It has been about a month since the last earnings report for Ralph Lauren (RL). Shares have lost about 1.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Ralph Lauren due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Ralph Lauren Q3 Earnings Beat, Upbeat View
Ralph Lauren delivered better-than-expected top and bottom-line results in third-quarter fiscal 2019. This marked the company’s 16th straight quarter of earnings beat while sales topped estimates for the fourth straight quarter. Results gained from solid execution of the company’s key initiatives, particularly during the holiday season. This aided higher average unit retail and continued to improve quality of sales.
Further, the company skewed revenue and operating margin guidance for fiscal 2019 toward the upper-end of its previous forecast. It also provided a robust view for the fiscal fourth quarter.
The company now projects net revenues for fiscal 2019 to be up slightly on a constant-currency basis compared with the prior guidance of flat to slightly up. For the fiscal year, operating margin is now anticipated to increase 60 bps in constant currency, up from the previous view of 40-60 bps increase.
The increase in gross margin is likely to benefit operating margins. Foreign currency is now expected to negatively impact revenue growth by 80-90 bps (75 bps previously estimated) and have a minimal impact on operating margin.
For the fiscal fourth quarter, management envisions net revenues to decline slightly in constant currency, owing to a planned cutback in off-price sales. Foreign currency is expected to mar revenue growth by about 300 bps. Operating margin is anticipated to expand around 70 bps in constant currency, including negative impact of about 60 bps from foreign currency.
Ralph Lauren reported third-quarter fiscal 2019 adjusted earnings of $2.32 per share, which surpassed the Zacks Consensus Estimate of $2.14. The bottom-line figure also increased by 14.3% from the prior-year quarter.
On a reported basis, Ralph Lauren posted earnings of $1.48 per share against the year-ago quarter’s loss of $1.00. Reported earnings for the quarter primarily included restructuring and other charges.
Ralph Lauren’s net revenues increased 5.1% year over year to $1,725.8 million. Moreover, the top line surpassed the Zacks Consensus Estimate of $1,666 million. On constant-currency basis, revenues were up 6.3% on the back of growth across all regions. However, foreign currency hurt revenue growth by nearly 120 basis points (bps) in the fiscal third quarter.
North America: During the quarter under review, revenues at this segment rose 3% on a reported basis to $908.7 million. The improvement can be attributed to robust performance in retail stores. Comparable store sales (comps) at North America’s retail channel improved 4%, owing to a 21% increase in digital commerce, and flat comps in brick and mortar stores. However, wholesale revenues for the segment dipped 3% year over year.
Europe: Revenues for this segment improved 10% year over year to $415.2 million while currency-neutral revenues were up 13%. Currency-neutral comps at retail stores in Europe rose 4%, backed by a 3% increase in brick and mortar stores, and 13% rise in digital commerce.
In Europe, reported revenues for the wholesale business rose 16% and were up 20% in constant currency. This increase was mainly due to a shift in the timing of shipments, which will negatively impacted the fiscal fourth quarter.
Asia: Revenues at this segment were up 10% to $274.8 million and 11% in constant currency. The upside was driven by strong performance across all markets, including 19% currency-neutral growth in Greater China. Retail comps in Asia rose 4% on a currency-neutral basis, courtesy of growth in both brick and mortar, and e-commerce.
Ralph Lauren's adjusted gross profit margins expanded 90 bps to 61.6%, driven by efforts to enhance quality of sales through lower promotions, better pricing, and favorable product and channel sales mix. Additionally, foreign currency aided the gross margin by 30 bps.
Driven by gross margin expansion, adjusted operating income margin expanded 70 bps to 13.9%. Further, foreign currency boosted operating margins by 20 bps.
Ralph Lauren ended the quarter with cash and short-term investments of $2,063 million, total debt of $686.6 million and total shareholders’ equity of $3,353.9 million. Inventory improved 11% to $914.5 million at the end of third-quarter fiscal 2019. This increase was driven by the investments made to support global store expansions, enhanced deliveries, and increased shipments to Europe wholesale customers and factory stores.
Moreover, the company incurred capital expenditure of $149.2 million as of Dec 29, 2018. For fiscal 2019, capital expenditure is now estimated to be roughly $250 million, a decrease from the prior guidance of $275 million. The lower capex guidance is mainly due to timing shifts into fiscal 2020.
The company repurchased Class A shares worth $208 million in the fiscal third quarter. Following this, it had nearly $700 million under the currently authorized share repurchase program.
As of Dec 29, 2018, Ralph Lauren had 501 directly-operated stores and 651 concession shops globally. The directly-operated stores included 120 Ralph Lauren, 76 Club Monaco and 305 Polo factory stores.
Additionally, the company’s global licensing partners operated 101 Ralph Lauren stores and 59 Club Monaco stores, bringing the total number of licensed stores to 160. It also had 111 licensed concession shops in operation.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 8.08% due to these changes.
Currently, Ralph Lauren has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Ralph Lauren has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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