Polo Ralph Lauren (RL) Q4 Results Weak; Co. Needs to Get the Horse Moving

May 25, 2011 9:43 AM EDT
Shares of Polo Ralph Lauren Corp. (NYSE: RL) are trading down in early-morning trade following the release of its fourth-quarter earnings earlier. Just minutes after the opening bell, the stock is down 9 percent to $117.70.

The company reported quarterly sales of $1.43 billion, ahead of the Street’s forecast of $1.39 billion, and up 7% from the same quarter last year. Net revenue for the year came in at $5.7 billion, up 14% year over year and slightly above the Street’s estimate of $5.62 billion.

RL’s net income for the quarter was $73 million, or $0.74 per diluted share, versus net income of $114.1 million, or $1.13 per share, last year. The Street was looking for EPS of $0.79.

Full year sales came in at $568 million, or $5.75 per diluted share, compared to the Street estimate $5.78.

The company noted this quarter was one week shorter than the previous quarter a year ago; the extra week resulted in roughly an additional $70 million in net revenue and $0.13 per share in earnings.

Gross profit for the fourth quarter increased 3% from $789 million to $810 million. Gross profit margin of 56.8% was 220 basis points below the prior year level. RL said the decline in gross profit margin reflects the impact of cost of goods inflation.

Operating expenses increased 12% during the fourth quarter from $618 million in the year-ago quarter to $693 million. Operating expense margin was 48.6%, 240 basis points above the prior year period.

RL ended finished fiscal 2011 with $1.1 billion in cash and investments compared to $1.2 billion in cash and investments at the end of fiscal 2010. Cash and investments net of debt was $839 million at the end of fiscal 2011 compared to $941 million of net cash at the end of last year.

The fourth quarter ended with inventory up 39 percent to $702 million.

Polo Ralph Lauren ended the fourth quarter with 367 directly operated stores, comprised of 106 Ralph Lauren stores, 58 Club Monaco stores, 191 Polo factory stores and 12 Rugby stores.

The company sees FY12 sales increasing in the mid 20% range while wholesale revenue is predicted to increase in the low 20% range. RL forecasts the operating margin from continuing operations for fiscal 2012 to be 100 - 150 basis points below the prior year.

Commenting on the quarter, Wall Street Strategies' Brian Sozzi said, "we can’t say we were disappointed by the data set, just fancy a glance on our pre-earnings note. However, the amount of gross margin deceleration relative to 3Q (-220 bps 4Q11 y/y; +47 bps y/y 3Q11) is concerning, as was the inventory position compared to projected future sales (+mid-teens percentage revenue guidance against a +39% rise in inventory)."

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