Polo Ralph Lauren Corp. (RL) said on Friday its quarterly earnings fell sharply because of litigation costs and other items, but its shares rose 5 percent as revenue and earnings before the unusual items beat analyst expectations.

Prudential Securities also upgraded the shares to "overweight" from "neutral weight" and raised its price target to $50 from $43.

"We believe RL is in the midst of a transformational shift," analyst Lizabeth Dunn said in a research note. "We expect the company will look for opportunities to own more of its business (as opposed to licensing)."

The company recently announced plans to acquire a footwear license from Reebok International Ltd. (RBK) and license acquisitions should add significantly to earnings, Dunn said.

Polo Ralph Lauren said its earnings for the quarter ended April 2 fell to $23.4 million, or 22 cents per share, from $76.4 million, or 75 cents per share, in the year-ago period.

Results for the latest quarter include a $100 million reserve for a lawsuit, in which Jones Apparel Group Inc. (search) accuses Polo Ralph Lauren of breaching a licensing contract; $500,000 for its consolidation in Europe; $1.3 million to adjust for the accounting of leases; and $6.2 million associated with alleged breach of the company's retail computer systems including penalties, monitoring expenses and credit card reissuance costs.

Excluding those items, adjusted net income was $85.1 million, or 81 cents per share. On that basis, Wall Street analysts on average expected 80 cents per share, according to Reuters Estimates.

Quarterly revenues rose to $902.2 million from $818.8 million a year earlier.

Gross margin rose to 52.9 percent from 47.8 percent a year earlier.

"This appears to be a very high-quality quarter," Dunn said. "Sales and gross margin significantly exceeded our expectations."

The company said it still expects earnings in the range of $2.75 to $2.85 per share in fiscal 2006. Analysts, on average, expected $2.82 per share, according to Reuters Estimates.

Polo Ralph Lauren were up $2.08 at $42.64 on Friday on the New York Stock Exchange (search).