Perry Ellis International Inc. ( PERY - Snapshot Report ) posted adjusted earnings per share of 40 cents in the third quarter of fiscal 2012, missing the Zacks Consensus Estimate of 61 cents and deteriorating from the year-ago earnings of 51 cents. The impact of unshipped revenue, promotional activity and increased investment led to the decline in the bottom line.

Perry Ellis' total revenue increased 23% year over year in the quarter to $248.4 million. Sales growth was aided by improved performances at Golf, Hispanic, accessories, women’s contemporary dress as well as growth in direct to consumer. Organic revenue grew 5%, excluding the newly acquired Rafaella business, which infused $38.4 million to the total revenue. However, unshipped products worth $5.0 million associated with Rafaella and the company’s European business hurt the revenue to some extent.

The Rafaella women's sportswear business has been challenging in the quarter as the products lacked upgrade. To add to this, warmer weather in the fall season hit the sales as well. Historically, it has been noticed that cooler temperatures tend to lead better sell-through rates for bottom wear.

During the quarter, Perry Ellis' gross profit increased 15.2% year over year to $82.5 million. However, gross margin fell 240 basis points (bps) to 33.2% in the quarter under review. The decline was due to higher levels of markdowns and customer allowances, which hurt the margin by about 100 bps. Additionally, price rises seemed to have an adverse impact on sales of basic merchandise and replenishment products resulting in a drop in the number of units shipped. Approximately $1.7 million worth unshipped gross profit dollars and the weak margined Rafaella resulted in the lower margin.

At quarter end, Perry Ellis had cash and cash equivalents of $21.4 million. Long-term debt was $220.0 million.

Outlook

Perry Ellis reduced its earnings guidance to at or above $2.00 for fiscal 2012, compared to $2.45–$2.52 guided earlier. The reduction was followed by the challenging third quarter. Earlier, the company had raised its fiscal 2012 guidance twice. EBITDA guidance was also cut to the range of $75-$80 million from $90 million guided previously. The expectation for revenue was reiterated at $1 billion.

Our Take

Perry Ellis, the designer, distributor and licensor of a broad line of men's and women's apparel, accessories, and fragrances, remains optimistic about the Rafaella women’s product assortment for the next spring and summer season. Management remains committed to integrate its thriving businesses such as Golf and Hispanic as well as the Perry Ellis Collection with Rafaella’s women’s sportswear. We believe this is a positive step toward the strength of Perry Ellis’ market share gain. Additionally, the newly acquired Metropark locations that were dilutive in the third quarter due to pre-opening expenses, will likely drive traffic in the holiday season.

Concerns for the near term include the inflationary commodity environment, struggling margins and high amount of debt in the company’s balance sheet. The slashed outlook also makes us cautious.

Perry Ellis currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock. Perry Ellis' peers include Polo Ralph Lauren Corp. ( RL - Analyst Report ) and CROCS Inc. ( CROX - Snapshot Report ) .