Ralph Lauren Earnings Preview: Strength In Wholesale Segment Likely To Offset Slow Growth In Retail

Luxury lifestyle company Ralph Lauren (NYSE:RL), is scheduled to report its Q4 fiscal 2013 results on May 9. We expect the company’s revenues to grow at a slightly accelerated rate of  around 10-11%, compared to a 9% growth in the third quarter. The company’s wholesale operations should grow more than its retail operations, which is likely to be impacted negatively by exchange rate fluctuations and discontinued operations. For the full-year, we expect revenue growth to be near the higher end of the company’s guidance of 5%-7% growth, due to the unexpectedly strong performance of the wholesale segment over the fiscal year.

We expect Ralph Lauren’s top line growth to accelerate in the long run due to its growth strategies such as expansion in the retail footprint, e-commerce channel and new product categories (such as Denim & Supply and accessories). In addition, we expect the company to acquire a more comparable base to boost its top line growth, as it discontinues unproductive businesses and streamlines its supply-chain arrangements.

See our complete analysis for Ralph Lauren

Recap Of Q3 Fiscal 2014 Results

Ralph Lauren’s revenue grew by 9% annually in Q3 to reach $2 billion. The growth in sales was uniform across all merchandise categories and supported by strong trends across every major geographic region. The company also managed to cut down on its expenses despite making several investments in long term initiatives, which shows the discipline in its operations management. Gross profit margin dropped by 1.1% compared to the previous year, feeling the impact of unfavorable currency dynamics and the integration of the low-priced Chap’s menswear line into the company sales mix. Operating expenses were 120 basis points lower year-on-year, as disciplined operational management allowed the company to cut down on expenses while increasing revenues at the same time. Operating income was $334 million and operating margin was 16.6%, 10 basis points higher than the prior year. ^[1]

Wholesale revenues jumped by an impressive 14% to $840 million, driven by the strong performance in North American operations, the addition of Chaps menswear operations and improved trends in Europe. The retail segment sales increased by 6% to $1.1 billion in the third quarter, reflecting contribution from new stores and comparable store sales growth. Excluding the impacts of discontinued businesses and negative foreign currency effects, retail sales increased 10%. ^[1]

High Revenue Growth Expected In The Second Half Of Fiscal 2014

In the Earnings Call of Q2 Fy14, the company’s CFO Christopher H Peterson said, “Based on the timing of our specific projects, we’ve characterized fiscal 2014 as a tale of 2 halves, with modest sales growth and outsized investment spending in the first half of the year, transitioning to accelerated revenue and profit growth in the second half of the year.”

He cited three key drivers supporting the company’s revenue outlook: 1) expected growth in wholesale orders for the back half of the year, 2) improved contribution from recently transitioned stores in Australia and New Zealand, and 3) strong customer response to the fall assortments in both wholesale and retail channels. ^[2]

Wholesale Outlook Strong

Wholesale revenues grew 14% to $840 million in the third quarter. Growth was primarily a result of the contribution from the newly transitioned Chaps men’s sportswear operations and continued growth in North American merchandise categories, which continue to gain market share. Growth in Ralph Lauren’s wholesale channel sales had lagged behind that of its retail segment in the past few quarters owing to the company’s strategy to expand its direct-to-consumer business. However, we expect the recently integrated Chaps sportswear business from a licensed business to a directly managed wholesale business to boost revenue growth for wholesale channel. In addition, the retail segment is more sensitive to currency fluctuations as owing to its more diverse geographical distribution. For these reasons, we expect the wholesale segment to outperform overall sales growth for the company in Q4. ^[1]

Retail Segment Growth Expected To Be Slow

Retail segment sales rose 6% to $1.1 billion in the third quarter, dragging down the company’s overall growth. This drag in momentum was a reflection of the impact of discontinued businesses and unfavorable currency translations. Excluding the impact of these two factors, retail sales grew by 10% on a year-on-year basis. ^[1]

However, retail operating income of $223 million was 11% above the figure from the same period of fiscal 2013. This was primarily due to higher units per transaction at most of RL’s retail stores worldwide. The improvement in margin reflects the ability of RL’s operations management team to deliver profits even while increasing investments in new store rollouts and the expansion of e-commerce operations. Still, the company is likely to feel the impact of higher than expected restructuring related charges and the increased competition in the U.S. retail market in the post-holiday market. ^[1]

Our price estimate for Polo Ralph Lauren stands at $174, implying a premium of around 10% to the market price.

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1. Ralph Lauren’s Management Discusses Q3 2014 Results, Seeking Alpha, February 2014 [↩] [↩] [↩] [↩] [↩]
2. Ralph Lauren Management Discusses Q2 2014 Results, Seeking Alpha, November 2013 [↩]