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Polo’s Cost of Growth: Short-Term Blip Ahead, But Outlook Still Bullish

Polo Ralph Lauren Corp. kept a brisk gallop in the third quarter, but warned its pace may slow slightly for the fiscal year.

NEW YORK — Polo Ralph Lauren kept a brisk gallop in the third quarter, but warned its pace may slow slightly for the fiscal year.

The company posted third-quarter profits that leapt 20.9 percent — bolstered by strong sales of its luxury goods. For the full year, though, Polo Ralph Lauren scaled back its profit outlook as it expects to take charges relating to the reacquisition of Polo Jeans as well as store closures. Investors retreated on the news, and the stock closed Tuesday down 5.7 percent to $54.17.

Still, the firm remains optimistic in its growth plans, saying it wants to expand its luxury accessories offerings, build a global denim business, grow its Asian operations and open more Club Monaco stores over the next year.

“This is an exciting time for our company as we continue to introduce new product categories and take more direct control of our brand. The Ralph Lauren brand has never been stronger as the demand for our luxury products around the world is accelerating,” said Ralph Lauren, chairman and chief executive officer, in a statement.

For the three months ended Dec. 31, net income was $90.7 million, or 84 cents a diluted share, compared with $75 million, or 72 cents, in the same year-ago quarter. Analysts polled by Thomson First Call were expecting EPS of 76 cents. Total revenues rose 10.4 percent to $995.5 million from $901.6 million, which included sales of $933.2 million, up 10.6 percent from $843.6 million, and $62.3 million in licensing royalties. The sales figure includes a 6.2 percent increase in wholesale sales to $454 million from $427.4 million, and a 15.1 percent jump in retail sales to $479.2 million from $416.2 million. Total retail same-store sales rose 7.4 percent, which reflected a 10.2 percent increase at Ralph Lauren stores, a 7.1 percent rise at Club Monaco stores and a 6.3 percent gain at factory stores.

In the nine months, net income rose 47 percent to $245.6 million, or $2.30 a diluted share, from $167 million, or $1.61, in the year-ago period. Total revenues were up by 15.5 percent to $2.77 billion from $2.4 billion.

Roger Farah, president and chief operating officer, said during a conference call to analysts and investors that the company will cut back distribution of Polo Jeans from $300 million to $200 million in sales, an effort to get out of the off-price channel to improve the brand. “Another exciting part of the acquisition [of Polo Jeans] is it allows us to really enhance our denim business through multiple brands. Based on contractual issues in the past, that growth was limited. We expect the denim category to be accretive in fiscal 2008,” he told analysts.

This story first appeared in the February 8, 2006 issue of WWD.  Subscribe Today.

In a telephone interview, Farah said freestanding Polo Jeans stores in the U.S. is a “potential retail strategy,” but not until after the company has remerchandised and upgraded the fit and price points of the brand. Polo already operates a few Double R-L stores for high-end denim apparel. There are also some Polo Jeans stores in Asia through licensing arrangements.

Polo is gearing up for the opening of a new 22,000-square-foot flagship in Tokyo next month, which will showcase the company’s luxury labels. The brands have had a presence in Japan for some time now, but they haven’t been as readily available, Farah said, referring in part to how the brands have been merchandised in the past.

“Japanese customers are buying better products on a worldwide basis now [and] the new Tokyo store will be the first time they can see Ralph Lauren product. The new store is basically the size of a mansion and it will help lift the overall market. I think there’s a large business in Japan, and there’s more to be done there,” the president said.

The company also opened a Club Monaco store in Hong Kong in the fall, and its success contributed to Polo’s plan to move more aggressively in fiscal year 2007 to open more internationally licensed stores. “There’s a lot of interest and the Club Monaco name plays well internationally. We were holding back to when we were able to handle it…. We’re starting to push it out a little bit,” Farah said during the call.

The company is also expanding its luxury accessories business. In the fall, the company launched its handbag line, including its Ricky bag. “We had complete sellout with our higher-priced Ricky bags,” Farah said. He explained that the bags were backordered during the fall, and that the company managed to fill all orders in time for Christmas. “I was really stunned by the instant success and customer reaction,” he said.

For now, the accessories business remains in the investment phase as Polo develops its global strategy. Belts sold well during holiday, and the company has an eyewear boutique on Madison Avenue. The footwear business, which the company acquired last summer, will be accretive in fiscal year 2008.

In addition to acquiring the Polo Jeans business last week from Jones Apparel Group, the company said it will close its Club Monaco outlets and Club Monaco Caban Home stores in Canada. The company cut its view on earnings per share for the full-year fiscal 2006 to between $2.80 and $2.85, compared with an earlier forecast of between $2.85 and $2.92.

“The longer-term payoff of having the ability to quickly integrate new ventures should far outweigh the immediate costs of implementing the processes,” wrote Jennifer Black, analyst at Jennifer Black & Associates.

For full-year fiscal 2007, the company is expecting EPS to be in the range of $3 to $3.10.