you can’t blame ralph lauren (RL 0.41%) It put its best foot forward when it reported better-than-expected earnings for the second quarter of fiscal 2023. While that may be true, the quarter was far from ideal. Here are some key issues to watch, including a weak U.S. market, which could lead investors to take a negative view on the stock going forward.
Better, but not good?
High-end retailer Ralph Lauren reported adjusted earnings per share of $2.23 in the fiscal second quarter, with revenue up about 5%. It hailed that as a better-than-expected forecast, which was fine, but adjusted earnings per share were down from $2.62 in the same fiscal quarter in 2022. So there are some downsides to discuss here.
Cost of sales, for example, rose nearly 14% year-over-year. Meanwhile, selling, general and administrative costs rose 7%. Both figures dwarf the 5% sales growth on the top line of the income statement. That’s a key reason earnings are lower, while rising inflation is a factor in both metrics. Of course, this isn’t Ralph Lauren’s fault, but the company still has to deal with these headwinds.
To offset lower net income, the company has been buying back shares. This is what colleagues have been doing. Ralph Lauren’s share count ended the fiscal second quarter with 69 million shares, down from 75.3 million shares in the same period in fiscal 2022. That actually makes the company’s falling EPS a bigger concern. In fact, without share repurchases, the company’s performance could be worse than expected.
looking to the future
Even more worrisome is the company’s financial performance in the United States. Sales in the geographic region were $727 million for the quarter, well ahead of Europe ($494 million) or Asia ($316 million). Therefore, the monitoring of Ralph Lauren’s domestic business is very important. Overall sales were up 3%, which isn’t great, but it’s not terrible either. Beneath this figure, however, there is a worrying trend.
Company sales to third parties rose 8%. However, sales at its own stores were flat year-over-year, and digital sales fell 1%. This was in stark contrast to breakouts elsewhere, with sales in Europe and Asia up 15% and 33% respectively (at constant exchange rates). That hinted at strong demand outside the U.S., though sales at brick-and-mortar stores in Europe were also flat.
The important point is that Ralph Lauren’s massive U.S. presence is a relative weak spot that investors need to keep a close eye on today. The risk is that weaker domestic sales could signal weakness elsewhere in the company. Share buybacks and headlines demonstrating “better-than-expected” results may have masked potential negative impacts.
It wouldn’t be so worrisome if the world wasn’t facing sharply rising interest rates, high inflation, a strong dollar and geopolitical tensions. There is a risk of a recession in the U.S. and, frankly, the rest of the world. The stakes here seem especially high in an industry driven by consumer fashion trends these days, as retailers often get a very negative reception on Wall Street as they fail to meet expectations. It’s not uncommon for aspirational brands to fall out of favor because of fashion missteps, even temporarily.
Ralph Lauren isn’t a bad company, but Wall Street is in a sensitive position these days. High-end retailers are widely expected to hold up well in the face of economic uncertainty, as wealthy customers typically keep spending even in tough times. But the relatively weak performance of the company’s U.S. business could end up being a burden it can’t easily overcome.
Falling short of expectations could lead to a swift negative reaction from investors. It’s best to err on the side of caution now, keeping a close eye on US operations before committing too much.