Here's Why Investors Are Shying Away From Ralph Lauren (RL)

Major designer, marketer and distributor of premium lifestyle products, Ralph Lauren Corporation (NYSE:RL) has seen its shares slump 35.8% over the past six months, underperforming the Zacks categorized Textile – Apparel Manufacturing industry’s decline of 13.4%. More recently, we noted that this Zacks Rank #4 (Sell) company has lost nearly 5%, despite reporting better-than-expected earnings in fourth-quarter fiscal 2017. So, what is it that’s weighing upon investors’ sentiment? Let’s find out.



While the company came up with its ninth straight earnings beat in fourth-quarter fiscal 2017, revenues fell year over year and missed our estimates. This mainly resulted from the company’s initiatives to reduce excess inventory, along with sluggish traffic. Moreover, foreign currency continued to have an adverse impact on Ralph Lauren’s performance. Incidentally, currency has long been a hurdle for Ralph Lauren, given its international exposure.

Going forward, management expects all the aforementioned headwinds to linger and impact results in fiscal 2018. Taking a look at the impact from currency woes, the company estimates currency headwinds to reduce revenues growth by nearly 225 basis points (bps) and operating margin rate by about 75 bps, in the first quarter. Further, fiscal 2018 revenues and operating margin growth are expected to be hampered by currency woes to an extent of 150 bps and 50 – 75 bps, respectively.

Consequently, management projected revenues to decline 8–9% in fiscal 2018 and in low double-digits in the first quarter. Also, Ralph Lauren revealed plans to adopt the Accounting Standard Update (ASU) for the accounting of employee share-based payments, which was recently issued by the Financial Accounting Standards Board (FASB). This is likely to raise the effective tax rate in fiscal 2018, with the first and second quarters bearing the maximum impact – which remains a concern for the bottom line. Incidentally, effective tax rate for fiscal first quarter is anticipated to be 33%, while that for fiscal 2018 is expected to be 28%. Excluding this impact, the tax rate would have been 25%.

Apart from hurting investors’ sentiment, these factors have also caused a downtrend in the Zacks Consensus Estimate for fiscal 2018. Evidently, our estimate for the fiscal has declined from $5.14 to $4.78, over the past 30 days. Additionally, Ralph Lauren remains vulnerable to intense competition, as failure to offer high-quality distinguished products at a better price may hamper its market share thus impacting performance negatively.

However, the company’s solid brand portfolio, restructuring efforts and focus on profitable areas remain the driving factors. Also, Ralph Lauren is on track to achieve its cost saving goals under its Way Forward plan. Nevertheless, we remain cautious about the stock, given the aforementioned hurdles.

So, for the time being, you can shift your focus to better-ranked stocks like Cherokee Inc. (NASDAQ:CHKE) with a Zacks Rank #1 (Strong Buy), and Tailored Brands, Inc. (NYSE:TLRD) and Gildan Activewear Inc. (TO:GIL) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cherokee has an average positive earnings surprise of 165.7% in the trailing four quarters. The stock also has a long-term growth rate of 15%.

Gildan Activewear, with long-term earnings per share growth rate of 12.3%, has delivered positive earnings surprise in the last two quarters.

Tailored Brands has a long-term growth rate of 15%. Also, it has witnessed positive estimate revisions for the current fiscal, over the past 30 days.

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