Ralph Lauren Corporation
/ (RL-NYSE)/ Equity Research / RL | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 08/25/2014
Current Price (02/05/15) / $141.77
Target Price / $149.00
Earnings Update: Ralph Lauren Misses on Q3 Earnings & Revenues
After posting better-than-expected results in the trailing four quarters, Ralph Lauren disappointed with lower-than-expected top and bottom lines for its third quarter of fiscal 2015. The underperformancecan be traced back to currency headwinds, lower operating income and a higher effective tax rate, leading the company to lower its revenue outlook for fiscal 2015. However, the company intends to stay fixed on its goal by undertaking significant investments, introducing new stores and making the correct organizational alterations. Taking cue from this encouraging outlook, the company announced a dividend hike, instilling confidence among investors. Ralph Lauren remains focused on its mix shift plan toward retail and international, with the vision of greater profitability in these sections over time.Thus, we retain our Neutralview on Ralph Lauren.SUMMARY
/ Equity Research / RL | Page 1SUMMARY DATA
52-Week High / $186.7352-Week Low / $139.71
One-Year Return (%) / -5.60
Beta / 1.37
Average Daily Volume (sh) / 1,566,464
Shares Outstanding (mil) / 88
Market Capitalization ($mil) / $12,434
Short Interest Ratio (days) / 5.72
Institutional Ownership (%) / 68
Insider Ownership (%) / 32
Annual Cash Dividend / $1.80
Dividend Yield (%) / 1.27
5-Yr. Historical Growth Rates
Sales (%) / 9.7
Earnings Per Share (%) / 13.2
Dividend (%) / 44.2
P/E using TTM EPS / 17.4
P/E using 2015 Estimate / 16.9
P/E using 2016 Estimate / 15.2
Zacks Rank *: Short Term
1 – 3 months outlook / 4 - Sell
* Definition / Disclosure on last page
Risk Level * / Low,
Type of Stock / Large-Blend
Industry / Textile-Apparel
Zacks Industry Rank * / 158 out of 267
RECENT NEWS
Ralph Lauren Misses on Q3 Earnings & Revenues- Feb 4, 2015
After posting better-than-expected results in the trailing four quarters, Ralph Lauren disappointed with lower-than-expected top and bottom lines for its third quarter of fiscal 2015.
Quarterly earnings of $2.41 per share missed the Zacks Consensus Estimate of $2.52 and decreased 6.2% from the year-ago quarter figure of $2.57.
The underperformance can be traced back to lower operating income and a higher effective tax rate.
Quarterly Highlights
Net revenue inched up 0.9% year over year to $2,033 million. This improvement was backed by enhanced performance across the company’s retail segment and higher licensing revenues. However, the company’s net revenues fell short of the Zacks Consensus Estimate of $2,107 million.
Overall, retail revenue grew 2% year over year to $1,149 million, licensing revenues increased 6% to $47 million, while wholesale revenues remained almost flat at $837 million.
Improvement at the retail segment was mainly driven by double-digit growth in the international eCommerce business and the addition of new stores. On a currency neutral basis, sales at the retail segment increased 5% year over year. Moreover, on a constant currency basis, consolidated comparable-store sales (comps) at the retail division dipped 2%.
On the other hand, at the wholesale segment, the favorable impact of improved wholesale shipments from Europe was completely offset by lesser American shipments and a negative impact from currency translations. Excluding this negative currency impact, sales rose 2%.
Licensing revenues benefited from higher royalties as Ralph Lauren, Lauren and Polo products saw increased sales globally.
Ralph Lauren's gross profit in the quarter fell 1% year over year to $1,159 million, with the gross margin contracting 120 basis points (bps) to 57%, owing to an unfavorable mix, heavy promotions and currency effects.
Total operating expenses rose 1% year over year to $844 million, while as a percentage of sales, it contracted 10 bps to 41.5%. The improvement in operating expenses as a percentage of net revenues was mainly due to efficient operational management and lower restructuring expenses, which were partly offset by to increased investments in global retail development, advertising, and marketing and infrastructure.
Ralph Lauren's operating income decreased 6% year over year to $315 million, while operating margin contracted 15.5% to 110 bps, in line with management’s projection of a 100–150 bps contraction. The decline in operating margin was mainly due to higher operating expenses related to increased investments to support the company’s long-term growth strategies.
In spite of a not so impressive quarter, Ralph Lauren remains confident of its future performance. Management believes that its results so far this year highlight its focus on long-term objectives. The company intends to stay fixed on its goal by undertaking significant investments, introducing new stores and making the correct organizational alterations.
Encouraged by its long-term focus, management hiked its quarterly dividend to $0.50 a share, payable on Apr 10, 2015 to stockholders of record as of Mar 27.
Further, during the quarter, Ralph Lauren bought back nearly 0.5 million of its Class A common stock and in turn used up $100 million of its repurchase authorization. This brings the company’s year-to-date share repurchase to $350 million, with nearly $230 million remaining under its ongoing share repurchase program.
Balance Sheet
Ralph Lauren ended the quarter with cash and investments of $1,407 million compared with $1,415 million in the year-ago quarter. During the quarter, the company deployed $124 million toward capital expenditure. Moreover, inventory levels stood at $1,211 million, up 8.4% from $1,117 million in the comparable quarter last year.
Store Update
Ralph Lauren exited the quarter with 470 directly operated stores and 504 concession shops across the globe. The directly operated stores include 148 Ralph Lauren, 65 Club Monaco and 257 Polo factory stores. Additionally, Ralph Lauren’s global licensing partners operated 71 Ralph Lauren stores, 23 dedicated shops as well as 114 Club Monaco stores and shops.
Guidance
Following the third-quarter results, Ralph Lauren lowered its constant dollar outlook for fiscal 2015. The company now expects revenue growth of about 4% against 5–7% growth anticipated earlier.
Further, the company expects operating margin for fiscal 2015 to fall 170–190 bps from fiscal 2014.
For the fourth quarter of fiscal 2015, the company expects net revenue to grow at a mid single-digit rate, on a constant currency basis. This includes a 550 bps negative impact from currency translations. Operating margin is anticipated to contract in the range of 250–300 bps from the year-ago level. The effective tax rate for the quarter is projected at 31–32%.
VALUATION
Ralph Lauren’s current trailing 12-month earnings multiple is 17.4x compared with the 24.9x industry average and 18.8x for the S&P 500. Moreover, the stock is trading at a discount to the industry average, based on forward earnings estimates. Over the last 5 years, Ralph Lauren’s shares have traded in the range of 13.9x to 25.2x trailing 12-month earnings. Our target price of $149.00, 15.9x 2016 EPS, reflects this view.
Key Indicators
Earnings Surprise and Estimate Revision History
NOTE – THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET.
OVERVIEW
Ralph Lauren Corp. is a major designer, marketer and distributor of premium lifestyle products. The company possesses a strong portfolio of globally recognized brand names such as Polo, Ralph Lauren Purple Label, Ralph Lauren Collection, Black Label, Blue Label, Lauren, RRL, RLX, Rugby, Ralph Lauren Childrenwear and American Living. The company offers lifestyle product collections in 4 categories – Apparel, which includes men's, women's, and children's clothing; Home, which includes bedding and bath products, furniture, fabric and wallpaper, paint, tabletop and giftware; Accessories, comprising footwear, eyewear, jewelry and leather goods; and Fragrance and skin care products sold under the Glamorous, Romance, Polo, Lauren, Safari, and Polo Sport brands. The New York-based company currently reports its operating results under the following segments:
Wholesale segment includes wholesale-channel sales used principally for major department stores, specialty stores, and golf and pro shops located throughout the U.S., Europe and Asia. During second-quarter fiscal 2015, this segment contributed 47% of the total revenue.
Retail business consists of retail-channel sales directly to consumers through full-price and factory retail stores spread across the U.S., Canada, Europe, South America and Asia, as well as sales through the Internet. During the second quarter, this segment constituted 51% of the total revenue.
Licensing business includes revenues from royalty-based arrangements, under which the company provides license to third parties for the use of various trademarks related to the manufacture and sale of certain products. During the second quarter, this segment contributed 2% of the total revenue.
REASONS TO BUY
Strong Brand Portfolio Keeps Ralph Lauren on Top: Ralph Lauren is a major specialty retailer of premium lifestyle merchandise in the U.S. commanding a stellar portfolio of globally recognized brands that provide it an edge over its peers. The company has been able to strengthen its position in the market based on these premium brands, while many other retailers have struggled to retain consumers amid the recession and changing fashion trends.
Focus on Mix Shift to Drive Long-Term Growth: Ralph Lauren continues to progress with its mix shift plan toward retail and international, with the vision of greater profitability in these sections than the wholesale and domestic businesses. The company also remains focused on building its brand image which is essential for luxury retailers. In the retail segment, the company continues to invest in Polo, Ralph Lauren and D&S stores along with growing its e-Commerce and omni-channel presence. Further, the company now intends to employ more focus on expanding its accessories business, which constitutes less than 10% of its global sales, as fashion trends in this product line changes less frequently than in the apparel business. Other categories that the company intends to focus on include women’s, activewear, luxury and denim. While the company recently launched its “Polo for Women” brands across the globe, it is also set to venture into the activewear segment with the launch of Polo Sport with the first men’s collection going live in fall 2015. Relating to its international venture, the company has identified significant potential for expansion in Europe and China.
Strategically Expanding Global Business: Ralph Lauren aims to strategically expand and enhance its international presence, particularly in Asia. Ralph Lauren has taken direct control of operations in Asia from its licensee in order to effectively capitalize on opportunities in emerging economies like China, Korea and India. The company intends to open about 60 stores in China at prime locations by the end of fiscal 2015. We believe that this strategy would help in gaining incremental revenue and profit.
Healthy Balance Sheet & Strong Cash Flows Driving Growth: Ralph Lauren boasts of a debt-free balance sheet with cash and investments of $1,191 billion at the end of second-quarter fiscal 2015, providing it financial flexibility to drive future growth. The company’s ability to generate a strong operating cash flow has helped in the execution of its long-term strategies such as expanding globally, enhancing product and brand offerings, and building operational infrastructure. Over the past 5 fiscal years, the company has invested approximately $1.371 billion toward acquisitions and infrastructure development, majorly funded through its operating cash flows. In fiscal 2015, Ralph Lauren intends to make a capital expenditure of $400–$500 million toward capital projects.
REASONS TO SELL
Lowered Fiscal 2015 Guidance Weigh on Estimates: Despite an increase in profitability in the second quarter of 2015, Ralph Lauren trimmed its revenue growth guidance for fiscal 2015, anticipating negative impact from currency translations. Moreover, the company skewed its operating margin forecast of 75-125 bps toward the mid-to-low end of the range. Overall, the company expects sales and margins for the year to be bleak due to the ongoing investments toward enhancement of its global retail operations and infrastructure as well as higher capital allotments to augment advertising and marketing. As a result, the Zacks Consensus Estimate for the third quarter, fiscal 2015 and 2016 witnessed sharp downward revisions over the last 60 days.
Macroeconomic Headwinds May Dampen Operating Performance: Consumer confidence and spending behavior may dampen due to macroeconomic factors including increase in fuel and energy costs, credit availability, high unemployment levels, and high household debt levels, which may negatively impact disposable incomeof consumers. This in turn, could affect the company’s growth and profitability. Currently, Ralph Lauren’s operating performance has a major threat from the prevailing weak macroeconomic conditions in Europe, which contributes significantly to its wholesale revenues.
High Dependence on Outside Suppliers: Ralph Lauren does not own or operate any manufacturing facility and therefore purchases all its merchandise requirements from outside. The company’s operations might get adversely affected if these manufacturers fail to either ship orders on time or meet its standards.
Competitive Pressure: The company operates in a highly fragmented market and competes with a number of well-established players such as Estee Lauder, Coach, V.F. Corp., Phillips-Van Heusen, Jones Apparel, Liz Claiborne and Kenneth Cole Productions. The company primarily competes on the basis of fashion, quality and service. Failure to offer high-quality distinguished products at a competitive price may hamper Ralph Lauren’s market share, consequently resulting in reduced top and bottom lines.
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of RL. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1132 companies covered: Outperform - 16.4%, Neutral - 77.0%, Underperform – 6.4%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
/ Equity Research / RL | Page 1