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High in the Saddle: Polo’s Luxury Slant Helps Net Leap 52.5%

Polo Ralph Lauren’s first-quarter income skyrocketed 52.5 percent, boosted by its luxury slant.

NEW YORK — Getting a big boost from its leanings toward luxury, Polo Ralph Lauren Corp. generated substantial top- and bottom-line growth in its fourth quarter and even initiated a stock dividend.

Yet, Wall Street hardly noticed. Shares fell 34 cents, or 1.5 percent, to end the day at $23.01 in New York Stock Exchange trading Wednesday.

In addition to a 52.5 percent gain in fourth-quarter net income, Polo also reported that it will exert greater control of its distribution through a reduction in department store doors, as well as the introduction this fall of microchip-laden labels to better monitor the authenticity, origin and intended destination of its merchandise.

For the three months ended March 29, income jumped to $73.2 million, or 74 cents a diluted share, from $48 million, or $48 cents, in the year-ago quarter. The current year included a pre-tax $6.4 million restructuring charge for the firm’s European consolidation, while the year-ago results included a $16 million pre-tax real estate restructuring charge. Excluding the charge and gains on foreign currency translations, earnings per share would have been 77 cents on income of $76.1 million, or 1 cent above consensus estimates of 76 cents.

Total revenues in the quarter were up 9.4 percent to $692.3 million from $633.1 million. The top line was boosted by a 23.9 percent spike in licensing income to $74.7 million from $60.3 million. Wholesale sales rose 7.4 percent to $421.7 million from $392.5 million, while retail sales rose 8.7 percent to $195.9 million from $180.3 million. Comparable-store sales were up 5.8 percent, driven by positive same-store sales in each of its retail formats — full-priced, outlet and the Club Monaco nameplate.

Ralph Lauren, chairman and chief executive officer, said in a statement, “Strong customer demand and a balanced growth strategy delivered another record year of results, despite ongoing challenges in the marketplace.” The designer also noted the company’s ability to drive profitable long-term growth because of its flexible business model and proven ability to “produce strong results from multiple channels and in multiple geographies.”

Separately, the company said its board initiated a regular quarterly cash dividend of 5 cents per share, or 20 cents on an annual basis. The dividend is payable on July 11 to shareholders of record at the close of business on June 27. Based on the number of shares outstanding, the annualized payout is expected to be $20 million.
Roger Farah, president and chief operating officer, said during a conference call with Wall Street analysts that Polo is in ongoing discussions with Jones Apparel Group regarding the Lauren by Ralph Lauren license. “We are continuing to work for what we hope will be the right solution for the customers and the brand,” he said.

As reported, those discussions also center on the Ralph by Ralph Lauren license and even the successful Polo Jeans license held by Jones, even though the jeans license is unaffected by the initial Lauren dispute. In total, the three licenses represent about $1 billion in annual revenue to Jones.

While not mentioning the licenses held by Jones, Farah told analysts that the company believes in the “direct ownership of those businesses whose expertise falls within the scope of our core competence….A continued focus on acquiring those licenses that make sense to our business will be an important part of our company’s future growth strategy.”

Dennis Rosenberg, analyst at Credit Suisse First Boston, in a research note update, wrote Wednesday, “We believe that discussions may be centered on buying back the Polo Jeans license as a part of a comprehensive resolution.”

Farah said during a telephone interview that the company was just starting to review its different department store doors, which it plans to reduce over the next few years. “Our decision will be based on can we make the proper assortment for the customer given the size of the door and store or will [the brand] just be represented by basics. Ralph and the company [believe] that if it’s just basics, it’s not going to be fair to the brand and the customer.”

One production change the company has spent the last two years perfecting will be introduced in all fall shipments. Using filaments, labels will contain microchips that can be scanned for certain information to determine a product’s authenticity.

“We’ll know exactly what style was ordered, what pieces and for what customer. We’ll be able to nail down where the problem is, and take the necessary [steps] to stop it,” Farah said.

The process and formation of the technology was initiated by Polo, and the goal was to cut down on the production of counterfeit or unauthorized goods. “After years of ‘ring around the rosy,’ we will give the wanding gun to key retailers so they can determine whether [a product] is counterfeit or not….This issue of counterfeiting will dry up once [the perpetrators] realize that there is technology to fix the problem.” The president even joked — tongue-in-cheek — that the company was willing to share its know-how for a small fee.
So far the firm’s sourcing hasn’t been affected by SARS, and it doesn’t rely heavily on air flights for shipment. Farah noted, however, that the reduction in commercial air flights could cause pressure for some firms. “When you lose 40 percent of the flights and you’re shipping the same amount of goods, there is a risk of compression because people who are close to delivery and rely on flying the goods out could find themselves without [adequate] space on the planes,” he explained.

Farah is hoping that, starting in the fall, firms will begin putting the cash that has accumulated on their balance sheets to work through capital expenditures that would trigger new economic growth. Polo expects to open 50 to 60 new Polo Ralph Lauren stores over a five-year period. Polo’s capex for fiscal 2003 was $98.4 million, up from $88 million a year ago. The company expects to spend $110 million in CAPEX for fiscal 2004.

One strategy that has helped boost Polo’s bottom line is the distribution of certain products in select channels. Company-owned retail stores contained a greater degree of luxury product orientation, including Polo’s Blue Label. “It is really difficult for brands to be selling the same product to department stores and in their own stores. [Whether] by price point by collection or in other cases where it is product just for our stores only, it is a [plan] that is an important part of our overall retail strategy,” he said.

Jennifer Black, an analyst at Wells Fargo Securities, observed, “I was impressed. Most of the classic merchandise at the upper end was from Polo and they offered basics with a fashion twist. Consumers voted with their dollars. I was also impressed with Roger’s ability to significantly improve the back-of-the-house operations.”

Polo reaffirmed fiscal 2004 guidance disclosed in February, with EPS of $1.95 to $2.05.

For fiscal 2003, income rose 1 percent to $174.2 million from $172.5 million. Total revenues were up 3.2 percent to $2.44 billion from $2.36 billion.