Wednesday, May 25, 2011

Polo Ralph Lauren (RL) Margin Squeeze a Shot Across the Bow for Retailers?

It's been interesting to see some investors push into consumer discretionary retailing stocks the past few weeks.  That may be a function of lower gasoline prices, but it seemed to ignore the coming impact of higher commodity prices on margins.  Since it takes a few quarters to work such prices through the food chain, the surge in commodity prices that began from The Bernank's declaration to inflate everything starting in late August 2010, now appears to be hitting.  Polo Ralph Lauren's (RL) earnings this morning are a fine example, as margins were squeezed to the tune of 220 basis points.  Yes there was a 5 cent miss but I think that degree of margin compression is what has been hitting the stock.  Also some inventory buildup, but that could be 'transitory'.

Now we could in theory make a bull case for the longer term in retail, especially the higher end [Oct 8, 2010: No Recession in High(er) End] - especially until QE3 is announced this winter (my guess).  To compensate for the higher input costs, retailers with pricing power (i.e. the high end) are raising prices.  Right now those price increases are not high enough to compensate for the increase in inputs.  But as the dollar strengthens, people take 'risk off' and commodities sell off (as they have done now for 3+ weeks) the same retailers suffering from higher input costs will see lower input costs a few quarters down the line.  But they obviously won't be lowering prices - hence they hit a sweet spot.  We'll see how it works out - right now the market is not looking that far ahead.

RL has had a huge run since the lows in September 10, running from $75 to $135: +80%.  In the context of that sort of move today's 7% drop is not severe, other than the fact it caused a lot of damage in the chart.  And once that sort of damage is done, you lose the trend following investors who are willing to buy every dip as long as its not technically insulting.  And once again we see a 'gap' filled (this one from mid Feb).


Polo Ralph Lauren misses by $0.05, reports revs in-line; sees Q1, FY12 revs above consensus (RL) 129.39 : Reports Q4 (Mar) earnings of $0.74 per share, $0.05 worse than the Thomson Reuters consensus of $0.79; revenues rose 7.2% year/year to $1.38 bln vs the $1.39 bln consensus. Gross profit margin was 56.8%, 220 bps below the prior year level. The decline in gross profit margin reflects the impact of cost of goods inflation that was partially offset by improved retail segment margins and overall channel mix.

Outlook: In 1Q12, the co expects consolidated revenues to increase in the mid 20% range (cons: +12.7%). Wholesale revenues are expected to grow at a low 20% rate in the first quarter and retail revenues are expected to grow slightly faster, including comparable store sales that are projected to increase by a low double-digit rate. The co expects the operating margin from continuing operations for the first quarter of Fiscal 2012 to be ~equivalent to that in the comparable prior year period. The co currently expects consolidated revenues for FY12 to increase by a mid teens percentage (cons: +9.8%), with retail revenues growing slightly faster than wholesale revenues. 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 co expects the operating margin from continuing operations for Fiscal 2012 to be 100-150 bps below the prior year. The Fy12 tax rate is estimated at 33%. Capital expenditures are planned at ~$325 million in Fiscal 2012.

Via Barron's:

  • Operating expenses rose 12%, faster than revenue (up 7%), as the company invested more in growth initiatives and paid higher incentive-based compensation. Input cost pressures are weighing on results. And the company said it faces uncertainty as consumers start to deal with inflation.
  • One analyst says that investors should be wary of buying on the drop. “Investors are viewing the fourth quarter earnings shortfall and cautious fiscal 2012 operating margin commentary as indicative of a shift in the medium-term fundamentals of the business,” wrote Wall Street Strategies analyst Brian Sozzi. “Hard to dispute that notion.”
  • “[T]he amount of gross margin deceleration relative to the third quarter (-220 bps 4Q11 year over year ; +47 bps year over year 3Q11) is concerning, as was the inventory position compared to projected future sales (+mid-teens percentage revenue guidance against a +39% rise in inventory).”

[Feb 9, 2011: Polo Ralph Lauren Smashes Estimates, Doubles Dividend, and Announces $250M Buyback Program]

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