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Ralph Lauren in Troubled Waters: What's Hurting the Stock?

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Ralph Lauren Corporation (RL - Free Report) has been facing difficulties due to issues at its North America business segment, which is persistently delivering dismal results. However, the company posted solid results in the second-quarter fiscal 2018.

Shares of this Zacks Rank #5 (Strong Sell) company have gained 4.9% in the past month, underperforming the industry’s growth of 6.2%. Let’s analyze the factors hindering Ralph Lauren’s performance.

North American Business Deters Growth

Ralph Lauren’s overall performance looks chic as second-quarter fiscal 2018 marked its 11th consecutive earnings beat. Further, sales topped estimates after two consecutive misses. However, the North America segment is struggling due to lower retail and wholesale sales. Evidently, revenues at the segment slumped 16% in the second quarter.

In fact, lower sales in both retail and wholesale channels at the North America segment can be attributed to distribution and brand exits, planned reduction in shipments and promotions to enhance the quality of sales, and lower customer demand. Additionally, comparable store sales at this division tumbled 9% on a currency-neutral basis including a 6% drop in stores and 18% fall in e-commerce sales. Comps were mainly hurt by the company’s planned reduction in promotional activities and decline in traffic.

Soft Outlook Hurts Estimates

Despite a strong second quarter, Ralph Lauren provided a bleak outlook for the third quarter and fiscal 2018. While foreign currency is expected to act as a tailwind, the company projects sales to decline 6-8% in the third quarter and 8-9% in fiscal 2018. Also, operating margin is estimated to contract 50-70 basis points (bps), on currency-neutral basis, in third quarter. Meanwhile, currency-neutral operating margin for fiscal 2018 is anticipated in the 9.5-10.5% range including a minimal negative impact from foreign currency.

As a result, the Zacks Consensus Estimate moved south in the last 30 days. While the consensus estimate for the third quarter dipped by 1 cent to $1.82 per share and for fiscal 2018 it declined by 5 cents to $5.56 per share in the same time frame. For fiscal 2019, the same moved down by 18 cents to $5.37 per share.

Is There Any Hope?

Though recovery of the North American business looks difficult in the near term, Ralph Lauren remains on track to deliver the goals under its Way Forward Plan, which bodes well. Furthermore, the company’s initiatives to bolster digital and international presence reflect its growth prospects.

Nonetheless, Ralph Lauren’s soft outlook for the near future keeps skepticism on the stock intact.

Do Textile-Apparel Stocks Grab Your Attention?

Investors interested may consider G-III Apparel Group LTD (GIII - Free Report) , Crocs Inc. (CROX - Free Report) and Guess? Inc. (GES - Free Report) . While G-III Apparel flaunts a Zacks Rank #1 (Strong Buy), each of Crocs and Guess carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

G-III Apparel Sports delivered an average positive earnings surprise of 6.1% in the trailing four quarters. It has a long-term earnings growth rate of 15%.

Crocs pulled off an average positive earnings surprise of 108.9% in the trailing four quarters. In addition, it has a long-term earnings growth rate of 15%.

Guess delivered an average positive earnings surprise of 28.2% in the trailing four quarters. It has a long-term earnings growth rate of 17.5%.

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