Ralph Lauren Corporation (RL - Free Report) has seen its shares gain as much as 17.7% since it reported solid results for fourth-quarter fiscal 2018. In fact, shares touched a 52-week high of $137.59 on May 25, closing the session lower at $137.30.
A glimpse of the company’s price performance shows that the stock has surged a whopping 103.9% in a year’s time. It has outperformed both the industry’s increase of 46.1% and the Consumer Discretionary sector’s growth of 7.6% in the same time frame.
Impressive Earnings History & Outlook
Ralph Lauren boasts a robust earnings surprise history. Fourth-quarter fiscal 2018 marked its 13th consecutive earnings beat driven by stringent focus on initiatives that focuses on core business, improving product assortments and delivering better quality of sales. Further, gross margin continued to expand, courtesy of the company’s efforts to enhance quality of sales through lower promotions, positive geographic and channel mix shifts as well as reduced product costs and mix. Also, foreign currency is aiding the company’s results.
For fiscal 2019, operating margin is anticipated to rise marginally (on a currency-neutral basis) backed by higher gross margin. The same metric is anticipated to increase marginally in first-quarter fiscal 2019 on a currency-neutral basis. Foreign currency is also expected to benefit revenue growth by nearly 20-40 bps in the quarter.
Uptrend in Earnings Estimates
Robust quarterly results have raised analysts’ optimism as reflected by an uptrend in the earnings estimates. The Zacks Consensus Estimate of $6.23 for fiscal 2019 and $6.75 for fiscal 2020 moved north 11 cents and 16 cents, respectively, in the past seven days. Also, the consensus mark of $1.41 for first-quarter fiscal 2019 increased 16 cents in the same time frame.
We note that Ralph Lauren’s Way Forward Plan is on track. The plan focuses on evolving the company’s core business related to its product, marketing and customer experience as well as reviving its operating structure by developing a systematic way of building stronger assortments, a demand-driven supply chain, an excellent sourcing capability and a multi-channel global expansion strategy.
Apart from this, Ralph Lauren is well on track with its restructuring plan, which is likely to generate savings of roughly $140 million by fiscal 2019 end. These restructuring activities include rightsizing the portfolio and cost-structure, alongside streamlining the structure of the organization. Ralph Lauren remains keen on bolstering international presence as well.
The company is continually expanding in underpenetrated markets with new small-format stores that are highly productive. Moreover, it is on track to generate nearly $0.5 billion of revenues from Greater China in the next five years.
Expansion of digital platforms is a major component of Ralph Lauren’s global growth strategy. In fiscal 2018, the company developed a winning digital ecosystem, including our directly-operated platforms, wholesale digital, pure plays and social commerce.
Moving forward, management expects digital growth to accelerate as it has almost completed the development of its directly-operated North America e-commerce business. Also, in first-quarter fiscal 2019, the company targets upgrading technology platforms for the directly-operated European e-commerce business.
This transition should eventually enhance shopping experience at its website with enhanced search, navigation and checkout process. Meanwhile, the company’s digital wholesale business has been witnessing marked improvements, which is driving market share gains in this channel at key retailers and categories.
Ralph Lauren is witnessing softness across its North America segment since the last few quarters. Revenues at the North America unit slumped 14% on both reported and constant-currency basis in the fourth quarter due to lower wholesale sales. On a currency-neutral basis, comparable store sales at North America’s retail channel remained flat owing to a 6% rise in brick and mortar stores, which were compensated by an 18% fall in online channel.
Moreover, management provided a soft sales view for first-quarter and fiscal 2019. The company expects fiscal first-quarter revenues in the range of flat to down slightly, excluding currency impact. In fiscal 2019, revenues are likely to decline by low-single digits, excluding currency impacts.
We believe these hurdles will be easily offset by this Zacks Rank #3 (Hold) company’s robust strategic actions. Also, Ralph Lauren has a Momentum Score of A and long-term earnings growth rate of 10.3%, which are impressive.
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