HAMBRECHT & QUIST GIVES LAUREN STOCK A ‘BUY’ RATING

NEW YORK — Polo Ralph Lauren has won a second “buy” rating from an investment firm that wasn’t an underwriter of its initial public offering in June, Hambrecht & Quist.
Initiating coverage of Polo, Hambrecht & Quist analyst Shelly Hale Young cited continued strength in Polo women’s apparel as well as plans to expand product lines and retail stores. She said she expects per-share earnings in the current year ending March 1998 to climb 26 percent to $1.13, and sales to gain 10 percent to $1.4 billion.
The Hambrecht & Quist report, dated Aug. 28, follows a “buy” recommendation issued Aug. 21 by Furman Selz.
Young said she expects wholesale sales to increase 7 percent to $665 million in fiscal 1998 on the continued strength of Polo women’s wear, where she expects revenues to jump 29 percent to $103 million.
Polo stock rose 1 to 26 5/16 on the New York Stock Exchange Friday, and Young said the stock should trade at 23 times earnings.
“Polo Ralph Lauren has combined a strong brand franchise with control of its distribution to become a leader in its industry,” Young wrote in a research report. “Over the past five years, the company has achieved a compound annual growth rate in sales of about 13 percent, from $767 million in fiscal 1993 to $1.3 billion in 1997.”
Over the next several years, Young said, earnings increases should stem from continued improvement in gross margins, and operating efficiencies on higher sales.
Young noted she currently expects the firm’s gross margins to expand to 49 percent of sales in 1998 from 45.9 percent in 1997, due to a “dramatic” reduction in closeout sales in the men’s wholesale division. Closeout sales in the segment were down 54 percent to $50 million.
“We believe investors could expect to see our estimate for Polo’s operating margin of 14 percent to 15 percent of sales come more in line with Nautica and Tommy Hilfiger, which are about 17 percent to 18 percent, providing significant upside to our bottom-line growth rates.”
However, Young said, the company is not without risk. Polo tends to rely on its key department store customers and licensing partners, and “the loss of any such customer could hurt the company’s results.”
In the men’s wholesale business, sales in the current fiscal year are expected to add 3 percent to $561 million. Retail sales are estimated to increase 10 percent to $562 million, and licensing revenues are projected to rise 19 percent $164 million.

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