You can't blame Ralph Lauren (RL -3.55%) for putting its best foot forward when it reported that fiscal second-quarter 2023 earnings were better than expected. While that's perhaps true, the quarter was far from great. Here are some key issues to watch, including a soft U.S. market, that could lead investors to take a negative view of the stock in the future.

Better, but not good?

High-end retailer Ralph Lauren reported fiscal Q2 adjusted earnings per share of $2.23 on revenue growth of roughly 5%. It hailed this as better than expected, which is fine, but adjusted earnings per share fell from $2.62 in the same fiscal quarter of 2022. So there are headwinds here that have to be discussed.

Two people with bags looking in a store window.

Image source: Getty Images.

For example, cost of goods sold rose nearly 14% year over year. Meanwhile selling, general, and administrative costs rose 7%. Both of these figures dwarf the 5% sales increase on the top line of the income statement. That's a key reason why earnings were lower, with rising inflation a factor in both metrics. That's not really Ralph Lauren's fault, of course, but the company still has to deal with these headwinds.

Trying to offset the effect of lower net income, the company has been buying back shares. That's something that peers have been doing as well. Ralph Lauren's share count ended fiscal Q2 at 69 million, down from 75.3 million at the same point in fiscal 2022. This actually makes the company's earnings per share drop a more troubling concern. Indeed, without the share repurchases, the company's results might have been worse than expected.

Looking forward

Adding to the concerns here are the company's U.S. financial results. This geographic region had sales of $727 million in the quarter, much more than Europe ($494 million) or Asia ($316 million). So Ralph Lauren's domestic operations are very important to monitor. Overall sales were up 3%, which isn't great but isn't exactly bad, either. However, underneath that number there was a worrying trend.

The company's sales to third parties were up 8%. However, sales in its own stores were flat year over year and digital sales were down 1%. That was in stark contrast to its other geographic breakouts, with Europe and Asia seeing sales gains of 15% and 33%, in constant currency. That hints at solid demand outside the United States, though sales in brick-and-mortar stores in Europe were flat, as well.

The big takeaway here is that Ralph Lauren's large U.S. business is a relative weak spot that investors need to keep tabs on today. The risk is that weak domestic sales could be a harbinger of pending weakness in the rest of the company's geographies. Stock buybacks and headlines attesting to "better than expected" results are possibly papering over the potential negative.

It wouldn't be such a concern if the world weren't facing sharply rising interest rates, high inflation, a strong dollar, and geopolitical tensions. There is a risk of a recession in the United States and, frankly, in the rest of the world. And with retailers falling short of expectations today often being treated very negatively on Wall Street, the risks here seem particularly high in an industry driven by consumer fashion trends. It is not uncommon for desirable brands to fall out of favor, even if temporarily, because of a fashion misstep.

Maybe wait

Ralph Lauren isn't a bad company, but Wall Street is in a sensitive place today. High-end retailers are generally expected to hold up well in the face of economic uncertainty, since wealthy customers can usually keep spending even in tough times. But the weak relative performance of the company's U.S. business could end up being a burden it can't easily overcome.

And falling short of expectations could lead to a swift and negative reaction by investors. It is probably best to err on the side of caution right now, keeping tabs on the U.S. business before making too large a commitment here.