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Why Is Ralph Lauren (RL) Down 3.4% Since Last Earnings Report?

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It has been about a month since the last earnings report for Ralph Lauren (RL - Free Report) . Shares have lost about 3.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Ralph Lauren due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Ralph Lauren Q1 Earnings & Revenue Beat

Ralph Lauren reported solid first-quarter fiscal 2022 results, wherein the top and bottom lines not only surpassed the Zacks Consensus Estimate but also improved year over year. Results gained from solid performance across Europe and North America regions and brand strength. Management also concluded the sale of Club Monaco to Regent in the reported quarter.

Ralph Lauren reported adjusted earnings per share of $2.29 in the fiscal first quarter, surpassing the Zacks Consensus Estimate of 89 cents. The bottom line came ahead of a loss of $1.82 and earnings of $1.77 reported in first-quarter fiscal 2021 and first-quarter fiscal 2020, respectively.

Net revenues surged 182% year over year to $1,376.3 million and exceeded the Zacks Consensus Estimate of $1,219 million. On a constant-currency basis, revenues were up 176% from the prior-year quarter. The uptick was attributable to growth across North America and Europe. The top line also reflected gains of 650 basis points (bps) from favorable currency.

The global digital business witnessed growth of more than 80%, while owned digital e-commerce rose more than 45% year over year.

Segment Details

North America: During the fiscal first quarter, the segment’s revenues skyrocketed 301% from the year-ago quarter to $662 million. The retail channel in the region witnessed 176% growth in comparable store sales (comps), including a 51% rise in digital commerce and a 278% increase in brick-and-mortar stores. Revenues from the North American wholesale business grew significantly to $250 million from $23 million reported in the prior-year period.

Europe: The segment’s revenues significantly grew 194% year over year to $355 million, with a 179% rise in currency-neutral revenues. Comps at retail stores in Europe surged 98% owing to a 154% increase in brick-and-mortar stores and 23% growth in digital sales. Revenues for the segment’s wholesale business surged 344% on a reported basis and 324% at constant currency.

Asia: The segment’s revenues advanced 68% year over year to $288 million on a reported basis and 61% on a currency-neutral basis. Comps in Asia were up 43%, backed by a 43% rise in brick-and-mortar stores and a 42% increase in the digital business.

Margins

Ralph Lauren's adjusted gross profit margin contracted 200 bps year over year to 69.8% while the metric expanded 530 bps as compared to first-quarter fiscal 2020, driven by strong average unit retail growth.

Adjusted operating expenses increased 39% from the year-ago period to $729 million in the fiscal first quarter, driven by compensation and rent-related expenses as well as higher marketing investments. Adjusted operating expenses, as a percentage of sales, decreased from 107.5% to 53% in the reported quarter.

Further, the company reported an adjusted operating income of $231 million against a loss of $174.1 million in the year-ago quarter.

Financials

Ralph Lauren ended the quarter with cash and short-term investments of $2,596.4 million, total debt of $1,135 million and total shareholders’ equity of $2,717.7 million. Inventory at the end of the quarter grew 3.9% year over year to $803 million. Capital expenditure for the quarter under review came in at $28.2 million. During the quarter, the board approved a quarterly dividend of 68.75 cents.

Store Update

As of Jun 26, 2021, Ralph Lauren had 482 directly operated stores and 647 concession shops globally. The directly-operated stores included 155 Ralph Lauren and 327 Polo factory stores. The company operated 141 licensed stores globally.

Outlook

The company issued the fiscal 2022 view, wherein it expects constant-currency revenues to grow nearly 25-30% year over year with a favorable currency impact of roughly 30 bps. Operating margin is likely to be 12-12.5% compared to 4.8% and 10.3% reported in fiscal 2021 and fiscal 2020, respectively. This uptick can be attributable to lower operating expenses. Gross margin is envisioned to expand 50-70 bps, up from the earlier guided view of 40-60 bps, driven by average unit retail growth and positive product mix, which more than offset higher freight costs.

For second-quarter fiscal 2022, revenues are anticipated to rise roughly 20-22% year over year at constant currency with a favorable currency impact of approximately 50 basis points. Operating margin is forecasted 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.

However, the company continues to expect uncertainties related to COVID-19, the impact of timing and path of recovery in each market, potential resurgences of the pandemic, and global supply-chain disruptions.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Ralph Lauren has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. Notably, Ralph Lauren has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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