Ralph Lauren (RL) Down 9.8% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Ralph Lauren (RL). Shares have lost about 9.8% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Ralph Lauren Q3 Earnings & Sales Beat, Gross Margin Aids

Ralph Lauren’s earnings and sales beat trend continued in third-quarter fiscal 2020. The results benefited from consistent strength across all regions, led by Asia and Europe. In addition, a stringent cost discipline and continued investment in brand elevation and other strategic endeavors — including “Next Great Chapter” — aided the quarterly results.

Ralph Lauren reported adjusted earnings of $2.86 per share in the fiscal third quarter, which surpassed the Zacks Consensus Estimate of $2.45. The bottom line increased in double digits (up 23.3%) from the prior-year quarter.

On a reported basis, the company posted earnings of $4.41 per share, up from the year-ago quarter’s $1.48, reflecting triple-digit growth. The reported earnings primarily included restructuring and other charges, as well as impacts of tax reform.

Net revenues grew 1.4% year over year to $1,750.7 million and surpassed the Zacks Consensus Estimate of $1,715 million. On a constant-currency basis, revenues were up 2% from the prior-year quarter. The top line was driven by growth across all geographic regions, led by Europe and Asia. However, foreign currency hurt revenue growth by nearly 60 basis points (bps) in the fiscal third quarter.

Ralph Lauren's adjusted gross profit margin expanded 60 bps to 62.2%, both on reported and currency-neutral basis. Gross margin growth was driven by improved pricing and promotions, as well as positive geographic and channel mix.

Adjusted operating expenses increased 2% from the year-ago period to $843 million in the fiscal third quarter. Adjusted operating expense, as a percentage of sales, increased 50 bps to 48.2% on higher marketing investments and store expansion. Driven by gross margin expansion, adjusted operating income margin expanded 10 bps to 14%.

Segment Details

North America: During the quarter under review, the segment’s revenues rose 0.2% from the year-ago quarter to $910.6 million. The retail channel in the region delivered strong growth, with a 4% increase in comparable store sales (comps). Comps growth was backed by 4% improvement in brick-and-mortar stores and 6% rise at ralphlauren.com. However, revenues from North America wholesale declined 8% from the prior-year period.

Europe: The segment’s revenues improved 3% year over year to $437.8 million and currency-neutral revenues were up 5%. Comps at retail stores in Europe rose 3% from the year-ago period, driven by a 2% increase in brick-and-mortar stores and 15% rise in digital. Revenues for the segment’s wholesale business improved 2% on a reported basis and 5% in constant currency.

Asia: The segment’s revenues increased 5.4% from a year ago to $289.6 million on a reported and currency-neutral basis, backed by robust performance in the retail channel. Comps in Asia dipped 1% year over year, as growth in brick and mortar and digital channels was more than offset by decline in Hong Kong due to business disruptions. Excluding Hong Kong, comps improved 2% from the prior-year quarter.

Financials

Ralph Lauren ended the quarter with cash and short-term investments of $1,908.4 million, total debt of $694 million, and total shareholders’ equity of $3,116.5 million. Inventory dipped 1% from a year ago to $905 million at the end of the fiscal third quarter. In constant currency, inventories were flat year over year due to strong sell-throughs, improved product assortment and supply-chain initiatives.

The company incurred capital expenditure of $216 million in the first nine months of fiscal 2020. It repurchased Class A shares worth $98 million in the fiscal third quarter. It has nearly $732 million remaining under the currently authorized share repurchase program.

As of Dec 28, 2019, Ralph Lauren had 532 directly-operated stores and 655 concession shops globally. The directly-operated stores included 138 Ralph Lauren, 76 Club Monaco and 318 Polo factory. Additionally, the company operated 257 licensed stores globally.

Guidance

For fiscal 2020, Ralph Lauren retained the net revenue growth target of 2-3% on a currency-neutral basis. The guidance includes negative impacts from tariffs and business disruptions in Hong Kong. However, it does not include any potential impact from coronavirus outbreak in Asia, as the company is closely monitoring the situation with regard to employees, customers and supply chain. It now expects operating margin expansion, in constant currency, at the higher end of the prior guidance range of 40-60 bps.

Foreign currency is now expected to hurt revenue growth and operating margin expansion by 110-130 bps and 10 bps, respectively. Tax rate for the fiscal year is estimated to be 20%.

For the fiscal fourth quarter, management envisions net revenues to be slightly up on both reported and constant-currency basis. Foreign currency is expected to mar revenue growth by 50 bps. Moreover, operating margin is anticipated to increase marginally, in both reported and constant-currency basis. This will include a minimal impact from currency. Tax rate for the fiscal fourth quarter is envisioned to be 26%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -43.88% due to these changes.

VGM Scores

At this time, Ralph Lauren has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. 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 B. 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 indicates a downward shift. Notably, Ralph Lauren has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.