Wednesday, November 01, 2006

Calls of Note Part 3

- UBS is somewhat cautious on Ralph Lauren (NYSE:RL) ahead of co's Nov 8 earnings release wondering if upside surprises are becoming more difficult for the co.

Firm wonders if 2Q was negatively impacted by an unusually warm Sept in Europe (represents 15% sales). On the flip side, 2Q should have benefited from unseasonably cooler climate in the US and incremental sales from the Polo Jeans and Chaps divisions. Further, Japan has posted strong 2Q sls for luxury retailers which bodes well for RL.

With an expanding base, upside surprises become more difficult. They est lower operating margin driven by increased expenses related to retail expansion and systems initiatives coupled with incremental stock option expense, partially offset by gross margin expansion and a slightly lower tax rate.

1Q upside resulted in a raised FY guidance, with remaining quarters' estimates unchanged. Since 1Q represents the smallest quarter, it was difficult to extrapolate if the 1Q momentum was sustainable. UBS looks for an updated FY guidance, as mgmt typically provides one during its 2Q conf call.

RL is currently trading near the top end of its recent historic range. Firm believes it's difficult to justify further multiple expansion at this time. Their $69 PT is derived on the basis of 19x on CY07E EPS of $3.63. Maintains Neutral.

Notablecalls: UBS may have a point there. While the shorts have been taken on a pretty wild ride over the past 3-4 months, I would be on a lookout for some weakness in the coming days.

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