Ralph Lauren Heads To $160 On Strong N. American Sales

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RL: Ralph Lauren logo
RL
Ralph Lauren

American luxury retailer Ralph Lauren (NYSE:RL) released its Q1 fiscal 13 earnings on Wednesday. [1] While the company posted a modest growth of 4% in its revenues and 3% in its gross profits compared to Q1 fiscal 12, a solid performance in North American wholesale business and factory channel were the major highlights of the earnings.

Weak macro-economic conditions in Europe continues to weigh on Ralph Lauren’s results, offsetting most of the positive growth in North American wholesale channel, and also impacting Ralph Lauren’s gross margins which were down 70 basis points compared to the same period last year. Ralph Lauren competes with premium apparel and accessories players like Coach (NYSE:COH), Liz Claiborne (NYSE:LIZ), Ann (NYSE:ANN) and other premium private labels.

We have revised our price estimate for Ralph Laurent to $160, which is roughly 8% ahead of its current market prices. Change in our price estimate primarily reflects changes to Ralph Lauren’s net cash/debt position along with changes to the company’s capital expenditures.

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See our complete analysis for Ralph Lauren here

Major trends in Q1 geographically

During the quarter, North American wholesale and factory stores were the major growth channels for Ralph Lauren. The company realized a double-digit growth in its North American wholesale operations, which was primarily fueled by comp store productivity gains from its men’s, women’s and children’s apparel segments. This growth also included incremental distribution in Canada for Denim & Supply, Lauren accessories and footwear and Lauren dresses.

Factory stores continues to be yet another strong growth channel for Ralph Lauren. While the company experienced a reduction in store traffic during the quarter, higher Average Unit Retail (AUR) and a higher conversion rate more than offset the impact from low store traffic. With the luxury customer continuing to be cost conscious, we expect growth in the factory stores channel to be an important driver of sales going forward.

While the company realized high growth across most of its business segments in North America, weak macro-economic conditions in Europe continues to weigh on Ralph Lauren’s results, particularly in its wholesale and full-priced retail store channels. The impact was particularly severe in South European countries such as Italy and Spain, which constitute two of Ralph Lauren’s major European markets. Additionally, lower wholesale shipments to specialty stores throughout Europe also put downward pressure on Ralph Lauren’s gross margin, since these customers account for Ralph Lauren’s highest margin relationships.

Why we’re positive on Ralph Lauren

Though Ralph Lauren posted modest top line and bottom line growths compared to its performance in past few quarters, we remain optimistic on Wednesday’s earnings for two prime reasons.

First, we believe a major part of low revenue growth in Q1 was self-induced by Ralph Lauren, with lower wholesale shipments into Europe and impact of strategic store closings in Greater China. As Ralph Lauren re-position its brand in China by opening stores at premier new locations, we expect the growth cross retail channel to be much stronger going forward. Second, we expect the company to see improvement in its margins gaining primarily from tight inventory control and declining product costs such as cotton prices.

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Notes:
  1. Ralph Lauren releases Q1 fiscal 13 earnings, Source: Ralph Lauren’s IR []