KCP Kenneth Cole Productions, Inc.

We maintain our long-term Neutral recommendation on Polo Ralph Lauren Corporation (RL) with a target price of $160.00 per share. However, the company has a Zacks #4 Rank, implying a short-term Sell rating.

Polo Ralph Lauren is one of the leading specialty retailers of premium lifestyle merchandise in the U.S. Moreover, the company commands a strong portfolio of globally recognized brands, which provides it with a competitive edge and strengthens its well-established position in the market.

Polo’s fourth-quarter 2012 earnings of $0.99 per share surpassed the Zacks Consensus Estimate of $0.85 and surged 33.8% from $0.74 posted in the prior-year period. The robust performance was primarily driven by solid top-line growth, a lower tax rate and a reduced number of shares outstanding.

Polo Ralph Lauren expects net revenue in fiscal 2013 to increase by a mid-single-digit percentage due to the company’s anticipation of a low-single-digit decline in wholesale sales and low-double-digit growth in retail sales. Moreover, the company expects moderate operating margin expansion which will be mainly driven by gross margin expansion, partially offset by the negative impact of continued investment in long-term growth initiatives and overall channel mix.

The company aims to strategically expand and elevate its international presence, particularly in Asia. Polo Ralph Lauren recently took direct control of operations in Asia from its licensee in order to effectively capitalize on opportunities in emerging markets such as China, South Korea and India. We believe Polo’s initiatives to capitalize on opportunities in Asia spurred by reduced long-term debt augur well for future operating performance.

Moreover, the company has a very strong balance sheet with cash and investments of $1,187.3 million and long-term debt-to-capitalization ratio of just 7% at the end of fiscal 2012. We believe a solid cash position provide Polo Ralph support in times of dividend payout, share repurchase and strategic acquisitions. This offers Polo Ralph Lauren financial flexibility to drive future growth.

However,Polo Ralph’s financial performance may be substantially affected due to its significant presence in international market (almost 36% of net revenue in fiscal 2012), which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits.

Moreover, consumer confidence and spending behavior may dampen due to macroeconomic factors including increase in fuel and energy costs, credit availability, high unemployment levels, and high household debt levels, which may negatively affect their disposable income, and in turn, the company’s growth and profitability.

Above all, Polo Ralph Lauren operates in a highly fragmented market and competes with a number of well-established players, such as Estee Lauder Companies Inc. (EL), Coach Inc. (COH), V.F. Corporation (VFC), and Kenneth Cole Productions Inc. (KCP). The company primarily competes on the basis of fashion, quality and service. To retain the existing market share, Polo Ralph may have to reduce its sales prices, which could affect its margins.

 
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