Head­winds Ahead?

The com­pany said it ex­pects higher costs ahead, due to tar­iffs, for­eign ex­change and freight in­fla­tion.

WWD Digital Daily - - Front Page - BY VICKI M. YOUNG

Ralph Lau­ren Corp. bested es­ti­mates, but its shares fell over wor­ries of

higher costs ahead.

While the sec­ond-quar­ter earn­ings re­sults at Ralph Lau­ren Corp. re­flected early progress in the com­pany’s “Next Great Chap­ter” strate­gic plan, in­vestors were con­cerned about higher costs and gross mar­gin de­clines in the months ahead.

On Tues­day, the com­pany re­ported ad­justed earn­ings per di­luted share of

$2.26, which beat Wall Street’s con­sen­sus es­ti­mate of $2.16. Rev­enues rose 1.6 per­cent to $1.69 bil­lion, also beat­ing Wall Street’s es­ti­mate of $1.65 bil­lion. De­spite the beat, in­vestors on Tues­day sent shares of Ralph Lau­ren down 6.6 per­cent to close at $127.79 in Big Board trad­ing.

Wells Fargo an­a­lyst Ike Boru­chow noted that the EBIT beat of “+3 per­cent” was the small­est one in three years, and “com­pares to the 12-to-24-month av­er­age of +10 per­cent.”

The con­cern of in­vestors cen­tered on a moder­a­tion of the com­pany’s gross mar­gin ex­pan­sion. Gross mar­gin ex­panded 100 ba­sis points in the quar­ter ended Sept. 29. Jane Nielsen, chief fi­nan­cial of­fi­cer, said on the com­pany’s con­fer­ence call to an­a­lysts that the com­pany ex­pects to ex­pand its gross mar­gin by 75 ba­sis points for the full year. The ex­pan­sion has been boosted by re­duc­ing pro­mo­tions to get av­er­age unit re­tails up, as well as ben­e­fits from both the ge­o­graphic and chan­nel mixes, all of which Nielsen are ex­pected to con­tinue for the full year.

Nielsen also noted that the com­pany has been call­ing out for some months the dy­namic shift it is now see­ing. She ex­plained: “Where we’re see­ing a switch is re­ally that prod­uct cost, which was a slight head­wind in the quar­ter, ac­tu­ally be­comes a head­wind through Q3 and Q4 and is about 30 to 40 ba­sis points of pres­sure by the time we exit the year in the fourth quar­ter. You’ll re­call last year that was a tail­wind of about 80 ba­sis points. So that’s where the dy­namic is shift­ing.”

The cfo also said those pres­sures in­clude tar­iff is­sues from ex­ist­ing leg­is­la­tion and some freight and in­put costs in­fla­tion “that we’re see­ing.” Fur­ther, for­eign ex­change was a tail­wind in the first quar­ter of about 10 ba­sis points and in the sec­ond quar­ter was about 40 ba­sis points, but has moved into a head­wind in the sec­ond half, the cfo ex­plained. De­spite those pres­sures, Nielsen said, “We’re re­ally pleased that we con­tinue to ex­pect gross mar­gin ex­pan­sion. And we’re hold­ing to our guid­ance on gross mar­gin ex­pan­sion.”

For fis­cal year 2019 guid­ance, the com­pany ex­pects net rev­enues to be flat to up slightly in con­stant cur­rency. For­eign cur­rency was pro­jected to have 75 ba­sis points of neg­a­tive im­pact on rev­enue growth for the fis­cal year.

For the third quar­ter, the com­pany guided net rev­enue to be up low sin­gle dig­its in con­stant cur­rency, with for­eign cur­rency fore­cast to pres­sure rev­enue growth by 100 ba­sis points in the pe­riod.

Wells Fargo’s Boru­chow said that with sales and mar­gin guid­ance es­sen­tially un­changed for the sec­ond half, that leaves “some in­vestors ques­tion­ing if the up­ward re­vi­sion mo­men­tum is fi­nally stalling.” He has a “mar­ket per­form” rat­ing on shares of Ralph Lau­ren.

The com­pany in the com­pleted quar­ter cel­e­brated its 50th an­niver­sary fash­ion show in New York City’s Cen­tral Park, which, through its mar­ket­ing ef­forts on so­cial, also helped to at­tract new, younger con­sumers to the brand.

Ralph Lau­ren, ex­ec­u­tive chair­man and chief cre­ative of­fi­cer, said that the 50th an­niver­sary cel­e­bra­tion “cap­tured how our brand and the World of Ralph Lau­ren resonates across gen­er­a­tions, cul­tures and be­yond fash­ion. This is the story, not just of our past, but the one that in­spires and builds our fu­ture.”

Dur­ing the call, Patrice Lou­vet, pres­i­dent and chief ex­ec­u­tive of­fi­cer, said the com­pany’s sec­ond-quar­ter re­sults were driven by dou­ble-digit, top-line growth in Asia and se­quen­tial progress in North Amer­ica and Europe. Overseas, the com­pany saw an 0.8 per­cent dip in Eu­ro­pean sales to $459.2 mil­lion, while it posted a 12.9 per­cent gain in Asian sales to $244.7 mil­lion. North Amer­i­can sales were up 1.4 per­cent, with whole­sale rev­enue flat to last year and re­tail hav­ing its first pos­i­tive com­pa­ra­ble-store sales gain — 1 per­cent — in over three years on a con­stant cur­rency ba­sis. Comps re­flect a 1 per­cent de­cline in brick-and-mor­tar stores and a 9 per­cent in­crease at the com­pany’s web site due in large part to the new plat­form for its North Amer­i­can dig­i­tal flag­ship.

Lou­vet said the com­pany’s long-term plan is based on three guid­ing prin­ci­ples: “Put the con­sumer at the cen­ter of ev­ery­thing we do. El­e­vate and en­er­gize our brands. And bal­ance growth and pro­duc­tiv­ity.”

He said the an­niver­sary show in Septem­ber dur­ing New York Fash­ion Week drove “record lev­els of en­gage­ment around the world, across dig­i­tal and so­cial me­dia. We had more than 3 bil­lion so­cial me­dia im­pres­sions and over 100 mil­lion global views of the show on­line. Im­por­tantly, search vol­ume for the brand in­creased high sin­gle dig­its ver­sus the same pe­riod last year based on Google an­a­lyt­ics.”

Lou­vet said the com­pany con­tin­ues to en­er­gize core prod­ucts and ac­cel­er­ate un­der-de­vel­oped cat­e­gories. New part­ner­ships in­clude a lim­ited- edi­tion cap­sule with Mr Porter, a men’s on­line re­tailer, last month. Avail­able on

Fri­day will be a cap­sule col­lec­tion of men’s wear pieces with Lon­don-based streetwear brand Palace. The cap­sule will be avail­able through the com­pany’s re­cently launched Polo app, on its new dig­i­tal flag­ship in Europe and across Palace’s re­tail net­work. The ceo also said the com­pany just made avail­able its first wear-to-work of­fer­ing in its women’s Polo brand in se­lect, di­rectly op­er­ated re­tail doors and at the com­pany’s web site.

The com­pany’s global dig­i­tal busi­ness saw rev­enue grow 10 per­cent to last year. In China, the com­pany launched its di­rectly op­er­ated dig­i­tal site, which is the ex­clu­sive on­line des­ti­na­tion for its lux­ury la­bels. The pre­mium ex­pe­ri­ence on the site in­cludes free on­line and in-store re­turns, same-day de­liv­ery in Shang­hai, live chat cus­tomer ser­vice and in­te­gra­tion with WeChat.

Overseas, the com­pany opened 25 stores in Asia, with 10 in China. The open­ings were in key city clus­ters that in­clude Bei­jing, Taipei, Shang­hai and Hong Kong. The com­pany also opened two full-priced stores in Europe, one in Lon­don and the other in Manch­ester.

Ralph Lau­ren at his spring show dur­ing New York Fash­ion Week.

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