8/10/2011
By Brian Sozzi, Research Analyst

Polo Ralph Lauren (RL) shares popped pre-market, a move we feel is warranted given the clean nature of the 1Q12 earnings report this morning.  There was no mention of the impact from a calendar shift that hurt 4Q11 revenues by 10% (in turn aided 1Q12), but that looks to have been properly incorporated into the guidance.  So, what we are left with is a three-month period from Polo that was surprisingly strong on the top line (did the company lowball the Street with respect to price increases for spring/summer?) and margins (gross margin 63.00% reported, 60.24% consensus), suggesting that the company is navigating global consumer headwinds relatively handily.  In fact, total revenues by segment for 1Q12 were strongly ahead of first quarter periods dating back to the boom in consumer spending.

To see strong comparable store sales growth acceleration at retail sequentially, broad-based no less (shouldn't factory be fluctuating with pressure on the "aspirational" shopper?), is about as peculiar as it gets in retail land at the moment.  Polo appears to have benefited in the quarter from some degree of pricing actions to combat inflation, new businesses, and greater than expected interest in its discretionary wares at the traditional malls and off-malls.

We are watching closely commentary on Europe and the U.S. wholesale business on the earnings call; with the company's strong shipments into these channels any downdraft in the consumer scooping up the clothing is likely to be margin unfavorable.  That said, Polo shares were trading at the mid-point of its 9-year P/E multiple range (16.4x) prior to the report and with the results brought forward today, looming additional price increases, and countless global merchandising initiatives investors are buying into the story following the 4Q11 earnings miss. 

Highlights
* Trouncing of 1Q12 guidance across the board ($0.44 EPS beat).
* Bought back stock in the quarter.
* Strong revenue outlook for 2Q, operating margin outlook below consensus (Street may view it as conservative).

Brian Sozzi
Wall Street Strategies

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