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North American Revenues Less Than Rosy at Ralph Lauren?

Ralph Lauren Corp. announces first-quarter results on Tuesday, but Wall Street is concerned that the company’s North American revenues might have worsened during the three-month period.

Investment research firm Jane Hali & Assocs., which had been positive on the stock following fourth-quarter results and the turnaround in men’s, has changed its rating to “Neutral.”

Last quarter, JHA believed that strength in European and Asian sales would help offset weakness in the North America market. So what changed? Now the research firm believes that the “domestic business is worsening and international will not be able to continually offset” the issues in the North American component.

Moreover, Valérie Hermann, president of RL global brand, resigned earlier this month, which JHA perceives as a “setback” for the company. JHA also noted that company president and chief executive officer Patrice Louvet cited the need to balance fashion with more core merchandise, which could be problematic given that core product is generally basics that are being “cannibalized at each level of the [Ralph Lauren] business.”

Ralph Lauren derives 59 percent of its overall business from North American revenues split 50-50 between wholesale and retail, JHA said. By segment, wholesale is based on sales to the department store channel, which continues to worsen. In the fourth quarter, North American comparable sales fell 4 percent, while company stores were down 7 percent, with a partial offset by up 6 percent in the digital channel.

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For the first quarter, comparable sales at retail are expected to be challenged due to the downturn in tourism. The company operates 41 full price stores and 174 factory outlet doors. While international contributes 41 percent of overall revenues, the company needs additional time to build out its planned 100 new stores in China.

JHA noted that while it expects to see less Ralph Lauren product in the off-price channel, it hasn’t seen a decrease in the amount of product in the department store channel, particularly in Macy’s. And it noted that while Ralph Lauren is driven by men’s wear, the company still needs to work on its women’s business, which it said is lagging on the fashion side. One other factor hurting the company is the continuing promotional environment in U.S. retail scene.

Wall Street’s consensus estimate for first-quarter results has adjusted diluted earnings per share at $1.66, on revenues of $1.42 billion.

JHA isn’t the only research firm that has noted a shift in sentiment on Ralph Lauren shares.

Last week, UBS issued a report that noted sentiment softening on Ralph Lauren stock, for which the equity research firm has a “Neutral” rating on the shares. The UBS report said that a survey of investors resulted in 72 percent identifying North America sales growth as the most important stock driver.

The concern in the latest survey was Ralph Lauren’s revenue outlook, which UBS analyst Jay Sole said was likely due to the company’s high U.S. department store and outlet channel exposure. Sole said “good international growth will help [Ralph Lauren] meet expectations” when it reports first quarter results, but that it probably needs to show more than an in-line first quarter earnings report to drive expansion.

UBS has a price target for shares of Ralph Lauren at $115.00. The shares on Monday closed up nearly 1.1 percent to $111.27, but then slipped 0.3 percent to $110.92 in after-market trading.