Ralph Lauren (RL) Stock Up On Q2 Earnings And Sales Beat

Ralph Lauren Corporation (NYSE:RL) RL reported a solid first-quarter fiscal 2017 as the top and bottom lines cruised ahead of the respective Zacks Consensus Estimate. In response, the company’s shares rose over 6% in the pre-market trading session and opened to trade at up nearly 8%.

Adjusted earnings of $1.06 per share fared better than the Zacks Consensus Estimate of 89 cents but declined 2.8% from $1.09 reported in the prior-year quarter.

On a reported basis, the company posted a loss of 27 cents per share against earnings of 73 cents in the prior-year quarter. Reported earnings for the quarter primarily included restructuring, impairment and inventory charges related to the company’s recently announced restructuring actions.

Quarterly Highlights

Net revenue of this luxury apparel retailer was down 4% year over year to $1,552 million but ahead of the Zacks Consensus Estimate of $1,528 million. On a currency-neutral basis too, revenues fell 4% in the quarter. Quarterly revenue growth was in line with the company’s recently provided guidance of a mid-single-digit decline.

During the quarter, reported revenues for the International business increased 10%, offset by an 11% fall in North American revenues.

Segment-wise, Wholesale revenues witnessed a 5% decline year over year to $607 million, both on a reported and currency-neutral basis. Similarly, reported and currency-neutral Retail revenues dipped nearly 3% to $907 million, while licensing reported and currency-neutral revenues were down 8% to $38 million.

Consolidated comparable-store sales (comps) at the retail division were down 7% on a constant currency basis, and 6% on a reported basis owing to challenging traffic trends.

The decline in Wholesale revenues is attributed to the soft performance in North America due to adverse traffic trends in the U.S. department store channel, partly compensated by a rise in Europe. In Retail, sales were hurt by a fall in comps, offset by improved non-comparable store sales.

Ralph Lauren's adjusted gross profit margin expanded 130 bps to 61.1%, owing to favorable sales mix shifts, fall in product costs and a rise in Asia due to actions to enhance the quality of sales metrics.

Adjusted operating income margin contracted 60 bps to 8.2% but fared better than the previously guided 110–160 bps decline. The better-than-expected operating margin was mainly due to better inventory control actions and a favorable product mix. However, operating margin comparisons suffered due to fixed expense deleverage and gross margin pressures.

Financials

Ralph Lauren ended the quarter with cash and investments of $1.2 billion, long-term debt of $602 million and total shareholders’ equity of $3,566 million.

During the reported quarter, Ralph Lauren deployed $78 million toward capital expenditure. Also, the company repurchased shares worth $100 million during the quarter, with about $200 million remaining under the current authorization.

Store Update

At the end of first-quarter fiscal 2017, Ralph Lauren had 485 directly operated stores and 598 concession shops across the globe. The directly operated stores included 132 Ralph Lauren, 81 Club Monaco and 272 Polo factory stores. This took the company’s net new directly operated stores’ count to 18 and net new concession shops’ count to 40.

Additionally, the company’s global licensing partners operated 96 Ralph Lauren stores, 17 dedicated shops as well as 134 Club Monaco stores and shops as of Jul 2, 2016.

Guidance

Ralph Lauren provided its outlook for the second quarter and fiscal 2017. The company expects fiscal second quarter reported revenues to be down in the mid-to-high single-digits range, with minimal impact from currency headwinds at current exchange rates. Operating margin for the upcoming quarter is expected to contract about 200–250 bps from last year, while the effective tax rate is projected at 29%. The company expects the initiatives related to its Way Forward Plan to bear a greater effect on its second half fiscal 2017 results than the second-quarter results.

Coming to fiscal 2017, the company reiterated its low double-digit percentage revenue decline forecast. The fall is likely to reflect from an intentional pullback in inventory receipts, closing of stores, harmonizing pricing, and other quality of sale initiatives, along with challenging retail traffic trends and a highly promotional retail backdrop. 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%.

The company also stated that its fiscal second-quarter and fiscal 2017 guidance excludes any impact from the Way Forward Plan related charges.

Zacks Rank

Currently, Ralph Lauren carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the related apparel/shoe industry include American Eagle Outfitters (NYSE:AEO) Inc. AEO, DSW Inc. DSW and Nordstrom Inc (NYSE:JWN). JWN, each carrying a Zacks Rank #2 (Buy).