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Ralph Lauren Beats, Retains Outlook

RL PVH

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Polo Ralph Lauren Corp. (RL - Analyst Report) reported its first-quarter fiscal 2013 earnings per share of $2.03, beating the Zacks Consensus Estimate of $1.79 per share. Quarterly earnings also witnessed a 6.8% growth from $1.90 earned in the year-ago period.

The better-than-expected bottom-line performance was primarily driven by top-line growth, lower tax rate and reduced number of shares outstanding.

Quarterly Details

During the quarter, Polo Ralph Lauren's net revenues increased 4.4% year over year to $1,593.4 million, beating the Zacks Consensus Estimate of $1,582 million. The year-over-year growth was primarily driven by improved performance across the company’s all segments.

Overall, in the first quarter, retail revenue increased 3.1% to $694.1 million and wholesale revenue hiked 5.3% to $857.3 million, while licensing revenue grew 5.3% to $42 million.

Revenue growth at retail division was the result of an improvement in comparable store sales, increased e-commerce business and contribution from new stores. The increase in wholesale revenue was primarily supported by growth in the United States partially offset by decline in Europe due to lower shipments.

Ralph Lauren's gross profit in the quarter grew 3.2% year over year to $992.1 million. On the contrary, gross margin contracted 70 basis points to 62.3% due to increased raw material costs.

Total operating expenses elevated 3% year over year to $700.1 million, mainly due to overall business expansion, strong retail segment growth as well as incremental investments in growth initiatives and infrastructure. However, operating expenses, as a percentage of sales, contracted 60 basis points to 43.9% due to better cost management and shift in timing of certain expenses.

Polo Ralph Lauren's operating profit surged 3.5% to $292 million from $282.1 million in the year-ago quarter, while operating margin shrunk 20 basis points compared with the prior-year quarter to 18.3%, reflecting gross margin contraction, partially offset by improved operating expenses as a percentage of sales.

Exiting the quarter, Polo Ralph Lauren operated 379 directly operated stores and 478 concession shops across the globe. Additionally, Ralph Lauren’s global licensing partners operated 55 Ralph Lauren stores and 27 dedicated concession shops as well as 60 Club Monaco stores and dedicated shops.

Balance Sheet

Polo Ralph Lauren exited the quarter with cash and investments of $1.1 billion compared with $981 million in the previous-year quarter. During the period, the company deployed $62 million toward capital expenditure and $300 million toward repurchasing 2 million shares. Moreover, inventory levels improved 7.6% in the quarter to $964 million compared with $896 million in the same period last year.

Guidance

Polo Ralph Lauren continues to expect net revenue in fiscal 2013 to increase by mid-single-digit percentage while anticipating a low-single-digit decline in wholesale sales and low-double-digit growth in retail sales segment. Moreover, the company expects moderate operating margin expansion mainly due to gross margin expansion, partially offset by negative impact from continued investment in long-term growth initiatives and overall channel mix. Further, the company anticipates deploying $360 million toward capital expenditure.

For the second quarter of fiscal 2013, the company expects net revenue to decrease by mid-single-digit percentage. Moreover, operating margin is expected to be lower by 175-225 basis points from the prior-period level.

Ralph Lauren, which competes with The Jones Group Inc. and Phillips-Van Heusen Corporation (PVH - Snapshot Report), currently holds a Zacks #3 Rank, implying a short-term Hold rating on the stock. Currently, we retain a long-term Neutral recommendation on the stock.

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