Ralph Lauren Earning Preview: What We’re Watching

by Trefis Team
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Ralph Lauren (NYSE:RL) is scheduled to announce its Q3 fiscal 2012 financial results on Wednesday. [1] While the general consensus is that Ralph Lauren may show weaker earnings due to a decline in margins, we note that the company’s ability to hold up during the tough macro-economic conditions and the increased solid holiday spending during the holidays, could surprise some analysts. Ralph Lauren competes with premium apparel and accessories players like Coach (NYSE:COH), Liz Claiborne (NYSE:LIZ), Ann (NYSE:ANN) and other premium private labels.

See our complete analysis for Ralph Lauren here

Why is the market cautious?

The primary reason behind the market’s cautious view remains the concerns regarding uneasy macro-economic conditions prevailing in Europe. As Europe constitutes a sizable portion of Ralph Lauren’s international business, the market fears that promotions in Europe to drive sales may take a toll on Ralph Lauren’s margins, thus reflecting as a decline in its earnings.

What’s behind our sanguine view?

While we acknowledge that European economies woes could weigh in spending, we believe that the results could surprise. Last quarter amid concerns that an economic slowdown in Europe and China would lead to weak sales, the company posted stunning Q2 results with a growth of 24% in revenues and 21% in gross profits. On top of it, Ralph Lauren registered twice the growth in international revenues as compared to domestic revenues, thus effectively putting to rest all the concerns regarding its international endeavors.

Additionally, we believe that the company should also benefit from high luxury spending during holidays. As displayed by its prime competitor Coach in its recent earnings release, we also expect Ralph Lauren to benefit from luxury spending increase during the holidays. The company will also benefit from Chinese new year where the increase in luxury sales should benefit Ralph Lauren. Ralph Lauren announced the opening of flagship stores in Hong Kong, Shanghai and Beijing, which should also support margins this quarter as flagship stores carry higher margins compared to concession stores.

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Notes:
  1. Ralph Lauren to announce Q2 earnings on 8th February, Source: Ralph Lauren IR []
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