Polo Ralph Lauren Corporation (RL) will pay approximately $47 million to Doosan Corporation to gain direct control of the wholesale and retail distribution in South Korea. Doosan Corporation will cease to be the licensee of the company in South Korea, effective January 1, 2011, as the company buys back its license.
The total consideration of $47 million comprises a cash payment of $25 million for certain assets and $22 million primarily for inventory and various other assets at closing on December 31, 2010.
Doosan Corporation, the licensee of Polo Ralph Lauren, has been distributing Polo Ralph Lauren’s products through 175 shop-in-shops and five freestanding locations throughout South Korea over the past 12 years. The company considers South Korea as one of its key markets. Therefore, the gain of direct control in South Korea is a significant step forward for Polo Ralph Lauren to expand its Asian operations.
In a similar vein of entrenching its direct access in Asia, Polo Ralph Lauren had earlier acquired Impact 21, its Japanese men’s, women’s and jeans apparel and accessories licensee, in 2007. The company has also clinched several acquisitions in the Asian markets including China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Taiwan and Thailand in January 2010. Revenue from Asia totaled $459.7 million in full year 2010, up 17% year over year.
The direct control of South Korean operations will aid Polo Ralph Lauren in fully integrating its Asian strategy and leverage the Hong Kong-based leadership, expertise and infrastructure to optimize the unique opportunities found in each country.
During the fourth quarter earnings call, Polo Ralph Lauren guided first-quarter 2011 total revenue to grow at a low double-digit rate, including a net unfavorable foreign currency translation effect. The Zacks Consensus Estimate for total revenue is $1.1 billion for first-quarter 2011. For full year 2011, Polo Ralph Lauren expects revenue to increase by a mid single-digit percentage, including a net unfavorable foreign currency translation effect.
The Zacks Consensus Estimate for first-quarter 2011 is earnings of 89 cents per share. For full year 2011 and 2012, the Zacks Consensus Estimates are respectively, $4.67 per share and $5.94 per share.
Based in New York, Polo Ralph Lauren Corporation designs, markets, and distributes lifestyle products for apparel, home, accessories and fragrances. The company sells its products in wholesale and department stores, operates its own retail shops, and licenses the Polo name to third-party manufacturers.
The company faces a few pressing problems in the near term like lower discretionary spending, intense competition and adverse foreign currency translations. However, the company’s consistent effort in improving upon its Asian business via acquisitions and direct control of operations would help ameliorate the negatives.
We thus maintain our Neutral recommendation on Polo Ralph Lauren. The quantitative Zacks #4 Rank (Sell) for the company indicates a downward directional pressure on the shares over the near term.
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