On Feb 6, 2015, Zacks Investment Research downgraded Ralph Lauren Corporation (RL), designer, marketer and distributor of lifestyle products, to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Ralph Lauren reported lower-than-expected top and bottom line results for the third quarter of fiscal 2015 on Feb 4, despite performing well in the trailing four quarters. Market sentiments for the stock have been weak since, as evident from a 20.3% drop in the company’s share price.
Quarterly earnings per share of $2.41 missed the Zacks Consensus Estimate of $2.52 and decreased 6.2% from the year-ago quarter figure of $2.57. The under-performance can be traced back to lower operating income and a higher effective tax rate.
Moreover, net revenue of $2,033 million fell short of the Zacks Consensus Estimate of $2,107 million by 3.5%. Further, on a constant currency basis, consolidated comparable-store sales (comps) at the retail division dipped 2%.
Based on dismal third-quarter results and the ongoing negative impact of foreign currency translations, the company has skewed its fiscal 2015 guidance. Ralph Lauren lowered its constant dollar outlook for fiscal 2015. The company now expects revenue growth of about 4% against 5–7% growth anticipated earlier. Further, the company expects operating margin for fiscal 2015 to fall 170–190 bps from fiscal 2014.
For the fourth quarter of fiscal 2015, the company expects net revenue to grow at a mid single-digit rate, on a constant currency basis. This includes a 550 bps negative impact from currency translations. The company also expects operating margin to contract in the range of 250–300 bps from the year-ago level.
Lackluster results have made investors dubious about Ralph Lauren’s performance in the years ahead. This is evident from the downward movement noticed in the Zacks Consensus Estimate that fell 7.1% to $7.88 for fiscal 2015 and 20.0% to $7.66 for fiscal 2016 in the past 7 days.
Other Stocks to Consider
Better-ranked stocks in the same industry include Gildan Activewear Inc. (GIL), sporting a Zacks Rank #1 (Strong Buy), Crocs, Inc. (CROX) and Lululemon Athletica Inc. (LULU), both carrying a Zacks Rank #2 (Buy).
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