Ralph Lauren (RL) Beats on Q1 Earnings, FY15 Outlook Intact

Zacks

Continuing with its upbeat bottom-line performance since the last three consecutive quarters, the luxury apparel retailer, Ralph Lauren Corporation (RL) once again posted better-than-expected earnings result for the first quarter of fiscal 2015. The company’s earnings for the quarter came at $1.80 per share and surpassed the Zacks Consensus Estimate of $1.75.

However, quarterly earnings were approximately 7.2% lower than the year-ago quarter’s earnings of $1.94 per share. This was primarily due to the company’s planned incremental investments toward supporting its long-term growth objectives which more than offset the benefits of top-line growth and reduced share counts.

Quarterly Highlights

In the quarter, Ralph Lauren's net revenue increased 3% year over year to $1,708 million. The year-over-year growth was primarily driven by improved performance across the company’s retail and licensing segments partially offset by soft results at the wholesale segment. However, the company’s net revenues fell short of the Zacks Consensus Estimate of $1,726 million.

Overall, in the quarter, retail and licensing revenues increased 9% and 4%, respectively, to $960 million and $40 million. Wholesale revenues for the quarter fell 4% year over year to $708 million.

Improvement at the retail segment was mainly driven by new store openings along with double-digit growth in the international markets as well as e-Commerce business. Moreover, on a reported basis comparable store sales at the retail division improved 3% while on a currency neutral basis it improved 1%.

Ralph Lauren's gross profit in the quarter increased 4% year over year to $1,043 million. Gross margin for the quarter improved 30 basis points (bps) to 61% as the negative impact from unfavorable foreign currency exchange rates were more than offset by favorable channel and geographic mix.

Total operating expenses rose 10% year over year to $799 million, while as a percentage of sales, it expanded 280 bps to 46.8%. The rise in operating expenses as a percentage of net revenues was mainly due to increased investments in long-term strategic growth initiatives and infrastructure.

Ralph Lauren's operating profit declined 12% to $244 million from $276 million a year-ago, while operating margin contracted 240 bps to 14.3% compared with the prior-year quarter. The decline in operating margin was mainly due to higher operating expenses as a percentage of sales partially offset by slight improvement in gross margin.

Exiting the quarter, Ralph Lauren operated 436 stores directly along with 503 concession shops across the globe. Additionally, Ralph Lauren’s global licensing partners operated 65 Ralph Lauren stores, 17 dedicated concession shops as well as 110 Club Monaco stores and dedicated shops.

Balance Sheet

Ralph Lauren ended the quarter with cash and investments of $1,369 million compared with $1,351 million in the year-ago quarter end. During the quarter, the company deployed $85 million toward capital expenditure. Moreover, inventory levels stood at $1,180 million, up 12.1% from $1,053 million in the comparable period last year.

During the quarter, Ralph Lauren bought back nearly 1.2 million shares of its Class A common stock for approximately $180 million. The company has nearly $400 million remaining under its ongoing share repurchase program.

Guidance

Ralph Lauren continues to expect its sales for fiscal 2015 to reflect a growth of about 6%—8%. Operating margin for the year is projected to contract in the range of 75–125 bps from the prior-year level based on higher advertising and marketing together with continued investments toward enhancement of its global retail operations and infrastructure. Effective tax rate for the year is expected to be 30%. Moreover, the company plans to spend about $400—$500 million toward capital projects in fiscal 2015.

For the second quarter of fiscal 2015, the company expects net revenue to increase 4%–6% on account of strong growth in the retail segment. Operating margin is anticipated to contract in the range of 200–250 bps from the year-ago level driven by the timing of investments to support the company’s strategic growth objectives. Effective tax rate is projected to be 30%.

Other Stocks to Consider

Currently, Ralph Lauren holds a Zacks Rank #2 (Buy). Some better-ranked stocks in the textile-apparel industry include Perry Ellis International Inc. (PERY) and Hanesbrands Inc. (HBI), both carrying a Zacks Rank #1 (Strong Buy). Another stock worth considering in the related industry is V.F. Corporation (VFC) which holds a Zacks Rank #2.

Read the Full Research Report on VFC
Read the Full Research Report on RL
Read the Full Research Report on HBI
Read the Full Research Report on PERY


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