On Thursday morning, Ralph Lauren Corp (RL) released the firm's fiscal second quarter.
For the three month period ended October 1st, the firm posted adjusted EPS of $2.23 (GAAP EPS: $2.18) on revenue of $1.58B. Performance on both the top and bottom lines did beat Wall Street. Net income did contract 17.8% while revenues increased 5%. Ralph Lauren is quick to point out that revenue growth would have been 13% in constant currency.
Gross profit for the quarter was $1B, as gross margin printed at 64.8%. Operating margin printed at 13.1%, or 13.4% on an adjusted basis. which exceeded the firm's own outlook owing to discipline in controlling operating expenses as costs associated with freight and marketing increased. Operating income printed at $207M or $211M adjusted.
Geographically...
- North America drove 3% revenue growth to $727M. Within the region, comp sales were flat for brick and mortar retail and contracted 1% for digital commerce. Wholesale revenue increased 8%. Adjusted North American operating income hit the tape at $125M, putting the region's adjusted operating margin at 17.2% (-660 basis points).
- Europe drove $494M in sales, which was flat from last year but would have been a 15% increase in constant currency. Comp sales grew 3% in the region on flat brick and mortar sales and a 15% increase in digital sales. European wholesale revenue increased 9% or 24% in constant currency. European adjusted operating income was $135M, placing the region's adjusted operating margin at 27.3% (-530 basis points).
- Asia drove revenue of $316M, which was up 17% (+33% in constant currency). Comp sales in the region increased 25% with 25% growth in brick and mortar sales and 22% growth in digital sales. Asian adjusted operating income was $66M, leaving the region's adjusted operating margin at 20.8% (+470 basis points).
Outlook
- For the full fiscal year 2023: Ralph Lauren expects to grow revenue in constant currency at a high single digits (about 8%) pace comparable to last year. Foreign exchange is expected to negatively impact revenue growth by roughly 730 basis points. The firm sees operating margin at the low end of the previously given 14% to 14.5% range. This would still compare favorably to last year's 13.1%.
- For the current quarter: Ralph Lauren expects to see revenue increase by low to mid-single digits in constant currency. Foreign exchange is expected to negatively impact growth by a rough 780 basis points. The firm expects operating margin to fall in a range spanning from 17.3% to 17.8% in constant currency.
Balance Sheet
Ralph Lauren ended the quarter with a net cash position of $1.417B and inventories of $1.261B. This put current assets at $3.441B, down from six months ago, which was down from a year ago. Current liabilities are down as well, to $1.71B, including no short-term debt. The firm's current ratio stands at a very healthy 2.10. Once omitting inventories, the firm's quick ratio is also healthy looking at 1.27.
Total assets add up to $6.734B including "goodwill" and other intangibles of $961.1M. That amounts to a more than acceptable 14.3% of total assets. Total liabilities less equity comes to $4.478B. This includes long-term debt of $1.138B, which could be handled out of pocket if need be. This firm has a nice balance sheet.
My Thoughts
This is a solid report. There is some margin compression, but the firm appears to be managing rising costs quite effectively. The market appears to appreciate the guidance. The stock trades at 12 times forward looking earnings, so it is not expensive by any stretch. 14% of the float is or was held in short positions. That could help keep a bid under this stock for a couple of days. The dividend is meaningful at $3 annually for a yield of 3.32%. I do not own this stock, but I see no overt reason why I would not. We all know that I like a good balance sheet.
Readers will see that the shares have consolidated in a trading range that comes pretty close to defining a 38.2% Fibonacci retracement of the late February through June (ultimately bottoming in October) sell-off.
The shares have taken back their 21 day EMA and 50 day SMA. Those lines appear to be acting as recent support. The pivot seems to be the 200 day SMA , currently at $100. A take and hold of this level could propel the share price past the top of this trading range and could set up prices as high as $115.
Personally I would not chase these shares today. I would prefer to either wait for a down day and try to enter near the 50 day SMA or write some November 18th $90 puts for about $1.15. This way if I were to get tagged, my net basis would be $89.85. If not, I pocket the $1.15.
