Please ensure Javascript is enabled for purposes of website accessibility

Why Ralph Lauren Stock Dropped 14% in November

By John Ballard – Updated Dec 5, 2018 at 2:29PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The fashion brand delivered a positive quarter, but investors were looking for more.

What happened

Shares of Ralph Lauren (RL -1.12%) plunged 14% last month, according to data provided by S&P Global Market Intelligence.

The stock had been up 25% year to date through the end of October but fell sharply following the company's second-quarter earnings report on Nov. 6.

A man shopping for men's clothing in a department store.

IMAGE SOURCE: GETTY IMAGES.

So what

The decline in the share price seems to be a case of investor enthusiasm getting too far ahead of the company's actual performance leading up to the latest quarterly results. Management has been implementing a strategy to improve growth and profitability by investing more in marketing, selectively expanding in the right markets around the world, investing in digital capabilities, and controlling costs.

In the first half of the year, Ralph Lauren's revenue was up 2% while operating income grew 20%. The faster growth in operating income reflects solid execution on management's strategy to control costs while still making the necessary investments in marketing and digital to keep revenue growing.

The second-quarter earnings report continued to show progress, with revenue and earnings beating the consensus analyst estimate. Ralph Lauren posted revenue growth of 2% year over year, while non-GAAP earnings per share were up 13.5%.

What's more, the company showed good results internationally, with 13% revenue growth in Asia, highlighted by more than 20% growth in Greater China -- Ralph Lauren's fastest-growing market.

Now what

Investors were probably looking for better growth in the North America segment, which only grew 1% in the quarter. That might seem low given that management increased marketing investment by 30%.

Nonetheless, Ralph Lauren is heading in a positive direction. Management expects full-year revenue growth to be roughly flat to up slightly on a constant currency basis, which is better than previous guidance that revenue would be flat to slightly down this year. Also, operating margin should be up 40 to 60 basis points driven by gross margin expansion.

Wall Street analysts expect Ralph Lauren to grow adjusted earnings per share 12.4% in fiscal 2019. The stock trades at a modest forward PE of 15 times next year's earnings estimates. If the company shows further progress to accelerate revenue growth in the coming quarters, especially in North America, the stock price should recover. 

John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.