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Ralph Lauren Shares Rise on Robust Q2 Earnings

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Shares of Ralph Lauren Corporation (RL - Analyst Report) rose nearly 5.5% yesterday and closed at $180.52 after the company announced better-than-expected second-quarter fiscal 2014 bottom-line results, provided upbeat revenue guidance and raised its quarterly cash dividend.

Ralph Lauren’s second-quarter earnings per share of $2.23 surpassed the Zacks Consensus Estimate of $2.20. However, quarterly earnings witnessed a 2.6% decline from $2.29 earned in the year-ago period primarily due to weak margins.

Quarterly Highlights

In the quarter, Ralph Lauren's net revenue increased 2.9% year over year to $1,915 million, almost in line with the Zacks Consensus Estimate of $1,916 million. The year-over-year growth was primarily driven by improved performance across the company’s wholesale and retail segments.

Overall, in the said quarter, retail revenues increased 4.8% to $944 million, wholesale revenues rose 1.4% to $928 million and licensing revenues declined 6.5% to $43 million.

Revenue growth at the retail division resulted from improvement in e-Commerce business and increased contribution from new stores. The rise in wholesale revenues was mainly owing to increased revenues from the United States, partially offset by decline in Europe due to lower shipments and reduced Japanese wholesale sales.

Ralph Lauren's gross profit in the quarter dropped 1.0% year over year to $1,084 million. Moreover, gross margin contracted 220 basis points (bps) to 56.6% due to unfavorable foreign currency exchange rates, impact from the integration of the Chaps men’s sportswear operation and reduced profits from concession shops.

Total operating expenses rose 5.6% year over year to $789 million, mainly due to overall business expansion, strong retail segment growth as well as increased investments in growth initiatives and infrastructure. Consequently, operating expenses, as a percentage of sales, expanded 110 bps to 41.2%.

Ralph Lauren's operating profit declined 15.2% to $295 million from $348 million in the year-ago quarter, while operating margin shrunk 330 bps compared with the prior-year quarter to 15.4%. The decline in operating margin reflected from gross margin contraction and higher operating expenses as a percentage of sales.

Exiting the quarter, Ralph Lauren operated 416 directly operated stores and 523 concession shops across the globe. Additionally, Ralph Lauren’s global licensing partners operated 56 Ralph Lauren stores, 13 dedicated concession shops as well as 98 Club Monaco stores and dedicated shops.

Balance Sheet

Ralph Lauren exited the quarter with cash and investments of $1.4 billion compared with $1.1 billion in the previous-year quarter. During the quarter, the company deployed $148 million toward capital expenditure and $52.7 million toward repurchasing 0.3 million shares. Moreover, inventory levels improved 9.1% to $1.2 billion from $1.1 billion in the comparable period last year.

Guidance

Bolstered by improved sales results, Ralph Lauren raised its lower-end revenue guidance for fiscal 2014. The company now expects revenues to increase in the range of 5%–7% in fiscal 2014, up from its previous guidance range of 4%–7%. Moreover, due to improved global retail operations, Ralph Lauren now anticipates operating margin to contract at the lower-end of its previously announced guidance of contraction of 25–75 bps.

For the third quarter of fiscal 2014, the company expects net revenue to increase by 8%–10%. Operating margin is anticipated to be flat year over year as the reduced gross margin will likely be offset by fall in operating expenses as a percentage of sales.

Other Stocks to Consider

Currently, Ralph Lauren holds a Zacks Rank #3 (Hold). Better-performing stocks in the apparel-retail industry include Hanesbrands Inc. (HBI - Analyst Report), Fifth & Pacific Companies, Inc. and Michael Kors Holdings Limited (KORS - Analyst Report). All of these carry Zacks Rank #2 (Buy).

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