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What: Shares of Ralph Lauren Corporation (NYSE:RL) were down nearly 16% by noon on Wednesday after the company reported disappointing earnings for its fiscal third quarter and guided for slower revenue growth for the full year.
So what: A strong dollar hurt Ralph Lauren's results. While the company reported year-over-year revenue growth of just 1%, revenue would have grown by 3% adjusting for currency. Sales from the wholesale channel declined slightly, while a small jump in retail sales more than made up for it.
Net income came in at $215 million, or $2.41 per diluted share, compared to $237 million and $2.57 per diluted share in the same period last year. Net income and diluted EPS fell by 9% and 6%, respectively. Analysts were expecting EPS of $2.50 for the quarter.
Gross margin declined year-over-year by 1.2 percentage points, with operating margin suffering a 1.1-percentage-point decline. The retail channel performed particularly poorly, with retail operating margin falling by 2.6 percentage points year-over-year.
While Ralph Lauren boosted its quarterly dividend by 11%, the guidance for the full fiscal year was disappointing. Currency is expected to continue to have a major impact on results, but even adjusted for currency the 4% expected revenue growth is lower than the company's previous expectation of 5%-7% revenue growth. Operating margin is also expected to contract by 1.7-1.9 percentage points compared to last year.
Now what: After years of robust growth, Ralph Lauren is slowing down. Both gross margin and operating margin peaked in fiscal 2013 after rising over the past decade, in part due to increasing investments being made by the company. During the third quarter, capital expenditures rose by 53% year-over-year to $124 million. A slowdown in luxury spending in China isn't helping, either. During 2014, luxury spending in China fell by 1%, according to consulting firm Bain. Combined with currency issues, earnings may continue to be pressured going forward.
Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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