POLO GOOD/BAD NEWS: A STRONG 4TH QUARTER, FEAR OF LAG IN 2001

Byline: Thomas J. Ryan

NEW YORK — Polo Ralph Lauren Corp. is biting the bullet again.
On Wednesday, Polo said efforts to prune expenses and increase efficiencies, particularly at retail and in newer businesses, would cause earnings to miss Wall Street estimates in its fiscal year ending March 2001. However, the company also reported greater emphasis on cost-cutting initiatives which, it said, will reduce expenses by 200 to 300 basis points over the next 12 to 18 months in an effort to translate top-line gains more quickly to the bottom line.
Polo now expects earnings to increase “at least 10 percent,” while Wall Street estimates had earnings at about $1.72 a share against $1.45 — a 19 percent gain.
Polo’s shares fell 1 3/16 to 14 9/16, a 7.5 percent drop, on the New York Stock Exchange, as analysts reduced their estimates in line with Polo’s new guidance to $1.60, and several cut ratings on the stock.
Polo made its projections while reporting that, driven by vibrant demand for the Polo brand, earnings in its fourth quarter ended April 1 hit $31.8 million from $27.3 million, or 27 cents, before a restructuring charge a year ago. Results met estimates.
After the restructuring charge to streamline wholesale operations, the year-ago loss was $7.4 million. Revenues gained 4.8 percent to $466.9 million from $445.7 million.
On a conference call, Lance Isham, Polo’s vice chairman, said consumer demand “continues to be very, very strong” for Polo’s brands.
“I feel we are in a better position for long-term growth more than at any time in the company’s history,” Isham stated. But he added that last year’s acquisition of Club Monaco and Poloco, its European licensee, caused the firm to reexamine ways to reduce expenses and improve efficiencies throughout the organization, resulting in the profit revision. Strong demand for core brands as well as the addition of Monaco and Poloco should lift sales in the high teens.
Roger Farah, who last month was hired as president and chief operating officer, said Polo will be examining “all areas of expense” in the next six months and is benchmarking its performance against peers in luxury and better-priced apparel suppliers.
“Our corporate overhead is too high,” said Farah, who formerly ran Venator. “We really have identified this as a major source of focus, and it’s a real opportunity going into the back half of the year.”
Polo said it will look to reduce redundancies at its full-price and outlet concepts and in its multiple brands. It plans to move more quickly to integrate Club Monaco and its Poloco to consolidate back-office functions.
In particular, Polo plans to make investments in its recently expanded Greensboro distribution center. Farah said the center is servicing wholesale “reasonably well,” and the transition to outlets should be completed early fall. Polo then plans to integrate full-price retail and Club Monaco into the center.
Polo also plans to improve inventory turns and cut expenses by shortening the time from design to arrival on the selling floor. “We believe it is taking us too long,” said Farah. The improved infrastructure will allow Polo to better absorb acquisitions, he said.
But for analysts, it was nearly a case of deja-vu, as the firm last year made a similar charge to reduce expenses primarily in its core wholesale area.
Morgan Stanley’s Josie Esquivel, who cut the stock to “neutral” from “strong buy,” said the new moves are hard to quantify since the cost-cutting plan initiated in 1998 appears to be falling short of projections.
“I think it’s hard to really put your arms around what they’re doing and if it’s good or not,” said Esquivel.
Stacy Pak of Prudential Securities said in a research note that it “appears that the payback from the Club Monaco and Poloco acquisitions will take longer than previously anticipated.” She maintained her “hold” rating on the stock.
Salomon Smith Barney’s Carol Pope Murray said the size of the revision “was a little bit surprising” and the retail business seems to be lagging. She said Polo’s operating expense rate “has definitely been a source of earnings pressure for the company since the get-go and this is a continuation. Hopefully, at some juncture, they’ll be able to toe the line.”
The revision was disturbing to some because many had waited for the turnaround this year, said Jennifer Black at First Security Van Kasper, who cut her rating to “buy” from “strong buy.”
“They have to look at the best interest for the company, although this is frustrating for investors,” said Black. “I think in the long run, patient investors will be rewarded.”
Murray listed many positive points, including the potential in Europe, its Internet initiative as well as the fact that Polo’s brand is performing well on the department store selling floor. But she, along with other analysts, seemed baffled that stellar sales aren’t driving earnings.
“It’s a little bit disconcerting that top-line demand is not translating into higher earnings,” she said. Murray, who kept her rating at “outperform,” said Farah’s experience in streamlining Venator, formerly Woolworth, should help.
“Roger has a lot of experience, and hopefully he brings a fresh look,” said Murray. Isham told analysts the initiatives will pay off in the second half.
“We think in this market, double-digit earnings growth is not so bad, and quite frankly if we can do better, we will,” Isham said.
Polo saw particular strength in the latest quarter among its higher-end lines, with men’s Purple Label up over 30 percent at retail, and women’s collections, including Ralph Lauren Black label and Ralph Lauren Sport, up “well over 30 percent,” Isham said.
Polo’s owned retail stores “reflected strong demand for luxury apparel and collection accessories.” Men’s apparel, exclusive of Polo Sport and Polo Golf, increased sales at retail “well over 5 percent” partly due to a successful replenishment program and demand for casual dressing at work. Men’s U.S. backlog is ahead 10 percent.
Overall, wholesale sales dipped 4.2 percent to $240.4 million as gains in men’s were offset by the elimination of the Ralph Lauren bridge line. Wholesale operating earnings were up 12 percent to $31.6 million, with better full-price sell-throughs.
Licensing revenues climbed 13.5 percent to $61.4 million, led by Ralph, Lauren, Polo jeans, accessories, footwear kids’ and fragrances.
Retail widened its typical first-quarter loss to $16.3 million from $15.1 million. The Monaco acquisition lifted sales by 18.9 percent to $163.4 million. Including Monaco’s sales in the prior year, sales slid 3.6 percent. A “strong” performance at its full-price Polo and concept stores such as Polo Sport offset softness at Monaco and the outlets. Same-store sales dipped 2.8 percent.
Monaco continued to get hurt by overly lean inventory levels and problems with its assortments, particularly not having enough “classics,” but the firm still plans to increase square footage at the chain by 50 percent through the opening of larger-than-typical locations in major cities, including Los Angeles, Boston, Miami, San Francisco, New York and Washington, D.C.
“We know this brand has great potential, but it has been a challenging transitional year,” said Isham. “While the current business is not on plan, we expect it to be on target by early fall.”
Isham said men’s and boys’ in Europe are “well above plan,” with backlog up over 20 percent. Women’s will be rolled out this fall, and Ralph, Lauren, infants’ and toddlers’ in spring 2001.
In the year, earnings advanced 14.6 percent to $143.5 million, or $1.45, from $125.2 million, or $1.25, before charges a year ago. Last year’s fourth-quarter charge reduced fiscal 1999’s net income to $90.6 million, or 91 cents. Revenues gained 13.2 percent to $1.96 billion from $1.73 billion.