Polo Ralph Lauren Corp.'s (RL) fourth-quarter 2011 earnings of 74 cents per share declined 34.5% from the prior-year quarter earnings of $1.13. However, quarterly earnings were in line with the Zacks Consensus Estimate.
The decline in the year-over-year earnings was primarily attributable to higher inflationary cost pressure and increased operating expenses.
Quarterly Details
During the quarter, Polo Ralph Lauren's net revenues rose 6.7% year over year to $1,426.9 million, outpacing the Zacks Consensus Estimate of $1,389.0 million. The growth was primarily driven by an increase of 13.9% in Retail sales to $631.3 million.
The increase in retail sales was mainly attributable to a high single-digit growth in same-store sales and contribution from newly transitioned South Korean operations.
Polo Ralph's gross profit in the quarter inched up 3.0% year over year to $810.3 million. On the contrary, gross margin contracted by 220 basis points (bps) to 56.8%. The decline in gross margin was mainly driven by increased cost of goods sold, partially offset by better domestic retail margin and overall channel mix.
Total operating expenses rose 12.0% year over year to $693.1 million, mainly due to increased expenses associated with South Korean operations, higher incentive compensation costs and continued investments in the company's strategic growth initiatives.
Accordingly, Polo Ralph Lauren's operating profit declined 31.8% to $117.2 million from $171.8 million in the year-ago quarter. Operating margin plummeted 460 basis points to 8.2% compared with 12.8% in the prior-year quarter.
At quarter end, Polo operated 367 directly operated stores and 510 concession shops across the globe.
Balance Sheet
Polo Ralph Lauren exited fiscal 2011 with cash and investments of $1,130.5 million, slightly below the prior-year quarter. The company has a long-term debt-to-capitalization ratio of just 8.1% compared with a long-term debt-to-capitalization ratio of 8.3% in the year-ago period. During the fiscal year, the company deployed $255.0 million toward capital expenditure compared with $201.0 million in the year-ago quarter.
Moreover, during fiscal 2011, the company utilized $578.0 million to repurchase approximately 6.0 million shares. Currently, the company can utilize approximately $972.0 million under its authorized share repurchase program, inclusive of a new $500.0 authorization approved by the board of directors.
Guidance and the Zacks Consensus and Rank
Moving forward, Polo Ralph Lauren now expects full fiscal 2012 revenues to grow in mid teen percentage. The company expects operating margin to be lower by 100 to 150 basis points in the fiscal due to higher input costs, business disruption in Japan and increased investments in strategic growth initiatives.
Ralph Lauren, which competes with Liz Claiborne Inc. (LIZ) and Phillips-Van Heusen Corporation (PVH), currently holds a Zacks #2 Rank, implying a short-term Buy rating on the stock. The company retains a long-term Outperform recommendation on the stock.
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