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Ralph Lauren Hurt by Weak North America Unit: Can It Recover?

Shares of Ralph Lauren Corporation RL have declined 13.4% in the past three months against the industry’s growth of 1.5%. The stock’s dismal run on the bourses is attributable to the sluggish North America business and adverse currency rates.

These factors weighed on the company’s fourth-quarter fiscal 2019 results. Notably, it has been witnessing weak traffic and soft performance at both retail and wholesale channels. 

 

Revenues at the North America segment fell 7% in the fiscal fourth quarter, with a comparable store sales (comps) decline of 4% owing to a 7% decrease in brick-and-mortar stores, offset by a 6% rise in digital commerce. Further, wholesale revenues dropped 10% year over year due to soft select spring fashion concepts and fall in off-price sales.

This apart, currency headwinds hurt revenues by nearly 270 basis points (bps) in the fiscal fourth quarter. This is likely to persist in fiscal 2020. 

The company estimates foreign currency to negatively impact revenue growth by 90-100 bps and operating margin expansion by 10-20 bps in fiscal 2020. For first-quarter fiscal 2020, currency headwinds are expected to mar revenue growth by approximately 190-200 bps and operating margin by 10 bps.

However, we are encouraged by this Zacks Rank #3 (Hold) company’s initiatives that may cushion the stock in the long run. Let’s get a glimpse of these initiatives.

Efforts to Counter Hurdles

Despite the afore-mentioned hurdles, management is leaving no stone unturned to improve its growth prospects. In this regard, Ralph Lauren’s “Next Great Chapter” plan, announced in June 2018, is delivering robust results. The plan focuses on delivering sustainable long-term growth and value creation.

The company expects to execute this growth plan through five strategic priorities — winning over a new generation of customers, energizing core products and accelerating underdeveloped categories, driving targeted expansion in its regions and channels, leading with digital, and operating with discipline to fuel growth. Backed by such well-chalked plans, the company was ahead of its commitments regarding revenues, quality of sales, operating income and earnings per share in fiscal 2019.

As part of the plan, the company targets delivering low- to mid-single-digit CAGR and mid-teen operating margin by fiscal 2023 at constant currency. Further, the company expects returning to constant-currency revenue growth by fiscal 2020.

Additionally, it anticipates marketing spend to grow nearly 5% of revenue by fiscal 2023, while capital expenditure is expected to represent 4-5% of revenue. Furthermore, the company plans returning 100% free cash flow to shareholders over the next five years, amounting to about $2.5 billion on a cumulative basis through fiscal 2023 in the form of dividends and share repurchases. 

Moreover, the company is focused on augmenting international presence by continually expanding in underpenetrated markets.  In fiscal 2019, Ralph Lauren’s constant-currency revenues in Greater China increased 20%, with more than 30% growth in Mainland China. This along with strength in Japan, Korea and Hong Kong led to revenue growth of 11% and 13% (at constant currency) in Asia. In fiscal 2019, the company opened 135 stores and concessions globally, of which 94 were in Asia, including 39 in China. 

In fact, store openings included four full-price stores and two net new factory stores in Europe. Ralph Lauren also sees immense potential to expand in Europe, where it currently has only 23 owned, full-price stores. Additionally, the company is on track to expand real estate locations in order to elevate the brand, and drive sales and profitability.

Moreover, expansion of digital platforms bodes well for the company. It has developed a winning digital ecosystem, including directly operated platforms, wholesale digital, pure plays and social commerce, in fiscal 2018. The company’s constant-currency digital revenues improved 11% in fiscal 2019, backed by strength in all regions. Also, the company has been strengthening its partnerships with key digital wholesale players across regions. 

Don’t Miss These Better-Ranked Apparel Stocks

Guess Inc. GES has a long-term earnings growth rate of 17.5%. The stock presently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Under Armour Inc. UAA, with a long-term earnings per share growth rate of 27.1%, also carries a Zacks Rank #2 at present.

lululemon athletica Inc. LULU, with a long-term earnings per share growth rate of 18.4%, currently carries a Zacks Rank #2.

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lululemon athletica inc. (LULU): Free Stock Analysis Report
 
Ralph Lauren Corporation (RL): Free Stock Analysis Report
 
Guess?, Inc. (GES): Free Stock Analysis Report
 
Under Armour, Inc. (UAA): Free Stock Analysis Report
 
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