and quality of our products but also to our strategic merchandising initiatives, which enabled us to generate significant sales growth.

Our core business is performing exceedingly well across men's, women's and children's. The consistent upgrading of our in-store shops and visual presentation has been an important backdrop to support the momentum in our various brands. Our ability to expand the bandwidth of each of our brands to address new lifestyle sensibilities has deepened our relevance with the customer who knows they can always count on Ralph Lauren for distinctive high-quality merchandise in all aspects of their life.

Emerging categories, such as accessories, dresses, activewear and footwear, offer excellent examples of our ability to extend our brand into new classification with tremendous success in a relatively short period of time. It has also allowed us to secure incremental distribution and floor space. We built a Lauren dress division from scratch just 3 years ago, hiring industry-leading talent to address an emerging category that was a natural extension for our core Lauren sportswear business. Today, we are already among, if not the, better leading dress resource in the department store channel, and we still have considerable growth before us, both in terms of expanded distribution and assortment. We just added evening and special occasion dresses, as well as special sizes to our dress assortment.

Footwear is a similar story, one that is equally compelling in both men's and women's. The breadth of our footwear assortment has expanded dramatically in the 4 years since we've acquired this business. In that time, we tripled the size of our wholesale shipment. Today, we are recognized as an important footwear resource with the ability to sell at both specialty retail and department store environments in a manner that supports our overall brand's objectives.

We will continue to evolve the assortment into exciting new lifestyle sensibilities in fiscal 2012, including footwear that complements our Black Label and RLX brand. Up until now, our success in the category has been concentrated in the United States, where we continue to have door-growth opportunities. During fiscal '12, we intend to expand our Ralph Lauren footwear and add Polo and Lauren footwear into Europe, which is an exciting next step in the evolution of our overall accessory strategy. RalphLauren.com and the international markets are expected to play a key role in our long-term development of this category.

Fiscal 2011 was a pivotal year for our handbag effort. While we've had Ralph Lauren luxury products for the last few years, led by our iconic Ricky Bag, fiscal '11 was the first year we really began to address the broader lifestyle opportunities. As a result, in luxury handbags, we now have compelling assortment of merchandise in the sweet spot that has historically been dominated by leading European brands. This spring, we had broad success in the handbag category and did extremely well with Ralph's iconic Western-inspired design, including the Navajo blanket bags and the leather lace totes. Although Ralph Lauren handbags are now primarily available in our own retail stores and on RalphLauren.com, as the assortment grows, we believe we have an important opportunity to develop worldwide distribution for this product in leading specialty and department stores that currently feature our apparel merchandise.

Our first Lauren handbag collection was introduced last fall, and we have experienced excellent progress to date. Momentum has accelerated as customers became more aware of the product and as we've expanded our merchandise offering. We are very excited about the long-term global opportunity with Lauren handbags, which should evolve as we expand distribution over the next several years.

With both the Ralph Lauren and Lauren brands, we are steadily building a stable of iconic designs to further develop what we believe will be a very strong accessories platform.

With this much as we've accomplished in fiscal '11, we have several new merchandise opportunities in '12. The first is inspired by Ralph's long time love of denim, one of the most iconic staples of the American wardrobe. At the luxury level, we are launching Black Label denim for men, which will complement and extend our modern Black Label sensibility, and women's collection denim, which is a new luxury denim lifestyle offering that we feel is unique to the marketplace.

At the premium level, we are launching Ralph Lauren Denim & Supply, an exciting new brand that captures the heritage of denim with an edgy, Bohemian attitude that is distinctly Ralph Lauren and perfect for the young customer. The launch of Ralph Lauren Denim & Supply offers incremental distribution for us in North America, where the merchandise will be sold through approximately 250 better department stores and on RalphLauren.com. Ralph Lauren Denim & Supply will replace the Polo Jeans Co. brand in Europe and Asia and will essentially maintain the existing distribution network for those products. The introduction of Ralph Lauren Denim & Supply is an important step in expanding our world of denim merchandising strategy.

Fiscal '12 will also showcase a renewed focus on our Ralph Lauren and Lauren Home product merchandise categories. Over the last year, we've selectively taken more direct control of certain product categories including textiles, which had been one of our largest licenses, while finding best-in-class partners for others. We opened a new distribution center in May for Lauren textiles to include bedding and bath products. Today, we have categories of furniture, bedding and bath, table cloth, tops, lighting, rugs, fabrics, wall coverings, gifts and accessories. All the key classifications in home are in place to deliver an impactful and integrated lifestyle presentation for our customer, which we believe will support new growth opportunities.

For Home, in fiscal '12, we intend to enhance distribution by partnering with our wholesale customers to showcase the products and implement strategic merchandising initiatives that appropriately tell the story of our collections. We already have a handful of flagship locations for each of our Home products: 888 Madison Avenue in New York; our store in Greenwich, Connecticut, and London for Ralph Lauren Home; and Lord & Taylor in New York City for Lauren Home. We are also gaining traction with department stores and specialty stores in Europe.

So clearly, a lot accomplished in fiscal '11 with more opportunity in the future, and with that, I'll turn the call over to Tracey.

Tracey Travis

Thank you, Jacki, and good morning, everyone. As Roger highlighted earlier, we reported excellent full year operating results, and the fourth quarter, which despite the impact of meaningful calendar shifts that we described to you on our third quarter earnings call, exceeded our expectations given the continued momentum in our business. Incremental sales and profit within our Retail segment were the primary drivers of the upside, with all regions of the world contributing to the outperformance, although the heaviest concentration was achieved in the United States.

Before I provide you with further insight into the fourth quarter's operational drivers, I do need to remind you of the nature of the calendar shifts we told you about in February that negatively affect comparisons with our prior-year periods, impacts that were reflected in the guidance we previously provided you for the fourth quarter. Roger mentioned them as well, and they do include an extra 53rd week that was in our results last year in the fourth quarter and a later Easter week this year that shifted that holiday sales growth into the first quarter of our fiscal 2012 versus the fourth quarter that we're reporting now. Lastly, we also mentioned the timing of the high-volume sales week post-Christmas that fell within our third quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010. On a normalized calendar basis, we estimate the shifts alone negatively affected our reported sales growth in the quarter by approximately 10 full percentage points.

Unless otherwise noted, my discussion of our fourth quarter business performance is based on our reported GAAP financial results, which reflect a 13-week period for fiscal 2011 and a 14-week period for the fourth quarter of fiscal 2010.

On a reported basis, consolidated net revenues were $1.4 billion in the fourth quarter, 7% above the prior-year period and led by a double-digit gain in Retail segment sales. Our Retail performance was better than we expected in several areas, including same-store sales, the contribution from new stores and our performance in Asia, excluding Japan. We did not incur any meaningful impact from foreign currency translations on our consolidated fourth quarter sales as the strengthening of the Japanese yen was mostly offset by a modest weakening of the euro relative to last year.

The gross profit margin of 56.8% was essentially in line with our expectations. As we have communicated all year, we have incurred cost-of-goods inflation for this year's spring/summer season, and we determined that we would not make any material changes to our pricing until the upcoming fall season. Some of the inflationary cost-of-goods pressure we experienced in the fourth quarter was offset by a higher level of full-price selling at most of our retail concepts and the seasonal variations in our overall channel mix.

Operating expenses of $693 million were 12% above the prior-year period, and the operating expense margin rose 240 basis points to 48.6% in the fourth quarter, reflecting incremental expenses associated with our newly transitioned South Korean operations, the continued investment in our growth initiatives and higher incentive compensation costs.

Fourth quarter operating income of $117 million was 32% below the prior-year period, primarily due to the calendar shifts affecting the comparability with the prior-year period and the lower gross profit margin and higher expense rate I just discussed.

Net income was $73 million, and net income per diluted share was $0.74 for the fourth quarter of fiscal 2011. Our effective tax rate in the fourth quarter at 34.4% was approximately 250 basis points higher than the prior-year period as a greater proportion of our earnings were generated in higher tax jurisdictions.

Due to the timing of the natural disasters in Japan, which occurred in the latter part of our fiscal fourth quarter, the financial impact on our reported results was relatively modest at approximately $0.02 per diluted share.

Moving on to segment highlights. Wholesale segment sales rose 2% to $752 million in the fourth quarter as strong growth in U.S. Wholesale shipments, continued growth in department stores in Europe, as well as expanded distribution in Greater China were mostly offset by a planned decline in Japanese Wholesale shipments and softness in some European specialty stores, most notably in Italy.

Wholesale operating income was $136 million in the fourth quarter, and the operating profit margin was 18.2% compared to 24.9% in the prior-year period. The decline in margin rate is primarily attributable to the cost-of-goods inflation, lower Japanese Wholesale shipments and continued investment in new merchandise categories.

The 14% increase in Retail segment sales in the fourth quarter of fiscal 2011 primarily reflects strong momentum at our factory stores worldwide and on RalphLauren.com, as well as the incremental contribution from newly transitioned South Korea operations. Overall, comparable store sales, which I'm referencing on a 13-week to 13-week basis, increased 7%, which was achieved on top of a 16% gain in the prior-year period and, of course, excludes the sales at the Asian stores and concession shops that we assumed in the fourth quarter of fiscal 2010. These sales will be included in our comps beginning in the first quarter of fiscal 2012 as they are fully anniversaried.

The 3% decline in Ralph Lauren comps during the fourth quarter is entirely due to our Retail Japanese operation. Excluding Japan, Ralph Lauren comps were flat on top of a 17% increase in the prior-year period. Sales trends at our global flagship locations worldwide, many of which are not in our comp base, have been very strong, which is consistent with the rebound in sales of global luxury products. Factory store comps rose 8% in the fourth quarter, Club Monaco comps were up 10%, with excellent performance in trend-right women's fashions, and sales at RalphLauren.com increased 21%.

Across all Retail formats, customers are responding to our compelling product content, as Jacki mentioned, and our focused merchandising strategies. Our strong third quarter sales provided us with a good start to full-price spring selling in the fourth quarter. In the United States, high-traffic urban locations and popular tourist destinations for both Ralph Lauren and factory stores continue to post the strongest sales trends for us. We also achieved better conversion rates on higher traffic levels this quarter.

In Europe, unseasonably cold weather and civil unrest in the Middle East during the quarter negatively affected customer traffic across the continent, although trends improved meaningfully in the latter part of the period. Performance in our Greater China and South Korea concession shops was also better than anticipated during the quarter. Japan sales trended down approximately 30% in the weeks following the earthquake and tsunami compared to relatively flat performance in the quarter-to-date period prior to the disasters. Retail segment operating income of $26 million was 40% greater than the prior-year period, and the operating margin improved 80 basis points to 4.1%.

Strong comp growth and higher full price sell-throughs more than offset the short-term dilutive impact of South Korea, investment in international e-commerce, cost inflation and extraordinary items such as the business disruption in Japan.

Licensing royalties for the quarter were $44 million, 6% below the prior-year period. Higher fragrance licensing revenues were more than offset by a decline in international licensing revenues related to the South Korea transition. We also had Lauren Home product licensing revenues as a result of some of the strategic changes that Jacki spoke to earlier. The 19% decline in licensing operating income in the fourth quarter is attributable to the same international and home effects that impacted sales for licensing.

Consolidated inventory was up 39% at the end of the fourth quarter on a reported basis. Approximately half of the increase in dollars is to support the anticipated sales growth and shipment cadence highlighted in our fiscal 2012 outlook. And 1/4 of the increase is related to newly transitioned Asian operations within fiscal 2011. As you’ll recall, we had unusually low inventory levels this time last year from the transition of the Southeast Asia and Greater China region, and our South Korean inventory is entirely incremental this year versus last year. The remaining 1/4 of the increase is attributable to cost-of-goods inflation and foreign currency dynamics. With a relatively flat inventory turn and near-term sales expectations in the first quarter, we remain comfortable with the content and currency of our inventory.

We spent approximately $255 million in capital expenditures during the fiscal 2011 to support our retail store and wholesale shop development worldwide, in addition to continued infrastructure investments. We also repurchased approximately 6 million shares of stock for an aggregate of $578 million during the year, including 2 million shares for $247 million during the fourth quarter. And as Roger mentioned, yesterday, our board authorized an additional $500 million for share repurchase, bringing our total current authorizations to $972 million.

We ended the year with $1.1 billion in cash and investments after funding all of our capital and acquisition cost needs and returning a substantial amount of capital to shareholders via our share repurchase activity, as well as a doubling of the dividend.

Fiscal 2011 was clearly a year of tremendous progress for advancing our strategic objectives, while still growing earnings at a double-digit rate. And we are encouraged by the current momentum of our underlying business trends, even though we are mindful and experiencing intensifying inflationary dynamics that are beginning to broadly affect consumers. While we are currently benefiting from strong demand for our products across most channels and formats worldwide, we are increasingly impacted by the inflationary pressure on cost of goods as evidenced by our fourth quarter gross margin dynamics. As most of you know, the cost of goods inflation we began to experience in the second half of fiscal 2011 intensifies in fiscal '12 with fall inventory receipts.

Beginning this fall, as Roger indicated, we made what we believe are responsible, selective pricing adjustments to mitigate a portion of the impact. In general, we've determined not to pass on the full impact of our higher cost of goods, and the magnitude of inflation is such that we do expect our gross profit margin and, therefore, our operating margin, to be down in fiscal 2012. We believe the customer, the consumer, will accept some higher prices due to the strength of our brand and the consistent quality of our merchandise. But after a decade of apparel deflation, the actual customer reaction remains unknown until the merchandise is available for sale in the stores.

We also remain committed to our strategy of investing in growth initiatives in infrastructure during fiscal 2012, including international retail expansion and e-commerce and continued systems enhancements. Sequencing these types of investments as we have in the past should help to drive profit growth in future years.

Now I'd like to briefly review our initial expectations for the year that we outlined in this morning's press release. For the first quarter of fiscal 2012, we currently expect consolidated net revenues to increase in the mid-20s range, a rate of growth that is an acceleration of the momentum we experienced in the second half of fiscal 2011 and is positively impacted by the benefit of the later Easter sales I highlighted earlier. Wholesale revenues are expected to increase at a low 20% rate based on strong shipment growth in both the U.S. and Europe. Retail segment sales are expected to grow slightly faster than Wholesale revenues, a function of low double-digit comparable store sales growth and the contribution from new stores and concession shops, inclusive of our incremental South Korean concession shops and stores.

Our operating margin for the first quarter is expected to be approximately equivalent to the prior-year period, with a higher Retail mix offsetting the continued margin decline in Wholesale due to cost of goods. We will also incur higher operating expenses related to the continued investment in our growth initiatives across geographies, distribution channels and emerging product categories.

For the full fiscal 2012 period, we expect revenues to increase at a mid-teens rate with Retail segment sales again growing slightly faster than Wholesale revenues. Our full year operating margin is expected to decline 100 to 150 basis points, primarily due to the gross profit margin pressure I discussed earlier. We also continue to monitor our performance closely in Japan, post the unfortunate incidents of the earthquake, tsunami and nuclear crisis. As the entire nation is obviously preoccupied with its safety and relief efforts, we currently expect the initial disruption and subsequent irregular shopping patterns in Japan to negatively impact our fiscal results, which is also reflected in our sales and margin guidance.

We will also support our growth initiatives with advertising and marketing spending for our new product introductions to generate more awareness for emerging product categories such as denim and to support our international expansion efforts. We have excluded any potential extraordinary charges that may result from our Greater China repositioning efforts. These charges could range from $10 million the $20 million depending on the timing of the closure.

Our fiscal 2012 tax rate is planned at approximately 33% based on our forecasted income mix and excluding any discrete items. We intend to spend approximately $325 million in capital expenditures in fiscal 2012 to support our Retail and Wholesale growth initiatives and the consistent upgrading of our global infrastructure. We currently expect to open 34 new stores and 47 concession shops during the year and close 65 stores and shops in the Greater China region as part of the repositioning that was discussed earlier by Roger.

And much of our capital next year is dedicated to our international growth efforts, including continued expansion of Ralph Lauren in the Asia Pacific region, the introduction of Rugby and Club Monaco brands into Europe and the launch of Denim & Supply, with shops in leading department stores around the world.

So we've communicated a lot to you this morning regarding our results and our plans for this year. We are clearly balancing multiple factors in our fiscal '12 outlook with the realities of the margin pressure as we execute our plans. Over the years, our team has demonstrated incredible agility when faced with highly uncertain market environments, and we expect the same to be true in fiscal 2012 as we navigate through the near-term impacts of commodity inflation. Our ability to gain share in our largest markets and expand merchandise categories is enabling us to build additional platforms for future growth, and our financial strength and increasing cash generation prowess allow us the flexibility to invest in opportunities that will yield substantive future returns for our shareholders.

With that, let's open the call for your questions. Operator, would you assist us with that?

Question-and-Answer Session


[Operator Instructions] We'll take our first question from Kate McShane with Citi.

Kate McShane - Citigroup Inc

With your guidance for next year, how should we think about SG&A dollar growth? Will you be leveraging the spend next year, and has anything changed in terms of your expected level of spending in Southeast Asia and Korea versus when you last talked about the opportunities there?

Tracey Travis

We would expect, Kate, slight leverage. Again, our operating margin guidance does exclude, as I mentioned, any potential restructuring charges that might occur from the Greater China repositioning, so we would expect some slight SG&A leverage, excluding any charges. And again, the bulk of the operating margin decline would be related to cost-of-goods pressure. In terms of extra spending in Asia, we certainly are continuing to invest in infrastructure. We are continuing to invest in advertising as we rebrand our product in the market, and those are investments that will accelerate in fiscal 2012.


Our next question will come from Adrianne Shapira with Goldman Sachs.

Adrianne Shapira - Goldman Sachs Group Inc.

Roger, you just talked about the input costs obviously mounting, and you're looking to increase prices in the fall. Could you perhaps quantify what you're expecting the input costs in the back half -- talk about what price increases you are planning to flow through, it doesn't sound as if fully. And given how strong the top line momentum is in light of the calendar shifts, it would seem as if we should be quite encouraged the ability to pass it through and quite encouraged about the elasticity of demand in light of how strong the momentum is.

Roger Farah

Yes, Adrianne, let me just cover a couple of the questions you've got in there. One, the fourth quarter results we've reported is a bit of a Haley's Comet. The unusual combination of an extra week, the loss of Easter, the loss of the week after Christmas, really is a bit of a false read that I think Tracey tried to capture for you. If you take the run rate of sales through our third quarter, adjusted fourth quarter and the guidance we’ve provided for first quarter, you'll see that business really is quite strong, and really, all merchandise categories in all regions and all channels are contributing to that. So we're actually encouraged with the customers' response to our products and strategies. We did not take many price increases in the spring, even though we began to see some costs rising, but we have for fall. And those increases really are very dependent on the price point of the product and the merchandise categories. The actual cost-of-goods inflation, depending on the products, range from low- to mid-single-digits all the way up into the low-20s. And when you look at the breadth of product we have from the highest levels of collection in Purple Label down to products we make for Chaps, for Cole's [Kenneth Cole] and Penney's [J.C. Penney], some of the bigger cost movements were in the lower portion of that pyramid, and that's where we were more cautious about passing on the products as they came through. I also believe, and this is one person's opinion, that the cost of goods that we've all seen and read and talk so much about will begin to moderate into spring and fall of next year. I think that the supply and demand imbalance was real, and some of the other costs got run up for other reasons, and I think the more natural supply and demand will begin to take effect as we look at next year. So our point of view has been, we're not going to alter the quality, we're not going to alter the materials, trim, findings or the cut of the products. We're not going to alter where we make goods because our principles of product and product integrity has been so critical to our success, we think the customers want the same product and are going to pay more for it where appropriate. And then I think this pig in a python is going to play itself out over the next couple of seasons. We raised our gross margin in the last 7 years 900 basis points. So I think we've become very expert at sourcing, logistics and distribution, merchandising and really felt that a short-term blip was not something to throw us off our strategic mission. So a lot of that's embedded in your question, and I've expanded it in an effort to try to cover some of what I know is on all of your minds.


Next we’ll hear from Faye Landes with Consumer Edge Research.

[Technical Difficulty]


Next question will come from Bob Drbul from Barclays Capital.

Robert Drbul - Barclays Capital

I was just wondering, on the price increases, when you think about men's versus women's versus kid's, are there more sort of categories that you're leery of raising price or where you think there will be more resistance?

Roger Farah

No, I think that our point of view, Bob, was really about the high-end customer, the luxury customer, the higher parts of our distribution, the customer there who has been so voracious in their appetite for our products will pay higher prices where fair value is provided. And then we were more cautious with merchandise categories that were in other channels of distribution where we think the customer is going to be squeezed with a lot of inflationary things coming at them in the fall, and so we were more cautious with those product categories. But it really wasn't split across men's, women's, kid's or home or accessories.


Moving on, we'll hear from Robbie Ohmes with Bank of America Merrill Lynch.

Robert Ohmes - BofA Merrill Lynch

Maybe a question for Jacki or Roger, if you want to jump in. I was curious if we could get a little more insight on to the expansion at Club Monaco and Rugby and the launch of Ralph Lauren Denim & Supply in Europe and sort of how that will be -- where it will be distributed and how it will be positioned relative to the existing business you guys have over there?

Roger Farah

Well, I'll start with the Club Monaco and Rugby, and then I'm going to let Jacki jump in on Denim & Supply. Club Monaco, as you've been following, Robbie, the comps for years now has been extraordinarily successful with identifying their customer, the product offering and then the price value of what they've made. I think you also know that today, that production has been integrated into our overall manufacturing cycle. So we've had, for years, a lot of international retailers, knocking on the door, looking to get Club Monaco distributed in their market. We have partnered in Asia with distribution experts. But in Europe, our European team really felt that they had the ability to distribute it to key retailers as a Wholesale business, as well as looking at stand-alone store distribution. We had a test this February that started with Brown's in London that was extraordinarily successful, and we just think that product really appeals to an international customer. We see that in a lot of our New York stores, where we get a lot of tourists who are coming in to buy product they can't get in other parts of the world. So we think Club Monaco represents an opportunity, not only in Asia where we are, and we're growing successfully, but in Europe. Rugby, we'll be opening our first store in Europe later this year in London. There, again, we've had -- whether it's on the website or whether it's in the stores here in New York, we've had a tremendous reaction from our international customers. We opened a store in Japan last year that actually is the #2 store in volume in our network, and so we think Europe represents opportunities and are looking for additional locations going forward with Rugby. Jacki, you want to touch on Denim & Supply as we look at that business?

Jackwyn Nemerov

Absolutely. Well, the Denim & Supply business in Europe will replace the existing Polo Jeans Company business, which as you know, we decided to close in the U.S. about 4 years ago when we made that transition. It was a very different product in Europe and a much more elevated product for both Europe and Asia. And so what we decided to do over time, and we've been working on this for quite a while, is develop a brand new statement in denim with a very exciting Bohemian attitude, really driven to this younger customer and, over time, replace the Polo Jeans business. That will now take place for fall. So that will be the transition for Europe and Asia. The exciting part about the development of this brand is, now, we're planning a reintroduction in the U.S. of this vibrant category, and it will be launched in about 250 stores in the U.S. and in Canada. And with prime locations in men's and women's, with a very fresh impactful presentation, there will be strong marketing placed behind it, really speaking to this young customer. Our plan is to take a very unique style of marketing this product, really reaching this audience in a very unique way, and our plans for what and exactly will be done will be developed and you'll see over the next couple of months. But it's something we're very excited about, and so are the customers that we are participating with on this launch.


Next, we'll hear from David Glick with Buckingham Research Group.

David Glick - Buckingham Research Group, Inc.

Roger, I just wanted to get a sense for the relative growth in the U.S. versus Europe versus Asia that's embedded in your guidance. I mean you guys have talked for a long time about your ultimate goal of 1/3, 1/3, 1/3 and just wondering if you could help us calibrate how disproportionately Asia is growing relative to Europe relative to the U.S.

Roger Farah

Yes, it's a good question, David, and I've got 1/3, 1/3, 1/3 tattooed on my forehead. We've had extraordinary growth in Europe. As you can see, we're putting together and seeing strong growth in Asia, excluding the issues in Japan for the moment. The only trouble is the U.S. keeps growing, and it's outrunning our estimates. So while we keep growing internationally, we're growing equally fast domestically. And I think as the Internet has added to the U.S. distribution pattern both our own and Wholesale as we keep launching new product categories like footwear, dresses, handbags, denim. The U.S. growth is equal to the extraordinary international growth. So I think as Tracey gave you some guidance to the first quarter and the full year, we are actually getting growth around the horn. And I think one of the surprises to us, and perhaps to all of you, was the strong core domestic Wholesale growth in the U.S. So I'm not sure how we're going to get to the 1/3, 1/3, 1/3 when the U.S. keeps growing, but we'll try.


Next, we'll hear from Jeff Klinefelter, Piper Jaffray.

Jeffrey Klinefelter - Piper Jaffray Companies

Roger, just a question about the Asian region and the strategy there. Given your experience operating Japan directly over the last couple of years, Korea more recently and then heading into China with a greater emphasis, what have you learned from the Japan experience that impacted your Korean strategy? And then what do you expect both of those to do in terms of impacting your China strategy?

Roger Farah

Yes, it's a good question. Each of those markets were run by a separate license group. So as we took back Japan, separate from China, Hong Kong, separate from Korea, each one of those were the transition of a long-term license to our ownership and control. And the Japanese business and the South Korea business are really heavily driven by department store shop-in-shops, and those marketplaces are heavily dominated by department store shop-in-shops. Those businesses, over many years, had a focus of men's casual, Blue Label sportswear. And in Japan, where we've had control of the business longer, we've seen tremendous reaction from the customer as we've begun to elevate product in women's and in kids and in other product categories as we've added visual enhancements and clarity, as we've sharpened our message, pre the earthquake and tsunami, we were beginning to see nice trends in what overall was a tough market. And one of the guidance issues for '12 isn't that Japan is not beginning to show some recovery from that, but it was against what our run rates would have been prior to that. Korea, where in fact, we've now had the business only for 5 months, we took on a terrific team of people that came with the acquisition, who really knew their products. And although the licensee did run down the inventories as we got to the end of the license in December, so we started January at a low level. As we've replenished inventory through the last 5 months, the customer there has responded, and that market has responded to better products, more elevated products and more fashion. So we feel very good about the long-term opportunity in Korea. Of course, many of you know that a lot of the business is in Seoul, Korea, and a lot of that business is fueled by Chinese tourists. Pricing in South Korea is less than it is in the mainland of China. So there is a healthy tourist component coming into Korea for shopping weekends. The year we've had China, Hong Kong and the rest of the Dickson portfolio has also been one of a slightly different challenge because we had to build an organization from scratch. We had no history on the merchandise. We had no infrastructure. Unlike the Japanese and Korea acquisition where we took on an existing team, we really had to build an organization from day one and get to know the stores and the territories. The other issue is that, that market will be dominated by stand-alone retail into the future. They're not really embedded in a department store-driven distribution channel. So our ability to identify and acquire key locations, both in major cities and more suburban malls will be a key to that market. We are clearly underdeveloped in women's. We're clearly underdeveloped in accessories and kids, and I think our goal would be to elevate and refine the men's business we have over time. The other thing I would just say so it doesn't get lost in the small print of the script, the Chinese are traveling the world. And many of the luxury brands that I talked to, talked powerfully about the impact of the Chinese tourist in their other international locations, like Paris or London or Milan or Switzerland. So we believe as we build up the proper presence and consistent with our global image in China, we will see those customers and the lift in our business in Europe, which we don't really get much of today. So it's really a holistic approach to the Chinese customer, slightly different than the Japanese and Korean markets that we think is absolutely exciting for the medium-term and long-term for this company. Let's continue to take questions. I know we're a little long because the end-of-the-year report was more robust , but we'll keep fielding questions for another few minutes.


Marie Driscoll with Standard & Poor's Equity Research has our next question.

Marie Driscoll - S&P Equity Research

My question is about the Home category. It's exciting to hear that you're building it out, and I was wondering if you could just be more granular on what you're doing, both domestically and internationally.

Jackwyn Nemerov

In the Home business, we really started with what we feel is the foundation of that business, which is our textile business, so our bedding and bath. And that's a sizable business that we believe can really benefit from ownership and operating methods. We have been working hard on fresh new products. The teams have done a wonderful job of really looking at the balance of what that product should be. We began shipping in May, and our sales for the season have been very strong in Home. So that becomes the foundation. What we then did is looked carefully at each of our licenses, we determined which really were valuable for our future, which we needed to make changes with and so forth, and we have been working hard on this over the last 2 years with a heavy concentration in this last year. And every one of our licenses today's performance is up over last year. We've been working very closely on the content of that product. We've most recently added lighting and rugs, and the markets have gone extremely well for those categories of products. So all the changes that we've made, we're really starting to see very positive results from, and of course, we see Home, both in Ralph Lauren and Lauren, completely holistically so that as you enter the world of Ralph Lauren or you enter the world of Lauren, you're completely immersed in the entire experience in every category of products as we offer the customer wonderful choices for gifts and we offer them wonderful choices for their bedroom or their living room. And as I said, the size and scope of the categories is extensive, and we're very pleased today with the changes we've made, what we're seeing as a result and, as I said, the very positive business performance.


Michael Binetti with UBS.

Michael Binetti - UBS Investment Bank

I just want to try and make sure I understand how the margins are going to play out through the year here. So if I just look at the revenue guidance, it's pretty solid, and you said the biggest negative to operating margins is going to be the gross margin pressure. So am I wrong -- it sounds like the -- and you've touched on this a few times, that the SG&A is going to be increasing, it sounds like almost roughly the same pace as revenue, which would be a pretty big step up, right?

Tracey Travis

You're correct. And I mean, a part of the increase in SG&A is the fact that we do have a full year of our Korea business in this year versus only a -- really 2 months in our prior fiscal year. So that's a portion of the increase in SG&A. We also called out the fact that we are increasing our advertising spend to support some of the new initiatives like Home that Jacki spoke about and Denim & Supply and our international growth as well, and we're also expanding our e-commerce distribution. So we've spoken previously, and certainly on this call as well, that we're expanding e-commerce into Europe, and we're also exploring -- expanding into Asia as well. And that investment is also in our results for fiscal '12. So we are continuing to invest for future growth in addition to obviously the performance of our current core businesses, which are expected to grow quite nicely, as you mentioned.


Christine Chen with Needham & Company.

Christine Chen - Needham & Company, LLC

I wanted to ask -- I know it's hard to quantify it, but the uncertainty in Japan, has that also affected some of the tourist business in maybe China or South Korea and anywhere else since they do travel? I mean, do you expect that to maybe resume? And then you had said that you expect South Korea to be accretive this year, correct? Dilutive in the near-term but ultimately at the end of the year, it should be accretive?

Tracey Travis

Yes, dilutive in the fourth quarter and accretive for the fiscal 2012 year.

Roger Farah

Yes. And answer to your question about the Japanese tourist. I mean, clearly, in the 2 months right after the earthquake and tsunami, the tourist travel in Japan was dramatically down, although quite frankly, the Chinese tourist is today the dominant influence in really the gateway cities. One of the interesting subjects that's not often reported is the difficulty that Chinese tourists have to get visas to visit in the United States. So today, many of the tourists that are traveling out of China are really going to Europe. While that's a wonderful trip and a wonderful experience, we'd love to get more of them into the United States. But nevertheless, where you see Hawaii or other Asian destinations for tourism, the Japanese tourist is staying closer to home, although I think it's going to be a quarter-to-quarter update. We're already seeing some recovery in the mood and the spirit in Japan. There's definitely an attitude of trying to move on, and then we'll see how that plays out for the tourist business. But the headline issue on the tourist business is the Chinese, and their impact on the global shopping pattern, as I said earlier, is extraordinary, not just in their home market but as they move to other countries.


And we do have time for one more question. We'll take our final question from Faye Landes with Consumer Edge Research.

Faye Landes - Consumer Edge Research, LLC

Just a quick follow-up on SG&A. Your points about next year's SG&A spending were explicit, so I appreciate that. But I was just wondering if you could talk about -- address 2 issues there. First of all, how should we think of this in the out-years? Obviously, there's lots of ways to spend money to support the business, so what kind of SG&A philosophy will you have after next year as businesses continue to ramp all over the world? And also, given some degree of uncertainty regarding consumer response to rising prices, which you had outlined earlier, how much flex do you have in the SG&A, how much could you crank it down, how much flexibility do you have to crank it down if sales aren't quite what you expected?

Tracey Travis

Great questions, Faye. So I'll start and perhaps Roger will finish up. One of the other impacts that I didn't mention that is impacting, if you just look at our SG&A, is how we are growing. So we called out the fact that in the fourth quarter, Retail grew faster than Wholesale. In fiscal 2012, we also called out the fact that Retail is growing faster than Wholesale, and our strategies to grow Asia are primarily Retail growth, whether they're concessions shops or freestanding stores. That does have an impact on SG&A. It's a mix impact. So with Retail, you have higher gross profit and higher SG&A costs. So that too is impacting us. As it relates to fiscal '12, I can only point you back to the recession, when we were faced very suddenly with reduction in sales and made some prudent choices as it relates to discretionary spending and other spending as well. So certainly, if the sales don't materialize, which we're pretty comfortable they will, again, we have been very thoughtful in terms of how we've planned price increases. But there's a lot of other economics noise in the environment with gas prices and food prices rising and everything else, that we will certainly make prudent choices, if need be, to manage the year, as we have previously. And in the future, I think you can expect us to continue to invest in growth strategies. I think that has been working very well for us in the last few years. It's the reason why Jacki spoke about our tremendous footwear growth this year. It's the reason why Europe has contributed as much as it has over the last few years for us as a company. We have been very smart and thoughtful on the executive leadership team here under Ralph's direction of investing in high-return projects, both in the near-term as well as long-term, and we certainly will continue to do that. And Asia represents, again, a very exciting opportunity for us along those lines. Roger?

Roger Farah

Yes. Tracey's answer is complete. The only thing that I would add is the question to Jacki as we transition from what was a licensed textile business to own. We're obviously taking on expenses that used to be licensed, same for Korea, from a licensed category bringing it in-house. The launch of Denim & Supply, which is a new business, which comes with expenses before we start shipping. So we believe, Faye, that those will begin to moderate as we come full circle on most of the key license activities. And as we continue to see the kind of sales increases we've enjoyed, my expectation is we'll be able to leverage the expense line. And if I'm right, we'll begin to see, over the next 12 months, supply and demand get in better alignment, which will help mitigate some of the margin impacts.

So I know we've run long this morning. We tried to cover a lot of information on fourth quarter, fiscal '12, some small highlights of the next 3-year outlook and what our focuses are going to be. We're very excited about the consumer trends and reactions to our strategies. We'll see how the fall pricing impacts. My guess is Polo Ralph Lauren product will continue to win and take market share, but when we get together in August to talk about early reads on fall, I think we'll have a better idea. So thank you for listening, and I appreciate your questions. We'll talk to you shortly.


And that does conclude today's teleconference. Thank you all for joining.

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