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Why Is Ralph Lauren (RL) Down 15.8% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Ralph Lauren (RL). Shares have lost about 15.8% 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 catalysts.

Ralph Lauren Q1 Earnings & Revenues Surpass Estimates

Ralph Lauren delivered better-than-expected top- and bottom-line results in first-quarter fiscal 2020.

This marked the company’s 18th straight quarter of earnings beat while sales topped estimates for the sixth straight quarter.

Results gained from consistent strength in the company’s international markets. In addition, cost-containment efforts as well as continued investment in brand elevation and other strategic endeavors including “Next Great Chapter” aided the quarterly results.

Ralph Lauren reported first-quarter adjusted earnings of $1.77 per share, which surpassed the Zacks Consensus Estimate of $1.66. The bottom-line figure also increased by 14.9% from the prior-year quarter.

On a reported basis, Ralph Lauren posted earnings of $1.47 per share, up from the year-ago quarter’s earnings of $1.31. Reported earnings for the quarter primarily included restructuring and other charges.

Net revenues grew 3% year over year to $1,428.8 million and outshined the Zacks Consensus Estimate of $1,415 million. On constant-currency basis, revenues were up 5%.

Top line was fueled by favorable results across regions. However, foreign currency hurt revenue growth by nearly 220 basis points (bps) in the fiscal first quarter.

Segment Details

North America: During the quarter under review, revenues at this segment inched up 3% to $719.4 million. The upside was backed by wholesale revenue improvement of 2% along with comparable store sales (comps) growth at North America’s retail channel.

Comps inched up 1% owing to a 1% increase in brick and mortar stores and flat comps at ralphlauren.com.

Europe: Revenues at this segment improved 2% year over year to $360.8 million, while currency-neutral revenues were up 7%. Currency-neutral comps at retail stores in Europe rose 4% backed by a 2% increase in brick and mortar stores and a 22% rise in digital commerce.

Meanwhile, the segment’s revenues at the wholesale business remained flat in the first quarter but increased 5% in constant currency.

Asia: Revenues at this segment increased 4% to $258.6 million and 8% in constant currency, backed by robust performance at the retail channel. Comps in Asia rose 5%, courtesy of growth in brick and mortar, and digital commerce channels.

Margins

Ralph Lauren's adjusted gross profit margin expanded 10 bps to 60.1% driven by positive product, geographic and channel mix. However, this was somewhat offset by higher promotional activity for healthy inventories.

Driven by gross margin expansion and lower adjusted operating expense rate, adjusted operating income margin expanded 110 bps to 12.2%.

Financials

Ralph Lauren ended the quarter with cash and short-term investments of $1,929.1 million, total debt of $692 million and total shareholders’ equity of $3,012.8 million.

Inventory improved 11% to $988.6 million at the end of first-quarter fiscal 2020 driven by increases in Europe and Asia to support initiatives.

Moreover, the company incurred capital expenditure of $49.4 million in the reported quarter.

For fiscal 2020, capital expenditure is still estimated to be roughly $300 million.

The company repurchased Class A shares worth $150 million in the fiscal first quarter.

Following this, it had nearly $1.1 billion under the currently authorized share repurchase program. It also paid dividends of about $48.8 million in the quarter.

Store Update

As of Jun 29, 2019, Ralph Lauren had 510 directly-operated stores and 661 concession shops globally. The directly-operated stores included 126 Ralph Lauren, 75 Club Monaco and 309 Polo factory stores.

Additionally, the company operated 262 licensed stores globally.

Other Developments

Ralph Lauren remains on track with its strategic efforts. Notably, the company increased its marketing investments by 19% during first-quarter fiscal 2020 from the previous year.

In first-quarter fiscal 2020, the company registered revenue growth of 8% and comps improvement of 5% in Asia driven by roughly 30% increase in Mainland China. Also, the company’s Europe division witnessed 7% revenue growth in constant currency.

Moreover, digital ecosystem sales rose 1%, with roughly 10% growth in International, somewhat offset by soft performance in North America.

Furthermore, average unit retail across its direct-to-consumer network increased 1% in the quarter.  For the fiscal year, the company projects low to mid-single digit AUR growth, which remains on track with its long-term plans.

Guidance

For fiscal 2020, Ralph Lauren continues to project net revenue growth of 2-3%. Furthermore, operating margin is anticipated to expand 40-60 bps in constant currency.

Foreign currency is likely to hurt revenues and operating margin expansion by 90-100 bps and 10-20 bps, respectively. Tax rate for the fiscal year is estimated to be 22%.

For the fiscal second quarter, management envisions net revenues to increase 1% in constant currency. Foreign currency is expected to mar revenue growth by about 90-100 bps.

Moreover, operating margin is anticipated to expand 40-60 bps in constant currency including a negative impact of roughly 20 bps from currency. Tax rate for the second quarter is envisioned to be 23%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, Ralph Lauren has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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