Ralph Lauren Corp. is getting nervous.
This story first appeared in the October 30, 2014 issue of WWD. Subscribe Today.
In reporting a 2 percent drop in net income for the second quarter ended Sept. 27, the fashion group cut its revenue outlook for both the third quarter and fiscal 2015. Even though the results fit in with the pattern of slowing sales across the luxury sector, Wall Street generally took the news in stride, nudging Lauren’s shares up 0.5 percent Wednesday to close at $161.79 in Big Board trading.
The main problem remains a currency one, which is the reason for the company’s growing caution about the rest of the fiscal year. It now expects revenue growth at 5 to 7 percent, down from the prior forecast of 6 to 8 percent. Net revenues for the third quarter are projected to rise 3 to 5 percent.
Jacki Nemerov, president and chief operating officer, noted in a call to Wall Street the difficult economic backdrop generally. That has had the U.S. dollar strengthening against several major currencies amid political tensions that escalated in Eastern Europe, the Middle East and parts of Asia.
“Collectively, these events had a negative impact on global tourism and in certain instances have also weighed on local customer demand,” she told analysts.
Despite the global crises, international remains a bright spot for the group, where sales rose at double-digit rates in the second quarter. The company has 448 stores it directly operates and 494 shops-in-shop worldwide. The total number of stores including those operated by licensed partners was 643 at the end of the second quarter.
The company plans to open 20 to 25 stores globally in the second half.
Ralph Lauren, chairman and chief executive officer, said of the firm’s second-quarter performance, “We achieved several critical goals, including the launch of Polo for women, the opening of our first Polo flagship store on Fifth Avenue and our first dual-gender Ralph Lauren flagship in Greater China. These milestones showcase the strength and scope of our luxury positioning and represent some of our most compelling opportunities.”
Expansion also means that the company will continue with what has been a metamorphosis from wholesaler to retailer. The apparel firm over the years has straddled the fence from wholesaler to retailer, and then back to wholesaler each time it’s bought back a license. More recently, it’s been amping up its push into the global retail arena. Going forward, the company will continue to be retail-centric as it expands its operations.
Christopher H. Peterson, chief financial officer and chief administrative officer, said, “We do expect our retail segment to grow faster than wholesale.” He explained that the international markets where the company is expanding don’t have the same wholesale development as in the U.S. for the company’s brands, and so the focus needs to be more on retail. “Over the foreseeable future, wholesale will grow, but retail will grow faster. The white-space opportunity in international expansion will be retail, [even though] that will be more capital intensive.”
Peterson said that “40 percent of the sales” at its new Fifth Avenue Polo store are from foreign tourists. The cfo told WWD that the “Chinese tourist is our number-one foreign shopper in the U.S.” In Europe, the number-one foreign shopper is the Russian tourist, followed by its Chinese counterpart.
According to Nemerov, the company will be rolling out a reintroduction of Polo Sport globally next fall, first launching in men’s. “We anticipate additional new product categories to follow, but haven’t sequenced the timing of what’s following when,” she said in a telephone interview.
The new line will address the “whole active segment,” she said. It’s different from the broader Polo line and is differentiated from it by a focus on performance and technical fabrications so it trends more in the ath-leisure space.
As for the second-quarter numbers, net income dipped 2 percent to $201 million, or $2.25 a diluted share, from $2.05 million, or $2.23, a year ago. Net revenues rose 4.1 percent to $2 billion from $1.92 billion. Wall Street was expecting diluted earnings per share of $2.06 on revenues of $2.02 billion.
Net revenues included a 4.1 percent gain in net sales to $1.95 billion from $1.87 billion. By category, wholesale net sales rose 1.6 percent to $943 million, while retail net sales jumped 6.6 percent to $1.01 billion. Comparable-store sales rose 1 percent. The balance of revenues was from licensing income.
Operating expenses rose 7 percent to $846 million, due in part to investments in global retail development and infrastructure.