Zacks_Analysts' Blog : Mixed 3Q12 for Ralph Lauren - Analyst Blog

Polo Ralph Lauren Corp. (RL) reported third-quarter fiscal 2012 earnings per share of $1.78, reflecting a 3% growth from $1.72 earned in the year-ago period. Quarterly earnings also surpassed the Zacks Consensus Estimate of $1.67 per share. The company’s earnings in the quarter reflected a decline in shares outstanding as against last year.

Quarterly Details

During the quarter, Polo Ralph Lauren's net revenues climbed 17% year over year to $1,756.0 million, which however fell short of the Zacks Consensus Estimate of $1,768.0 million. The year-over-year growth was primarily driven by a global increase in retail sales and double-digit wholesale revenue growth in the United States and Europe.

Overall, in the third quarter, retail revenue increased 22% to $1,006.0 million, while wholesale revenue rose 11% to $750.0 million.

The robust performance in the retail division was mainly attributable to the contribution from new stores and concession shops, including incremental revenues from newly transitioned South Korean operations and comparable store sales growth. The increase in wholesale revenue was primarily supported by 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.

Ralph Lauren's gross profit in the quarter jumped 14% year over year to $1,031.6 million. On the contrary, gross margin contracted by 150 basis points to 57.1% 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 15% year over year to $761.5 million, mainly due to overall business expansion, including strong retail segment growth, as well as incremental costs associated with the transition of certain formerly licensed operations. Consequently, operating expenses as a percentage of sales expanded by 50 basis points to 42.2%.

Polo Ralph Lauren's operating profit surged 10% to $270.1 million from $246.3 million in the year-ago quarter. However, operating margin contracted by 90 basis points compared with the prior-year quarter to 15.0%, reflecting gross margin contraction, partially offset by operating expense leverage.

At the quarter end, Polo operated 378 directly operated stores and 508 concession shops across the globe. Additionally, Ralph Lauren’s global licensing partners operated 60 Ralph Lauren stores and 49 dedicated concession shops as well as 58 Club Monaco stores and dedicated shops.

Balance Sheet

Polo Ralph Lauren exited the third quarter with cash and investments of $1,202.1 million, compared with $1,242.8 million in the year-ago period. During the quarter, the company deployed $68.0 million toward capital expenditure.

Moreover, inventory levels improved 28% in third-quarter, ending at $895 million compared with $698 million in the same period last year. The increase was driven by an investment to support probable sales growth, new operations and new merchandise categories, and the inflationary and foreign exchange impact on cost of goods.

Guidance

Bolstered by better-than-expected quarterly results, Ralph Lauren has raised its fiscal year 2012 revenue guidance to 20%, compared with the previous guidance range of high-teen-to-low 20.0%.

Moreover, the company now expects operating margin to be at almost the same level or marginally below the prior-year level. This compares with the previous guidance of a 50 basis points downside. Fiscal 2012 tax rate is presently expected to be at about 34%.

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