Ralph Lauren Earnings: Solid Start to Fiscal Year Despite Tough North America Market

Ralph Lauren RL overcame challenged consumer spending on apparel in North America to beat our sales and EPS estimates in its (June-ended) fiscal 2024 first quarter. Although the near-term outlook for the North America market remains dim, the firm held to its full-year guidance for low-single-digit sales growth and an adjusted operating margin of about 12%. As our estimates align with this outlook, we do not expect to make any material change to our $131 fair value estimate and view Ralph Lauren’s shares as fully valued.

Ralph Lauren’s quarterly North America sales (42% of total) fell 10%, missing our estimate of a 7% drop. While the firm had previously guided to a decline due to wholesale timing shifts, demand for lower-priced merchandise in outlets and at wholesale was weak. However, total sales edged up less than 1% against our forecast for a 1% decline. The firm achieved sales growth of 8% and 13% in Europe (30% of total) and Asia (25%), respectively, against our 1% and 8% estimates. The strong European result was partly due to order timing, but we think underlying demand is solid. Meanwhile, Asia sales benefited from the reopening in China (sales up more than 50%), the key growth market for global luxury. As Ralph Lauren builds out its store and online distribution in both regions, we model long-term sales growth of about 3%-4% and 7% for Europe and Asia, respectively, over the next decade.

Ralph Lauren’s adjusted gross and operating margins of 68.8% and 13.4%, respectively, beat our estimates by 80 and 110 basis points. The firm shifted some marketing expenses to the second quarter, which will probably depress its operating margin in the period. The company intends to spend about 7% of its sales on marketing this year, which we consider worthwhile in supporting its brand, the source of our narrow-moat rating. Indeed, aided by its marketing as well as its merchandising and distribution efforts, the company’s average unit retail is up 15% over the past year.