Ralph Lauren Management Discusses Q4 2012 Results - Earnings Call Transcript

May.22.12 | About: Polo Ralph (RL)

Ralph Lauren (NYSE:RL)

Q4 2012 Earnings Call

May 22, 2012 9:00 am ET

Executives

James Hurley - Director of Investor Relations

Roger N. Farah - President, Chief Operating Officer and Director

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

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

Analysts

Omar Saad - ISI Group Inc., Research Division

Adrianne Shapira - Goldman Sachs Group Inc., Research Division

Lizabeth Dunn - Macquarie Research

Christian Buss - Crédit Suisse AG, Research Division

Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division

Faye I. Landes - Consumer Edge Research, LLC

Barbara Wyckoff - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Operator

Good morning, and thank you for calling the Ralph Lauren's Fourth Quarter Fiscal 2012 Earnings Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions] Now for opening remarks and introductions, I will turn the conference over to Mr. James Hurley. Please go ahead, sir.

James Hurley

Good morning, and thank you for joining us on Ralph Lauren's fourth quarter and full year fiscal '12 conference call.

The agenda for today's call includes Roger Farah, our President and Chief Operating Officer, who will give you an overview of 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 '13. After that, we will open the call up for your questions, which we ask that you limit to one per caller.

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

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

Roger N. Farah

Thank you, Jim, and good morning, everyone. We are pleased to be reporting exceptional fourth quarter and full fiscal '12 results this morning. For the full year, our sales increased 21% to nearly $9 billion, reflecting -- $7 billion, excuse me, I'm already excited, reflecting excellent growth across our major channels of distribution and geographic regions.

We achieved record level operating earnings of over $1 billion, a function of our strong sales growth and our ability to leverage expenses even as we continue to make substantial investments to support our long-term growth objectives.

Diluted EPS rose 24% for the year, which is an acceleration from the low-teens compounded growth we delivered in the prior 3 years.

We ended fiscal '12 with $1.3 billion in cash and investments. In recognition of our strong performance, liquidity metrics and comfort with our long-term plans and projections, our Board of Directors recently authorized the doubling of our cash dividend to $1.60 a share annually. This is the third 100% increase in the quarterly cash dividend in as many years and is a clear demonstration of our company's commitment to enhance shareholder returns.

As strong as our operating performance was for fiscal 2012, let's not forget that we started the year facing some formidable headwinds. Every year has its own unique set of challenges at the onset. Some of that is purposeful and strategic and some of that are a function of external realities. At the beginning of fiscal '12, we were contending with considerable political and social uncertainty in Europe and the Middle East; the aftermath of the devastating earthquake and tsunami in Japan; and most significantly of all, we faced an unprecedented spike in our cost of goods.

We managed through these external factors thoughtfully while staying focused on our long-term growth objectives of expanding our international presence, extending our direct-to-customer reach including significant investments in global e-commerce, innovating and developing new product categories such as the launch of Denim & Supply and assuming the control of our home textile operations, investing in our global systems and infrastructure and attracting and developing world-class talents.

Our results confirm the extraordinary operational and managerial disciplines of our global teams, and they are reflective in the incredible appeal of the Ralph Lauren brand worldwide.

Our international sales rose 33% in 2012 and represented 36% of our revenue, which is 300 basis points above the prior year level and compares to just 20% 5 years ago.

Our European revenue was up 26%, an acceleration from the low-teens compounded growth rate we achieved over the prior 5 years. This is considerable progress for a period characterized by substantial macroeconomic challenges. And despite near-term caution, it's also a validation of growth opportunities we continue to see in Europe over the long term.

We made major progress transforming our operations and brand presence throughout Asia during the year. Our talented locally based teams are leveraging our more comprehensive and direct control over the regions and are implementing plans that, we believe, significantly benefit our company over the long term.

We have a unique opportunity to get this right. So we're being thoughtful and deliberate in the pacing and sequencing of our investments in people, systems, infrastructure, distribution and marketing. In some cases, this involves taking a step back in order to find a clearer, more profitable path to the future. This same approach has worked very well for us in the past in Europe and Japan and with the transition of many of our product licenses.

As most of you know, we embarked on a major brand repositioning effort in Greater China, closing 95 points of distribution, representing 60% of our network, during the year. We effectively reset our presence in the market, leaving us with what we believe is a more brand appropriate and a stronger foundation for growth.

Over the next 3 years, we expect to open approximately 60 new stores in Greater China, all in premier locations and adjacent to the world's leading luxury brands. 15 of those stores are in place for the back half of fiscal 2013 across many of the major cities including Beijing, Shanghai and Hong Kong.

The integration of our formally licensed South Korean operations was executed seamlessly during the year. And in a relatively short period of time, the local team has embraced our culture and operating procedures. Over the last year, we successfully closed and repositioned 30 concession shops, which is approximately 17% of our total Korean shop presence, and we are beginning to implement many of the strategic merchandise initiatives that have worked well for us in other parts of the world.

Today, more than half of our Asian revenues are generated in Japan. We started fiscal '12 with a cautious outlook for Japan in the aftermath of the devastating earthquake and tsunami. And while sales were challenging in the few weeks following disasters, they recovered quickly and gained momentum throughout the year. I believe the current strength of our Japanese operations is a function of resetting our presence there. This is a process that began in earnest 4 years ago and include the closing and relocating of shops and implementing strategic merchandise initiatives. Over the next several years, we intend to build on our strong foundation in Japan by relocating and adding concession shops in addition to growing our freestanding store network, which is very modest today.

It will take time and patience for us to substantially scale up our presence throughout Asia especially since we will not compromise on the real estate or brand positioning. Securing appropriate incremental distribution is a multiyear process especially with our standards of excellence. However, growing a more elevated local market presence should help sales to Asians and especially Chinese tourists visiting other parts of the world, particularly Europe and the United States.

In addition to opening new stores and concession shops, we made a significant investment in e-commerce last year. We launched international e-commerce for Ralph Lauren in France, Germany and several other French- and German-speaking countries, and we launched e-commerce for Club Monaco in the United States followed by Canada. We will continue to invest in this high-growth global channel with more dedicated marketing, more sophisticated technology and more focus on delivering a best-in-class customer experience.

For fiscal 2013, we intend to launch e-commerce in Japan in the second half of the year. We will also be doubling the capacity at RalphLauren.com, dedicated U.S. customer service and distribution center in order to support an expected doubling of the business from current levels.

Since an increasing portion of our anticipated long-term growth is expected to come from our retail segment and customers are shopping across channels more than ever, during fiscal 2013, we intend to make substantial investments in global customer relation management and customer intelligence platforms. We're in the early stages of development and investment, but we believe that over time, knowing and our servicing our customers better should support stronger sales and profits growth into the future.

We are already driving excellent productivity in our brick-and-mortar stores. The substantial strength of our retail comps, which rose 14% in 2012 on top of a double-digit gain in 2011 is the best evidence of this. In fact, the last 3 years, productivity per square foot at our directly operated retail concepts in the United States and Europe has accelerated. These productivity gains are important drivers of consistent improvement in our retail segment profitability even in the context of fairly turbulent market conditions.

We have made some meaningful changes in our management team and organizational structure in 2012. These changes provide more direct alignment with our key long-term growth objectives and should enable more powerful leverage with certain strategically important areas of our business. Jacki assumed the oversight of our global supply chain and logistics organization. Since she already managed our global merchandising and product development, Jacki now manages the full product life cycle from end-to-end, which was a real asset as we navigated through the raw materials inflation last year.

We also welcomed Daniel Lalonde to our organization in February as President of International with oversight of our operations outside of North America and in support of our ongoing focus on growing our international presence.

We also elevated Eric Korman to President of our Global Digital & E-Commerce operations, including leadership and oversight for our customer intelligence initiatives.

Fiscal '12 was a strong and productive year by any measure. With a fair amount of uncertainty at the onset, the team planned prudently but were positioned to seize market share opportunities as they emerged. And ultimately, our performance was better than we anticipated. Our results are an affirmation of the powerful diversity of our operating model across channel, regions and merchandise categories. They confirm that the strategies, as we execute them, continue to position us for compelling growth even as we contend with unforeseen external realities and make substantial reinvestments back into the business.

And while we enter fiscal '13 excited about our long-term global growth prospectus, we are faced with another set of unique challenges. Once again, some are purposeful and strategic and some are a function of the external factors. We are absolutely committed to our repositioning efforts in Asia, to our investment in global e-commerce and customer intelligence and to the continued upgrading of our systems and infrastructure. These commitments will likely weigh on our expenses especially in the first half of the year, but we believe they are critical to achieving our long-term objectives.

As we consider the current environment, we are concerned about near-term global economic trends, especially the uncertainty in Europe. Geopolitical issues are likely to dominate consumer psyche for some time whether it's adjusting to the new political realities emerging in Europe or the upcoming presidential elections here in the U.S.

We believe we are proactively positioning ourselves to navigate through these dynamics, planning prudently while remaining agile enough to capitalize on opportunities as they emerge. This approach has served us well in the past. Regardless of the near-term dynamics, we have a clear and compelling growth trajectory ahead of us. We are allocating talent and capital to our most compelling high-growth, high-return opportunities. And we intend to continue operating the business according to the clearly defined strategies and disciplined execution that are the hallmarks of our organization. The consistency of our approach has created significant shareholder value in the past, and we believe it can support additional value creation over the long term.

And with that, I turn the call over to Jacki.

Jackwyn L. Nemerov

Thank you, Roger, and good morning, everyone. Fiscal 2012 was a tremendous year for us. The allure of our brand and the impact of our merchandising initiatives drove strong global sales growth, including mid-teens expansion in our largest market, North America. This exceptional performance was supported by momentum in even our most core product categories where we have long dominated. We also saw excellent traction in the emerging accessories and denim categories.

The strength of our sales performance is supported by disciplined merchandising, planning and allocation strategies that, combined with our brand leadership, generated strong profitability for the company and our wholesale partners.

Our market share gains in men's and children's worldwide is a testament to our commitment to innovation. The constant evolution of our assortments to include a broader range of products and lifestyle sensitivity gives existing customers something fresh and attracts new customers to the world of Ralph Lauren.

In women's, the spring/summer Live in Color merchandising and marketing program for the Lauren Lifestyle brand is a beautiful and highly coordinated expression of a brand-right and trend-right statement. As a result, we are experiencing very strong performance across sportswear, dresses, accessories and footwear.

In fiscal 2012, we made a major commitment to growing our presence in the denim arena across multiple customer segments. For our most premium customers, we introduced Black Label denim for men in our own stores and select specialty stores worldwide. This not only added a compelling new dimension for the current Black Label customer, but it's also attracted a new customer to the brand. We look forward to building on our early success with additional points of global distribution in the near future.

In addition, we introduced Denim & Supply last fall. In the last 6 months of the year, we opened or converted hundreds of department store shop-in-shops and 4 freestanding stores worldwide. The scale of the launch demonstrates our commitment to both denim category and the younger, more trend-conscious consumer.

As we transition out of Polo Jeans, which is primarily in international markets, we continue to focus on building customer awareness for Denim & Supply around the world, leveraging the familiarity of the Ralph Lauren name while expressing the youthful and independent spirit of this new brand.

Handbags and small leather goods are another meaningful growth strategy for us. In the Ralph Lauren luxury segment, we are experiencing strong performance of our seasonal fashion styles, and at the same time, steadily building a stable of signature styles that we expect to be the backbone of this global opportunity.

The majority of our distribution is still limited to select Ralph Lauren stores worldwide, but given the reaction to the line, we have slowly expanded the distribution to include a handful of our existing shops at our most prestigious partners including Bergdorf Goodman, Saks Fifth Avenue and Harrods.

With our Lauren Lifestyle brand, we are in our second spring season with handbags and small leather goods, and the brand has achieved more than double the distribution it had at this time last year.

For those of you who are familiar with the category, I'm sure you've seen the evolution of the Lauren handbag and small leather goods assortment in a relatively short period of time. We believe that the quality and value proposition of the line is unmatched in the category. Customers have responded, and comp gains at existing locations have been strong.

With more focused attention on product development and procurement and with expanded distribution and dedicated advertising and marketing, we believe handbags and small leather goods will become a very meaningful contributor to our consolidated sales growth over the next few years and they are, of course, a key component of our growth plans in Asia.

As our businesses become more complex across brands, merchandise categories, distribution channels and geographies, we have put a great deal of emphasis on streamlining our global processes. A critical aspect of my expanded role is to bring continuity from design to merchandising, to manufacturing into supply chain and sales. Our optimized organizational structure provides a vantage point for me to leverage our unique strength in each of these disciplines in a more integrated and impactful way. It should also allow me to identify and develop new competencies that will enable us to be an even more agile organization.

A good example of how this optimized structure can add real value is how we navigated an unprecedented spike in raw materials last year. It was imperative for us to maintain the design aesthetic for which we are known and the quality of make and continuity of execution for which we are respected throughout the industry. In order to do so while maintaining the value proposition to the customer and protecting our profitability, we mobilized an extraordinary collaboration across our merchandising, buying, sourcing, production and logistics teams. We also leveraged our strong relationship with outside partners and customer organizations.

Our sales results and market share gains attest to the fact that customers appreciate the decisions we made, and we ended the year with only a modest decline in our gross profit margin, which we will experience in the second half a recovery in product margins.

If you have a feeling in the coming months of the Ralph Lauren brand is even more visible than usual, you will not be wrong. Beginning with Father's Day, we will be celebrating what we call the Sports of Summer as a proud sponsor of this summer's great global sporting events from the U.S. Open and British Open golf championships and the U.S. Open and Wimbledon tennis championships to Black Watch Polo and most notably, the London Olympic Games. Event-specific merchandise will highlight the heritage of each sport and the unique connection between the sensibility of the Ralph Lauren brand and these iconic athletic lifestyles.

We'll be supporting each program with advertising and marketing that reflects our multi-channel distribution. The Sports of Summer will reinforce our position as the preeminent sports lifestyle brand and create global visibility and a powerful halo for all Ralph Lauren merchandise around the world.

We are very proud of our progress in fiscal 2012 and are especially excited to be in the earliest stage of the development in some of the highest growth categories, which means that with as much as we've achieved, there's still so much more to come.

And with that, I'll turn the call over to Tracey.

Tracey Thomas Travis

Thank you, Jacki, and good morning, everyone. As Roger highlighted earlier, we reported excellent fourth quarter and full year operating results. We achieved this performance while managing extraordinary cost inflation and meaningful investment in our long-term growth initiatives, including the integration of formally licensed South Korea and home textile operations; the global fall launch of Denim & Supply; the continued expansion of our international e-commerce capabilities; and commencing a major repositioning of our distribution network in Greater China through exiting the balance of what amounts to 95 total shop and store locations. We ended the year with record sales and profits, and we achieved progress on all of our strategic initiatives.

With respect to the fourth quarter, consolidated net revenues were $1.6 billion, 14% greater than the prior year period and in line with our expectations. We achieved double-digit growth in all of our major geographies and across both our wholesale and retail segments in the quarter.

The gross profit margin of 57.1% was 30 basis points higher than the prior year period and better than we expected. The improvement to the prior year was primarily a function of favorable channel and product mix that more than offset the net impact of cost of goods inflation in the quarter.

Operating expenses rose 14% to $790 million in the quarter, and the operating expense margin of 48.7% was modestly above the prior year period. The increase in operating expenses was primarily a function of our sales growth and the mix of overall business growth, specifically higher retail segment growth, which maintains a higher expense structure than our other business segments.

We also had incremental costs associated with the assumption of our home textile operations and shifting in timing of some corporate expenses that we discussed with you on our third quarter conference call.

Restructuring charges of $10 million in the fourth quarter were also in line with the outlook we provided on the third quarter conference call. Excluding the restructuring charges, we would have achieved 50 basis points of operating expense leverage.

Our fourth quarter operating income of $136 million was 16% greater than the prior year period, and our operating margin rose 20 basis points to 8.4%, the net result of the higher gross profit margin and offset by the impact of the restructuring charges I mentioned.

Net income for the fourth quarter increased 29% to $94 million, and net income per diluted share rose 34% to $0.99. The growth in net income and diluted EPS was primarily a function of our higher operating income in addition to a lower effective tax rate in the fourth quarter of fiscal 2012 due to the favorable effect of discrete tax items.

Regarding our segment performance in the fourth quarter. Wholesale revenues rose 10% to $828 million, a result of continued momentum in North America and in Europe where the fourth quarter also benefited from the earlier shipment of certain spring/summer product. Our core apparel offering, particularly our men's and children's wear merchandise supported most of this growth worldwide. Incremental distribution for handbags in North America and footwear in Europe also contributed to the growth.

In North America, wholesale revenue growth also benefited from continued sales of new categories such as Denim & Supply and home textiles.

Additional points of distribution for Lauren in accessories were growth drivers in Europe in the quarter.

Wholesale operating income grew 12% to $153 million in the fourth quarter, and the wholesale operating margin rose 30 basis points to 18.5%.

The improvement in operating income and margin rate was primarily a result of stronger product margins that were partially offset by incremental expenses associated with new and emerging merchandise categories, particularly home textiles, Denim & Supply and the expansion of certain products in Europe.

Retail segment sales grew 19% to $752 million from the fourth quarter. We experienced broad-based momentum with particular strength at our factory stores globally, at concession shops in Japan and Korea and online.

Overall comp store sales increased 12% in the fourth quarter including 30% growth at RalphLauren.com, 5% expansion at Ralph Lauren stores, a 10% increase at our factory stores and 14% growth at Club Monaco stores. Comp growth across retail formats was primarily a function of higher transactions and higher average dollars per transaction. Trends at our Ralph Lauren stores in the U.S. and Europe remain the most challenging during the quarter as local customers continue to be somewhat restrained with their discretionary luxury apparel shopping. We did, however, experience strong growth in the Asia-Pacific region led by Japan and despite completing the closing of an additional 53 points of distribution as part of our China brand elevation and network repositioning efforts.

Performance at RalphLauren.com and our factory stores worldwide and the Club Monaco remained robust, a continuation of trends that have persisted for all of those concepts throughout the year and on top of strong comp growth in the fourth quarter of fiscal 2011.

Retail segment operating income of $44 million was an impressive 72% greater than the prior year period, and the retail operating margin improved 180 basis points to 5.9%.

The growth in retail operating income and the expansion in margin rate are primarily a result of strong comp store sales growth and improved profitability in each of our major geographic regions.

Licensing royalties of $43 million in the fourth quarter were 2% below the prior year period, reflecting a decline in home product licensing royalties due to assuming direct control over our home textile operations. The decline in licensing royalties contributed to a contraction in licensing operating income in the fourth quarter.

We ended the year with inventories up 20% from the prior year period. Approximately 7% of the increase is for merchandise to support revenue growth on comparable products, geographies and distribution. The remaining 13% of this increase is related to non-comp items included in inventory this year, primarily home textile, new stores and international e-commerce in addition to cost of goods inflation. There was no material foreign currency impact in the quarter.

We spent approximately $272 million in capital expenditures during the full fiscal year to support our retail store and wholesale shop development worldwide in addition to continued investment in our global systems and infrastructure. Approximately half of our capital spending for the year was to support our international growth efforts, and we continue to expect that an increasing portion of our capital spending will be allocated to international retail and development, particularly in Asia over the next several years.

Consistent with our commitment to return capital to shareholders, we purchased an aggregate 3.2 million shares of our Class A common stock for approximately $395 million during fiscal 2012. At the end of the fourth quarter, we had approximately $577 million remaining under our authorized share repurchase program. We also returned $74 million to shareholders in the form of dividends in fiscal 2012.

After funding all of our capital needs and working capital requirements and returning capital to shareholders, we ended the year with $1.3 billion in cash and investments, an increase from the $1.1 billion we ended fiscal 2011 with.

Fiscal 2012 was clearly a year of substantial growth and strategic progress for the company. We are very proud of our accomplishments, and as Ralph mentioned in this morning's press release, we are also very excited about what's on the horizon for us.

As we look to the future, we remain committed to reinvesting in the business in order to fund the growth initiatives that have consistently supported our strong financial results.

As you are already aware, a critical part of our success formula over the past several years has been our ability to balance our support of initiatives that represent critical growth areas for the future along with the exceptional daily execution of our core business operations. Our European operation, our footwear line, our Lauren apparel brand and RalphLauren.com are all examples of investments we made within the last decade and they represent meaningful contributors to our profit growth today.

In fiscal 2013, there are a few areas of incremental investment that are expected to become important contributors to our growth for the next decade. These include continued global e-commerce development with a more concerted focus on building capabilities in Asia in order to continue to support our customers' desire for channel shopping options. As Roger spoke about earlier, we are also building internal capabilities to institutionalize and maximize customer relationship management and intelligence on a global basis across all channels of our business.

We intend to invest incrementally in the Ralph Lauren brand via advertising and marketing, particularly as we support our newer merchandise categories and regions of the world and as we leverage our sponsorship of the world's premier sports events, most notably this summer's Olympics.

We will also continue to invest thoughtfully in operating systems and infrastructure that support our global growth aspirations.

While we enter fiscal 2013 on the heels of impressive multi-year momentum, in the last few months, we've experienced the effects of some remarkable sociopolitical upheaval and the onset of another recession throughout much of Europe as many consumer-based companies have already noted in their earlier press releases. Economic growth also appears to be slowing in other regions within Asia that have been important engines of global expansion for some time.

In the U.S., which remains our largest market, economic recovery remains uneven across many segments. A derivative effect of these macro dynamics is reflected in volatile foreign currency exchange rates, which have evolved into a material headwind for us this year. The impact of this uncertainty, combined with actions we have taken to proactively position ourselves to take advantage of future growth opportunities, does mean that we expect fiscal 2013's growth will be less robust than our stellar fiscal 2012.

With that as a backdrop, I'd like to review the financial outlook that we provided in this morning's press release. For the full year fiscal 2013 period, we currently expect revenues to increase at a mid-single-digit rate, with a low single-digit decline in wholesale revenues offset by a low double-digit increase in retail segment sales. Areas of our business that were the primary drivers of our strong revenue growth in fiscal 2012, including most of our retail formats worldwide and our core North American wholesale operations, are expected to provide continued momentum throughout fiscal 2013, but at a more modest rate given the economic climate.

And while Europe was an important contributor to our growth last year, we expect low single-digit expansion in the region this year as momentum in our retail segment in Europe is largely offset by a decline in wholesale volume due to the severity of the economic slowdown I discussed earlier.

We continue to transition certain Japanese wholesale license to directly controlled concessions, which is also expected to impact wholesale revenue growth throughout the year. And strategic changes we decided to make in our business such as the impact of closing 60% of our Greater China distribution network and the winding down of American Living, combined with unfavorable foreign currency effects that are expected to persist throughout the year, are estimated to suppress our consolidated sales growth for fiscal 2013 by approximately 4%.

Our full year operating margin is expected to be modestly above fiscal 2012's level as the recovery in gross profit margin is largely offset by an increase in operating expense rate to support strategic investment in our growth initiatives and also reflects the impact of our higher retail mix.

Our fiscal 2013 tax rate is planned at approximately 33%.

As I just mentioned, while we do expect to realize gross profit margin expansion this year, we don't expect meaningful improvement to begin until the fall season, which is our fiscal third quarter. This, coupled with the anticipated sequencing of our investment in our strategic initiatives, means that fiscal 2013 will evolve as a story of 2 halves for us. We expect to experience operating margin pressure in the first half of the year followed by operating margin expansion in the second half of the year.

For the first quarter, we expect consolidated net revenues to grow at a low single-digit rate as flat to slightly lower wholesale revenues are offset by high single-digit growth at our retail segment.

Our outlook includes continued broad-based strength in North America and at most of our retail formats worldwide that is moderated by a decline in European wholesale volume, some of which is a function of a shift in the timing of certain spring/summer shipments that benefited the fourth quarter of fiscal 2012.

Revenue growth will also be impacted by reduced distribution in Greater China. Foreign currency effects are estimated to negatively impact consolidated sales growth by approximately 2% to 3% in the first quarter, primarily due to weakness of the euro.

Operating margin for the first quarter of fiscal 2013 is expected to be down approximately 250 to 300 basis points from the prior year period. The decline in operating margin is primarily attributable to an anticipated de-leveraging of operating expenses due to relatively flat wholesale revenues and lower concession sales in Greater China where we are still absorbing the cost of our infrastructure despite the network contraction.

We are also incurring investments in the strategic initiatives I outlined earlier. Our first quarter gross profit margin is expected to be pressured at many of our retail concepts as they are still cycling through the cost of goods inflation that impacted our wholesale segment in the latter part of fiscal 2012.

We intend to spend approximately $360 million in capital expenditures in fiscal 2013 to support our retail and wholesale growth initiatives and the consistent upgrading of our global systems and infrastructures. Approximately 1/3 of our capital spend is allocated to our distribution network development in Asia, mostly concentrated on Greater China.

While we are once again entering our new fiscal year amidst a lot of uncertainty, we are taking proactive measures to navigate through these challenges in a manner that is both Ralph Lauren appropriate and that supports our future growth objectives. Whatever the near-term headwinds might be, they in no way alter our enthusiasm for or our focus on our long-term goals. We are very confident in the relevance of our strategy and the strong growing appeal and glowing appeal of the Ralph Lauren brand across many merchandise categories worldwide, which should enable us to continue to deliver meaningful profit growth over the long term.

And with that, we will take your questions. Operator, would you assist us with that now?

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Omar Saad with ISI Group.

Omar Saad - ISI Group Inc., Research Division

I was hoping, Roger and team, you guys could give a little bit more detail on kind of what you're seeing in Europe and how you're thinking about it, near term and long term, especially in the context of several other high-profile companies reporting a significant slowdown there and your guidance for flat to down wholesale growth, how you're thinking about the consumer spending environment, the macro, your opportunity kind of to offset that through retail -- own retail growth, additional distribution on the wholesale side either doors and/or categories and then how you're thinking about the tourism piece as well. Is there a benefit there as the brand continues to grow globally?

Roger N. Farah

Omar, I know we ran a little long with our "end of the year presentation", but that's a pretty long question. Let me see if I can talk about Europe broadly and then hit on some of the specifics you touched on. If I miss some of them, I apologize. We reported extraordinary results last year, 26%, and we really saw that across all strategies: retail, wholesale, across almost all of the countries. We had double-digit growth in France, Germany, Spain, the U.K., Scandinavia and others. I think what you've heard from us today and what you've heard from other people is that the ongoing overhang of economic uncertainties in Europe, which have been now prominent in the press, pretty hot and heavy since the middle of last fall straight through the spring are weighing on the customer's mind. And I think that's true of the local customers by country and to some degree, that's been masked by the tourist business in many of the key capitals. Depending on the brands that you're talking about, if you have a high penetration of Chinese tourists visiting the major capitals of Paris or London or Switzerland or Milan, that has inflated, I think, the European results. We don't happen to have, based on our small penetration in China, we don't happen to have that kind of Chinese tourists running through our European operations. While we do get a high degree of tourism, our major tourists are coming from the Middle East or Russia where we have strong presences, and then they find us in other European cities. So we think over time as we build our Chinese presence and we talked today about the 60 stores we plan on opening over the next 3 years, 15 in the back half of this year, we think our growing presence there at a luxury level will, in fact, begin to develop the tourist business in Europe and the United States that others are enjoying. So our results to date have been primarily based on the local markets and/or tourism from other countries. We're planning, based on our relationships with our key wholesale distribution, cautiously. They want to be tight with their inventory. They want to try to improve their turns. There's a great deal of uncertainty in the southern tier of Europe, particularly Spain. Italy has particular problems with their specialty distribution. The specialty channel there has gone through several turbulent years. And then the northern parts of Europe whether it's Germany, France, Scandinavia or the U.K. held up better last year and we believe will hold up better into the new year. But I think the constant overhang of economic concern and then what the corrections will be to manage that set of issues I think is what's dragging that market into a slower growth environment. So while we're planning growth, I think Tracey said it very clearly, we're just planning it more conservatively than we've done in the past. Against that, we continue to invest in e-commerce growth in that market. We launched in the U.K., France, Germany and we'll continue to look for that channel to grow. Quite frankly, the factory channel continues to perform well in Europe. But in our Ralph Lauren stores, we're seeing a softness that I think is a reflection of the local customer being cautious with their shopping in the near term. None of this dissuades us from our long-term ambitions in Europe. In '08 and '09, we took market share during a very difficult time. My hope is that we'll do that again, but we're very committed to the long-term distribution of Ralph Lauren in Europe and we'll continue for the right real estate. Maybe this economic environment creates opportunities either to get better access to property or maybe at a better price, or perhaps some cases, to buy. So I think being nimble and being light on our feet in Europe will give us our long-term objective. The question is what happens over the near term. Clearly, the euro has suffered. So for us, that's an impact to us as it continues to kind of gyrate in the high 1.20s, low 1.30s. And we'll just see how that plays out as the year goes on.

Operator

[Operator Instructions] We'll go next to Adrianne Shapira with Goldman Sachs.

Adrianne Shapira - Goldman Sachs Group Inc., Research Division

Roger, you've proven that you do better when you're in control. We saw that in the '08, '09 downturn. And so with this clear ongoing shift to retail, my question is really twofold: one, as it relates to sales, help us think about how you're planning with wholesale down low singles versus retail up low doubles, how much of that is self-imposed as you shift to more retail; and then the second part of the question, how it relates to profitability. As you mentioned, productivity per square foot is accelerating. So how do we think about this mix shift impacting overall profitability?

Roger N. Farah

Yes, Adrianne, I mean we've operated under the belief consistent with what you just said that whether it's controlling a license or controlling a region that our commitment to doing it right over the long term has paid off. The shift in distribution channel from wholesale to retail or concession shops, primarily in Asia to owned, I think has served us well in terms of communicating to the customer in its purest way. And so I think you saw comp stores last year that were extraordinary at 14%, on top of the year before that of 10% and years and years of compounding have given us very high sales productivity. That, in turn, has given us very strong profitability in retail. Those of you who have followed our story for a long time know that we started from a very low point and we've made a pretty amazing progress. Our point of view is that in Asia particularly, where there's not an appropriate or robust distribution channel, our future depends on our ability to run our shop-in-shops or run direct retail. Now the margins in retail, even at the high levels we're at today where our hopes of getting them higher are not quite as high as our wholesale margins, which are extraordinary. The inventories will turn slower. There'll be capital involved, but we believe over the long haul, our ability to take our message directly to the customer in brick-and-mortar or e-commerce really is the foundation of our future growth. The other issue, which I'll just mention, and I think you all know this, but as cost of goods begin to improve and inbound receipts begin to return to a more normalized level, we're very pleased with our decision a year ago not to change the quality and not to change our sourcing strategy, and I think the customer reacted to that quality. But those inbound receipts come in and turn faster in our wholesale segment where the margins will begin to recover sooner. In retail where the inventory turns slower, it's a combination of the on hand and the new receipts. And as they turn through the year, the margin will begin to rise. So the rate of margin improvement cycles through different at wholesale and retail because it's not the inbound receipt that's driving margin. It's the margin on what you sell. So if the wholesale goods are turning 5 or 6 or 7x a year and retail's turning 2 or 3 or 4 depending on the format, the wholesale margins will recover faster followed by the retail margin. So that's an important nuance to the way the year lays out.

Operator

We'll go next to Liz Dunn with Macquarie.

Lizabeth Dunn - Macquarie Research

I guess I'm wondering about your sort of awareness with the Chinese customer, the consumer. Is the reason that you don't have as much of that business in Europe just that the business hasn't been positioned well there? And what -- other than just distribution in China and getting the right locations, what other steps are you taking to increase your awareness with the Chinese consumer?

Roger N. Farah

Okay, Liz. The reality is that we had a licensee that was based in Hong Kong for many, many years. And with that, his focus was on Hong Kong, Taiwan, Singapore, Malaysia and had very little distribution in Ralph Lauren products in China proper. What he did have was positioned as a casual sportswear brand primarily for men in B- and C-type locations. So our brand awareness over the last 10 or 15 years and the quality impression of our brand is very different than the way we see it here in the United States and Europe. So as those customers travel, they're looking for the brands that they have learned over the last 10 or 15 years signify quality and heritage, and their knowledge of our brand is much lower and incomplete. So we believe that not only will that grow business in China as we have the right kind of stores, but as we expose the customer through the store experiences, through marketing or through future Internet activities, they will then look for the brand when they travel around the world. Today, many of the luxury brands are reporting European sales of 25%, 30% or 40% to Chinese. Our Chinese tourist business in Europe is less than 2%. So we believe that we'll get the multiplier effect as we push out in China over the next 3 to 5 years.

Operator

We'll go next to Christian Buss with Credit Suisse.

Christian Buss - Crédit Suisse AG, Research Division

Yes, I was wondering if you could talk a little bit about the cadence of incremental investments over the balance of the year? Can you help us understand how you're planning to roll out some of the investments that you're talking about now?

Roger N. Farah

Okay, well, let me break the investments into a couple buckets. The primary international investments are being made in Asia and I think I said earlier that the bulk of the 15 stores that are being opened in China will be in the back end. That doesn't mean we're not spending money in the front half. So the opening date is really the culmination of the spending. So in that case, back-side openings will be front-side spending. The ongoing investments in the Internet are really 12 months of the year whether that's distribution and logistics here in the United States or the ramp-up in building as we go to a full launch in Japan. So that's spending in advance of the revenue will be for the first 9 months. Separately, the ongoing investments in technology, infrastructure and systems is really a 12-month cycle and should be evenly spread through the year. So I guess the sum of all that is more investment spending in the early part of the year culminating with openings or launching in the fall, and we get the revenue in the back half of the year.

Operator

We'll go next to Jeff Klinefelter with Piper Jaffray.

Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division

Just curious, a little bit more color on the domestic business, the wholesale business, given the strong spring we had in the industry, the apparent interest in color, which seems to play very well into your brand -- your brands. Wondering, puts and takes kind of, Roger, by category. You have some new categories that are gaining distribution. What about kind of the organic or heritage categories? Any movement in the number of doors that you're in or floor space would be helpful.

Roger N. Farah

Okay, Jeff. I would say that you're correct. We've had a very strong domestic performance with our wholesale partners at their retail. And putting aside the way Easter falls within our fiscal reporting because, as you know, the March, April time period for us is split between fourth quarter and first quarter. For most other people, not. We've enjoyed our strongest businesses this spring in our heritage and core businesses like men's. That's had a very strong spring. The children's business has had a strong spring. Lauren has begun to perform better in sportswear, but we've had a very strong business in dresses. Jacki talked about accessory and footwear. So we're really seeing broad-based strength in the performance of our products at retail. The domestic retailer continues to operate with a mindset towards conservatism in terms of inventory and turn, but nevertheless, we've had a strong spring. As you mentioned, color plays well for us as a brand. And I really do believe, based on our last couple of experiences with Olympic products, it will be a very exciting lead up through the August Olympics. So we think domestically, we are well positioned in the core product categories. Denim & Supply, it's the first spring we're in the market. We have added to the distribution of our handbag and accessory businesses, so those are beginning to roll out. I think Jacki quoted a doubling of the doors in our handbag and accessories from this time last year. We're also beginning to see traction in our ownership of the home business. I think our partnerships with the department stores and their confidence in the way we've taken licenses and repositioned them, I think people are beginning to get excited about the opportunities at home here in the domestic market. So lots of good things in the core, and the new businesses are beginning to get traction and door count.

Operator

We'll go next to Faye Landes with Consumer Edge Research.

Faye I. Landes - Consumer Edge Research, LLC

Two quick questions, one more technical. But the first as follows: first of all, Roger, you've spoken before of volatility in -- relative volatility quarter-to-quarter -- week-to-week, rather, in your U.S. retail especially in gateway cities and in flagship stores. You've talked about that in the last several calls. I was hoping you could address that. And then the more technical question is it appears that you've bought back few, if any, shares in this quarter and I was hoping you could address that given your general enthusiasm for the share buyback.

Roger N. Farah

Okay, Faye. I'll start with the week-to-week. The predictability of the trend lines really post the recession has been different than probably prerecession. The consumer mentality, I think, in the last 2 years while in aggregate has been spectacular, I think they're more careful about their spending. I think they're more selective. I think they're looking for great product, but maybe the great piece or the great item or the great accessory. I do believe they're buying close to the need. So some of the weather patterns has affected the business. It was spectacularly warm earlier in the year and then it got cold, and I think the customer has exhibited a sensitivity to that, that we probably didn't see before. The other part of your question is the gateway cities where the United States has seen important tourist activities, where Florida was particularly hurt during the recession. It has come back and some of that has been fueled by the tremendous tourist business from the Brazilians. When we track by country where our international tourist business is here in the United States, the Brazilians rank very, very high, not only in Florida but in New York. So we see tourism not only affecting the travel patterns and the shopping in Europe. We see it here in the United States. The more technical part of your question, which is our strategy to return excess capital to the shareholder. As we've talked about in the past, Tracey and I have said our first priority is investing back into our business if we think we can get a return, and I think we've done that well over the years and we expect to do that into the new year and beyond. Our second alternative, assuming we've done that properly, is to take excess cash and return it to shareholders either through dividends or share buyback. And I think you've seen, as our cash flows have grown over the last couple years, we've done that pretty aggressively. I think today's announcement to double the dividend again, third year in a row we've doubled the dividend, I think, reinforces our commitment to return money to shareholders in the most efficient way we think is appropriate. And I think you'll see in fiscal '13 a combination of this more aggressive dividend and share repurchase going back to the shareholder if we don't have a proper use for it. We're clearly holding a lot of cash in our balance sheet. We have very little debt. We did that proactively through the recession. At this point, with early reads on interest rates staying low for a long time, my guess is we'll look to return excess capital to the shareholders both ways throughout the year.

Operator

We'll take our final question from Barbara Wyckoff with CLSA.

Barbara Wyckoff - Credit Agricole Securities (USA) Inc., Research Division

Can you talk about the accessory penetration, where can it go over time? And also opportunities in categories outside of handbags and small leather goods.

Roger N. Farah

Okay, Barbara. We don't quote percentages, but I would say that whether we're talking about the Ralph Lauren level of accessories or whether we're talking about a Lauren or Polo level of accessories, the company is putting a lot of time, energy and money to distort those categories. We've clearly developed multiple tiers and multiple channels for our apparel, but we're very focused on the right distribution in product and accessories. Then the question always becomes how do you to define accessories? Does that include eyewear, and does that include watches and jewelry and handbags, small leather goods, belts, scarves? Interestingly, because I know, Barbara, you go in the store up the street on 72nd, we devoted the entire main floor to our accessory area, which for us is a future direction but does not read the same way in many of our former stores. Some of the real strong categories there have been the belts, scarves and footwear, things that in the past don't seem to get the same kind of attention that perhaps handbags and small leather goods go to. So we're finding the customer has a real appetite for Ralph's design sensibility across all product categories. And, of course, we're in the early stages of developing watches, which, if you travel the world, has been one of the strongest growth categories for luxury companies everywhere. And while that's a long process to do that, we have some spectacular watches that are beginning to get traction with the largest single store in the world for us in watches being Macau. And I think that gives you a sense of the upside to some of these product categories as we reinforce that with our commitment to the Asian market.

So with that, operator, I apologize. We've run a little late. It was the end of year, and I thought it deserved a little extra attention in the prepared remarks. Just a spectacular year on every level. We started the year with some concerns as we do again this year, but it was a spectacular year. I think the team really maximized the opportunity in the Ralph Lauren brand in the Ralph Lauren way, and we're excited about the new year. So we thank you for your interest and your attention. We look forward to updating you in August. Thank you.

Operator

And that concludes today's conference. We thank you for your participation.

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