Polo Ralph Lauren Corporation F2Q08 (Qtr End 9/29/07) Earnings Call Transcript

Nov. 7.07 | About: Polo Ralph (RL)

Polo Ralph Lauren Corporation (NYSE:RL)

F2Q08 Earnings Call

November 07, 2007, 9:00 AM ET

Executives

James Hurley - IR

Roger N. Farah - President and COO

Tracey T. Travis - CFO

Analysts

Omar Saad - Credit Suisse

David Glick - Buckingham Research

Brian McGough - Morgan Stanley

Liz Dunn - Thomas Weisel Partners

Margaret Mager - Goldman Sachs

Virginia Genereux - Merrill Lynch

Jeffrey Edelman - UBS

Christine Chen - Needham and Company

Kate McShane - Citigroup

Jeffrey Klinefelter - Piper Jaffray

Good morning and thank you for calling the Polo Ralph Lauren Second Quarter Fiscal Year 2008 Earnings Conference Call. As a reminder, today's call is being recorded. All lines will be in listen-only function during the presentation. At the end of the presentation, we will conduct a question-and-answer session. Instructions on how to ask a question, where your touchtone phone will be given at that time. Now for opening remarks and introductions, I'll turn the call over to Mr. James Hurley. Please go ahead sir.

James Hurley - Investor Relations

Good morning and thank you all for joining us on Polo Ralph Lauren second quarter fiscal 2008 conference call. The agenda for this morning's 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 second quarter in addition to reviewing our expectations for the remainder of the year. After that we'll open up the call for your questions.

As you know, we'll be making some forward-looking comments today including our financial outlook. The principal risks that could cause our results to differ materially from our current expectations are detailed in our SEC filings. Now I would like to call... turn the call over to Roger.

Roger N. Farah - President and Chief Operating Officer

Thank you Jim and good morning everyone. We're pleased to be reporting strong financial results today. We met our expectations for the first half of fiscal 2008, even as we're making significant investments and long-term initiatives. In the second quarter, we delivered an 11% sales growth with solid retail comps of 4.5%, again very challenging one and two year comparisons.

Internationally our wholesale and retail businesses continue to be strong across all regions of Europe and most parts of Asia.

Our second quarter results reflect underlying growth in our core Ralph Lauren businesses. The near-term dilutive impact of recent acquisitions that position us for strong long term growth and sustained investments in new initiatives, whether it be emerging retail concept or new product initiatives like American Living, dresses or watches or acquisitions like Japan and small leather goods. Even as we invest for growth, our balance sheet and cash flows remain robust and we achieved a trailing 12-month ROI of 30% at the end of the second quarter.

As I look at the underlying trends that drove our first half results, and that would be excluding the impact of the acquisition, I see a great deal of consistency between the first quarter and the second quarter. Our underlying wholesale revenues were up 7% in this quarter. Our retail comp maintained mid to high-single digits, and our growth margin rates were higher than last year at the same time.

Our inventories have consistently been in good shape and reflect our sales growth. Of course on a reported basis, we have had a negative impact from purchase accounting relating to the recent acquisitions and a higher tax rate. I am pleased with the underlying strength and consistency we've achieved in the first half of the year.

As I stated before, fiscal 2008 is very much an investment year both financially and operationally as we continue to execute on three main strategies. One, expanding our direct-to-consumer businesses. Two, growing our international businesses and three, developing new merchandise categories with discrete channels of distribution. We remain very focused on these initiatives and are excited about their potential to meaningfully enhance our global brand positioning and continue to deliver a long-term incremental shareholder value.

I'd like to spend a few minutes updating you on the progress with each of these initiatives. In our direct-to-consumer businesses, we are tracking to have our new 330,000 square foot customer service and fulfillment center dedicated to Ralph Lauren Media fully operational in spring 2008. We recently celebrated an important milestone for this major investment. We took our first call on November 1 last week. We are looking forward to the benefits of being in full control of our e-commerce operation, especially as we look to leverage this business on a global basis.

With respect to growing our international businesses, we continue to benefit from ongoing strength in Europe and Asia, especially for our luxury products. We have invested in prestigious and high profile locations to support the increasingly global focus of our directly operated retail store development. Next year for example we will be opening multiple locations in Paris that should certainly help us reposition the brand in that important European market. At the same time, we continue to develop and integrate new systems that allow us to operate like a truly global organization. And this involves everything from management information systems to supply chain rationalization.

The integration of Japan is proceeding nicely and there is potential opportunity where we can leverage our in-house design, merchandising and supply chain expertise to have a positive impact on sales and profits. And this is one of the most important luxury markets and it's our second largest country in terms of brand sales at retail.

On the product front, we successfully integrated our small leather goods business into our supply chain and distribution platform. And that transition went smoothly. The investment in dresses, one of the strongest growing classifications over the last two years is being successfully leveraged across our Lauren American living and Chaps brand. And the initial response for the product for next spring has been very encouraging. We are also on track to launch a collection of high-end watches and fine Jewelry for fall 2008, which will initially be sold in our directly operated stores and then rolled out to third party distribution in 2009.

During the second quarter, we also presented the summer line for American Living to the JCPenny buyers. And once again the response is very favorable. We're now just a few months away from the launch of American Living at retail which has the making of a very strong long-term partnership with JCPenny.

I'd like to spend some time on the current environment and specifically as it relates to our revised earnings outlook for fiscal 2008, which we addressed in this morning's press release and what Tracey will walk you through later on the call.

Despite strong first half results, we're taking a more conservative view of discretionary spending among US consumers for the back half of the year. The macro economic headwinds of the weak housing market and consumer-credit concerns, all of which have been discussed at length in the news along with the unseasonable warm weather this fall make us more cautious about the traffic patterns in all domestic channels for the holiday season.

In general, the women's business is trending softer than men, which has been the case for most of the year. The high-end luxury accessory businesses like handbags, shoes, watches and jewelry have been strong, but is currently a relatively small portion of our overall business. While I believe we have a compelling holiday assortment that will be supported by a strong advertising campaign, we thought it was prudent to recalibrate our expectations for the back half of this fiscal year with a more cautious view on sales and margins for our domestic operations.

Despite a more conservative view of the near-term spending in the US, nothing about our strategy has changed. We continue to execute against our stated objectives and our expectations to return on our investments remain the same. In the past few years we've made significant long-term investments in Europe. Lauren Kids, retail, e-commerce and others as well as infrastructure investments to develop a world-class supply chain. All of these decisions have paid off the tremendous returns for our shareholders. We continue to view the current strategies in investments as the right direction for our company.

Now, let me turn the call over to Tracey to discuss the financial and operational highlights of the quarter as well as our revised outlook for the year.

Tracey T. Travis - Chief Financial Officer

Thank you Roger and good morning everyone. First, I'd like to highlight for you the drivers of our second quarter net income and earnings per share performance, then I will take you through our revised guidance for fiscal 2008.

For the quarter, we achieved consolidated net revenues of $1.3 billion, an increase of 11% over the prior year’s period. When we exclude the impact of the non-comp licensee acquisitions and those are Impact 21 in Japan and New Campaign, Inc for small leather goods, second quarter net revenues still increased a healthy 7%. As a reminder, two other recent acquisitions, Ralph Lauren Media in the fourth quarter of fiscal 2007 and new Polo Japan in the first quarter of fiscal 2008 were already 50% owned by Polo prior to the acquisitions and therefore were already consolidated into our results last year.

International markets continue to be important drivers of topline growth during the second quarter and especially our European business. Regarding merchandise category, our menswear product experienced strong sales globally and our Chaps product lines were also strong performers. Regarding our retail business, consolidated comps in our directory operated retail stores experienced 4.5% comps during the quarter which was achieved on top of a 9.3% comp gain in the second quarter of fiscal 2007 and a 6.2% comp gain in the second quarter of fiscal 2006.

Our gross profit dollars increased 10% to $695 million and our gross profit rate declined 70 basis points to 53.5% in the second quarter compared to 54.2% during the same period last year. The decrease in our overall gross profit rate is entirely due to the effect of recent acquisitions. Excluding the full effect of recent acquisitions, our gross profit rate was 40 basis points higher than last year.

Second quarter operating expenses increased 20% to $503 million compared to $418 million in the second quarter of fiscal 2007. Operating expenses as a percent of revenue were 38.7%, 290 basis points higher than last year. The higher operating expenses primarily reflect the impact of the newly acquired businesses. Both the non-cash effect of the purchase accounting related to the transaction as well as the businesses’ ongoing operating expenses. We also experienced higher stock-based compensation costs due primarily to an approximate 80% appreciation in our stock price versus last year's.

Start-up expenses related to American Living and dresses which both launched in the fourth quarter and cost related to our 40th anniversary celebration, in addition to the overall growth in the core businesses. Our second quarter operating income declined 10% to $193 million. I would like to highlight that approximately $20 million of decline in operating income is due to the non-cash amortization of intangible assets and inventory related to purchase accounting for the recent acquisitions. This represents 90% of the year-over-year decline in operating income.

Our second quarter operating margin was 14.8% compared to 18.4% in the second quarter of last year, representing a 360 basis point decline. Other drivers of the margin decline include the investments and new product launches and the increased stock compensation expense I mentioned earlier. Net income for the second quarter of fiscal 2008 declined 16% to $115 million and net income per diluted share decreased 15% to $1.90. The decrease in our net income and diluted EPS results principally relates to the decline in operating income I have already highlighted including the $20 million of non-cash amortization related to purchase accounting as well as to a tax rate of 39.4% which is 350 basis points higher than the prior year primarily reflecting our adoption this year of FIN 48 as we have discussed before.

Now I would like to spend a few minutes providing more insight into our segment highlights for the quarter. So, beginning with our Wholesale segment. Our Wholesale sales grew 17% to $772 million or 7% excluding the Japan and small leather goods licensee acquisitions, which now are included in our Wholesale segment. The increase in Wholesale revenue was primarily fuelled by strong global menswear sales and growth across all product categories in Europe. Sales in Italy, our largest European market, were especially strong during the quarter.

As I mentioned earlier, Chaps was also a driver of Wholesale revenue growth with both women's and children's performing well. Our Wholesale operating income increased 12% to $176 million primarily as a result of the higher sales. Our reported Wholesale operating margin was 22.8%, 100 basis points below last year's operating margin of 23.8%. The decline primarily reflects higher SG&A expenses to support new product lines as well as the non-cash effect of purchase accounting related to the recent acquisition. Excluding the impact of the recent acquisitions, the Wholesale operating margin would have expanded slightly.

For our Retail segment, second quarter sales increased 7% to $474 million, and overall comp store sales increased 4.5% reflecting an increase of 5% at Ralph Lauren stores, 4.2% at Factory stores and 5.5% at Club Monica stores. RalphLauren.com sales were up 28% over the comparable period driven by double-digit gains in all major product categories.

Our comparable store sales were strong in July and August, but as Roger mentioned softened in September. The unseasonably warm weather presented the challenge for us in selling fall merchandising. In Europe, our retail stores continue to post very healthy total sales and same store sales gains. Our Japanese retail stores are also growing at an impressive double-digit rate, thanks to broad-based interest in all of the luxury products carried in these stores.

Retail operating income was $52 million compared to $67 million in the second quarter last year and the Retail operating margin was 11.1% versus 15% last year. The declines in Retail operating income and margin rate also reflects the non-cash effect of purchase accounting associated with the acquisition of the minority interest in Ralph Lauren Media that we previously did not own. Increased occupancy expense related to future store expansion plans such as the planned Paris Store that Roger mentioned earlier, and gross margin declined at some of our retail format.

Licensing royalties for the quarter were $53 million, 14% below the prior year, and operating income decreased 39% to $23 million. The decline in Licensing revenue and operating income was due to the effect of recent acquisitions and this primarily relating to the Impact 21 acquisition, which is now consolidated as part of the Wholesale segment, which I mentioned earlier. Excluding the effect of the recent acquisition, Licensing revenue and operating income was up primarily due to eyewear and fragrance sales.

We ended the second quarter with $473 million in cash or $130 million in net debt, which reflects short-term borrowings to complete the Impact 21 acquisition. During the second quarter, we invested $48 million in capital expenditures for new stores, new shop installations, particularly in Europe, and infrastructure investments. We also repurchased approximately 1.9 million shares of stock for $150 million during the quarter. We currently have approximately $298 million remaining under our existing share repurchase program. As Roger said, we are pleased at the investments we have made in our business this year, have continued to yield last 12 months’ return on investment of 30% as of the end of the second quarter.

Roger spoke of the fiscal 2008 year as being one of investment for us and as we have communicated to you before, we expect this to be reflected in our earnings results. In terms of our earnings guidance for fiscal 2008, I want to remind you of what we have said before that you should expect to see investment related to new business initiatives throughout the entire year with the first signs of revenue related to some of these investments beginning in the fourth quarter and then into fiscal 2009.

Additionally we have the impact of purchase accounting related to two Japanese acquisitions, Ralph Lauren Media as well as small leather goods. This will result in suppressed earnings in the first three quarters of this fiscal year with earnings growth disproportionately weighted to the fourth quarter. This is not new news, but I thought it was worth revisiting since they are fair amount of investments and associated impacts this year, which we have tried to lay out for you.

As mentioned in our press release, although we met our expectations for the first half of fiscal 2008, we are concerned about the impact, the current US macro environment will have on consumer spending over the next several months. Accordingly as Roger said, we believe it is prudent to recalibrate our expectations for the back half of the year. And I would like to review our revised outlook with you now.

For the first full year of fiscal 2008, we now expect revenues to increase by a low-teen percentage, which compares to our prior expectations of mid-teen percentage growth. The more moderate topline outlook effectively assumes a weaker consumer spending in the US across all of our distribution channels for the back half of the year.

We expect our reported operating margins to be down by approximately 250 basis points compared to fiscal 2007, the majority of which can be attributed to the non-cash impact from purchase accounting, but some of the which is assumption of our slightly lower sales growth outlook. Our fiscal 2008 tax rate should continue to track to the year-to-date trend, which is approximately 39%.

The net result of all of this is that we now expect fiscal 2008 diluted earnings per share to be in the range of $3.50 to $3.60 per diluted share, compared to our prior expectation of $3.64 to $3.74. And as a reminder, this includes an estimate of approximately $60 million of non-cash purchase accounting impact, and that's a before tax number. We also provided more specific guidance on our fiscal third quarter expectations in this morning's press release. So, I'd like to review that guidance now.

For the third quarter, we expect consolidated revenues to increase at a mid single digit percentage rate. This reflects mid-to-high single digit percentage growth in wholesale and high-single digit percentage growth in retail. It also reflects a low 20s percent decrease in licensing due both to the impact of the acquisitions I mentioned previously and to a one-time accelerated payment to exit a licensing arrangement that we received in the third quarter of fiscal 2007. Operating margins are expected to decline approximately 500 basis points in the quarter as a result of the non-cash purchase accounting related to the Japanese acquisitions and Ralph Lauren Media, continued investment in new business initiative and to more the conservative view of domestic sales.

And with that, I'll turn the call back to Roger for questions and answers.

Roger N. Farah - President and Chief Operating Officer

Okay operator. I think we're ready to take the first question.

Question and Answer

Operator

Great. We'll now begin the question-and-answer session [Operator Instructions]. Our first question comes from Christine Chen of Needham and Company. Miss. Chen you line is open.

Roger N. Farah - President and Chief Operating Officer

Hello operator. We can't hear anything, maybe you should move to the next question.

Operator

Yes, we are going to the next question, which is Omar Saad of Credit Suisse.

Omar Saad – Credit Suisse

Thanks, good morning.

Roger N. Farah - President and Chief Operating Officer

Good morning.

Omar Saad – Credit Suisse

Roger, hoping you could expand a little bit on the US consumer environment. How you think about it given the breadth of your business across channels and across price points. We would love to hear some of your unique insights, whether it's the outlet business and is that being impacted by the gas prices or the luxury business and some of this consumer market, stock market fears that are out there. I mean the wholesale channel, it seems like women's been weak for some time. I don’t know if you have any particular insight you could share with us on that as well. And how you think about this as we head into the holiday season, which traditionally obviously has even the biggest season for the industry?

Roger N. Farah - President and Chief Operating Officer

Yes, it's the headline question for all of us I think on the macroeconomic level, and I would make sure we are really focused on the US, because the international business is a whole different set of discussion point, but domestically we saw reasonably strong July and August and then a significant slowdown in September. So, that quarter itself well… in total we delivered our plans. It had some extreme parts to it. And I think we saw the domestic customer really slowing down their discretionary spending late August and into September. How much of that was weather, hard to tell. When you look at the regional maps for our performance, the Northeast, the Midwest definitely were weaker which we do think was the primary part of the country that was impacted by weather. You know, California, Southwest, Southeast, less of a weather issue, our businesses were stronger in those markets. And then the New York business is experiencing tremendous growth given a very high level of tourist traffic and that has continued on unabated. So, the country itself has sort of different reactions over the last six, seven, eight weeks. I believe the high-end customer continues to spend. We're seeing in our business domestically and internationally, and I believe they will continue to spend through Christmas for themselves and for gift giving. I also believe that if the financial headlines and news that keeps coming out of Wall Street gets worse, that may or may not provide the psychological depressant to the consumer more than it is; they can't afford to buy a sweater or a coat, so we will have to watch that carefully. But at the moment, the high-end consumer continues to shop at a pretty high rate on a worldwide basis. I think Tracey alluded to double-digit comps in Europe and double-digit comps in Asia, and they have continued to trend well until October, November. I think it's the middle customer that is being squeezed with mortgages being reset, maybe borrowed against the equity in their home, and as that equity value has fallen in many parts of the country, they are forced to cut back their discretionary spending. And I think that's the one perhaps we are most worried about as we look at the third and fourth quarters for us where discretionary spending, it's really squeezed. Gas prices, which continue to be talked about, it's hard for me to really see how that is impacting it. We have not seen that as an impact in the factory business. That business continues to be pretty solid. And so I think that is less of an issue. I think the channels that are below that, whether it's a Coles or Penny’s I think have seen some of that turbulence. I think they obviously picked up a lot of market share over the last two years during the Federated-May merger, but the last three or four months they've seen some turbulence in their comps. Even though Chaps continues to perform extremely well at Coles and the American Living product that we've now shown through two markets has a huge enthusiastic following now with the Penny's merchant team. So, my met on all of that… and it is a long answer, but I think it's the heart of what's going on. It is that the middle customers are the one being squeezed the hardest. In terms of product category, I think women's has been soft really throughout the year. And that's really all formats for us, whether it's the very contemporary part of Club Monica or whether that is the women's businesses in Lauren price points or really across-the-board. And I think that's just fashion and trend as opposed to any serious permanent change. Men's business has continued to perform reasonably well, really on a global basis. And so that pattern is unchanged. I think the weather did hurt the apparel businesses, particularly in those regions I talked about and now that the weather has changed, we'll see what happens.

Omar Saad – Credit Suisse

And how do you plan for the... how do you deal with the planning kind of for consumer overarching kind of slowdown? Do you pull back on inventory or are you being more... your inventory is obviously in pretty good shape. Are you being a little bit more promotional in your businesses to work through that or how do you deal with that?

Roger N. Farah - President and Chief Operating Officer

It's interesting because the... what has turned into the shortest selling cycle of the year now has become fall. We ship it in July and August and hopefully it solidifies September and by October, you want to start moving out of it to make room for Holiday Cruise and Resort, which is now coming into the stores in the first week and two weeks of November. So, it used to be the largest and most profitable delivery cycle for really all manufacturers, it has now become the shortest. The Holiday Cruise which then bleeds into spring, which bleeds into summer allows you much more of a selling time to sell through goods at full price. So, when the weather doesn't come as it did in this year, there is more promotional activity late September into October to try to clear those goods to position the Holiday Cruise Resort product that comes in early November. So, we've taken some action. I think Tracey said one of the issues on the operating margin rates in retail in the second quarter reflected some aggressive attempts to move through some of that fall a little earlier than we might like. But as you commented, our inventories are in great shape. We're flowing fresh product and we think we're well positioned with a slightly more conservative point of view about sales and margin and to whatever degree we've got flexibility in our expense structure without impacting our initiatives, we'll look at that through the back half of the year, just to be cautious.

Omar Saad – Credit Suisse

Great. And one last quick question. Do you think kind of this year aside with a lot of investments you are making, do you feel confident that you can get back to that 15% operating margin level next year and beyond?

Roger N. Farah - President and Chief Operating Officer

We started the conference call by saying, we feel very good about those investments and there is nothing in the short-term domestic pull back that would convince me otherwise. So much of that investment is positioned around very long-term strategies including our growth internationally. And I think the European example has worked beautifully. We're rapidly approaching that $1 billion target we all talked about a couple of years ago. We think the investments in Asia over the long-term are the right things to do, direct-to-customer in these new businesses that address the discrete channels. So, I don't believe any of those have changed. I don't believe any of our operating margin rates or targets will change. But sitting here today, I don't know whether this fall… weather pattern/economic pattern will bleed into spring or not. But fundamentally our goals and our objectives and our current expectations are unchanged.

Omar Saad - Credit Suisse

Thank you. Best of luck.

Roger N. Farah - President and Chief Operating Officer

Okay. Thanks Omar.

Operator

Our next question comes from David Glick of Buckingham Research.

David Glick - Buckingham Research Group

Good morning Roger. Just a little bit of follow-up on the Wholesale channel. Can you give us… year-over-year inventories are obviously in great shape. Can you give us some color on the inventory levels in your retail partners and the department store channel? And then your evaluation of the Q3 assortments from a fashion perspective here in men’s versus women’s versus what you're seeing in early selling on holiday. And are you seeing any pressures from your partners to go back on goods or the goods flowing smoothly into the channel?

Roger N. Farah - President and Chief Operating Officer

Hey, just to be clear. Are you talking about our third quarter or their third quarter?

David Glick - Buckingham Research Group

That's the… their third quarter.

Roger N. Farah - President and Chief Operating Officer

Okay. Well, I am interested to see what's reported tomorrow with comp store sales for October myself. But absent that piece of information I think Dave, what I would say about our men’s assortment, and I said it earlier, our men’s business has held up very nicely around the world, and domestically it's been the strength of the year-to-date. I think our fall deliveries, which for us was second quarter, their third quarter, generally tend to be heavier in weight. And I think with the warmer weathers that we've experienced and the record-breaking heat, I think we didn’t move through those as well as we would have planned. Then I think the stores we're taking more aggressive actions to clear that through as we begun to receipt cruise, holiday transition product in early November. The business on that product has started to pick up. So, we're encouraged about the quality of what we are delivering, the early consumer reaction, and feel like moving through that fall product aggressively both in our stores and in Wholesale channels the right decision.

David Glick - Buckingham Research Group

And is there any pressure on going back on goods on the retailers part, or are they getting... are the inventories under control for the most part?

Roger N. Farah - President and Chief Operating Officer

Yes. I think the Retailer, Ralph Lauren product in men’s, women’s, home, kids, all of the categories is the backbone of their business. We work very hard to edit the doors we're in, build the right kind of shops, put in the right support, the right kind of selling. So, we're comfortable with the [inaudible] through our third and fourth quarter and the plans that are in place to have that product sold through.

David Glick - Buckingham Research Group

And if you were to do that same in the Lauren assortments for fall. What kind of feedback can you give us?

Roger N. Farah - President and Chief Operating Officer

Well, I would say against the backdrop of our softer women’s here in general, I think that is applied for Lauren as well. Here again the fall product which tends to be heavier, now we're working hard to sell that through and receive the holiday, cruise first two weeks of November depending on how your calendar. That product has begun to check at retail better than the fall product. I also think as we have developed the Lauren jeans line and attempted to create clarity between where one line starts and the other ends, I think we've left sort of middle range of products there that we're readdressing with the holiday product and then into spring. That I think will better capture that piece of the business, which I think may have gone lost in our attempts to bifurcate the two lines. So, we're feeling better about the go forward position there as well.

David Glick - Buckingham Research Group

And last question. As the weather has pulled off last week, particularly in the Midwest and Northeast and into this week, are you starting to see more footsteps or are you getting color from your partners that the traffic levels are starting to rebound as the weather normalizes?

Roger N. Farah - President and Chief Operating Officer

Yes, we have.

David Glick - Buckingham Research Group

Great. Okay. Thanks and good luck.

Roger N. Farah - President and Chief Operating Officer

Thank you.

Operator

We will take our next question from Brian McGough of Morgan Stanley.

Brian McGough – Morgan Stanley

Yes. Thanks, this is Brian McGough. Hi, everybody.

Roger N. Farah - President and Chief Operating Officer

Hi Brian.

Brian McGough - Morgan Stanley

I thought I heard this right. But when you talked about the Wholesale margins, excluding the non-cash amortization, were the margins up?

Roger N. Farah - President and Chief Operating Officer

Yes. First quarter and second quarter.

Brian McGough - Morgan Stanley

How? I mean with everything that has happened out there at Retail, I mean where did you see margin strength? I mean... you guys have moved to a model over the past two, three years where you basically took your markdowns close to zero, really. I'm going to assume there has been pretty much no change there...

Roger N. Farah - President and Chief Operating Officer

We have great management, what can I tell you. And I think Brian the reason we isolated the operating margins there, which are very high to begin with and really credit to Jackwyn Nemerov and her team, who have many years of experience. I think it's also a great testimony to the supply chain improvements we've made over the last four or five years. So, I think through logistics and distribution through how we deliver product to the customer. So, even with the integration of the Chaps business, which I know initially there was a concern that might dilute the profit margins of our Wholesale business. I think you've seen and will continue to see not only healthy margin rates, but the expansion I think that business can provide. So, that is one of the true examples of the integration of what's going on here even in difficult times. I think it is also fair to say, Brian, that we have had strength in our European business, where the business has not experienced any of the issues. We've just spent some time talking about domestically, and as you know that comes with a higher margin. So, the combination of all that and my hats off to really the people managing that here, Wholesale and our supply chain people. It's really quite impressive given the environment.

Brian McGough - Morgan Stanley

Okay. Great. A couple more... just I was hoping, Roger, can you just talk a bit more strategically next year? I mean you guys have a lot coming down the pipe, you've got.... Hello you there?

Operator

We're experiencing technical difficulty. Please standby by. [Technical Difficulty]

Roger N. Farah - President and Chief Operating Officer

I'm sorry Brian, if you can hear me. We got cut off on this end for the last few minutes and you were in the middle of asking a follow-up question to the wholesale margins. So, if you're still there, could you repeat the question?

Operator

[Operator Instructions] Your line is open.

Brian McGough – Morgan Stanley

Okay, am I on?

Roger N. Farah - President and Chief Operating Officer

Sorry Brian.

Brian McGough - Morgan Stanley

Yes, don't worry about it. Actually I spent the past couple of minutes just kind of talking to the broader audience about what your plan is for the next two years?

Roger N. Farah - President and Chief Operating Officer

Thank you for doing that.

Brian McGough - Morgan Stanley

Yes.

Roger N. Farah - President and Chief Operating Officer

We didn't pay our bill, we got cut-off.

Brian McGough - Morgan Stanley

Question I think on the...

Roger N. Farah - President and Chief Operating Officer

We had a lot on our plate and then you got cut-off.

Brian McGough - Morgan Stanley

Yes, so just next year like… from I guess more of a strategic standpoint. So, you got what you're doing on the footwear side, you have dresses, you have americanliving.com. I mean there is... would you talk a little bit more about a few of the other call options you have out there like handbags and also your other Japanese license and anything else that you are eyeing from a strategic standpoint and where you might be headed?

Roger N. Farah - President and Chief Operating Officer

Okay, well again I apologize for the line going dead. The two major additional call outs that we've talked about before and we continue to look towards is the end of the long-term handbag license that runs out of the end of December [inaudible] at which point we will be able to wholesale and third party the collection handbag business that we've been doing at this point and our own stores only, as well as we are free to develop other brands and other product categories of handbags such as... which relate to our apparel businesses. So, we're definitely committed to doing that. And we'll talk in February about when that product will launch, it will not launch in spring. We will look to wholesale selectively and are negotiating hopefully, successfully for those key locations on a worldwide basis for fall of Calendar 2008. We are also looking very hard at the other licensed Japanese businesses, the bulk of which are really the Kids business and some smaller other businesses. Those licenses expire at the end of February, which is an opportune time for us to look to bring that into our Japanese business model. And so all of those will be looked at for our fiscal '09 planning and we'll talk about those in more detail in February.

Brian McGough - Morgan Stanley

Okay, last very, very quick one. As far as your tax rate goes, your tax rate is really high and as I look at other multinationals, it's hard to find one that even has a tax rate over 32%, even over 30%. As you guys move forward with your plans for the next two to three years and a greater portion of your profit comes from Europe and Asia, shouldn't your tax rate start to approach 30% instead of upward… [inaudible] 40%?

Tracey T. Travis - Chief Financial Officer

That sounds great, Brian. Yes, I mean… as you know the federal tax rate is 35%. So, as we have discussed previously and as disclosed in our 10-Q filings, FIN 48 obviously is a big piece of the tax rate increase for us. And we're doing some tax planning as it relates to our Asia business as we expand there and certainly hope to do some tax planning both there as well as in the US. So it's a primary focus of the organization to over time as we expand globally, realize some of the other benefits that other multinationals realize.

Brian McGough - Morgan Stanley

Thanks.

Operator

And our next question comes from Liz Dunn of Thomas Weisel.

Liz Dunn – Thomas Weisel Partners

Hi, good morning. I wanted to get an update on some of the other initiatives. What's going on with the jeans business and just as a follow-up to Brian's question, the launch of the handbags. Why are they not launching until fall, is it just so much on your plate that you wanted to give it the full attention, and so it's going to be fall, and with that do you risk potentially losing some of the existing floor space?

Roger N. Farah - President and Chief Operating Officer

Okay Liz. I would say in answer to the handbags question. Your assessment is correct. We have so much on our plate. In order to organize ourselves to conduct a Wholesale handbag business, a lot of time and energy, but at the moment it is going into a lot of other subjects that we detailed here this morning in the past call. So, for us it is a matter of capacity in our effort to do it right, we think that's the right timing. The jeans business is an interesting business where we discontinued the Polo Jeans in the US market and have worked our way through that. We have been building and pushing Lauren Jeans to our comparable distribution points to the Lauren Sportswear, and I think that line in general has been well received. But I think going forward we've got some points of view about getting it more narrowly focused for that customer profile on the doors we are in for spring and beyond. I also think in the men’s business, we're doing Polo Denim under the heading of our Polo Sportswear. I think we have gone through some iterations there about fit and washes and prices, all of which has been very helpful to us in shaping where we want to go in the future with that business. So, I think both men’s and women’s as it relates to that remain big opportunities and we're pushing forward. At the same time, we've also expanded the Denim representation on our kids business in Rugby and in Blue Label. So, we've got components of Denim running through all other businesses. At the very high-end, we have got Double RL. We're at the moment… we're retailing it in vertical home stores, and we're looking to expand that, and we have it wholesaled in selective high-end specialty stores. So, from the top of the pyramid down through some of the more moderate price points, we are seeing the positive impact of the Denim business we rolled back into the company.

Liz Dunn - Thomas Weisel Partners

Okay. And then just my second question relates to Japan. Can you talk about where you are in terms of building the infrastructure and staffing and just all the things that you need to do sort of from a more qualitative standpoint? Where are you, what have you learned from, how you proceeded with Europe and when do you expect to be sort of fully staffed up and from an infrastructure perspective, where you need to be to really execute on that business?

Roger N. Farah - President and Chief Operating Officer

Okay. Well, the update on Japan since the acquisition is as follows. I think we've done all the homework we need to do in terms of the current business, the points of distribution, the quality of the inventory and the way the brand is positioned. I think we have a lot of activity right now in the sourcing area and are looking at how we transition the manufacturing of those goods into our worldwide manufacturing network. We've done a lot of work and are moving quickly through the logistics and distribution of how goods come into the country, how they are processed. There are different laws in Japan in terms of inspection levels and content labels, but we're working through that. I think we're moving quickly, particularly based on what we've learned in Europe. We are moving from three distribution centers in Japan down to one, and we think we'll begin to see some efficiencies there. We've relocated our European IT head to Japan since he went through all the systems convergence that we did in Europe over the last five or six years to help jumpstart IT conversions to our global network. And now we're working on a group of people who will help integrate the merchandise strategies, buy door planning strategies that we've used affectively both in the United States and Europe to really go door by door and work on the assortments, which for the most part will impact fall of next year. So, we're using the playbook that has worked for us both in the United States and in Europe. We are looking to take learnings from our [inaudible] store which Tracey talked about and is running strong double-digit increases. And we're planning that through the rebuilding of the management team, their priorities, their focus and that will dictate the capital spending as we go forward.

At the same time, we are looking to position our platform to be able to expand as these new licenses expire at the end of February as Brian asked earlier. So, lots going on in Japan. Nevertheless, it's a challenge sometimes of the language barriers to work through interpreters and all the cultural issues. But I think they're very enthusiastic in Japan about the changes, and I think we're going to play that out over the next planning period pretty aggressively.

Liz Dunn - Thomas Weisel Partners

And longer term, you still feel that your business can be sort of the third Asia, a third Europe and a third US?

Roger N. Farah - President and Chief Operating Officer

I do.

Liz Dunn - Thomas Weisel Partners

Okay, great. Thanks good luck.

Roger N. Farah - President and Chief Operating Officer

Okay, thank you.

Operator

Our next question comes from Margaret Mager of Goldman Sachs.

Margaret Mager - Goldman Sachs

Hi.

Roger N. Farah - President and Chief Operating Officer

Good morning.

Margaret Mager - Goldman Sachs

Good morning. A couple of questions. Let us see. As far as the outlook for the second half of the year in the adjustment in your sales guidance, can you... are you also making adjustments in how you're going to launch the American Living initiative and could you talk about that? Will there be fewer doors, less merchandising, how are you… what kind of adjustments are you making? And then second question related to that. I don't think you made any expense adjustments in your outlook. And I am just wondering what are you doing on the expense side, and what is your contingency plan if the environmental doesn't meet your revised expectations? Thanks.

Roger N. Farah - President and Chief Operating Officer

All right, good question. Margaret, is this still your swan song?

Margaret Mager - Goldman Sachs

Yes, this would be it. So...

Roger N. Farah - President and Chief Operating Officer

I do know whether I have a drum roll or…

Margaret Mager - Goldman Sachs

I think for you guys...

Roger N. Farah - President and Chief Operating Officer

Emphasis into my answers here.

Margaret Mager - Goldman Sachs

This is 40 consecutive quarters. So, congratulations on your ten-year anniversary.

Roger N. Farah - President and Chief Operating Officer

Well, thank you. And our ten-year public anniversary and our 40th year in business has been quite a year. But let me answer the American Living question first Margaret. We are making no changes. The door counts, the merchandise plans, the merchandise presentations initiatives, the advertising and launch characteristics and the first year media plan are all unchanged. As a matter of fact, I think that Penny’s is dealing this launch even more enthusiastic given the environment has a bit of little up and down. And I think their enthusiasm has grown, particularly after we show the summer line, which back up the spring line. So, all systems go on American Living. We are obviously hard at work since this early November and a lot of that product has to be coming through the supply chain now in order to be here to deliver that February launch, and hats off to our wholesale and manufacturing people who have been able to pull that of at this point. Everything is tracking on time and looks good. The second piece of your question, which is the expense piece, I don't think we directly talked about that in terms of the back half of the year. I think what we're trying to do in terms of dealing with our concern about a softer environment perhaps is look at things that will be called discretionary or flexible spending in order to try to work against the sales and margins issues. What I don't think we're doing Margaret at this point is making any radical decisions that would cut into the muscle or the fiber of the company. I don't think a slight softening in the environment is going to cause us to do that. And as all of you have pointed out, given all the things we have on our plates and all of the resources that are being applied to that, I think that will be incredible short-term and imprudent. If the environment God forbid continued on this way for a long time, I think we'd come up with some different answers. So, at this point that's our approach.

Margaret Mager - Goldman Sachs

Okay, so as far as the change in the outlook from a high teens fiscal year revenue to low teen… mid teens down to low teens in the full year, the adjustment is all from the US market, and it's not from American Living, so therefore it's all from the Wholesale department store or Channel?

Tracey T. Travis - Chief Financial Officer

Wholesale and Retail.

Roger N. Farah - President and Chief Operating Officer

Yes, I think, Margaret, we have taken a view of our own Retail, taken our sales forecast down a tick and we will see what happens. We don't know from day-to-day, but we will see what happens. Our original plans were built on a comp that was in the 5% to 7% range domestically, which is consistent with what we have been running. And I think we are looking more at a 3% to 5% kind of a comp storage number domestically. And so we'll see what happens, but that's the view we've taken in terms of third and fourth quarters.

Margaret Mager - Goldman Sachs

Okay.

Roger N. Farah - President and Chief Operating Officer

Europe and Asia remain unchanged and American Living remains unchanged.

Margaret Mager - Goldman Sachs

Okay. That's very helpful. Thanks. And if you wouldn't mind, one bigger picture question on the e-commerce strategy, which you highlighted as one of your key go-forward initiatives. The business is trending up 28% as we speak. Is it actually big enough to move the needle on the overall company topline? Is it contributing 1%, 2% to the total, say, that low teens aggregated revenue increase you're expecting? And if you could talk about just... as you see this strategy unfolding, when does it actually become big enough to become a needle mover in terms of sales? Thanks.

Roger N. Farah - President and Chief Operating Officer

Okay, well that's a good question, because we made a very early commitment to the online business back in 2000, and we spent a couple of years really learning and investing in how that would operate. So, we are very proud six, seven years later of what that business has become. In terms of size, it is still only about 4% of the company's sales. So, despite the fact that it’s experiencing terrific topline growth, its impact on the overall company result at this point is relatively small. I think our desire to see that as a huge platform of the future speaks to why we bought the 50% back from our partner that we didn't own. I think it speaks to our commitment to building a state-of-the-art call center and customer service center in Greensboro, North Carolina, which has the capacity to be doubled in size in the future if we need it. All of that is because we believe it is here to stay and we've got a running head start on that business unlike any others who are now trying to get into it. We think it is an integral part of branding, communicating and doing business. There is no doubt that in future years, people are going to get their information and make their decisions more off of various online communications, whether it’s a computer or a cell phone or any other media. And I think we are positioned and believe it's going to be a big business. At the same time because of the strong foundation we've built here, we are looking at the international opportunities and studying those to better see how it reflects on our global ambitions as a company. And so with the strength of Europe and the strength of our business there and the investments we've made, we are looking hard at what role e-commerce can be in that market both for commercial sales and profit as well as promoting the brand. So, a lot of very exciting things going on there, but as you know, that keeps changing, and that business keeps evolving and we're trying to stand on top of it.

Margaret Mager - Goldman Sachs

You already have a great website. So, good luck with all of that going forward and I appreciate the well wishes, Roger. And hope to see guys. Take care. Thank you.

Roger N. Farah - President and Chief Operating Officer

Thank you. Good luck.

Operator

Our next question comes from Robert [inaudible] of Lehman Brothers.

Unidentified Analyst

Hi, good morning Roger.

Roger N. Farah - President and Chief Operating Officer

Hi Robert.

Unidentified Analyst

The question that I have right now is, when you look at the third quarter and the fourth quarter, what is the contribution from the acquisition expected to the wholesale part of the business versus what we've seen in the last... even in the most recent quarter?

Roger N. Farah - President and Chief Operating Officer

What's the organic growth and then how much on top of that?

Unidentified Analyst

Yes. What are the... in the high-single-digit wholesale assumption, how much is the organic versus what you're getting on the acquisition side? I think we saw 10 points of acquisition….

Roger N. Farah - President and Chief Operating Officer

Yes. I think we'll have to break that out off-line and get back to you. We don't have it in front of us. You have a second question?

Unidentified Analyst

No. That will be it for me.

Roger N. Farah - President and Chief Operating Officer

Okay.

Unidentified Analyst

Thank you.

Roger N. Farah - President and Chief Operating Officer

Thank you.

Operator

We'll take our next question from Virginia Genereux of Merrill Lynch.

Virginia Genereux – Merrill Lynch

Thank you. And good job in this difficult environment.

Roger N. Farah - President and Chief Operating Officer

Hi Virginia.

Virginia Genereux - Merrill Lynch

How are you Roger and Tracy?

Tracey T. Travis - Chief Financial Officer

Hi.

Virginia Genereux - Merrill Lynch

Hey, I've got a question on owned-retail if I may. Can you guys tell us sort of how many or what percent of sales of the 303 stores or 302 stores are international? And sort of follow on to that. Roger, if you... it looks like Retail margins will be down a little bit this year, even adjusting for the acquisition noise. Yes. I know some of that is, Roger, the investment in the fulfillment center for RL Media and stuff. You're also I think opening more stores. As you look out to next year, Roger, do you think retail margins can improve from this year's level kind of weighing the dotcom falloff and investment falloff and against accelerated door growth?

Roger N. Farah - President and Chief Operating Officer

Okay. Well, the first part of your question. About 10% of the doors at the moment are international retail doors, the rest are domestic. Of the 302, call it 30 to 35 in either Europe or Asia that are owned.

Virginia Genereux - Merrill Lynch

Thank you. Right.

Roger N. Farah - President and Chief Operating Officer

And we'd look to expand that going forward. In terms of the Retail margins, when you take out the dotcom fulfillment center and you take out the accounting charges that come with the acquisition of the 50% of RL Media because that's running through the Retail P&L. And you look at some expense of real estate that we've committed to in Paris that won't open until the fall of '09, but in order to secure these unique locations, we have to commit to that at the early part of this year. And we are now going through the permitting process, because they're sort of historic buildings. If you net all that out, I think what you're seeing is a slight dip in the gross profit rate due to markdowns in the second quarter and/or depending on the customer third and fourth quarter reactions, I think we are going to see more markdowns this year than last year when we were running at 7% to 9% comps. So if our forecast of 3% to 5% comp comes true, some of that will result in product we will have a clear in the third and fourth quarter. So, there will be some margin dip. Assuming next year it doesn't have those one-offs that Ralph Lauren Media and the fulfillment center and the accounting and some of these real estates, I would like to think the margins are going to come back to more normalized levels.

Virginia Genereux - Merrill Lynch

That's great. Thank you. You are coming from a great year last year in terms of no door openings and stuff. And then secondly if I may Roger, if I... let's talk about business sort of pro forma. I mean I think at this year we're kind of 75% US and Canada and 25% international. And maybe next year, it's a little more international. But I have tried to include Japan. So, my question is could you segment the US business Roger. You mentioned kind of you got the middle customer who's tougher, high-end, holding up. But if I take that 70%, 75% say that's kind of US, how do you guys think about your customer exposure?

Roger N. Farah - President and Chief Operating Officer

Well, I think Virginia, it's a good question. We think we are balanced in the way we are touching customers at different price points and different channels. Our own stores plus high end distribution like ASACs or Neiman or our online business all represents the best way for the high-end customer to [inaudible] to touch down. And so we continue to invest in that, because we think that's an important part of the market, and we think that's where our growth is. At the same time, you have all read about the door count expansion at Coles, the number of doors that are being talked about at the Penny's, I think between the two chains in next five years...

Operator

Please stand by. [Technical Difficulty]

Roger N. Farah - President and Chief Operating Officer

Virginia, Can you hear us? We got cut off again.

Operator

[Operator Instructions]

Virginia Genereux - Merrill Lynch

Can you guys hear me?

Roger N. Farah - President and Chief Operating Officer

Yes, thank you. I don't know why we keep getting cut off. I'm now standing 15 feet away from the phone. What I was saying when I think I got cut-off, correct me if I'm wrong, is the Coles and Penny’s announced door expansion which... if I added up right are about 750 doors over the next five years represents significant opportunities. And I think we are uniquely positioned to give them full lifestyle brands. Bigger than anybody else I can think of that can cover men's, women's, home, kids, accessories and all the pieces and parts. So, I think our opportunity to position ourselves in that channel is going to pay great dividends for the corporation. I think in the middle channel, the question is when you get done with integrations and mergers and name plate changes, I think that channel can win. I think that it has been going through a lot of people in the last couple of years. They quite frankly have Ralph Lauren well positioned in key departments. So I think to the domestic question, I think we are well positioned in the merchandise categories we want to be in, and I think we are well positioned in the channels of distribution we want to be in.

We are obviously adding incremental investment to the high end of that pyramid. And we think that is the right place for us to be not only domestically, but on a worldwide basis. So, that is the strategy we've embarked on and we feel good about it.

Virginia Genereux - Merrill Lynch

That's great. And then just last one I think following on [inaudible]. Tracey I think your gains at least for the next quarter, I think by our math implies that the core that the ex-acquisition… that the Wholesale business will be down actually versus kind of the 6% or 7% year-to-date growth. But maybe there is some shipping dynamic going on there. Is that indicative of retailer demand… I mean are orders getting cut like that or is there... I mean should we think about that, does that have implications for the rate of growth over the next couple of quarters?

Tracey T. Travis - Chief Financial Officer

Virginia, you're right. It does… given the fact that Japan for the first three quarters is relatively the same in terms of sales volumes, it does imply that the Wholesale channel will be flat to slightly down. As Roger said, it's not a matter of cancellations on our part as it relates to the Wholesale orders. It is a more conservative outlook in terms of sell-throughs. Obviously we've some incremental markdowns in our third quarter numbers from a Wholesale standpoint, so that's really what's driving the softness.

Roger N. Farah - President and Chief Operating Officer

I think Virginia the only thing I would add to Tracey's comment is that the 7% we've been running through the first six months to relatively flat third quarter and then the spike in the fourth quarter. Some of that is affected by the shipping patterns in Europe, because Europe has a very small first and third quarter and then has very large second and fourth quarters. So, the growth of Europe, which is embedded in the second quarter numbers lessens in the third quarter, because they have a very small quarter, and then it's projected to come on strong again in the fourth quarter. So, some of that is the event flow of the international businesses running against the more steady domestic business.

Virginia Genereux - Merrill Lynch

Thanks, that is what I was thinking. Thank you all.

Roger N. Farah - President and Chief Operating Officer

Okay.

Operator

And we'll take our next question from Jeff Edelman of UBS.

Jeffrey Edelman - UBS

Thank you, good morning.

Roger N. Farah - President and Chief Operating Officer

Good morning Jeff.

Jeffrey Edelman - UBS

Would you discuss the growth that the European business has had in the quarter, what that contributed overall, and what kind of currency impact we might have seen both at the top and bottomline?

Roger N. Farah - President and Chief Operating Officer

Yes, I would say that the European wholesale business, which represented during the quarter about 30% of our business in the quarter, ran at about 11% increase. So, you can do the math on the total business, it was better than the 7% normalized number. And its contribution is growing. The currency impact, which Tracey can give you, is relatively modest. And also it's relatively modest on our bottomline, because what we get is a positive through the conversion of the profit back in the US dollars, you know, is offset by the increase in the cost of goods for all the products, whether it's raw material or finished products we make out of Europe that is going the other way in hurting us. So, the net profit impact is relatively modest in Europe at the moment.

Tracey T. Travis - Chief Financial Officer

About 2% of the growth, Jeff.

Jeffrey Edelman - UBS

Okay. Thank you.

Tracey T. Travis - Chief Financial Officer

In the wholesale segment.

Jeffrey Edelman - UBS

Right. Okay, thank you.

Tracey T. Travis - Chief Financial Officer

Revenue growth.

Jeffrey Edelman - UBS

And then Tracey. Again as we think about the fourth quarter revenues, I know what you said about shift in timing of the European shipments. But it looks as if the year-over-year growth in your third quarter up about $50 million. Fourth quarter up about $200 million.

Tracey T. Travis - Chief Financial Officer

In the fourth quarter, we are shipping American Living.

Jeffrey Edelman - UBS

You're right. Okay. So, that is still a good chunk of that in the fourth quarter?

Roger N. Farah - President and Chief Operating Officer

Apples-to-apples.

Tracey T. Travis - Chief Financial Officer

Yes.

Jeffrey Edelman - UBS

Right. Okay. Just wanted to clarify that. Thank you.

Tracey T. Travis - Chief Financial Officer

The net dresses and other products, Jeff.

Roger N. Farah - President and Chief Operating Officer

Yes. The only other thing I'd say about these quarterly numbers. Because of the 53rd week at Retail, that last week in the quarter does shift meaningfully from quarter-to-quarter against prior year comparison. So, although it is certainly a number to look at, I wouldn't get too invested in it.

Jeffrey Edelman - UBS

Okay. Great. Thank you.

Roger N. Farah - President and Chief Operating Officer

Thanks Jeff. I think we are going to ask for a couple more questions since the phone line got disconnected twice. So, are there just a couple more questions operator?

Operator

There are few more questions. We'll take our next one from Christine Chen.

Christine Chen – Needham and Company

Thank you. Sorry about the technical difficulties.

Roger N. Farah - President and Chief Operating Officer

You're back.

Christine Chen - Needham and Company

I'm back, yes. I'm not sure what happened.

Roger N. Farah - President and Chief Operating Officer

We got your telephone cold.

Christine Chen - Needham and Company

Yes, exactly. Wanted to ask if you could help clarify. There was some speculation going on in the investor base at the end of September surrounding either a change in friends and family or your employee discount policy. Just wondering if you could share what changed and when you begin to anniversary that and what impact that has for the second half of the year? And then if you could give us an update on footwear, is it still expected to be neutral for this year and then accretive next year?

Roger N. Farah - President and Chief Operating Officer

I'll answer the footwear question first. We are very excited about the results coming back from the Las Vegas show and I think your assessment of that is correct. So, we are feeling good about next year's impact. Two points on the employee discount on the friends and family. One, we added an employee discount to every full-time employee in the company. So that they can now shop in our stores to make sure that all the benefits and perks of the company are even across all levels of the organization, and that was a change we've been studying for several years. Up until that point, we had a discount policy but at a very limited basis, partly because of the number of employees we have and the relatively small number of stores we have that they could shop in. We were afraid that the large New York population all in discounts could swamp and blow holes in our inventory in a handful of stores. We don't have Macys Herald square or Bloomingdales 59th Street for employees to shop at. But we think we got to the point where that would be an appropriate decision, and so we made that. And that is a change that we have contemplated for a long time.

Separately, we did put friends and family back into the end of September that we had dropped last year when the business was running so strongly. And we did it in an effort to move through some of the fall goods that based on weather we are not selling as well, and we continue to look at that as an occasional way to move through goods if necessary.

Christine Chen - Needham and Company

And then Rugby, can you comment on how Rugby performed during the quarter, we were very excited to get one in San Francisco?

Roger N. Farah - President and Chief Operating Officer

Oh, boy. Have you been in that store yet?

Christine Chen - Needham and Company

Yes. We spent money.

Roger N. Farah - President and Chief Operating Officer

Good. We like that. The store we opened in San Francisco has done very well, it's sort of central casting for a Rugby location and we've had strong results since that store has been open. I think Rugby performed well given the same weather issues and the fact that the bulk of the stores are kind of a Northeast and Midwest in nature. But we continue to be very positive and enthusiastic about where that business can go and the reaction to the San Francisco store is encouraging.

Christine Chen - Needham and Company

Would you ever consider breaking out same-store sales for Rugby separately?

Roger N. Farah - President and Chief Operating Officer

Yes, I think when the comp number gets big enough to mean something. I think in its embryonic stage, it's not that meaningful given the small store count, but eventually will, sure.

Christine Chen - Needham and Company

Okay, great. Well, thank you. Good luck.

Roger N. Farah - President and Chief Operating Officer

Thank you very much.

Operator

And we'll go now to Kate McShane of Citigroup.

Kate McShane - Citigroup

Hi good morning.

Roger N. Farah - President and Chief Operating Officer

Good morning, Kate.

Kate McShane - Citigroup

Just one quick question. Most of them have been answered already. There were a few comments about the second quarter retail gross margins... second quarter retail gross margins being down?

Roger N. Farah - President and Chief Operating Officer

Yes.

Kate McShane - Citigroup

It was mentioned before that markdowns is the reason for the outlook for the rest of the year, but was it markdowns in the second quarter or was it more a product mix that weigh down gross margins for this category?

Roger N. Farah - President and Chief Operating Officer

The gross margin or the operating profit? Gross margin?

Kate McShane - Citigroup

Gross margin. Yes.

Tracey T. Travis - Chief Financial Officer

It was slightly related to markdowns. And again as Roger said before, with the more conservative comp outlook for retail from the back half of the year, if that materializes and obviously with that will become a greater level of markdown. So, that is what you are saying in the actual... for the second quarter as well as forecast.

Kate McShane - Citigroup

Okay. Thank you.

Roger N. Farah - President and Chief Operating Officer

Right operator. We will take one more question, if there is one.

Operator

Yes. Your last question comes from Jeff Klinefelter of Piper Jaffray.

Jeffrey Klinefelter - Piper Jaffray

Yes, good morning, thank you for this one last question. Just very briefly, Roger on your European and Asian businesses. Any quick thoughts on the pace of growth, the structure of that growth? We know it's very different in the mall based environment and even some of the street real estate here in the US. Are you looking at your own stores, are you looking at shop and department stores, any franchise opportunities to accelerate the real estate strategy a little bit in either or both of those global markets?

Roger N. Farah - President and Chief Operating Officer

Yes, it's a great question to ask and end on, because one of the realities is, each of those markets is different and they are different from each other. So, we are trying to operate with the philosophy that where we can own and control and run it ourselves, we will. And where we think we need partners, which we thought we did in Moscow, there are other parts of Eastern Europe, Istanbul and places like that we are looking at or made any partners, then we will look to work with somebody who has got a unique local expertise that can add value. And I think given the nature of the distribution in Europe being more specialty store, there are definitely high end specialty stores in markets [inaudible]. They have the real estate, they have the customer contacts, they've got the selling associates. And so we will look to do that in a way to accelerate our business since we've been so well received by the European market. Where you're talking about major commitments in markets like Paris, I think those are ones that we want to own and operate ourselves. I think in Asia, Asia is also a complex part of the world. The issues in Japan are quite different than China, which are quite different than Australia. So, each market brings with it a different strategy, but the headline is where we can own and operate it and think we can deliver the value to the customer and our shareholders, we will do it. If not we'll look to accelerate with the right kind of more creative business model.

And so, with that thank you all for staying on the call a little longer. I'm sorry we got cut off twice. I am not quite sure why that happened. Hope everybody goes out to the stores and shops aggressively. So, look forward to talking to you at the end of the third quarter in February. Thanks.

Operator

We appreciate your joining us for today's Polo Ralph Lauren second quarter fiscal year 2008 earnings conference call. Have a great day.

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