Ralph Lauren Earnings Preview: Can The Company Beat Consensus Estimates Again?

Ralph Lauren (NYSE:RL) is set to announce its third quarter earnings on February 4^th, with analysts expecting earnings of $2.15 per share and revenue of $2.04 billion for the quarter. In the last quarter, the company reported an EPS of $2.13, beating Thomson Reuters’ consensus estimates of $1.73 by $0.40. It even managed to surpass the revenue expectations of $1.96 billion by earning $2 billion. Despite an upbeat second quarter earnings, the full year guidance was maintained by the company, due to an expected negative impact of 400 basis points from foreign currency. ^[1]

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The Company Is Facing A Number Of Headwinds

After nearly 50 years, Mr. Ralph Lauren stepped down as CEO of the company in 2015. The market greeted this news, together with the announcement of the appointment of Stefan Larsson as the new CEO, positively. The new CEO has a proven track record with success at H&M and Old Navy. With a rather large portion of Ralph Lauren’s sales attributed to basic products like Polo shirts, Larsson’s skills in efficiently managing the supply chain process could prove to be profitable to the company. Logistical efficiencies will help in maintaining higher margins and could accelerate growth. However, the company has been suffering from the impact of a strong dollar. Foreign currency had a negative impact of 500 basis points on the income of the company in the second quarter. The net revenues are expected to be flat for the year, driven by 3%-5% revenue growth in terms of constant currency and 400 basis points of negative impact from foreign currency. For the third quarter, the company reckons net revenues to be up 0%-2%, with foreign currency having an estimated 250 basis points downward effect on the revenues, and the operating margin to be lower than the corresponding period in FY 2015 by 200 to 250 basis points.

Ralph Lauren has also endured declining mall traffic with regards to its wholesale business. Macy’s, the company’s largest wholesale customer, has witnessed a difficult year, just like many of its competitors. Furthermore, warmer weather than normal has resulted in a lower demand for winter clothing, negatively affecting Ralph Lauren.

Plenty Of Positives In 2016

Lower energy prices may partially offset the impact of a strengthening dollar, improving the consumers’ purchasing power. According to Stephen Stanley, Chief Economist of Amherst Pierpont, a decline in gas prices by a penny, puts about a billion dollars into Americans’ pockets. ^[2] This may provide a boost to the domestic and international sales for Ralph Lauren. Moreover, earlier than expected expense reductions from the reorganization strategy resulted in meaningful SG&A cost savings and higher margins in the second quarter. These should continue to reap benefits in the third quarter. The Men’s Polo brand is an example of the line planning process initiated by the company and is expected to result in double-digit reductions in SKUs (Stock Keeping Units). The global line planning process will be subsequently applied to other brands, culminating in expected cost savings of $110 million, as a result of a decline in SKUs and sample and design cost, better inventory turnover, improved gross margins, and better SG&A levels.

Furthermore, with the Federal Reserve’s interest rate hike in December, it may not be unreasonable to expect the current strength of the U.S. dollar to dissipate, removing a significant headwind on the company. Ralph Lauren is also focusing on its international retail channel to offer growth momentum, particularly from Asia. In China, after repurchasing its license deal with Dickson Concepts in 2010, the company closed a majority of its distribution outlets. As compared to some of its competitors, such as Coach, which generates 25%-40% of its revenues from China, and Burberry, which obtains ~41% of its revenues from China, RL’s Asia-related revenue, including Australia and New Zealand, amounted to only about 12% in FY 2015. The upscale brand repositioning effort in China bodes well for the company, as an elevated brand image appeals to high-end luxury consumers. This would, in turn, improve the company’s retail margins, and better brand recognition in China may result in higher revenues in Europe and the U.S. as well, driven by demand from Chinese tourists.

The company’s license revenue grew at 7% in constant currency, during the second quarter. While this segment comprises about 2% of the revenue of the company, it is its highest margin business, and is an appealing avenue to grow its business internationally. ^[3]

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1. Ralph Lauren, Q2 2016- Earnings Call Transcript [↩]
2. Cheap Gas is akin to a $60 billion tax cut [↩]
3. Ralph Lauren- 10Q, For 2nd quarter ended September, 2015 [↩]