Investors are optimistic as Ralph Lauren (RL 2.47%) prepares to close the books on fiscal 2019. The apparel specialist fared well over the holiday season, with sales growth speeding up despite an initiative to raise prices. CEO Patrice Louvet said the results gave management confidence that the right growth plan is in place for today's uneven selling environment. But that confidence will be tested when the company announces fourth-quarter results on Tuesday, May 14, and looks ahead to a new fiscal year.
Let's take a closer look.
A delicate trade-off
Ralph Lauren reported some of its best operating trends in more than a year last quarter, with comparable-store sales rising in the U.S., Europe, and Asia. The U.S. market is easily its biggest, but 4% growth at home came entirely from a 21% spike in digital sales as customer traffic held flat in its physical stores. On Tuesday, investors will be closely watching to see where U.S. growth lands, given that comps have been flat or negative in four of the last five quarters.
Meanwhile, Louvet and his team have been targeting the Asian market more aggressively lately, and that strategy is working as sales in China have improved steadily in each of the last six quarters. The expansion rate dipped to 4% last quarter, though, after adjusting for currency exchange shifts. Another slowdown this week might threaten the company's wider rebound ambitions.
Working against all those growth initiatives is the fact that Ralph Lauren is reducing its reliance on price cuts to lift demand. To that end, higher prices helped gross profit margin improve by almost a full percentage point to 61.6% of sales last quarter. Executives predicted back in February that profitability gains will show up again in Q4, but they might significantly pressure sales growth. Most investors who follow the stock are expecting sales to drop by about 4% this quarter, to $1.47 billion.
A new outlook
Assuming Ralph Lauren hits its year-end targets, fiscal 2019 will have delivered modest improvements in both sales and profitability. The company took some key steps toward strengthening the business for future growth, too, including reducing its exposure to low-margin, off-price retailing, boosting its online presence through new partnerships with e-commerce specialists like Stitch Fix, and building a bigger network in attractive metropolitan areas in China.
Yet its inconsistent growth over the past year highlights the challenges Ralph Lauren faces as management looks out to fiscal 2020. Sales are likely to have fallen in the core U.S. market this past year despite a healthy spike in e-commerce revenue. And Ralph Lauren likely can't count on stronger demand in China to pick up all the slack in the coming year.
Louvet and his team said back in June that they're aiming for modest sales and profitability growth on an annual basis, and on Tuesday they'll likely back up that forecast with some concrete comps and margin predictions. If industry trends hold up, and economic growth doesn't slow in any of its key markets, then Ralph Lauren has a good shot at extending its rebound into a second straight year. More market volatility, or competitive stumbles, meanwhile, might force the company to undershoot its 2020 margin target, its growth outlook, or both key metrics.