Apparel maker Polo Ralph Lauren Corp. (RL) Wednesday reported a rise in third quarter net profit, which came in above Street view, helped by improved gross margins and higher comparable store sales, despite a slight decline in net revenues. Looking ahead, the company said it remains cautious regarding global consumer spending trends, while providing its guidance for the fourth quarter and full year 2010. Polo Ralph shares are currently trading down more than 8% on the NYSE.
For the third quarter, the retailer's net income was $111.1 million or $1.10 per share as compared with $105.3 million or $1.05 per share in the prior-year period. Polo Ralph said growth in third quarter net income principally relates to higher operating income.
On average, 16 analysts polled by Thomson Reuters expected the company to earn $1.01 per share for the quarter. Analysts' estimates typically exclude special items.
Net revenues for the period were $1.24 billion, compared to $1.25 billion in the third quarter of fiscal 2009, reflecting lower domestic and Japanese wholesale sales, which more than offset higher same-store sales at the company's retail segment and mid single-digit constant currency growth in Europe. Foreign currency translation had a net favorable effect of 2% on revenues. Quarterly net sales edged down to $1.196 billion from $1.202 billion in the year-ago period. Analysts expected the company to generate revenues of $1.26 billion for the quarter.
The New York-based fashion company, whose brands include Polo, American Living, Chaps and Club Monaco, operates mainly in three segments: Wholesale, Retail and Licensing.
In Wholesale division, net revenues were $603.5 million, down 8% from $655.0 million in the same quarter last year, reflecting lower global shipment volumes, partially offset by higher footwear sales, net favorable effect of foreign currency translation, incremental benefit of formerly licensed children's wear and golf apparel products in Japan.
Licensing royalties for the quarter were $48.3 million compared to $49.9 million a year earlier. Polo Ralph noted that the declines in fragrance and home product licensing royalties were partially offset by higher international licensing royalties.
However, retail segment revenues increased 8% to $592.1 million from $547.1 million in the corresponding period last year, reflecting a net increase in comparable store sales and a net favorable effect of foreign currency translation.
Quarterly comparable store sales rose 6% as compared with a 4% in the prior year, reflecting a 4% increase at Ralph Lauren stores, 6% growth at Factory Stores and a 7% rise at Club Monaco stores. During the quarter, RalphLauren.com same-stores increased 13%. On constant currency basis, same-store sales at Ralph Lauren Stores were up 2%, and Factory Store sales grew 3%. Same store sales at Club Monaco rose 7% and RalphLauren.com sales for the quarter increased 13%.
During the three-month period, total selling, general and administrative costs totaled $551.2 million, an increase from $503.1 million in the comparable period prior year. Amortization of intangible assets rose to $5.3 million from $5.1 million a year earlier, whereas restructuring costs decreased to $0.6 million from $1.5 million last year. In the third quarter, Polo Ralph had a one-time expense of $4.9 million with regard to impairment of assets.
Quarterly gross profit increased 470 basis points to 58.2% from 53.5% in the third quarter last year, helped by improved wholesale and retail segment margins, and was primarily driven by disciplined inventory management that led to reduced markdowns in the company's retail stores, improved product mix across all channels and continued savings from supply chain initiatives.
During the third quarter, Polo Ralph repurchased about 1.0 million shares of Class A common stock, utilizing $78 million of its authorized share repurchase programs, and has nearly $352 million remaining under such programs. The company ended its third quarter with inventory down 7% to $545 million from $585 million in the fiscal 2009-year period.
Commenting on the results, chairman and chief executive officer Ralph Lauren said, "We've made excellent progress with our accessories efforts; our footwear business is growing nicely, we've opened several watch salons around the world and we've greatly enhanced our handbag and small leather goods collections."
In the preceding second quarter, the company's net income grew to $177.5 million or $1.75 per share from $161.0 million or $1.58 per share in the prior-year quarter. Second quarter net revenues declined 4% to $1.37 billion from $1.43 billion in the same quarter last year.
For the first nine months of fiscal 2010, net income grew 1% to $365.4 million or $3.60 per share from $361.5 million or $3.56 per share in the comparable period last year. Polo Ralph's net sales for the nine-month period declined 4% to $3.51 billion from $3.65 billion in the prior year.
Year-to-date net revenues were $3.64 billion as compared with $3.79 billion in the same period a year ago.
Looking ahead to fiscal 2010, Polo Ralph said it expects net revenues to decline by a low single digit rate, which compares to prior guidance of a mid single digit decline in net revenues, due to the better-than-anticipated revenue performance for the first nine months of the year. Analysts currently expect the company to generate revenues of $4.90 billion for the year. The company anticipate results for the newly transitioned Asia Pacific operations to be reflected in the retail segment, beginning the fourth quarter of fiscal year 2010.
For the fourth quarter, Polo Ralph estimates operating expenses to grow at a mid single digit rate from the year-ago period, including impairment and restructuring charges, which primarily reflects incremental costs with regard to the company's new Asia Pacific operations, a higher amount of sales from its retail segment and additional incentive compensation accruals. The company also expects dilution related to the company's newly transitioned Asia Pacific operations to be about $0.08 to $0.10 per share in the 2010 fourth quarter.
During the 2010 third quarter, Polo Ralph opened five directly operated stores and did not close any directly operated stores, and over the last twelve months, the company opened 12 directly operated stores and closed 11 directly operated stores.
At the end of the third quarter, the company operated 333 stores compared to 332 stores in the prior year. Polo Ralph's current retail group consists of 89 Ralph Lauren stores, 62 Club Monaco stores, 171 Polo factory stores and 11 Rugby stores. In addition to this, at the end of the quarter, international licensing partners operated 91 Ralph Lauren stores and 60 Club Monaco stores and dedicated shops.
Among peers, New York-based Jones Apparel Group, Inc. (JNY) on October 28 posted higher third-quarter profit, as the company controlled its inventories and costs in a period when sales declined 11%. Jones Apparel's attributable net income was $29.1 million or $0.36 per share as compared with $26.8 million or $0.33 per share last year, and revenues were down 11% to $855.7 million from $964.7 million in the same quarter of 2008. Third quarter net sales fell to $843.9 million from $948.6 million in the previous year.
Another competitor, Liz Claiborne Inc. (LIZ) on November 4 posted third quarter attributable net loss of $90.5 million or $0.96 per share, compared to a loss of $68.7 million or $0.73 per share in the previous year quarter. Liz' third quarter net sales plunged to $769.6 million from $1.0 billion last year.
RL is currently trading on the New York Stock Exchange at $78.79 per share, down $6.88 or 8.03%, on a volume of 3.19 million shares. In the past 52-week period, the stock has been trading in a range of $31.64 to $86.97.
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