Ralph Lauren Corp. has closed half of its store base in China in the face of the viral outbreak, as the clothing empire’s third-quarter results show a turnaround plan that’s working. But its fourth quarter could hinge on how the coronavirus epidemic progresses in the weeks ahead.
In a Nutshell: “Creating style that endures and inspires our customers guides everything we do,” Ralph Lauren, executive chairman and chief creative officer, said.
The company has closed roughly half of its 110 stores in China and is monitoring the region’s ongoing coronavirus outbreak. While China represents a “massive growth opportunity”down the road, the country currently accounts for “less than 4 percent of the total company business,” Patrice Louvet, president and CEO, said during a Tuesday morning conference call to analysts.
The company won’t know how much the outbreak has disrupted its supply chain until workers head back to work, Louvet said. Like many others in the fashion sector, the company has steadily diversified its supply chain, a move that limits its exposure to sourcing in China.
The Chinese government extended the Lunar New Year holiday vacation beyond the last week in January due to the outbreak, and some areas such as Shanghai have extended the break until Feb. 9. That means schools don’t have to reopen until the Feb. 10, the same day workers head back to factories and jobs.
“We’ll need to see how employees return to the various factories post the vacation,” Louvet said, adding that the priority is making “sure that our employees are safe, our consumers are safe and that we follow very closely the guidance both from the local and the global authorities on this health crisis.”
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Net Sales: For the period ended Dec. 28, net revenues rose 1.4 percent to $1.75 billion from $1.73 billion.
Sales gained 0.2 percent to $910.6 million in North America, its largest market, while comparable store sales were up 4 percent. Retail store comps rose 4 percent and were up 6 percent at ralphlauren.com. Wholesale revenues in North America were down 8 percent.
“Not only does this show, in our view, [that Ralph Lauren] can offset weak U.S. department store trends, but also it implies strong management discipline and improved quality of sale as [Ralph Lauren] reduces sales to the off-price channel,” UBS analyst Jay Sole said.
Europe saw revenues rise 3 percent to $437.8 million, with retail comps up 3 percent. Retail comps at its European stores rose 2 percent and were up 15 percent in digital commerce. Wholesale revenue in Europe rose 2 percent.
In Asia, revenues rose 5.4 percent to $289.6 million. Comparable store sales slipped 1 percent, with brick-and-mortar and digital commerce operations offsetting the decline in Hong Kong. Excluding Hong Kong, comps were up 2 percent.
The company increased its marketing spend for the quarter by 16 percent versus the same year-ago quarter to drive brand awareness. Average unit retail across its direct-to-consumer network was up 6 percent in the period, on top of the 9 percent gain a year ago.
During the quarter, the company leveraged the success that it’s had implementing price increases in Asia and Europe, bring that focus to its North American operation. “We began phasing in strategic ticket price increases in our North America factory outlet channel in late September, followed by our North America full price wholesale and direct-to-consumer doors in Spring 2020,” Louvet told analysts.
The increases are less about just upping the price and more of a reflection of the work the team has done to elevate the brand across all touch points, from inventory to product to distribution for average unit retail growth, he added.
Earnings: Net income for the quarter more that doubled to $334.1 million, or $4.41 cents a diluted share, from $120 million, or $1.48, in the year-ago period. Excluding certain charges, adjusted net income was $217 million, or $2.86 a diluted share.
Wall Street was expecting adjusted diluted earnings per share of $2.45 on revenues of $1.72 billion.
“The big picture message from this report is the company’s turnaround is on track and likely advancing faster than the market expected,” Sole said.
Cowen & Co. analyst John Kernan describes the company’s core product as “energized” and sees an opportunity in growing the outerwear category.
“New digital initiatives/apps along with localized product and limited edition launches are improving relevancy with Gen Z/Millennials,” said Kernan, who has an “Outperform” rating on Ralph Lauren shares and raised his stock price target to $152 from the prior range of $140. The company’s shares have been trading in the $113.00 a share range, but rose nearly 10 percent Tuesday to above $124.00 following the company’s third-quarter report.
For fiscal 2020, the company said it expects net revenue growth in the range of 2 percent to 3 percent on a constant currency basis. The guidance includes the impact of tariffs and business disruptions in Hong Kong, but not the potential impact from the coronavirus outbreak, given the “dynamic situation that we are monitoring closely with regards to our employees, consumers and supply chain,” the company said.
For the fourth quarter, the company forecasts net revenue to be “up slightly” on both a constant currency and reported basis.
CEO’s Take: “We continue to make strong progress on our Next Great Chapter plan amid a volatile backdrop, with third quarter results ahead of our overall expectations, including better than expected revenues, operating margin, and double-digit EPS growth,” Louvet said.
“As I’ve shared before,” Louvet said on the conference call, “the three principles underlying this work include, putting the consumer at the center of everything we do; elevating the brand across all consumer touch points and balancing growth and productivity. And we are doing all of this while managing through volatile industry dynamics, including the recent coronavirus outbreak, which we are actively monitoring.”