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Here's Why Ralph Lauren (RL) is Marching Ahead of the Industry

Ralph Lauren Corporation RL has been gaining from brand strength, solid demand and expansion across all channels. Also, a solid online show and strong AUR growth bode well. The company also announced the next phase of its Next Great Chapter: Accelerate plan.

Driven by these factors, the company delivered impressive second-quarter fiscal 2023 results. It reported the ninth straight earnings beat and the seventh consecutive revenue surprise in the fiscal second quarter. Net revenues grew 5% year over year to $1,579.9 million and beat the Zacks Consensus Estimate of $1,560 million. On a constant-currency (cc) basis, revenues were up 13% from the prior-year quarter. The metric gained from solid growth across all regions.

Consequently, management anticipates year-over-year revenue growth at cc in the high-single digits on a 52-week comparable basis for fiscal 2023. For the third quarter of fiscal 2023, the company expects year-over-year revenue growth of low to mid-single digits at cc.

We note that shares of this Zacks Rank #3 (Hold) company have gained 18.5% in the past three months compared with the industry’s 8.4% growth.

 

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

 

That said, let’s delve deeper into the factors driving the stock.

Factors Narrating RL’s Growth Story

Ralph Lauren remains on track with expanding digital and omni-channel capabilities through investments in mobile, omni-channel and fulfillment. In second-quarter fiscal 2023, digital business continued to be a key growth driver, with accelerated digital sales across all regions. The global digital ecosystem continued to witness robust growth, recording year-over-year mid-teen revenue growth. This includes mid-single-digit growth within owned Ralph Lauren and digital sites on top of more than 30% growth last year.

The company introduced additional digital sites in key markets, including Korea and Australia, in the fiscal second quarter. Revenues for the company’s owned digital sites rose year over year in the mid-single digits, driven by strong full-price selling stemming from a positive mix of products, investments in AI-powered targeting and consumer acquisition. Also, its online search grew year over year in the low-double digits and exceeded 50 million social media followers on a global basis.

Ralph Lauren continues to scale and expand its connected retail capabilities, including virtual selling appointments, “buy online, pick up in store” and endless aisle product availability. The company launched its first-ever full catalog Ralph Lauren mobile app during the holiday season, efficiently leveraging its connected retail capabilities to deliver the most personalized and content-rich platform.

The company’s average unit retail (AUR) increased 18% for second-quarter fiscal 2023, marking the 22nd straight AUR growth, driven by continued momentum. It has been navigating through the ongoing inflationary environment, driven by a favorable product mix and strong pricing power. Ralph Lauren earlier expected to deliver AUR above its annual long-term target of low to mid-single-digit growth through fiscal 2023, which will help mitigate mid to high-single-digit cost inflation.

The company’s strategy of product elevation, acquisition of full-priced consumers, and favorable channel and geographic mix, as well as ramping up its targeting and personalization efforts, is likely to support long-term AUR growth. This is likely to continue aiding gross margin growth. For fiscal 2023, the gross margin at cc is envisioned to expand 30-50 bps on a 52-week comparable basis, driven by solid AUR growth and positive product mix, which is expected to more than offset higher freight and product cost inflation.

Also, RL remains focused on its “Next Great Chapter plan,” which includes creating a simplified global organizational structure and rolling out improved technological capabilities. As part of the plan, it completed the transition of Chaps to a licensed business, concluding its portfolio realignment announced last year. The move will likely enable it to focus on core brands as part of the Next Great Chapter elevation strategy.

For fiscal 2023, RL earlier anticipated revenue growth in the high-single digits or 8% year over year (cc) on a 52-week comparable basis. For the third quarter of fiscal 2023, the company expects year-over-year revenue growth of low to mid-single digits at cc.

Headwinds to Overcome

Despite the upsides, all is not rosy for Ralph Lauren, as it continues to reel under increased product costs, higher freight and global supply-chain delays. This led to an adjusted gross profit margin contraction of 270 bps year over year on a reported basis and 80 bps on a cc basis in second-quarter fiscal 2023.

The adjusted operating margin contracted 370 bps year over year to 13.4%. Adjusted operating expenses increased 7% from the year-ago period to $809 million in the fiscal second quarter due to higher marketing investments, and compensation and selling expenses.

As a result, adjusted earnings per share of $2.23 declined 14.9% from the prior-year quarter’s $2.62. For fiscal 2023, the operating margin is forecast at the lower end of the earlier mentioned 14-14.5% (cc), which includes a negative impact of unfavorable currency of 200 bps.

Also, adverse impacts of foreign currency remain concerning. Notably, adverse currency rates hurt net revenues by 800 bps in second-quarter fiscal 2023. For fiscal 2023, the company expects adverse currency rates to hurt revenues by 730 bps. The operating margin is expected to be affected by 200 bps of unfavorable currency.

Meanwhile, the gross margin is forecast to be negatively impacted by 170 bps of unfavorable currency. For the fiscal third quarter, the unfavorable currency is likely to negatively impact revenues by 780 bps, the gross margin by 170 bps and the operating margin by 180 bps.

Bottom Line

Although freight and currency woes remain concerning, we believe that Ralph Lauren is well-placed for long-term growth on the back of brand strength, robust demand, solid online show and strong AUR growth. Also, a long-term earnings growth rate of 4.3% raises optimism in the stock.

Stocks to Consider

Some better-ranked companies from the Consumer Discretionary sector are lululemon athletica LULU, Boyd Gaming BYD and Crocs CROX.

lululemon presently carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 10.4%, on average. LULU has an expected long-term earnings growth rate of 20%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for lululemon’s current financial-year sales and earnings suggests growth of 26.7% and 26.8% from the year-ago period’s reported numbers, respectively.

Boyd Gaming currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 11.2%, on average. BYD has a long-term earnings growth rate of 12.8%.

The Zacks Consensus Estimate for BYD’s current financial year sales and EPS indicates growth of 4.4% and 11.7%, respectively, from the year-ago period’s reported levels.

Crocs currently has a Zacks Rank #2. CROX has a long-term earnings growth rate of 15%. The company has a trailing four-quarter earnings surprise of 18.2%, on average.

The Zacks Consensus Estimate for CROX’s current financial-year sales and earnings suggests growth of 51.5% and 23.7% from the year-ago period’s reported numbers, respectively.

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Ralph Lauren Corporation (RL) : Free Stock Analysis Report

lululemon athletica inc. (LULU) : Free Stock Analysis Report

Boyd Gaming Corporation (BYD) : Free Stock Analysis Report

Crocs, Inc. (CROX) : Free Stock Analysis Report

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