Green Pastures Ahead: Polo Net Up 165% and Outlook Strong

The growth engine at Polo Ralph Lauren keeps on churning, as evidenced by a 165.1 percent leap in the company’s first-quarter income.

NEW YORK — Consumers with a seemingly insatiable appetite for apparel and accessories helped drive up net income at Polo Ralph Lauren 165.1 percent as revenue grew 24.1 percent.

Management at the iconic lifestyle company described its first-quarter results as strong, and its brand as well-received.

“With sales in our retail stores outperforming the industry, we see phenomenal response to our luxury designs. Our Polo brand continues to lead in the men’s wear arena, and its performance this spring at retail has never been stronger. The new deliveries of our Lauren women’s line have been well received,” said Ralph Lauren, chairman and chief executive officer, in a statement.

Polo posted income of $13.4 million, or 13 cents, for the three months ended July 3, compared with $5.1 million, or 5 cents, in the same year-ago quarter. Excluding adjustments such as restructuring charges and foreign currency gains and losses, first-quarter income would have been $14 million, or 14 cents, representing a 289.5 percent boost over last year’s net income of $3.6 million, or 4 cents.

On the top line, net revenues rose to $592.8 million from $477.7 million. Results include a 7.6 percent decline in licensing royalties, representing the loss of the Lauren licensing income, now reported as part of the wholesale business. Sales rose 28.8 percent to $535.8 million from $416.1 million, which includes a 47.9 percent jump in wholesale sales to $239 million from $161.6 million and retail sales gains of 16.6 percent to $296.8 million from $254.5 million. Same-store sales soared 16.1 percent at Ralph Lauren stores, 10.4 percent at the Club Monaco chain and 11.6 percent for the company’s outlet stores.

Roger Farah, president and chief operating officer, said in a telephone interview, “We’re very pleased with the results and the contribution from all the pieces and parts.”

The latest quarter represents the first time the company delivered a pre-fall women’s collection shipment to stores. Polo will also deliver a pre-spring collection, bringing the total number of shipments to four.

Farah explained that the pre-fall women’s collection was shipped to stores at the end of June and in early July, in advance of the fall runway deliveries that hit stores at the end of July and August.

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“We’ve had a terrific reaction from the retailers and our key specialty accounts. The extra delivery has given fall a flying start. The delivery also ensures a steady flow of product into the stores. The consumer is constantly shopping for newness. She is back in the stores two, three, maybe four times a month. Continuing to deliver new product in front of her is part of the success of what’s driving Polo retail,” Farah said.

Farah confirmed what market sources said about Polo’s customer base: teens and urban consumers are eyeing Polo as the brand of choice. In particular, teens representing the aspirational shopper in the segment have been gobbling up Polo products, noted Wall Street analysts and other financial sources.

“In the last year or two, through advertisement and change in some of the fit of the product, Polo has become a status symbol for teens and young women in their early twenties. The urban consumer has always liked Polo. Ralph’s done a lot to orient the market [and the brand so that] one isn’t favored over the other. The hipness of the Ralph Lauren brand gravitates toward color, making it cool and hip for everyone,” Farah said.

Jennifer Black, of Jennifer Black & Associates, believes the company’s 165.1 percent profit gain in the quarter is the beginning of more profitable times to come.

“All the back-of-the-house work that Roger did in the last couple of years is finally paying off, along with the great merchandising assortment. The results are just phenomenal. And it proves that the company was right to pursue its retail strategy. Some thought that the acquisition of Club Monaco was wrong, but the comps show otherwise. The decisions that the company has made are based on Ralph’s vision to control destiny rather than be controlled,” the analyst said.

Black said investors and analysts didn’t initially agree with the company’s decision to cut down on the number of doors of its men’s business. “That was a smart decision to make, because it resulted in the integrity of the brand going up. Sometimes the focus is on rising sales when there really should be an emphasis on the quality of those sales. In the end, it is the quality of sales that represents the win-win for any brand,” she said.

Speaking of wins, shares of Polo rose $1.49, or 4.5 percent, to close at $34.61 in trading on Wednesday on the New York Stock Exchange.

Polo expects second-quarter revenues to rise in the high-teens percentage range, with wholesale sales to increase in the low-forties range. Wholesale sales to Europe are projected to rise in the high-single digits. Retail sales are expected to rise in the mid-single-digit range. While the company provides guidance for the quarter, it no longer provides earnings per share estimates for the quarterly periods. For the year, the company guided EPS to be in the range of $2.35 to $2.45. Revenues are projected to grow in the low-thirties percentage range, coupled with a mid-single-digit gain in retail sales.

Polo also completed the acquisition of RL Childrenswear, its licensee for children’s wear in the U.S., Canada and Mexico. The company said it expects fiscal 2006 revenues for children’s wear to be more than $200 million, with EPS to be accretive in the range of 15 to 20 cents.

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