Why Is Ralph Lauren (RL) Down 1.5% Since Last Earnings Report?

A month has gone by since the last earnings report for Ralph Lauren (RL). Shares have lost about 1.5% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Ralph Lauren Q4 Earnings & Revenue Beat on Brand Strength

Ralph Lauren posted impressive fourth-quarter fiscal 2022 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate and improved year over year. Results have gained from brand strength and high-potential product categories across all regions, as well as expansion across all channels. It also launched the Morehouse and Spelman college collection in the quarter.

Ralph Lauren reported adjusted earnings per share of 49 cents in the fiscal fourth quarter, surpassing the Zacks Consensus Estimate of 30 cents. The bottom line advanced 29% from the prior-year quarter’s 38 cents.

Net revenues grew 18% year over year to $1,523 million and beat the Zacks Consensus Estimate of $1,452 million. On a constant-currency basis, revenues were up 22% from the prior-year quarter. The uptick was attributable to double-digit growth across all regions. This was partly offset by the impacts of 360 basis points (bps) from adverse currency rates.

The company’s global digital ecosystem witnessed year-over-year low-double-digit revenue growth and revenue growth of more than 80% on a two-year basis. This was driven by strength across owned and wholesale digital channels globally.

Segmental Details

North America: In the fiscal fourth quarter, the segment’s revenues advanced 19% from the year-ago quarter to $674 million. Comparable store sales (comps) for North America’s retail channel improved 21%, including a 19% increase in brick-and-mortar stores and 27% growth in digital commerce. Revenues from the North America wholesale business grew 1% year over year.

Europe: The segment’s revenues grew 26% year over year to $467 million, with a 34% improvement in currency-neutral revenues. Comps for the retail channel in Europe were up 77%, owing to a 145% increase in brick-and-mortar stores, which more than offset the 2% decline in digital sales. Revenues for the segment’s wholesale business rose 5% on a reported basis and 12% at constant currency.

Asia: The segment’s revenues increased 20% year over year to $346 million on a reported and 26% on a currency-neutral basis. Comps in Asia were up 12%, backed by 10% growth in brick-and-mortar stores and a 46% increase in the digital business.

Margins

Ralph Lauren's adjusted gross profit margin expanded 40 bps year over year to 63%. However, the metric was hurt by an unfavorable currency of 80 bps. The increase was driven by solid AUR growth across all regions and channels, which more than offset higher freight, raw materials and labor costs. The adjusted gross margin expanded 420 bps from fourth-quarter fiscal 2020, owing to solid AUR growth.

Adjusted operating expenses increased 19% from the year-ago period to $910 million in the fiscal fourth quarter. This growth was driven by higher marketing investments as well as compensation and selling expenses to aid both near and long-term growth. Adjusted operating expenses, as a percentage of sales, expanded 30 bps to 59.8% in the reported quarter.

The company’s operating income was $54.2 million, up 23% from $44.1 million in the year-ago quarter. The adjusted operating margin expanded 20 bps year over year to 3.6%. The metric was hurt by a negative foreign currency of 120 bps.

Financials

Ralph Lauren ended the quarter with cash and short-term investments of $2,598.4 million, the total debt of $1.6 billion, and total shareholders’ equity of $2,536 million. Inventory grew 29% year over year to $977.3 million.

The company repurchased Class A shares for about $150 million in the fiscal fourth quarter. This resulted in $1.6 billion available for share repurchase under the company’s existing program. Management also approved a dividend hike of 9%. It will now pay a dividend of 75 cents on Jul 15 of shareholders’ record as of Jul 1.

Capital expenditure in fiscal 2022 was $167 million. Management expects capital expenditure of $290-$310 million for fiscal 2023.

Store Update

As of Apr 2, 2022, Ralph Lauren had 504 directly operated stores and 684 concession shops globally. The directly operated stores included 175 Ralph Lauren and 329 Polo factory stores. The company operated 148 licensed stores globally.

Outlook

Management issued the first-quarter and fiscal 2023 guidance based on the current supply-chain condition, inflationary pressures, the war in Ukraine, COVID-19 variants and other COVID-related disruptions. It expects the ongoing uncertainty to continue, which might impact market recovery. The company also takes into account the potential for a further resurgence of the coronavirus outbreak and the possibility of global supply-chain disruptions.

For fiscal 2023, RL anticipates revenue growth in the high-single digits or 8% year over year on a cc basis, on a 52-week comparable basis. This includes a 400-bps negative impact of unfavorable currency. On a 53-week comparable basis, the metric is likely to be hurt by an unfavorable currency of 100 bps.

The operating margin is forecast to be 14-14.5% at cc, which includes a negative impact of unfavorable currency of 130 bps. This compares favorably with last year’s reported operating margin of 13.1% on a 52-week comparable basis and 13.4% on a 53-week basis.

The gross margin is envisioned to expand 30-50 bps at cc on a 52-week comparable basis, driven by solid AUR growth, and positive product and channel mix, which is expected to more than offset higher freight and product cost inflation. However, unfavorable currency is likely to hurt the metric by 110 bps.

For the first quarter of fiscal 2023, the company expects year-over-year revenue growth of 8% at cc. This includes a 480-500 bps impact of unfavorable currency. The view also considers government-mandated lockdowns and other COVID-related restrictions, particularly in China.

The company anticipated an operating margin of 13.5% at cc, which includes the negative impacts of higher freight and marketing expenses, which are likely to reduce in the second half of fiscal 2023. The metric is expected to be hurt by 130 bps of unfavorable currency. The gross margin is predicted to decline year over year at cc due to rising freight and product costs, offsetting continued AUR growth. Unfavorable currency impacts of 100 bps are likely to dent the gross margin.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

The consensus estimate has shifted -21.87% due to these changes.

VGM Scores

At this time, Ralph Lauren has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. 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 #3 (Hold). We expect an in-line return from the stock in the next few months.

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