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After Beating Earnings, Will Ralph Lauren Maintain Its Momentum?

By Pearl Wang - Updated Feb 10, 2020 at 8:26AM

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Shares rose after a strong earnings report, but how much risk do the coronavirus outbreak and the declining wholesale business present?

Ralph Lauren's (RL 2.48%) third-quarter earnings report came in ahead of consensus analyst estimates. Investors rewarded the strong comparable-store sales results, helped by the company's branding efforts, and shares jumped over 9% following the release.

Management also affirmed its outlook for fiscal year 2020, though the company chose not to include any potential impact from the coronavirus outbreak, which is affecting businesses all over China.

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Image source: Ralph Lauren.

What drove results?

Ralph Lauren reported third-quarter adjusted (non-GAAP) earnings of $2.86, an increase of 23% year over year.  Third-quarter revenue came in at $1.75 billion, topping previous guidance and analysts' estimates. For fiscal 2020, Ralph Lauren is guiding to net revenue growth of 2% to 3%.

Outerwear and fleece outperformed during the holiday season for the luxury fashion company. Woven shirts, sweaters, and denim also enjoyed strong demand. The company cited improved product mix toward categories with higher pricing, such as outerwear.

Ralph Lauren increased its marketing spending 16% during the quarter, and the company noted strong consumer receptivity to its holiday shopping filter for Snapchat and its newly created global digital game, The Holiday Run.

That comes on top of the success the company is having with higher selling prices, as the fashion retailer has been able to work in price increases, an improved product mix, and reduced discounts to expand its AUR (average unit retail). CEO Patrice Louvet elaborated during the company's earnings call, "We are focused on elevating our brand positioning in the North American market and globally as part of our AUR-led strategy."

Strategic store openings are another piece of the company's growth strategy. During the fiscal third quarter, Ralph Lauren opened 48 new stores (37 of them in Asia) and closed 31 locations. The company sees opportunity for "significant expansion" in Europe, as it currently has only 46 full-price stores across the continent.

Wholesale and other headwinds

Wholesale was a weak spot for Ralph Lauren, with the North American wholesale business down 6% during the third quarter. The company is "working on improving the consumer experience in the wholesale channel through in-store refreshes, expansion into underpenetrated categories, and increased marketing," according to COO and CFO Jane Nielsen.

And as the coronavirus makes headlines, Ralph Lauren has closed about half of its 110 stores in China due to health concerns in the region. The company is focused on the Chinese market as a long-term opportunity, but sales in that country remain small. Louvet clarified that "China represents less than 4% of the total company business."

However, there could also be risk from supply chain disruption in the region. While Ralph Lauren has worked to diversify its supply chain over the past two years, the company must be flexible and adapt to the situation as employees in its factories return to work after the extended Lunar New Year holiday.

Overall, Ralph Lauren delivered an impressive quarter and appears to be executing well on its strategies to expand sales and profitability thanks to strong branding, improved product mix, and pricing power.

Pearl Wang 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.

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