November 6, 2018 / 1:13 PM / 2 years ago

Ralph Lauren expects tariff, freight costs to rise

(Reuters) - Ralph Lauren (RL.N) expects higher tariff and freight-related costs to hit profits in the second half of its fiscal year, the upscale fashion group said on Tuesday, overshadowing upbeat quarterly sales and driving its shares down 6 percent.

FILE PHOTO: A man walks past Ralph Lauren Corp.'s flagship Polo store on Fifth Avenue in New York City, U.S., April 4, 2017. REUTERS/Brendan McDermid/File Photo

Rising freight and commodity costs, a result of a shortage of truck drivers, has plagued nearly every consumer goods company this year. In response, most companies including Ralph Lauren are offering fewer discounts to shield profits.

Ralph Lauren expects higher commodity and freight costs to reduce profit margins by between 30 and 40 basis points by the end of its fiscal year in March.

Meanwhile, its inventories climbed 15 percent in the quarter ended September as the company used less air-freight to keep costs in check while expecting future growth from store openings and online sales.

“They had a lot of excuses to why their inventory was up ... but you’re talking about a business that had a revenue increase of 2 percent against an inventory of up 15 percent,” Chief Executive Jane Hali of research firm Jane Hali & Associates said. “That’s not a good story.”

Ralph Lauren shares have risen over 5 percent this month alone and have gained 32 percent this year. The stock was last down 7 percent at $127.27 on Tuesday morning.

However, Ralph Lauren’s latest quarterly results showed it had managed to reverse a years-long trend of declining sales in North America, chiefly as a strategy to intensify marketing on social media begins to bear fruit.

The social media focus is aimed at wooing more high-spending millennials as a lack of big discounts and promotions shrinks its more bargain-hungry clientele.

The New York-based company, known for its preppy Polo shirts, spent about 30 percent more on marketing in the second quarter ended September compared with a year earlier, targeting events including its 50th Anniversary Fashion Show and the New York Fashion Week.

Its revenue overall climbed 1.6 percent to $1.69 billion and topped analysts’ expectations of a 0.9 percent decline, according to IBES data from Refinitiv.

The fashion house also boosted its annual revenue projections, now forecasting net revenue to be unchanged or rise slightly from a year earlier, compared with a prior forecast of a slight decline.

Quarterly net income rose to 18 percent to $170.3 million. Excluding one-time items, Ralph Lauren earned $2.26 per share, exceeding Wall Street estimates for the ninth consecutive quarter.

Analysts on average had expected earnings of $2.16 per share.

Reporting by Uday Sampath in Bengaluru; Editing by Sweta Singh and Sai Sachin Ravikumar

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