Polo Ralph Lauren Corporation (RL) - Description of business


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Company Description
Conduct and Ethics for all directors, officers, and employees, our Code of Ethics for Principal Executive Officers and Senior Financial Officers, and information concerning our directors, Committees of the Board, including Committee charters, and transactions in Polo securities by directors and executive officers, is available at our website under the captions “Corporate Governance” and “SEC Filings”. Paper copies of these filings and corporate governance documents are available to stockholders without charge by written request to Investor Relations, Polo Ralph Lauren Corporation, 650 Madison Avenue, New York, New York 10022.

In this Form 10-K, references to “Polo,” “ourselves,” “we,” “our,” “us” and the “Company” refer to Polo Ralph Lauren Corporation and its subsidiaries, unless the context requires otherwise. Due to the collaborative and ongoing nature of our relationships with our licensees, such licensees are sometimes referred to in this Form 10-K as “licensing alliances.” Our fiscal year ends on the Saturday nearest to March 31. All references to “Fiscal 2006” represent the 52-week fiscal year ended April 1, 2006. All references to “Fiscal 2005” represent the 52-week fiscal year ended April 2, 2005. All references to “Fiscal 2004” represent the 53-week year ended April 3, 2004.

PART I

Item 1.    Business

General

Polo Ralph Lauren Corporation is a global leader in the design, marketing and distribution of premium lifestyle products. We believe that our global reach, breadth of product and multi-channel distribution is unique among luxury and apparel companies. We operate in three distinct but integrated segments: wholesale, retail and licensing. During the past five years, we have continued to develop our business model, expand our vertically integrated retail segment, reposition our wholesale segment, and maintain a strong licensing segment despite the acquisition of several of our key licensed businesses. The following tables show our net revenues and operating profit (excluding unallocated corporate expenses, legal and restructuring charges) by segment for the last three fiscal years:

                         
    Fiscal Years Ended  
    April 1,
    April 2,
    April 3,
 
    2006     2005     2004  
    (millions)  
 
Net revenues:
                       
Wholesale
  $ 1,942.5     $ 1,712.1     $ 1,210.4  
Retail
    1,558.6       1,348.6       1,170.5  
Licensing
    245.2       244.7       268.8  
                         
    $ 3,746.3     $ 3,305.4     $ 2,649.7  
                         


                         
    Fiscal Years Ended  
    April 1,
    April 2,
    April 3,
 
    2006     2005     2004  
    (millions)  
 
Operating Income:
                       
Wholesale
  $ 398.3     $ 299.7     $ 143.7  
Retail
    140.0       82.8       55.7  
Licensing
    153.5       159.5       191.6  
                         
      691.8       542.0       390.4  
                         
Less:
                       
Unallocated corporate expenses
    (159.1 )     (133.8 )     (99.9 )
Unallocated legal and restructuring charges
    (16.1 )     (108.3 )     (19.6 )
                         
    $ 516.6     $ 299.7     $ 270.9  
                         


Our net revenues by geographic region for the last three years are shown in the tables below. Note 20 to our Consolidated Financial Statements included in this Annual Report on Form 10-K contains additional segment and geographic area information.

                         
    Fiscal Year Ended  
    April 1,
    April 2,
    April 3,
 
Net revenues by geographic area
  2006     2005     2004  
    (millions)  
 
United States and Canada
  $ 3,032.3     $ 2,587.2     $ 2,073.5  
Europe
    627.7       579.2       464.1  
Other regions
    86.3       139.0       112.1  
                         
Net revenues
  $ 3,746.3     $ 3,305.4     $ 2,649.7  
                         


We continue to invest in our business. In the past five years, we have invested approximately $1.4 billion for the acquisition of several key licensed businesses and capital improvements, all fundamentally through strong operating cash flow. We intend to continue to execute our long-term strategy of expanding our accessories and other product offerings, growing our specialty retail store base, and expanding our presence internationally.

Seasonality of Business

Our business is affected by seasonal trends, with greater wholesale segment sales in our second and fourth quarters and greater retail segment sales in our second and third quarters. These trends result primarily from the timing of seasonal wholesale shipments and key vacation travel and holiday shopping periods in the retail segment. As a result of the growth in our retail operations and other changes in our business, historical quarterly operating trends and working capital requirements may not be indicative of future performances. In addition, fluctuations in sales and operating income in any fiscal quarter may be affected by, among other things, the timing of seasonal wholesale shipments and other events affecting retail sales.

Recent Developments

On March 30, 2006 we opened a wholly-owned Ralph Lauren flagship store in the Omotesando shopping district in Tokyo. The Omotesando store is expected to raise our luxury image in Japan, where our products are also sold in five licensee owned specialty stores and over 300 department store shops-within-shops.

On February 27, 2006, we signed a ten year license agreement with Luxottica Group, S.p.A., (“Luxottica”) effective January 1, 2007, for the design, production and worldwide distribution of prescription frames and sunglasses under the Polo Ralph Lauren brand. The agreement provides for Luxottica’s payment of approximately $200 million on the effective date, representing the discounted net present value of the guaranteed minimum royalties and design service payments over the life of the agreement. The approximate $200 million prepayment is nonrefundable, except with respect to certain breaches of the agreement by the company, in which case only the unearned portion of the prepayment would be required to be prepaid. The agreement will replace our current eyewear license with Safilo S.p.A., which expires on December 31, 2006.

In Fiscal 2006, we acquired several businesses that source and sell products bearing our trademarks under license in order to control key product categories and realize the benefits of vertical integration. On February 3, 2006, we acquired all of the issued and outstanding shares of capital stock of Sun Apparel, Inc., our licensee for men’s and women’s casual apparel and sportswear in the United States and Canada (the “Polo Jeans Business”), from Jones Apparel Group, Inc. and certain of its subsidiaries (“Jones”). The acquisition cost was approximately $260 million in cash, including $5 million of transaction costs, and the purchase price is subject to certain post-closing adjustments. Note 5 to our consolidated financial statements sets forth how the purchase price has been preliminary allocated among the acquired assets. In addition, simultaneous with the transaction, we settled all claims under our litigation with Jones relating to the termination on December 31, 2003 of the United States and Canadian license and design agreements for the sale of products under the “Lauren” trademark for a cost of $100 million. Other than inventory, Jones retained the right to all working capital balances at the date of closing. We have entered into a transition services agreement with Jones to provide a variety of operational, financial and information systems services over a period of six to twelve months. We intend to expand our denim and casual sportswear business by introducing new product offerings under our Lauren brand for women and Polo brand for men while continuing to distribute Polo Jeans — branded products internationally.

On July 15, 2005, we acquired from Reebok International Ltd. (“Reebok”) all of the issued and outstanding shares of capital stock of Ralph Lauren Footwear Co., Inc., our global licensee for men’s, women’s and children’s footwear, together with certain foreign assets owned by affiliates of Reebok (collectively, the “Footwear Business”). The acquisition cost was approximately $112 million in cash, including $2 million of transaction costs, and is subject to certain post-closing adjustments. The purchase price was allocated as described in Note 5 of our consolidated financial statements. In addition, Reebok and certain of its affiliates entered into a transition services agreement with the Company to provide a variety of operational, financial and information systems services over a period of twelve to eighteen months.

In March 2006, we announced a five year arrangement as the first exclusive outfitter for all on-court officials at Wimbledon through 2010. This follows our four-year arrangement to be the official outfitter of all on-court officials at the U.S. Open tennis tournament, which began in 2005.

Our Brands and Products

Since 1967, our distinctive brand image has been consistently developed across an expanding number of products, price tiers and markets. Our Polo, Polo by Ralph Lauren, Ralph Lauren Purple Label, Ralph Lauren Black Label, RLX, Ralph Lauren, Blue Label, Lauren, RL, Rugby, Chaps and Club Monaco , brand names are one of the world’s most widely recognized families of consumer brands. We have been an innovator in aspirational lifestyle branding and believe that, under the direction of Ralph Lauren, the internationally renowned designer, we have influenced the manner in which people dress and live in contemporary society, reflecting an American perspective and lifestyle uniquely associated with Polo and Ralph Lauren. We combine our consumer insight and design, marketing and imaging skills to offer, along with our licensing alliances, broad lifestyle product collections with a unified vision:

  •  Apparel — Products include extensive collections of men’s, women’s and children’s clothing;
 
  •  Accessories — Accessories encompass a broad range of products such as footwear, eyewear, jewelry and leather goods, including handbags and luggage;
 
  •  Home — Coordinated products for the home include bedding and bath products, furniture, fabric and wallpaper, paints, broadloom, tabletop and giftware; and
 
  •  Fragrance — Fragrance and skin care products are sold under our Glamorous, Romance, Polo, Lauren, Safari, Blue Label and Black Label brands, among others.


Domestically our Rugby, Blue Label for women and Black Label for men brands are sold only in our own retail specialty stores. Our lifestyle brand image is reinforced by our Polo.com internet site, which averaged 1.8 million unique visitors to the site each month during Fiscal 2006 and 820,000 customers during Fiscal 2006.

Polo by Ralph Lauren.   Our Polo by Ralph Lauren menswear collection is a complete men’s wardrobe consisting of products related by theme, style, color and fabric. Polo by Ralph Lauren menswear is generally priced at a range of price points within the men’s premium ready-to-wear apparel market. We currently sell this collection through department stores, specialty stores and our Ralph Lauren and outlet stores in the United States and abroad.

Blue Label.   Our Blue Label collection of womenswear reflects a modern interpretation of classic Ralph Lauren styles with a strong weekend focus. Blue Label collection is generally priced at a range of price points within the premium ready-to-wear apparel market. We currently sell the Blue Label collection domestically and internationally through Ralph Lauren stores and selected wholesale accounts in Europe and Asia. In Japan, our Blue Label line is sold under the Ralph Lauren brand name.

Polo Golf.   Our Polo Golf collection of men’s and women’s apparel is targeted at the golf and resort markets. Price points are similar to those charged for products in the Polo by Ralph Lauren line. We sell the Polo Golf collection in the United States and Canada through leading golf clubs, pro shops and resorts, as well as department stores, specialty stores and Ralph Lauren stores.

RLX.   Our RLX collection of menswear and womenswear consists of functional sport and outdoor apparel for running, cross-training, skiing, snowboarding and cycling. We sell RLX in our Ralph Lauren stores.

Ralph Lauren Childrenswear.   We offer a comprehensive collection of both Boys and Girls apparel and accessories that are sold to better specialty and department stores. The line ranges from newborn up to size 16 in Girls and size 20 in Boys.

Lauren by Ralph Lauren.   Our Lauren by Ralph Lauren women’s collection is a complete women’s lifestyle brand consisting of products related by theme, style, color and fabric. Lauren by Ralph Lauren is generally priced at a range of price points within the women’s better ready-to-wear apparel market. We currently sell this collection through department stores in the United States.

Women’s Ralph Lauren Collection and Black Label.   Our Ralph Lauren Collection expresses our up-to-the-moment fashion vision for women. Ralph Lauren Black Label includes timeless versions of our most successful Collection styles as well as newly-designed classic signature styles. Collection and Black Label are offered through our Ralph Lauren stores and limited distribution to premier fashion retailers. Price points are at the upper end of the luxury range.

Men’s Purple Label Collection.   Our Purple Label collection of men’s tailored clothing and sportswear brings true luxury and quality to American menswear. We sell the Purple Label collection through our Ralph Lauren stores and a limited number of premier fashion retailers at price points at the upper end of the luxury range.

Men’s Black Label.   Our Ralph Lauren Black Label for men is a new, sophisticated collection, featuring razor sharp tailoring and dramatically lean silhouettes, which is at once modern and timeless. Classic suiting and sportswear is infused with a savvier attitude. We sell the Men’s Black Label collection through our Ralph Lauren stores and a limited number of premier fashion retailers at price points at the upper end of the luxury range.

Rugby.   Rugby is a full lifestyle collection with a hipper, more youthful fit. Rugby is sold in a limited number of our Rugby stores. Rugby is designed for 18 to 25 year olds, and is an opportunity to better serve this demographic.

Our Wholesale Segment

Our wholesale segment sells our products primarily to leading upscale department stores, specialty stores and golf and pro shops, both domestically and internationally. We have focused on elevating our brand and improving productivity by reducing the number of unproductive doors within department stores in which our products are sold, improving in-store product assortment and presentation, and improving full price sell-throughs to consumers. As of April 1, 2006, the end of Fiscal 2006, our products were sold in approximately 1,950 domestic department stores, and during Fiscal 2006 we invested approximately $26 million in shops-within-shops dedicated to our products in domestic department stores. We have also effected selective price increases on basic products and introduced new fashion offerings at higher price points.

Department stores are our major wholesale customers in North America and Japan. In Europe, our wholesale sales are a varying mix of sales to both department stores and specialty shops, depending on the country. Our collection brands — Women’s Ralph Lauren Collection and Black Label and men’s Purple Label Collection and Black Label — are distributed through a limited number of premier fashion retailers. In addition, we sell excess and out-of-season products through secondary distribution channels.

Worldwide Distribution Channels

The following table presents the approximate number of doors (excluding our own specialty stores), by channel, in which products distributed by our wholesale segment, excluding Chaps, were sold to consumers worldwide as of April 1, 2006. In addition, during fiscal 2006 our Wholesale Segment launched Chaps for women and boys product lines in approximately 750 department stores.

                         
    Approximate Number of
 
    Doors as of April 1, 2006  
    Polo
    Collection
       
    Brands     Brands     Lauren  
 
Department Stores
    4,130       150       1,002  
Specialty Stores
    5,411       195        
Golf and Pro Shops
    2,470              


The following department store chains were the only wholesale customers whose purchases represented more than ten percent of our worldwide wholesale net sales for the year ended April 1, 2006. Although Federated Department Stores, Inc. and The May Department Stores Company are shown separately, Federated Department Stores acquired The May Department Stores by merger on August 30, 2005. Combined, Federated and May accounted for approximately 33% of our wholesale net sales in Fiscal 2006.

  •  Federated Department Stores, Inc., which represented approximately 18%,
 
  •  Dillard Department Stores, Inc., which represented 17%, and
 
  •  The May Department Stores Company, which represented 15%.


Federated has announced plans to close or divest itself of more than 79 of the combined companies’ stores in calendar 2006 and to divest itself of the approximately 50 store Lord & Taylor division, and is converting the remaining stores formerly owned by The May Department Stores to the Macy’s name plate. We do not believe that this merger and restructuring will have a material adverse effect on our business.

Our product brands are sold primarily through their own sales forces. Our Wholesale Segment maintain their primary showrooms in New York City. In addition, we maintain regional showrooms in Atlanta, Chicago, Dallas, Los Angeles, Milan, Paris, London, Munich, Madrid and Stockholm.

Shop-within-Shops.   As a critical element of our distribution to department stores, we and our licensing partners utilize shop-within-shops to enhance brand recognition, to permit more complete merchandising of our lines by the department stores and to differentiate the presentation of products. Shop-within-shops fixed assets primarily include items such as customized freestanding fixtures, moveable wall cases and components, decorative items and flooring.

At April 1, 2006, we had approximately 9,100 shop-within-shops dedicated to our wholesale products worldwide and our licensing partners had more than 775 shop-within-shops. During Fiscal 2006, we added approximately 1,654 shop-within-shops. Excluding significantly larger shop-within-shops in key department store locations, the size of our shop-within-shops typically ranges from approximately 100 to 4,800 square feet for Polo products, from approximately 240 to 4,000 square feet for Lauren by Ralph Lauren, from approximately 100 to 600 square feet for our Collection Brands, and from approximately 300 to 900 square feet for Home Furnishings. We share in the cost of these shops-within-shops.

Basic Stock Replenishment Program.   Basic products such as knit shirts, chino pants and oxford cloth shirts can be ordered at any time through our basic stock replenishment programs. We generally ship these products within one to five days of order receipt. These products accounted for approximately 7.4% of our wholesale net sales in Fiscal 2006. We have also implemented a seasonal quick response program to allow replenishment of products which can be ordered only during a portion of the year.

Our Retail Segment

Our retail segment consists of 137 full-price retail stores and 145 outlet stores worldwide, excluding our seven remaining Caban home stores, of which we are in the process of disposing by sale or closure. The expansion of our full-price retail store base is a primary long-term strategic goal. We opened 11 new full-price stores in Fiscal 2006, net of store closings, including the flagship store in Tokyo, and currently anticipate opening between 10 and 15 full-price stores in Fiscal 2007. Our retail operating profit rate increased from 3.0% of net sales in Fiscal 2001 to 9.0% of net sales in Fiscal 2006, reflecting improvements in productivity, gross margins, and full-margin sell-through rates. Our full price retail stores reinforce the luxury image and distinct sensibility of our brands and feature exclusive

lines that are not sold in domestic department stores: Blue Label for Women, Black Label for Men and Ralph Lauren Home. We operated the following full price stores as of April 1, 2006:

Full-Price Retail Stores

                                 
Location
  Ralph Lauren     Club Monaco     Rugby     Total  
 
United States and Canada
    50       64 *     5       119  
Europe
    13                   13  
Other
    5                   5  
                                 
      68       64       5       137  
                                 


*  Excludes the seven Caban Stores
  •  Ralph Lauren stores feature the full-breadth of the Ralph Lauren apparel, accessory and home product assortments in an atmosphere reflecting the distinctive attitude and luxury positioning of the Ralph Lauren brand. Our seven flagship Ralph Lauren stores showcase our upper-end luxury styles and products and demonstrate our most refined merchandising techniques.
 
  •  Club Monaco stores feature updated fashion apparel and accessories for both men and women. The brand’s clean and updated classic signature style forms the foundation of a modern wardrobe.
 
  •  Rugby, the newest brand in the Ralph Lauren family, is a vertical retail format featuring an aspirational lifestyle collection of apparel and accessories for men and women. The brand is characterized by a youthful, preppy attitude which resonates throughout the line and the store experience.


In addition to generating sales of our products, our worldwide full-price stores set, reinforce and capitalize on the image of our brands. Our stores range in size from approximately 1,000 to over 37,600 square feet. These full-price stores are situated in upscale regional malls and major upscale street locations, generally in large urban markets. We generally lease our stores for initial periods ranging from 5 to 10 years with renewal options.

We extend our reach to additional consumer groups through our 123 domestic Polo Ralph Lauren outlet stores and 21 European outlet stores. During Fiscal 2006, we added 1 new Polo Ralph Lauren outlet store, net, and closed four of five Club Monaco outlet stores. We will close the remaining Club Monaco outlet store in Fiscal 2007. Our outlet stores are generally located in outlet malls.

  •  Polo Ralph Lauren outlet stores offer selections of our menswear, womenswear, children’s apparel, accessories, home furnishings and fragrances. Ranging in size from 3,000 to 20,000 square feet, with an average of approximately 9,400 square feet, these stores are principally located in major outlet centers in 36 states and Puerto Rico.
 
  •  Polo Jeans outlet stores carry all classifications within the Polo Jeans line, including denim, knit and woven tops, sweaters, outerwear, casual bottoms and accessories. Ranging in size from 3,200 to 5,000 square feet, with an average of 4,200 square feet, these stores are located in 7 states, principally in major outlet centers.
 
  •  European outlet stores offer selections of our menswear, womenswear, children’s apparel, accessories, home furnishings and fragrances. Ranging in size from 2,400 to 13,200 square feet, with an average of approximately 6,400 square feet, these stores are located in 6 countries, principally in major outlet centers.


Outlet stores obtain products directly from us, including our retail stores, our product licensing partners and our suppliers.

Polo.com

In addition to our stores, our retail segment sells Ralph Lauren products on-line through our e-commerce website, Polo.com (http://www.polo.com). Polo.com offers our customers access to the full breadth of Ralph Lauren apparel, accessories and home product, and allows us to reach retail customers on a multi-channel basis and reinforces the luxury image of our brands. In Fiscal 2006, Polo.com averaged 1.8 million unique visitors a month

and had 820,000 customers. Polo.com is owned and operated by Ralph Lauren Media, LLC, our consolidated 50% owned joint venture with NBC Universal and ValueVision Media, Inc., which operates ShopNBC.

Our Licensing Segment

Through licensing alliances, we combine our consumer insight, design, and marketing skills with the specific product or geographic competencies of our licensing partners to create and build new businesses. We generally seek out licensing partners who:

  •  are leaders in their respective markets,
 
  •  contribute the majority of the product development costs,
 
  •  provide the operational infrastructure required to support the business, and
 
  •  own the inventory.


We grant our product licensees the right to manufacture and sell at wholesale specified categories of products under one or more of our trademarks. We grant our international geographic area licensing partners exclusive rights to distribute certain brands or classes of our products and operate retail stores in specific international territories. These geographic area licensees source products from us, our product licensing partners and independent sources. Each licensing partner pays us royalties based upon its sales of our products, subject, generally, to a minimum royalty requirement. Other than our Ralph Lauren Home collection licenses, which are discussed below, these payments generally range up to 14.0% of the licensing partners’ sales of the licensed products. In addition, licensing partners may be required to allocate a portion of their sales revenues to advertise our products and share in the creative costs associated with these products. Larger allocations are required in connection with launches of new products or in new territories. Our licenses generally have 3 to 5 year terms and may grant the licensee conditional renewal options.

We work closely with our licensing partners to ensure that their products are developed, marketed and distributed so as to reach the intended market opportunity and to present consistently to consumers worldwide the distinctive perspective and lifestyle associated with our brands. Virtually all aspects of the design, production quality, packaging, merchandising, distribution, advertising and promotion of Polo Ralph Lauren products are subject to our prior approval and continuing oversight. The result is a consistent identity for Polo Ralph Lauren products across product categories and international markets.

Approximately 26% of our licensing revenue for Fiscal 2006 was derived from two product licensing partners: Impact21, one of the sublicensees for Japan, and WestPoint Home, Inc, accounted for 14% and 12%, respectively, of our licensing revenue in Fiscal 2006.

Product Licenses

The following table lists our principal product licensing agreements for men’s and women’s sportswear, men’s tailored clothing, personal wear, accessories and fragrances as of April 1, 2006. The products offered by these licensing partners are listed below. Except as noted in the table, these product licenses cover the United States or North America only.

     
Licensing Partner
 
Licensed Product Category
 
L’Oreal S.A./Cosmair, Inc. (global)
  Men’s and Women’s Fragrances and Skin Care Products
Carole Hochman Design
  Women’s Sleepwear, Loungewear, Robes and Daywear
Corneliani S.P.A. (includes Europe)
  Men’s Polo Tailored Clothing
Peerless, Inc
  Men’s, Chaps and Lauren Tailored Clothing
Sara Lee Corporation
  Men’s Polo Ralph Lauren and Chaps Personal Wear Apparel and Chaps Hosiery for Mens and Boys
Wathne Imports, Ltd.
  Handbags and Luggage
Hot Sox, Inc.
  Men’s and Boy’s Polo Ralph Lauren and Women’s Ralph Lauren and Lauren, and Boy’s Hosiery
New Campaign, Inc. 
  Chaps, Ralph Lauren and Lauren Belts and Other Small Leather Goods
Echo Scarves, Inc. 
  Men’s Polo Ralph Lauren and Polo Jeans Company and Women’s Ralph Lauren and Lauren Scarves and Gloves
Retail Brand Alliance, Inc.
(successor to Carolee, Inc.)
  Lauren Women’s Jewelry
Safilo USA, Inc.* (global)
  Eyewear
The Warnaco Group, Inc. 
  Men’s Chaps Sportswear
Apparel Ventures, Inc. 
  Women’s Swimwear
Philips Van-Heusen Corporation
  Men’s Chaps Dress Shirts
Randa Corp
  Men’s Chaps Ties
Bandanco Enterprise, Inc. (Champlain)
  Men’s Chaps Luggage


* Effective January 1, 2007, Luxottica Group, S.p.A. will be our eyewear licensee

As described above under the caption “Recent Developments,” we acquired our licensed Polo Jeans Business in February 2006 and our licensed global men’s, women’s and children’s footwear business in July 2005.

International Licenses

We believe that international markets offer additional opportunities for our quintessential American designs and lifestyle image. We work with our international licensing partners to facilitate international expansion. International expansion opportunities may include:

  •  the roll out of new products and brands following their launch in the U.S.,
 
  •  the introduction of additional product lines,
 
  •  the entrance into new international markets, and
 
  •  the addition of Ralph Lauren or Polo Ralph Lauren stores in these markets.


The following table identifies our largest international area licensing partners (excluding Ralph Lauren Home licensees):

     
Licensing Partner
 
Territory
 
Oroton Group/PRL Australia
  Australia and New Zealand
Doosan Corporation
  Korea
P.R.L. Enterprises, S.A. 
  Panama, Aruba, Curacao, The Cayman Islands, Costa Rica, Nicaragua, Honduras, El Salvador, Guatemala, Belize, Colombia, Ecuador, Bolivia, Peru, Antigua, Barbados, Bonaire, Dominican Republic, St. Lucia, Trinidad and Tobago
Dickson Concepts/PRL Hong Kong
  Hong Kong, China, Philippines, Malaysia, Singapore, Taiwan and Thailand
Polo Ralph Lauren Japan Corporation*
  Japan
Commercial Madison/PRL Chile
  Chile


* Polo Ralph Lauren Japan is our consolidated 50% owned joint venture with Onward Kashiyama Co., Ltd. Polo Ralph Lauren Japan operates principally through sublicensees, including Impact21 Co., Ltd., mens’ and womens’ apparel and accessories and Polo Jeans, Naigai, childrens and golf apparel and hosiery, and Hitomi casual wear.

Our international licensing partners acquire the right to source, produce, market and/or sell various categories of our products in a given geographic area. These rights may include the right to own and operate retail stores. The economic arrangements are similar to those of our product licensing partners. We design licensed products either alone or in collaboration with our domestic licensing partners. Our product licensees whose territories do not include the international geographic area licensees’ territories generally provide our international licensing partners with product or patterns, piece goods, manufacturing locations and other information and assistance necessary to achieve product uniformity, for which they are often compensated.

As of April 1, 2006, our international licensing partners operated 13 Ralph Lauren stores, 29 Polo Ralph Lauren stores, 28 Polo Jeans stores, 2 Children’s stores and 4 Polo outlet stores.

Ralph Lauren Home

Together with our licensing partners, we offer an extensive collection of home products that draw upon and further the design themes of our other product lines, contributing to our complete lifestyle concept. Products are sold under the Ralph Lauren Home and Lauren Ralph Lauren brands in three primary categories: bedding and bath, home décor and home improvement. As of April 1, 2006, we had agreements with eight domestic and two international home product licensing partners.

We perform a broader range of services for our Ralph Lauren Home licensing partners than we do for our other licensing partners. These services include design, operating showrooms, marketing, advertising and, in some cases, sales. As a result, we receive a higher average royalty rate from our Ralph Lauren Home collection licensing partners, typically ranging from 15.0% to 20.0%. In general, the licensing partners manufacture, own the inventory and ship the products. Our Ralph Lauren Home licensing alliances generally have 3 to 5 year terms and may grant the licensee conditional renewal options.

Ralph Lauren Home products are positioned at the upper tiers of their respective markets and are offered at a range of price levels. These products are generally distributed through several channels of distribution, including department stores, specialty home furnishings stores, interior design showrooms, customer direct mail catalogs, home centers and the Internet as well as our own stores. As with our other products, the use of shop-within-shops is central to our department store distribution strategy.

The Ralph Lauren Home and Lauren Ralph Lauren home products offered by us and our product licensing partners are:

         
Category
 
Product
 
Licensing Partner
 
Bedding and Bath
  Sheets, bedding accessories, towels and shower curtains, blankets, down comforters, other decorative bedding and accessories   WestPoint Home, Inc. Fremaux-Delorme Ichida
    Bath rugs   Lacey Mills
Home Décor
  Fabric and wallpaper   P. Kaufmann, Inc. Designers Guild Ltd.
    Furniture   Henredon Furniture Industries, Inc.
    Tabletop and giftware Table linens, placemats, tablecloths and napkins   Mikasa, Inc.
Brownstone
Home Improvement
  Interior paints and stains Broadloom carpets and area rugs   ICI/Glidden Company Karastan, a division of Mohawk Carpet Corporation


WestPoint Home, Inc. offers a basic stock replenishment program that includes bath and bedding products and accounted for approximately 81% of their net sales of Ralph Lauren Home products in Fiscal 2006. WestPoint Home, Inc. accounted for approximately 58% of total Ralph Lauren Home licensing revenue in Fiscal 2006.

Product Design

Our products reflect a timeless and innovative American style associated with and defined by Ralph Lauren and our design team. Our consistent emphasis on innovative and distinctive design has been an important contributor to the prominence, strength and reputation of the Ralph Lauren brands.

All Ralph Lauren products are designed by, or under the direction of, Ralph Lauren and our design staff, which is divided into seven departments: Menswear, Womenswear, Lauren, Children’s, Accessories, Home and Club Monaco. We form design teams around our brands and product categories to develop concepts, themes and products for each brand and category. These teams support all three segments of our business — wholesale, retail and licensing — through close collaboration with merchandising, sales and production staff and licensing partners in order to gain market and other input.

Marketing

Our marketing program communicates the themes and images of our brands and is an integral feature of our product offering. Worldwide marketing is managed on a centralized basis through our advertising and public relations departments in order to ensure consistency of presentation.

We create distinctive image advertising for all our products, conveying the particular message of each brand within the context of our core themes. Advertisements generally portray a lifestyle rather than a specific item and often include a variety of products offered by both ourselves and our licensing partners. Our primary advertising medium is print, with multiple page advertisements appearing regularly in a range of fashion, lifestyle and general interest magazines. Major print advertising campaigns are conducted during the fall and spring retail seasons, with additions throughout the year to coincide with product deliveries. In addition to print, some product categories have utilized television and outdoor media in their marketing programs for certain product categories. Our Polo.com e-commerce website presents the Ralph Lauren lifestyle on the internet while offering the full breadth of our apparel, accessories and home products.

If our domestic licensing partners are required to spend an amount equal to a percent of their licensed product sales on advertising, we coordinate the advertising placement on their behalf.

We also conduct a variety of public relations activities. Each of our spring and fall womenswear collections are presented at major fashion shows in New York City, which typically generate extensive domestic and international media coverage. We introduce each of the spring and fall menswear collections at major fashion shows in cities such as New York or Milan, Italy. In addition, we organize in-store appearances by our models and sponsors, professional golfers, snowboarders and triathletes. In March 2006, we announced a five year arrangement as the first exclusive outfitter for all on-court officials at Wimbledon through 2010. This follows our four-year arrangement to be the official outfitter of all on-court officials at the U.S. Open tennis tournament, which began in 2005.

Sourcing, Production and Quality

We contract for the manufacture of our products and do not own or operate any production facilities. Over 350 different manufacturers worldwide produce our apparel products. We source both finished products and raw materials. Raw materials include fabric, buttons and other trim and are sourced primarily with respect to our collection brands. Finished products consist of manufactured and fully assembled products ready for shipment to our customers. As part of our efforts to reduce costs and enhance the efficiency of our sourcing process, we have shifted a substantial portion of our sourcing to foreign suppliers. In Fiscal 2006, less than 1%, by dollar volume, of our products were produced in the United States, and over 99%, by dollar volume, were produced outside the U.S., primarily in Asia, Europe and South America. See “Import Restrictions and other Government Regulations” and “Risk Factors — Risks Related to Our Business — Our business is subject to government regulations and other risks associated with importing products.”

Two manufacturers engaged by us accounted for approximately 15% and 10% of our total production during Fiscal 2006, respectively. The primary production facilities of these two manufacturers are located in China, Hong Kong, Indonesia, Macau, Philippines, Saipain, Singapore and Sri Lanka.

Our wholesale segment must commit to manufacture the majority of our garments before we receive customer orders. We also must commit to purchase fabric from mills well in advance of our sales. If we overestimate our primary customers’ demand for a particular product, we may sell the excess in our outlet stores or sell the product through secondary distribution channels. If we overestimate the need for a particular fabric or yarn, that fabric or yarn may be used in garments made for subsequent seasons or made into past seasons’ styles for distribution in our outlet stores.

We have been working closely with suppliers in recent years to reduce the lead times for fulfillment ( e.g., shipment) of orders and to permit re-orders of successful programs. In particular, we have increased the number of deliveries within certain brands each season so that merchandise is kept fresh at the retail level.

Suppliers operate under the close supervision of our global manufacturing division and buying agents headquartered in Asia, South America and Europe. All garments are produced according to our specifications. Production and quality control staff in the United States, South America, Asia and Europe monitor manufacturing at supplier facilities in order to correct problems prior to shipment of the final product. Procedures have been implemented under our vendor certification and compliance programs, so that quality assurance is focused upon as early as possible in the production process, allowing merchandise to be received at the distribution facilities and shipped to customers with minimal interruption.

Competition

Competition is very strong in the segments of the fashion and consumer product industries in which we operate. We compete with numerous designers and manufacturers of apparel and accessories, fragrances and home furnishing products, domestic and foreign. Some of our competitors may be significantly larger and have substantially greater resources than us. We compete primarily on the basis of fashion, quality and service, which depend on our ability to:

  •  anticipate and respond to changing consumer demands in a timely manner;
 
  •  maintain favorable brand recognition;
 
  •  develop and produce high quality products that appeal to consumers;


  •  appropriately price our products;
 
  •  provide strong and effective marketing support;
 
  •  ensure product availability; and
 
  •  obtain sufficient retail floor space and effectively present our products at retail.


See “Risk Factors — Risks Relating to the Industry in Which we Compete — We face intense competition in the worldwide apparel industry.”

Distribution

To facilitate distribution domestically, Ralph Lauren men’s and women’s products are shipped from manufacturers primarily to our distribution center in Greensboro, North Carolina for inspection, sorting, packing and shipment to retail customers. Ralph Lauren Childrenswear product is shipped from our manufacturers to a leased distribution center in Martinsburg, West Virginia. In addition, we utilize third party logistics providers to manage selected programs for specific customers. These facilities are designed to allow for high density cube storage and utilize bar code technology to provide inventory management and carton controls. Product traffic management is also coordinated from these facilities. European distribution and warehousing has been largely consolidated into one third party facility located in Parma, Italy.

Our full-price store and outlet store distribution and warehousing are principally handled through the Greensboro distribution center. Club Monaco products are distributed from facilities in Ontario, Canada, New Jersey and California.

ValueVision Media, which operates ShopNBC, currently performs warehousing, order fulfillment and call center functions for Ralph Lauren Media, LLC, which operates our Polo.com e-commerce website. ValueVision Media and NBC Universal are our partners in Ralph Lauren Media, LLC. Ralph Lauren Media, LLC anticipates bringing warehouse, order fulfillment and call center functions in-house in Fiscal 2008.

Management Information Systems

Our management information systems make the marketing, manufacturing, importing and distribution of our products more efficient by providing, among other things:

  •  comprehensive order processing;
 
  •  production information;
 
  •  accounting information; and
 
  •  an enterprise view of information for our marketing, manufacturing, importing and distribution functions.


The point-of-sale registers in our stores enable us to track inventory from store receipt to final sale on a real-time basis. We believe our merchandising and financial systems, coupled with our point-of-sale registers and software programs, allow for rapid stock replenishment, concise merchandise planning and real-time inventory accounting.

We also utilize a sophisticated automated replenishment system to facilitate the processing of basic replenishment orders from our wholesale customers, the movement of goods through distribution channels, and the collection of information for planning and forecasting. We have a collaborative relationship with many of our suppliers that enables the Company to reduce cash to cash cycles in the management of our inventory. In Fiscal 2006, we began implementing a new, global enterprise resource management system for our wholesale segment. We anticipate completing the implementation of this system across all of our wholesale divisions by the end of fiscal 2008.

Wholesale Credit Control

We manage our own credit function. We sell our merchandise primarily to major department stores and extend credit based on an evaluation of the customer’s financial condition, usually without requiring collateral. We monitor credit levels and the financial condition of our customers on a continuing basis to minimize credit risk. We do not factor our accounts receivables or maintain credit insurance to manage the risks of bad debts. Our bad debt write-offs were $4.3 million in Fiscal 2006, representing less than one percent of net revenues. See “Risk Factors — Risks Related to Our Business — Our business could be negatively impacted by any financial instability of our customers.”

Wholesale Backlog

We generally receive wholesale orders for apparel products approximately three to five months prior to the time the products are delivered to stores. Such orders are generally subject to broad cancellation rights. As of April 1, 2006, our summer and fall backlog was $291 million and $746 million, respectively, compared to $252 million and $525 million, respectively, at April 2, 2005. Our backlog depends upon a number of factors, including the timing of the market weeks for our particular lines, during which a significant percentage of our orders are received, and the timing of shipments. As a consequence, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual shipments.

Trademarks

We own the “Polo,” “Ralph Lauren” and the famous polo player astride a horse trademarks in the United States. Other trademarks we own include:

  •  “Lauren/Ralph Lauren”
 
  •  “RRL”
 
  •  “Club Monaco”
 
  •  “Rugby”
 
  •  “RLX”
 
  •  “Chaps”
 
  •  Various trademarks pertaining to fragrances and cosmetics


Ralph Lauren has the royalty-free right to use as trademarks “Ralph Lauren,” “Double RL” and “RRL” in perpetuity in connection with, among other things, beef and living animals. The trademarks “Double RL” and “RRL” are currently used by the Double RL Company, an entity wholly owned by Mr. Lauren. In addition, Mr. Lauren has the right to engage in personal projects involving film or theatrical productions (not including or relating to our business) through RRL Productions, Inc., a company wholly owned by Mr. Lauren. Any activity by these companies has no impact on the Company.

Our trademarks are the subjects of registrations and pending applications throughout the world for use on a variety of items of apparel, apparel-related products, home furnishings and beauty products, as well as in connection with retail services, and we continue to expand our worldwide usage and registration of related trademarks. In general, trademarks remain valid and enforceable as long as the marks are used in connection with the products and services and the required registration renewals are filed. We regard the license to use the trademarks and our other proprietary rights in and to the trademarks as extremely valuable assets in marketing our products and, on a worldwide basis, vigorously seek to protect them against infringement. See Item 3 — “Legal Proceedings.” As a result of the appeal of our trademarks, our products have been the object of counterfeiting. We have a broad enforcement program which has been generally effective in controlling the sale of counterfeit products in the United States and in major markets abroad.

In markets outside of the United States, our rights to some or all of our trademarks may not be clearly established. In the course of our international expansion, we have experienced conflicts with various third parties

who have acquired ownership rights in certain trademarks, including “Polo” and/or a representation of a polo player astride a horse, which would impede our use and registration of our principal trademarks. While such conflicts are common and may arise again from time to time as we continue our international expansion, we have generally successfully resolved such conflicts in the past through both legal action and negotiated settlements with third-party owners of the conflicting marks. See “Risk Factors — Risks Related to Our Business — Our trademarks and other intellectual property rights may not be adequately protected outside the United States” and Item 3 — “Legal Proceedings.” Although we have not in the past suffered any material restraints or restrictions on doing business in desirable markets in the past, we cannot assure that significant impediments will not arise in the future as we expand product offerings and additional trademarks to new markets.

We currently have an agreement with a third party which owned conflicting registrations of the trademarks “Polo” and a polo player astride a horse in the United Kingdom, Hong Kong and South Africa. Under the agreement, the third party retains the right to use the “Polo” and polo player symbol marks in South Africa and all other countries that comprise Sub-Saharan Africa, and we agreed to restrict use of those Polo marks in those countries to fragrances and cosmetics solely as part of the composite trademark “Ralph Lauren” and the polo player symbol, as to which our use is unlimited, and to the use of the polo player symbol mark on women’s and girls’ apparel and accessories and women’s and girls’ handkerchiefs. By agreeing to those restrictions, we secured the unlimited right to use our trademarks in the United Kingdom and Hong Kong without payment of any kind, and the third party is prohibited from distributing products under those trademarks in those countries.

Import Restrictions and Other Government Regulations

Virtually all of our merchandise imported into the United States, Canada, and Europe is subject to duties. Until January 1, 2005, our apparel merchandise was also subject to quotas. Quotas represent the right, pursuant to bilateral or other international trade arrangements, to export amounts of certain categories of merchandise into a country or territory pursuant to a visa or license. Pursuant to the Agreement on Textiles and Clothing, quotas on textile and apparel products were eliminated for World Trade Organization (the “WTO”) member countries, including the United States, Canada and European countries, on January 1, 2005. Notwithstanding quota elimination, China’s accession agreement for membership in the WTO provides that WTO member countries (including the United States, Canada and European countries) may re-impose quotas on specific categories of products in the event it is determined that imports from China have surged and are threatening to create a market disruption for such categories of products (so called “safeguard quota provisions”). In response to surging imports, in November 2005 the United States and China agreed to a new quota arrangement which will impose quotas on certain textile products through the end of 2008. In addition, the European Union also agreed with China on a new textile arrangement which imposed quotas through the end of 2007. The United States and other countries may also unilaterally impose additional duties in response to a particular product being imported (from China or other countries) in such increased quantities as to cause (or threaten) serious damage to the relevant domestic industry (generally known as “anti-dumping” actions). The European Union has imposed anti-dumping duties on imports from China and Vietnam in certain footwear categories. In addition, China has imposed an export tax on all textile products manufactured in China. Although there can be no assurance, we do not believe this tax will have a material impact on our business.

We are also subject to other international trade agreements and regulations, such as the North American Free Trade Agreement, the Central American Free Trade Agreement and the Caribbean Basin Initiative. In addition, each of the countries in which our products are sold has laws and regulations covering imports. Because the United States and the other countries in which our products are manufactured and sold may, from time to time, impose new duties, tariffs, surcharges or other import controls or restrictions, including the imposition of “safeguard quota”, or adjust presently prevailing duty or tariff rates or levels, we maintain a program of intensive monitoring of import restrictions and opportunities. We seek to minimize our potential exposure to import related risks through, among other measures, adjustments in product design and fabrication, shifts of production among countries and manufacturers, as well as through geographical diversification of our sources of supply.

As almost all our products are manufactured by foreign suppliers, the enactment of new legislation or the administration of current international trade regulations, executive action affecting textile agreements, or changes in sourcing patterns resulting from the elimination of quota could adversely affect our operations. Although we

generally expect that the recent elimination of quotas will result, over the long term, in an overall reduction in the cost of apparel produced abroad, the implementation of any “safeguard quota provisions” or any “anti-dumping” actions may result, over the near term, in cost increases for certain categories of products and in disruption of the supply chain for certain products categories. See “Item 1A — Risk Factors” below.

Apparel and other products sold by Polo are also be subject to regulation in the United States and other countries by other governmental agencies, including, in the United States, the Federal Trade Commission, United States Fish and Wildlife Service and the Consumer Products Safety Commission. These regulations relate principally to product labeling, licensing requirements and flammability testing. We believe that we are in substantial compliance with those regulations as well as applicable federal, state, local, and foreign rules and regulations governing the discharge of materials hazardous to the environment. We do not estimate any significant capital expenditures for environmental control matters either in the current year or in the near future. Our licensed products and licensing partners are also subject to regulation. Our agreements require our licensing partners to operate in compliance with all laws and regulations, and we are not aware of any violations which could reasonably be expected to have a material adverse effect on our business.

Although we have not suffered any material inhibition from doing business in desirable markets in the past, we cannot assure that significant impediments will not arise in the future as we expand product offerings and additional trademarks to new markets.

Employees

As of April 1, 2006, we had approximately 12,800 employees, consisting of approximately 10,000 in the United States and approximately 2,800 in foreign countries. Approximately 38 of our United States production and distribution employees in the womenswear business are members of the Union of Needletrades, Industrial & Textile Employees under an industry association collective bargaining agreement, which our womenswear subsidiary has adopted. We consider our relations with both our union and non-union employees to be good.

Executive Officers

The following are our current executive officers and their principal business experience for the past five years.

         
Ralph Lauren
  Age 66   Mr. Lauren has been Chairman, Chief Executive Officer and a director of the Company since prior to the Company’s initial public offering in 1997, and was a member of the Advisory Board of the Board of Directors of the Company’s predecessors since their organization. He founded Polo in 1967 and has provided leadership in the design, marketing, advertising and operational areas since such time.
Roger N. Farah
  Age 53   Mr. Farah has been President, Chief Operating Officer and a director of the Company since April 2000. He was Chairman of the Board of Venator Group, Inc. from December 1994 to April 2000, and was Chief Executive Officer of Venator Group, Inc. from December 1994 to August 1999.
Jackwyn Nemerov
  Age 54   Ms. Nemerov has been Executive Vice President of the Company since September 2004. From 1998 to 2002, she was President and Chief Operating Officer of Jones Apparel Group, Inc.


         
Tracey T. Travis
  Age 43   Ms. Travis has been Senior Vice President of Finance and Chief Financial Officer of the Company since January 2005. Ms. Travis served as Senior Vice President, Finance at Limited Brands, Inc., an apparel and personal care products retailer, from April 2002 until August 2004, and Chief Financial Officer of Intimate Brands, Inc., a women’s intimate apparel and personal care products retailer, from April 2001 to April 2002. Prior to that time, Ms. Travis was Chief Financial Officer of the Beverage Can Americas group at American National Can, a manufacturer of beverage cans, from 1999 to 2001, and held various finance and operations positions at Pepsi Bottling Group from 1989-1999. Ms. Travis is a member of the boards of directors of Jo-Ann Stores, Inc., a specialty retailer of fabrics and crafts, and the Lincoln Center Theater.
Mitchell A. Kosh
  Age 56   Mr. Kosh has served as Senior Vice President of Human Resources and Legal since July 2000. He was Senior Vice President of Human Resources of Conseco, Inc., from February 2000 to July 2000. Prior to that, Mr. Kosh held executive human resource positions with the Venator Group, Inc. starting in 1996.


Item 1A.    Risk Factors

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Form 10-K. Any of the following risks could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this report.

Risks Related to Our Business

The loss of the services of Mr. Ralph Lauren or other key personnel could have a material adverse effect on our business.

Mr. Ralph Lauren’s leadership in the design, marketing and operational areas of our business has been a critical element of our success. The death or disability of Mr. Lauren or other extended or permanent loss of his services, or any negative market or industry perception with respect to him or arising from his loss, could have a material adverse effect on our business. Our other executive officers and other members of senior management have substantial experience and expertise in our business and have made significant contributions to our growth and success. The unexpected loss of services of one or more of these individuals could also adversely affect us. We are not protected by a material amount of key-man or similar life insurance covering Mr. Lauren, our other executive officers and certain other members of senior management. We have entered into employment agreements with Mr. Lauren and our other executive officers.

We cannot assure the successful implementation of our growth strategy.

As part of our growth strategy, we seek to extend our brands, expand our geographic coverage and increase direct management of our brands by opening more of our own stores, strategically acquiring select licensees and

enhancing our operations. Implementation of our strategy involves the continued expansion of our business in Europe, Asia and other international areas. As discussed elsewhere in this Annual Report on Form 10-K, we acquired our previously licensed Polo Jeans and Footwear licenses in Fiscal 2006. We may have difficulty integrating acquired businesses into our operations, hiring and retaining qualified key employees, or otherwise successfully managing such expansion. In addition, Europe, as a whole, lacks the large wholesale distribution channels found in the United States, and we may have difficulty developing successful distribution strategies and alliances in each of the major European countries.

Implementation of our strategy also involves the continued expansion of our network of retail stores, both in the United States and abroad. We may not be able to purchase or lease desirable store locations or renew existing store leases on acceptable terms. Furthermore, we may not be able to successfully integrate the business of any licensee that we acquire into our own business or achieve any expected cost savings or synergies from such integration.

Our business could suffer as a result of consolidations, restructurings and other ownership changes in the retail industry.

Several of our department store customers, including some under common ownership, account for significant portions of our wholesale net sales. We believe that a substantial portion of sales of our licensed products by our domestic licensing partners, including sales made by our sales force of Ralph Lauren Home products, are also made to our largest department store customers. In Fiscal 2006, sales to Federated Department Stores, Inc. represented 18% of our wholesale net sales, sales to Dillard Department Stores, Inc. represented 17%, and sales to The May Department Stores Company represented 15%. Federated Department Stores and The May Department Stores merged in August 2005. Federated has announced plans to close more than 79 of the combined companies’ stores in calendar 2006 and to divest itself of the 55 store Lord & Taylor division and is converting the remaining stores formerly owned by The May Department Stores to the Macy’s name plate. In the aggregate, our ten largest customers accounted for approximately 72% of our wholesale net sales during Fiscal 2006. There can be no assurance that consolidations in the department store sector will not have a material adverse effect on our wholesale business.

We do not enter into long-term agreements with any of our customers. Instead, we enter into a number of purchase order commitments with our customers for each of our lines every season. A decision by the controlling owner of a group of stores or any other significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease the amount of merchandise purchased from us or our licensing partners or to change their manner of doing business with us or our licensing partners, could have a material adverse effect on our business or financial condition. See “BUSINESS — Operations — Customers and Service.”

Our business could be negatively impacted by any financial instability of our customers.

We sell our wholesale merchandise primarily to major department stores across the United States and Europe and extend credit based on an evaluation of each customer’s financial condition, usually without requiring collateral. However, the financial difficulties of a customer could cause us to curtail business with that customer. We may also assume more credit risk relating to that customer’s receivables. Three of our customers, Dillard Department Stores, Inc., Federated Department Stores, Inc. and The May Department Stores Company, in the aggregate constituted 45% of trade accounts receivable outstanding at April 1, 2006. As noted above, Federated Stores, Inc. and The May Department Stores Company merged in August 2005. Our inability to collect on our trade accounts receivable from any one of these customers could have a material adverse effect on our business or financial condition. See “BUSINESS — Credit Control.”

Our business could suffer as a result of a manufacturer’s inability to produce our goods on time and to our specifications.

We do not own or operate any manufacturing facilities and depend exclusively on independent third parties for the manufacture of all of our products. Our products are manufactured to our specifications primarily by international manufacturers. During Fiscal 2006, less than 1%, by dollar value, of our men’s and women’s

products were manufactured in the United States and over 99%, by dollar value, of these products were manufactured in Asia and other countries. Two of the manufacturers engaged by us accounted for approximately 15% and 10% of our total production during Fiscal 2006. The primary production facilities of these two manufacturers are located in Asia. The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a substantial reduction in purchase prices, any of which could have a material adverse effect on our financial condition and results of operations.

Our business could suffer if we need to replace manufacturers.

We compete with other companies for the production capacity of our manufacturers and import quota capacity. Some of these competitors have greater financial and other resources than we have, and thus may have an advantage in the competition for production and import quota capacity. If we experience a significant increase in demand, or if an existing manufacturer of ours must be replaced, we may have to expand our third-party manufacturing capacity. We cannot guarantee that this additional capacity will be available when required on terms that are acceptable to us. See “BUSINESS — Sourcing, Production and Quality.” We enter into a number of purchase order commitments each season specifying a time for delivery, method of payment, design and quality specifications and other standard industry provisions, but do not have long-term contracts with any manufacturer. None of the manufacturers we use produce our products exclusively.

Our business could suffer if one of our manufacturers fails to use acceptable labor practices.

We require our licensing partners and independent manufacturers to operate in compliance with applicable laws and regulations. While our internal and vendor operating guidelines promote ethical business practices and our staff periodically visits and monitors the operations of our independent manufacturers, we do not control these manufacturers or their labor practices. The violation of labor or other laws by an independent manufacturer used by us or one of our licensing partners, or the divergence of an independent manufacturer’s or licensing partner’s labor practices from those generally accepted as ethical in the United States, could interrupt, or otherwise disrupt the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our financial condition and results of operations.

Our business is subject to risks associated with importing products.

As of April 1, 2006, we source a significant portion of our products outside the United States through arrangements with over 350 foreign vendors in various countries. In Fiscal 2006, over 99%, by dollar value, of our products were produced outside the U.S., primarily in Asia, Europe and South America. Risks inherent in importing our products include:

  •  quotas imposed by bilateral textile agreements with China and non-WTO countries. These agreements limit the amount and type of goods that may be imported annually from these countries;
 
  •  changes in social, political and economic conditions or terrorist acts that could result in the disruption of trade from the countries in which our manufacturers or suppliers are located;
 
  •  the imposition of additional regulations relating to imports or exports;
 
  •  the imposition of additional duties, taxes and other charges on imports or exports;
 
  •  significant fluctuations of the cost of raw materials;
 
  •  significant delays in the delivery of cargo due to security considerations;
 
  •  the imposition of antidumping or countervailing duty proceedings resulting in the potential assessment of special antidumping or countervailing duties; and
 
  •  the imposition of sanctions in the form of additional duties either by the United States or its trading partners to remedy perceived illegal actions by national governments.


Any one of these factors could have a material adverse effect on our financial condition and results of operations.

We are dependent upon the revenue generated by our licensing alliances.

Approximately 30% of our income from operations for Fiscal 2006 was derived from licensing revenue received from our licensing partners. Approximately 26% of our licensing revenue for Fiscal 2006 was derived from two licensing partners: Impact21, 14%, and WestPoint Home, Inc., 12%. We had no other licensing partner which accounted for more than 10% of our licensing revenue in Fiscal 2006. The interruption of the business of any one of our material licensing partners due to any of the factors discussed immediately below could also adversely affect our licensing revenues and net income.

We rely on our licensing partners to preserve the value of our licenses.

The risks associated with our own products also apply to our licensed products in addition to any number of possible risks specific to a licensing partner’s business, including, for example, risks associated with a particular licensing partner’s ability to:

  •  obtain capital;
 
  •  manage its labor relations;
 
  •  maintain relationships with its suppliers;
 
  •  manage its credit risk effectively; and
 
  •  maintain relationships with its customers.


Although some of our license agreements prohibit licensing partners from entering into licensing arrangements with our competitors, our licensing partners generally are not precluded from offering, under other brands, the types of products covered by their license agreements with us. A substantial portion of sales of our products by our domestic licensing partners are also made to our largest customers. While we have significant control over our licensing partners’ products and advertising, we rely on our licensing partners for, among other things, operational and financial control over their businesses.

Failure to maintain licensing partners could harm our business.

Although we believe in most circumstances we could replace existing licensing partners if necessary, our inability to do so for any period of time could adversely affect our revenues, both directly from reduced licensing revenue received and indirectly from reduced sales of our other products. See “Operations — Our Licensing Alliances.”

Our trademarks and other intellectual property rights may not be adequately protected outside the United States.

We believe that our trademarks and other proprietary rights are extremely important to our success and our competitive position. We devote substantial resources to the establishment and protection of our trademarks and anti-counterfeiting activities worldwide. Significant counterfeiting of our products continues, however, and in the course of our international expansion we have experienced conflicts with various third parties that have acquired or claimed ownership rights in some trademarks that include Polo and/or a representation of a polo player astride a horse, or otherwise have contested our rights to our trademarks. We have in the past resolved certain of these conflicts through both legal action and negotiated settlements, none of which, we believe, has had a material impact on our financial condition and results of operations. We cannot guarantee that the actions we have taken to establish and protect our trademarks and other proprietary rights will be adequate to prevent counterfeiting or a material

adverse effect on our business or brands arising from imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the trademarks and proprietary rights of others. Also, there can be no assurance that others will not assert rights in, or ownership of, trademarks and other proprietary rights of ours or that we will be able to successfully resolve these types of conflicts to our satisfaction or at all. In addition, the laws of certain foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. See “Trademarks,” and Item 3 “LEGAL PROCEEDINGS.”

Our business is exposed to domestic and foreign currency fluctuations.

We generally purchase our products in U.S. dollars. However, we source most of our products overseas. As a result, the cost of these products may be affected by changes in the value of the relevant currencies. Changes in currency exchange rates may also affect the U.S. dollar value of the foreign currency denominated prices at which our international businesses sell products. Furthermore, our international sales and licensing revenue generally is derived from sales in foreign currencies. These foreign currencies include the Japanese Yen, the Euro and the Pound Sterling, and this revenue could be materially affected by currency fluctuations. Although we hedge some exposures to changes in foreign currency exchange rates arising in the ordinary course of business, we cannot assure you that foreign currency fluctuations will not have a material adverse impact on our financial condition and results of operations. See Item 7 “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Liquidity and Capital Resources.”

Our ability to conduct business in international markets may be affected by legal, regulatory, political and economic risks.

Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is subject to risks associated with international operations. These include:

  •  the burdens of complying with a variety of foreign laws and regulations;
 
  •  unexpected changes in regulatory requirements; and
 
  •  new tariffs or other barriers to some international markets.


We are also subject to general political and economic risks in connection with our international operations, including:

  •  political instability and terrorist attacks;
 
  •  changes in diplomatic and trade relationships; and
 
  •  general economic fluctuations in specific countries or markets.


We cannot predict whether quotas, duties, taxes, or other similar restrictions will be imposed by the United States, the European Union, Japan, or other countries upon the import or export of our products in the future, or what effect any of these actions would have on our business, financial condition or results of operations. Changes in regulatory, geopolitical, social or economic policies and other factors may have a material adverse effect on our business in the future or may require us to modify our current business practices.

Risks Relating to the Industry in Which We Compete

We face intense competition in the worldwide apparel industry.

We face a variety of intense competitive challenges from other domestic and foreign fashion-oriented apparel and casual apparel producers, some of which may be significantly larger and more diversified and have greater financial and marketing resources than we have. We compete with these companies primarily on the basis of:

  •  anticipating and responding to changing consumer demands in a timely manner;
 
  •  maintaining favorable brand recognition;


  •  developing innovative, high-quality products in sizes, colors and styles that appeal to consumers;
 
  •  appropriately pricing products;
 
  •  providing strong and effective marketing support;
 
  •  creating an acceptable value proposition for retail customers;
 
  •  ensuring product availability and optimizing supply chain efficiencies with manufacturers and retailers; and
 
  •  obtaining sufficient retail floor space and effective presentation of our products at retail.


We also face increasing competition from companies selling apparel and home products through the Internet. Although our Ralph Lauren Media, LLC joint venture sells our products through the internet, increased competition in the worldwide apparel, accessories and home product industries from Internet-based competitors could reduce our sales, prices and margins and adversely affect our results of operations.

The success of our business depends on our ability to respond to constantly changing fashion trends and consumer demands.

Our success depends in large part on our ability to originate and define fashion product and home product trends, as well as to anticipate, gauge and react to changing consumer demands in a timely manner. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. We cannot assure you that we will be able to continue to develop appealing styles or successfully meet constantly changing consumer demands in the future. In addition, we cannot assure you that any new products or brands that we introduce will be successfully received by consumers. Any failure on our part to anticipate, identify and respond effectively to changing consumer demands and fashion trends could adversely affect retail and consumer acceptance of our products and leave us with a substantial amount of unsold inventory or missed opportunities. If that occurs, we may be forced to rely on markdowns or promotional sales to dispose of excess, slow-moving inventory, which may harm our business. At the same time, our focus on tight management of inventory may result, from time to time, in our not having an adequate supply of products to meet consumer demand and cause us to lose sales. See “BUSINESS — Sourcing, Production and Quality.”

A downturn in the economy may affect consumer purchases of discretionary items and luxury retail products, which could adversely affect our sales.

The industries in which we operate are cyclical. Many factors affect the level of consumer spending in the apparel, cosmetic, fragrance and home products industries, including, among others:

  •  general business conditions;
 
  •  interest rates;
 
  •  the availability of consumer credit;
 
  •  taxation; and
 
  •  consumer confidence in future economic conditions.


Consumer purchases of discretionary items and luxury retail products, including our products, may decline during recessionary periods and at other times when disposable income is lower. A downturn in the economies in which we, or our licensing partners, sell our products may adversely affect our revenues and profits materially.

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