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Why Is Ralph Lauren (RL) Down 13.8% Since Last Earnings Report?

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A month has gone by since the last earnings report for Ralph Lauren (RL - Free Report) . Shares have lost about 13.8% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Ralph Lauren’s Earnings and Sales Beat Estimates in Q2

Ralph Lauren reported second-quarter fiscal 2019 adjusted earnings of $2.26 per share, which exceeded the Zacks Consensus Estimate of $2.17. The bottom-line figure also increased by 13.6% from the prior-year quarter. Notably, this marked the company’s 15th straight quarter of earnings beat.

On a reported basis, Ralph Lauren posted earnings per share of $2.07, surging 18.3% from the year-ago figure of $1.75. Reported earnings for the quarter primarily included restructuring and other charges.

Revenues

Ralph Lauren’s net revenues increased 1.6% year over year to $1,690.9 million. Moreover, the top line surpassed the Zacks Consensus Estimate of $1,660 million. On constant-currency basis, revenues were up 2.1% on the back of growth in Asia. However, foreign currency hurt revenue growth by nearly 50 basis points (bps) in the fiscal second quarter.

Segment Details

North America: During the quarter under review, revenues at this segment rose 1% on a reported basis and nearly 2% in constant currency to $888.2 million. The improvement can be attributed to robust performance in retail stores and wholesale business. On a currency-neutral basis, comparable store sales at North America’s retail channel improved 1% owing to a 9% increase in e-commerce, offset by a 1% decline in brick and mortar stores. This marked a return to growth for the North America digital business, courtesy of strong brand building, robust consumer experience and higher quality of sales, supported by its new platform. Wholesale revenues for the segment were flat year over year.

Europe: Revenues for this segment dipped 1% year over year to $459.2 million, while currency-neutral revenues were flat. Currency-neutral comps dropped 4%, including a 4% fall in brick and mortar stores due to assortment and inventory challenges. However, comps were flat in e-commerce. In Europe, reported revenues for the wholesale business dipped 1% and were flat in constant currency. This downturn was mainly due to a shift in timing of shipments, which aided the fiscal first quarter performance and negatively impacted the fiscal second quarter.

Asia: Revenues at this segment were up 13% to $244.7 million and 14% in constant currency. The upside was driven by strong retail and wholesale sales. Comps rose 6% on a currency-neutral basis, courtesy of both brick and mortar, and e-commerce operations.

Margins

Ralph Lauren's adjusted gross profit margins expanded 100 bps to 60.9%, driven by efforts to enhance quality of sales through lower promotions, better pricing and favorable product mix. Additionally, foreign currency aided gross margins by 40 bps.

Driven by gross margin expansion, adjusted operating income margin expanded 50 bps to 13.9%. Further, foreign currency boosted operating margins by 30 bps.

Financials

Ralph Lauren ended the quarter with cash and short-term investments of $1,872.6 million, total debt of $683.9 million and total shareholders’ equity of $3,462 million. Inventory improved 15% to $994.6 million at the end of second-quarter fiscal 2019. This increase was driven by the investments made to support global store expansions, enhanced deliveries and increased shipments to Europe factory stores.

Moreover, the company incurred capital expenditures of $93.1 million as of Sep 29, 2018. For fiscal 2019, capital expenditure is estimated to be roughly $275 million.

Store Update

As of Sep 29, 2018, Ralph Lauren had 487 directly-operated stores and 638 concession shops globally. The directly-operated stores included 116 Ralph Lauren, 75 Club Monaco and 296 Polo factory stores.

Additionally, the company’s global licensing partners operated 91 Ralph Lauren stores and 59 Club Monaco stores, bringing the total number of licensed stores to 150. The company also had 119 licensed concession shops in operation.

Guidance

The company issued guidance for the third quarter and fiscal 2019. It projects net revenues to be flat to slightly up, on a constant-currency basis, in fiscal 2019. For the fiscal year, operating margin is anticipated to increase 40-60 bps in constant currency owing to gross margin expansion. Foreign currency is expected to negatively impact revenue growth by 75 bps and have a minimal impact on operating margin.

For the fiscal third quarter, management envisions net revenues to increase low single-digits in constant currency. Foreign currency is expected to mar revenue growth by approximately 100 bps. Operating margin is anticipated to grow around 20 basis points in constant currency and expected to be slightly benefited by foreign currency.

In fiscal 2019, effective tax rate is anticipated to be approximately 21%, while in the third quarter, tax rate is projected at 22-23%.

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, Ralph Lauren has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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 looks promising. Notably, Ralph Lauren has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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