By  on November 6, 2013

NEW YORK — Forget the second quarter hiccup — it’s the third quarter and beyond that has investors excited about Ralph Lauren Corp.’s growth prospects.

Shares of Ralph Lauren Corp. surged 5.5 percent to close Wednesday at $180.52 in Big Board trading after the company raised its full-year revenue forecast and said it expects a strong third quarter, which includes the all-important holiday selling season.

Ralph Lauren is solidifying its position as a specialty retailer as stores and direct-to-consumer continue to become a bigger component of its overall business strategy. In 2003, retail for the first time generated more than half the company’s revenues, but that shifted back to wholesale over time when the company took some licensed operations back in-house. With continued investments in retail and e-commerce, the company looks likely to remain more of a specialty retailer, relinquishing its past wholesale roots.

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In her first conference call with Wall Street analysts in her new position, Jackwyn Nemerov — who became president and chief operating officer in September when Roger Farah became executive vice chairman — said, “The diversity of the Ralph Lauren portfolio, the strength of our lifestyle positioning and our increasingly global reach are enviable assets that position us for strong long-term growth.”

For the second quarter ended Sept. 28, net income was down by 4.2 percent to $205 million, or $2.23 a diluted share, from $214 million, or $2.29, a year ago. Net income was impacted by unfavorable foreign currency dynamics, the integration of the Chaps men’s sportswear business and lower profits from concession shops. The company also has been investing in its global retail operations, which include e-commerce platforms and technological enhancements. Results still beat Wall Street’s consensus expectations of $2.20 a share by 3 cents.

Net revenues for the period rose 2.8 percent to $1.92 billion from $1.86 billion. That includes a 3.1 percent gain in net sales to $1.87 billion from $1.82 billion. Wholesale net sales rose 1.4 percent to $928 million, while retail net sales were up 4.8 percent to $944 million. Consolidated comparable-store sales fell 1 percent.

For the six months, net income fell by 5.1 percent to $386 million, or $4.17 a diluted share, on a net revenue increase of 3.3 percent to $3.57 billion.

Ralph Lauren, chairman and chief executive officer, said, “I am excited about the growing momentum in our business worldwide and confident in the relevance of our strategies to deliver meaningful shareholder value creation over the long term.”

The company raised the low end of its full-year fiscal 2014 revenue outlook to 5 percent to 7 percent growth from the previous 4 percent to 7 percent range. For the third quarter, it expects consolidated net revenues to rise by 8 to 10 percent.

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Nemerov spoke briefly about the company’s three growth pillars: expansion of international presence; direct-to-consumer, including e-commerce, and merchandise innovation.

The company’s goal is to have the Americas, Europe and Asia each represent a third of the firm’s total revenues. Currently, the Americas is 66.6 percent, Europe is 20 percent and Asia is in the low-double-digit percent range. In terms of direct-to-consumer, the company will continue to open stores for its different brands. It’s currently working on the new Polo flagship on Fifth Avenue here, set to open in September. The intention is to build out the Polo concept globally, and the company already has a site planned in London for Polo, Nemerov said. On the digital front, which includes e-commerce, the company launched its South Korean site about six weeks ago, she said. The company also transacts online in the U.S. and in 10 European countries. For merchandise innovation, Nemerov cited the company’s luxury products, such as the Soft Ricky bag and the new Safari and Stirrup Steel Link watches.

In a telephone interview, Nemerov said, “We are finding that consumers are reacting to newness, and are clearly motivated by something they don’t have in their closet. When we put out a product that is fresh and exciting...early results have been quite exciting.”

Christopher H. Peterson, executive vice president, chief administrative officer and chief financial officer, said in the telephone interview that the company took back its New Zealand and Australian Ralph Lauren licensed operation when it expired on June 30. That business currently includes two department store accounts that carry a full assortment of products, full-priced stores and outlet stores in those territories.

He also said that over the next three to five years, gross margins can grow due in part to a business shift to retail from wholesale.

“We expect our retail segment to grow faster going forward as the company focuses on growth in places like Greater China and Southeast Asia, where they do not have a developed wholesale channel. The strategy will be more about opening freestanding stores. The e-commerce business is growing disproportionately fast,” the cfo said. He noted that gross margins will be higher internationally as the company continues its expansion in Asia, where price points tend to be higher with better gross margins than in the core U.S. business.

Peterson added that the retail segment carries a “higher gross margin” than its wholesale component. Another positive impact on gross margin growth will be the accessories category.

The cfo said that accessories are about 10 percent globally of the overall business and that it is a category that has higher gross margins in general and will continue to grow at a faster rate than apparel.

On a macroeconomic front, Peterson said there is a bifurcation in the consumer groups in the U.S., which is Ralph Lauren’s largest consumer base. The lower-end consumer is feeling a tougher 2013, due in part to the payroll tax at the beginning of the year, he said. The luxury consumer, boosted by the wealth effect of an improved housing market and an equity market that has done well in the past 12 months, is feeling more confident. That leaves the aspirational consumer still somewhat in the middle, Peterson observed.

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