Polo Beats Estimates on Strong Sales

| About: Polo Ralph (RL)

Polo Ralph Lauren Corp.'s (NYSE:RL) fiscal 2012 first-quarter earnings surged 57% to $1.90 per share from $1.21 in the year-ago period, as higher sales and strong gross margin drove performance. Quarterly earnings also surpassed the Zacks Consensus Estimate of $1.45.

Quarterly Details

During the quarter, Polo Ralph Lauren's net revenues climbed 32.4% to $1,526.4 million, outpacing the Zacks Consensus Estimate of $1,414.0 million. The growth was primarily driven by an increase of 28.7% in Wholesale sales to $673.0 million and a rise of 37.3% in Retail sales to $813.5 million.

The robust performance in wholesale sale was primarily supported by a double-digit shipment growth of core men's, women's and children's apparel. The increase in retail sales was mainly attributable to a high double-digit growth in same-store sales and contribution from newly transitioned South Korean operations.

Polo Ralph's gross profit in the quarter jumped 35.0% year over year to $961.5 million. On the contrary, gross margin expanded by 120 basis points (bps) to 63.0%. The increase in gross margin was mainly driven by better geographic and channel mix, partially offset by increased cost of goods sold.

Total operating expenses rose 26.0% year over year to $679.0 million, mainly due to increased expenses associated with South Korean operations, expenses related to channel mix and continued investments in the company's strategic growth initiatives. However, operating expenses margin contracted by 210 basis points to 44.5% due to strong top-line growth.

Polo Ralph Lauren's operating profit surged 62.0% to $282.0 million from $174.0 million in the year-ago quarter. Operating margin climbed 340 basis points to 18.5% compared with 15.1% in the prior-year quarter.

At quarter end, Polo operated 371 directly operated stores and 535 concession shops across the globe.

Balance Sheet

Polo Ralph Lauren exited first-quarter 2012 with cash and investments of $981.0 million, slightly below the prior-year quarter. The company has a long-term debt-to-capitalization ratio of just 8.5% compared with a long-term debt-to-capitalization ratio of 8.1% in the year-ago period. During the quarter, the company deployed $39.0 million toward capital expenditure.

Moreover, during the quarter, the company utilized $302.0 million to repurchase approximately 2.5 million shares. Currently, the company can utilize approximately $670.0 million under its authorized share repurchase program, inclusive of a new $500.0 authorization approved by the board of directors.

Guidance

Moving forward, Polo Ralph Lauren now expects second-quarter 2012 revenues to grow in the high-teens to low 20%. The operating margin for the upcoming second quarter is expected to be lower by 300 basis points from the prior-year quarter due to higher input costs, business disruption in Japan and increased investments in strategic growth initiatives.

Bolstered by better-than-expected quarterly results, Polo Ralph has raised its full fiscal 2012 guidance. The company now expects full fiscal 2012 revenues to grow in mid-to-high teen percentage, up from mid teen forecasted earlier.

Moreover, the company at present expects operating margin to be lower by 50 to 100 basis points in the fiscal resulting from higher input costs, business disruption in Japan and increased investments in strategic growth initiatives, compared with the prior expectation of 100 to 150 basis points.

Ralph Lauren, which competes with Liz Claiborne Inc. (LIZ) and Phillips-Van Heusen Corporation (NYSE:PVH), currently, holds a Zacks #3 Rank, implying a short-term 'Hold' rating on the stock. The company retains a long-term 'Neutral' recommendation on the stock.

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