By  on August 9, 2007

Investors on Wednesday drove shares of Polo Ralph Lauren Corp. down by almost 12 percent after the company lowered its fiscal year 2008 outlook due to a higher tax rate, even though it also said first-quarter income rose by 10.1 percent.

Polo's share price declined 11.8 percent to close at $81.80 in trading on the New York Stock Exchange. Nearly six million shares traded, compared with a three-month average volume of 919,503. The company is forecasting diluted earnings per share for fiscal year 2008 at between $3.64 and $3.74 from prior expectations of between $3.70 and $3.80, due to a 1 percent increase in its tax rate to 39 percent from 38 percent.

The fall in the shares came despite a strong first quarter for Polo, during which income rose to $88.3 million, or 82 cents a diluted share, in the period ended June 30 from $80.2 million, or 74 cents, in the same year-ago quarter. Revenues rose 12.2 percent to $1.07 billion, which included a 16.9 percent gain in wholesale sales and a 9.2 percent rise in retail sales, from $953.6 million. Retail same-store sales grew 7.6 percent in the quarter.

"The momentum in our European business is especially encouraging, and we are excited by our new opportunities in Japan. We are fortunate to have the talent and financial strength to pursue multiple initiatives. We recently completed our first American Living line review and I came away even more convinced of the tremendous growth potential for our Global Brand Concepts business," said Ralph Lauren, chairman and chief executive officer, in a statement.

Roger Farah, president and chief operating officer, told Wall Street analysts during a conference call that fiscal 2008 will be an investment year, both financially and operationally as the company continues to execute on three main strategies: expanding its direct-to-consumer business, growing its international operations and developing new merchandise categories with discreet channels of distribution.

As for international operations, Farah said during the analysts' call that "momentum in Europe for both wholesale and retail operations across all product categories is encouraging," and that the company still has expansion potential in the Continent. He also said, "We believe the opportunities in Japan will mirror the success we've achieved in Europe."He boasted that American Living, the first under the Global Brands Concepts business, was well received by J.C. Penney, which will carry the collection exclusively. What the company learns from customer reaction to the collection when it launches in spring 2008 will help in future discussions with other retailers interested in participating in the program, Farah said. The company is already at work on the fall line.

In a telephone interview, Farah said Polo has received substantial interest from companies wishing to partner with it. Those firms expressing interest in their entirety represent each major channel of distribution, Farah said.

The president also said in the phone call that this was the first time in a long time that "dresses led the charge in women's casual sportswear."

He was referring to how the changing fashion trends helped to shift the paradigm of Polo's women's business, with growth of sales of men's products outpacing gains in women's merchandising categories for the first time in a long while.

Farah emphasized in the interview, "We are on track with our plan for the rest of the year."

He said the company has two big store openings planned for fall 2008, both in Paris. In addition, Polo is still on track for a fall 2008 launch of a watch line in partnership with luxury goods group Compagnie Financière Richemont.

"Ralph Lauren continues to build on its competitive advantage of executing on its branding and world-class distribution capabilities. As we have been saying, the investments the company is making will better enable it to strategically and pristinely grow the brand. The short-term consequence is a less predictable earnings stream over this year as purchase accounting and investments in various initiatives cause more volatility in the cost side of the business. We believe the company will continue to be a world-class operation with strong organic growth and enviable margins over the long-term and would opportunistically buy the stock on pullbacks due to what we perceive to be short-term volatility caused by the noise in the numbers," wrote Jennifer Black, whose firm bears her name, in a research note.

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