Ralph Lauren Earnings Preview: A Bright Future Could Lie Ahead For Ralph Lauren

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Ralph Lauren

Premium lifestyle brand, Ralph Lauren (NYSE:RL), is poised to report fiscal 2016 Q1 results on August 5. In the previous fiscal year, Ralph Lauren managed to deliver earnings surprises in three of the four quarters even against currency headwinds. Q4 2015 proved to be a lucrative quarter for the company, with revenues clocking in with a 7% increase year-on-year on a currency neutral basis. This stellar performance in the quarter can be credited to record sales in North America, solid growth across major categories such as men’s, women’s, and children’s, and new launches. We believe that Ralph Lauren is poised to continue on its growth trajectory even in this quarter and here’s why.

What Could Work In Fiscal 2016?

Let’s start by looking at the company’s top initiatives and selling points in the last quarter and full-year and what can be expected from these avenues going into Q1.

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—  Record sales in North America may not be sustained: Luxury spending in the U.S., to a large extent, has been reaping the benefits of a recovering economy. One such recipient of this has been Ralph Lauren, who saw an 8% increase in revenues on a currency-neutral basis in the Q4 2015. This growth came predominantly from wholesale and e-commerce avenues, both of which experienced double-digit growth rates. These channels, coupled with a growing U.S. economy, could work in Ralph Lauren’s favor even in this quarter. Furthermore, the brand could also benefit through new launches such as the Polo line for women, and the Ricky handbag line, in an otherwise mature market. Having said this however, the U.S. is a relatively saturated market where most brands in the luxury space have resorted to innovations and new launches to drive sales. In this situation, intense competition could eat into prospects for Ralph Lauren. Moreover, an appreciating dollar could also choke off demand in the region in the quarter. Against these factors, although the region might experience sales increases, we may not see the kind of growth that was observed in Q4 of fiscal 2015 going into this quarter.

New launches could ensure sales: Ralph Lauren could have much to look forward to based on new launches going into 2016. For instance, the brand introduced the Ricky handbag portfolio last quarter, which has been well received, as evidenced by the success of the Drawstring Ricky, a soft-leather bag crafted in Italy. This line could ensure further sales growth for Ralph Lauren, in major markets like North America going into fiscal 2016. Furthermore, the brand is also bullish on their prospects in the accessories realm, where they have recently introduced a lightweight cashmere scarf collection in an array of colors. Ralph Lauren could see higher frequency in terms of customer traffic in light of their growing accessories portfolio, which could also help draw customer attention to other product categories such as apparel. This quarter could also see the positive impact of Polo Sport, an extension of the company’s trademark Polo brand in active wear. Based on initial data, the brand has received commendable feedback and could go on to garner share gains going forward, in light of its “perfect fit with the athletic spirit and sensibility.”

Company specific strategies could drive efficiency: Ralph Lauren has taken a number of steps to drive efficiency in their business, which could go on to benefit the company’s brand perception among customers. This includes the recent decision to amalgamate the company’s men’s and women’s luxury products into a single label. This move could help Ralph Lauren’s brand image by driving simplicity in their luxury status. According to the company, the merger could help “clarify our luxury message, driving consistent global brand presentation, and marketing synergies.”

A Note On Costs And Benefits

Apart from this, the company has indicated changes on the management front going forward. The company will now be bifurcated based on six brands – Ralph Lauren; RRL; Polo; Lauren, Champs, and American Living; Ralph Lauren Home; and Club Monaco – with each brand being headed by a unique leadership team. In this reorganization, each team will be responsible for the global performance of the relevant brand. The fact that each brand will now have unique business strategies that are devised by individuals who have an in-depth understanding of the forces at play surrounding that brand, could bring in considerable benefits to the company. Ralph Lauren anticipates close to $100 million in yearly savings from this initiative, a part of which could be realized in this fiscal year itself. Furthermore, the company has indicated further investments, in which they will be opening 40-50 stores in the fiscal year. The company will also be seen investing in their e-commerce platform, which has driven significant sales in the last fiscal year. This includes upgraded information systems to drive multi-channel capabilities and to improve the customer’s shopping experience on Ralph Lauren websites.

Clearly these steps could incur costs to the company. According to the management, while the restructuring process is expected to levy a one-time cost of $70 million to $100 million, the investments in the company’s information systems is expected to result in a 60 basis point drag on margins in the full year. While these steps could have an impact on cash flows this quarter and in the full year, Ralph Lauren may move to a more efficient set-up that could bring in considerable sales and cost savings in the ensuing years.

Lastly, there is the matter of currency. The U.S. dollar has continued to strengthen against a number of key currencies the past year. Given that Ralph Lauren has operations in areas in Europe and Asia, an appreciating dollar has had a negative impact on the company’s financials. For instance, while revenues in fiscal 2015 grew 4% on a currency-neutral basis, they grew about 2% on a reported basis. The impact of a strengthening dollar could exert an influence even in this quarter. However, currency headwinds could be a temporary phenomenon, which could turn around for the better in the medium term. For now, the company’s strong product portfolio, and efforts at driving efficiency, could be reasons to anticipate growth going forward.

Trefis has a $141 price estimate for Ralph Lauren, which is above the current market price. We will be updating our model in light of the earnings release.

Sources:

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