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Strategic Growth Plans to Aid Ralph Lauren (RL) Amid High Costs
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Ralph Lauren Corporation (RL - Free Report) has been gaining from brand strength, solid demand, and expansion across all channels and regions. Also, the company witnessed broad-based strength across all three regions. This led to impressive first-quarter fiscal 2023 results, wherein it reported the eighth straight earnings beat and the sixth consecutive revenue surprise.
Net revenues grew 8% year over year to $1,490.6 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.
Consequently, management expects fiscal 2023 year-over-year cc revenue growth in the high-single digits on a 52-week comparable basis. The operating margin is forecast to be 14-14.5% on a cc basis. Notably, RL 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, on a 52-week comparable basis, is envisioned to expand 30-50 bps on a cc basis, driven by solid AUR growth and positive product mix, more than offsetting higher freight and product cost inflation.
For second-quarter fiscal 2023, the company expects year-over-year revenue growth of 11% on a cc basis. It anticipates an operating margin of 15.4-15.7% on a cc basis.
That said, let’s delve deeper into other factors aiding the stock.
Factors Narrating RL’s Growth Story
Ralph Lauren remains on track with expanding digital and omni-channel capabilities through investments in mobile, omni-channel and fulfillment. In first-quarter fiscal 2023, 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 growth, recording year-over-year low-double-digit revenue growth and revenue growth of more than 80% on a two-year basis. On a cc basis, Ralph Lauren’s digital ecosystem sales grew in the mid-single digits. This was driven by strength across owned and wholesale digital channels globally.
The company introduced additional digital sites in key markets, including India and Israel, in the fiscal first quarter. Revenues for the company’s owned digital sites rose year over year in the high-single digits, driven by strong full-price selling, stemming from a positive mix of products, investments in AI-powered targeting and consumer acquisition. New customers in its digital sites grew 70% from the pre-pandemic levels.
Also, its online search grew year over year in the high teens, driven by a better-than-expected performance in Polo shirts and spring luxury campaigns. 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.
Other notable companies in the Consumer Discretionary space, which continue to perform well on the online front, are as follows:
lululemon’s (LULU - Free Report) e-commerce business delivered an impressive performance in the second quarter of fiscal 2022, with revenues increasing 53% on a three-year CAGR basis. The company continues to strengthen omni-channel capabilities such as curbside pickups, same day deliveries and BOPUS (buy online pick up in store). lululemon is enhancing its mobile app to offer the curbside pickup service and train its store associates to help customers speed up transactions.
For fiscal 2022, LULU’s sales view assumes e-commerce growth in the low to mid-20s range relative to that reported in fiscal 2021, and compares with a high-teens to low-20s range expected earlier.
Crocs’ (CROX - Free Report) continued progress in expanding digital and omnichannel capabilities bodes well. We note that CROX’s digital sales advanced 21% year over year in the second quarter, driven by strong traffic and solid demand.
Increased focus on the Crocs mobile app and global social platforms aided digital sales. Gains from strategic collaborations, influencer campaigns, and digital and social marketing efforts remained upsides.
Carter’s (CRI - Free Report) e-commerce business has been performing well, driven by expanded omnichannel facilities, including curbside pickup, same-day pickup, buy online and pickup at store and ship from store, along with easy access to a broad array of online products when shopping in stores.
CRI’s mobile app is also performing well. Carter’s anticipates e-commerce penetration to rise to 42% by 2024.
Coming to Ralph Lauren, its average unit retail (AUR) increased 8% for first-quarter fiscal 2023, marking the 21st straight AUR growth, driven by continued momentum. 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, is likely to support long-term AUR growth. This is likely to continue aiding gross margin growth.
The company recently announced an update on its strategic growth plan — "Next Great Chapter: Accelerate." The "Next Great Chapter: Accelerate" focuses on delivering sustainable long-term growth and value creation. Through the accelerated plan, the company is likely to continue building on its brand position; expand its distinctive, timeless products and experiences across multiple categories; and increase its presence in key cities across the globe.
Management outlined the financial growth targets for the next three years from a base of fiscal 2022 through 2025. For the next three years, the company anticipates a compound annual revenue growth rate of mid to high-single digits in cc. It expects the cc operating margin to exceed the revenue guidance, expanding to at least 15% by the end of fiscal 2025. Growth is likely to be driven by modest gross margin expansion and operating expense leverage, along with continued investments in the company’s long-term strategic priorities.
Headwinds to Overcome
Ralph Lauren has been reeling under elevated freight expenses and higher marketing investments. In first-quarter fiscal 2023, 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%. 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%. As a result, adjusted earnings per share of $1.88 in the fiscal first quarter declined 18% from the prior-year quarter’s $2.29.
For fiscal 2023, the operating margin is forecast to be 14-14.5% at cc. 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. For the second quarter of fiscal 2023, the company anticipates an operating margin of 15.4-15.7% at cc, which includes the negative impacts of higher freight and marketing expenses. 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 remain concerning. Adverse currency rates hurt net revenues by 510 bps in first-quarter fiscal 2023. For fiscal 2023, the company expects adverse currency rates to hurt revenues by 600 bps. On a 53-week comparable basis, the metric is likely to be hurt by an unfavorable currency of 100 bps. The operating margin is expected to be affected by 180 bps of unfavorable currency. The gross margin is forecasted to be negatively impacted by 150 bps of unfavorable currency. For the fiscal second quarter, the unfavorable currency is likely to negatively impact revenues by 750 bps, the gross margin by 190 bps and the operating margin by 240 bps.
Conclusion
We believe that the above-mentioned upsides will likely work well for RL, helping it counter cost-related hurdles and currency woes.
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Strategic Growth Plans to Aid Ralph Lauren (RL) Amid High Costs
Ralph Lauren Corporation (RL - Free Report) has been gaining from brand strength, solid demand, and expansion across all channels and regions. Also, the company witnessed broad-based strength across all three regions. This led to impressive first-quarter fiscal 2023 results, wherein it reported the eighth straight earnings beat and the sixth consecutive revenue surprise.
Net revenues grew 8% year over year to $1,490.6 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.
Consequently, management expects fiscal 2023 year-over-year cc revenue growth in the high-single digits on a 52-week comparable basis. The operating margin is forecast to be 14-14.5% on a cc basis. Notably, RL 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, on a 52-week comparable basis, is envisioned to expand 30-50 bps on a cc basis, driven by solid AUR growth and positive product mix, more than offsetting higher freight and product cost inflation.
For second-quarter fiscal 2023, the company expects year-over-year revenue growth of 11% on a cc basis. It anticipates an operating margin of 15.4-15.7% on a cc basis.
That said, let’s delve deeper into other factors aiding the stock.
Factors Narrating RL’s Growth Story
Ralph Lauren remains on track with expanding digital and omni-channel capabilities through investments in mobile, omni-channel and fulfillment. In first-quarter fiscal 2023, 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 growth, recording year-over-year low-double-digit revenue growth and revenue growth of more than 80% on a two-year basis. On a cc basis, Ralph Lauren’s digital ecosystem sales grew in the mid-single digits. This was driven by strength across owned and wholesale digital channels globally.
The company introduced additional digital sites in key markets, including India and Israel, in the fiscal first quarter. Revenues for the company’s owned digital sites rose year over year in the high-single digits, driven by strong full-price selling, stemming from a positive mix of products, investments in AI-powered targeting and consumer acquisition. New customers in its digital sites grew 70% from the pre-pandemic levels.
Also, its online search grew year over year in the high teens, driven by a better-than-expected performance in Polo shirts and spring luxury campaigns. 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.
Other notable companies in the Consumer Discretionary space, which continue to perform well on the online front, are as follows:
lululemon’s (LULU - Free Report) e-commerce business delivered an impressive performance in the second quarter of fiscal 2022, with revenues increasing 53% on a three-year CAGR basis. The company continues to strengthen omni-channel capabilities such as curbside pickups, same day deliveries and BOPUS (buy online pick up in store). lululemon is enhancing its mobile app to offer the curbside pickup service and train its store associates to help customers speed up transactions.
For fiscal 2022, LULU’s sales view assumes e-commerce growth in the low to mid-20s range relative to that reported in fiscal 2021, and compares with a high-teens to low-20s range expected earlier.
Crocs’ (CROX - Free Report) continued progress in expanding digital and omnichannel capabilities bodes well. We note that CROX’s digital sales advanced 21% year over year in the second quarter, driven by strong traffic and solid demand.
Increased focus on the Crocs mobile app and global social platforms aided digital sales. Gains from strategic collaborations, influencer campaigns, and digital and social marketing efforts remained upsides.
Carter’s (CRI - Free Report) e-commerce business has been performing well, driven by expanded omnichannel facilities, including curbside pickup, same-day pickup, buy online and pickup at store and ship from store, along with easy access to a broad array of online products when shopping in stores.
CRI’s mobile app is also performing well. Carter’s anticipates e-commerce penetration to rise to 42% by 2024.
Coming to Ralph Lauren, its average unit retail (AUR) increased 8% for first-quarter fiscal 2023, marking the 21st straight AUR growth, driven by continued momentum. 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, is likely to support long-term AUR growth. This is likely to continue aiding gross margin growth.
The company recently announced an update on its strategic growth plan — "Next Great Chapter: Accelerate." The "Next Great Chapter: Accelerate" focuses on delivering sustainable long-term growth and value creation. Through the accelerated plan, the company is likely to continue building on its brand position; expand its distinctive, timeless products and experiences across multiple categories; and increase its presence in key cities across the globe.
Management outlined the financial growth targets for the next three years from a base of fiscal 2022 through 2025. For the next three years, the company anticipates a compound annual revenue growth rate of mid to high-single digits in cc. It expects the cc operating margin to exceed the revenue guidance, expanding to at least 15% by the end of fiscal 2025. Growth is likely to be driven by modest gross margin expansion and operating expense leverage, along with continued investments in the company’s long-term strategic priorities.
Headwinds to Overcome
Ralph Lauren has been reeling under elevated freight expenses and higher marketing investments. In first-quarter fiscal 2023, 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%. 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%. As a result, adjusted earnings per share of $1.88 in the fiscal first quarter declined 18% from the prior-year quarter’s $2.29.
For fiscal 2023, the operating margin is forecast to be 14-14.5% at cc. 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. For the second quarter of fiscal 2023, the company anticipates an operating margin of 15.4-15.7% at cc, which includes the negative impacts of higher freight and marketing expenses. 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 remain concerning. Adverse currency rates hurt net revenues by 510 bps in first-quarter fiscal 2023. For fiscal 2023, the company expects adverse currency rates to hurt revenues by 600 bps. On a 53-week comparable basis, the metric is likely to be hurt by an unfavorable currency of 100 bps. The operating margin is expected to be affected by 180 bps of unfavorable currency. The gross margin is forecasted to be negatively impacted by 150 bps of unfavorable currency. For the fiscal second quarter, the unfavorable currency is likely to negatively impact revenues by 750 bps, the gross margin by 190 bps and the operating margin by 240 bps.
Conclusion
We believe that the above-mentioned upsides will likely work well for RL, helping it counter cost-related hurdles and currency woes.