The third quarter was very good for Ralph Lauren Corp. as earnings results both beat Wall Street’s consensus estimates for revenues and earnings per share on an adjusted basis, and indicated execution progress against strategic initiatives.
For the three months ended Dec. 29, the company swung to the black with net income at $120 million, or $1.48 a diluted share, against a net loss in the year-ago quarter of $81.8 million, or $1.00. Excluding restructuring-related and other charges, adjusted EPS for the quarter just ended was $2.32. Net revenues rose 5.1 percent to $1.73 billion from $1.64 billion.
Wall Street was expecting third-quarter adjusted EPS of $2.14 on revenues of $1.66 billion.
“As we continue to strengthen the foundations of our business and elevate our iconic brand, I am pleased with the progress we are making,” Ralph Lauren, executive chairman and chief creative officer, said.
Patrice Louvet, president and chief executive officer, noted the company’s “solid execution on our key initiatives,” particularly during the holiday selling season, and emphasized that the company drove higher average unit retail (AUR) and continued to improve quality of sales overall.
“These results give us confidence that our strategic investments in brand-building, product, digital and global expansion are on the right track, while the strength of our balance sheet will continue to be a competitive advantage as we manage through an increasingly volatile global environment,” Louvet said.
Investors liked the results, and sent shares of Ralph Lauren up 8.4 percent to close at $124.16 in Big Board trading Tuesday.
Dana Telsey, analyst at Telsey Advisory Group, said the quarter’s results “appeared solid across the board” and that the higher AUR is “bolstering revenue and gross margin improvement as the company focuses on creating excitement for its core brands and pivots away from heavy promotional activities and channels.” She noted that customer experience is being enhanced as the company focuses on leveraging its brand through digital channels. Telsey reiterated her “Outperform” rating on shares of Ralph Lauren.
Moody’s credit analyst Mike Zuccaro said, “The company continues to successfully execute on its strategic priorities while maintaining financial discipline in a challenging global environment. He added that the company’s “financial policies remain conservative, with modest funded debt levels and excellent liquidity underpinned by sizable cash balances and year-to-date free cash flow of nearly $400 million.”
There was a lot to like in the third quarter earnings report.
Net revenues included gains in its North America, Europe and Asia operations.
In North America, revenues rose 2.5 percent to $908.7 million, which included a 3 percent decline in wholesale revenues and a retail comparable sales gain of 4 percent. Retail comps comprised of a flat comp at its stores, offset by a 21 percent jump in sales at its ralphlauren.com channel. Europe gained 9.7 percent to $415.2 million, helped by the timing of shipments, although the shift will in turn negatively impact fourth quarter results. Revenues in Asia were up 9.5 percent to $274.8 million. Growth in Asia was led by 19 percent constant currency growth in Greater China, and strength across Japan, South Korea and Australia.
The company also said that adjusted gross margin was 61.6 percent, up 90 basis points in the quarter from a year ago, driven by initiatives to improve quality of sales. The company reduced promotional activity, improved pricing and changed the product and channel sales mix. Excluding restructuring-related and other charges, adjusting operating income was $239 million and adjusted operating margin was 13.9 percent or 70 basis point above the prior year, driven by gross margin expansion. Foreign currency also helped gross margin by 30 basis points for the quarter.
Ralph Lauren said it delivered on several key initiatives, which included winning over a new generation of consumers. That was accomplished by an increase in marketing, up 18 percent from a year ago, and through collaborations such as with U.K.-based streetwear brand Palace and leveraging celebrity and social influencers, including custom designs for the wedding of Nick Jonas and Priyanka Chopra.
The company drove average unit retail–up 9 percent–across its direct-to-consumer network through an elevation of its product assortment. Denim and outerwear sell-out trends were encouraging, the company said, while limited edition Polo collections gained traction following the leveraging of the Polo mobile app in the U.S. and in marketing programs globally.
Another highlight was its global digital revenue, which grew 20 percent year-over-year in constant currency. In addition to the digital comp growth of 21 percent in North America, which marked the anniversary of its platform upgrade from last year, Ralph Lauren also saw a 13 percent gain in Europe. The company continued to expand its digital presence in China through a new site launch in September and pure-play partnerships.
As for guidance, the company expects fourth quarter net revenue to be down slightly in constant currency mostly because of a planned reduction in the off-price sales channel. For fiscal 2019, the company projected net revenues to be up slightly on a constant currency basis.