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Soft North America Unit Hurts Ralph Lauren, Growth Plan Aids

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Ralph Lauren Corporation (RL - Free Report) is losing sheen for a while, thanks to persistent softness at its North America segment, particularly the digital business. Moreover, a volatile global retail backdrop along with adverse foreign currency translations remains a concern.

Quite apparent, shares of this leading designer and marketer of premium lifestyle products have lost 36.7% in a year, wider than the industry’s 18.6% decline.

Let’s Delve Deep

In first-quarter fiscal 2020, North America’s digital business performed below management’s expectations. Robust growth in digital pure players was more than offset by soft trends at Ralph Lauren and Wholesale Dot Com. Moreover, the digital business’ comparable store sales (comps) remained flat mainly on account of lower sales to international consumers due to currency headwinds and tighter import regulations in the major Asian markets. Also, select products, within Lauren and men's polo seasonal styles, hurt digital comps. Furthermore, certain product issues persisted during the first quarter, which weighed on the unit’s wholesale digital business.


 

The company anticipates decrease in international shoppers to hurt digital comps throughout fiscal 2020. Although management has been taking initiatives to drive growth at North America’s digital business, it will take time. Over the long term, the company expects the segment’s digital business to deliver low double-digit growth.

Meanwhile, Ralph Lauren remains exposed to adverse foreign currency translations, which are likely to persist in fiscal 2020. Currency hurt revenue growth by nearly 220 basis points (bps) in the first-quarter fiscal 2020. The same is expected to negatively impact revenues by 90-100 bps and operating margin by 10-20 bps in the fiscal year. For the fiscal second quarter, currency headwinds are expected to mar revenues by approximately 90-100 bps and operating margin by 20 bps.

The Next Great Chapter Initiative Looks Promising

While the aforementioned factors make us apprehensive, Ralph Lauren’s “Next Great Chapter” plan that was announced in June 2018 might provide some respite to investors. Notably, management stated that this strategy started off well in its first year.

The Next Great Chapter growth plan focuses on delivering sustainable long-term growth and value creation. The company expects to execute this plan through five strategic priorities including winning over a new generation of customers; energizing core products and accelerating under developed categories; driving targeted expansion in its regions and channels; leading digital; and operating with discipline to fuel growth.

As part of the plan, the company targets delivering low to mid-single digit revenue compounded annual growth rate (CAGR) and mid-teen operating margin by fiscal 2023, in constant currency. Additionally, it anticipates marketing expenditure to grow nearly 5% of revenues by fiscal 2023, while capital expenditure is expected to represent 4-5% of revenues. Furthermore, the company plans to return 100% free cash flow to its shareholders in the next few years, amounting to about $2.5 billion (on a cumulative basis) through fiscal 2023 via dividends and share repurchases.

Strength in Ralph Lauren’s international and digital businesses has further been driving the company’s performance. Management has elevated the brand in Asia, particularly Greater China, the company’s fastest growing market. In first-quarter fiscal 2020, constant-currency revenues in Greater China increased 12%, with 30% growth in Mainland China. Additionally, the company sees immense potential to expand in Europe, where it currently has only 36 full-price stores.

Expansion of digital platforms is a key aspect of Ralph Lauren’s growth strategy. Constant-currency digital revenues improved 1% in the reported quarter backed by nearly 10% growth in international regions, mostly offset by soft performance in North America. The company has been strengthening partnerships with digital pure players across international markets. These partnerships coupled with strong brand building efforts are likely to continue driving growth at digital business.

Though the company is currently witnessing soft trends in North America, its growth plan as well as digital and international businesses position it for growth in the long-run. Currently, Ralph Lauren carries a Zacks Rank #3 (Hold).

Key Picks in the Consumer Discretionary Space

Crocs, Inc. (CROX - Free Report) has an impressive 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.

Delta Apparel, Inc. (DLA - Free Report) , also a Zacks Rank #1 stock, has an expected long-term earnings growth rate of 15%.

Columbia Sportswear Company (COLM - Free Report) has a long-term earnings growth rate of 11.2% and a Zacks Rank #2 (Buy).

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