Ralph Lauren's (RL) Q2 Earnings Beat Estimates, Sales Miss

Ralph Lauren Corporation RL reported second-quarter fiscal 2021 results, wherein the bottom line surpassed the Zacks Consensus Estimate while sales lagged the same. Despite COVID-19-related disruptions and sudden changes in consumer behavior, the company witnessed improved performance on a sequential basis across all regions, driven by solid digital revenues.

That said, management expects COVID-19 impacts and uncertainties to continue in the third quarter and fiscal 2021. However, it foresees gross margin expansion to continue in the second half of fiscal 2021 along with a marginal decline in expenses.

Q2 in Detail

Ralph Lauren reported adjusted earnings per share of $1.44 in the fiscal second quarter, exceeding the Zacks Consensus Estimate of 94 cents. The bottom line also compares unfavorably with adjusted earnings of $2.55 reported in the prior-year quarter.

Net revenues declined 30% year over year to $1,193.5 million and missed the Zacks Consensus Estimate of $1,220 million. On a constant-currency basis, revenues were down 31% from the prior-year quarter. Soft revenues mainly resulted from lower sales across all regions, stemming from supply-chain disruptions related to COVID-19. Meanwhile, currency movements favorably impacted the top line to the tune of nearly 100 basis points (bps).

Apart from these, digital revenues grew in mid-teens year over year and saw double-digit growth in all regions.

Ralph Lauren Corporation Price, Consensus and EPS Surprise

Ralph Lauren Corporation price-consensus-eps-surprise-chart | Ralph Lauren Corporation Quote

Segment Details

North America: During the fiscal second quarter, the segment’s revenues declined 38% from the year-ago quarter to $543 million. The retail channel in the region witnessed a 32% slump in comparable store sales (comps) and a 40% decrease in brick-and-mortar stores, partly offset by a 10% rise in digital commerce. Revenues from the North America wholesale business plunged 46% from the prior-year period.

Europe: The segment’s revenues fell 25% year over year to $359 million, with a 28% decline in currency-neutral revenues. Comps at retail stores in Europe declined 29% due to a 35% decrease in brick-and-mortar stores, somewhat offset by 26% growth in the digital platform. Revenues for the segment’s wholesale business fell 23% on a reported basis and 27% at constant currency.

Asia: The segment’s revenues decreased 7% year over year to $237 million on a reported basis and 8% on a currency-neutral basis. Comps in Asia dropped 11% due to a 12% decrease in brick-and-mortar stores, which is more than offset by a 32% rise in digital operations in the quarter.

Margins

Ralph Lauren's adjusted gross profit margin expanded 500 basis points (bps) to 66.5%, driven by positive regional and channel mix shifts stemming from COVID-19 along with enhanced AUR in all regions.

Adjusted operating expenses declined 19% from the year-ago period to $643 million in the fiscal first quarter. The uptick can be attributable to savings related to employee furloughs, reduced rent, and lesser corporate and selling expenses. However, adjusted operating expenses, as a percentage of sales, increased 730 bps to 53.9%. Further, the company reported an adjusted operating income of $151 million and adjusted operating margin that contracted 230 bps to 12.6% in the quarter under review.

Financials

Ralph Lauren ended the quarter with cash and short-term investments of $2,012 million, total debt of $1,631 million and total shareholders’ equity of $2,544.1 million. Inventory dropped nearly 12.4% from a year ago to $887 million at the end of the quarter.

Store Update

As of Sep 26, 2020, Ralph Lauren had 542 directly-operated stores and 654 concession shops globally. The directly-operated stores included 145 Ralph Lauren, 72 Club Monaco and 325 Polo factory stores. Additionally, the company operated 273 licensed stores globally.

Looking Ahead

As part of the Fiscal 2021 Strategic Realignment Plan, management announced plans to lower headcount by the end of fiscal 2021, which is likely to generate pre-tax cost savings of roughly $180-$200 million from fiscal 2022. However, this move will result in pre-tax charges of up to $160 million, which is likely to be incurred in second-quarter fiscal 2021.  

Moving on, this Zacks Rank #3 (Hold) company is on track with the transition of the Chaps brand, which is in sync with its long-term brand elevation strategy. In this context, it has entered into a multi-year licensing deal with an affiliate of 5 Star Apparel LLC, a division of the OVED Group, to be effective from Aug 1, 2021. Per the deal, 5 Star Apparel will manufacture, market and distribute men’s and women’s products of the Chaps brand. Also, this deal will help Ralph Lauren focus better on its core brands and reduce dependence on North American stores.

Price Performance

In the past three months, shares of this company have lost 40.5% compared with the industry’s decline of 10.5%.

Stocks to Consider

Hanesbrands HBI, a Zacks Rank #1 (Strong Buy) stock, has an impressive long-term earnings growth rate of 3.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Deckers Outdoor Corporation DECK has a long-term earnings growth rate of 17.7% and a Zacks Rank #1.

Columbia Sportswear Company COLM has a long-term earnings growth rate of 2.9% and a Zacks Rank #2 (Buy).

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