It has been about a month since the last earnings report for Ralph Lauren (RL Quick QuoteRL - Free Report) . Shares have lost about 5.3% 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 Beats on Q2 Earnings & Revenues, Ups View

Ralph Lauren posted solid second-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 all regions, mainly Europe and North America. The Asia region also contributed to quarterly growth, driven by strength in China and Korea, which more than offset the COVID-19 impacts in Japan. Robust performance in casual bottoms, sweaters and fleece along with high potential in underdeveloped categories — particularly denim, accessories and home — bode well. Encouragingly, management raised the fiscal 2022 top-line view.

Q2 Highlights

Ralph Lauren reported adjusted earnings per share of $2.62 for the fiscal second quarter, surpassing the Zacks Consensus Estimate of $1.99. The bottom line surged 81.9% from the prior-year figure of $1.44.

Net revenues grew 26% year over year to $1,504.1 million and beat the Zacks Consensus Estimate of $1,462 million. On a constant-currency basis, revenues were up 25% from the prior-year quarter. The uptick was attributable to double-digit growth across all regions. The top line also reflected gains of 100 bps from favorable currency.

Although people are returning to physical stores, the global digital business continued to witness growth of 45%, while owned digital e-commerce rose more than 35% year over year.

Segmental Details

North America: For the fiscal second quarter, the segment’s revenues advanced 30% from the year-ago quarter to $703 million. The retail channel in the region witnessed 31% growth in comparable store sales (comps), including a 32% rise in digital commerce and a 31% increase in brick-and-mortar stores. Revenues from the North America wholesale business grew 23% year over year.

Europe: The segment’s revenues grew 38% year over year to $496 million, with a 36% rise in currency-neutral revenues. Comps at retail stores in Europe rose 27%, owing to a 28% increase in brick-and-mortar stores and 24% growth in digital sales. Revenues for the segment’s wholesale business rallied 44% on a reported basis and 42% at constant currency.

Asia: The segment’s revenues increased 14% year over year to $270 million on a reported and 13% on a currency-neutral basis. Comps in Asia were up 7% year over year, backed by a 4% rise in brick-and-mortar stores and a 69% surge in the digital business.

Margins

Ralph Lauren's adjusted gross profit margin expanded 80 bps year over year to 67.3%. The same expanded 50 bps on a constant-currency basis. The uptick can be attributable to improved pricing and promotions along with better product mix, which more than offset higher freight costs and unusual COVID-19 mix benefits. The metric also expanded 580 bps from second-quarter fiscal 2020, owing to solid AUR growth.

Adjusted operating expenses increased 17% from the year-ago period to $755 million for the fiscal second quarter, driven by compensation and higher marketing investments. Adjusted operating expenses, as a percentage of sales, decreased from 53.9% to 50.2% for the reported quarter.

The company reported an adjusted operating income of $256.6 million, which skyrocketed more than 70% from $150.9 million in the year-ago quarter. Adjusted operating margin expanded 450 bps year over year to 17.1%.

Financials

Ralph Lauren ended the quarter with cash and short-term investments of $3,061 million, total debt of $1,135.5 million, and total shareholders’ equity of $2,862.8 million. Inventory at quarter-end grew 4.6% year over year to $928.2 million. Capital expenditure for the six months ended Sep 25, 2021 was $63.4 million. In the quarter, the board approved a quarterly dividend of 68.75 cents. Management also noted that it is likely to resume share repurchase activities from the second half of fiscal 2022.

Store Update

As of Sep 25, 2021, Ralph Lauren had 493 directly operated stores and 658 concession shops globally. The directly operated stores included 164 Ralph Lauren and 329 Polo factory stores. The company operated 141 licensed stores globally.

Outlook

Despite the ongoing uncertainty related to COVID-19, the potential for further outbreaks in several regions and global supply-chain disruptions, management raised its fiscal 2022 view on impressive quarterly results and signs of recovery across all markets.

The company expects constant-currency revenues to grow 34-36%, up from the earlier mentioned 25-30%. Favorable currency is likely to hurt the top line by 20 bps. Operating margin is anticipated to be 12-12.5% compared with 4.8% and 10.3% reported in fiscal 2021 and 2020, respectively. Gross margin is still envisioned to expand 50-70 bps driven by average unit retail growth and positive product mix, which more than offset higher freight costs. Operating expenses are likely to be higher in the second half of fiscal 2022 due to increased marketing and other investments.

For third-quarter fiscal 2022, revenues are anticipated to rise 14-16% year over year at constant currency, with a favorable currency impact of 140 bps. Operating margin is forecast to be 13-13.5%, with a slight expansion in gross margin. This is mainly due to shift in the timing of investments from the fiscal second quarter to the third, higher freight costs, normalizing channel mix shift and foreign-currency headwinds of 30 bps.

Business Developments

In the fiscal second quarter, the company, in association with Zepeto, launched its first digital apparel collection. It also introduced the exclusive Next Generation-focused capsules for Urban Outfitters and ASOS as well as a new Ralph's Club fragrance. Ralph Lauren started its second digital-forward Emblematic retail concept in Shanghai. It also completed the transition of Chaps to a licensed business, thus concluding its portfolio realignment announced last year. The move will likely enable the company to focus on core brands, as part of the Next Great Chapter elevation strategy.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Ralph Lauren has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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 indicates a downward shift. Notably, Ralph Lauren has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.