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Ralph Lauren Down 10% YTD: Will Growth Strategies Aid Stock?

Zacks Equity Research

Ralph Lauren Corporation RL is witnessing persistent softness in its North America segment, particularly its digital business. A volatile global retail backdrop coupled with adverse impacts of foreign currency translations remain added concerns.

These headwinds have caused shares of this leading designer and marketer of premium lifestyle apparel to lose 9.5% on a year-to-date basis. In fact, the stock has also underperformed the industry’s 14.7% rally.

However, Ralph Lauren’s surprise trend remains robust, with 18 straight quarters of earnings beat and sales beating the Zacks Consensus Estimate for six quarters in a row. Moreover, Ralph Lauren’s robust strategic efforts, including the “Next Great Chapter” plan, might help this Zacks Rank #3 (Hold) company bring back its lost shine.

Let’s Delve Deep

In first-quarter fiscal 2020, North America’s digital business performed below management’s expectations. Robust growth in digital pure players was more than offset by soft trends at Ralph Lauren and Wholesale Dot Com. Moreover, the digital business’ comparable store sales (comps) remained flat mainly on account of lower sales to international consumers due to currency headwinds and tighter import regulations in the major Asian markets. Also, select products, within Lauren and men's polo seasonal styles, hurt digital comps. Furthermore, certain product issues weighed on the unit’s wholesale digital business.

Although management anticipates a decline in international shoppers to hurt digital comps throughout fiscal 2020, we expect the North America segment to return to growth. Management has been making solid efforts to drive growth at the North America digital business. Encouragingly, the company expects the segment’s digital business to deliver low double-digit growth over the long term.

After delivering significant results owing to its Way Forward plan, Ralph Lauren is now progressing well with its Next Great Chapter plan, announced in June 2018. Management stated that this strategy started off well in its first year. It expects to execute this growth plan through five strategic priorities – winning over a new generation of customers; energizing core products and accelerating under developed categories; drive targeted expansion in its regions and channels; lead with digital; and operate with discipline to fuel growth.

For fiscal 2020, the company projects low to mid-single-digit AUR growth, which remains on track with long-term plans. The improvement will be fueled by the company’s efforts to brand elevation and product mix strategy, specifically in international regions. We note that the under-developed categories also performed well, thanks to strength in denim and outerwear.

As part of the plan, the company targets delivering low to mid-single digit revenue compounded annual growth rate (CAGR) and mid-teen operating margin by fiscal 2023, in constant currency. Additionally, it anticipates marketing expenditure to grow nearly 5% of revenues by fiscal 2023, while capital expenditure is expected to represent 4-5% of revenues.

Furthermore, the company plans to return 100% free cash flow to its shareholders in the next five years, amounting to about $2.5 billion (on a cumulative basis) through fiscal 2023 in the form of dividends and share repurchases.

Meanwhile, Ralph Lauren remains keen on bolstering international presence by continually expanding in underpenetrated markets. In addition, its Asia and Europe divisions are delivering impressive performance, which is likely to continue. The company also remains on track to expand real estate locations for strengthening the brand, and driving sales and profitability.

In a bid to develop an overall winning digital ecosystem, the company has been strengthening its partnerships with key digital wholesale players across regions.

Better-Ranked Consumer Discretionary Stocks

Crocs, Inc. CROX has delivered positive earnings surprise of 140.8%. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Delta Apparel, Inc. DLA has an impressive long-term earnings growth rate of 15% and a Zacks Rank #1.

Columbia Sportswear Company COLM, also a Zacks Rank #1 stock, has an expected long-term earnings growth rate of 11.2%.

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Ralph Lauren Corporation (RL) : Free Stock Analysis Report
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