Here's Why You Must Retain Ralph Lauren (RL) In Your Portfolio

Ralph Lauren Corp. (NYSE:RL) stock has picked significant pace, following robust second-quarter fiscal 2020 results on consistent strength in international markets. Shares of the lifestyle product designer have gained 21.6% in the past three months, outpacing the industry’s 7.4% growth.

Notably, the company’s sales and earnings beat the Zacks Consensus Estimate and improved year over year in the fiscal second quarter. The stock is also getting a boost from a stringent cost discipline and margin expansion along with continued investment in brand elevation and other endeavors — including “Next Great Chapter”.

Factors Favoring the Stock

Ralph Lauren is making significant progress in bolstering international presence by continually expanding in underpenetrated markets. In the past two years, the company has expanded the brand in Asia, particularly China, and built strong business foundation by enhancing the quality of sales and profitability.

The company’s international business reported 7% top-line growth in constant currency (representing about 45% of total sales) in the fiscal second quarter. This included constant-currency revenue growth of 8% and 5%, respectively, in Europe and Asia.

Additionally, expansion of digital platforms is a key aspect of Ralph Lauren’s growth strategy. The company developed a winning digital ecosystem, including directly-operated flagship sites, wholesale digital, pure plays and social commerce.

Its constant-currency digital revenues improved in low-teens in the fiscal second quarter, backed by more than 30% growth in international regions and modest improvement in North America digital revenues. Notably, digital comps in North America improved 2% in the quarter, which was above management’s expectations and improved sequentially from the first quarter of fiscal 2020.

Further, the company witnessed average unit retail (AUR) growth of 2% across its direct-to-consumer network in the fiscal second quarter, driven by momentum in under-developed categories mainly on strength in denim. This is consistent with Ralph Lauren’s target of achieving low-single-digit AUR growth for fiscal 2020, with moderate increases throughout the fiscal year. AUR growth across all segments mostly aided gross margin expansion in the fiscal second quarter.

The company expects AUR to be incrementally stronger in the second half of fiscal 2020 compared with the first half. The improvement is expected to be fueled by price increases in select channels and categories as well as accelerated product mix shifts. Additionally, AUR will likely benefit from the company’s ongoing efforts to reduce promotions, which will likely improve the quality of sales and expand the brand globally across every distribution channel.

The aforementioned efforts have not only been boosting the company’s results but have also been keeping it on track with the “Next Great Chapter” plan, which focuses on delivering sustainable long-term growth and value creation.

Hurdles in Growth Path

Despite strong international growth, Ralph Lauren is witnessing softness in North America, resulting from a decline in the wholesale business in the region. Notably, underlying North America wholesale revenues were down in high-single digits in the fiscal second quarter, thanks to modest share declines in women’s category as Lauren’s brand underperformed the market.

Apart from the wholesale business, the North America segment’s top line was affected by reduced sales to international shoppers on its U.S. site. This has been the primary cause of soft digital sales in North America over the past few quarters. Management expects lower digital sales to international shoppers to hurt North America digital comps through the rest of fiscal 2020.

Further, disruptions in the Hong Kong business are partly hurting growth in the Asia segment. Notably, constant-currency revenues in Hong Kong were down 27% in the reported quarter. Results in Hong Kong were impacted by 48 full days of store closures in the fiscal second quarter due to heavy protests in the region. Additionally, reduced tourism in the region marred the top line. Declines in Hong Kong affected total comps in Asia by three points.

Wrapping Up

The above discussion shows that Ralph Lauren’s growth efforts are likely to keep the stock’s momentum going despite the headwinds. Further, the Zacks Rank #3 (Hold) company’s expected long-term earnings growth rate of 5.1% and a VGM Score of B speak well of its growth potential.

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