Polo Ralph Lauren Corp. (RL) reported its second-quarter 2013 earnings per share of $2.29, beating the Zacks Consensus Estimate of $2.15 per share. However, quarterly earnings witnessed a 6.9% decline from $2.46 earned in the year-ago period. The year-over-year decline in the bottom-line was primarily due to lower sales, higher operating expenses and a higher tax rate.
Polo Ralph Lauren's total revenues inched down 2% year over year to $1.862 billion. Per the company, the year-over-year decline was a result of its planned strategy to reduce wholesale shipments, which was partially offset by improved results at the retail segment. However, it came in ahead of the Zacks Consensus Estimate of $1.836 billion.
Polo Ralph Lauren's gross profit in the quarter grew 2% year over year to $1.095 billion while the gross margin expanded 220 bps to 58.8% due to lower input costs and benefits coming from channel mix and operational efficiency.
Total operating expenses climbed 3% year over year to $0.747 billion, mainly due to overall business expansion, increased marketing and advertising expenses as well as incremental investments in growth initiatives and infrastructure. As a percentage of sales, operating expenses were 190 bps higher year over year at 40.1%.
Polo Ralph Lauren's operating profit inched down 1% to $0.348 billion. However, its operating margin improved 30 bps compared with the prior-year quarter to 18.7%, reflecting gross margin expansion, partially offset by increased operating expenses as a percentage of sales.
Overall, in the second quarter, Retail revenue increased 5% to $0.901 billion primarily due to an improvement in comparable store sales, increased e-commerce business and contribution from new stores, partially offset by store closures at Greater China. Driven by improved revenue along with efficient cost management, the segment’s operating income increased 8% to $0.157 billion, while the operating margin expanded 60 basis points (bps) to 17.4%.
Due to the company’s planned strategy of reducing wholesale shipments and the negative impact from discontinuing American Living operations, its Wholesale segment’s revenue dipped 8% to $0.915 billion. Consequently, operating income came in at $0.233 billion, which was 4% lower than the comparable prior-year quarter. However, due to lower input and operating expenses, the segment’s operating margin improved 120 bps to 25.5%
The company’s Licensing revenue declined 3% year over year to $0.047 billion due to termination of American Living and South American licensing agreements. Consequently, the operating income inched down 2% to $0.035 billion during the quarter.
Polo Ralph Lauren exited the quarter with cash and investments of $1.1 billion compared with $0.979 billion in the year-ago quarter. During the quarter, the company deployed $0.055 billion toward capital expenditure. Moreover, inventory levels increased 7% in the quarter to $1.1 billion compared with $0.988 billion in the same period last year.
Polo Ralph Lauren expects net revenue in the third quarter to increase by low-single-digit percentage points, while anticipating a low-single-digit decline in wholesale sales and mid-single-digit growth in the retail sales segment. Moreover, the company expects the operating margin to expand in the range of 25–75 bps mainly due to gross margin expansion, partially offset by a negative impact from continued investment in long-term growth initiatives and overall channel mix.
For fiscal 2013, the company expects net revenue to increase in the band of 2%–3%, lower than its previously guided range of a mid-single-digit percentage rate. Moreover, the operating margin is expected to expand by 50 bps from 2012.
Subsequent to its earnings release for the second-quarter, the company announced that it intends to focus on its higher growth businesses, and hence wants to discontinue its Rugby brand. Polo Ralph Lauren anticipates shutting down nearly 14 Rugby stores and e-commerce operations associated with this brand by the end of fiscal 2013. Approximately 75% of the assumed pretax charge of $20–$30 million is expected to be incurred in the third quarter and the balance in the fourth quarter.
We believe Ralph Lauren’s initiatives to capitalize on opportunities in Asia along with its lower long-term debt level, augur well for its future growth prospects. Moreover, Ralph Lauren leverages its globally renowned brands and their premium positioning to bolster its well-established business in the specialty retailing sector.
However, macroeconomic headwinds, stiff competition, higher inventory level and rising input costs still remain causes for concern. As a result, we are maintaining a long-term ‘Neutral’ recommendation on the stock.
Ralph Lauren, which competes with The Jones Group Inc. (JNY) and Phillips-Van Heusen Corporation (PVH), carries a Zacks #2 Rank, implying short-term Buy rating on the stock, based on rising earnings momentum over the past several quarters.
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