By  on February 4, 2010

Despite a 5.5 percent gain in third-quarter profits, shares of Polo Ralph Lauren Corp. Wednesday fell 8.4 percent as investors gauged the impact of planned investments in Asia on fourth-quarter earnings.

Tracey Travis, the company’s chief financial officer, said on a conference call that Polo’s expansion plans for Asia could take a bite out of fourth-quarter earnings of 8 cents to 10 cents a diluted share. The firm took back direct control of its operations in key Asian markets on Jan. 1.

Roger Farah, president and chief operating officer, told WWD there might be a “lack of understanding of the short-term impact of starting up a business from scratch.”

He pointed out the investors with whom he spoke support the firm’s long-term strategy, and he speculated there might even have been some short-term profit taking on Wednesday given the firm’s stock was up through most of 2009.

Shares of Polo finished Wednesday’s New York Stock Exchange session at $78.51, down $7.16.

“These higher expenses are not a surprise to us, and we believe that the investments associated with this new venture will prove to be minor in comparison to the financial gains that will be achieved over the longer term,” noted analyst Jennifer Black of Jennifer Black & Associates.

Moving to merchandising issues, Farah said customers worldwide have been gravitating toward men’s and women’s Blue Label products due to their price points, which seem to resonate best given the current economic backdrop.

Although pleased by an uptick in shopping by luxury consumers, Farah said he doesn’t expect their spending to return to the levels reached in 2007 or even 2006. “I personally think we are entering a new period, where we’ll see more responsible spending by the consumer. If they like something, they will buy it. Now that the worldwide supply and demand are in alignment, we won’t see excessive promoting which [tends] to devalue brands. The strong brands will thrive,” he said.

Farah said Chinese consumers “are looking for designer, luxury and logoed product.”

For the three months ended Dec. 26, income rose to $111.1 million, or $1.10 a diluted share, from $105.3 million, or $1.05, in the year-ago quarter. Total revenues inched down 0.6 percent to $1.24 billion from $1.25 billion.

Sales were essentially flat at $1.2 billion, with wholesale volume down 7.9 percent, to $603.5 million, and retail volume up 8.2 percent, to $592.1 million. Comparable-store sales, including sales at, rose 6 percent, reflecting a 4 percent gain at Ralph Lauren stores, 6 percent increase at factory stores, 7 percent spike at Club Monaco stores and a 13 percent jump at

For the nine months, income rose 1.1 percent to $365.4 million, or $3.60 a diluted share, from $361.5 million, or $3.56, a year ago. Total revenues fell 4 percent to $3.64 billion from $3.8 billion.

Ralph Lauren, chairman and chief executive officer, said, “Customers appreciate our unwavering commitment to quality and innovation, which are defining characteristics of our company.”

Farah told analysts on the conference call the company first got wind of a possible global financial crisis two years ago and responded by “developing focused merchandise strategies and calibrating our global shipment volumes with the expected consumer demand trends” and exploring supply chain initiatives.

“The decisions we made to adjust our merchandising assortments to accommodate the new customer mind-set, in addition to taking significant costs out of the business, helped drive the operating profitability of our retail segment to 17 percent, up 75 percent in dollar terms, compared with last year,” Farah told analysts.

In addition to taking back control of what were formerly licensed territories in several Asian countries, which included hiring and training 700 employees and building a supply chain and logistics network to service the region, Polo is also in the market with its first handbag collection for its Lauren brand, which will be delivered to department store doors in the fall.

Due to better-than-expected year-to-date results, Polo expects fiscal 2010 net revenues to decline at a low-single-digit rate, compared with prior guidance of a midsingle-digit decline. Polo also said that, beginning in the fourth quarter, results from the new Asia-Pacific operations will be primarily reflected in its retail segment.

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