Ralph Lauren Corp. (RL Quick QuoteRL - Free Report) looks promising on the back of brand strength and high-potential product categories, as well as expansion across all channels. A solid online show and strong AUR growth bode well.

This led to a robust surprise trend, which continued in fourth-quarter fiscal 2022. The company reported the seventh straight earnings beat and the fifth consecutive revenue surprise in the fiscal fourth quarter.

Earnings and revenues also improved year over year. Net revenues grew 18% year over year and 22% on a constant-currency (cc) basis. The uptick was attributable to double-digit growth across all regions. Adjusted earnings per share of 49 cents advanced 29% year over year in the fiscal fourth quarter.

The company has been expanding digital and omni-channel capabilities through investments in mobile, omni-channel and fulfillment. In fourth-quarter fiscal 2022, the digital business continued to be a key growth driver, with accelerated digital sales across all regions. The global digital ecosystem continued to witness robust improvement, recording year-over-year revenue growth of more than 80%. On a cc basis, the metric grew in the low-double digits. This was driven by strength across owned and wholesale digital channels globally.

Revenues for the company’s owned digital sites rose 18% year over year, driven by strong product assortments, consumer acquisition, expanded connected retail capabilities, and high-impact marketing. New customers on its digital sites grew more than 70%. 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 acquisitions.

In the quarter, the company launched localized digital commerce sites, including the first digital flagship in Australia and the Middle East, as well as 15 new ship-to destination largely across broader Europe, as part of its ecosystem expansion globally. It remains focused on further digital investments to continue with the creation of content for all platforms, enhancing digital capabilities to improve the 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” and endless aisle product availability. 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 20th straight 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 a 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, are likely to support long-term AUR growth. This is expected to continue aiding gross margin growth.

For fiscal 2023, the gross margin is expected to expand 30-50 bps at cc on a 52-week comparable basis, driven by solid AUR growth, and positive product and channel mix, which is expected to more than offset higher freight and product cost inflation. The operating margin is forecast to be 14-14.5% at cc. This compares favorably with the last year’s reported operating margin of 13.1% on a 52-week comparable basis and 13.4% on a 53-week basis.

It is also accelerating 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, concluding its portfolio realignment announced last year. The move will likely enable it to focus on core brands as part of the Next Great Chapter elevation strategy.

For fiscal 2023, RL anticipates revenue growth (cc) in the high-single digits or 8% year over year 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 $2.5 billion on a cumulative basis through fiscal 2023, in the forms of dividends and share repurchases.

Cost Headwinds

Ralph Lauren continued to witness elevated marketing expenses in fourth-quarter fiscal 2022 to support various initiatives around the holiday season, digital expansion into new markets and categories, and consumer acquisition. In fourth-quarter fiscal 2022, marketing investments rose 48% year over year.

Driven by higher marketing investments as well as compensation and selling expenses, adjusted operating expenses increased 19%, while adjusted operating expenses, as a percentage of sales, expanded 30 bps year over year. Management anticipates marketing expenses for fiscal 2023 to be 6-7% of net sales to support the new website, mobile apps, consumer acquisition and key brand moments.

Persistent cost inflation due to the ongoing supply-chain disruptions, and higher logistics and raw material costs remain concerning. Management’s first-quarter and fiscal 2023 guidance includes the current supply-chain condition, inflationary 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, the company anticipated an operating margin of 13.5% at cc, which includes the negative impacts of higher freight and marketing expenses, which are likely to reduce in the second half of fiscal 2023. The gross margin is predicted to decline year over year at cc due to rising freight and product costs, offsetting continued AUR growth. The company expects the highly volatile and inflationary input cost environment to continue in fiscal 2023.

Also, it has been reeling under adverse currency impact. 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, the 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.

Conclusion

Image Source: Zacks Investment Research

We believe that the above-mentioned upsides are likely to continue working well for this Zacks Rank #3 (Hold) stock, thereby helping it counter escalated inflation and cost-related hurdles. Shares of RL have lost 22.8% year to date compared with the industry’s decline of 34.8%.

Stocks to Consider

Some better-ranked stocks from the same industry are Delta Apparel (DLA Quick QuoteDLA - Free Report) , Oxford Industries (OXM Quick QuoteOXM - Free Report) and GIII Apparel Group (GIII Quick QuoteGIII - Free Report) .

Oxford Industries is an apparel company, which designs, sources, markets and distributes products bearing the trademarks of its owned and licensed brands. It currently flaunts a Zacks Rank #1 (Strong Buy). OXM has a trailing four-quarter earnings surprise of 99.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Oxford Industries’ current financial year’s sales and earnings suggests growth of 10.9% and 7.1%, 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, the manufacturer, designer and distributor of apparel and accessories, presently has a Zacks Rank #2 (Buy). GII 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.