Ralph Lauren Corp.RL is on a winning streak with its shares displaying notable momentum in the last six months backed by a solid earnings surprise trend, robust growth strategies and a favorable outlook. Further, the premium lifestyle retailer's long term earnings growth rate of 8.8% and a VGM Score of A, highlight its inherent strength.
Notably, the stock has improved 34.6% in the past six months, outperforming the industry 's growth of 16%. Moreover, it has surged 7.3% in the past month owing to the robust earnings results and outlook. That said, let's find out the reasons behind the upsurge in the stock price.
Robust Earnings Trend
As mentioned earlier, Ralph Lauren's robust earnings trend is one of the key reasons for the stock momentum. The company flaunts a solid earnings history, with positive earnings surprises delivered in 11 straight quarters. Notably, second-quarter fiscal 2018 marked its 10th consecutive earnings beat. Further, the bottom line grew year over year and gross profit margin continued to expand - thanks to favorable geographic and channel mix shifts along with lower promotions and reduced product costs.
Ralph Lauren Corporation Price, Consensus and EPS Surprise
Currency Tailwinds to Drive Future Results
While foreign currency has long been a headwind for Ralph Lauren and most other retailers, favorable currency rates in the second quarter of fiscal 2018 benefited results. Foreign currency tailwinds contributed 40 basis points (bps) to revenue growth, 10 bps to gross margin expansion and 30 bps to operating margin growth in the second quarter. Following the strong quarter, the company provided outlook for the third quarter and adjusted guidance for fiscal 2018 to account for the recent positive movements in foreign currency rates.
The company expects foreign currency to benefit revenue growth by nearly 160-170 bps and operating margin by 10-20 bps in the third quarter. Furthermore, it now estimates foreign currency to aid revenue growth by nearly 80 bps in fiscal 2018, against the previous guidance of minimal negative impact. Moreover, foreign currency is now anticipated to have a minimum effect on operating margin, compared with 40-50 bps negative impact predicted earlier.
Way Forward Plan to Aid Growth
Ralph Lauren remains on track to deliver goals under its Way Forward Plan that was announced in Jun 2016. Divided in two parts, the first part focuses on evolving the company's core business in relation to product, marketing and customer experience. The second part centers around reviving operating structure by developing a systematic way of building stronger assortments, a demand-driven supply chain, an excellent sourcing capability and a multi-channel global expansion strategy. In short, the plan is all about refocusing on the core, strengthening the brands and returning the company to profitable growth in the long term. The company is also focused on lowering inventories to keep it on par with demand.
Key Initiatives - Digital and International Expansion
As part of key initiatives, Ralph Lauren remains keen on bolstering digital and international presence. On the International front, the company envisions immense growth potential in Asia, particularly in China. In the past two years, the company has elevated the brand in Asia and built strong business foundation by enhancing the quality of sales and profitability. With only 13% of its business in Asia, the company is currently underpenetrated in the region and anticipates numerous growth opportunities ahead.
Going forward, the company expects Mainland China to be a major contributor of growth in Asia due to lower penetration and strong brand awareness in the region. Moreover, the company is continually expanding both online and physical presence in China, while also focusing on marketing and distribution. In the second quarter, the company successfully launched T-mall and JD.com, and with commerce on WeChat. Complementing these digital portals, the company has also opened 15 smaller format stores year-to-date in Mainland China.
By the end of fiscal 2018, the company plans to have a total of 60 stores in Mainland China. Moreover, including Hong Kong, Macau and Taiwan, the company targets generating nearly $0.5 billion of revenues for Greater China in the next five years compared with about $170 million generated by the region in fiscal 2017.
While all is well with this Zacks Rank #3 (Hold) company, its North America business continues to suffer. Revenues at the North America segment slumped 16% in the second quarter owing to lower retail and wholesale sales. Lower sales in these channels can be attributed to distribution and brand exits; planned reduction in shipments and promotions to enhance the quality of sales; and lower customer demand. On a currency-neutral basis, comparable store sales at this division tumbled 9%. This included a drop of 6% in stores and 18% plunge in e-commerce sales, which were hampered by the planned reduction in promotional activities and fall in traffic.
Looking for Some Trending Picks? Look at These
Better-ranked stocks in the same industry include PVH Corp. PVH , Guess?, Inc. GES and Lululemon Athletica, Inc. LULU , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
PVH has a long-term EPS growth rate of 13%. Further, the stock has returned 48.6% year to date.
Guess? has grown 34.4% year to date. Moreover, it has a long-term earnings growth rate of 17.5%.
Lululemon has improved 28.6% in the last three months. Further, the company has a long-term EPS growth rate of 12.4%.
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