Polo Ralph Lauren profit tops view; shares jump

NEW YORK Wed May 28, 2008 12:59pm EDT

Ralph Lauren waves to an applauding crowd after his show at Fashion Week in New York September 16, 2005. REUTERS/Seth Wenig

Ralph Lauren waves to an applauding crowd after his show at Fashion Week in New York September 16, 2005.

Credit: Reuters/Seth Wenig

NEW YORK (Reuters) - Polo Ralph Lauren Corp (RL.N) reported sharply higher quarterly profit on Wednesday that soared past Wall Street estimates, sending the clothing maker's shares up more than 11 percent to their highest price this year.

Net income jumped 41 percent to $103.5 million, or $1.00 per share, in the company's fiscal fourth quarter, that ended March 29, from $73.2 million, or 68 cents per share, a year ago.

Analysts on average had been expecting profit of 65 cents per share, according to Reuters Estimates, for the company, whose brands include Polo, Chaps and Club Monaco.

The quarter's results were hurt by non-cash amortization charges of $8 million, but helped by a lower quarterly tax rate, which was 28 percent, versus 39 percent a year ago.

Net revenue increased 20 percent to $1.24 billion from $1.03 billion a year ago, as higher wholesale and retail sales offset a decline in licensing revenue.

Excluding the impact of the recent acquisition of Impact 21, a Japanese licensee, the remaining interest in Polo Ralph Lauren Japan Corp, and New Campaign Inc, a small leather goods licensee, revenue rose 14 percent.

The company's gross margin was 54.3 percent in the quarter, up from 54.1 percent in the same period a year ago. But excluding acquisitions, the margin was lower, as greater markdowns were needed to move unsold merchandise.

"There is no question that in the United States the back half of fiscal 2008 was an exceedingly difficult period for the retail industry," said Polo's chief operating officer Roger Farah on a conference call. "Sitting here today I don't believe it would be reasonable to expect things to be materially better in the near term."

"There is still talk about a consumer-led U.S. recession, and we believe the potential negative impact this could have on a global growth prospect is very real," Farah added.

MANAGING A DIFFICULT ENVIRONMENT

Nonetheless sales in the company's wholesale unit rose 25 percent to $786 million, while sales at retail stores rose 16 percent to $400 million.

Total sales at stores open at least a year rose 8.9 percent, driven by increases of 5.6 percent at Ralph Lauren stores, 10 percent at factory outlet stores and 12.5 percent at Club Monaco stores. The company opened 21 net new stores in fiscal 2008, and said it is working on new stores in New York, Los Angeles and Paris.

Licensing royalties declined 2 percent to $55 million.

The United States currently accounts for 65 percent of sales of branded goods, with Europe accounting for 17 percent and Asia and the rest of the world representing 18 percent, the company said.

"Ultimately we'd like to have the United States, Europe, and Asia each representing approximately one-third of our revenues," said Farah.

In the U.S., sales were also boosted by the launch of American Living, a line of clothes and home goods Polo is designing exclusively for mid-tier department store J.C. Penney Co Inc (JCP.N).

Following the launch of more than 40 product categories earlier this year, Polo said it will introduce more items over the coming year, such as jackets, clothes for young children, slippers and sleepwear.

The J.C. Penney deal is part of Polo's strategy to diversify into other parts of the consumer spectrum beyond its traditional high-end customers. To access the luxury market it is teaming up with Cartier watch maker Richemont (CFR.VX) to make high-end Ralph Lauren watches.

The company affirmed its outlook for fiscal 2009, saying it still sees full-year earnings of $3.95 to $4.05 per share on revenue expected to increase by a low-to-mid single digit percentage rate.

For the first quarter, Polo said it expects revenue to grow at a low-to-mid single digit rate and its operating margin to fall 3 to 4 percentage points.

Analysts on average had been expecting 86 cents per share, excluding items, in the first quarter, according to Reuters Estimates.

Thomas Weisel Partners analyst Liz Dunn said in a research note that the retail environment is challenging and she believes Polo will struggle this year in the absence of a boost from the launch of the American Living line. She is forecasting 2009 earnings of $3.80 per share.

Polo shares were up $7.08 at $68.83 on the New York Stock Exchange.

(Reporting by Martinne Geller, editing by Steve Orlofsky, Dave Zimmerman and Gunna Dickson)

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