Ralph Lauren (RL) Tops Q2 Earnings, Reiterates FY17 View

Ralph Lauren Corporation (NYSE:RL) reported second-quarter fiscal 2017 adjusted earnings of $1.90 per share that fared better than the Zacks Consensus Estimate of $1.70 but declined 10.8% from $2.13 reported in the prior-year quarter.

In response, the company’s shares rose nearly 2% in the pre-market trading session.

On a reported basis, the company posted earnings of 55 cents per share against $1.86 earned in the prior-year quarter. Reported earnings for the quarter primarily included restructuring and other charges associated with the company’s Way Forward plan, which was announced in Jun 2016.

Way Forward Plan

Under its Way Forward plan. Ralph Lauren’s management expects to generate annualized cost savings worth $180–$220 million, on the back of its fiscal 2017 restructuring activities. These restructuring activities include rightsizing the portfolio and cost-structure, alongside streamlining the structure of the organization. Further, the company expects to incur $400 million and $150 million by the end of fiscal 2017, on account of these restructuring charges and inventory charge associated with the company’s Way Forward Plan, respectively.

Revenues

Net revenue of this luxury apparel retailer was down about 8% year over year to $1,821 million and slightly short of the Zacks Consensus Estimate of $1,829 million. On a currency-neutral basis too, revenues fell nearly 8% in the quarter. Quarterly revenue growth was in line with the company’s guidance of a mid-to-high single-digits decline.

During the quarter, reported revenues for the International business increased 2%, offset by a 12% fall in North American revenues.

Segment-wise, Wholesale revenues witnessed a 10% decline year over year to $831 million, both on a reported and currency-neutral basis. The decline in Wholesale revenues is attributed to the soft performance in North America due to lowered shipments as part of its Way Forward plan, partly compensated by a rise in Europe.

Reported Retail revenues dipped nearly 5% to $942 million, while currency-neutral revenues fell 6% owing to a decline in comparable-store sales (comps), which were down 8% on a reported basis and 9% in constant-currency. The decline in comps was mainly attributed to reduced traffic partly negated by diminished markdowns.

Licensing revenues increased 2% to $48 million on a reported basis, while the same remained nearly flat in constant-currency.

Margins

Ralph Lauren's adjusted gross profit margins expanded 40 basis points (bps) to 56.9%, owing to favorable geographic and channel mix shifts and early efforts under its Way Forward plan to lower product costs and enhance the quality of sales metrics. However, the improvement was partly neutralized by foreign currency headwinds.

Adjusted operating income margin contracted 110 bps to 12.4% but fared better than the previously guided 200–250 bps decline. The better-than-expected operating margin was primarily owing to international quality of sales initiatives, higher inventory productivity and a change in the timing of operating expenses. However, operating margin comparisons suffered due to fixed expense deleverage, offset by gross margin gains.

Financials

Ralph Lauren ended the quarter with cash and investments of $965 million, long-term debt of $597 million and total shareholders’ equity of $3,598 million.

Store Update

At the end of second-quarter fiscal 2017, Ralph Lauren had 485 directly-operated stores and 620 concession shops across the globe. The directly-operated stores included 128 Ralph Lauren, 82 Club Monaco and 275 Polo factory stores.

Additionally, the company’s global licensing partners operated 102 Ralph Lauren stores and 59 Club Monaco stores, bringing the total number of licensed stores to 161. Additionally, the company had 97 licensed concession shops in operation as of Oct 1, 2016.

Guidance

Ralph Lauren provided its outlook for third-quarter while it reiterated its fiscal 2017 guidance. The company expects fiscal third-quarter reported revenues to be down in the low-double digits to down low-teens range. This is expected to be driven by smooth execution of its quality of sales actions, lowered inventory receipts and fleet optimization plans in sync with its Way Forward plan. Though the company anticipates currency headwinds to have lesser impact on the company’s revenue growth, it is likely to reduce gross margin by about 120 bps.

Operating margin for the upcoming quarter is expected to contract about 200–250 bps from last year, as the timing shift in operating expenses will pressure third-quarter margins, with synergies from the cost savings initiatives under the Way Forward plan anticipated to be realized in fourth-quarter. Effective tax rate is projected at 29%.

Coming to fiscal 2017, the company reiterated its low double-digit percentage revenue decline forecast, in line with its Way Forward plan. The fall is likely to reflect from an intentional pullback in inventory receipts, closing of stores, harmonizing pricing and other quality of sale initiatives. However, the company expects currency to bear minimal effect on its fiscal 2017 revenues, based on current exchange rates.

Further, the company anticipates operating margin for fiscal 2017 at 10% reflecting a rise in new store expenses, negative currency impacts, infrastructure investments and fixed expense deleverage, offset by synergies from cost-saving actions. The company expects an effective tax rate of 29%.

Additionally, the company stated that its fiscal third-quarter and fiscal 2017 guidance excludes any impact from the Way Forward Plan related charges.

Zacks Rank

Currently, Ralph Lauren carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the related industry include Duluth Holdings Inc. (NASDAQ:DLTH) , Zumiez Inc. (NASDAQ:ZUMZ) and The Gap Inc. (NYSE:GPS) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Duluth Holdings, with a long-term earnings growth rate of 25%, has surged nearly 92.2% year-to-date.

Zumiez has jumped 58.7% year-to-date. The stock has a long-term earnings growth rate of 15%.

Gap has gained nearly 11% year-to-date. Moreover, it has a long-term earnings growth rate of 9.4%.

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