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Why Ralph Lauren (RL) has a Robust Upside Story Despite Woes

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Ralph Lauren Corporation (RL - Free Report) displays a remarkable upside story despite the looming effects of the coronavirus pandemic, higher marketing expenses and supply-chain disruptions. The company has been gaining from sturdy consumer demand for casual bottoms, sweaters and fleece, along with high potential in underdeveloped categories — particularly denim, accessories and home. RL’s focus on expanding digital and omni-channel capabilities, through investments in the mobile app, omni-channel and fulfillment, bodes well.

Ralph Lauren continued with its stellar performance in second-quarter fiscal 2022. It reported the fifth straight earnings beat and the third consecutive revenue surprise in the fiscal second quarter. Earnings and revenues also improved year over year. The 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.

This Zacks Rank #2 (Buy) company has a market capitalization of $8.75 billion. In the past year, RL has risen 16.3% compared with the industry’s growth of 7.8%. The performance of the stock also compares favorably against the Consumer Discretionary sector’s decline of 10% in a year.

In the past 30 days, the Zacks Consensus Estimate for fiscal 2022 earnings per share has moved up 0.3% to $7.34 per share, suggesting 331.8% growth from the year-ago reported figure.

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Here’s Why Ralph Lauren Should Retain the Momentum

Ralph Lauren is likely to retain its strong performance on consistent brand elevation efforts and robust full-priced selling trends, which have been aiding average unit retail (AUR) growth. In second-quarter fiscal 2022, all the geographies exceeded the company’s annual long-term target of low- to mid-single-digit AUR growth, led by 23% 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 of its targeting and personalization efforts. Robust AUR growth along with improved pricing and promotions and better product mix have been boosting gross margin.

Ralph Lauren is on track to exceed its top-and bottom-line targets under the “Next Great Chapter” plan that was announced in June 2018. Later, it announced measures to accelerate its “Next Great Chapter plan,” which includes creating a simplified global organizational structure and rolling out improved technological capabilities. As part of the plan, the company envisions delivering low to mid-single-digit revenue compounded annual growth rate (CAGR) and mid-teen operating margin by fiscal 2023 in constant currency.

The company anticipates marketing spending to grow nearly to 5% of revenues by fiscal 2023, while capital expenditure is expected to represent 4-5% of revenues. The company plans to return 100% free cash flow to shareholders in the next five years, amounting to about $2.5 billion on a cumulative basis through fiscal 2023 in the form of dividends and share repurchases.

Ralph Lauren is also making significant progress in expanding digital and omni-channel capabilities. In second-quarter fiscal 2022, digital business continued to be a key growth driver, with accelerated digital sales across all regions. Global digital ecosystem sales advanced 45%, while owned digital e-commerce rose more than 35% year over year despite the gradual return of traffic to stores.

The company’s digital investments remain focused on creating 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 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.

Conclusion

Ralph Lauren continues to witness elevated marketing expense owing to reactivation of in-person activities, and high-impact digital campaigns and personalization. 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.

Moreover, freight headwinds related to supply chain woes have been partly offsetting gross margin growth. Although Ralph Lauren provided a robust margin view for fiscal 2022, it expects margins to be offset by some lingering costs, including global supply chain pressure, higher freight costs and marketing investments. The company’s gross margin view for fiscal 2022 includes slightly higher freight headwinds of 130-150 bps versus the previous expectation of 100-120 bps.

Nonetheless, we believe Ralph Lauren to remain resilient in the current environment given its strategies and continued strong demand for its brands.

Other Stocks to Consider

Some other top-ranked stocks from the same industry include Delta Apparel (DLA - Free Report) , Guess (GES - Free Report) and Hanesbrands (HBI - Free Report) .

Delta Apparel currently sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 95.5% on average. The DLA stock has rallied 50.6% in the past year. You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Delta Apparel's current financial-year sales and earnings per share suggests growth of 11.6% and 9.4%, respectively, from the year-ago period's reported numbers.

Guess currently has a Zacks Rank #1. It has a trailing four-quarter earnings surprise of 97% on average. Shares of GES have gained 9.8% in the past year.

The Zacks Consensus Estimate for Guess’ current financial-year sales suggests year-over-year growth of 38.6%. The consensus mark for GES’ earnings per share is pegged at $2.97, indicating a substantial improvement from a loss of 7 cents reported in the year-ago period.

Hanesbrands currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 28.6%, on average. Shares of HBI have gained 17.5% in a year.

The Zacks Consensus Estimate for Hanesbrands’ current financial-year sales and earnings suggests growth of 2% and 25.5%, respectively, from the year-ago period's reported numbers.


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