Ralph Lauren (RL Quick QuoteRL - Free Report) has been gaining from brand strength, high-potential product categories across all regions, as well as expansion across all channels. Also, a solid online show and strong AUR growth bode well. This led to the seventh straight earnings beat and the fifth consecutive revenue beat in the fourth quarter of fiscal 2022. Earnings and revenues also improved year over year. It also witnessed double-digit growth across all regions.

These upsides are likely to continue working well for RL, thereby helping it counter escalated inflation and cost-related hurdles. We note that although shares of this stock lost 15.5% year to date, they came ahead of the industry’s decline of 32.3%. That said, let’s delve into other factors aiding the stock:

Factors Narrating RL’s Growth Story

The company has been making significant progress in expanding digital and omni-channel capabilities through investments in mobile, omni-channel and fulfillment centers. In fourth-quarter fiscal 2022, RL’s digital business continued to be one of its key growth drivers, with accelerated digital sales across all regions. The global digital ecosystem continued to witness robust growth, recording year-over-year revenue growth of more than 80%. On a constant currency basis, the metric grew low double-digits driven by strength across owned and wholesale digital channels globally. Revenues from the company’s owned digital sites rose 18% year over year, driven by strong product assortments, new consumer acquisition, expanded connected retail capabilities, and high-impact marketing. New customers in its digital sites grew more than 70%. Region-wise, digital sales were up 27% in North America and 46% in Asia.

Image Source: Zacks Investment Research

Digital sales benefited from full-priced sales owing to the right product mix, a pull-back on promotions and investments in Artificial Intelligence (AI)-powered capabilities, and new full-price consumer acquisition. During the quarter, the company launched localized digital commerce sites, including first digital flagship in Australia and the Middle East, as well as 15 new ship-to destinations largely across broader Europe as part of its ecosystem expansion globally. It remains focused on further digital investments to continue creating content for all platforms, enhancing digital capabilities to improve user experience and continuing to leverage AI and data to serve its consumers more efficiently.

Ralph Lauren continues to scale and expand its connected retail capabilities, including virtual selling appointments, buy online, pick up in store, endless aisle product availability and more. The company launched its first-ever full-catalog Ralph Lauren mobile app during the holiday season, efficiently leveraging its connected retail capabilities to deliver the most personalized and content-rich platform.

Average unit retail (“AUR”) increased 13% for fourth-quarter fiscal 2022, marking the 20th straight quarter of AUR growth driven by its persistent brand elevation efforts with increases across every region. The company has been navigating through the ongoing inflationary environment, driven by favorable product mix and strong pricing power.

It expects to continue delivering AUR above its annual long-term target of low- to mid-single digit AUR growth through fiscal 2023, which will help mitigate mid-to-high single-digit cost inflation. The company’s 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, is likely to support long-term AUR growth. This is likely to continue aiding gross margin growth.

This Zacks Rank #3 (Hold) company 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, it completed the transition of Chaps to a licensed business, thus concluding its portfolio realignment announced last year. The move will likely enable Ralph Lauren to focus on core brands, as part of the Next Great Chapter elevation strategy.

For fiscal 2023, RL anticipates revenue growth in the high-single digits or 8% year over year on a cc basis, on a 52-week comparable basis. For the first quarter of fiscal 2023, the company expects year-over-year revenue growth of 8% at cc. The company earlier revealed plans of returning 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.

Headwinds to Overcome

Despite these upsides, Ralph Lauren continued to witness elevated marketing expenses in fourth-quarter fiscal 2022 to support various initiatives around the holiday season, besides digital expansion into new markets and categories, and new consumer acquisition. In fourth-quarter fiscal 2022, marketing investments rose 48% year over year, representing 9.5% of net sales. Driven by confidence in its demand creation activities, Ralph Lauren anticipates marketing expenses for fiscal 2023 to be 6-7% of net sales to support new website, mobile apps, consumer acquisition and key brand moments.

The company is also reeling under significant cost inflation due to the ongoing supply chain disruptions and higher logistics and raw material costs. In fourth-quarter fiscal 2022, adjusted gross margin included freight headwinds. Management’s first-quarter and fiscal 2023 guidance includes the current supply-chain condition, inflation pressures, the war in Ukraine, COVID-19 variants and other COVID-related disruptions. It expects freight and labor expenses to remain high in fiscal 2023.

For first-quarter fiscal 2023, it anticipated an operating margin of 13.5% at cc, which includes the negative impacts of higher freight and marketing expenses. Gross margin is predicted to decline year over year at cc due to rising freight and product costs, offsetting continued AUR growth. The company also expects the highly volatile and inflationary input cost environment to continue in fiscal 2023.

Also, unfavorable currency fluctuations remain concerning. For fiscal 2023, the company expects adverse currency rates to hurt revenues by 400 bps. On a 53-week comparable basis, the metric is likely to be hurt by an unfavorable currency of 100 bps. For the fiscal first quarter, unfavorable currency is likely to negatively impact revenues by 480-500 bps, the gross margin by 100 bps and the operating margin by 130 bps.

Bottom Line

Despite rising inflation, higher freight and marketing expenses, we believe that online strength, strong AUR growth and other well-chalked-out endeavors are likely to help the stock get back on track in the near term. Also, a long-term earnings growth rate of 9% reflect its inherent strength.

Stocks to Consider

Some better-ranked stocks from the same industry that investors can consider are Delta Apparel (DLA Quick QuoteDLA - Free Report) , Steven Madden (SHOO Quick QuoteSHOO - Free Report) and GIII Apparel Group (GIII Quick QuoteGIII - Free Report) .

Steven Madden is involved in designing, sourcing, marketing and selling private-label footwear, handbags and accessories for women, men, and children. It currently flaunts a Zacks Rank #1 (Strong Buy). SHOO has a trailing four-quarter earnings surprise of 44%, on average.You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Steven Madden’s current financial year’s sales and earnings suggests growth of 15.2% and 19.6%, respectively, from the year-ago period's reported numbers.

Delta Apparel, a manufacturer of knitwear products, currently sports a Zacks Rank #1. DLA has a trailing four-quarter earnings surprise of 95.5%, on average.

The Zacks Consensus Estimate for Delta Apparel's current financial year’s sales and earnings per share suggests growth of 11.9% and 10.1%, respectively, from the year-ago period's reported numbers.

GIII Apparel, a manufacturer, designer and distributor of apparel and accessories, presently has a Zacks Rank #2. GIL has a trailing four-quarter earnings surprise of 160.6%, on average.

The Zacks Consensus Estimate for GIII Apparel’s current financial-year sales and earnings suggests growth of 8.7% and 5.2% from the year-ago period’s reported numbers, respectively.