You can’t blame Ralph Lauren (RL 0.41%) for doing his best when he announced that the results for the second quarter fiscal 2023 were better than expected. That may be true, but the quarter was far from excellent. Here are some key issues to watch, including a weak US market, which could cause investors to view the stock negatively going forward.
Better, but not good?
Upscale retailer Ralph Lauren reported adjusted earnings per share of $2.23 for the fiscal second quarter, on revenue growth of about 5%. He hailed that as better than expected, which is good, but adjusted earnings per share fell from $2.62 in the same fiscal quarter of 2022. So there are some headwinds here that need to be discussed.
Image source: Getty Images.
For example, cost of goods sold increased nearly 14% year over year. Meanwhile, selling, general and administrative expenses increased by 7%. These two figures eclipse the 5% increase in sales on the first line of the income statement. This is one of the main reasons earnings were lower, with rising inflation being a factor in both measures. It’s not really Ralph Lauren’s fault, of course, but the company still has to deal with those headwinds.
Trying to offset the effect of lower net profit, the company repurchased shares. This is something the peers have done too. Ralph Lauren’s share count ended the second quarter of the fiscal year at 69 million, down from 75.3 million at the same time in fiscal 2022. That actually makes the company’s earnings per share decline a more troubling concern. Indeed, without the share buybacks, the company’s results could have been worse than expected.
Looking forward
The company’s financial results in the United States add to the concerns. This geographic region recorded sales of $727 million during the quarter, significantly more than Europe ($494 million) or Asia ($316 million). Ralph Lauren’s domestic operations are therefore very important to monitor. Overall sales were up 3% which isn’t great but not really bad either. However, beneath that number, there was a worrying trend.
The company’s sales to third parties increased by 8%. However, sales in its own stores were flat year over year and digital sales were down 1%. This contrasts sharply with its other geographic breakdowns, with Europe and Asia seeing sales gains of 15% and 33%, in constant currency. This points to solid demand outside the United States, although sales in physical stores in Europe also remained stable.
The big takeaway here is that Ralph Lauren’s big US business is a relative weak spot for investors to keep an eye on today. The risk is that weak domestic sales could be a harbinger of impending weakness in the rest of the company’s geographies. Share buybacks and headlines attesting to “better than expected” results may be masking the potential negative.
It wouldn’t be such a concern if the world weren’t dealing with sharply rising interest rates, high inflation, a strong dollar and geopolitical tensions. There is a risk of recession in the United States and, frankly, in the rest of the world. And with retailers falling short of expectations today and often being treated very negatively on Wall Street, the risks here seem particularly high in an industry driven by consumer fashion trends. It’s not uncommon for desirable brands to fall out of favor, even temporarily, because of a fashion faux pas.
Maybe wait
Ralph Lauren is not a bad company, but Wall Street today is in a sensitive situation. High-end retailers are generally expected to hold up well in the face of economic uncertainty, as wealthy customers can generally continue to spend even in tough times. But the relative weak performance of the company’s US operations could end up being a burden it cannot easily overcome.
And failing to meet expectations could lead to a rapid and negative reaction from investors. It’s probably best to err on the side of caution right now, keeping an eye on US affairs before making too big of a commitment here.
You can’t blame Ralph Lauren (RL 0.41%) for doing his best when he announced that the results for the second quarter fiscal 2023 were better than expected. That may be true, but the quarter was far from excellent. Here are some key issues to watch, including a weak US market, which could cause investors to view the stock negatively going forward.
Better, but not good?
Upscale retailer Ralph Lauren reported adjusted earnings per share of $2.23 for the fiscal second quarter, on revenue growth of about 5%. He hailed that as better than expected, which is good, but adjusted earnings per share fell from $2.62 in the same fiscal quarter of 2022. So there are some headwinds here that need to be discussed.
Image source: Getty Images.
For example, cost of goods sold increased nearly 14% year over year. Meanwhile, selling, general and administrative expenses increased by 7%. These two figures eclipse the 5% increase in sales on the first line of the income statement. This is one of the main reasons earnings were lower, with rising inflation being a factor in both measures. It’s not really Ralph Lauren’s fault, of course, but the company still has to deal with those headwinds.
Trying to offset the effect of lower net profit, the company repurchased shares. This is something the peers have done too. Ralph Lauren’s share count ended the second quarter of the fiscal year at 69 million, down from 75.3 million at the same time in fiscal 2022. That actually makes the company’s earnings per share decline a more troubling concern. Indeed, without the share buybacks, the company’s results could have been worse than expected.
Looking forward
The company’s financial results in the United States add to the concerns. This geographic region recorded sales of $727 million during the quarter, significantly more than Europe ($494 million) or Asia ($316 million). Ralph Lauren’s domestic operations are therefore very important to monitor. Overall sales were up 3% which isn’t great but not really bad either. However, beneath that number, there was a worrying trend.
The company’s sales to third parties increased by 8%. However, sales in its own stores were flat year over year and digital sales were down 1%. This contrasts sharply with its other geographic breakdowns, with Europe and Asia seeing sales gains of 15% and 33%, in constant currency. This points to solid demand outside the United States, although sales in physical stores in Europe also remained stable.
The big takeaway here is that Ralph Lauren’s big US business is a relative weak spot for investors to keep an eye on today. The risk is that weak domestic sales could be a harbinger of impending weakness in the rest of the company’s geographies. Share buybacks and headlines attesting to “better than expected” results may be masking the potential negative.
It wouldn’t be such a concern if the world weren’t dealing with sharply rising interest rates, high inflation, a strong dollar and geopolitical tensions. There is a risk of recession in the United States and, frankly, in the rest of the world. And with retailers falling short of expectations today and often being treated very negatively on Wall Street, the risks here seem particularly high in an industry driven by consumer fashion trends. It’s not uncommon for desirable brands to fall out of favor, even temporarily, because of a fashion faux pas.
Maybe wait
Ralph Lauren is not a bad company, but Wall Street today is in a sensitive situation. High-end retailers are generally expected to hold up well in the face of economic uncertainty, as wealthy customers can generally continue to spend even in tough times. But the relative weak performance of the company’s US operations could end up being a burden it cannot easily overcome.
And failing to meet expectations could lead to a rapid and negative reaction from investors. It’s probably best to err on the side of caution right now, keeping an eye on US affairs before making too big of a commitment here.
