Premium lifestyle retailer Ralph Lauren Corporation (RL Quick QuoteRL - Free Report) looks like a great investment given its Way Forward Plan, robust brand portfolio and impressive earnings surprise history. Further, the company is scoring well on the value quotient with Value Style Score of “B”.  Moreover, the company’s Zacks Rank #3 (Hold) and estimated long-term earnings growth rate of 8.1%, back our favorable view for the stock.

Additionally, the stock has outperformed the broader industry in the last six months. The company’s shares have dropped nearly 12.7% in the last six months, while the Zacks categorized Textile-Apparel industry has witnessed a decline of 18.1%. Though this seems encouraging, let’s find out more about the stock.

Ralph Lauren is a leading specialty retailer of premium lifestyle merchandise in the U.S., commanding a stellar portfolio of globally recognized brands that provide it an edge over its peers. Further, the company is well on track with its Way Forward Plan, announced in Jun 2016. The plan is aimed at evolving its core business and reviving operating structure.

Divided in two parts, the first part of the Way Forward Plan focuses on evolving the company’s core business revolving around its product, marketing and customer experience. While, in the second part of the plan the company remains keen on reviving its operating structure by developing a systematic way of building stronger assortments, a demand-driven supply chain, an excellent sourcing capability and a multi-channel global expansion strategy.

Ralph Lauren’s focus on its core business is evident from the recent sale of its Denim & Supply brand and at the same time strengthening of its Polo brand. Further, in a bid to improve assortments, it is planning to discontinue unproductive styles, consequently, reducing the number of Stock Keeping Units (SKUs). Evidently, the company reached 10% SKUs reduction for fall 2016, across its apparel brands. For spring 2017, the company now targets to reduce SKUs by 20%, with further reduction planned for fall 2017.

Additionally, management continues to identify and close underperforming stores under its Way Forward Plan. We believe that this will not only aid the company in lowering its operating costs, but also aid the top line and bottom line, going forward.

All these factors helped the company deliver the seventh straight quarter of a positive surprise in second-quarter fiscal 2017. The company presents a solid earnings history, with positive earnings surprises delivered in 20 out of the past 22 quarters.

Looking ahead, Ralph Lauren targets generating annualized cost savings worth $180–$220 million, on the back of its fiscal 2017 restructuring activities. Moreover, management remains confident of its performance, based on systematic infrastructural investments, eCommerce enhancements and improved product pricing.

However, we believe the company’s results will suffer in the near term, particularly fiscal 2017. In sync with its Way Forward Plan, the company reiterated its previously stated dismal fiscal 2017 view, and provided a soft sales and margins outlook for the fiscal third quarter. Moreover, revenue growth for both periods is anticipated to be impacted by the company’s actions to improve the quality of sales, lowered inventory buys, store closures, price management and other initiatives. It expects fiscal third-quarter revenues to be down in the low double digits to down low-teens range.

Further, the company’s margins are expected to be hurt by a rise in new store expenses, negative currency impacts, infrastructure investments and fixed expense deleverage. Though it anticipates currency headwinds to have lesser impact on the company’s revenue growth, it is likely to reduce gross margin by about 120 bps.

Stocks that Warrant a Look

Some better-ranked stocks include The Children's Place Inc. (PLCE Quick QuotePLCE - Free Report) , Tailored Brands Inc. , and Perry Ellis International Inc. , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Children's Place has an average positive earnings surprise of 36.3% in the trailing four quarters. The stock, with a long-term growth rate of 10.3%, has seen positive estimate revisions for the current quarter in the last seven days.

Tailored Brands, with a long-term earnings growth rate of 17.5%, has returned 55.8% in the past one year.

Perry Ellis has jumped 36.3% in the past one year. The company has an average positive earnings surprise of 19.5% in the trailing four quarters.

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