Polo Ralph Lauren Corporation today reported net income of $74.8 million, or $0.72 per diluted share, for the third quarter of Fiscal 2005 ended January 1, 2005, compared to $35.4 million, or $0.35 per diluted share, for the third quarter of Fiscal 2004.
Adjusted net income was $74.7 million, or $0.72 per diluted share, for the third quarter of Fiscal 2005 compared to $47.7 million, or $0.47 per diluted share, for the third quarter of Fiscal 2004. Adjusted results exclude restructuring charges and the foreign currency effect of certain transactions involving our European operations. For a full analysis of the adjustments, please refer to the table reconciliation of GAAP results to adjusted results.
For the first nine months of Fiscal 2005, reported net income increased 79% to $168.7 million, or $1.63 per diluted share, compared to $94.4 million, or $0.94 per diluted share in the first nine months of Fiscal 2004. Adjusted net income was $167.7 million, or $1.62 per diluted share, in the first nine months of Fiscal 2005, compared to $104.2 million, or $1.04 per diluted share, in the first nine months of Fiscal 2004.
“I am proud of our company and how it continues to perform. We have a unique business model that stretches from wholesale to retail across many families of businesses and many geographies,” said Ralph Lauren, Chairman and Chief Executive Officer. “I am excited about how we look today whether it is in Milan or Aspen. I have always had the same vision for our company – be tuned in to your customers and be there first.”
“Our results show we continually re-ignite our brands with new products and new markets. We expect to produce another record year next year and we are positioned for continuous growth beyond that,” Mr. Lauren continued.
“We are extremely pleased with our growth and the strength it represents. The clarity in our strategies and the consistency in our execution have guided our investments in people and capital. From the acquisition of our children's licensee to the re-launch of our Lauren business to the completed consolidation of our European businesses, all support our long-term strategy of building and growing our brands on a worldwide basis,” said Roger Farah, President and Chief Operating Officer. “The powerful platform we have established is generating strong profitability and cash flow. Our focused expense and capital spending, improvements in inventory management and the increased efficiencies generated by our ongoing infrastructure initiatives have greatly strengthened our balance sheet for future growth opportunities.”
— In the third quarter comparable retail store sales increased
6.1% overall. Comparable retail store sales increased 3.4% at
Ralph Lauren stores, 6.7% at Club Monaco stores, and 7.2% in
our outlet stores. Our strategic store expansion plan is on
track with the opening of seven Ralph Lauren stores and three
Club Monaco stores in the third quarter of Fiscal 2005.
Additionally, in October we opened our Rugby store in Boston,
a new concept store with a full lifestyle collection targeting
18 to 25 year old men and women customers.
— We have a strong balance sheet and ended the third quarter
with $363 million in cash, or $55 million cash net of debt. We
continue to make excellent progress in managing our inventory
levels and generated a 44% increase in wholesale and retail
sales in the third quarter with less than a 1% increase in
inventory levels. At the end of the third quarter, inventory
was $425 million, including the women's Lauren by Ralph Lauren
line and childrenswear, compared to $422 million at the end of
the third quarter last year. Our trailing 12-month inventory
turnover improved to 3.8x compared to 3.0x at the end of the
third quarter last year.
— In October we expanded and extended our existing bank credit
facility by entering into a new five-year credit agreement
with a syndicate of banks. The new credit agreement, which is
substantially on the same terms as the prior credit agreement,
increased our revolving line of credit to $450 million,
subject to increase to $525 million.
— We paid a regular quarterly dividend of $0.05 per share on
Polo Ralph Lauren Common Stock in January 2005. The dividend
was initiated in July 2003, making this the seventh
consecutive dividend payment.
— We continued to expand our executive talent with the addition
of Tracey Travis, who joined the Company in January 2005, as
Senior Vice President and Chief Financial Officer. Tracey has
responsibility for corporate finance, financial planning and
analysis, treasury, tax and corporate compliance.
Third Quarter Income Statement Review
Net Revenues Net revenues for the third quarter increased 38% to $888.0 million compared to $645.4 million in the third quarter last year. Our wholesale revenues were $427.4 million, up 95% over last year, driven by the inclusion of the women's Lauren by Ralph Lauren line and childrenswear in our wholesale segment and increased sales in our domestic menswear and European businesses. Retail sales grew 12% to $402.6 million compared to $359.0 million last year with comparable store sales up 6.1%. Licensing revenues decreased $9.3 million due to the absence of royalty income from the previously licensed women's Lauren by Ralph Lauren and childrenswear businesses. The increase in Fiscal 2005 net revenues also reflects the favorable impact of the strengthening Euro to dollar exchange rate.
Gross Profit For the third quarter, gross profit was $438.0 million, an increase of $105.0 million, or 32%, compared to $333.0 million in the third quarter of Fiscal 2004. The increased gross profit was generated primarily by the addition of the women's Lauren by Ralph Lauren line and childrenswear, as well as our domestic menswear and retail businesses and our European wholesale business. Our overall gross margin was 49.3% compared to 51.6% last year, reflecting the above-mentioned reduction in licensing revenue and increase of wholesale versus retail business mix. The gross margin rate improved in our domestic and European wholesale businesses and in our retail business.
SG&A Expenses Operating expenses as a percent of revenues were 36.4% this year compared to 42.2% last year, a 580 basis point improvement. In the third quarter, SG&A expenses were $323.2 million, an increase of $50.7 million, or 19%, compared to $272.5 million in the third quarter of Fiscal 2004. The rate improvement was achieved by improved infrastructure leverage as well as benefits from our European consolidation and the change in business mix. The dollar increase was driven primarily by the inclusion of expenses for Lauren and childrenswear. SG&A also reflects the unfavorable impact of the strengthening Euro to dollar exchange rate.
Third Quarter Foreign Currency Gains and Restructuring Charges
The Company reports all financial results in accordance with U.S. Generally Accepted Accounting Principles (GAAP), but management believes that the supplemental presentation of results adjusted to exclude certain items provides investors with useful information regarding the Company's core business results. The Company does not suggest that investors should consider adjusted results in isolation from or as a substitute for financial information prepared in accordance with GAAP. The company presents such information to provide investors with an additional tool to evaluate the Company's results. Please see the attached table, which reconciles net income to net income before restructuring charge and foreign currency gains and losses.
Adjusted results exclude $0.4 million in foreign currency gains and $3.6 million in foreign currency losses related to certain balance sheet transactions and unhedged inventory purchases in our European operations in the third quarter of Fiscal 2005 and Fiscal 2004, respectively. Adjusted Fiscal 2005 third quarter results also exclude a pre-tax restructuring charge of $0.2 million related to operational consolidation efforts in Europe primarily associated with severance costs. Adjusted Fiscal 2004 third quarter results exclude a pre-tax $15.9 million restructuring charge, including approximately $12.2 million of which consists of an increase in the reserve for lease termination costs primarily associated with two Club Monaco properties, which were included in the Company's 2001 Operational Plan and approximately $3.7 million is related to operational consolidation efforts in Europe associated with severance and contract termination costs.
At the end of the third quarter, we operated 280 stores, with 1.99 million square feet, compared to 265 stores, with 1.88 million square feet, at the end of the third quarter last year. Our retail group consisted of 60 Ralph Lauren stores, one Rugby store, 69 Club Monaco stores, 125 Polo outlet stores, 20 Polo Jeans Co. outlet stores, and five Club Monaco outlet stores. During the third quarter we opened eleven stores and closed one.
Share Repurchase Program
The Company announced today that its Board of Directors has authorized the repurchase of up to
$100 million of our shares, in addition to the remaining $20 million balance of the current program. The Company's current share repurchase program expires on April 1, 2006. Shares acquired under the repurchase programs will be used for stock option programs and for other corporate purposes.
Fourth Quarter Fiscal 2005
The Company expects consolidated revenues in the fourth quarter to increase in the mid-single digit percent range. We expect that our wholesale revenues will increase in the high-single-digit percent range as we anniversary the inclusion of women's Lauren by Ralph Lauren and add childrenswear revenues. We also expect improved performance in our European wholesale businesses. Retail revenues are expected to be comparable to last year due to the impact of a 13-week fourth quarter this year compared to a 14-week fourth quarter last year. In addition, licensing revenues are expected to decrease in the low-single digit percent range reflecting the absence of royalties associated with childrenswear.
Although the Company expects a slight improvement in wholesale operating margins in the fourth quarter, it is expected to be offset by a decrease in licensing operating margin as well as a decrease in retail operating margins due to reduced expense leverage resulting from one less week of sales this year compared to last year.
The Company expects the fourth quarter of Fiscal 2005 to reflect the smallest quarterly net income increase for the year primarily due to the impact of a 13-week fourth quarter in this fiscal year compared to a 14-week fourth quarter last year. Earnings per share are expected to be approximately flat to last year, reflecting approximately 105 million shares outstanding in the fourth quarter of Fiscal 2005 compared to 102.3 million shares in the prior year's fourth quarter.
Full Year Fiscal 2006
The Company's initial outlook for Fiscal 2006 is for mid-single-digit percent consolidated revenue growth. Gross Profit is expected to expand significantly due to a growing retail business, and SG&A as a percent of revenues is expected to increase slightly, driving improved operating margins of approximately 100 basis points. The consolidated tax rate is expected to be 35.5% and the Company expects to have approximately 105 million shares outstanding. Earnings per share are expected to be in the range of $2.75 to $2.85.
The preliminary annual guidance does not include any impact related to the expensing of stock options to be made in Fiscal 2006 as required under the new accounting rules, which the company will implement in Fiscal 2006.
As previously announced, we will host a conference call and live online broadcast today, February 2, 2005 at 9:00 A.M. Eastern. The dial-in number is 1-913-981-5522. The online broadcast is accessible at http://investor.polo.com.
Polo Ralph Lauren Corporation is a leader in the design, marketing and distribution of premium lifestyle products in four categories: apparel, home, accessories and fragrances. For more than 35 years, Polo's reputation and distinctive image have been consistently developed across an expanding number of products, brands and international markets. The Company's brand names, which include “Polo by Ralph Lauren”, “Ralph Lauren Purple Label”, “Ralph Lauren”, “Black Label”, “Blue Label”, “Lauren by Ralph Lauren”, “Polo Jeans Co.”, “RRL”, “RLX”, “Rugby”, “RL Childrenswear”, “Chaps”, and “Club Monaco” among others, constitute one of the world's most widely recognized families of consumer brands. For more information, go to http://investor.polo.com.