By  on August 6, 2014

Ralph Lauren Corp. appears to be in the early stages of a retail push for growth.

That was the gist of comments by Jackwyn Nemerov, president and chief operating officer, and Christopher H. Peterson, chief financial officer, during a conference call to Wall Street analysts following the company’s report of first-quarter results. While the results were better than expected, profits still slid 10.5 percent for the period, owing largely to infrastructure investments such as store-opening costs.

The company will open its first Ralph Lauren luxury flagship in Greater China this fall; its first Polo flagship on Fifth Avenue at the end of this month, as well as an 8,000-square-foot Polo store in Singapore next month, and two Club Monaco stores are set to open shortly in London. The company is also officially unveiling its Polo women’s line when the Fifth Avenue flagship opens.

Ralph Lauren, chairman and chief executive officer, said, “Our first-quarter results demonstrate that we are making the right strategic decisions and investments to support our long-term growth objectives.”

Nemerov said during the call that despite geopolitical tensions and macroeconomic pressures overseas, the company’s “brands and products performed very well in the first quarter. We achieved double-digit growth in Europe led by continued strength in our retail operation and increased wholesale shipments for the spring-summer season.”

She said the early read on the first collection of Polo tailored clothing for men’s as a directly operated business was “very strong.” Nemerov also noted that the new Polo flagship on Fifth Avenue is “just the beginning of a global rollout that will take place over the next several years.”

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As for what’s trending in the second quarter for women’s, Nemerov said, “We’re seeing that the dress category has been very strong, as has been the skirt category. We’re seeing that the customer wants to show their legs. That speaks to the femininity of our look and the feel of our product.”

The company is also assessing future plans with Macy’s for American Living, the lifestyle line created by Ralph Lauren’s Global Brands unit that was initially an exclusive at J.C. Penney Co. Inc. The line’s sportswear offering will be rolled out at all Macy’s doors for fall, with a dress rollout at a limited number of doors.

There are also more retail rollouts ahead, although the timing hasn’t yet been set. According to Peterson, also in the telephone interview, the company is optimizing its fleet of Denim & Supply stores in terms of merchandising and assortment plans before it considers rolling out that concept. There are two in the U.S. and a number in Asia and Europe.

He said the company has accelerated its pace of store openings for Club Monaco. There are 61 company-operated stores, with most of the retail locations in the U.S. and Asia.

Overall, the company has 436 directly operated stores. As well as the 61 Club Monaco stores, it has 140 Ralph Lauren stores and 235 Polo factory stores, plus 503 concession shop locations worldwide. That’s separate from the stores run by licensed partners overseas.

With the focus on retail, the European economic backdrop for the company appears to be holding steady. According to Peterson, “Our business is doing very well in Northern Europe, in the U.K. and Scandinavian markets. At the same time in Southern Europe, in Spain and Italy, those markets are stabilizing.”

For the three months ended June 28, Lauren’s net income dropped to $162 million, or $1.80 a diluted share, from $181 million, or $1.94, a year ago. That was better than Wall Street’s earnings per share estimate of $1.76.

Total revenues gained 3.3 percent to $1.67 billion from $1.61 billion, which included a 3.7 percent wholesale net sales decline to $708 million and a 9.2 percent retail net sales gain to $960 million. Same-store sales on a consolidated basis rose 3 percent. Lower wholesale revenues were due to shifts in timing of certain shipments between quarters. Wall Street had been expecting total revenues of $1.73 billion.

Selling, general and administrative expenses rose 7.3 percent to $789 million from $735 million. The company said an operating margin of 14.3 percent reflects investments in growth initiatives. It spent $85 million in capital expenditures mostly to support new retail stores and infrastructure investments.

For the quarter, the company’s gross margin was 61 percent, up 30 basis points. Peterson said the 30-basis-point increase is likely to trend for the balance of the year, although the actual numerical percent may vary.

Based on his experience at Procter & Gamble, Peterson also introduced a low-cost commercial paper program at the group during the quarter as a capital-efficient way of financing, a first for the apparel firm. The cfo explained during the interview that the program is “completely flexible.” It allows the company to borrow up to $300 million of short-term borrowings — for as little as one week to a few weeks — in the commercial paper market. So far the company has issued $20 million in commercial paper last month at a rate of 0.3 percent. Peterson compared that interest rate with a five-year note the company issued in September that had a rate of 2.5 percent. The program can be ramped up or down, and once the amount borrowed has been paid down, it can be re-borrowed again.

The company reiterated its expectation that consolidated net revenues for fiscal 2015 will rise by 6 to 8 percent. It also said it expects second-quarter consolidated net revenues to increase by 4 to 6 percent.

Shares of Ralph Lauren inched up 0.2 percent to close at $156.88 in Big Board trading.


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