Polo Ralph Lauren Beats Estimates, Raises Guidance

|
 |  About: Polo Ralph Lauren Corporation (RL), Includes: KATE, PVH
by: Zacks Investment Research

Polo Ralph Lauren Corp.'s (NYSE:RL) fiscal 2012 second-quarter earnings surged 17.7% to $2.46 per share from $2.09 in the year-ago period, primarily driven by strong growth in net revenues. Quarterly earnings also surpassed the Zacks Consensus Estimate of $2.24 per share.

Quarterly Details

During the quarter, Polo Ralph Lauren's net revenues climbed 24.0% to $1,856.8 million, outpacing the Zacks Consensus Estimate of $1,836.0 million. The growth was primarily driven by an increase of 20.0% in Wholesale sales to $995.5 million and a rise of 31.0% in Retail sales to $861.3 million.

The robust performance in wholesale sale was primarily supported by a double-digit growth in the United States and Europe coupled with a strong growth in global shipments of core men’s and children’s apparel. The increase in retail sales was mainly attributable to opening of 11 net new stores, 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 21.0% year over year to $1,078.6 million. On the contrary, gross margin contracted by 140 basis points to 56.6%. The decline in gross margin was mainly due to increased cost of goods sold partially offset by better geographic and channel mix and increased pricing in selected items.

Total operating expenses rose 25.0% year over year to $727.8 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. Consequently, operating expenses as a percentage of sales expanded by 30 basis points to 38.2%.

Polo Ralph Lauren's operating profit surged 14.0% to $350.8 million from $307.4 million in the year-ago quarter. However, operating margin contracted by 170 basis points to 18.4% compared with 20.1% in the prior-year quarter reflecting higher cost of goods sold.

At quarter end, Polo operated 374 directly operated stores and 522 concession shops across the globe.

Balance Sheet

Polo Ralph Lauren exited second-quarter 2012 with cash and investments of $979.0 million, slightly below the prior-year quarter. The company has a long-term debt-to-capitalization ratio of just 7.5% compared with a long-term debt-to-capitalization ratio of 8.2% in the year-ago period. During the quarter, the company deployed $53.0 million toward capital expenditure.

Moreover, during the quarter, the company utilized $92.0 million to repurchase approximately 0.8 million shares. Currently, the company can utilize approximately $579.0 million under its authorized share repurchase program.

Guidance

Moving forward, Polo Ralph Lauren now expects third-quarter 2012 revenues to grow in the low-teens rate. The operating margin for the upcoming third quarter is expected to be lower by 300 basis points from the prior-year quarter due to higher input costs, channel mix 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 high-teen-to-low 20.0% range, up from mid-to-high teen forecasted earlier. Moreover, the company at present expects operating margin to be lower by 50 basis points in the fiscal resulting from higher input costs and increased investments in strategic growth initiatives, compared with the prior expectation of 50 to 100 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 Outperform recommendation on the stock.