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NEW YORK — Polo Ralph Lauren Corp. believes the future is in retail — its own. While restructuring charges pushed the company’s third-quarter earnings down 6.1 percent, the firm took comfort in its best retail sales, comparable-store gains and luxury retail profits ever.
In fact, Roger Farah, president and chief operating officer, said the day is fast approaching when Polo will derive the majority of its business from retailing operations.
When pressed during a conference call to elaborate on Polo’s simmering dispute with primary licensee Jones Apparel Group over the Ralph and Lauren names, Farah took the high road, noting only that “Jones has been a good partner and that both companies agree that Lauren has been and continues to be a top performer in the better category.” (See related story, page 14.)
For the three months ended Dec. 28, income was $42.8 million, or 43 cents a diluted share, versus $45.6 million, or 45 cents, in the year-ago quarter. Excluding restructuring charges of $5.1 million for the previously announced consolidation of European operations and foreign currency adjustments, Polo posted a 7.7 percent gain in income to $47.1 million from $43.7 million.
Total revenues for the quarter were up 3.6 percent to $639.2 million from $617.1 million. Licensing income dipped by 1.7 percent to $55.9 million from $56.8 million. Sales rose 4.1 percent to $583.3 million from $560.3 million, which included a 4.2 drop in wholesale sales to $268.3 million and a 12.4 percent pop in retail sales to $315.1 million.
The gains at retail included a 2.3 percent increase in square footage to 1.81 million square feet, in 251 stores, from 1.77 million square feet, in 234 stores, last year. Comps were up 8.7 percent, and represented the third consecutive quarter of same-store sales gains. Polo saw low-single-digit increases in its outlet format and Club Monaco stores and a mid-single-digit gain in its stores.
Polo’s Club Monaco operation posted a 17 percent comp-store increase in December, boosted by improved product flows, strong sell-throughs in tops and accessories and strength in the men’s business.
Ralph Lauren, chairman and chief executive officer, said in a statement: “In a difficult economic environment, I am pleased by our strong performance led by our luxury retail business. That shows that if you create exciting lifestyle merchandise with a distinct point of view and offer it in a unique retail environment, you can succeed despite challenging marketplace conditions.”
Farah told analysts that the company had a “phenomenal consumer reaction to our luxury line that exceeded our original plan. We entered holiday with a strong mix of items, better planning and forecasting and a fresh flow of product to our stores, and dramatically reduced the promotional activity” in its retail formats. He also noted that the relatively new women’s Blue Label, which provides casual apparel for a younger customer, also “exceeded expectations” at its stores.
He pointed out that the men’s suit business picked up sales from a year ago as the “move to more formal business attire is taking root. It gives our customer more reasons to shop at our stores.”
While traffic slowed in the department store business and there were more promotions, Farah said that the company had better sell-ins in the quarter, and an increase in volume in the replenishment business.
The European business in the year’s first nine months had $450 million in sales, more than double the amount the company had at this point in the year at the time of its acquisition three years ago. The gains were driven by strong sales in jeans and enthusiasm for the women’s Blue Label.
He said that the company’s results show a diversified business model that is now better balanced between retail and wholesale revenues: “We are getting to a point where retail sales are bigger than wholesale sales over the next 12 months.” Farah also said the company wasn’t changing its business model, and that the wholesale component of the business will remain a big contributor to the overall fortunes of the firm. However, the gains at its own retail stores and the increased knowledge of how to better operate that business does carry over to its wholesale operation.
In the past quarter, the company, functioning as a vertical operator, has improved the flow of merchandise to its sales floor, resulting in increased sales of full-priced merchandise and a decreased reliance on markdowns to clear inventory. The company, as reported, has been working with its retail partners to effect the same flow levels in the department stores and move merchandise onto the floor closer to season.
In the telephone interview, Farah said that the company plans on having discussions with retailers on issues such as how to better coordinate the flow and what strategies need to be altered to fine-tune the marketing and presentation of in-store shops. While retailers have been receptive to suggestions in the past, Farah pointed out that “some of these things are easy to talk about, but not so easy to do.”
He told analysts that, based on observations on a recent tour of retail doors in cities ranging from the Sun Belt to the Middle Atlantic and Northeast corridors, the company observed there were “plenty of instances where product was available, customers were available” and there were insufficient staffing levels.
Addressing Polo’s department store business, Farah also said during the call: “We are supporting them with as much markdown money as we can. We are giving them more markdown money in this environment to help department stores and our own business perform.”
He said that providing support for its retail partners is not contrary to its “no-return” policy announced last year, but also declined to disclose the average percentage increase in the support given to retailers.
“At the end of the day, the big bucket that everything fits into is [how you support] your brand. Markdown money, where appropriate, [is given] to help retailers clear out goods to get to the next season,” he said.
The no-return policy pertains to the preservation of the “premium” quality of its brand equity through a decrease in reduced-price selling. “We try to sell less so the retailer can sell better. At the end of the day, we all end up with less leftovers,” he said.
Striking a “less is more” stance, Farah told Wall Street: “The more vertical we are, the more we can supply a fresh flow of product if we need to. What’s driving our business is sales of [our] high-end products. Our view is that there were too many goods being sold into the department store channel, resulting in too much promotional activity. Too much excess merchandise came back to us and we had to sell in the outlet and off-price channel.”
He said that, with better planning, sell-throughs will increase, promotional pressures will lessen and “we don’t have the excess merchandise to dump off.”
Later, he said: “There are plenty of experienced wholesalers not performing as retailers, as evidenced by recent decisions by some to get out. Wholesalers are focused on product design and manufacture, and [are used to] shipping large quantities to their customers. There’s an art to design and retail where you are selling one product at a time. It is a different mind-set, and not a lot of wholesalers understand the difference.”
For the fourth quarter, the company reaffirmed previous earnings guidance in the range of 75 to 80 cents a share. For fiscal 2004, earnings per share are expected to land between $1.95 and $2.05.
Shares of Polo closed at $21.10, up 40 cents, or 1.9 percent, in trading Thursday on the New York Stock Exchange.
For the nine months, income fell by 18.8 percent to $101 million, or $1.02 a diluted share, from $124.5 million, or $1.26, a year ago. Revenues inched up 0.9 percent to $1.75 billion from $1.73 billion.