Ralph Lauren's Key Plans Bode Well Despite Coronavirus Scare

Zacks Equity Research

Ralph Lauren Corp. RL has been on the growth trajectory, backed by stringent cost discipline and continued investment in brand elevation and other strategic endeavors including “Next Great Chapter”, which have been aiding quarterly results. Additionally, strength in international and digital businesses has been a key driver.
    
These factors have collectively contributed to solid share price trend in the past six months. The company has gained 39.8%, significantly outpacing the industry’s growth of 13%. Furthermore, the stock has surpassed the Consumer Discretionary sector’s growth of 11.9% and the S&P 500 Index’s rally of 16.2%.



Factors Favoring the Stock

Ralph Lauren is well on track with its “Next Great Chapter” plan announced in June 2018, which focuses on delivering sustainable long-term growth and value creation. The company expects to execute this growth plan through five strategic priorities including winning over a new generation of customers; energizing core products and accelerating under developed categories; driving targeted expansion in its regions and channels; leading with digital and operating with discipline to fuel growth.

As part of its growth-boosting efforts, the company remains keen on bolstering international presence by continually expanding in underpenetrated markets. In the past two years, it elevated the brand in Asia, particularly in China, and built a strong business foundation by enhancing the quality of sales and profitability. Overall, the company’s international business was strong in third-quarter fiscal 2020 with constant currency revenue growth of 5% and 5.4% in Europe and Asia, respectively.

Expansion of digital platforms is another key aspect of Ralph Lauren’s growth strategy. The company developed a winning digital ecosystem including directly-operated flagship sites, wholesale digital, pure plays and social commerce. In third-quarter fiscal 2020, constant-currency digital revenues improved in double-digits, backed by solid growth across all regions. Notably, digital comps in North America improved in high-single digits with double-digit growth registered in Europe and Asia.

The company is adding new digital partners across all regions to expand its footprint. These partnerships coupled with sturdy brand-building efforts and higher quality of sales are likely to drive growth at the company’s digital business, particularly in the international regions.

Headwinds in the Story

Though the aforementioned factors make us optimistic about the stock’s potential, there are some hurdles in its path. The most prominent concern is the impact of soft wholesale business and lower digital sales to international shoppers in North America. Moreover, concerns about the outbreak of coronavirus in China may pose a threat.

Despite overall gains, Ralph Lauren’s North America business is grappling with persistent softness in wholesale sales. Additionally, the North America segment’s top line was affected by continued headwinds from reduced sales to international shoppers on its U.S. site due to currency woes and import restrictions in Asia.

The company is on track to improve customer experience in the wholesale business by implementing store refreshes, enhanced marketing strategies and expansion in the underpenetrated categories. However, these efforts will take time to reflect on the results of the segment’s wholesale business. Moreover, management expects weak digital sales to international shoppers to remain a headwind through the rest of fiscal 2020. Clearly, soft wholesale business and lower digital sales to international shoppers are likely to affect the North America business in the near term.

Additionally, the company expects the current situation in China, Japan and Korea due to the coronavirus outbreak to hurt its fourth-quarter fiscal 2020 net sales by $55-$70 million and operating income by $35-$45 million in Asia. Also, it anticipates global orders for the fiscal fourth quarter to be impacted by supply chain disruptions in China.

Conclusion

The near-term picture for the company’s growth track may appear bleak on the concerns arising in China. However, analysts expect the aforesaid impacts on Asia operations to marginally hurt the company’s overall results as it is still under exposed in China, which accounts for only 4% of its total business. Moreover, this Zacks Rank #1 (Strong Buy) player’s strategies bode well.

3 More Consumer Discretionary Stocks to Watch

Guess Inc. GES has an expected long-term earnings growth rate of 17.5% and a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

G-III Apparel Group, LTD. GIII is Zacks #1 Ranked and has an expected long-term earnings growth rate of 11.4%.

lululemon athletic inc. LULU has an impressive long-term earnings growth rate of 18.9% and a Zacks Rank #2 (Buy).

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