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 [Farah On Core Luxury Customers]

  • Q4 dynamics also suggest something of an inflection point of change in the marketplace. Worldwide, we are seeing our core luxury customers returning to the stores with an openness to spend. [In the US] the aspirational customer remains cautious, and has not returned to the stores in any way. While [our customers] are not spending at pre-recession levels, and they can be focused on value, they do recognize that product availability is limited and there is no price resistance on unique or novel items.
  • We also saw things get progressively better every month during Q4, and the rebound has been most pronounced in our women’s products
  • Urban and tourist destinations are outperforming stores that cater to more regional or local customers
  • As we’ve highlighted in the past, our performance in Europe has been spectacular over the last 10 years when we’ve grown revenues 5-fold, and the momentum continues to be with us
  • While aggregate wholesale shipments were down, we experienced progressive improvement from Q3, which reflects a more stable environment among our wholesale customers worldwide

[On Asia Expansion]

  • Given our commitment to the Asian expansion, we are studying how and when it makes sense for us to launch e-commerce capabilities there
  • In Asia, our focus and primary concentration will be in 2 countries, Japan and China
  • [China] As you know, we spent much of FY2010 building a world-class organization of over 700 employees and putting in a new infrastructure to support the transformational growth our company expects in the long term.

 

US Wholesale

  • Should be fueled by share gains and new product initiatives, such as Handbags.
  • The Lauren handbag product will initially be available in approximately 150 of the best North America department stores, and select e-commerce sites beginning in August, with additional distribution already being planned for holiday and beyond.
  • Key price points range from 150 to $400 and the introduction will be supported with product specific advertising both at the national level, and in conjunction with our various wholesale partners

 

Retail/Consumer Direct

  • With only 20 directly operated and 8 licensed Ralph Lauren stores and 24 factory stores, there is clearly room to expand our direct to consumer reach throughout Europe
  • And an exciting new evolution on our European growth strategy this year is e-commerce.  Based on the success of ralphlauren.com in the United States, and the growing importance of this channel worldwide, we intend to launch e-commerce capabilities in Europe, beginning with the U.K. this fall
  • While our European e-commerce initiative will be managed in-market, we are leveraging our ralphlauren.com team in the United States and our existing technology and distribution partners to help ensure a successful launch
  • Although the investment we are making will be dilutive in the near term, we are excited about the long term sales and profit potential of international e-commerce

Other Geographic Callouts

  • In Europe, geographic trends at our Ralph Lauren stores remain consistent with those we have articulated over the last several quarters with the U.K. and Scandinavia remaining strong, and some improvement in Italy
  • European factory stores have maintained their broad based strength across regions
  • In Japan, comp trends at our Omotesando flagship store and at our factory stores were quite robust, and clearly outperformed the broader retail market
  • Our concession shop performance was also noteworthy, particularly for our men’s products

 

Headwinds. [NOTE, SINCE RL’S LAST EPS RELEASE, THE FX GAP RL REFERS TO IN THE COMMENTS BELOW HAS NARROWED BY 50%. THEY’LL NEED TO BACK OFF THIS STATEMENT TO AN EXTENT].

  • [FX] Comparing yesterday’s 1.22 euro per dollar rate to the average 1.4 rate we experienced in FY2010, which is a 13% decline, there is obviously a substantial translation impact
  • Based on our geographic sales mix, we currently anticipate approximately 250 to 300BPS of negative currency translation on our sales, a portion of which will flow through to profits for the full year of FY2011 period, with more pronounced pressure related to exchange rates in the back half of the year
  • There is an additional and approximately equivalent amount of unfavorable transaction exchange rate impact on our operating profits in FY2011
  • [Sourcing] Another profit headwind is higher sourcing costs, which we are beginning to experience with rising raw material, freight and labor expenses, as well as tightened factory and freight capacity in our global supply chain
  • Historically, we have generally been successful in our efforts to contain cost of goods inflation, although we appear to be up against the perfect storm in the back half of FY2011, particularly with our spring 2011 merchandise deliveries

 

OFFICIAL GUIDANCE

Financial/Accounting Notes:

  • “Before I begin the segment highlights for the quarter, as you read in this morning’s press release, we are now reporting our Japan concession shop sales and profits, which had previously been captured in our wholesale segment, in our retail segment.”
  • As a reminder, our revenue growth outlook for FY2011 is for a 52 week period and compares with FY2010’s 53 week period

Net Revenues

  • For Q1 FY2011, we currently expect consolidated net revenues to increase at a low double digit rate
  • Our expectations are based on low double digit growth in global wholesale shipments with increases across all major regions and high single digit comps, which now include our Japanese concession shop locations on a comparable basis

Operating Margin

  • Our operating margin for Q1 is expected to be modestly above the 11.4% achieved in the prior year period, with gross margin improvement being mostly offset by higher operating expense deleverage related to the continued investment in our various strategic growth initiatives across geographies, distribution channels and emerging product categories

Retail Segment

  • For the full year FY2011 period, we expect consolidated revenues to increase at a mid single digit rate, led by our retail segment, and mitigated by a low double digit decline in licensing revenues, which clearly reflects the impact of our assuming more direct control over certain product categories and geographies
  • We currently expect to achieve a low double digit operating margin rate in FY2011, the net effect of gross margin pressure that is more back half weighted and a modest deleveraging of operating expenses that is more front half weighted, as we are currently forecasting a modest leveraging of our operating expenses in H2
  • Our FY2011 tax rate is expected to be 34%
  • Again as a reminder, our FY2009 and FY2010 tax rates were advantaged by the favorable resolution of certain nonrecurring discrete tax items that we do not expect to have this year.

Capital Spending Plan

  • The higher level of investment that is flowing through the P&L is also reflected in our capital spending plans
  • We are planning approximately 280mm in Capex in FY2011 to support our retail, wholesale and infrastructure investments and initiatives that Roger and I have outlined on this call today
  • About half of our capital is allocated for 15 to 20 new stores and shops; including a new 30,000 square foot flagship location to showcase our women’s and home collection merchandise across from the Rhinelander Mansion on 72nd and Madison Avenue in New York City