Pointing to rising costs in cotton and labor as well as a sales drop in Japan, the company’s report today reversed a trend in its previous quarters that saw large increases in profit. The stock market reacted to the disappointing results with shares plunging more than 10%. Until today, shares have risen 17% this year.
For the quarter ended April 2, net income fell to $73.2 million or 74 cents a share. Revenue rose 6.7% to $1.43 billion from a year earlier, when the company reported net income of $114.1 million, or $1.13 a share. Comparable store sales increased 7%, reflecting a 3% decline at Ralph Lauren stores due to a high single-digit reduction in Japan, an 8% increase at factory stores and 10% growth at Club Monaco stores. RalphLauren.com sales increased 21%.
Analysts’ average estimate expected a higher profit of 79 cents a share on larger sales of $1.4 billion.
Costs, Inflation to Pressure 2012 Margins
Polo’s wholesale sales increased 2.1% to $752 million, but segment operating income fell due to the higher cost of goods. Strong growth in domestic wholesale shipments, expanded distribution in parts of Asia and continued progress in Europe were partially offset by a planned decline in Japanese wholesale sales. Licensing revenue decreased 5.8%.
Total operating expenses rose to $693.1 million from $617.6 million. Gross margin fell 2.2 percentage points to 56.8%.
The company said that an extra week in last year’s quarter contributed about 13 cents per share to earnings and approximately $70 million to revenue. The shift of the Easter holiday and the week between Christmas and New Year had an effect on comparisons.
Nonetheless, in a conference call with analysts, Roger Farah, president and chief operating officer, said today the company is facing “unprecedented inflationary pressures.”
“Even though we face real sourcing cost pressure during the year and the impact of impending inflationary pressure on the consumer is unknown, our brands are strong and we have a culture of tremendous operational discipline,” Farah said.
Consequently, the company forecast a major drop in operating margin in the next fiscal year.
“Based on the anticipated impact of cost of goods inflation and increased investment in strategic growth initiatives, in addition to business disruption in Japan, the company expects the operating margin from continuing operations for fiscal 2012 to be 100 to 150 basis points below the prior year.”
For its fiscal 2011, earnings climbed 18% to $567.6 million, or $5.75 per share, from $479.5 million, or $4.73 per share. Net revenue increased 14% to $5.48 billion from $4.8 billion helped by retail expansion in Asia and low double-digit comparable stores sales growth as well as a low double-digit increase in international wholesale shipments.
Looking ahead, Polo Ralph Lauren anticipates first quarter sales climbing in the mid-20% range. Comparable store sales are expected to rise at a low double-digit rate with total 2012 revenue rising by a percentage in the mid-teens.
The company said its board of directors has authorized an additional $500 million stock repurchase program.