Ralph Lauren’s Profitability Carries Earnings But Gives Modest Guidance

Lifestyle company Ralph Lauren (NYSE:RL) posted net revenue of $1.6 billion in Q4 fiscal 2013, which represented an y-o-y increase of 1%. Excluding the impact of store closures associated with its China restructuring, the discontinuation of American Living and adverse currency effect, revenue rose by around 4% annually in Q4. The revenue growth failed to meet its initial guidance, as early spring merchandise sales were affected by cold weather and due to currency headwinds.

However, Ralph Lauren’s net income grew by 35% annually during the quarter to $127 million on account of improved profitability. Gross margin rose by 220 basis annually to 59.3%, driven by decrease in input costs, favorable sales mix and operational discipline. Operating expenses as percentage revenues also improved by 50 basis points annually due to better operational management.

We believe Ralph Lauren’s revenue growth will accelerate in the future on account of its strategic initiatives and a more comparable base as it laps the discontinuation of its several businesses in the future. The company forecasts revenue to rise by around 4%-7% in fiscal 2014, which includes 150 basis point net negative currency impact.

Ralph Lauren’s profitability is expected to drop in the near future on account of increased investments in store openings, weaker yen and integration of Chaps sport wear business.

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Revenue Growth Was Driven By Higher Retail Sales

In Q4 fiscal 2013, wholesale sales decreased by 4% annually on account of the discontinuation of American Living and a reduction in wholesale shipments to European customers. However, retail sales grew by 7% annually due to 4% rise in comparable stores sales (on a constant currency basis) and due to the contribution from new stores and e-commerce operations. The company saw strong sales growth at factory stores and e-commerce sites worldwide.

Update On Strategic Growth Initiatives

During fiscal 2014, Ralph Lauren plans to step up its investments in various growth strategies. It will expand its retail network and global e-commerce capabilities, and also upgrade its management information systems.

Ralph Lauren aims to open around 30 new stores during the year, primarily located in international markets. ^[1] High-end Ralph Lauren flagship stores as well as Polo stores are also expected to open in the coming years.

Within the e-commerce channel, Ralph Lauren’s plans include – opening a new e-commerce site in Korea, increasing the number of countries served through e-commerce in Europe and Asia, and expanding distribution capabilities.

With respect to infrastructure investment, Ralph Lauren will upgrade its ERP systems from current legacy systems to SAP in a phased manner during the year. The new system is expected to drive productivity and procurement savings post fiscal 2014.

Outlook for Q1 fiscal 2014

– Net revenue to rise by a low single-digit rate. Foreign currency translation is expected to have a net negative impact of 150 basis points.

– Wholesale sales are forecast to grow at a slightly higher rate than retail sales on account of integration of Chaps men’s sport wear business.

– Operating margin to be lower by 200-250 basis than the prior year due to increased investments in growth strategies, integration of Chap’s sportswear business, and adverse currency impact.

– Tax rate is forecast at 32%.

We are in the process of revising our price estimate for Ralph Lauren’s stock.

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1. Ralph Lauren Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, May 23, 2013 [↩]