Lifestyle company Ralph Lauren (NYSE:RL) is scheduled to report its Q4 2013 financial results on May 23, 2013. We expect Ralph Lauren to post strong sales growth this quarter with higher sales at factory stores, Club Monaco, e-commerce sites and North American wholesales stores. Moreover, the profitability is expected to improve on account of lower input costs and better expense management.
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While we expect Ralph Lauren to post strong sales growth in the Americas region, we will keep a close eye on European and Asian sales this quarter. We think the sales growth at retail segment will outpace overall revenue growth in the coming quarters as Ralph Lauren leverages its strategic initiative of growing its direct-to-consumer business.
Recap of Q3 2013 Results
In Q3 2013, Ralph Lauren posted revenue of $1.8 billion, which represented a y-o-y increase of 2%. Excluding the impact of strategic changes such as store closures associated with Asia Pacific restructuring plan, the discontinuance of American Living brand and adverse currency impact, revenue rose by 5% annually in Q3. These factors are also expected to weigh on the company’s financial results in the fourth quarter.
Ralph Lauren’s gross margin expanded by 220 basis points annually in Q3 2013 to 59.3%, on account of decline in input costs, favorable product mix and better expense management. Its operating margin also saw a 150 basis point increase to 16.5% in Q3. According to guidance provided by Ralph Lauren, operating margins in Q4 are expected to be around 125-150 basis points higher than the prior year in Q4 2013.
Sales Trend In Different Geographies
The Americas region, which accounts for over 65% of Ralph Lauren’s sales, continues to be a strong growth market for the company. In Q3 2013, the company’s revenue from Americas rose by 4% annually due to growth at various sales channels including factory stores, wholesales stores, Club Monaco and e-commerce sites. We expect Ralph Lauren to post continued growth in this geography in the coming quarters.
European sales, which comprise for around 20% of Ralph Lauren’s sales, showed some weakness in the first six months of fiscal 2013. However, in Q3 2013, they rose by 8% annually in constant currency terms driven by growth in retail sales. We will closely track European sales this quarter as higher sales in Q4 will indicate long term recovery in Ralph Lauren’s European operations. We expect the company’s European wholesale business to remain challenging in the near term on account of weak macro economic conditions in Southern Europe.
Asian sales have been hit in the recent past owing to Asia Pacific restructuring plan (wherein a large part of retail network in China was closed down) and weakness in concession stores at Japan and Korea. We think these headwinds will impact Asian sales in the fourth quarter as well. Moreover, the continued weakening of yen during January-March 2013, could also pose challenges to Asian sales this quarter.
Sales Growth At Retail Channel Will Outpace Overall Revenue Growth
Ralph Lauren is expanding its direct-to-consumer business by opening more company-owned stores, e-commerce sites and converting its former licensing business to company-owned operations. The company has added 36 new factory stores during the last three fiscal year,s and recently started providing online sales in several countries including Italy, Greece, Spain and Portugal.
Ralph Lauren’s retail sales rose by 6% y-o-y in Q3 2013, as compared to 2% annual decline in wholesale sales on account of 4% comparable store sales growth coupled with the addition of new stores and growth in e-commerce sales. We think this trend will continue and the sales growth at retail segment will outpace overall revenue growth in the coming quarters.
Key Future Growth Strategies
The key future growth strategies for Ralph Lauren include Asian expansion as well as growing its e-commerce business and new product categories (such as Denim & Supply and accessories). Growth in China represents one of the major growth strategies for Ralph Lauren as it aims to open 60 new stores in Greater China during 2012-2014. We will closely track the company’s progress against these strategic initiatives during the fourth quarter.
Our near $190 price estimate for Ralph Lauren’s stock is broadly in line with the current market price.