Ralph Lauren Corp. ( RL - Analyst Report ) posted its third-quarter 2013 adjusted earnings of $2.40 per share, jumping 34.8% from the comparable year-ago quarter and surpassed the Zacks Consensus Estimate of $2.21 per share. The year-over-year increase was primarily driven by a rise in sales, improved margins and a lower tax rate.

Quarterly Details

Polo Ralph Lauren's total revenues inched up 2% year over year to $1,846.1 million. Per the company, the year-over-year increase was a result of improved retail segment results, which was partially offset by its planned strategy to reduce wholesale shipments. However, revenue lagged the Zacks Consensus Estimate of $1,873.0 million.

Ralph Lauren's gross profit in the quarter grew 6% year over year to $1,094.1 million, while the gross margin expanded 220 basis points (bps) to 59.3% due to lower input costs and benefits coming from better product mix and operational efficiency.

Total operating expenses climbed 4% year over year to $789.7 million, mainly due to overall business expansion, increased marketing and advertising expenses as well as incremental investments in growth initiatives and infrastructure. As a percentage of sales, operating expenses expanded 60 bps year over year to 42.8%.

Ralph Lauren's operating profit increased 13% to $304.4 million. Moreover, its operating margin improved 150 bps to 16.5%, reflecting gross margin expansion, partially offset by increased operating expenses as a percentage of sales.

Segment-Wise

Overall, in the third quarter, Retail revenue increased 6% to $1,062.0 million primarily due to an improvement in comparable store sales, increased e-commerce business and contribution from new stores, partially offset by store closures at Greater China and weak sales at Asian concession shops.

Driven by improved revenue along with efficient cost management, the segment’s operating income increased 4% to $201.2 million. However, operating margin contracted 30 bps to 18.9%. However, excluding the impact of discontinuation of Rugby brand operations, operating margin improved 60 basis points to 19.8%

Due to the company’s planned strategy of reducing wholesale shipments and the negative impact from discontinuing American Living operations, its Wholesale segment’s revenue inched down 2% to $733.9 million. However, operating income increased 29% to $144.9 million while operating margin improved 470 bps to 19.7%, primarily driven by higher gross margin, favorable product mix and better cost efficiency.

The company’s Licensing revenue inched up 1% year over year to $50.2 billion on the back of improved domestic licensing revenues. Consequently, the operating income increased 3% to $37 million during the quarter.

Balance Sheet

Polo Ralph Lauren exited the quarter with cash and investments of $1.4 billion compared with $1.3 billion in the year-ago quarter. During the quarter, the company deployed $78.0 million and $150.0 million toward capital expenditure and share repurchases, respectively. Moreover, inventory levels increased 10% in the quarter to $981.0 million compared with $895.0 million in the comparable period last year.

Guidance

Polo Ralph Lauren expects net revenue in the fourth quarter to increase by mid-single-digit percentage points, while anticipating a flat wholesale sales growth and 8%–11% growth in the retail sales segment. Moreover, the company now expects the operating margin to expand in the range of 125–150 bps mainly due to gross margin expansion, partially offset by a negative impact from continued investment in long-term growth initiatives and overall channel mix.

For fiscal 2013, the company expects net revenue to increase by 2%, lower than its previously guided range of 2%–3%. However, bolstered by better-than-expected improvement in operating margin, the company now expects it to grow in the range 75–100 bps, up from its earlier guidance of 50 bps.

Other Stocks to Consider

Ralph Lauren currently holds a Zacks Rank #2 (Buy). Other stocks in the same industry that are worth considering include Abercrombie & Fitch Company ( ANF - Analyst Report ) , Michael Kors Holdings Limited ( KORS - Snapshot Report ) and Joe’s Jeans Inc. ( JOEZ - Snapshot Report ) . Abercrombie and Michael Kors hold a Zacks Rank #1 (Strong Buy) while Joe’s Jeans has a Zacks Rank #2 (Buy).