We’re taking RL off our Long Bias List. Heading into the quarter it sat dead last on our list – and we had it on reluctantly (we think the TAIL call is terrible) simply due to the upside in the model over the near term. While RL beat this quarter handily, the fact is that it came entirely from the margin side. Revenue looked bearish in almost every business line and geography, and missed our model by a wide margin. We’re rarely off by that much on the top line for any company. This was far more than a supply chain issue -- there's something bigger at play here.
Perhaps the biggest point of proof for that was its revenue going from -4% growth vs FY2020 (March) in Q1 to -12% growth in Q2. Looking at the components, digital sales in the company's own channel slowed from 50% growth YY in Q1 to 35% growth YY in Q2, Wholesale revenue slowed from -3.8% vs FY2020 in Q1 to -17.4% vs FY2020 in Q2, North America Revenue slowed from -8% vs FY2020 to -20% vs FY2020, and Asia revenue slowed from 11% growth vs FY2020 to 6% growth vs 2020. The one semi-bright spot was Europe, where sales accelerated vs 2020 from -1.6% to 3.2%, which makes sense from a macro perspective as Europe continues its reopening cadence.
There’s still earnings upside left in the model for this year – but its coming from two areas that are not sustainable – namely Gross Margin (which is up for everyone due to the full price selling environment – which mean-reverts in 2022) and lower SG&A (a pullback in which will hardly drive further drive incremental brand heat). Longer term we think Ralph Lauren has a brand relevance problem, and think that the company has to step up its marketing and branding materially to attract a younger customer – which means either margin pressure due to higher spending, or continued weakness in the top line. To be fair here, we have the company coming in at $8.90 for the year, and we think that the Street lands somewhere around $7.75. So the stock is not yet a short. But EPS upside is likely to come again in the December and March quarter from the margin side, which we simply don’t think is worth paying for, because it’s not sustainable. The earnings gap between our model and consensus likely closes after year-end, which we’ll gladly short if the stock is still at or above ~$120.
