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Why Is Ralph Lauren (RL) Down 3.2% 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 3.2% in that time frame, outperforming 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 & Revenues Beat on Solid Demand

Ralph Lauren posted impressive first-quarter fiscal 2023 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. Results have gained from brand strength, solid demand, and expansion across all channels and regions.

Ralph Lauren reported adjusted earnings per share of $1.88 in the fiscal first quarter, surpassing the Zacks Consensus Estimate of $1.72. However, the bottom line declined 18% from the prior-year quarter’s $2.29.

Net revenues grew 8% year over year to $1,490.6 million and beat the Zacks Consensus Estimate of $1,413 million. On a constant-currency (cc) basis, revenues were up 13% from the prior-year quarter. The metric gained from solid growth across all regions. This was partly offset by the impacts of 510 basis points (bps) from adverse currency rates.

The company’s global digital ecosystem witnessed year-over-year low-double-digit revenue growth and revenue growth of more than 80% on a two-year basis. This was driven by strength across owned and wholesale digital channels globally. The company also introduced additional digital sites in key markets, including India and Israel, in the fiscal first quarter.

Segmental Details

North America: In the fiscal first quarter, the segment’s revenues advanced 6% from the year-ago quarter to $701 million but came below the consensus mark of $727.2 million. Comparable store sales (comps) for North America’s retail channel improved 5%, including a 5% increase in brick-and-mortar stores and 2% growth in digital commerce. Revenues from the North America wholesale business grew 5% year over year.

Europe: The segment’s revenues grew 17% year over year to $416 million, with a 28% improvement in currency-neutral revenues. The metric also came ahead of the consensus mark of $361.6 million. Comps for the retail channel in Europe were up 34%, owing to a 45% increase in brick-and-mortar stores and a 7% rise in digital sales. Revenues for the segment’s wholesale business rose 8% on a reported basis and 20% at cc.

Asia: The segment’s revenues increased 16% year over year to $334 million on a reported and 26% on a currency-neutral basis. The metric also came ahead of the consensus mark of $296.5 million. Comps in Asia were up 19%, backed by 17% growth in brick-and-mortar stores and a 37% increase in the digital business.

Margins

Ralph Lauren's adjusted gross profit margin contracted 180 bps year over year on a reported basis and 80 bps on a cc basis to 68%. However, the metric expanded 350 bps on a three-year basis on solid AUR growth. Improved pricing and promotions were more than offset by higher freight and global supply-chain delays.

Adjusted operating expenses increased 13% from the year-ago period to $823 million in the fiscal first quarter. The rise was driven by higher marketing investments, and compensation and selling expenses to drive both near and long-term growth. Adjusted operating expenses, as a percentage of sales, expanded 220 bps to 55.2% in the reported quarter.

The company’s adjusted operating income was $190 million, up 18% from $231 million in the year-ago quarter. The adjusted operating margin contracted 410 bps year over year to 12.7%.

Financials

Ralph Lauren ended the quarter with cash and short-term investments of $1,776.9 million, total debt of $1.1 billion, and total shareholders’ equity of $2,364.1 million. Inventory grew 47% year over year to $1,178.2 million. The company repurchased Class A shares for about $213 million in the fiscal first quarter.

Capital expenditure in the reported quarter was $39.4 million. Management expects capital expenditure of $290-$310 million for fiscal 2023.

Store Update

During the quarter, the company opened more than 60 new stores and concessions. As of Jul 2, 2022, Ralph Lauren had 526 directly operated stores and 708 concession shops globally. The directly operated stores included 185 Ralph Lauren and 341 Polo factory stores. The company operated 113 licensed stores globally as of the same date.

Outlook

Management issued the second quarter and retained its fiscal 2023 guidance based on the supply-chain condition, inflationary pressures, foreign currency movement, the war in Ukraine, and COVID-19 variants and other COVID-related disruptions.

For fiscal 2023, RL continues to anticipate constant currency revenue growth in the high-single digits year over year, on a 52-week comparable basis. This includes a 600-bps negative impact of unfavorable currency. On a 53-week comparable basis, the metric is likely to be hurt by an unfavorable currency of 100 bps.

The operating margin is forecast to be 14-14.5% at cc, which includes a negative impact of unfavorable currency of 180 bps. Notably, it reported an operating margin of 13.1% on a 52-week comparable basis and 13.4% on a 53-week basis in the last year.

The gross margin is envisioned to expand 30-50 bps at cc on a 52-week comparable basis, driven by solid AUR growth and positive product mix, which is expected to more than offset higher freight and product cost inflation. However, the unfavorable currency is likely to hurt the metric by 150 bps.

For the second quarter of fiscal 2023, the company expects year-over-year revenue growth of 11% at cc. This includes a 750-bps impact of unfavorable currency.

The company anticipates an operating margin of 15.4-15.7% 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 metric is expected to be hurt by 240 bps of unfavorable currency. The gross margin is predicted to contract 40-80 bps year over year at cc due to rising freight and product costs, offsetting continued AUR growth. Unfavorable currency impacts of 190 bps are likely to dent the gross margin.

How Have Estimates Been Moving Since Then?

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

The consensus estimate has shifted -14.75% due to these changes.

VGM Scores

Currently, Ralph Lauren has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, 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 B. 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. It's no surprise Ralph Lauren has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

Performance of an Industry Player

Ralph Lauren is part of the Zacks Textile - Apparel industry. Over the past month, Crocs (CROX - Free Report) , a stock from the same industry, has gained 1%. The company reported its results for the quarter ended June 2022 more than a month ago.

Crocs reported revenues of $964.58 million in the last reported quarter, representing a year-over-year change of +50.5%. EPS of $3.24 for the same period compares with $2.23 a year ago.

For the current quarter, Crocs is expected to post earnings of $2.57 per share, indicating a change of +4.1% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.4% over the last 30 days.

Crocs has a Zacks Rank #4 (Sell) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of A.


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