Polo Ralph Lauren (NYSE: RL) reaffirmed today that it expects fiscal 2005 earnings will be between $2.32 to $2.45 per share, a healthy 30% to 40% rise from last year. The high-end clothing and home products company attributes the expected earnings jump to high-single-digit revenue growth, improved operating margins, and a reduction in taxes.
Polo appears to be staking its future on re-emphasizing its higher-margin, premium-priced luxury roots. The company has particularly high hopes for its Lauren women's line, which was previously sold under license by Jones Apparel (NYSE: JNY). Polo severed that arrangement in December after Jones failed to meet minimum sales requirements. With Lauren now fully under its control, Polo expects the line will generate sales of $400 million in the coming fiscal year, and margins in the mid-teens. By contrast, the Jones licensing deal contributed just $43 million to Polo's revenue in fiscal 2003.
Bargain hunters beware, because Polo is also making more of an effort to force consumers to pay full price for its wares. The firm curtailed off-price sales in its men's wholesale area last quarter, which reduced revenue in that business line by 18%. Despite the pain this entails, Polo intends to continue to cut such sales, until the off-price area represents a "minimal" part of its business.
In keeping with its higher pricing strategy, the clothier will build out its high-end retail stores. Polo's store mix is currently weighted toward bargain outlets, which make up 139 of a total 265 locations. In fiscal 2005, Polo will bulk up the full-priced area, adding 18 new sites, while outlet expansion will be "very limited."
The company's focus on high prices makes sense based on the latest comparable-store sales performance. In its most recent quarter, Polo's comps growth was a respectable 8.8%. However, that increase was thanks in large part to sales jumps in the teens and low-20s at conventional stores, versus low-single-digit rises at outlets.
Polo's plan to take advantage of consumers' increased willingness to pony up for its pricey products looks like it could pay off. The real test for Polo will be meeting its goals for the Lauren line. If it can follow through, Polo shares could be in for jump.
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Fool contributor Brian Gorman does not own shares of any companies mentioned here.
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