Highlights From RL's Q4 Conference Call: 14% Increase in Annual Revenues Was Double Our Original Outlook

Polo Ralph Lauren Corp. (NYSE: RL) reported Q4 EPS of $0.74, $0.05 worse than the analyst estimate of $0.79. Revenue for the quarter came in at $1.43 billion versus the consensus estimate of $1.39 billion. Shares are being ripped today, currently down 7.57%.

Highlights From RL's Q4 Conference Call:

• (Roger N. Farah) We're pleased to be reporting fourth quarter and fiscal '11 results that were much better than the expectations we articulated for you during the last year.
  
• We made excellent progress on each of our strategic growth objectives and delivered the best operating results in our history, continuing to 5-year and 10-year trends of double-digit sales and earnings growth and generating for the first time over $1 billion in EBITDA.
  
• The 14% increase in annual revenues was double our original outlook, fueled by the excellent momentum of our core apparel offerings particularly in the U.S. and in Europe where revenues rose at a double-digit rate.
  
• Diluted EPS growth of 22% was achieved after substantial reinvestment back in the businesses, including the start-up of Southeast Asia and greater China, the transition of South Korea and the development of international eCommerce.
  
• The strong results enabled us to enhance shareholder returns by repurchasing nearly $600 million of stock and doubling our quarterly dividend during the year.
  
• I'm pleased to report that all 1,500 of our Japanese employees were safe and accounted for within hours of the disasters and we continue to support them in their time of great need with various fundraising efforts.
  
• The long process of rebuilding is just beginning and will obviously have an impact on our fiscal '12 outlook for the region, but we are happy to see the nation on a path to recovery.
  
• Over the next three years we intend to invest over $1 billion in total capital to continue advancing our strategic objectives. About half of that will be allocated to new stores, concession shops and additional eCommerce development, all with an emphasis on international markets.
  
• We made major strides in our international growth objectives during fiscal '11 assuming control of our distribution in South Korea during the fourth quarter and completing the last phase of our multi-year mission to bring our Asian operations in-house that began with Japan in 2007.
  
• After operating South Korea for five months now, we are encouraged by the early business trends, sales, gross profit margins, operating expenses, all of which have been favorable to plan.
  
• Over the next 12 months, we intend to exit approximately 65 points of distribution that do not support our global real estate and merchandising strategies in this market. We believe these accelerated actions will allow us to deliver a clearer brand message to this critical customer, one that is better aligned with our presence in the rest of the world. The Chinese are poised to become the world's largest consumers of luxury goods and they are already driving a substantial portion of the industry growth outside of China as they travel around the world which is why the consistency of our global presence is so important.
  
• Today, we have a well-balanced representation across a range of formats including our own retail stores, eCommerce in the U.K., mono brand licensing stores as well as department stores and specialty stores. Europe continues to yield excellent sales and profit growth for us. We expect sustained double-digit sales growth in this region over the next three years.
  
• We believe we can achieve this ongoing growth with our core apparel merchandising that is accentuated by the introduction of new merchandise categories and brands including Club Monaco into selected wholesale accounts this fall, the rollout of eCommerce to additional countries and new store growth.
  
• Our focus on brand elevation is perhaps most apparent with our direct-to-customer efforts. The investments we've made in our stores and in the growing of our eCommerce platform showcase our commitment to the global luxury customer.
  
• Of the approximately $500 million in capital we intend to invest over the next three years for new stores, concession shops and the continued development of global eCommerce, nearly 70% of this capital will be allocated to international markets.
  
• As cost pressures intensified into fiscal '12 we made a thoughtful pricing adjustment by brand and region to help mitigate inflationary pressures. In general these adjustments do not fully offset our higher cost and this is expected to have a negative impact on our fiscal '12 gross margin particularly as we make large fall wholesale shipments in the second quarter.
  
• We expect that momentum to be maintained as we assess our outlook over the next three years when the investments we've made in fiscal '11 and the ones we plan to make in fiscal '12 bear fruit in fiscal '13 and beyond.
  
• We believe we'll generate over $3.5 billion of EBITDA over the next three years, which is a testament to the high-quality growth we are pursuing. In recognition of our strong cash flow yesterday our board increased our share repurchase authorization by another $500 million and with over $1 billion in cash and investments already on our balance sheets we are confident we have the financial strength to pursue all of our growth aspirations and we are very excited about the future.
  
• (Jackwyn L. Nemerov) Our core business is performing exceedingly well across men's, women's and children's. The consistent upgrading of our in-store shops and visual presentation has been an important backdrop to support the momentum in our various brands.
  
• Emerging categories such as accessories, dresses, active wear and footwear offer excellent examples of our ability to extend our brand into new classifications with tremendous success in a relatively short period of time.
  
• We just added Evening and Special Occasion dresses as well as special sizes to our dress assortment.
  
• Footwear is a similar story, one that is equally compelling in both men's and women's.
  
• We will continue to evolve the assortment into exciting new lifestyle sensibilities in fiscal 2012 including footwear the complements our Black label and RLX brands.
  
• Fiscal 2011 was a pivotal year for our Handbag efforts. While we've had Ralph Lauren Luxury products the last few years, led by our iconic Ricky bag, fiscal '11 was the first year we really began to address the broader lifestyle opportunities. As a result in Luxury handbags, we now have a compelling assortment of merchandise in the sweet spot that has historically been dominated by leading European brands.
  
• With both the Ralph Lauren and Lauren brands we are steadily building a stable of iconic designs to further develop what we believe will be a very strong accessories platform. With as much as we've accomplished in fiscal '11, we have several new merchandise opportunities in '12.
  
• The launch of Ralph Lauren Denim and Supply offers incremental distribution for us in North America where the merchandise will be sold through approximately 250 better department stores and on RalphLauren.com. Ralph Lauren Denim and Supply will replace the Polo Jeans Co. brand in Europe and Asia and will essentially maintain the existing distribution networks for those products.
  
• Today, we have categories of furniture, bedding and bath, table tops, lighting, rugs, fabrics, wall coverings, gifts and accessories. All the key classifications in home are in place to deliver an impactful and integrated lifestyle presentation for our customer, which we believe will support growth opportunities. For Home in fiscal '12, we intend to enhance distribution by partnering with our wholesale customers to showcase the products and implement strategic merchandising initiatives that appropriately tell the story of our collection.
  
• (Tracey Thomas Travis) Incremental sales and profit within our Retail segment were the primary drivers of the upside with all regions of the world contributing to the out-performance although the heaviest concentration was achieved in the United State.
  
• Lastly, we also mentioned the timing of the high volumes sales week post-Christmas that fell within our third quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010. On a normalized calendar basis, we estimate the shifts alone negatively affected our reported sales growth in the quarter by approximately 10 full percentage points.
  
• On a reported basis, consolidated net revenues were $1.4 billion in the fourth quarter, 7% above the prior year period and led by a double-digit gain in Retail segment sales. Our Retail performance was better than we expected in several areas including same-store sales, the contribution from new stores and our performance in Asia excluding Japan.
  
• The gross profit margin of 56.8% was essentially in line with our expectations.
  
• Operating expenses of $693 million were 12% above the prior year period and the operating expense margin rose 240 basis points to 48.6% in the fourth quarter reflecting incremental expenses associated with our newly transitioned South Korean operations, the continued investment in our growth initiatives and higher incentive compensation costs.
  
• Fourth quarter operating income of $117 million was 32% below the prior year period, primarily due to the calendar shifts affecting the comparability with the prior year period and the lower gross profit margin and higher expense rate.
  
• Net income was $73 million and net income per diluted share was $0.74 for the fourth quarter of fiscal 2011. Our effective tax rate in the fourth quarter and 34.4% was approximately 250 basis points higher than the prior-year period, as a greater proportion of our earnings were generated in higher tax jurisdictions.
  
• Wholesale segment sales rose 2% to $752 million in the fourth quarter, as strong growth in U.S. wholesale shipments, continued growth in department stores in Europe, as well as expanded distribution in greater China were mostly offset by a planned decline in Japanese wholesale shipments and softness in some European specialty stores, most notably in Italy.
  
• Wholesale operating income was $136 million in the fourth quarter and the operating profit margin was 18.2% compared to 24.9% in the prior-year period.
  
• The 14% increase in Retail segment sales in the fourth quarter of fiscal 2011 primarily reflects the strong momentum at our factory stores worldwide and on RalphLauren.com as well as the incremental contribution from newly transitioned South Korea operations.
  
• The 3% decline in Ralph Lauren comps during the first quarter is entirely due to our Retail Japanese operations. Excluding Japan, Ralph Lauren comps were flat on top of a 17% increase in the prior-year period.
  
• Factory Store comps rose 8% in the fourth quarter, Club Monaco comps were up 10% with excellent performance in trend right women's fashions and sales at RalphLauren.com increased 21%.
  
• Retail segment operating income of $26 million was 40% greater than the prior-year period and the operating margin improved 80 basis points to 4.1%. Strong comp growth and higher full price sell-throughs more than on set the short-term diluted impact of South Korea, investment in international eCommerce, cost inflation and extraordinary items such as the business disruption in Japan.
  
• Licensing royalties for the quarter were $44 million, 6% below the prior-year period.
  
• The 19% decline in licensing operating income in the fourth quarter is attributable to the same international and home affects that impacted sales for licensing.
  
• We ended the year with $1.1 billion in cash and investments after funding all of our capital and acquisition cost needs and returning a substantial amount of capital to shareholders via our share repurchase activity as well as a doubling of the dividend.
  
• For the first quarter of fiscal 2012, we currently expect consolidated net revenue to increase in the mid-20s range, a rate of growth that is an acceleration of the momentum we experienced in the second half of fiscal 2011 and is positively impacted by the benefit of the later Easter sales I highlighted earlier. Wholesale revenues are expected to increase at a low 20% rate based on strong shipment growth in both the U.S. and Europe.
  
• For the full fiscal 2012 period, we expect revenues to increase at a mid-teens rate with Retail segment sales again growing slightly faster than Wholesale revenues. Our full-year operating margin is expected to decline 100 basis points to 150 basis points primarily due to the gross profit margin pressure.
  
• We intend to spend approximately $325 million in capital expenditures in fiscal 2012 to support our Retail and Wholesale growth initiatives and the consistent upgrading of our global infrastructure. We currently expect to open 47 - 34 new stores and 47 concession shops during the year and close 65 stores and shops in the Greater China region as part of the repositioning.
  
• (Q&A) With your guidance for next year how should we think about SG&A dollar growth? Will you be leveraging the spend next year and has anything changed in terms of your expected level of spending in Southeast Asia and Korea versus when you last talked about the opportunities there? (A) We would expect, Kate, slight leverage. Again our operating margin guidance does exclude, as I mentioned, any potential restructuring charges that might occur from the Greater China repositioning so we would expect some slight SG&A leverage excluding any charges. And again bulk of the operating margin decline would be related to cost of goods pressure. In terms of extra spending in Asia, we certainly are continuing to invest in infrastructure. We are continuing to invest in advertising as we re-brand our product in the market and those are investments that will accelerate in fiscal 2012.
  
• Roger, you just talked about the input costs obviously mounting and you're looking to increase prices in the fall. Could you perhaps quantify what you're expecting the input costs in the back half? Talk about what price increases you are planning to flow through? It doesn't sound as if fully. And given how strong the top line momentum is in light of the calendar shifts, it would seem as if we should be quite encouraged, the ability to pass it through and quite encouraged about the elasticity of demand in light of how strong the momentum is. (A) Yeah, Adrianne, let me just cover a couple of questions you've got in there. One, the fourth quarter results we reported is a bit of a Halley's Comet. The unusual combination of an extra week, the loss of Easter, the loss of the week after Christmas really is a bit of a false read that I think Tracy tried to capture for you. If you take the run rate of sales through our third quarter, adjusted fourth quarter and the guidance we've provided for first quarter, you'll see the business really is quite strong. And really, all merchandise categories in all regions and all channels are contributing to that. So we're actually encouraged with the customers' response to our products and strategies. We did not take many price increases in the spring even though we began to see some costs rising, but we have for fall. And those increases really are very dependent on the price point of the product and the merchandise categories. The actual cost of goods inflation, depending on the products, range from low to mid single-digits all the way up into the low twenties. And when you look at the breadth of product we have from the highest levels of collection in Purple Label down to products we make for Chaps for Kohl's and Penney's, some of the bigger cost movements were in the lower portion of that pyramid, and that's where we were more cautious about passing on the products as they came through. I also believe, and this is one person's opinion, that the cost of goods that we've all seen and read and talked so much about will begin to moderate into spring and fall of next year. I think that the supply and demand imbalance was real and some of the other costs got run up for other reasons, and I think that the more natural supply and demand will begin to take effect as we look at next year. So our point of view has been, we're not going to alter the quality; we're not going to alter the materials, trim, findings or the cut of the products. We're not going to alter where we make goods because our principles of product and product integrity has been so critical to our success, we think the customers want the same product and are going to pay more for it where appropriate, and then I think this pig in a python is going to play itself out over the next couple seasons. We raised our gross margin in the last seven years 900 basis points, so I think we've become very expert at sourcing, logistics and distribution, merchandising and really felt that our short-term blip was not something to throw us off our strategic mission. So a lot of that is embedded in your question and I've expanded it in an effort to try to cover some of what I know is on all of your minds.

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