(Reuters) - Ralph Lauren Corp (RL.N) reported better-than-expected results for the holiday quarter, helped by double-digit sales growth at its own stores as well as increased sales to department stores, and the clothing maker raised its margin forecast
Its shares rose more than 10 percent on Wednesday.
So-called affordable luxury continued to do well over the holidays, as illustrated by Ralph Lauren’s results and those of Coach Inc (COH.N), which reported last month.
Also on Wednesday, shoe and clothing maker and retailer Jones Group JNY.N said its results got a lift from its higher-end shoe brands like Kurt Geiger and Stuart Weitzman, which helped its gross margin rise despite weaker sales of the company’s more basic items.
Ralph Lauren, with brands ranging from mid-tier basics to high-end luxury labels such as Polo, Club Monaco and Chaps, said revenue rose 17.2 percent in its fiscal third quarter that ended December 31, to $1.81 billion, topping analysts’ average forecast of $1.75 billion, according to Thomson Reuters I/B/E/S.
The sales charge was led by a 12 percent gain at its stores open at least a year, with sales at Club Monaco stores rising the most.
Ralph Lauren also got a lift from department stores such as Macy’s Inc (M.N), which enjoyed a stellar holiday season. Wholesale sales were up 11 percent during the quarter.
The sales gains eased investor concerns about the pressure from rising product costs on gross margins, which have been a drag on Ralph Lauren’s share prices since October
“Investors are focusing on sales growth in this environment,” independent retail analyst Marie Driscoll said, noting that Wall Street was impressed by “across the board” increases at all of Ralph Lauren’s divisions.
That included gains overseas for a company that still gets the bulk of its sales in North America and Europe. So far this year, international sales are up more than 40 percent.
But sales in China -- far and away the world’s fastest-growing luxury market -- were modest, and Ralph Lauren is in the middle of an overhaul of how it sells products there.
The company will have closed more than half of the locations in China where its products are sold, planning to replace them with higher-end shops over which it would have more control.
On a call, Chief Operating Officer Roger Farah said it has closed 95 points of distributions in China, more than the 65 initially planned. But Farah said taking a step back in China, even at the cost of lower sales there in the short term, was worth it long term.
“It’s not a question of if for us in China, it’s a matter of when,” Farah told analysts on a conference call.
In recent years, Ralph Lauren has sought to improve its importance in Asia, the fastest growing market for luxury. That has included taking control of its licensees in South Korea and Japan. Asia accounts for 12 percent of overall revenue.
China’s emerging middle class been a boon to high-end brands including Coach Inc and Tiffany & Co. (TIF.N)
The company now expects sales for the full fiscal year ending next month to be up 20 percent, compared with a prior forecast of a rise in the high teens or low 20-percent range.
Still, the company said that pace could moderate in the next fiscal year.
Despite the strong sales, Ralph Lauren’s quarterly net income rose just 0.4 percent to $169 million, or $1.78 per share, hurt by higher product costs. But that was enough to beat Wall Street expectations of $1.67 per share.
Gross margin continued to be under pressure from higher costs, falling 1.5 percentage points to 57.1 percent of sales.
The rising sales led Ralph Lauren to say it now expects operating margin to be on a par with or just below last year‘s, compared with its previous forecast for a fall of 0.5 percentage point.
Ralph Lauren’s shares rose about 10 percent, or $15.56, to $172.64 in midday trading.
Reporting By Phil Wahba in New York; Editing by John Wallace and Maureen Bavdek