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Ralph Lauren Q1 Profits Fall

Wholesale sales increase during the quarter, but comparable-store sales at stores were down.

NEW YORK — Shares of Ralph Lauren Corp. fell nearly 8.6 percent Wednesday after the company posted a first-quarter decline in profits.

This story first appeared in the August 8, 2013 issue of WWD.  Subscribe Today.

Shares closed at $173.13 in Big Board trading on Wednesday. While the results generally were in line with Wall Street estimates, the fashion firm typically posts results that beat estimates by a healthy margin. In the current quarter, higher operating expenses due to overall business expansion, required infrastructure investment and the integration of the Chaps men’s sportswear operations hurt the bottom line.

For the three months ended June 29, net income fell 6.2 percent to $181 million, or $1.94 a diluted share, from $193 million, or $2.03, a year earlier. Net revenues were up 3.8 percent to $1.65 billion from $1.59 billion. Revenues included a 5.9 percent gain in wholesale net sales to $735 million and a retail sales increase of 2.6 percent to $879 million, although comparable-store sales decreased 1 percent. The balance of revenues was from licensing income.

The integration of Chaps reflects an increase in wholesale net sales offset by a decline in licensing income from when it was a licensed operation prior to Warnaco Group Inc. being acquired by PVH Corp. Ralph Lauren took back the license, and told Wall Street analysts that the company will also distribute Chaps in the Mexican market in both retail and wholesale locations next spring through a distribution partnership.

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The hit to the bottom line was a 5.5 percent decline in operating income to $276 million from $292 million. That’s due to higher operating expenses that reflect the company’s overall business expansion as it continues to invest in growth initiatives and the required infrastructure. Operating gross margin for the quarter was 16.7 percent of sales, or 160 basis points below the year-ago period.

Ralph Lauren, chairman and chief executive officer, said, “We opened a spectacular men’s luxury flagship store in Hong Kong, our first Polo store in East Hampton [N.Y.] and several additional, high-profile projects around the world are developing nicely….I am confident that the investments we are making today can support profitable, sustainable growth for us over the long term.”

Roger N. Farah, president and chief operating officer, said during the call to Wall Street analysts, “The first-quarter results that we are reporting today continue to demonstrate the resilience of our diversified operating model….We expect our recent investments in new stores, e-commerce operations and international expansion to continue to accelerate sales and profit momentum in the second half of the year.”

In a telephone interview, Farah said that the new Polo flagship on Fifth Avenue here is scheduled to open in September 2014. Currently a selection of men’s Polo items are offered at the Ralph Lauren stores. The East Hampton Polo store, and the one set to open by early fall in Short Hills, N.J., currently include women’s Blue Label. Once the flagship opens on Fifth Avenue it will house for the first time the initiative for the Polo women’s line. “It will be the world of Polo, and will be our first efforts [Polo in one store] for men’s, women’s and children’s,” Farah said.

He noted that the smaller Polo stores, such as in East Hampton and Short Hills, will likely continue to offer some women’s Blue Label instead of Polo women’s merchandise even after the women’s initiative launches. Blue Label for women’s is already featured in the higher-end Ralph Lauren stores.

The company in June opened two Ralph Lauren retail locations in China: a men’s flagship in central Hong Kong and a men’s and women’s store in Shanghai. According to Farah, it will open a Ralph Lauren store in September 2014 in Lee Gardens, a key downtown Hong Kong luxury shopping destination in Causeway Bay, that will house both men’s and women’s fashions and accessories. The Hong Kong store and the Polo flagship here on Fifth Avenue will likely have their store openings a week apart, Farah said.

As for the nonapparel categories, Farah said handbags, small leather goods and footwear have been trending well for the company. There has also been consistent momentum in both watches and eyewear, he noted.

Addressing the consumer base, globally, Farah said, “There’s strength in Germany, U.K., the Scandinavian countries and in emerging markets such as Turkey. That offsets slower sales in the southern European countries, such as Spain, Italy and, to a smaller extent, Greece.”

Farah added that sales in the U.S and China, as well as Southeast Asia, are good. What has been the overall problem has been sales in Japan and South Korea. “When you buy product a year in advance, it takes a couple of seasons to cycle through,” he said.

Of the early read on fall merchandise that has started to ship, Farah said, “We always ask ourselves when we deliver the product in June and July, ‘Who will buy this?’ So far there’s been strong reaction to the women’s Black Label products.”

The company said it expects 4 to 7 percent growth in consolidated net revenues for fiscal 2014, and for the second quarter consolidated net revenues to increase by a low-single-digit percentage.