Ralph Lauren (RL) Q3 Earnings Beat, Dips on Soft Sales

Ralph Lauren Corporation RL delivered third-quarter fiscal 2018 adjusted earnings of $2.03 per share beating the Zacks Consensus Estimate of $1.87 and increased 9.1% from the prior-year quarter. Notably, this marked the company’s 12th straight quarter of earnings beat.

The company’s better-than-expected results stemmed from stringent focus on key initiatives during the holiday season that resulted in lower discounting and better quality of sales.

On a reported basis, the company posted loss per share of $1.00, compared with earnings of 98 cents per share in the prior-year quarter. Reported earnings for the quarter primarily included restructuring and other charges associated with the company’s Way Forward plan as well as the impact of tax reform.

Ralph Lauren Corporation Price, Consensus and EPS Surprise

Ralph Lauren Corporation Price, Consensus and EPS Surprise | Ralph Lauren Corporation Quote

Despite earnings beat, the company’s shares declined 6.4% in the pre-market trading session mainly due to the lower-than-expected revenues. Moreover, this Zacks Rank #3 (Hold) stock has surged a solid 51.4% in the last three months, outperforming the industry's growth of 21.9%.

Revenues

Net revenues of this luxury apparel retailer was down 4.2% year over year to $1,641.8 million. Further, it lagged the Zacks Consensus Estimate of $1,648 million. On constant-currency basis, revenues declined 6%, which was at the higher end of the company’s guidance of 6-8% fall. The sales lag was mainly due to the company’s efforts to improve quality of sales, decrease promotions and elevate distribution, alongside brand exits and diminished consumer demand.

During the quarter, foreign currency aided revenue growth by nearly 190 basis points (bps) owing to favorable currency rates. This was above the company’s guidance of 160-170 bps positive impact.

Segment Details

North America: During the third quarter, revenues at this segment slumped 11% to $886 million due to lower retail and wholesale sales. Lower sales in these channels can be attributed to distribution and brand exits; planned reduction in shipments and promotions to enhance the quality of sales; and lower customer demand. On a currency-neutral basis, comparable store sales at this division tumbled 10%. This included a drop of 3% in stores and 27% plunge in e-commerce sales, which were hampered by the planned reduction in promotional activities and fall in traffic.

Europe: Revenues for this segment rose 8% year over year to $378 million, while currency-neutral revenues were flat. Currency neutral comps dropped 8%, including 9% decline in stores and 1% fall in e-commerce. The decline primarily reflected increased focus on improving quality of sales by lowering promotions.

Asia: Revenues at this segment jumped 7% in both reported and constant-currency basis, to $251 million. The upside was driven by strong retail and wholesale sales. Comps rose 3% on a currency neutral basis, thanks to increased conversion, average unit retail and the number of transactions.

Margins

Ralph Lauren's adjusted gross profit margins expanded 250 bps to 60.7%, driven by efforts to enhance quality of sales through lower promotions, favorable geographic and channel mix shifts, as well as reduced product costs. Additionally, foreign currency aided gross margins by 30 bps.

Adjusted operating income margin expanded 40 bps to 13.2%. The year-over-year increase can mainly be attributed to gross margin expansion and 50 bps benefit from foreign currency, offset by increased fixed expenses.

Financials

Ralph Lauren ended the quarter with cash and short-term investments of $2,038 million, total debt of $589 million and total shareholders’ equity of $3,407.5 million. Inventory declined 16.1% to $825.4, million as of Dec 30, 2017. This was backed by enhanced operating methods.

Further, the company incurred $48 million as capital expenditure in the quarter under review. Capital expenditures are now estimated to be roughly $200 million in fiscal 2018, compared with the previous forecast of $225 million.

Store Update

As of Dec 30, 2017, Ralph Lauren had 481 directly-operated stores and 628 concession shops globally. The directly-operated stores included 113 Ralph Lauren, 78 Club Monaco and 290 Polo factory stores.

Additionally, the company’s global licensing partners operated 87 Ralph Lauren stores and 62 Club Monaco stores, bringing the total number of licensed stores to 149. Additionally, the company had 122 licensed concession shops in operation.

Guidance

Ralph Lauren provided outlook for the fourth quarter and adjusted operating margins guidance for fiscal 2018 to account for the recent positive movements in foreign currency rates.

The company expects fiscal fourth-quarter reported revenues to be down 8-10%, excluding currency impact. Operating margin for the fiscal fourth quarter is expected to decline 240-260 bps, on a currency neutral basis. The company expects foreign currency to benefit revenue growth by nearly 330 bps and operating margin by about 90 bps in the fourth quarter. Including ASU 2016-09, tax rate is expected to be nearly 3% for the fourth quarter driven by lower U.S. federal statutory income tax owing to the new tax reform.

For fiscal 2018, the company still expects revenue to decline 8-9%, excluding currency. The company now estimates foreign currency to aid revenue growth by nearly 100 bps, compared with the previous guidance of 80 bps positive impact. Operating margin is now expected to be 10-10.5% on a currency-neutral basis due to year-to-date performance. Earlier, the company had anticipated operating margin of 9.5-10.5%, excluding currency. Foreign currency is now expected to benefit operating margin by 30 bps, compared with a minimum effect anticipated earlier. The guidance for foreign currency gains was altered due to recent improvements in currency rates. Tax rate for fiscal 2018 is now estimates to be 23%, a decline from the previous guidance of 25%.

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