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Earnings Preview: Ralph Lauren

RL PVH

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New York-based Ralph Lauren Corporation (RL - Analyst Report) – a designer, marketer and distributor of lifestyle products – is expected to release its financial results for the second quarter of fiscal 2013 on Thursday, November 1, 2012.

The current Zacks Consensus Estimate for the quarter stands at $2.14 per share, reflecting a fall of about 13% from $2.46 reported in the comparable prior-year period. Revenue, as per the Zacks Consensus Estimate, is pegged at $1,834 million.

First Quarter 2013 Recap

Ralph Lauren reported its first quarter 2013 earnings per share of $2.03, beating the Zacks Consensus Estimate of $1.78 per share as well as witnessing a 6.8% growth from $1.90 earned in the year-ago period. The better-than-expected bottom-line performance was primarily driven by top-line growth, lower tax rate and reduced number of shares outstanding.

During the quarter, Ralph Lauren's net revenues increased 4.4% year over year to $1,593.4 million, exceeding the Zacks Consensus Estimate of $1,579 million, driven by improved performance across all segments of the company.

Guidance

During the first quarter conference call, management anticipated net revenue to decrease by mid-single-digit percentage in the second quarter of fiscal 2013. Moreover, operating margin is expected to contract by 175-225 basis points from the prior-period level.

Management clarified that the contraction in operating margin will be mainly due to expected deleveraging of operating expenses, which will be offset in part by increased gross margin.

Agreement of Estimate Revisions

For the to-be-reported quarter, only 2 out of 12 estimates were revised upwards while no estimates were lowered over the past 30 days. During the last 7 days, no revision was witnessed in the estimates.

Moreover, for fiscal 2012, over the last 30 days, 3 estimates (out of 13) have been revised in the upward direction while none was adjusted in the opposite direction. In the last 7 days, no estimate revision was noticed for the stock.

Magnitude of Estimate Revision

For the upcoming quarter, the earnings remained stagnant at $2.14 per share mainly due to insignificant estimate revisions, over the last 7 or 30 days. For fiscal 2013, the estimate moved up by a penny to $7.86 per share over the last 30 days, whereas in the last 7 days the estimate remained stagnant.

Positive Earnings Surprise History

With respect to earnings surprise, Ralph Lauren has topped the Zacks Consensus Estimate over the last four quarters, with an average of 11.7%. We expect the company to surpass the Zacks Consensus Estimate in the coming quarters as well.

Conclusion

Ralph Lauren’s initiatives to capitalize on opportunities in Asia, spurred by reduced long-term debt, augur well for the future operating performance. Moreover, Ralph Lauren leverages its globally renowned brands and their premium positioning to bolster its well-established business in the specialty retailing sector.

However, macroeconomic headwinds, stiff competition, higher inventory level and rising input costs still remain the causes of concern. As a result, we are maintaining a long-term ‘Neutral’ recommendation on the stock.

Ralph Lauren, which competes with The Jones Group Inc. and Phillips-Van Heusen Corporation (PVH - Snapshot Report), carries a Zacks #2 Rank, implying short term Buy rating on the stock, based on rising earnings momentum over the past several quarters.

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