This summary is based on the third quarter fiscal 2008 earnings call conducted by Polo Ralph Lauren Corporation (RL) on February 6, 2008.
President, COO: Roger N. Farah
CFO, Sr. VP: Tracey T. Travis
Key Investors Issues
- The earnings per share rose marginally from $1.03 in prior year to $1.08.
- Quarterly revenue rose 11% over last year to $1.27 billion.
- The company now expects fiscal 2008 EPS to be at the low-end of the range of $3.64 to $3.74.
Third Quarter Fiscal 2008 Financial Highlights
For the third quarter, the firm achieved consolidated net revenues of $1.27 billion, an increase of 11% over the prior year''s period.
Higher sales were achieved through a combination of organic growth and acquisitions. Excluding the impact of a non-comp recent licensee acquisition and Impact 21 in Japan and New Campaign, Inc for small leather goods, third quarter net revenue still increased to a healthy 6%. The firm’s strategy of diversification into international markets continued to be an important driver of top line growth during the third quarter, as it experienced strong sales across all product lines in Europe. The men''s wear product experienced strong sales globally.
In the third quarter, the company was also able to support the phasing-in of store set ups for the launch of American Living at JCPenney later this month by beginning to provide product to their distribution network earlier than it had originally planned. The firm’s retail stores also contributed to the third quarter revenue growth. Consolidated counts in the directly operated retail stores were up 5.7% for the quarter, which was achieved on top of a 7.4% comp gain in the third quarter of fiscal 2007.
The gross profit dollars increased 10% to $677 million.
The gross profit rate declined 40 basis pints to 53.3% in the third quarter compared to 53.7% during the same period last year. Excluding the full impact of the recent acquisitions, the gross profit rate was 20 basis points higher than last year as the benefit of higher European sales offset increased promotional activity in certain of its domestic businesses.
Third quarter operating expenses increased 18% to $506 million compared to $430 million in the third quarter of fiscal 2007.
Operating expenses as a percent of revenues were 39.8%, 220 basis points higher than last year. The higher operating expenses primarily reflect the impact of the newly acquired businesses both the non-cash effect of the purchase accounting as well as their operating expenses. Higher stock-based compensation cost, higher advertising and public relations expenses and higher expenses commensurate with the overall growth in the core businesses.
The third quarter operating income declined 7% to $171 million, reflecting approximately $16 million of decline.
This is due to the non-cash amortization related to the purchase accounting for the recent acquisition. This represents more than 100% of the year-over-year decline in the operating income. The third quarter operating margin was 13.4% compared to 16.1% in the third quarter last year, representing a 270 basis point decrease. Other drivers of the margin decline include the investments in new product launches and the increased stock compensation.
Net income for the third quarter of fiscal 2008 increased 2% to $113 million and net income for diluted share increased 5% to $1.08.
The increase in net income and diluted EPS relate to an effective tax rate of 31.1% in the third quarter of fiscal 2008 compared to a 38.9% rate in the comparable period last year, which more than offset the decline in operating income. The lower effective tax rate for the quarter was primarily due to the resolution of discrete tax items in the quarter that were partially offset by the higher tax expense associated with the adoption this year of FIN 48.
The firm ended the third quarter with $804 million in cash or $186 million in cash net of debt.
On a reported basis, the company ended the third quarter with inventory up 20% over the comparable period last year.
The year-over-year growth in inventory is primarily related to recent acquisitions and new products mostly Japan and American Living in the quarter.
During the quarter, the firm invested $59 million in capital expenditures for new retail stores, new retail RalphLauren.com fulfillment center, new shop installations, and other infrastructure investments. Year-to-date, the firm has spent $152 million on capital expenditures to support future growth plans.
