Ralph Lauren Pinned to Neutral

Following a mixed third quarter 2012 from one of the leading designer, marketer and distributor of premium lifestyle products, Polo Ralph Lauren Corporation ( RL - Analyst Report ) , we retain our long-term Neutral recommendation on the stock.

In the third quarter, Polo’s earnings per share of $1.78 reflected 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 earnings beat in the quarter reflected a decline in shares outstanding as against last year. Polo Ralph Lauren's net revenues climbed 16.6% year over year to $1,805.6 million in the quarter, which however fell short of the Zacks Consensus Estimate of $1,768.0 million.

Solid quarterly performance prompted management to lift its revenue growth guidance for fiscal 2012 to 20%, instead of the high-teen to low 20% range forecast earlier. Moreover, the company anticipates operating margin to remain flat or slightly down from the prior-year level. Earlier, Polo was expecting a contraction of 50 basis points in operating margin. Fiscal 2012 tax rate is expected to be at about 34%.

Going forward, we believe Polo’s ongoing initiatives to capitalize on opportunities in Asia spurred by reduced long-term debt augur well for future operating performance. Moreover, Polo leverages its globally renowned brands and their premium positioning to bolster its well-established business in the specialty retailing sector.

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 - Analyst Report ) , Coach Inc. ( COH - Analyst Report ) , V.F. Corp. ( VFC - Analyst Report ) , Liz Claiborne Inc. ( ) 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 consumer 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.

Our Neutral recommendation for Polo shares is supported by the company’s third quarter earnings beat, 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.

Ralph Lauren currently holds a Zacks #2 Rank, implying a short-term Buy rating on the stock.