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Why Is Ralph Lauren (RL) Up 3.9% Since Its Last Earnings Report?

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It has been about a month since the last earnings report for Ralph Lauren Corporation (RL - Free Report) . Shares have added about 3.9% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is RL due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Ralph Lauren Q4 Earnings & Revenues Surpass Estimates

Ralph Lauren reported fourth-quarter fiscal 2018 adjusted earnings of 90 cents per share, beating the Zacks Consensus Estimate of 86 cents. The bottom-line figure also increased by a penny from the prior-year quarter. Notably, this marked the company’s 13th straight quarter of earnings beat.

The company’s better-than-expected results stemmed from stringent focus on key initiatives that focuses on its core business, improving product assortments and delivering better quality of sales.

On a reported basis, Ralph Lauren posted earnings per share of 50 cents compared to loss per share of $2.48 in the prior-year quarter. Reported earnings for the quarter primarily included restructuring and other charges associated with the company’s Way Forward plan as well as the impact of tax reform.

Revenues

Ralph Lauren’s net revenues decreased 2.3% year over year to $1,529.2 million. However, the top-line figure surpassed the Zacks Consensus Estimate of $1,493 million. On constant-currency basis, revenues were down 7% better than the company’s guidance of 8-10% fall. The company’s efforts to improve quality of sales, reduced promotions and improve distribution, alongside brand exits and soft consumer demand led to decline in revenues.

During the quarter under review, foreign currency aided revenue growth by nearly 440 basis points (bps) owing to favorable currency rates. This was above the company’s guidance of 330 bps positive impact.

Segment Details

North America: During the fourth quarter, revenues at this segment slumped 14% on both reported and constant-currency basis, to $759.3 million. This downturn can be attributed to lower wholesale sales backed by distribution and brand exits; planned reduction in shipments and promotions to enhance the quality of sales; and soft customer demand. 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.

Europe: Revenues for this segment rose 13% year over year to $420 million, while currency-neutral revenues fell 1%. Currency neutral comps dropped 6%, including 8% decline in stores due to traffic challenges in certain markets and planned inventory reductions. This was somewhat offset by 8% rise in e-commerce.

Asia: Revenues at this segment were up 17% to $256.8 million and 11% in constant currency. The upside was driven by strong retail and wholesale sales. Comps rose 4% on a currency neutral basis, courtesy of increased average unit retail and number of transactions.

Margins

Ralph Lauren's adjusted gross profit margins expanded 440 bps to 59.8% backed by efforts to enhance quality of sales through lower promotions, positive geographic and channel mix shifts, as well as reduced product costs and mix. Additionally, foreign currency aided gross margins by 90 bps.

However, adjusted operating income margin contracted 110 bps to 5.6%. This year-over-year decrease can mainly be attributed to expense deleverage, which was more than offset by higher gross margin. Further, foreign currency hurt operating margins by 240 bps.

Financials

Ralph Lauren ended the quarter with cash and short-term investments of $2,004 million, total debt of $596 million and total shareholders’ equity of $3,457.4 million. Inventory declined 4% to $761 million at the end of fiscal 2018. This was due to enhanced operating methods.

Moreover, the company incurred capital expenditures of $162 million in fiscal 2018. For fiscal 2019, the same is now estimated to be roughly $275 million.

Store Update

As of Mar 31, 2018, Ralph Lauren had 472 directly-operated stores and 632 concession shops globally. The directly-operated stores included 111 Ralph Lauren, 71 Club Monaco and 290 Polo factory stores.

Additionally, the company’s global licensing partners operated 88 Ralph Lauren stores and 59 Club Monaco stores, bringing the total number of licensed stores to 147. The company had 131 licensed concession shops in operation as well.

Guidance

Following the quarterly results, Ralph Lauren issued outlook for first-quarter and fiscal 2019.

The company expects fiscal first-quarter revenues in the range of flat to down slightly, excluding currency impact. Operating margin for the quarter is anticipated to increase marginally, on a currency-neutral basis. The company expects foreign currency to benefit revenue growth by nearly 20-40 bps. Tax rate is projected to be roughly 18% for the quarter.

For fiscal 2019, the company expects revenues to decline by low-single digits, excluding currency impacts. The company now estimates foreign currency to have a minimal impact on revenue improvement. Operating margin is anticipated to rise marginally on a currency-neutral basis backed by higher gross margin. Foreign currency expected to impact operating margin marginally in the fiscal year. Tax rate for fiscal 2019 is estimated to be 22%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter. In the past month, the consensus estimate has shifted 10.9% due to these changes.

Ralph Lauren Corporation Price and Consensus

VGM Scores

At this time, RL has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for value based on our styles scores.

Outlook

Estimates have been trending upward for the stock and the magnitude of this revision looks promising. Notably, RL has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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