Ralph Lauren smashes earnings estimates

U.S. Olympians show off Ralph Lauren's Opening Ceremony Parade Uniforms in July, 2012

WASHINGTON Ralph Lauren Corp. (RL) posted a 27 percent increase in its fiscal third-quarter profit as the designer clothing company enjoyed continued momentum in spending among its affluent shoppers in the U.S. and improving trends in Europe during the crucial winter holidays.

The news sent shares of the company up more than 8 percent in early afternoon trading.

The results, announced Wednesday, are an improvement from the first half of the year, when cotton costs soared and the company was bearing costs to eliminate some of its businesses to focus on the most profitable ones. But the company managed to navigate through the rough patches and delivered better-than-expected results.

The company's performance also shows that even in challenging times, the affluent will continue to spend on brands that they trust the most. The owner of the Ralph Lauren Collection and Polo by Ralph Lauren brands sells its products at department stores, its own shops and through other retailers.

"Our third-quarter performance is a testament to the enduring appeal of our brand and the dedication of our passionate team," Ralph Lauren, chairman and CEO, said in a statement. "Our orientation as a design-led, marketing and merchandising organization has enabled us to deepen our connection with our customers, particularly as we expand our portfolio of products and lifestyle sensibilities."

The New York-based company said it earned $215.7 million, or $2.31 per share, in the three months ended Dec. 29. That compares with $169 million, or $1.78 per share, a year earlier.

Revenue rose 2.2 percent to $1.79 billion.

Analysts had expected earnings of $2.20 per share on revenue of $1.85 billion, according to FactSet.

The company said that its wholesale segment's sales of $734 million in the third-quarter were 2 percent below the year before. The business has been dragged down by the discontinuation of its American Living brand to J.C. Penney and a planned reduction in shipments to certain European customers.

Ralph Lauren also discontinued its Rugby brand to focus on more profitable brands.

Retail sales rose 6 percent to $1.1 billion. Revenue at stores open at least a year rose 4 percent. The company estimated that the disruption caused by Superstorm Sandy, which hit the East Coast in late October, depressed third-quarter comparable sales by 1 to 2 percentage points.

During a conference call with investors following the earnings release, Roger Farah, president and chief operating officer, said the company is seeing ongoing weakness in Italy, Spain and southern Europe. That softness was offset by stronger wholesale business in the northern countries including Germany and the United Kingdom, and the Scandinavian market.

Ralph Lauren also aims to capitalize on the increasing migration of its shoppers online. Customer traffic to ralphlauren.com from mobile devices rose 35 percent in the third quarter.

"The continued shift in the customer' preference to shop online is undeniable," Farah said.

As a result, the company just bought a distribution center in North Carolina and plans to double its size to more than 800,000 square feet.

The company is also expanding its e-commerce business abroad and began serving online customers in Italy Greece, Spain and Portugal in the third quarter. It now serves customers online in 11 countries throughout Europe.

Ralph Lauren said that as a result of better-than-expected profitability in the first nine months of the year, it now expects operating margin from continuing operations for fiscal 2013 to be about .75 to 1 percent point above the year before. That's above its earlier expectation of a .50 percentage point improvement.

For the fourth quarter, Ralph Lauren said it expects its consolidated net revenue to be up by a mid-single-digit percentage, reflecting an 8 percent to 11 percent increase in retail revenue and flat wholesale revenue. Assuming a 5 percent increase, that would mean revenue would reach $1.7 billion in the fourth quarter. Analysts expect $1.74 billion, according to FactSet.

Shares of Ralph Lauren rose $13.21 to $178.20 in early afternoon trading.