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Can Ralph Lauren's Growth Plans Offset Near-Term Headwinds?

Zacks Equity Research

Ralph Lauren Corporation RL looks poised for long-term growth based on the progress of its growth plan — Next Great Chapter — in the first year. The plan focuses on delivering sustainable long-term growth and value creation for shareholders. Additionally, the company has been witnessing strength across its international and digital businesses, which bode well.

Notably, Ralph Lauren’s growth endeavors have been aiding its quarterly performances for the past several quarters. In fourth-quarter fiscal 2019, this Zacks Rank #3 (Hold) company delivered the 17th quarter of earnings beat, with the fifth consecutive quarter of positive sales surprise. It expects the Next Great Chapter plan to continue driving performance in the years ahead.

However, the company is witnessing sluggishness across its North America segment for quite some time now. Notably, weak traffic numbers and dull performances at the retail and wholesale channels are negatively impacting the unit. A decline in comparable store sales (comps) also resulted in the downside. Additionally, foreign currency remains a headwind for fiscal 2020.

In fourth-quarter fiscal 2019, Ralph Lauren’s North America revenues fell 7%, with a comps decline of 4%. Comps fell mostly due to challenging traffic, including foreign tourist traffic at brick and mortar stores. Wholesale revenues also declined due to soft select spring fashion concepts and anticipated fall in off-price sales. For fiscal 2020, the company expects currency to hurt revenues by 90-100 basis points (bps) and operating margin by 10-20 bps.

Backed by the aforementioned risks-rewards, Ralph Lauren’s stock has been in doldrums. Though the stock has displayed growth of 13.8% year to date, it underperformed the industry’s rally of 25.5%. Nevertheless, the stock seems to be picking momentum, with 7.8% gain in the past month, whereas the industry grew 4.6%.

 



The stock performance clearly demonstrates that Ralph Lauren deserves to hold a place in investors’ portfolio despite the aforementioned woes. We believe that the company’s efforts will help it tide over these short-term headwinds and position it for growth in the long term. With that said, let’s get a detailed view of the factors capable of lifting the stock.

Factors Favoring the Stock

Ralph Lauren expects to execute the “Next Great Chapter” plan through by five strategic priorities — including winning over a new generation of customers; energizing core products and accelerating underdeveloped categories; drive targeted expansion in its regions and channels; lead with digital; and operate with discipline to fuel growth. Driven by the company’s focus on the plan, fiscal 2019 marked an important milestone for its business and brands. Ralph Lauren was also ahead of its commitments with respect to revenues, quality of sales, operating income and earnings per share.

As part of the plan, the company targets delivering a low to mid-single-digit revenue compounded annual growth rate (CAGR) and mid-teens operating margin by fiscal 2023 in constant currency. It expects to return to constant-currency revenue growth by fiscal 2020. Additionally, it anticipates marketing spend 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 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.

Ralph Lauren also remains keen on bolstering international presence by continually expanding in underpenetrated markets. Over the last two years, the company strengthened the brand in Asia, particularly China, and built strong business foundation by enhancing the quality of sales and profitability. In fiscal 2019, the company’s constant-currency revenues in Greater China increased 20%, with over 30% growth in Mainland China. Management also sees immense potential to expand in Europe, where it currently has only 23 owned full-price stores. Going forward, the company remains on track to expand real estate locations to elevate the brand, and drive sales and profitability.

Additionally, Ralph Lauren’s growth strategy of expanding digital platforms remains impressive. The company developed a winning digital ecosystem — including directly-operated platforms, wholesale digital, pure plays and social commerce. Its constant-currency digital revenues improved 11% in fiscal 2019, backed by strength in all regions. Digital comps in North America grew 10% in the same period against a 22% decline in fiscal 2018. The company has also been strengthening its partnerships with key digital wholesale players across regions.

Looking ahead, management remains confident of Ralph Lauren’s performance, based on its efforts to focus on consumer demands; elevate and energize its brands; and balance growth and productivity. Thus, we remain optimistic about the stock’s potential despite hurdles in the North America business.

Don’t Miss These Better-Ranked Apparel Stocks

Guess Inc. GES has a long-term earnings growth rate of 17.5%. The stock presently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

lululemon athletica Inc. LULU, with long-term earnings per share growth rate of 18.4%, currently carries a Zacks Rank #2.

Under Armour Inc. UAA with long-term earnings per share growth rate of 27.1% also carries a Zacks Rank #2 at present.

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