Ralph Lauren Corporation RL seems to be losing its sheen of late. Shares of the lifestyle product designer have lost 26.5% in the past six months, wider than the industry’s 8.9% decline. The recent softness in share price mostly resulted from headwinds related to its digital business in North America and currency. Let’s delve deeper.
We note that investors are wary of the decelerating digital sales in Ralph Lauren’s North America segment. In first-quarter fiscal 2020, the segment’s digital business lagged management’s expectations, delivering flat digital comparable store sales (comps). This also reflected a decelerating trend on a sequential basis, with comps growth of 6% and 21% registered in the preceding two quarters.
In the fiscal first quarter, robust growth in sales from digital pure plays was more than offset by weaker trends in its website and Wholesale dot.com. Softness in digital comps in North America mainly resulted from lower sales to international customers on its U.S. site due to currency headwinds and tighter import regulations in the major Asia markets. Also, certain underperforming products under the Lauren in men's polo seasonal styles hurt digital comps. Furthermore, persistence of certain issues weighed on the North America unit’s wholesale digital business.
On first-quarter fiscal 2020 conference call, Ralph Lauren had projected that declines in sales to international shoppers will hurt digital comps in the North America unit throughout the current fiscal year. It anticipates the biggest sales decline in the fiscal year to take place in the second quarter.
Moreover, foreign currency headwinds are expected to persist throughout fiscal 2020, with estimated impacts of 90-100 basis points (bps) on revenue growth and 10-20 bps on operating margin expansion. For the fiscal second quarter, currency headwinds are expected to mar revenue growth by approximately 90-100 bps and operating margin by 20 bps.
Management has been striving to revive its North America digital platform. It remains focused on boosting conversion rates in domestic markets through favorable product mix in the outerwear category, and investing in enhanced mobile functionality and personalization. Encouragingly, the company expects to deliver global digital growth in low double digits over the long term.
Additionally, expansion of digital platforms is a key aspect of Ralph Lauren’s growth strategy. Apart from strengthening partnerships with key digital wholesale players, the company has been expanding distribution with digital pure plays across the international markets. Impressively, the company’s International digital sales rose 10% in the fiscal first quarter. Solid endeavors in the digital arena are likely to boost Ralph Lauren’s overall digital ecosystem, thus offsetting softness in its digital business in North America.
Moreover, Ralph Lauren is progressing well with its “Next Great Chapter” plan. The plan, which focuses on delivering sustainable growth and value creation, started off well in its first year. Management expects to execute this growth plan through five 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.
As part of the aforesaid plan, the company targets delivering low to mid-single-digit revenue compounded annual growth rate (CAGR) and mid-teen operating margin by fiscal 2023, both in constant currency. Additionally, it anticipates marketing spend to grow nearly 5% of revenues by the same period while capital expenditure is expected to represent 4-5% of revenues. Furthermore, the company expects to return 100% free cash flow to shareholders in the next few years, amounting to about $2.5 billion on a cumulative basis through fiscal 2023 via dividends and share repurchases.
Though the aforementioned concerns cannot be ignored, we remain hopeful of this Zacks Rank #3 (Hold) company’s solid strategic endeavors, including the “Next Great Chapter” plan. These efforts should go a long way in offsetting the hurdles and returning the stock on the growth path.
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