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Here's Why You Must Add Ralph Lauren (RL) to Your Portfolio

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Ralph Lauren Corporation (RL - Free Report) has been favored by investors, owing to solid business fundamentals combined with investments in expanding digital and omni-channel capabilities. The company is also benefiting from continued AUR growth, driven by its continued brand elevation efforts across every region. It is on track to exceed its top and bottom-line targets under the “Next Great Chapter” plan, which was announced in June 2018. The factors have been boons for Ralph Lauren’s overall performance.

The company retained investors' bullish sentiments by maintaining its earnings beat streak in all of the last four quarters, the average being 91.4%. The top line has surpassed estimates in the last two quarters. This underlines Ralph Lauren’s operational excellence.

In the past 30 days, the company’s estimates for fiscal 2022 and fiscal 2023 earnings per share have moved up by 18.8% and 13.5%, respectively. For fiscal 2022, its earnings estimates are pegged at $7.02 per share, suggesting growth of 312.9% from the year-ago reported figure.

The Zacks Rank #1 (Strong Buy) stock has gained 76.5% in the past year compared with the industry’s growth of 46.7%. The stock also comfortably outpaced the Consumer Discretionary sector and the S&P 500’s growth of 16% and 34.4%, respectively, in the same period.

 

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Now let us discuss at length what makes the leading lifestyle company an investor favorite.

Ralph Lauren’s overall performance has been benefiting from the easing of COVID-19 restrictions and the fast recovery in some markets as consumers have started visiting stores again and social gatherings have resumed. First-quarter fiscal 2022 top and bottom lines beat estimates and improved year over year mainly on solid performance across Europe and North America regions, and brand strength. Fast recovery across North America and Europe due to the easing of restrictions also aided results. Accelerating digital capabilities, enhanced marketing efforts, cost-saving plans and reduction in structural woes were other drivers.

The company is making significant progress in expanding digital and omni-channel capabilities through investments in mobile, omni-channel and fulfillment. Its digital investments continue to remain focused on the creation of content for all platforms, enhancing digital capabilities to improve the user experience and continuing to leverage Artificial Intelligence (AI) and data to serve its consumers more efficiently.

In first-quarter fiscal 2022, digital business continued to be a key growth driver, with accelerated digital sales across all regions. The global digital ecosystem sales increased more than 80%, while owned digital e-commerce rose more than 45% year over year despite the gradual return of traffic to stores. Momentum continued across all regions and in both owned and wholesale digital channels globally, led by significant growth in North America.

The company also witnessed strong average unit retail (AUR) growth, which led to better-than-anticipated margins. AUR increased 17% in the fiscal first quarter, marking the 17th straight quarter of AUR growth, driven by its continued brand elevation efforts across every region. All of the geographies exceeded the company’s annual long-term target of low to mid-single-digit AUR growth, led by 39% growth in North America on improved quality of sales and distribution. The company remains on track to reach its long-term target of low to mid-single-digit AUR growth, backed by its strategy of product elevation, acquisition of new full-priced consumers, and favorable channel and geographic mix as well as ramping up its targeting and personalization efforts.

In first-quarter fiscal 2022, Ralph Lauren's adjusted gross profit margin of 69.8% contracted 200 bps on a reported basis and 260 bps in constant currency. However, this was significantly better than expected as it lapped last year’s unusual COVID mix benefits on better pricing and promotion as well as favorable product mix and the benefit of supply-chain organization streamlining. Gross margin expanded 530 bps from first-quarter fiscal 2020, driven by strong average unit retail growth.

Based on strength in digital and improved gross margin outlook, with higher AURs and its ability to translate top-line growth to operating margin expansion, the company raised its view for fiscal 2022. It now expects year-over-year constant-currency revenue growth of 25-30%, with a favorable currency impact of 30 bps. Earlier, the company anticipated revenue growth of 20-25% on a constant-currency basis.

Gross margin is envisioned to expand 50-70 bps, up from the earlier mentioned 40-60 bps, driven by AUR growth and positive product mix, which more than offset higher freight costs. Gross margin guidance implies a 440-bps increase from that reported in fiscal 2020. Operating margin is likely to be 12-12.5% compared with 4.8% and 10.3% reported in fiscal 2021 and fiscal 2020, respectively. The uptick can be attributable to lower operating expenses. Earlier, the company predicted operating margin of 11%.

For second-quarter fiscal 2022, the company envisions year-over-year revenues growth of 20-22% at constant currency, with a favorable currency impact of 50 basis points. Operating margin is forecast to be 13-14%, owing to lower operating costs. Gross margin is likely to be flat to up 20 basis points on average unit retail growth and positive product mix.

Cost Headwinds to Persist

Although the company outlined a robust view, it expects freight cost inflation, global supply-chain pressures and higher marketing costs to affect margins in fiscal 2022. Its gross margin view for fiscal 2022 includes slightly higher freight headwinds of 100-120 bps versus the previously mentioned 100 bps. This is likely to partly offset gross margin growth. Gross margin growth for the fiscal second quarter is expected to be largely offset by higher freight costs as it laps last year's COVID mix benefits.

The company expects operating margin for the remaining three quarters to moderate from first-quarter fiscal 2022 levels, driven by the anticipated rise in marketing expenses, higher freight costs in the second half of fiscal 2022, and normalizing of the higher-margin wholesale replenishments witnessed in the fiscal first quarter. The company expects marketing investments to remain elevated in fiscal 2022, at nearly 6% of sales, to support consumer engagement, acquisition and long-term brand-building initiatives. It also expects the highly volatile and inflationary input cost environment to continue in fiscal 2022.

Conclusion

Backed by the strong business momentum, driven by strong in-store and online sales, and the progress on its growth initiatives, we expect the company to retain its upbeat performance in the near term.

Other Stocks to Watch

Columbia Sportswear Company (COLM - Free Report) has a long-term earnings growth rate of 33.5%. It currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hanesbrands Inc. (HBI - Free Report) , also a Zacks Rank #1 stock, has a long-term earnings growth rate of 8.5%.

Crocs, Inc. (CROX - Free Report) has an expected long-term earnings growth rate of 15%. It currently carries a Zacks Rank #2 (Buy).