Polo Ralph Lauren Corp. Wednesday weathered a rare earnings decline in the fourth quarter as it plotted a course for future growth through international retail expansion.

This story first appeared in the May 26, 2011 issue of WWD. Subscribe Today.

Roger Farah, president and chief operating officer, told WWD that the company would put over $1 billion into capital expenditures over the next three years, including $325 million in the new fiscal year alone, and that “70 percent” of the total would be focused on growing the company’s store base internationally, particularly in Europe and through concession shops in China and Hong Kong.

Polo will pare some operations in Asia as well, exiting 65 locations over the next 12 months that are part of a distribution network inherited from Dickson Concepts.

New for fall are Black Label denim for men, a women’s Collection denim line and Ralph Lauren Denim and Supply premium offering. The new denim line will also be offered in Europe and Asia, where it will replace the existing Polo Jeans Co. business.

Finally, Club Monaco will expand initially as a shop-in-shop concept in Europe before the focus turns to freestanding stores, and the first Rugby store in Europe will open later this year in London.

“As we look to the future, the scope of our opportunities across products, channels and geographies is incredibly invigorating,” said Ralph Lauren, chairman and chief executive officer.

In the fourth quarter ended April 2, net income declined 35.8 percent to $73.2 million, or 74 cents a diluted share, below the 79 cents expected, on average, by analysts polled by Yahoo Finance. Year-ago profits were $114.1 million, or $1.13.

Net revenues rose 6.7 percent to $1.43 billion from $1.34 billion, which included a net sales gain of 7.2 percent to $1.38 billion from $1.29 billion. Wholesale sales inched up 2.1 percent to $751.5 million from $736 million, while retail sales increased 13.9 percent to $631.3 million from $554.3 million. Comparable-store sales rose 7 percent, reflecting a 3 percent decline at Ralph Lauren stores because of a high-single-digit reduction in Japan; an 8 percent rise in factory stores, and a 10 percent increase at Club Monaco stores. Ralphlauren.com sales rose 21 percent in the quarter.

The company saw operating expenses increase 12 percent to $693.1 million from $612 million last year. The increase, mostly in selling, general and administrative expenses, was due to costs associated with Polo assuming full control of its South Korean operations, continued investment in the firm’s strategic growth initiatives and higher incentive compensation costs, the company said. Quarterly results also reflected restructuring and store impairment charges and the disruption in Japan following the March earthquake.

Investors were disappointed, sending shares down $14.69, or 11.4 percent, to $114.70, their lowest close since Feb. 7.

Farah told analysts on the company conference call, “We responded to the rapidly changing environment by pursuing additional market share opportunity and working to protect margins in the face of unprecedented inflationary pressures for our industry.”

Gross margins receded to 56.8 percent of sales from 59 percent a year ago, with higher costs being partially offset by improved margins at retail.

Farah noted that the 13.7 percent rise in annual revenues — to $5.66 billion from $4.98 billion — was double the firm’s original outlook and fueled by the “excellent momentum of our core apparel offerings, particularly in the U.S. and in Europe where revenues rose at a double-digit rate.”

For the full 52-week year, profits rose 18.4 percent to $567.6 million, or $5.75 a diluted share, from $479.5 million, or $4.73, in fiscal 2010, a 53-week year.

Midway through the first quarter of fiscal 2012, “sales are trending well,” Farah noted, adding that the company is projecting first-quarter consolidated revenues to increase in the mid-20s range. He said product has been “well received, reflecting the ongoing actual strength of the business.”

For fiscal 2012, the company expects consolidated revenues to increase by a midteen percentage, although operating margins from continuing operations are expected to be 100 to 150 basis points below those of fiscal 2011 due to the impact of cost-of-goods inflation, investment in strategic growth initiatives and the disruption in Japan.

Farah thinks that cost inflation pressures could ease a year from now, but noted the company was being “thoughtful” in the categories in which it elected to raise prices, even if that meant it would have to absorb a portion of the increases.

“In certain product categories we saw single-digit cost increases; in some others it was up to a 20 percent price increase. The fall product is being delivered in the next couple of months. We’ve raised prices where we can make the adjustments and customers will still respond [by buying where they see value],” he said.

“Our big concern was the midtier distribution, where the moderate customer is squeezed the hardest with rising apparel and gas prices. In that sector we were more sensitive to passing along price increases,” Farah said.


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