May 25, 2011
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Costs, competition weigh on Polo Ralph Lauren, American Eagle

May 25, 2011

May 25 - High raw material costs continued to hit clothes companies, leading to Polo Ralph Lauren Corp forecasting weak margins for the year and sending its shares down 9 percent on Wednesday.

American Eagle Outfitters, Ralph Lauren
Polo Ralph Lauren

Rising costs of raw materials like cotton, used extensively for making clothes like jeans and T-shirts, have dented margins at most apparel companies.

At Polo Ralph Lauren, fourth-quarter profit for the period ended April 2 fell to $73.2 million, or 74 cents a share, from $114.1 million, or $1.13 a share last year.

The clothing maker, whose brands include Polo, Club Monaco and Chaps, said higher raw material costs and business interruptions in Japan would hurt full-year margins.

"Investors are viewing the fourth-quarter earnings shortfall and cautious margin commentary as indicative of a shift in the mid-term fundamentals of the business," Wall Street Strategies analyst Brian Sozzi said in a note.

"Hard to dispute that notion."

The expected margin hit offset strong sales expectations -- Polo expects revenue to rise at a mid-20-percent range in the first quarter.

Teen clothes retailer American Eagle Outfitters Inc, which has seen sales falter as it loses ground to rivals like Abercrombie & Fitch and Zumiez, also said sales trends have improved from the first quarter as it works on its merchandise.

However, the company saw sales fall 6 percent in the first quarter and forecast a lackluster second quarter.

Teen retailers have often been criticized for the sameness of their products, which makes it difficult to retain a loyal customer base. Most of them resort to discounting to get more traffic, which in turn eats into margins.

With stronger peer Abercrombie deciding to discount to get more sales, rivals Aeropostale Inc and American Eagle have struggled to win over shoppers.

American Eagle shares were down 3 percent at $13.26 on the New York Stock Exchange Wednesday.

(Reporting by Nivedita Bhattacharjee in Bangalore; Editing by Jarshad Kakkrakandy, Anthony Kurian)

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