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Polo Profits Jump, Propelled by Luxury And Full-Price Selling

NEW YORK — Accelerating luxury product sales and reduced off-priced selling overwhelmed a weak retailing environment and produced bottom- and topline gains for Polo Ralph Lauren in its second quarter.<br><br>For the three months ended Sept. 28,...

NEW YORK — Accelerating luxury product sales and reduced off-priced selling overwhelmed a weak retailing environment and produced bottom- and topline gains for Polo Ralph Lauren in its second quarter.

This story first appeared in the November 7, 2002 issue of WWD.  Subscribe Today.

For the three months ended Sept. 28, income was up 8.2 percent to $51.7 million, or 52 cents a diluted share, from $47.8 million, or 49 cents, in the year-ago quarter.

Revenues were up 7.6 percent to $640.8 million from $595.7 million. For the quarter, wholesale sales rose 10.8 percent to $310.7 million from $280.4 million, while retail sales increased 6.5 percent to $263.8 million from $247.8 million. Licensing income dipped 1.8 percent to $66.3 million from $67.5 million.

The company reaffirmed its full-year earnings-per-share guidance of $1.80 to $1.90, as well as EPS ranges of 45 to 50 cents in the third quarter and 75 to 80 cents in the fourth. On average, analysts polled by Thomson First Call had expected $1.83 for the year and 47 cents and 77 cents for the third and fourth quarters, respectively.

Investors loved the results and outlook and sent shares of the company up $2.24, or 11.8 percent, to close at $21.25 in New York Stock Exchange trading.

Ralph Lauren, chairman and chief executive officer, said in a statement, “The appeal of our luxury products continues to grow, despite a tough retail environment. Whether it’s our women’s collection, our men’s Purple Label or our accessories, we are creating something special and the customer is responding positively. In our retail stores, we are seeing the same strong response because we are generating excitement through our designs, our products, our advertising and our store environments.”

Lauren said that the demand for the company’s luxury products has been ongoing, both domestically and internationally, and it “reinforces our belief that we are on track to deliver another record year.”

The company said Thursday that it is conducting a strategic review of its European business and has developed proposals to centralize and more efficiently consolidate its growing business operations. Since acquiring Polo Europe in 2000 and Polo Italy in 2001, the company has maintained five separate operational offices: two in England, one in France and two in Italy. The new plan places consolidated back-office functions at a new headquarters in Geneva, Switzerland. Discussions will begin shortly with the different work councils — elected employee representatives acting as liaisons with the corporate owner in a nonunionized capacity — in the three countries. Depending on the course of those discussions, the final details of the plan could change.

Roger Farah, president and chief operating officer, said in a conference call Thursday that the process can take several months. He referred to the separate back office functions as redundancies, with the Polo Europe business run by entrepreneurs using a “rickety infrastructure.”

Farah told WWD that the European business is “on plan, tracking [toward] a $500 million business, both retail and wholesale, this year.” The European business, at the time it was acquired, was a $180 million operation. Separate buying offices in the European countries would remain, even after the back-office consolidation is effected, he said.

He noted during the phone interview that since the acquisition, the European business has had a “38 percent compounded growth rate. It is growing faster than the U.S business, which is a more developed business.” Boosting the surge in European sales are the continent’s different economies, which Farah said had held up better than that of the U.S.

Another area of growth for the company is its Asian business. The series of transactions in connection with Polo’s Japanese business, announced last month, are still expected to close by the end of March 2003. That business, which consists of just two stores, does about $500 million in annual wholesale sales, Farah said. He told analysts during the call that the Japanese business can be doubled to $1 billion, and that the reason for the acquisition was to gain “greater control of the brands and have better influence on their distribution in the marketplace.”

Farah referred to Japan as the “linchpin to Asia.” Sales of luxury products are largely stimulated by the Asian customer, whether through local purchasing or overseas travel. With tourism steadier now, the Hawaii store, for example, has been trending better in sales than it did in the aftermath of Sept. 11.

Farah disclosed during the conference call that sell-in rates in Polo’s men’s wear business are at healthier levels now, resulting in a “dramatic curtailing of [sales] at off-pricers.” Off-priced sales are down 46 percent, Farah commented.

A tougher policy on returns has also helped. Jennifer Black, analyst at Wells Fargo Securities, commented in a research note, “We continue to think that Polo’s stance with respect to the department stores — no longer having a return policy and avoiding paying markdown allowances — is working well and should continue to do so. Over the past several quarters, the company has made a concerted effort to sell in more appropriate levels of merchandise in order to make the stores look better and to obtain a better regular price sell-through.”

Farah noted that, while “the men’s department store business continues to be challenging, we think our products are performing better than the competition.” the president said, adding that spring bookings are on plan — about flat with last year.

“The women’s business is exceeding expectations. Black Label is performing well in the top stores. We’ve increased the women’s Collection products that are produced in Italy. The spring market bookings are up 25 percent,” Farah told analysts.

The firm is encouraged by a recent improvement in retail sales, evident since late September. Sales of cashmere products, which had been soft, recently have sold at a high rate, he noted.

One big push this year is the company’s effort to increase its accessories offerings in certain key categories, such as men’s Purple Label, which Farah said has been a hit at retail. The company, which is pushing a bigger assortment for gift giving, is featuring desk accessories at its Polo retail stores, along with small leather goods. On the women’s side of the business, cold weather accessories such as scarves, hats and belts have been strong. Accessories available through licensees, such as sunglasses, have been strong and bode well for worldwide growth. Farah said the company has seen a “nice uptick” as well in the footwear business.

For its holiday marketing efforts, the company will focus its holiday mailing to key customers. Two commercials will be shown throughout the season, with the first to support its new Polo Blue fragrance and the second for its polo.com business.

For the six months, income was down 26 percent to $58.2 million, or 59 cents a diluted share, from $78.9 million, or 80 cents, a year ago. Total revenues were essentially flat, dipping 0.5 percent to $1.107 billion from $1.113 billion.