Luxury lifestyle company Ralph Lauren (NYSE:RL) is scheduled to report its Q1 fiscal 2014 results on August 7, 2013. We expect the company to post modest growth as currency headwinds will impact its top-line growth. Moreover, its profits are expected to decline in Q1 on account of accelerated investments in growth strategy, the integration of Chap’s sportswear business and adverse currency impacts. We believe sales growth in the wholesale channel will outpace Ralph’s overall revenue growth in Q1.
We expect Ralph Lauren’s top-line growth to accelerate in the long run due to its growth strategies such as expansion in retail footprint, e-commerce channel, and new product categories (such as Denim & Supply and accessories). In addition, a more comparable base will boost RL’s top-line growth as it laps the discontinuation of its several businesses in the future.
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Recap of Q4 fiscal 2013 results
Ralph Lauren saw net revenue growth of 1% annually in Q4 fiscal 2013 to $1.6 billion. Excluding the strategic changes associated with store closures in China, the discontinuation of American Living and adverse currency impacts, revenue grew by about 4% annually in Q4. The revenue growth failed to meet initial expectations as early spring merchandise sales were affected by cold weather and currency headwinds.
Profits showed a marked improvement in Q4 2013. Gross margin grew by 220 basis annually to 59.3% owing to a decline in raw material costs, a favorable sales mix and operational discipline. Operating expenses as a percentage of revenues also improved by 50 basis points annually for the quarter.
Profits expected to decline in the first half of fiscal 2014
Ralph Lauren aims to step up its investments in fiscal 2014 in areas such as retail store expansion, e-commerce capabilities, and management information systems. These strategic investments will impact its profits during the year. In addition, operating margin in the first half is expected to be impacted by factors such as the integration of Chap’s sportswear business and a significantly weaker yen.
Sales trend in different geographies
The Americas region, which comprises over 65% of Ralph Lauren’s sales, is a strong growth market for the company. In fiscal 2013, the sales growth in this region was recorded at 4% with high growth across channels such as factory stores, wholesales stores, Club Monaco and e-commerce sites. We believe Ralph Lauren will continue to see strong growth in this geography in the coming quarters owing to its superior brand image.
European sales, which account for about 20% of RL’s revenues, showed some weakness in fiscal 2013 due to macro headwinds in the region. However, it showed positive growth in the previous two quarters driven by higher retail sales. We will keep a close eye on the European results this quarter to see the company’s sales trend in this region. We expect wholesale shipments in this geography to be down in annual terms in Q1 2014 due to persisting macroeconomic challenges in Southern Europe.
Sales growth at the wholesale channel could outpace overall revenue growth
Growth in Ralph Lauren’s wholesale channel sales has lagged behind that of its retail segment in the past few quarters owing to the company’s strategy to expand its direct-to-consumer business. However, we expect the wholesale channel to post slightly higher growth compared to the retail segment in Q1. The recent integration of Chaps sportswear business from a licensed business to a directly managed wholesale business will boost revenue growth at the wholesale channel. In addition, currency headwinds are expected to impact the retail segment in a more pronounced manner compared to the wholesale channel in Q1 fiscal 2014.
Our $187 price estimate for Ralph Lauren’s stock is broadly in-line with the current market price.