New York—While the majority of Ralph Lauren Corp.’s business is in apparel, the company is looking to expand its accessories business especially in Asia and emerging markets.
Analysts asked Roger Farah, president/coo, about the direction of the company’s accessories business in a conference call on Friday when Ralph Lauren released its second quarter earnings.
“I think it’s pretty common knowledge that the concept of accessories broadly defined has been an importing growth category for the industry now for a while and whether that’s accessories at luxury prices or what’s called affordable luxury or even at more moderate prices, I think the accessory category has clearly outperformed apparel and specifically women’s apparel for a while now.”
Farah said the company’s greatest emphasis is on its successful apparel business, but it has been developing key accessories licenses over the last six years. “We’ve developed sourcing capabilities, we think the Ralph Lauren aesthetic translates beautifully into accessories and where we have partnerships or licensing relationships with Luxottica (eyewear) or partnerships with Richemont (watches) or L’Oreal (cosmetics). I think we’re with world class, best-in-class partners.”
Expansion into accessories is likely to be strongest in the Middle East, Russia and Asia, specifically China, where rising-income consumers express themselves through a signature or easily identifiable high-end product, he added.
Farah said he was “very pleased with where we stand and where we’re going one of the interesting realities of our results to-date both the extraordinary margin in wholesale and the extraordinary margin we now operate in retail is without high penetration of accessories—which properly executed brings with it higher profit margins. So I think we’re making good progress I think we’re making quality progress I don’t think we’re looking to jam this business artificially in the early stages. My guess is over the long-term it’s going to be a very big part of what we do and that will be more prevalent in Asia and some of the emerging markets, and perhaps some of the more mature markets, but I don’t want to back off the apparel business.”
Q2 Earnings, Sales Decline, But Beats Estimates
For its quarter ended Sept. 29, Ralph Lauren posted a decline from last year due to higher expenses and a sales decline that was offset by higher margins. Nonetheless, the second quarter profit and sales beat analysts’ average estimate.
In its third quarter forecast, the company came in below analysts’ estimates and lowered its full year sales growth, too.
Net income was $213.7 million, or $2.29 a share, compared with $233.5 million, or $2.46 a share in the prior-year quarter. Excluding one-time tax items, the company earned $2.45 a share, beating analysts’ estimate for $2.15 a share.
Second quarter net revenue declined 2.2% to $1.86 billion, yet ahead of analysts’ estimate for $1.83 billion.
Wholesale sales dropped 8% to $915 million following a “proactive reduction in shipments to certain European specialty stores” as well as currency fluctuations. The discontinuation of its American Living brand with JCPenney and the launch of its Denim & Supply were factors, too. Licensing declined 3% to $47 million due in part to the American Living closure and changes to license agreements in South America.
As for gross margin, it increased 220 basis points to 58.8% partially offset by a 190 basis points increase in operating expense as a percentage of revenues.
Looking ahead, the company forecast third quarter revenues to increase in the low single digits while analysts’ consensus expects a 7.7% sales increase to $1.94 billion.
The company also lowered its full year forecast for a 2% to 3% sales increases down from its previous estimate for a mid-single digit increase.
“While we expect continued margin improvement in the back half of the year, macroeconomic conditions lead us to be incrementally more cautious on near-term customer demand trends worldwide,” Farah said.
Donating $2 Million to Hurricane Sandy Relief
The company said it also plans to shutter its Rugby stores and e-commerce site by the end of its fiscal 2013 to focus on “high growth, more scalable” opportunities.
Meanwhile, Ralph Lauren, company’s chairman/ceo, announced today a $2 million gift to Hurricane Sandy relief efforts. As part of the $2 million gift, the Ralph and Ricky Lauren Family Foundation is donating $1 million to the Mayor’s Fund to Advance New York City to help address immediate needs of New Yorkers as well as long-term relief efforts. Ralph Lauren Corp., through the Polo Ralph Lauren Foundation, is donating the other $1 million to relief efforts, dividing the money between the Robin Hood Relief Fund, the American Red Cross Disaster Relief Fund and to local organizations for relief and rebuilding efforts in New Jersey, Connecticut, Long Island and Westchester County.