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Ralph Lauren (RL) Up 4.2% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Ralph Lauren Corporation RL. Shares have added about 4.2% in that time frame, underperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Ralph Lauren Q3 Earnings Top, CEO to Exit

Ralph Lauren Corporation reported third-quarter fiscal 2017 adjusted earnings of $1.86 per share that fared better than the Zacks Consensus Estimate of $1.64 but declined 18.1% from $2.27 reported in the prior-year quarter.

On a reported basis, the company posted earnings of $0.98 per share compared with $1.54 earned in the prior-year quarter. Reported earnings for the quarter primarily included restructuring and other charges associated with the company's Way Forward plan, which was announced in Jun 2016.

CEO Departs

Ralph Lauren declared that Stefan Larsson, the company's CEO and President, will step down from the positions on May 1, 2017. While the company continues its search for new CEO, the execution of its Way Forward Plan will continue uninterrupted under the stewardship of its Chief Financial Officer, Jane Nielsen. This decision came after conflict of opinions between Stefan and the company's Executive Chairman and Chief Creative Officer, Ralph Lauren, on the development of creative and consumer-facing parts of the business.

Revenues

Net revenue of this luxury apparel retailer was down about 12% year over year to $1,714 million and marginally surpassed the Zacks Consensus Estimate of $1,708 million. On a currency-neutral basis, revenues fell nearly 11% in the quarter. However, the company stated that reported revenues were in sync with its Way Forward Plan and currency-neutral revenues matched its previously formulated guidance.

During the quarter, reported revenues for the International business were down 6%, while the North American business reported 15% decline.

Segment-wise, reported Wholesale revenues witnessed a 26% decline year over year to $582 million, while currency-neutral revenues dropped 25%. The decline in Wholesale revenues is attributed to the soft performance in North America due to lowered shipments as part of its Way Forward plan, as well as a shift of timing of a European shipment into the fourth quarter.

Retail revenues dipped nearly 2% to $1.1 billion, on both reported and currency-neutral basis, owing to a decline in comparable-store sales (comps). Reported comps were down 5%, while currency-neutral comps declined 4% on the back of soft traffic and average transaction size trends owing to its efforts to boost sales, partly negated by favorable timing shift that moved post-Christmas week sales into the third quarter.

Licensing revenues slipped 4% to $44 million on both reported and constant-currency basis.

Margins

Ralph Lauren's adjusted gross profit margins expanded 140 bps to 58.2%, owing to favorable geographic and channel mix shifts, and efforts to enhance the quality of sales metrics, mainly via lower promotions in its international businesses. However, the improvement was partly offset by foreign currency headwinds.

Adjusted operating income margin contracted 90 bps to 12.8% but fared better than anticipated due to efficient expense control and enhanced gross margin. However, the year-over-year decline is mainly attributed to higher fixed expenses on lower revenues, partly compensated by better gross margin.

Financials

Ralph Lauren ended the quarter with cash and investments of $1,318 million, long-term debt of $589 million and total shareholders' equity of $3,610 million.

Store Update

At the end of third-quarter fiscal 2017, Ralph Lauren had 485 directly-operated stores and 634 concession shops globally. The directly-operated stores included 121 Ralph Lauren, 83 Club Monaco and 281 Polo factory stores.

Additionally, the company's global licensing partners operated 102 Ralph Lauren stores and 59 Club Monaco stores, bringing the total number of licensed stores to 161. Additionally, the company had 102 licensed concession shops in operation as of Dec 31, 2016.

Guidance

Ralph Lauren provided its outlook for fourth-quarter while it reiterated its fiscal 2017 guidance. The company expects fiscal fourth-quarter reported revenues to be down in the mid-teens range owing to the smooth execution of its actions to improve quality of sales, lowered inventory receipts and fleet optimization plans in sync with its Way Forward plan. Further, the company expects currency headwinds to reduce revenue growth by nearly 100 bps and gross margin rate by about 70 bps.

Further, sales calculations for the fiscal fourth quarter will be impacted by the inclusion of an additional 53rd week in fourth-quarter fiscal 2016. The additional week in fourth quarter fiscal 2016 contributed $72 million to net sales and $12 million to operating income. Net sales contribution for the period comprised $10 million of Wholesale revenues and $62 million of Retail revenues.

Operating margin for the fiscal fourth quarter is expected to be 6–6.5%, with foreign currency headwinds constituting nearly 100 bps impact. Effective tax rate is projected at 30%.

Coming to fiscal 2017, the company reiterated its low double-digit percentage revenue decline forecast, in line with its Way Forward plan. The fall is likely to reflect from an intentional pullback in inventory receipts, closing of stores, harmonizing pricing and other quality of sales initiatives. However, the company expects currency to bear minimal effect on its fiscal 2017 revenues, based on current exchange rates.

Further, the company anticipates operating margin for fiscal 2017 at 10% reflecting a rise in new store expenses, negative currency impacts, infrastructure investments and fixed expense deleverage, neutralized by synergies from cost-saving actions. The company expects an effective tax rate of 29%.

Additionally, the company stated that its fiscal fourth-quarter and fiscal 2017 guidance excludes any impact from the Way Forward Plan related charges and any severance costs due to the departure of its CEO.

Way Forward Plan

Under its Way Forward plan. Ralph Lauren's management expects to generate annualized cost savings worth $180–$220 million, on the back of its fiscal 2017 restructuring activities. These restructuring activities include rightsizing the portfolio and cost-structure, alongside streamlining the structure of the organization. Further, the company expects to incur charges of $400 million related to fiscal 2017 restructuring activities and $150 million inventory charge associated with the company's Way Forward Plan, by the end of fiscal 2017.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.

Ralph Lauren Corporation Price and Consensus

 

Ralph Lauren Corporation Price and Consensus | Ralph Lauren Corporation Quote

VGM Scores

At this time, Ralph Lauren's stock has a great Growth Score of 'A', though it is lagging a lot on the momentum front with a 'F'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and growth investors.

Outlook

The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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