Ralph Lauren Q1 Up, but Expects Sales Declines Ahead

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After the outcry over Team USA’s made in China uniforms, Ralph Lauren Corp. hopes to make the 2014 Olympic uniforms in the United States.

New York–Ralph Lauren Corp. said Wednesday that due to “volatile equity markets and global economic challenges” it expects its second quarter sales to drop by mid-single-digit percentage.

While its first quarter report topped analysts’ estimates, the company said weakening sales in Europe, particularly Spain and Italy, and the closing of a Chinese distributorship “clearly had an impact on highly discretionary luxury apparel sales,” said Roger Farah, chief operating officer.

For the quarter ended June 30, Ralph Lauren posted a 5.1% increase in net income to $193.4 million, or $2.03 a share, from $184.1 million, or $1.90 a share, a year earlier.

Net revenue rose 4.4% to $1.59 billion. Wholesale sales rose 3% to $694 million while its sales were up 5% to $857 million with comparable store sales up 1%.

The first quarter numbers beat analysts’ estimate for earnings of $1.78 and narrowly beat their sales forecast for $1.58 billion.

“While we are proud of our strong start to fiscal 2013, the outlook for consumer spending and global economic growth remains challenging and we are planning our business accordingly,” Farah said.

EU Crisis’ Impact on Highly Discretionary Luxury Items?

In its wholesale division, the company reported double-digit growth in North America while European wholesale revenues declined at a double-digit rate, primarily due to lower shipments to specialty stores, a shift in the timing of certain seasonal merchandise shipments and the net negative impact from foreign currency translation.

Wholesale gains were also offset by the transition of certain Japanese wholesale distribution to directly operated shops and the “elimination of certain distribution in Greater China,” which involved closing 50% of the region’s network.

In its retail division, contribution from new stores, incremental e-commerce operations and comparable store sales growth was partially offset by store closures associated with the Greater China network repositioning efforts.

First quarter licensing revenues were up 5% to $42 million, primarily attributable to higher apparel and fragrance royalties that were partially offset by a decline in home licensing revenues that’s being changed to direct control.

“Volatile equity markets and global economic challenges have clearly had an impact on highly discretionary luxury apparel sales,” Farah told analysts on a conference call.

While the company reiterated its fiscal 2013 outlook for total net sales increase of a “mid-single-digit,” it noted that strategic decisions regarding operations, such as reduced distribution in Greater China and the ending of its American Living brand with JCPenney, combined with a stronger dollar “are expected to impact revenue growth by 500 points.”

For its second quarter, the company sees sales declining by a mid-single-digit percentage, hurt by “a low-double-digit decline in wholesale revenues offset by a mid-single-digit increase in retail revenues.” Those same concerns in China and foreign exchange rates are expected to mitigate revenue growth by 700 to 800 points in second quarter, while margin is expected to slip by 175 points to 225 points from the same period last year.

Farah told analysts that he didn’t expect a “true read” on consumer spending until fall and holiday periods when the company will have a better understanding of the political situation in America and in China, and how the European Union is handling its debt crisis.

2014 Olympic Uniforms to be Made in USA?

Nonetheless, he noted that shoppers are being more “value-conscious.” Sales are Ralph Lauren outlets are better than the full line stores and “proving to be resilient.”

Ralph Lauren issued an apology last month following an outcry over the U.S. Olympic uniforms it made that were manufactured in China.

While the company said it was too late to make this Olympics uniforms in the United States, “Ralph Lauren promises to lead the conversation within our industry and our government to address the issue to increase manufacturing in the United States. We have committed to producing the Opening and Closing ceremony Team USA uniforms in the United States that will be worn for the 2014 Olympic Games.”