Ralph Lauren Down To Strong Sell On Weak Outlook - Analyst Blog

On Jun 11, 2014, Zacks Investment Research downgraded lifestyle products retailer, Ralph Lauren Corp. RL to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Ralph Lauren has witnessed sharp downward estimate revisions over the last 60 days. The primary reason behind this was the company's disappointing first-quarter and fiscal 2015 guidance. Though the company's fourth-quarter fiscal 2014 results were strong, the company projects a slowdown in sales growth and a decline in margins in the first quarter as well as for fiscal 2015.

The company highlighted that the weak forward outlook was mainly due to increased investments toward enhancement of its global retail operations and infrastructure as well as higher capital allotments to amplify advertising and marketing.

Ralph Lauren expects its sales for fiscal 2015 to reflect a growth of about 6%—8% while operating margin for the year is projected to contract in the range of 75–125 basis points (bps). Effective tax rate for the year is expected to be 30%. Moreover, the company plans to spend about $400—$500 million toward capital projects in fiscal 2015.

For the first quarter of fiscal 2015, the company expects net revenue to increase 3%–5%. Operating margin is anticipated to contract in the range of 300–350 bps from the year-ago level driven by the timing of investments to support the company's strategic growth objectives. Effective tax rate is projected to be 30%.

The company's soft guidance triggered a downtrend in the Zacks Consensus Estimate, as analysts became less constructive on the stock's future performance. The Zacks Consensus Estimate fell 17.5% to $1.75 per share for first-quarter fiscal 2015, 4.9% to $8.70 per share for fiscal 2015 and 6.2% to $9.92 per share for fiscal 2016 in the past 60 days.

Other Stocks That Warrant a Look

Not all apparel stocks are performing as disappointingly as Ralph Lauren. Some better-ranked stocks in the sector include Vince Holding Corp. VNCE that has a Zacks Rank #1 (Strong Buy), along with V. F. Corp. VFC and Michael Kors Holdings Limited KORS, both carrying a Zacks Rank #2 (Buy).