Polo Ralph Lauren Corp. (RL) appears to have avoided to a large extent last quarter’s slump in consumer spending as it easily beat estimates (see conference call transcript).  Polo released data for its fiscal fourth quarter ended March 29, and the company boosted its net income by 41%.  On a per share basis, income was about $1 per share compared to $.68 in the same quarter a year ago.  Sales were strong in Europe and wholesale revenues were greatly boosted by the partnership with JC Penny (JCP), both of which contributed to an overall revenue hike of 20%.  The company reaffirmed fiscal 2009 guidance of earnings in the range of $3.95-$4.05, and called for revenue growth in the low to mid single digit range.  The lower effective tax rate in the quarter was icing on the cake, and results that blew past consensus estimates helped boost RL’s stock price by almost 12%.

Polo’s sales numbers were definitely the highlight of the results.  Internet sales were up 36% and the critical same store sales metric increased by 8.9%.  The data was very encouraging given the overall tough conditions for most retailers; however, there is some cause for concern in our opinion.  A partnership with JC Penny yielded the “American Living” brand which covers some 40 home and apparel categories made by Polo for JC Penny to distribute exclusively.  As we stated earlier, Polo reported wholesale revenue growth of 25%, much of that attributable to this partnership.  However, JC Penny’s resale of the products has not gone as well as hoped, and inventories are growing too fast.  Our concern—backed by JC Penny’s quarterly results release March 28—is that disappointing retail sales at JC Penny may force it to back off from the higher end “American Living” products.  JC Penny was crushed in the first quarter, and the outlook for the near future is equally grim.

Ockham Research rates RL a Hold for the time being, and we would not recommend buying following the 12% run up that followed the results.  The strong sales performance during the last quarter has already been priced in, and we are not inclined to think that the performance is sustainable given the partnership with struggling retailer JC Penny.  The price-to-sales and price-to-cash flow valuation metrics are currently within their normal ranges, so the valuation is not very compelling at this time.  After today’s advance, the stock crossed outside of what we have established as the stocks rationally expected trading range of $47-$67 given current fundamentals.

Disclosure: none

• Who in the U.S. Gets Hurt the Most by Food-Price Inflation?  »
• Altria's Last Legal Hurdle Should Be Settled This Fall  »
• How Wal-Mart Really Beats Expectations  »
• Medical Properties Trust, Inc. Q2 2008 Earnings Call Transcript  »
• Finish Line Inc. - Value in Action  »

Ockham Research

• Bio & more articles
• Visit: Ockham Research