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Ralph Lauren’s Q1 Saw Overseas Gains Offset North America Weakness

Ralph Lauren Corp. bested Wall Street’s expectations for the first-quarter, and while the North America business was likely better than many expected, the domestic operation still could use some more fine-tuning to improve overall results.

In a Nutshell: Ralph Lauren, the company’s founder, executive chairman and chief creative officer, said, “I am very encouraged by the work we are doing to strengthen the foundations of our business, energize our teams and elevate our iconic brands.”

Leading the day-to-day charge is Patrice Louvet, president and chief executive officer. Louvet told Wall Street analysts during Tuesday morning’s conference call: “Our performance this quarter was driven by strong continued momentum in our international markets, both Europe and Asia, and expense discipline across the organization. At the same time, we continued to invest in elevating our brands and stabilize our North America business against a more volatile backdrop.”

The CEO noted that the company has been monitoring the global retail environment closely, particularly around trade and macro conditions, as its teams focus on managing through potential industry headwinds.

Louvet also spoke about some of the quarter’s marketing initiatives as the company works on winning over a new generation of consumers.

The company increased its marketing investments by 19 percent, and has shifted spend to the digital and social channels as those are the ones that matter most to consumers. One example was the spend around its Earth Polo launch at key sporting events. Earth Polo centers on the company’s sustainability efforts, with product made entirely of recycled plastic bottles and a waterless dyeing process.

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Louvet also spoke about expanding the scope of its experienced international merchant team to now include North America as part of a new global merchandising effort. “This team is now leveraging their proven track record of sharply aligning buys to consumer demand and successfully targeting a new younger consumer to the North American market,” Louvet told analysts.

The company considers denim, outerwear, wear-to-work, footwear and accessories as its five high-potential underdeveloped categories. The two farthest along are denim and outerwear.

Addressing the North American business, Louvet said the company’s “overall digital ecosystem in this market performed below our expectations in the quarter.”

While there was double-digit growth among pure players such as its partnerships with for its men’s Polo brand and with for men’s and women’s Polo apparel, the gains were offset by softer trends on its site. And in order to extend the company’s reach to new and younger customers, the company added women’s Polo to Rent the Runway, which joins its Lauren and Club Monaco siblings on the platform.

Louvet said comps at the company’s North America digital site were flat for the quarter, a softness that he attributed to a decline in sales from international consumers on the U.S. site due to foreign exchange headwinds, as well as import regulations in key Asian markets. The North American wholesale business also saw weaker demand driven primarily by product issues.

Jane Nielsen, the company’s chief financial officer, noted on the call that inventory was up 11 percent at the end of the quarter, mostly to support strategic expansion of its retail distribution in Asia and Europe.

Inventory was also up slightly in North America due to acceleration of certain merchandise to “get ahead of potential China tariffs.”  The CFO emphasized to analysts that inventory levels for the second half are expected to be more closely aligned to the company’s sales outlook.

Nielsen also noted: “In light of the dynamic trade environment, particularly China and Brexit, we will continue to opportunistically evaluate our inventory shipments to North America and the U.K. and diversify our global supply chain.”

Equity analyst Ike Boruchow of Wells Fargo Securities noted that concerns from the fourth quarter were due to company-specific hiccups, such as U.S. comps turning negative as fashion merchandise didn’t adhere to plan. Looking at first-quarter results, Boruchow said he would view the “results as ‘OK’, but more importantly, much better than feared.”

The analyst also noted that the near-term outlook isn’t optimistic, given that there are plans to further liquidate merchandise from Lauren, men’s Polo and seasonal fashion assortments in the current second quarter. Still, he has an “Outperform” rating on shares of Ralph Lauren, although the price target was lowered to $135 from $150 a share.

With overseas growth and cost initiatives expected to continue, and following Louvet’s addressing of the North America issues—including how the merchandising will now be led by a merchant team that’s part of a new global effort—Boruchow concluded that the company’s management team has “proven [its] ability to address/fix issues” in the company’s business.

Cowen & Co.’s John Kernan also has an “Outperform” rating on Ralph Lauren shares, noting that “international growth is undervalued.”

Net Sales: For the first quarter ended June 29, total net revenues grew 2.7 percent to $1.43 billion from $1.39 billion in the same year-ago quarter.

By geography, North America was up 3.1 percent to $719.4 million, with wholesale revenues up 2 percent and comparable store sales at its retail doors up 1 percent; Europe grew 1.5 percent to $360.8 million and saw wholesale revenues up 5 percent on a constant currency basis and at retail a comps gain of 4 percent, boosted by a 22 percent gain in digital commerce, and Asia gained 4.3 percent to $258.6 million, helped by a 5 percent comps increase at its retail and digital operations.

Earnings: Net income rose 7.4 percent to $117.1 million, or $1.47 a diluted share, from $109.0 million, or $1.31, a year ago. Excluding certain charges, adjusted diluted earnings per share was $1.77.

Wall Street’s consensus estimate was for adjusted diluted EPS of $1.66 on revenues of $1.42 billion.

For Fiscal 2020, the company forecasted a 2 percent to 3 percent gain in net revenues, with operating margins up 40 to 60 basis points in constant currency. It said the capital expenditure plan for Fiscal 2020 is $300 million.

For the second quarter, on a constant currency basis, the company guided net revenue to be up 1 percent, with the operating margin up 40 to 60 basis points.

CEO’s Take: Louvet rebutted some concerns on Wall Street that there might be limitations on how much longer international operations can offset the lackluster North American business. The CEO noted how the product has resonated “well” with Asian and European consumers, and pointed to growth opportunities in the two regions “for many years to come.” He also cited the mere 36 full-price stores across Europe, as well as how China represents just 3.5 percent of its total global business.