Ralph Lauren Corporation (RL - Free Report) continued with its earnings and sales beat trend in second-quarter fiscal 2020. Results benefited from consistent strength in international markets. In addition, a stringent cost discipline along with continued investment in brand elevation and other strategic endeavors — including “Next Great Chapter” — aided the quarterly results.
Following the impressive quarterly performance, shares of this premium lifestyle product designer gained nearly 8.1% in pre-market trading. In the past three months, the Zacks Rank #3 (Hold) stock has gained 4% compared with the industry’s growth of 0.2%.
Q2 in Detail
Ralph Lauren reported adjusted earnings of $2.55 per share in the fiscal second quarter, which surpassed the Zacks Consensus Estimate of $2.39. The bottom-line figure also increased 12.8% from the prior-year quarter.
On a reported basis, the company posted earnings of $2.34 per share, up from the year-ago quarter’s $2.07. Reported earnings for the quarter primarily included restructuring and other charges.
Net revenues grew nearly 1% year over year to $1,706.2 million and outpaced the Zacks Consensus Estimate of $1,688 million. On a constant-currency basis, revenues were up 2%. The top line was mainly fueled by growth in Europe and Asia. However, foreign currency hurt revenue growth by nearly 130 basis points (bps) in the fiscal second quarter.
North America: During the quarter under review, the segment’s revenues dipped 1% to $881.2 million. The decrease primarily resulted from a 6% decline in North America wholesale revenues. However, the retail channel in the region delivered strong growth, with a 2% increase in comparable store sales (comps). Comps growth was backed by 2% improvement each in brick-and-mortar stores and ralphlauren.com.
Europe: The segment’s revenues improved 3% year over year to $480.2 million, while currency-neutral revenues were up 8%. Currency-neutral comps at retail stores in Europe rose 3%, driven by a 2% increase in brick-and-mortar stores and 13% rise in digital commerce. Meanwhile, revenues for the segment’s wholesale business improved 2% on a reported basis and 7% in constant currency.
Asia: The segment’s revenues increased 4% to $255.3 million and 5% in constant currency, backed by robust performance at the retail channel. Comps in Asia rose 1%, courtesy of growth in brick and mortar, and digital commerce channels. However, this was partly negated by soft performance in Hong Kong due to business disruptions. Notably, revenues in Hong Kong declined 27%.
Ralph Lauren's adjusted gross profit margin expanded 60 bps to 61.5%, driven by positive product, geographic and channel mix as well as improved pricing and promotions. Moreover, gross margin expanded 80 bps in constant currency.
Driven by gross margin expansion and adjusted operating expense leverage, adjusted operating income margin expanded 100 bps to 14.9%.
Ralph Lauren ended the quarter with cash and short-term investments of $1,589.5 million, total debt of $693 million, and total shareholders’ equity of $2,913.6 million. The company witnessed moderate inventory growth of 2% to $1,012.5 million at the end of the fiscal second quarter. This was driven by robust inventory optimization initiatives worldwide, which better aligned inventory with its sales outlook.
Moreover, the company incurred capital expenditure of $130.6 million in the first half of fiscal 2020.
It repurchased Class A shares worth $250 million in the fiscal second quarter. Following this, it had nearly $830 million remaining under the currently authorized share repurchase program. It also paid out dividends of about $101.9 million in the first half of fiscal 2020.
As of Sep 28, 2019, Ralph Lauren had 517 directly-operated stores and 653 concession shops globally. The directly-operated stores included 132 Ralph Lauren, 75 Club Monaco and 310 Polo factory. Additionally, the company operated 254 licensed stores globally.
For fiscal 2020, Ralph Lauren retained its net revenue growth target of 2-3% on a currency-neutral basis. However, the company now expects revenues to be at the lower end of this range due to the escalating headwinds in Hong Kong. Furthermore, operating margin is anticipated to expand 40-60 bps in constant currency, including the impacts of List 4 tariffs from China.
Foreign currency is now expected to hurt revenues and operating margin expansion by 130 bps and 20 bps, respectively. Tax rate for the fiscal year is estimated to be 22%.
For the fiscal third quarter, management envisions net revenues to be nearly flat on a constant currency basis. Foreign currency is expected to mar revenue growth by about 70-90 bps. Moreover, operating margin is anticipated to be between flat and down 20 bps in constant currency. This will include a minimal impact from currency. Tax rate for the fiscal third quarter is envisioned to be 21%.
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