A month has gone by since the last earnings report for Ralph Lauren (RL). Shares have lost about 2.6% 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 Q4 Earnings & Revenues Surpass Estimates
Ralph Lauren delivered better-than-expected top- and bottom-line results in fourth-quarter fiscal 2019. This marked the company’s 17th straight quarter of earnings beat while sales topped estimates for the fourth straight quarter.
Ralph Lauren reported fourth-quarter adjusted earnings of $1.07 per share, which surpassed the Zacks Consensus Estimate of 93 cents. The bottom-line figure also increased by 18.9% from the prior-year quarter.
On a reported basis, Ralph Lauren posted earnings of 39 cents per share, down from the year-ago quarter’s earnings of 50 cents. Reported earnings for the quarter primarily included restructuring and other charges.
Net revenues dipped 1.5% year over year to $1,505.7 million. However, the top line outpaced the Zacks Consensus Estimate of $1,468 million. On constant-currency basis, revenues were up 1.2%. Foreign currency hurt revenue growth by nearly 270 basis points (bps) in the fiscal fourth quarter.
North America: During the quarter under review, revenues at this segment declined 7% on a reported basis to $708.4 million. The downside can be attributed to soft performance at both retail and wholesale channels. Comparable store sales (comps) at North America’s retail channel fell 4% owing to a 7% decrease in brick and mortar stores, offset by a 6% rise in digital commerce. Also, comps at the segment dipped nearly 1%, excluding the impact of Easter timing. Further, wholesale revenues at the segment dropped 10% year over year.
Europe: Revenues at this segment improved 4% year over year to $434.9 million, while currency-neutral revenues were up 11%. Currency-neutral comps at retail stores in Europe rose 5% backed by a 5% increase in brick and mortar stores and a 6% rise in digital commerce. Further, the segment’s reported revenues at the wholesale business rose 4% and were up 11% in constant currency.
Asia: Revenues at this segment increased 6% to $273.5 million and 10% in constant currency. The upside was driven by robust performance across all markets including 30% currency-neutral growth in Mainland China. Retail comps in Asia rose 4% on a currency-neutral basis, courtesy of growth in brick and mortar, and digital commerce channels.
Ralph Lauren's adjusted gross profit margin expanded 30 bps to 60.1% driven by efforts to enhance quality of sales through lower promotions, better pricing, favorable product, and geographic and channel sales mix. However, foreign currency hurt the gross margin by 20 bps.
Driven by gross margin expansion, adjusted operating income margin expanded 80 bps to 6.4%. Foreign currency dented operating margins by 30 bps.
Ralph Lauren ended the fiscal year with cash and short-term investments of $1,987.5 million, total debt of $689 million and total shareholders’ equity of $3,287.2 million. Inventory improved 7% to $818 million at the end of 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 $198 million in fiscal 2019. For fiscal 2020, capital expenditure is now estimated to be roughly $300 million.
The company repurchased Class A shares worth $470 million in the fiscal fourth quarter. Following this, it had nearly $630 million under the currently authorized share repurchase program. It intends to repurchase approximately $600 million of Class A shares in fiscal 2020. Moreover, the company's board approved additional shares for buyback, allowing it to repurchase nearly $600 million Class A shares.
Furthermore, Ralph Lauren announced a 10% hike in its quarterly dividend to 68.75 cents per share. The new dividend is payable July 12, 2019, to its shareholders of record as on June 28.
As of Mar 30, 2019, Ralph Lauren had 501 directly-operated stores and 653 concession shops globally. The directly-operated stores included 121 Ralph Lauren, 75 Club Monaco and 305 Polo factory stores.
Additionally, the company’s global licensing partners operated 108 Ralph Lauren stores and 58 Club Monaco stores, bringing the total number of licensed stores to 166. It also had 119 licensed concession shops in operation.
Management stated that Ralph Lauren’s Next Great Chapter strategy started well in the first year and fiscal 2019 marked an important milestone for its business and brands. Notably, the company was ahead of its commitments with respect to revenues, quality of sales, operating income and earnings per share. Further, the company saw strength in its international regions and average unit retail outpaced expectations across all regions.
Notably, the company has raised marketing investments by 13% in fiscal 2019 in comparison to previous year. Impressively, average unit retail across its direct-to-consumer network increased 8% in the fourth quarter and fiscal 2019, due to gains from the continuous efforts to elevate the product assortment and enhance quality of sales. In fiscal 2019, the company registered revenue growth of 13% and comps improvement of 5% in Asia, driven by more than 30% increase in Mainland China. Also, the company’s Europe division surpassed expectations, delivering a rise of 7% in revenue in constant currency.
Furthermore, global digital revenue increased 11% in constant currency in fiscal 2019, witnessing strength in all regions. Also, the company’s directly-operated digital flagships in North America and Europe reverted to growth in the fiscal year. It also launched the direct-to-consumer shared inventory program in North America in the reported quarter.
Management issued guidance for first-quarter and fiscal 2020. Ralph Lauren projects net revenues for fiscal 2020 to grow 2-3% on a constant-currency basis. For the fiscal year, operating margin is anticipated to expand 40-60 bps in constant currency backed by modest gross margin growth and SG&A leverage. Foreign currency is likely to hurt revenues and operating margin expansion by 90-100 bps and 10-20 bps, respectively, in fiscal 2020.
For the fiscal first quarter, management envisions net revenues to increase 3-5% in constant currency owing to gains from the timing of Easter. Foreign currency is expected to mar revenue growth by about 190-200 bps. Operating margin is anticipated to expand 30-50 bps in constant currency including a negative impact of about 10 bps from foreign currency.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
At this time, Ralph Lauren has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Ralph Lauren has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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