Earnings Preview: Retail Channel To Drive Ralph Lauren’s Top Line

Luxury lifestyle company Ralph Lauren (NYSE:RL) is scheduled to report its Q1 fiscal 2015 results on August 6. We expect the company’s revenues to grow at a lower rate of  around 3-5%, compared to a 14% growth in the fourth quarter. The company’s retail operations should grow more than its wholesale operations, where sales are likely to be flat with last year’s level. RL’s operating margin for the first quarter is expected to drop by over 3% compared to the first quarter last year, primarily due to higher operating expenses related to the timing of investments to support the company’s growth initiatives. Throughout fiscal 2014, RL focused on its long term growth objectives which include extending its direct-to-consumer reach through company-owned stores and e-commerce channel, expanding its international presence and developing the infrastructure to support that presence, and investment in new products and merchandise.

We expect Ralph Lauren’s top line to continue to grow as markets such as China and India are set to increase their spending on luxury items by 80% and 72% respectively over the 2013-2018 period. In addition, we expect the company to acquire a more comparable base to boost its top line growth, as it discontinues unproductive businesses and streamlines its supply-chain arrangements.

See our complete analysis for Ralph Lauren

Recap Of Q4 Fiscal 2014 Results

Ralph Lauren’s revenue grew by 14% annually in Q4 to reach $1.87 billion. The growth in sales was uniform across all merchandise categories and supported by strong trends across every major geographic region. The company also managed to cut down on its expenses despite making several investments in long term initiatives, which shows the discipline in its operations management. Operating income jumped by an impressive 24% to $225 million in the fourth quarter, which was achieved on top of a 33% increase in the prior year period. Operating margin improved 90 basis points to 12%, which was at the high-end of the outlook provided by the company in the previous quarter. ^[1] For the full year, operating income was $1.1 billion, implying a modest growth from the prior year. Operating margin declined 100 basis points to 15.2% due to an unfavorable foreign exchange rate and the mix impact from integrating the Chaps men’s sportswear operations.2014))

Wholesale revenues jumped by an impressive 24% to $983 million, driven by the strong performance in North American operations, the addition of Chaps menswear operations and improved trends in Europe. The retail segment sales increased by 5% to $884 million in the fourth quarter, reflecting contribution from new stores and comparable store sales growth in its international stores. ^[2]

Outlook For Fiscal 2015

For the full year fiscal 2015 period, the company guided for consolidated revenues to increase by 6% to 8%, led by retail segment growth. We expect RL’s fiscal 2015 operating margin to fall about 1-2% below fiscal 2014 level, due to investments in its strategic growth initiatives and infrastructure. The higher level of investment is reflected in the company’s capital spending plans. RL is planning approximately $400 million to $500 million in capital expenditures in fiscal 2015 to support its global direct-to-consumer and infrastructure investments, as well as wholesale shop development for the women’s Polo launch. ^[2]

Wholesale Outlook Stable

Wholesale revenues grew 24% to $983 million in the fourth quarter. ^[2]  This strong growth was driven by the strong momentum in core North American sales, where the company continues to gain market share, the addition of Chaps menswear operations and improved trends in Europe. Profitability also improved in this segment as operating margin was up 40 basis points due to strong profitability in the core operations which more than offset the mix impacts from the integration of Chaps men’s sportswear and negative foreign exchange effects. ^[2] Growth in Ralph Lauren’s wholesale channel sales had 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 think that RL has maxed out its growth potential in this segment. We expect revenue from sales to be at about the same level as last year. Any gains to the bottom line will have to come from reduction of costs and the elimination of operational inefficiencies.

Retail Segment Growth Expected to Pickup

Retail segment sales rose 5% to ~$890 million in the fourth quarter, dragging down the company’s overall growth. North America retail operations were negatively affected by the cold and late start to spring, and the Easter shift from March to April, which caused traffic to decline during the quarter. However, double-digit growth in European and Asian retail sales was strong enough to offset the losses in North America. Retail segment operating income was $51 million in the fourth quarter and the retail operating margin was 6.1%, 4% lower than the year before. The lower retail operating income margin reflects the expenditures made by the company on its global store expansion and e-commerce development efforts, and negative foreign exchange impacts. Retail operating margin was also affected by increased promotional activity in the U.S. However, retail sales are expected to pickup this year. The company is almost done with its investments in this segment and can now focus on growing its sales. Moreover, RL expects currency impacts to be neutral this year. Revenue generated from the recently opened stores will be incremental to the revenues from previous quarters and sales in the company’s international stores are expected to keep growing.

Our price estimate for Polo Ralph Lauren stands at $174, implying a premium of around 10% to the market price.

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1. Polo Ralph Lauren Q3 FY14  Earnings Call Transcript, Seeking Alpha, February 2014 [↩]
2. Ralph Lauren’s Q4 2014 Results Earnings Call, Seeking Alpha, May 2014 [↩] [↩] [↩] [↩]