By and  on August 6, 2008

Discipline is paying off for Polo Ralph Lauren Corp.

Increasing control over the distribution of its products and tight cost controls are enabling the company to buck the global economic downturn, evidenced by a 7.8 percent jump in first-quarter profits and an increase in full-year earnings guidance. The growth was driven by Polo’s own-retail operations and sales at higher profit margins.

Ralph Lauren, chairman and chief executive officer, said worldwide acceptance of Polo’s brands has been “supported by our continued investment in advertising, marketing and public relations, including high-profile events such as Wimbledon and the Olympics. Our status as one of the world’s few truly global luxury lifestyle brands is an incredible asset for our company.”

luxury lifestyle brands is an incredible asset for our company.”

Wall Street liked the news, sending Polo stock up Wednesday by 7.1 percent. Shares gained $4.36 to close at $65.86.

For the three months ended June 28, net income rose to $95.2 million, or 93 cents a diluted share, beating the consensus estimate of 72 cents from Yahoo Finance. That compares with $88.3 million, or 82 cents, in the year-ago quarter. The company said the growth was from a higher gross margin rate and a lower tax rate.

Total revenues were up 4 percent to $1.11 billion from $1.07 billion.

Despite essentially flat wholesale revenues of $574.5 million, versus $574 million, retail sales ballooned 9.4 percent to $492.4 million from $450 million. Same-store sales rose 3.9 percent, with Ralph Lauren stores climbing 5.3 percent, factory stores rising 3.3 percent and Club Monaco stores gaining 2.9 percent. sales jumped 20 percent. Licensing income inched up by 0.9 percent to $46.7 million from $46.3 million.

Although women’s wear performed well in the quarter, men’s wear was even stronger, the company said.

Polo upped fiscal year 2009 earnings per share guidance to between $4 and $4.10 from a prior estimate of $3.95 to $4.05. It ended the quarter with $711 million in cash, cash equivalents and short-term investments.

On a conference call with analysts, Roger Farah, president and chief operating officer, said, “Our first quarter reflects the successful benefits of our long-term strategic initiatives — primarily our commitment to new merchandise development and product innovation, our ongoing attempts to expand our direct-to-consumer and our growing international presence. This multipronged strategy is designed to diversify our businesses, reduce our exposure to any one region of the world or channel of distribution and to give us more direct control over our brands.”

The company’s results over the last few quarters reflect that it is still operating and executing at a very high level, Farah said.

“Our inventories are very well managed, as they are below last year, and at the same time, our retail sell-through rates have been strong and our profit margins have benefited as a result,” he said. “Our cash flows have grown with more direct control [that] we now have over our businesses, and we have made the right decisions in order to deliver a very strong balance sheet with large growing cash balances and very little debt. Our entire management team has supported and delivered on these key short-term operating priorities. Because of this cross-functional discipline, we are comfortable pursuing our long-term initiatives.”

In a telephone interview, Farah boasted that, with strong internal support, the company was in a good financial position to take advantage of unique opportunities.

“It’s amazing, the cash flows that we now generate,” he told WWD. “It’s amazing the way we manage our inventories. And with our low debt, we’re in a position opportunistically to do what we want to do. We don’t have to go looking for either financing or approval from someone. We have been conscientious in operating [the firm] in a disciplined way, and that gives us leverage to do whatever is the right thing to do.”

That means international expansion efforts in Europe and Asia, particularly growth in the Middle East and in Eastern Europe, and taking direct control over certain businesses, such as the children’s wear and golf apparel businesses in Japan from its former licensee Naigai Co. Ltd., which continues to hold the license for Polo-branded hosiery in Japan. The latest deal gives Polo direct control over product categories that account for 75 percent of its wholesale volume in Japan.

So far the company has closed doors in Europe that it believes no longer represent the brand’s positioning, but is increasing the volume in places where it can give the brand better quality representation. Even with fewer points of distribution, the European business has grown to more than $1 billion from $180 million when Polo bought the final components of that operation in 2001.

Farah noted that productivity in Europe is 50 percent greater than in the U.S. The firm generates about $1,000 a square foot in the U.S. and $1,500 a square foot in Europe, a reflection of differences in real estate.

“Europe has a very concentrated, city-driven retail experience. It doesn’t have the mall suburban stand-alone environment that we have in the states,” he explained.

Currently on the agenda is the building of a store across from the Rhinelander mansion flagship at 72nd Street and Madison Avenue in New York. The new site will house three floors of women’s apparel and accessories lines and one floor of home. The mansion will be dedicated only to men’s wear.

Similarly, in Paris, the company will open a women’s-only store late next month, featuring three floors of apparel and accessories. Farah said next year the company will open another store in Paris that will feature a full complement of men’s and women’s offerings, as well as a restaurant, on the Left Bank.

The company will launch sportswear from its Lauren line in 100 doors in Western Europe in spring 2009, followed by footwear, accessories and dresses in future seasons.

“We eventually want to get [Lauren] into Asia and Eastern Europe, but with much of the territories under license, it is hard to put a business such as Lauren into a licensed business,” Farah observed. “In Japan, where we have 75 percent direct control, it will come to Japan much sooner [when] we can properly position the brand and get the real estate to present the brand in the appropriate way.”

The company is also in discussions with key retail partners regarding a replenishment program. According to Farah, the initiative will benefit both the retailer and Polo.

“There are some items that are worthy of replenishment and some you want to sell out. The retailer can benefit if it is run right. There’s a lot of information about size scale, and one can learn from customers what size they’ll need, which can help in our novelty and fancy deliveries. From the information, we can adjust size scale in different regions.”

Jennifer Black, analyst at Jennifer Black & Associates, said the quarterly results “demonstrate to us that this company both increasingly segments its merchandise offering successfully into an array of consumer groups and successfully taps new markets one by one….As it moves along the curve of buying back franchises that gave it an initial cost-effective means to grow its business, the company increasingly gains power over its ability to control its brand image and merchandise offering. Through likely continued turbulent economic waters, Polo Ralph Lauren is one company that, over time, should continue to create shareholder value.”

She added that the firm’s sizeable wholesale and retail business both in the U.S. and overseas “enables this company to penetrate segments where demand is growing and pull back where demand is leaner.”�

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