Designer clothing company Ralph Lauren Corp (RL.N) said it expects increased promotions to eat into gross margins, spooking investors who had earlier pushed the stock higher on a strong sales outlook.
Ralph Lauren's shares rose as much as 6 percent in early trading on Wednesday but reversed course to trade down 3 percent by midday.
The clothier, known for its Polo and Lauren by Ralph Lauren brands, said on its conference call that it expects full-year operating margin to be 110-120 basis points lower.
"We are just being a little bit cautious with regard to the environment we are operating in," Chief Administrative Officer Chris Peterson said on a conference call.
Many traditional retailers have had to discount heavily in the holiday shopping season to persuade Americans to open their wallets. This ultimately squeezed profit margins across the industry.
"We are encouraged by Ralph Lauren's top line momentum ... however the ongoing margin pressure keeps us sidelined for now as earnings per share revisions remain downward," analyst Evren Kopelman of Wells Fargo said.
The weak margin outlook took the shine off the company's improved sales forecast and better-than-expected third-quarter results.
The company's shares slipped to $146.00, their lowest in more than a year, before easing a little to trade down 2.5 percent in midday trading on Wednesday.
Ralph Lauren said it expects full-year 2014 revenue to rise 7 percent - the high end of its previously projected range of 5-7 percent.
The company, founded and run by American style icon Ralph Lauren, has been opening more of its own stores to rely less on its wholesale business, which sells clothes to upscale retailers such as Macy's Inc (M.N).
Ralph Lauren is also repositioning itself in China, closing locations that were run by local partners and replacing them with its own stores.
Sales at its retail stores, excluding certain items, rose 10 percent to $1.1 billion, accounting for 55 percent of total revenue in the quarter. Comparable store sales rose 2 percent.
Ralph Lauren, whose portfolio also includes brands such as Club Monaco and Chaps, said wholesale revenue rose 14 percent to $840 million.
Brian Sozzi, chief executive of research firm Belus Capital Advisors, said Ralph Lauren's quarterly performance was surprisingly strong given that apparel margins at other retailers were decimated during the holiday season.
Sozzi said the company's strong core product margins stood out, indicating it was winning market share from rivals.
Ralph Lauren said it expects fourth-quarter sales to rise 10-12 percent, which translates to $1.81-$1.84 billion. Analysts on average expect current-quarter sales of $1.81 billion, according to Thomson Reuters I/B/E/S.
The company's net income rose to $237 million, or $2.57 per share, from $216 million, or $2.31 per share, a year earlier.
Revenue, including licensing revenue, rose 9 percent to $2.01 billion in the quarter ended December 28.
Analysts on average had expected a profit of $2.51 per share on revenue of $2.03 billion.
"The brand's higher price points and general appeal to more affluent shoppers has insulated it from some of the pressures that affected more commoditized brands," Moody's senior credit officer Scott Tuhy said.
(Additional reporting by Siddharth Cavale; Editing by Saumyadeb Chakrabarty)