Zacks_Analysts' Blog : Neutral on Polo Ralph Lauren - Analyst Blog

We retain our long-term Neutral recommendation on one of the world’s leading designer, marketer and distributor of premium lifestyle products, Polo Ralph Lauren Corporation (RL).

Our recommendation was backed by the company’s strong second-quarter 2012 results, raised management guidance and the company’s ongoing growth initiatives, offset by concerns regarding macroeconomic headwinds, stiff competition from other established retailers and currency fluctuation.

The premium U.S. lifestyle merchandise retailer’s second-quarter 2012 earnings of $2.46 per share beat the Zacks Consensus Estimate of $2.24 per share and surged nearly 18% from the prior-year period, on the heels of strong top-line performance, resulting from the company’s growth initiatives.

Buoyed by better-than-expected quarterly results, Ralph Lauren raised its revenue growth guidance for fiscal 2012 in high-teen to low 20% range, up from mid-to-high teens forecasted earlier. Consequently, Ralph Lauren has lowered its prior expectation of contraction in operating margin to 50 basis points from 50 - 100 basis points.

Further, management’s initiatives to capitalize on opportunities in Asia along with reduced long-term debt augur well for future operating performance. The company also commands a strong portfolio of globally recognized brands, such as Ralph Lauren Purple Label, Ralph Lauren Collection, Black Label, Blue Label, RRL, RLX and American Living.

However, Ralph Lauren operates in a highly fragmented market and competes with a number of well-established players, such as Estee Lauder Companies Inc. (EL), Coach Inc. (COH), V.F. Corp. (VFC), Liz Claiborne Inc. (LIZ) and others. To retain the existing market share, Polo Ralph may have to reduce its sales prices, which could affect its margins.

Going forward, we expect the consumer’s confidence and spending behavior to dampen due to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, high unemployment levels, and high household debt levels, which may negatively affect their disposable income, and in turn, the company’s growth and profitability.