Wednesday, May 25, 2011

RL 4Q Review

Polo Ralph Lauren reported 4Q and FY11 results before the open this morning. Net revenue for the quarter grew 7% to $1.43 billion from $1.34 billion in 2010 and above street consensus of $1.39 billion. Despite the revenue growth, diluted EPS was reported at $0.74, a 34.5% decline from 4Q10 EPS of $1.13 and missing expectations of $0.79. RL reported gross margin for the quarter to be 56.8%, 220 bps lower than the 59% mark last year. The decrease in gross margins is attributable to pressure on global commodities and other sourcing cost issues.

Revenue growth was driven primarily by sales in the retail segment, rising 14% quarter-over-quarter, led by 7% consolidated comps growth and incremental revenues from new operations in South Korea. Comps at the segment level included: (3)% at Ralph Lauren, 8% at factory stores and 10% at Club Monaco. E-commerce sales increased 21% quarter-over-quarter. Wholesale sales only rose 2% from the prior year level, as domestic growth in shipments and expended distribution in Europe were offset by a large decline in the Japanese business.

Management provided guidance for FY12, as they expect consolidated revenues to increase by mid-double-digits with retail expanding at a greater rate than wholesale. A noteworthy comment was made in regards to industry-wide inflationary concerns; “based on the anticipated impact of cost of goods inflation and increased investment in strategic growth initiatives, in addition to business disruption in Japan, the Company expects the operating margin from continuing operating for FY12 to be 100 – 150 basis points below the prior year.” The company has not increased pricing points to offset any inflationary costs to date, but plans on doing so during the upcoming fall season.

While margin pressure remains a serious concern, RL has shown their ability to generate top-line growth and we believe this trend will continue through fiscal 2012 as the Company expands its international operations and focuses on key strategic initiatives. The stock has traded down as much as 12% today on the EPS miss and weak margin guidance, however, the inherent business underlying Ralph Lauren remains intact and we remain long-term bullish. Macro commodity increases are a concern that the entire world faces, and RL will likely be able to mitigate the pressures more effectively than comparable peers.


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