Polo Ralph Lauren Corp. F1Q09 (Qtr. End 06/30/08) Earnings Call Transcript

Aug. 6.08 | About: Polo Ralph (RL)

Polo Ralph Lauren Corp. (NYSE:RL)

Q1 FY09 Earnings Call

August 6, 2008, 09:00 AM ET

Executives

James Hurley - IR

Roger N. Farah - President and COO

Tracey T. Travis - CFO

Analysts

Omar Saad - Credit Suisse

Liz Dunn - Thomas Weisel Partners

Robert S. Drbul - Lehman Brothers

Robby Ohmes - Merrill Lynch

Brad Stephens - Morgan Keegan

DavidGlick - Buckingham Research

Adrianne Shapira - Goldman Sachs

Stephanie Wissink - Piper Jaffray

Christine Chen - Needham & Company

Kate McShane - Citigroup

Operator

Good morning and thank you for the calling the Polo Ralph Lauren First Quarter Fiscal 2009 Earnings Conference Call. As a reminder today's conference is being recorded. All lines will be in a listen-only function during the presentation today. At the end of the presentation we will conduct a question and answer session at which time please limit yourself to one question. Instructions will be given at that time.

Now, for opening remarks and introduction, I will turn the conference over to Mr. James Hurley, Please go ahead Sir,

James Hurley - Investor Relations

Good morning and thank you for joining us on Polo Ralph Lauren's first quarter of fiscal 2009 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 quarter and comment on our broader strategic initiatives. And Tracey Travis, our Chief Financial Officer will provide operational and financial highlights from the first quarter in addition to reviewing our expectations for fiscal 2009. After that we will open up the call for your questions which we'd like you to limit to one per caller.

As you know, we'll be making some forward-looking comments today including our financial outlook. The principle risks 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 - President and Chief Operating Officer

Thank you Jim and good morning everyone. We're pleased to be reporting first quarter results that exceeded our expectations. We delivered a 4% revenue growth with a solid retail comp of 4%. And our diluted earnings per share increased 13%, compared to last year. While the first quarter sales growth was in line expectations, the margin performance was better than we had anticipated.

I'm proud of the results we achieved considering the fact that the domestic retail environment continues to be challenging. Our first quarter reflects the successful benefits of our long term strategic initiatives. Primarily, our commitment to new merchandised development and product innovation, our ongoing attempts to expand our direct to consumer, and our growing international presence.

This multi-prong strategy is designed to diversify our businesses, reduce our exposure to anyone reason of the world or channel of distribution and to give us more direct control over our brands. We believe our strategy positions us well for the future. At the same time, we have to focus on our short-term execution, particularly in uncertain environments. I believe our results over the last few quarters demonstrates that we are performing on a very high level.

Our inventories are very well managed as they are below last year. And at the same time our retail sell-through rates have been strong and our profit margins have benefited as a result. Our cash flows have grown with more direct control we now have over our businesses, and we have made the right decisions in order to deliver a very strong balance sheet, with large growing cash balances and very little debt.

Our entire management team has supported and delivered on these key short-term operating priorities. Because of this cross functional discipline, we are comfortable pursuing our long term initiatives. Beginning with our international expansion efforts, our brand sales throughout Europe and Asia continue to grow at a double-digit rate, which is consistent with the trends we've experienced over the last several quarters.

Sales in high profile department stores such as Galleries Lafayette, Harrods or Selfridges are particularly strong, aided by the iconic styling of our spring summer merchandise. We have also seen continued strength in our men's, women's and kids businesses across the international platforms. In Japan, we continue to see encouraging results from our remerchandising efforts at target doors. And we are refining our understanding of how to tier our products for specific points of sale.

As you read our press release this morning, we recently took direct control of our childrenswear and golf apparel businesses in Japan, from our former licensee, Naigai, who will continue to hold the licence for our Polo branded hosiery sales in Japan. This is a major building block as we re-position our brand in this important market.

We now directly control product categories that account for approximately 75% of our wholesale volume in Japan. With respect to our direct to consumer strategy, the comp store momentum at our directly operated stores is being complimented by new store opening and sustained double-digit gains at ralphlauren.com. I believe it's worth noting that our comps that remain healthy even as the overall domestic retail environment has deteriorated. Something I attribute to the desirability of our brand and products and our growing skills as a retail organization.

As you know we have a few very large store projects in progress in Paris and New York City. We expect these stores will reset the bar for the luxury shopping experience and in important brand statements for us that will likely resonate on a global level. We are also on schedule to launch rugby.com in the next couple of weeks in time for the back-to-school season. And we will leverage the customer fulfilment centre we recently completed for ralphlauren.com to service this exciting new avenue of growth for Rugby.

Moving on to the last of our long-term strategic initiatives, our commitment to new merchandise development and product innovation. New products have been a critical driver of consumer demand for us and the momentum behind our Polo, Black Label and Purple Label brands remain strong worldwide. We will be opening new points of distribution for our luxury products in the fall season in cities such as Paris and Istanbul.

Domestically, the growth in our emerging product categories such as footwear, dresses and our expanding Black Label men's sportswear merchandise has helped to offset lower shipments for our core men's, women's and kid's products. While the impact of lower shipments were planned for, our retail sell-throughs during the quarter were very strong. This is particularly through of our men's and children's products.

I believe that our performance is not only a testimony of the strength and vitality of our brands, but also a function of the fact that we are innovating, executing and merchandising at a higher and better level than ever before. Speaking of innovation, we continue to deliver new exciting products to J.C. Penney's American Living. In early July, we shipped young men's assortments in time to capitalize in the back-to-school season.

And we remain very excited about the growth potential for American Living. In addition to assuming more direction control over the design production and management of our various products over the years, our global commitment to investing in advertising, marketing and public relations has helped to elevate our brand and increase its desirability around the world.

In the past few years, we've begun sponsoring high profile sporting events such as Wimbledon and the U.S. Open. We are very excited as our role as an official outfitter of the U.S. Olympic and Paralympic teams at the Beijing Summer Olympics which begin in two days. Much of the product we have provided for the athlete is available to purchase in many of our stores. The outfits for the opening ceremony are consistent with our luxury brand and are true to our American heritage.

And I hope you will be among the estimated 4 billion people who tune into watch the opening ceremony to witness the unveiling of Ralph's iconic designs for yourself. Well, our new fiscal year is off to a good start. We continue to have a conservative view of the domestic retail environment. That said, we are raising our outlook for fiscal 2009 which Tracey will walk you through a little later. In the context of a challenging macro environment, we will to manage our businesses diligently.

I believe we are well positioned for the upcoming fall and holiday seasons. We have planned our inventories conservatively for the balance of the year and the initial read on sales of early fall merchandise is encouraging. Of course, we'll also state a course investing in our long term strategic growth initiatives as our past efforts have proven to be an excellent way for us to create value for our shareholders.

The strength of our management team cannot go unrecognized as it is their ability to execute against our various strategies that allow us to deliver for our shareholders. The fact that they are able to do so in the context of such a challenging business condition is a true testimony to their skills and Ralph and I would like to thank them for their hard work.

Now I'd like to turn the call over to Tracey to discuss the financial and operating highlights of the first quarter as well as our updated outlook for fiscal 2009.

Tracey T. Travis - Chief Financial Officer

Thank you, Roger and good morning everyone. First, I would like to highlight for you the drivers of our first quarter net income in earnings per share performance. Then I'll take you to our revised guidance for fiscal 2009. For the first quarter we achieved consolidated net revenues of $1.1 billion, an increase of 4% over the prior year's period. Higher sales were achieved as a result of strong international sale, particularly, in Europe and growth in our global retail segment, where consolidated comps rose 3.9% during the quarter and that was on top of a 7.6% increase in the prior year period.

Our ralphlauren.com sales also grew double-digit. Shipments of our newly launched American Living brand in the U.S., were more than offset, by lower shipments of our core domestic wholesale products. Approximately, half of our total revenue growth was due to the favourable Euro exchange rate.

Our gross profit dollar increased 8% to $638 million, and our gross profit rate increased 200 basis points to 57.3% in the first quarter, compared to 55.3% during the same period last year. The growth in gross profit dollars and the expansion in gross profit rate reflect both are growth in sales as well as the benefit of the strong currency effect related to our international sales. We did also have a small gross profit rate benefit, compared to last year due to the drop off of the purchase accounting impact from last year's acquisition.

First quarter operating expenses increased 10% to $492 million, compared to $446 in the first quarter of fiscal 2008. Operating expenses as a percent of revenues were 44.2%, 250 basis points higher than last year. The higher operating expenses primarily reflect the impact of the newly required and emerging businesses as well as higher occupancy expenses for our open stores. Operating income for the first quarter was a $147 million, approximately equal to the prior year period. And our operating margin for the quarter was 13.2%, 40 basis points below that of the first quarter of fiscal 2008.

Declining off in the operating margin rate reflects the higher operating expenses associated with business expansion that were partially offset by the higher gross margin rates.

Net income for the first quarter of fiscal 2009 increased 8% to $95 million and net income per diluted share increased 13% to $0.93. The increase in our net income principally relates to a higher gross profit margin that was offset by increased operating expenses that I just discussed and to an effective tax-rate of 35% in the first quarter of fiscal 2009, compared to a 39% rate in the comparable period last year.

The lower effective tax rate for the first quarter was primarily result of the lower income taxes, principally relating to favorable statutory law changes. Favorable geographic income mix as well as lower permanent differences. And now I'd like to spend a few minutes providing more insight into our segment highlights for the quarter.

Regarding our wholesale segment, sales of $575 million were essentially flat with those in the first quarter of Fiscal 2008. Revenues from American Living and strength in European sales were offset by lower domestic shipments of our core men's, women's and childrenswear products. The lower shipments reflect a planned reduction in orders from domestic wholesale account, which came as a result of the sharp slowdown in retail business trends last fall. They also compared strong orders in the year earlier period.

Our sell-throughs and wholesaler accounts were strong as Roger mentioned earlier. Consistent with the trend of the last few quarters, menswear remained stronger that womenswear. Although, womenswear also performed well in the quarter. In menswear, knits and shorts were the best performing categories, and customers responded particularly well for the color and novelty items in our assortment.

Our first quarter wholesale operating income of a $107 million was flat with the prior year per and our reported operating margin was 18.7%, 10 basis points below the prior year's operating margin. For our retail group, first quarter sales increased 9% to $492 million. Overall comp store sales increased 3.9% reflecting an increase of 5.3% in Ralph Lauren stores, 3.3% at factory stores and 2.9% at Club Monaco stores. RalphLauren.com sales were up 20% over the comparable period.

In general, stores that benefited from a high level of international tourism such as our New York City stores, outperformed locations that are more relying on U.S. consumers. Importantly, we are entering the full selling season with lean current inventory.

We opened seven new stores during the quarter, including two new store locations in East Hampton , New York. Retail operating income was $67 million in the quarter, 6% higher than the $64 million of retail operating income in the first quarter of fiscal 2008. The growth in retail operating income was a result of revenue growth as well as a reduction in the purchase accounting effects associated with the all medium minority interest acquisition that negatively affected retail operating income in the first quarter of last year. The retail operating margin decline 50 basis point to 13.6% in the first quarter of fiscal 2009, primarily reflecting increased occupancy cost cause related to future store openings and higher selling related expenses.

Licensing royalties for the quarter were $47 million, up 1% compared to the prior year, as a growth in our domestic Polo men's underwear and Chaps royalties and revenues from new American Living product licenses offset a decline in home licensing royalties.

Operating income for our licensing segment, increased to 11% to $24 million in first quarter fiscal 2009, compared to $22 million in the prior you period. The growth in licensing operating income was due to higher licensing royalties from Chaps and American Living that were partially offset by a declining from royalties as mentioned earlier.

As Roger mentioned, we ended the first quarter in excellent financial conditions and with a very strong balance sheet. We had $711 million dollars in cash, cash equivalents and short-term investments compared to $626 million at the end of fiscal 2008. Net of debt, we had $241 million in cash and short-term investments at end of the first quarter, which compares favorably with a $53 million net debt position at the end of fiscal 2008. And during the first quarter, we did pay back short term loan used to finance the Impact 21 and the New Polo Japan acquisitions last year.

We ended the first quarter with inventory down 6% from the same period in the prior year. The year-over-year decline in inventory compares to our 4% sales growth in the quarter. We are committed to proactively managing inventory in a disciplined manner as we have demonstrated in the past several quarters, particularly in this difficult environment.

With respect to other balance sheet items, we achieved a return on equity of 19% for the last 12 months ending with the first quarter of fiscal 2009. And our return on investment was 28%. We spent approximately $56 million on capital expenditures during the first quarter of fiscal 2009 to support new retail stores, also shop installations and other infrastructure investments.

Now that we are in our second quarter of fiscal 2009, we know the domestic retail environment remains challenging for us and for others. Uncertain times are likely to persist as expectations for consumer spending in the U.S. and some other... major international markets continue to be scale back.

As you well aware, we are... will be managing to a reduced level of domestic wholesale orders for most of fiscal 2009. And this pull back does compare to recently strong orders throughout most of fiscal 2008, especially in the first half of the year. Wholesale accounts continue to extremely conservative with their inventory which is totally understandable in this environment as we are conservative about inventory.

Well our first quarter results were better than our original expectations we are maintaining a conservative view of the entire domestic retail environment. In addition, as Roger mentioned earlier, we have acquired certain assets inclusive of inventory for childrenswear in golf apparel in Japan from our former licensee, Naigai. We expect to incur approximately $0.8 to $0.10 of earning dilution inclusive of non-cash purchase price amortization related to assuming more direct control of our childrenswear in golf apparel distribution in the U.S. We did acquire certain assets related to the acquisition of the transaction. We invested approximately 3 billion yen or $28 million to acquire these assets and those assets did include primarily inventory as well as some other assets.

And all of that detail will be reflected in the 10-Q that we'll file tomorrow. As you saw in this morning's press release, we are now guiding to full year fiscal 2009 diluted EPS of $4 to $4.10. Our top-line guidance of a low to mid-single digit increase in that revenues remains unchanged. Our full year guidance also reflects the dilutive impact, related to the Naigai assets or acquisitions.

For the second quarter, our guidance is for net revenue growth of mid to high single digit and an operating margin that is up 50 to 100 basis points, compared to a year earlier period.

And with that I will conclude the company's remarks and we will open the call up for question and answer. Operator could you assist is with that please.

Question And Answer

Operator

Thank you. [Operator Instructions]. Additionally, please limit your self to one question. And we'll take our first question from Omar Saad with Credit Suisse.

Omar Saad - Credit Suisse

Thanks good morning.

Roger N. Farah - President and Chief Operating Officer

Good morning.

Omar Saad - Credit Suisse

Roger and Tracey, wanted to see if you could elaborate on some of the comments on Europe and Asia and what you are seeing out there in these markets. We know the U.S. has slowed considerably over the last several quarters and probably will remain slow for sometime, but there is a big fear in the market place and some of these other market that have been favorite places to be are really going to experience kind of... become part of this global slowdown, are you seeing that in your business or do you are really kind of at a stage where your penetration is still so low that there is enough market share to be taken to offset kind of an overall macro pressure in these markets.

Roger N. Farah - President and Chief Operating Officer

Well, Omar it's a good question. I think its been floating out there for the last three months whether the rest of the world will begin to experience some of what the U.S. has been going through for the better part of a year. Our business which is today is not small in Europe. We are over a $1 billion dollars. And have broadly distributed across high-end specialty, our own stores and key department stores continues to perform very well.

And I think we said earlier, first quarter results were double digit and were forecasting the balance of the year to continue to be strong. If I broke that apart a little bit, there are differences by country. Certainly, Spain is feeling a pull back in what had been a very robust construction business. And there is a lot of building and a lot of speculation there that's coming back down. I think that is affecting the economy.

But in most of the other Western European countries, our business continues to be strong both for the locals as well as their tourist business. Their port tourist business may be down in terms of U.S. visitors. But they are certainly getting heavy dose of Eastern Europeans, people from the Middle East and clearly the Russians who are in fact in Europe and buying aggressively.

So I think overall, there is some concern in Spain. There is talk that may be England would begin to catch some of the cold we have. But as we sit here today we have not seen that manifest itself in our business.

In Asia, and I think Asia needs to be split between Japan and the rest of the region. The market place in Japan is softer it has been for sometime. I'm not quite sure the issues there are literally the same ones affecting the U.S. It is not really a housing crisis and some of the other things that we're all dealing with. But I do believe the economy in Japan is softer and I have noted as others have reported strength around the world, Japan continues to be more challenging.

With that said, our initiatives there in the first year of owning the business have been one of testing whether we could in fact with new product remerchandising, retraining of sales people, whether in fact we could move the performance of our brand in the market place. At the moment our distribution in Japan is primarily department store, so we are merchandising into a declining traffic pattern that's been going on for a while in Japan.

In the doors that we've focused on for spring, we saw a 22% trend change in both men's and women's. So we were very encouraged with our ability to reverse the trends in key locations in businesses, we've been in for 30 years in that market. So that definitely is encouraging. The rest of the Asian market continues to be quite strong, whether it's China, Hong Kong, Singapore, Malaysia, Australia all of those markets.

While their financial stock markets have come down, actually the consumer has continued to spend. So it's kind of a different answer for different parts of the world, but so far so good for us.

Omar Saad - Credit Suisse

Okay. Great that's my one question. Thanks.

Operator

Thank you. Our next question comes from Liz Dunn with Thomas Weisel.

Liz Dunn - Thomas Weisel Partners

Hi, good morning. Congratulations on a good quarter. My question relates to the wholesale business. You talked about the domestic wholesale sell-in being down and I think that was in line with your plan. Could you talk about that relative to your expectations was it in line with your expectations. And then you talked about the American Living sell-in, but could you discuss that in terms of sell-through versus your own expectations?

Roger N. Farah - President and Chief Operating Officer

Sure. Well, Liz I think when business started to soften last early fall from not many retailers domestically and then continued on to what many people said was the most difficult Christmas in a long time. I think the buys that were made for fall and holiday last year were bought six and 12 months in advance with higher expectations of sell-through.

So as the business results began to playing down, there definitely was too much inventory in the marketplace which caused the lot of promoting. For the most part, early spring at that point had already been in place. So you really went from fall to holiday to spring with most retailers optimistic about selling trends and then the disappointment that followed, created this big gap of excess inventory in the marketplace.

But first, we will buy that retailers, we are able to correct started with the summer buys and into fall, and it continued into holiday, where most of the major retailers have taken a position of more conservative inventory position holding tight at open to buy. In anticipation of tougher sales trends, I think the belief is that may be the natural margins will have a chance to rise and the sell-through would improve.

With that knowledge, we did partner with all of our key retailers for a more carefully planned summer fall, holiday buy, and so the plan that Tracey talked about came to fruition. So we weren't surprised, we had no excess goods. It was mutually agreed upon that we would sell-in less in hopes of improving the sell-through. In fact that's what happened. Polo business in men's was quite strong results, compared to other men's brands or in fact the total stores were significantly up. So the natural margins and the natural sell-throughs were quite good. It was on the back of very strong product. I don't think it's just, we lower the denominator it's that the product itself sold through well. I like the retailers came through clean. And we are now great position heading into fall and the early read on fall products continues to be strong.

That it also true in the kids business where we sold in less, sell-through were better. People came through it in a cleaner way and heading in to back-to-school, I think there is some optimism. I think women's business which for some time has been softest. I would say had some ups and downs through the season with some strong deliveries then may be some weaker ones.

But nevertheless, with the reduced buys, there is less clearance and the margins come up. As we head into fall, the actual deliveries of Lauren in the store now have experienced very nice sell-throughs in the last two or three weeks. So we sit here feeling a little more optimistic. The next year down which is really Chaps at Kohl's where our business has been outstanding, I think you have heard, Kohl's talked about that.

Our business there men's, women's, kids, home continues to run well ahead of plan and I think in our third year with Chaps, we really understand that customer and are getting the kind of sell-through that everybody feels good about even in the tough environment.

American Living, which as you all know we started shipping in February this year. So we have gone though a spring. Summer at this point and we have begun to deliver fall and back-to-school. I think we had some very strong business then we had some others that that we have learned from. And are now next week showing spring next year to J.C. Penny and I think that will incorporate a lot of our learning's.

One of the recent merchandise categories we delivered to Penny's which is young men's and it was a new initiative has actually done rather well in what is traditionally a strong part of their business back-to-school. So really across the board, I think we planned for and executed and gotten the expected results in a difficult environment.

Liz Dunn - Thomas Weisel Partners

Okay, great. Congrats, again. Thanks.

Roger N. Farah - President and Chief Operating Officer

Thanks, Liz.

Operator

Thank you. Our next question comes from Bob Drbul with Lehman Brothers.

Robert S. Drbul - Lehman Brothers

Hi, good morning.

Roger N. Farah - President and Chief Operating Officer

Hi, Bob.

Robert S. Drbul - Lehman Brothers

Just some questions around the U.S. retail business. I guess when you think about, you said you saw some encouraging results the last few weeks and how are you planning for tourism? How much has tourism really helped your business? Can you, maybe quantify that, how strong was New York, versus the rest of the U.S.? And just how are you planning your comps exactly here in the domestic business for the remainder of the year?

Roger N. Farah - President and Chief Operating Officer

Okay Bob, well overall as we said at the beginning of the year, we are sticking with a plan in retail that's about 3% comp. So that's about half the run-rate that we have experienced over the last five or six years when we performed pretty consistently in a five, six, seven comp. So we're planning or buying for, we are expensing for a comp rate of about three. As you can see the first quarter was in line or slightly better than that, so far so good.

Within that there are definite pockets of the strength and weakness. I am sure you realized the Midwest, Detroit is not particularly strong market right now. There are for sure issues in Florida or California. But there also great strengths, New York for sure is being benefited by tourism. I think it started around the holiday shopping season. It's continued through the spring and the summer. We've seen strong business in all of our channels of distribution in New York whether it's Bloomingdales or Bergdorf's, or Saks Fifth Avenue or our own stores. So we are getting a benefit of that.

One little statistic that might interest you, at Christmas time the foreign credit cards sales in the New York were up 45%. So that does give you some sense of the weak dollar and the strong international currencies and the impact it's having.

While we did not plan the business that way in the holiday, I think our merchandise allocation by door is now anticipating or the balance of the year. There will be great strength in certain stores and markets and in some other places, some weaknesses. So I think we have a chance to pre-plan the flow of product, a little better and respond to that and that's what we are doing.

Robert S. Drbul - Lehman Brothers

Thank you very much.

Roger N. Farah - President and Chief Operating Officer

Okay Bob.

Operator

Our next question comes from Robby Ohmes with Merrill Lynch.

Robby Ohmes - Merrill Lynch

Oh, thanks. Excuse me. I think my one question here actually for Tracey. Tracey, can you just remind us with your earnings guidance, why we should be looking for flat to down earnings for fiscal back half of this year may be tie into that the sourcing costs outlook. Thanks.

Tracey T. Travis - Chief Financial Officer

I think that was two questions Robby, but that's okay. I think certainly as we talked about, we are very cautious as it relates to the sort fourth remaining three quarters. Then as we look at the environment, we did have a strong first quarter. We talked about Naigai and the impact of that which is dilutive. We did have some expenses Robby that we are planned for the first quarter that will be probably happening later in the year. So that will impact us a little bit in the later quarters. But I think primarily it is... we are conservative in terms of looking at the remainder of the year and very cautious. That is the best explanation that I can give you at this time, as well as the Naigai impact for us.

And it relates to sourcing. I mean all of our expectations on sourcing have been baked into our forecast. So we have a tremendous sourcing team. We have done all of our negotiations as it relates to the sourcing in the process now. Obviously, we've placed our price for spring. All of our negotiations have been planned. And have incorporated all of the costing impacts related to all of the... everything going as it relates to China and all the negotiations that our sourcing team has done with the factories over there.

So I mean they have done a tremendous job of negotiating the best cost possible, but we are constantly revaluating and negotiating and getting the best price that we possibly can obviously for all of our goods and Roger, don't you want to add anything to it --

Roger N. Farah - President and Chief Operating Officer

Yes, I would only say to what Tracey is saying, that cost stability is really made up of variety of things that includes, raw materials, that includes the manufacturing, and it certainly includes the, what I call transportation. So, each one of those pieces has different variables to manage. And at this point, we are locked in with our costing through the balance of this year. We feel very strongly about what our team has been able to do on all three of those. And so at least from a margin point of view with the inventory position we have and we continue to mange to the improved sell through and our pricing expectations we feel pretty good about the margin opportunity through the balance of the year.

And I would only add Robby to the guidance questions, you probably start a long time you know it's rare for us to increase our guidance after first quarter. It is the smallest quarter of the year. So there is no doubt the bulk of the year is ahead of us with fall selling, holiday selling and spring.

So we'll see what happens and I think when we update in November which is more traditionally our time for mid-year guidance changes, at this point the first quarter was so robust that even in spite of the diluted impact of Niagara [ph] we felt the need to move it up somewhat, but I think we want to see fall sells and want to see the holiday begins to unfold and then we'll update more completely in November.

Robby Ohmes - Merrill Lynch

Great. Thank you very much.

Roger N. Farah - President and Chief Operating Officer

Hey.

Tracey T. Travis - Chief Financial Officer

Thank you.

Operator

Thank you. Next we'll take our next question from Brad Stephens with Morgan Keegan.

Brad Stephens - Morgan Keegan

Hey guys, good morning. Roger can you drill that on Europe a little bit more for us. I guess I looked at your K the last couple of years. In 2007 it's probably a 2350 wholesale door, last year you had 2075. So the number of doors going down but your European sales keep going to the roof. So could you give some more color that?

Roger N. Farah - President and Chief Operating Officer

Yes, that a very good question and very astute of you. Not this similar to the United States strategy several years ago. We are closing doors in Europe, that we think are no longer representative of the quality of the brand and the positioning we want to be in.

Many of those specialty stores in smaller markets could not get the brand and representation we were looking for and were buying it in a limited way that we think under shot market opportunity. So we have been on our campaign to reduce the bottom tier of the distribution and increase the volume with those stores that we think can give the brand its full complement whether its men's, women's, whether it's luxury or whether it's at the other price points.

So quite frankly, our business in Europe has done from a $180 million when we bought it back to over $1 billion and we have less points of distribution today than we have back then. Every one of those is a conscious decision to reduce those stores that we don't think our brand appropriate any more.

Brad Stephens - Morgan Keegan

If I can just ask a quick follow up then, as you reduced stores, how do we think about growth going forward. Is it taking more into Europe that footwear more space in these doors?

Roger N. Farah - President and Chief Operating Officer

Well I think the announcement we made last quarter is that Lauren is going to Europe. It will be part of spring shipping commitments I think we have about a 100 major doors that we'll be opening Lauren in the back half of our fiscal year.

We're very excited the retailers are very excited. Overtime other merchandise categories like footwear and other accessory categories for sure will be a source of great growth. I also believe model brand stores, standalone stores will be an important part of our growth strategy in Europe and the success we've had Moscow and the ongoing demand for our product in those emerging markets is enormous.

So when you look at the Middle-East, you look at the Eastern Europe, European countries, you look at Russia. I think we're going to be seeing growth for many years to come beyond the traditional cities like London or Paris. So I think growth is going to come in many forms and that allows us to cut out the bottom tier of distribution.

Brad Stephens - Morgan Keegan

All right thanks guys, good luck.

Roger N. Farah - President and Chief Operating Officer

Thank you.

Operator

Our next question comes from David Glick with Buckingham Research.

DavidGlick - Buckingham Research

Good morning and congratulations on the quarter.

Roger N. Farah - President and Chief Operating Officer

Thank you, David.

DavidGlick - Buckingham Research

Roger, just a follow up on the wholesale business. Given the improved inventory situation at your retail partners in the U.S and the better sell through particularly in men's and kids it sounds like some early songs of life in women's. Are there opportunities for may be higher replenishment orders or reorders may be selling less to half price. As we head into the second half of the calendar year.

And if you could give us the sense of the flavour of conversations, I'm sure you're talking to your retail partners about plans for spring '09 and given sort of a change in the dynamic. The performance of their business with you could we see a kind of a reversal of the trends that you saw in the first quarter in your domestic wholesale business?

Roger N. Farah - President and Chief Operating Officer

Okay David, let me respond with... again you guys are on your game this morning because your questions are insightful. We are partnering very aggressively right now with our key retailers about replenishment. I think it's fair to say that when the initial orders for new product is approached more conservatively and the mandate goes out to manage inventories more carefully; one of the things that inadvertently gets hurt is replenishment.

And I don't think there is a store in the world who wouldn't want to be in stock on replenishment items that really go out at high full price margins and really with reduced traffic you want to make sure you get the best service to the customer. So I think this spring there is a recognition of that one of the by products we're trying to manage inventory down has been a fall off in the commitment to replenishment.

And I think many of our retail partners in concert with Jackie and her team are working very hard on reinvigorating efforts this fall and into next year to be more diligent about staying in stock on key items. There is no reason to walk a customer on a basic and I think that's been a casualty of the inventory management initiatives.

So I do believe and I think you're right there is an opportunity throughout the fall into next year to see the replenishment business which is margin rich to begin to move up in terms of priorities and I think we'll help drive sales for both of us. I expect that to be an important part of the sales repair activities.

In terms of the spring plans for next year, we are not only deep into the planning we've had many of the buys committed to and I think while our business has performed well margins have come up and I think there is a lot of excitement of what we're doing. I believe stores are going to continue to be conservative in their buying till they see their retail trends begin to move higher.

I think the uncertainty and the inability to plan with clarity sales performances for next spring are going to have the retailers continue to operate in a conservative manner. Of course, we'll begin to lap that so on a comparable basis it won't be the same as it is now and through the next nine months.

DavidGlick - Buckingham Research

So it's fair to say you could see stabilization at least in your wholesale business ex-some of your growth initiatives like American Living and certainly the lift you're getting from Europe?

Roger N. Farah - President and Chief Operating Officer

Could be.

DavidGlick - Buckingham Research

Great. Thanks a lot good luck.

Roger N. Farah - President and Chief Operating Officer

Okay.

Operator

Thank you. Our next question comes from Adrianne Shapira with Goldman Sachs.

Adrianne Shapira - Goldman Sachs

Thank you, Roger what really impressive in the quarter obviously that big swing in margin expectations you are looking for that to be down. The 400 basis points and came in down only 40 basis points could you just walk us through and perhaps reconstruct where the big surprises were relative to your plan?

Roger N. Farah - President and Chief Operating Officer

Sure, it's a good question. I would say that the biggest change relative to our plan and forecast was really the merchandise margins and because in this quarter which is April, May and June and the back part of the quarter June, really carries the burden for the cost of spring margin settlements and inventory clean ups.

We really came through the spring in early summer in much better condition which allowed a 200 basis point improvement in margin which was not what we planned for. So certainly that was a major driver of the change versus the early guidance.

I think while expenses were up, we also did a good job of managing expenses in the quarter. We are continuing to fund new projects, new initiatives but I think the company really like inventory, like our balance sheet took a hard line on expenses. And so we picked up somewhere to plan and I think that's the bulk of the delta.

Adrianne Shapira - Goldman Sachs

Thanks, and just to make sure it sounds like it's more a function of an inventory management, you've been talking about rather than the currency benefits or sort of mix across geographies, is that fair?

Roger N. Farah - President and Chief Operating Officer

That's correct.

Adrianne Shapira - Goldman Sachs

Thank you.

Roger N. Farah - President and Chief Operating Officer

Okay.

Operator

Thank you. Our next question comes from Jeff Klinefelter with Piper Jaffray.

Stephanie Wissink - Piper Jaffray

Hi good morning this is Stephanie Wissink for Jeff, congrats on a solid quarter.

Roger N. Farah - President and Chief Operating Officer

Thank you, Stephanie.

Stephanie Wissink - Piper Jaffray

I would just like to follow up on one question Roger that you made regarding Europe, could you just talk more about the productivity per door efforts that you have, maybe speaking to the retail price difference in Europe and Asia versus the U.S and then your comment about mono-brand doors, just curious if those would be directly operated or if you're considering franchise and license agreements. Thanks.

Roger N. Farah - President and Chief Operating Officer

Okay. Well interestingly and on the productivity in Europe, whether it's our own doors which we obviously know exactly and you all know how productive we are in our stores in the U.S. The productivity of our stores in Europe is 50% greater, so whatever we're doing here in the United States which is about a $1000 a foot, we're doing $1,500 a foot in Europe, so when you get it right, because of the locations, the traffic patterns, the appetite for our product and our controlled distribution strategies, we are getting a 50% improvement in sell through.

So when we take that to the wholesale world and we look at a Harry's [ph] and Selfridge in a city like London, we have almost tripled the business in Harry's in the last four years and that's a result of an intensive effort on our European team to re-merchandise it, trade it up, make it more luxury as well as rebuild and expanding our presentations in all categories, men's, women's and children's.

So I think that what we're seeing is when we get it right, both presentation and assortments and service levels. All of the international markets including Japan, Asia and Europe have an ability to distort their performance with the product. The sell through are higher the full price sell through are higher the margins are better and there's last left there is less left over for clearance which keeps the brand elevated.

So it's a good news story when executed properly and that's what we're trying to take out to the rest of the world. I think generally productivity in the United States is lower. So to get an increase you have to work harder. And we are trying to balance that on a worldwide basis. Okay Stephanie?

Stephanie Wissink - Piper Jaffray

Yes. Could you just speak a little bit a very quickly to the mono-brand that door comment, would those be directly or through franchise?

Roger N. Farah - President and Chief Operating Officer

Sorry I forgot. Yes at the moment we have got both own stores and licensed stores certain territories like the Middle-East are licensed, the store we have in Moscow but the two stores and the third point of distribution are licensed.

We look by market and we try to make a determination both from a brand point of view and an economic point of view. What is the right approach, we think over time there is tremendous opportunity to have a more complete network of mono-brand stores which would be indistinguishable to the customer whether it's owned licensed or joint-ventured.

We would look to control the store design, we would look to control the location, merchandising presentations, how the products are presented and sold. So it should be indistinguishable from the customer. But we do think that's one of opportunities where we've done that well, when open Milan, we certainly think Paris will be like that, it's not only does a lot of business, it elevates the level of the brand in that market and the wholesale accounts get a halo effect as well. So it's really a multi-pronged strategy for Europe that has been time-tested and we're just going to continue to be aggressive while rolling it out.

Stephanie Wissink - Piper Jaffray

Thank you, that's very clear. Good luck guys.

Roger N. Farah - President and Chief Operating Officer

Thank you.

Operator

And our next question comes from Christine Chen from of Needham & Company.

Christine Chen - Needham & Company

Thank you. Congratulations on another good quarter in a very difficult environment.

Roger N. Farah - President and Chief Operating Officer

Thank you Christine.

Christine Chen - Needham & Company

Wanted to follow up on, you mentioned that your guidance reflected the dilution from the acquisition in Japan. Can you help us think about how we should be modelling it out in the quarters? Or is it evenly spread out, is it more concentrated in one particular quarter in the back half of the year? Thank you.

Tracey T. Travis - Chief Financial Officer

You can think if it is evenly spread out.

Christine Chen - Needham & Company

Okay, thank you very much.

Operator

And we will now take our final question from Kate McShane with Citigroup.

Kate McShane - Citigroup

Hi, thank you very much. Most of my questions have been answered. I was under the impression with the SG&A guidance you gave last quarter, that a lot of cost is coming from your real estate projects. Did anything change with your expectations for these projects during the quarter and are some of those costs coming later in the year?

Roger N. Farah - President and Chief Operating Officer

No, the projects that we articulated earlier continued to track as planned, but we did have expense savings in other parts of the base... of our expense base. So those projects continue unchanged, they stay on track but we did have some other expense opportunities thus we are trying that manage carefully and in what is an uncertain time.

Kate McShane - Citigroup

Thank you.

Roger N. Farah - President and Chief Operating Officer

Okay, with that I'll thank you all for participating. We look forward to updating you in November with a more complete thought on fiscal '09, but obviously we're off to a good start and I congratulate everybody at Polo for their hard work in this environment. Thank you very much.

Operator

Thank you. That does conclude today's conference. Thank you for your participation and have a great day.

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