A month has gone by since the last earnings report for Ralph Lauren (RL). Shares have added about 4.5% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Ralph Lauren due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Ralph Lauren's Q1 Earnings and Sales Miss Estimates
Ralph Lauren reported dismal first-quarter fiscal 2021 results, wherein both top and bottom lines declined year over year. The results have been primarily marred by the impacts of the coronavirus outbreak. Management expects COVID-19 impacts and uncertainty to continue in the second quarter and fiscal 2021. As a result, it did not provide any fiscal view.
Ralph Lauren reported an adjusted loss per share of $1.82 in the fiscal first quarter, wider than the Zacks Consensus Estimate of a loss of $1.53. The bottom line also compares unfavorably with adjusted earnings of $1.77 reported in the prior-year quarter. On a reported basis, the company posted a loss of $1.75 per share against earnings of $1.47 in the year-ago quarter.
Net revenues declined 66% year over year to $487.5 million and missed the Zacks Consensus Estimate of $661 million. On a constant-currency basis, revenues were down 65% from the prior-year quarter. Soft revenues mainly resulted from lower sales across all regions, stemming from supply-chain disruptions related to COVID-19 and currency headwinds of nearly 100 basis points (bps).
North America: During the fiscal first quarter, the segment’s revenues declined 77% from the year-ago quarter to $165 million. The retail channel in the region witnessed a significant decline, with a 64% slump in comparable store sales (comps) and a 3% rise in digital commerce. Revenues from the North America wholesale business plunged 93% from the prior-year period.
Europe: The segment’s revenues fell 67% year over year to $121 million, with a 64% decline in currency-neutral revenues. Comps at retail stores in Europe declined 62% due to a 75% decrease in brick-and-mortar stores, somewhat offset by 44% growth in digital platform. Revenues for the segment’s wholesale business fell 71% on a reported basis and 68% in constant currency.
Asia: The segment’s revenues decreased 34% year over year to $172 million on a reported basis and 32% on a currency-neutral basis. Comps in Asia dropped 33% as a 68% rise in digital operations in the quarter was more than offset by a 35% loss in brick-and-mortar comps due to store closures in the wake of the coronavirus outbreak.
Ralph Lauren's adjusted gross profit margin expanded 730 basis points (bps) to 71.8%, driven by positive regional and channel mix shifts stemming from COVID-19 along with enhanced AUR in all regions.
Adjusted operating expenses declined 30% from the year-ago period to $524 million in the fiscal first quarter. The decline can be attributable to savings related to employee furloughs, reduced rent, and lesser corporate and selling expenses. However, adjusted operating expenses, as a percentage of sales, increased significantly to 107.5%. Driven by soft sales and a higher operating expense rate, the company reported an adjusted operating loss of $174 million in the quarter under review.
Ralph Lauren ended the quarter with cash and short-term investments of $2,451.3 million, total debt of $1.6 billion and total shareholders’ equity of $2,555.5 million. Inventory dropped nearly 22% from a year ago to $773 million at the end of the quarter, with a double-digit decline in all regions.
Moreover, the company concluded issuing $500 million of 1.7% 2-year notes and $750 million of 2.95% 5-year notes. The net proceeds from this will be utilized to compensate the $475 million that the company withdrew from its Global Credit Facility in the fiscal fourth quarter as part of precautionary measures to preserve cash and strengthen liquidity to navigate through the global pandemic.
As of Jun 30, 2020, Ralph Lauren had 533 directly-operated stores and 654 concession shops globally. The directly-operated stores included 140 Ralph Lauren, 72 Club Monaco and 321 Polo factory stores. Additionally, the company operated 273 licensed stores globally.
The company witnessed strong conversion rates, driven by initiatives like its signature Pride campaign and capsule, RL @ Home program; exclusive capsules with Zalando and Asos; and the "Polo Shirt: Design For Good" competition on the Polo app. During the temporary store closures, it invested in value-based and digital activities. Such well-chalked efforts led to lesser marketing expenses to the tune of 34%.
Despite significant top-line headwinds stemming from the pandemic, AUR rose high-single digits. Notably, AUR grew in double digit in North America and Europe, each. E-commerce performed well in the reported quarter with solid comps in Ralph Lauren websites across all three regions. Also, wholesale digital businesses remained positive year over year. Encouragingly, management introduced Buy Online Pick Up in Store and curbside pickup in North America. Apart from these, digital clienteling and expansion of Buy Online Ship from Store were launched on a global basis.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -57.98% due to these changes.
Currently, Ralph Lauren has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Ralph Lauren has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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