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Polo Shares Sink on Weak Profit Picture

Reuters
Wednesday, 8 Aug 2007 | 3:09 PM ET

Polo Ralph Lauren posted a weaker-than-expected quarterly profit Wednesday, hurt by acquisitions-related accounting, and cut its full-year earnings forecast due to a higher tax rate, sending its shares down as much as 13 percent.

The maker of the Polo by Ralph Lauren and Club Monaco clothing lines said its operating margin had decreased in the quarter due to accounting for its recent acquisitions, which include the remaining 50 percent interest in both polo.com and its Japanese licensee.

Polo also said a higher tax rate would shave 6 cents per share off its full-year earnings. But Chief Operating Officer Roger Farah offered a cautiously optimistic prognosis on the health of its high-end consumers, since shares of Polo and other luxury-goods makers have been battered in recent weeks amid concerns over subprime mortgages, anemic U.S. jobs growth and uneven corporate earnings reports.

"If their portfolios or psychological view of the world changes -- I don't know that that will cause them not to spend because they don't have the money. But it may attempt to dislodge their confident view of the future," Farah said. "At the moment, the luxury customer continues to shop," he added.

In recent years the luxury sector has proven resilient, since its main consumers tend to suffer less from problems such as high gas prices.

By the Numbers

Polo said net income for the first quarter ended on June 30 rose 10 percent to $88.3 million, or 82 cents per share, from $80.2 million, or 74 cents per share, a year earlier.

Analysts, on average, were expecting 85 cents per share, according to Reuters Estimates.

Revenue rose to $1.07 billion from $954 million as increases in wholesale and retail sales offset a decline in licensing.

Sales at Ralph Lauren stores open at least a year rose 10.4 percent, while same-store sales rose 6.4 percent at factory stores and 8 percent at Club Monaco stores. Wholesale sales rose 17 percent in the quarter, boosted by acquisitions and higher worldwide sales of menswear and the Lauren line in the United States.

Licensing royalties fell 8 percent in the quarter, due to the elimination of revenues from a licensee Polo has recently acquired outright. Operating expenses rose 12 percent as the company prepared to launch new products later in the year.

For the second quarter, Polo forecast revenue growth at a high single-digit rate, with operating margins declining about 450 basis points due to accounting changes and investment in new business efforts.

"Fiscal 2008 is an investment year, both financially and operationally, as we integrate recent acquisitions ... and prepare to launch entirely new businesses," Farah said.

Polo now expects to earn $3.64 to $3.74 per share in 2008, down from its prior forecast of $3.70 to $3.80. It still sees full-year revenue increasing by a mid-teen percentage rate.

WR Hambrecht & Co. analyst Melissa Otto affirmed her "buy" rating on Polo shares, based on valuation and the company's growth potential.

Polo "is strengthening its global competitive positioning," Otto said in a research note. "We see opportunities for outperformance in Europe and Japan. In the U.S., we think the continued development of (its line) Rugby, the new American Living line designed for J.C. Penney Co Inc, and the outlet business look promising for growth."

Polo shares fell as low as $80.15, before trading down $10.67 at $82.11 on the New York Stock Exchange early Wednesday afternoon. They trade at 24 times earnings estimates for the current year, according to Reuters data, a premium to Tiffany & Co. and Coach , which trade at ratios of 20.8 and 23.3, respectively.

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