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Polo Shares Rise Despite 19.3% Profit Drop

Shares of Polo Ralph Lauren jumped more than 7 percent Wednesday.

Shares of Polo Ralph Lauren jumped more than 7 percent Wednesday after the company posted lower first-quarter results that still managed to easily beat Wall Street estimates.

Net income for the three months ended June 27 fell 19.3 percent to $76.8 million, or 76 cents a diluted share, from $95.2 million, or 93 cents, in last year’s comparable quarter. The consensus among analysts was for earnings per share of 50 cents, according to Yahoo Finance.

Total revenues declined 8.1 percent to $1.02 billion from $1.11 billion. Included in revenues was a 9.6 percent drop in wholesale sales, to $519.5 million, and a 6 percent decrease in retail sales, to $463 million. Comparable-store sales were down 9 percent with Ralph Lauren stores down 25 percent, factory stores down 4 percent and Club Monaco off 15 percent. Sales at RalphLauren.com, now included in retail sales numbers, jumped 14 percent. The balance of the revenue was from licensing income.

Shares closed at $68.31, up $4.52, or 7.1 percent, in New York Stock Exchange trading Wednesday. In the past year, the stock has traded as high as $82.02, back on Sept. 19, and as low as $31.22, on Nov. 20.

“Each of our brands has a unique channel of distribution and is focused on a specific customer, enabling us to gain market share. Regardless of the near-term economic challenges, we continue to have a clear, compelling growth trajectory ahead of us and our company has a long-standing track record of success,” said Ralph Lauren, chairman and chief executive officer.

Roger Farah, president and chief operating officer, told Wall Street analysts on a morning conference call the company anticipated weaker consumer demand trends and nearly two years ago took proactive measures to reduce shipments across its distribution channels.

“So even though our shipment volumes are down, our sell-throughs and margin trends are stronger and we continue to gain market share at our leading wholesale accounts around the world,” Farah said.

While gross profit declined 5.8 percent to $601.2 million, gross margin increased to 61.2 percent of net sales from 59.8 percent in the first quarter of last year.

The company’s primary focus these days and for the next few quarters to come, is its expansion in Southeast Asia, where it is also making a bigger push in the accessories categories. Farah told analysts the firm expects to have more than 200 locally based employees for its corporate and operational infrastructure and more than 500 store employees by the end of the fiscal year, which ends in March 2010. Polo already has 500 employees in its manufacturing group based in Southeast Asia.

In a telephone interview, Farah said the company’s balance sheet is healthy, with $1.1 billion in cash, or $671 million net of euro bond debt due in 2013.

As for the Rugby concept, which already has 11 sites in the U.S., Farah said the company will follow up on its e-commerce Rugby Web site by opening some international store locations within the next 12 months.

Secondary concepts have been problematic — and a frequent target of cost cutting — for many apparel brands, but Farah expressed confidence in Rugby.

“We’re not disappointed in Rugby,” he said, noting that after the international stores open, the company will spend about six months reviewing the U.S and international stores and the online site before deciding the next move for the concept.

He said Polo will continue to operate with “cautious expectations” since the improvement in consumer confidence from its low point in February still hasn’t translated into consumer spending.

Reacting to the better-than-expected results, retail analyst Jennifer Black, of the firm that bears her name, described Polo in a note to clients as “one of the best companies operationally, with its highly sophisticated supply chain and sourcing organization, which enables it to react quickly to changes in demand and quickly chase goods when necessary.”

One of the changes in consumer shopping behavior has been a shift toward casual dressing and away from career and tailored business, which Farah said has been “going on for the better part of the year.” The casual component of its business has remained strong. While unsure if the trend is permanent, he did note consumers working part-time or at home tend to dress more casually. However, he said the career and tailored portions of the business could heat up when the job market improves and men and women consider how to dress for job interviews.

The economic environment has helped Polo’s business in dresses, he said, in part because it is less expensive to buy one dress than three or four components to pull together for one outfit.