Back to top

Image: Bigstock

Will Ralph Lauren (RL) Gain From Strategic Growth Endeavors?

Read MoreHide Full Article

Ralph Lauren Corporation (RL - Free Report) is witnessing sluggishness across its North America segment for quite some time now. Notably, weak traffic numbers and dull performances at the company’s retail and wholesale channels are negatively impacting the unit. Decline in comparable store sales (comps) too resulted in the downside. Additionally, foreign currency remains a headwind for fiscal 2020.

In fourth-quarter fiscal 2019, Ralph Lauren’s North America revenues fell 7%, with a comps decline of 4%. Comps fell mostly due to challenging traffic including foreign tourist traffic at brick and mortar stores. Wholesale revenues also declined due to soft select spring fashion concepts and anticipated fall in off-price sales. For fiscal 2020, the company expects currency to hurt revenues by 90-100 basis points (bps) and operating margin by 10-20 bps.

So far this year, shares of Ralph Lauren have gained 5.6%, underperforming the industry’s 18.8% rally.


Strategic Efforts

In the fourth quarter, this Zacks Rank #3 (Hold) company delivered 17th quarter of earnings beat, courtesy of the solid execution of key initiatives including the “Next Great Chapter” plan. This strategic growth plan, which started off well in its first year, focuses on delivering sustainable long-term growth and value creation.

Management expects to execute this growth plan through five strategic priorities – winning over a new generation of customers; energizing core products and accelerating under developed categories; drive targeted expansion in its regions and channels; lead with digital; and operate with discipline to fuel growth. Further, the company has been gaining from its continuous efforts to elevate the product assortment and enhance quality of sales.

As part of the plan, Ralph Lauren targets delivering low- to mid-single digit revenue compounded annual growth rate (CAGR) and mid-teen operating margin by fiscal 2023, in constant currency. Further, the company expects returning to constant-currency revenue growth by fiscal 2020. In the next five years, the company intends to return 100% free cash flow to its shareholders via dividends and share repurchases, amounting to about $2.5 billion (on a cumulative basis) through fiscal 2023.

Meanwhile, Ralph Lauren remains keen on bolstering international presence by continually expanding in underpenetrated markets. Over the last two years, the company has been strengthening the brand in Asia, particularly China, and built strong business foundation by enhancing the quality of sales and profitability. In fiscal 2019, the company’s constant-currency revenues in Greater China increased 20%, with over 30% growth in Mainland China. Management also sees immense potential to expand in Europe, where it currently has only 23-owned full price stores. Going forward, the company remains on track to expand real estate locations to elevate the brand, and drive sales and profitability.

Additionally, Ralph Lauren’s growth strategy of expanding its digital platforms remains impressive. The company has developed a winning digital ecosystem including directly-operated platforms, wholesale digital, pure plays and social commerce. Its constant-currency digital revenues improved 11% in fiscal 2019 backed by strength in all regions. Comps in North America grew 10% in the same period against a 22% decline in fiscal 2018. The company has also been strengthening its partnerships with key digital wholesale players across regions.

All these aforementioned factors are likely to consistently boost the company’s top and bottom lines. Impressively, Ralph Lauren’s sales topped the Zacks Consensus Estimate for the fifth consecutive quarter now. Moreover, the company boasts a VGM Score of B and long-term expected earnings growth rate of 10.3%.

Better-Ranked Consumer Discretionary Stocks

Crocs, Inc. (CROX - Free Report) has an expected long-term earnings growth rate of 15% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

lululemon athletica inc. (LULU - Free Report) has an expected long-term earnings growth rate of 18.4% and a Zacks Rank #2 (Buy).

Columbia Sportswear Company (COLM - Free Report) , also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 8.9%.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>