RealMoney Silver - RL Beats Estimates

RL Beats Estimates
By Ron Thomas
RealMoney Contributor
2/6/2008 12:45 PM EST

Updated from 8:28 a.m. EST on Feb. 5.

Polo Ralph Lauren (RL) beat estimates, reporting EPS adjusted for a one-time tax rate change of 96 cents vs. a 77-cent average estimate and $1.03 last year. Third-quarter net revenue was up 6%, adjusted for non-comparable acquisitions. Street sales estimates were for a 4.3% sales gain.

Total sales rose 11%. Wholesale sales, adjusted for acquisitions, rose 5%, but there was some early shipping of American Living merchandise to JCPenney (JCP) . Strength came from Europe, menswear and Chaps at Kohl's (KSS) . Retail sales were up 9%, with a 5.7% comp. Ralph Lauren stores had a 6% comp, as did factory stores (which I would expect to come under pressure very soon). Internet sales rose 23%.

Gross profit increased 10%. Excluding acquisitions, the gross profit margin increased 20 basis points via higher European sales, which more than countered increased promotional activity in the U.S.

Operating expenses rose 18% and were 39.8% of sales, 220 basis points over last year because of purchase accounting adjustments, expenses of newly bought businesses and higher stock compensation cost. Operating income then declined 7%. The operating margin was 13.4%, down 270 basis points from last year, though much of this was acquisition- and investment-spending-related.

Net income increased 2% after the tax change, and net per share increased 5% visa buybacks.

Third-quarter inventory rose 20%, though no adjustment was made for investors concerning the inventory effect of the American Living rollout.

The guidance for fiscal 2008 was really unchanged except for the 12 cents per share from the special tax items. Sales are expected to be up low double digits, and the Street is at 11.3%. Management sees the lower end of a $3.64 to $3.74 EPS range. The 2009 guidance is for revenue to increase a low to mid-single-digit percentage and for EPS to increase to a $3.95 to $4.05 range vs. a $4.31 average estimate.

The American Living rollout goes to 575 stores and goes from apparel to home to silverware. JCPenney takes title to all of the merchandise and even has some of the home-related goods manufactured for it with Polo Ralph Lauren's designs. The ad push will be big.

Dresses are shipping now at all price points.

The Japanese business will have to be totally rebuilt after years of mismanagement by the licensee. I am not expecting big things in 2009.

Handbags at wholesale come in spring of 2009.

COO Roger Farah said that "the change in consumer spending patterns from fall are unprecedented." In the Q&A, he said that he picked the term "unprecedented" carefully, saying that he was looking at the swiftness of the December decline and how it affected all income groups. He said that he did not see what could stimulate the consumer to buy and sees no reason for a consumer upturn 12 months from now. He has seen weakness from the financial market-related spending in London during the holiday shopping season.

Asked about store growth in 2009, I heard nothing about the U.S., only a comment that there will be more growth internationally.

Asked about more 2009, Farah said that he is assuming strong sales in Europe and Asia, with core U.S. department store wholesale sales down a low single-digit percentage. Total domestic sales are to rise in the low single digits. Men's and kids inventories are planned to be down.

The stock is up 11% as I write this because I assume that the bulls are happy that earnings guidance for 2009 came in at $4.00 (lower that the $4.31 Street estimate) rather than nearer the lowest estimate of $3.60. What I think is pivotal, however, is that management, even though it is looking at a very weak U.S., is still not forecasting that economic weakness will spread around the world. That expectation can (and probably will) change, possibly quickly. With that change would come EPS estimates in the $3.60 area, I would think.

RL Preview: Not a Good Value Here

Polo Ralph Lauren (RL) is expected to report EPS of 77 cents, down 25% from $1.03 last year. Sales are expected to grow 4.3%, to $1.19 billion.

Even having come down from $100 in the middle of 2007, it seems hard to make a case for Ralph Lauren being cheap. With consensus estimates of $3.47 and $4.31 for fiscal 2008 and 2009, respectively, the stock, using a 7% risk discount rate, discounts a 10% five-year growth rate, which could well be low. But having seen three or four sell-siders cut their ratings within the last week or two, my best guess is that the company will be cutting estimates. Beyond that, it is hard to believe in the calendar year 2008 estimates for any consumer discretionary company at this point.

Going with the lowest estimates of $3.16 and $3.59 for fiscal 2008 and 2009, respectively, for a sort of L-shaped consumer recovery, the stock at $60 discounts a 14% five-year EPS growth rate, very near the almost always too high 15% sell-side average.

Polo Ralph Lauren's growth drivers are not too upscale, so middle-income consumers should be keep the company above the fray that has hurt department stores and other apparel stocks. Chaps at Kohl's (KSS) may be a big hit now, and American Living may, in the long term, be a great brand for JCPenney (JCP) , but both companies have to fight the probable recession as well as too much square-footage growth in department stores.

If the actions of foreign stock markets are any indication and the buying by upscale people in developing markets is correlated with U.S. spending, then, because of their lower incomes relative to American buyers of higher-priced clothing, it is safe to assume that a cutback in a foreign recession would be more than in the U.S. Going into accessories may work out, but I can only expect that it will be slow going expanding into them in a recession.

At the same time, management's comments at the end of the last quarter give no confidence. The company said that it was more concerned about the middle consumer. For this quarter, management saw mid-single-digit growth in wholesale revenue, high single-digit growth in retail revenue and operating margins down 500 basis points, though part of that is obviously investment spending.

The women's business has been weak. I can only assume that changing the merchandise, if that's what ends up being needed, will take nearly nine months.

In the very short term, regardless of where Polo Ralph Lauren sees its inventory position, if the retailers end up reporting huge inventories as of Jan. 31, the stock could be vulnerable from that angle as well.