Polo Ralph Lauren Corp. (RL) reported results for the third quarter of fiscal 2010 with earnings of $1.10 per share. Earnings were ahead the Zacks Consensus Estimate of $1.00 and were up 4.8% year-over-year. The better-than-expected performance was primarily driven by higher gross margin.

However, the company warned that results during fiscal fourth quarter is expected to reduce by 8 cents to 10 cents per share due to costs associated with the decision to assume direct control of Asia-Pacific operations from its licensee.

The warning has surprised investors as analysts, on average, were increasing earnings expectations for the quarter, sending the Zacks Consensus Estimate up by 3 cents over the past month to 78 cents per share. Shares of Polo Ralph Lauren have slipped more than 8% to $78.60 in Tuesday on the New York Stock Exchange.

Meanwhile, net revenues for the fiscal third quarter declined marginally by 0.6% year-over-year to $1.2 billion, primarily due to lower domestic and Japanese wholesale revenues, partially offset by higher same-store sales at Polo Ralph Lauren’s retail segment and favorable foreign currency translations.

Gross profit grew by 8.1% year-over-year to $723.7 million, while gross margins expanded 470 basis points (bps) to 58.2%. The growth was primarily driven by improved wholesale and retail segment margins, reduced merchandise markdowns and supply chain cost savings initiatives.

Total selling, general and operating expenses increased 9.6% to $551.2 million, mainly due to increased compensation expense and incremental business expansion costs. However, higher gross profit more than offset the increase in operating expenses. Consequently, operating profit rose by 3.5% to $172.5 million, while operating margin increased by 60 bps to 13.9%.

Polo Ralph Lauren ended the quarter with cash and cash equivalents of $973.8 million and long-term debt of $298.3 million. Capital expenditures in the second quarter amounted to $51 million and the company ended the quarter with inventory down 6.8% to $545.1 million from $585.1 million in the year-ago period. During the quarter, the company also deployed $78 million towards share buyback and currently has $352 million remaining under stock repurchase programs.

Polo Ralph Lauren revised its guidance for fiscal 2010. Management now expects fiscal 2010 net revenues to decrease in the low-single-digit range, compared to the earlier prediction of mid-single-digit decline. The Zacks Consensus Estimate on Polo Ralph Lauren’s earnings for the fiscal has moved up by 5 cents to $4.23 per share over the past month as 4 of 13 covering analysts raised expectations.

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