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Driven by operating income gains offset by a higher tax rate, Ralph Lauren Corp.’s (RL - Analyst Report) earnings for the fourth quarter of fiscal 2014 surged 22.6% year over year to $1.68 per share. Moreover, quarterly earnings were ahead of the Zacks Consensus Estimate of $1.64.

Quarterly Highlights

In the quarter, Ralph Lauren's net revenue increased 13.6% year over year to $1,867 million, above the Zacks Consensus Estimate of $1,833 million. The year-over-year growth was primarily driven by improved performance across the company’s wholesale and retail segments. Moreover, the top line growth reflected a notable demand for the Ralph Lauren brand and the company’s diverse operating model across channels, regions and merchandise categories.

Overall, in the quarter, retail revenues increased 5% to $845 million, wholesale revenues rose 23.5% to $983 million and licensing revenues declined 9.3% to $39 million. Moreover, comparable store sales (comps) at the retail division declined 2% impacted by the unusual weather in January and February, a late start to the spring season in North America and a shift of Easter to April this year.

Revenue growth at the retail division resulted from improvement in international business and store expansions worldwide. Wholesale revenues improved, mainly owing to increased revenues from the Americas, favorable impact from transition of Chaps men’s sportswear operations and a double-digit growth in Europe. The year- over-year decline in licensing revenue was mainly due to license take-backs in Australia/New Zealand and Chaps, offset partly by higher licensing revenues for Ralph Lauren products.

Ralph Lauren's gross profit in the quarter increased 7.7% year over year to $1,050 million. However, gross margin contracted 310 basis points (bps) to 56.2% due to unfavorable foreign currency exchange rates, mixed impact from the integration of the Chaps men’s sportswear operation and improved wholesale revenue growth.

Total operating expenses rose 4% year over year to $825 million, while as a percentage of sales, it contracted 400 bps to 44.2%. The improvement in operating expense rate was attributed to higher revenue along with a decline in impairment and restructuring costs, despite increased investments in long-term strategic growth initiatives and infrastructure.

Ralph Lauren's operating profit improved 23.6% to $225 million from $182 million a year-ago, while operating margin expanded 90 bps to 12.0% compared with the prior-year quarter. The slight rise in operating margin mainly benefited from the lower operating expenses as a percentage of sales more than offset the gross margin contraction.

Exiting the quarter, Ralph Lauren operated 433 stores directly along with 503 concession shops across the globe. Additionally, Ralph Lauren’s global licensing partners operated 64 Ralph Lauren stores, 9 dedicated concession shops as well as 106 Club Monaco stores and dedicated shops.

Fiscal Year 2014 Synopsis

For fiscal 2014, the company’s earnings came at $8.43 per share, up 5.4% from $8.00 per share in fiscal 2013 and surpassed the Zacks Consensus Estimate of $8.39. Revenues for the year rose approximately 7.3% to $7,450 million and swept past the Zacks Consensus Estimate of $7,413 million.

Balance Sheet

Ralph Lauren ended the fiscal year with cash and investments of $1.285 billion compared with $1.299 billion in the previous-year. During the quarter, the company deployed $390 million toward capital expenditure. Moreover, inventory levels stood at $1,020 million, up 13.8% from $896 million in the comparable period last year.

Guidance

Ralph Lauren expects its sales for the fiscal 2015 to reflect about 6%—8% growth. Operating margin for the year is projected to contract in the range of 75–125 bps from the prior-year level based on higher advertising and marketing together with continued investments towards enhancement of its global retail operations and infrastructure. Effective tax rate for the year is expected to be 30%. Moreover, the company plans to spend about $400—$500 million towards capital projects in fiscal 2015.

For the first quarter of fiscal 2015, the company expects net revenue to increase by 3%–5% on account of strong growth in the retail segment. Operating margin is anticipated to contract in the range of 300–350 bps from the year-ago level driven by the timing of investments to support the company’s strategic growth objectives. Effective tax rate is projected to be 30%.

Other Stocks to Consider

Currently, Ralph Lauren holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the textile-apparel industry include Columbia Sportswear Co. (COLM - Snapshot Report), Hanesbrands Inc. (HBI - Analyst Report) and V. F. Corp. (VFC - Analyst Report). All of these stocks carry a Zacks Rank #2 (Buy).

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