Ralph Lauren (RL 0.35%) investors cheered the company's latest earnings report, which included hopeful signs of gathering momentum in its growth rebound. Sure, sales gains slowed. But the apparel retailer still saw healthy demand in key markets like Asia and Europe while delivering a double-digit increase in earnings per share.
Shares soared following the report but remain well behind the broader market's 23% gain so far in 2019. That underperformance reflects uncertainty about the strength of Ralph Lauren's rebound, which CEO Patrice Louvet and his team addressed in their earnings call with investors. Below are a few highlights from that presentation.
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Performing in a tougher environment
We delivered second-quarter results slightly ahead of our overall expectations including better-than-expected revenues, expanded operating margin, and double-digit EPS growth.
-- Louvet
Despite a few weak spots, global results came in just above management's targets for the quarter. The international business was a standout, with Europe and China helping lift sales by 7%. Demand in the U.S. was more mixed and showed a slowdown compared to the prior quarter.
But management still saw plenty of encouraging news on the demand front, including in Ralph Lauren's direct-to-consumer business. Looking across the product lineup, executives said they gained market share in the men's polo niche but lost ground in women's apparel, which remains a growth opportunity.
Strong financial gains
Gross margins benefited from [price] growth of 2% with favorable channel and geographic mix coupled with pricing promotion management and product assortment mix.
-- CFO Jane Nielsen
The biggest contributor to Ralph Lauren's earnings spike was its rising gross profitability. Gross profit margin rose by 0.6 percentage points to 62% of sales thanks to targeted price increases, the success of new outerwear apparel launches, and the scaling back of promotions. That promotion change in particular is pressuring sales results and helps explain why revenue only inched higher by 2% after adjusting for currency exchange shifts.
Yet management is happy with the benefits it is providing to the brand and to the company's finances. They're planning for more pricing gains over the next six months, too, even as the selling environment gets more volatile due to tariff increases and economic slumps in places like Hong Kong.
The holiday season ahead
We continue to be vigilant regarding the geopolitical and macroeconomic environment and we are committed to maintaining discipline on costs and inventory as we elevate the brand and return the company to sustainable growth and value creation.
-- Nielsen
Ralph Lauren's updated outlook calls for sales gains of about 2%, hitting the low end of management's earlier guidance. While growth has been stronger in some markets, store closures in Hong Kong, volatility in the U.K., and increased tariffs are more than offsetting those gains. The company still projects improved gross and operating profit margins, which should help keep earnings chugging higher.
In the meantime, investors will be watching the balance between price increases and sales growth over the holiday season and into early 2020. If Ralph Lauren can maintain its margin gains without sacrificing market share, that's a good sign that management is on the right track and that its plan to elevate the brand into more premium niches is working.
