RL: Q1 Quick Take

 

RL posted blowout Q1 results of $1.90 vs. Street estimates of $1.44 with strong results across every segment. While we didn’t expect RL to come up short of expectations two quarters in a row, they came in significantly better than expected. RL’s visit to the ‘danger zone’ of our SIGMA was brief with both axis improving as inventories came in up 42% on 32% sales growth and operating margin expanded by 330bps. Given Q1 results, the company’s improved full-year outlook appears conservative, which is no surprise given last quarter’s miss. Estimates are headed higher and so too is the stock. We’ll have more detail on our adjusted numbers and view after the call.  

 

Here are a few key takeaways from the quarter:

 

1)      Wholesale Revs: Up 29% reflects a sharp reacceleration in sales on both a 1Yr and 2Yr basis even when backing out the $30mm shift of holiday sales into the quarter, which accounted for 6% growth. The company cited strength across all categories with domestic accessories the key highlight.

2)      Wholesale Profitability: Several factors severely impacted wholesale profitability last quarter including cost of goods inflation, lower Japanese wholesale shipments, and continued investment in new merchandise categories, but ongoing cost inflation and uncertainty over deferred pricing was mitigated by higher volumes. The company isn’t out of the clear yet with variability expected to continue depending on consumer reaction to new pricing in the fall, but certainly a solid indication that margins aren’t deteriorating further.

3)      SG&A Spending: Despite higher investment spending, the company levered SG&A by over 200bps suggesting some cushion in margins for the balance of the year.

4)      Guidance:

  1. Q2: No major surprises here. The company is coming in slightly more conservative on margin (down 300bps) vs. the Street down ~160bps, we are at -190bps, but the leverage in this model is clear and it looks like management is being conservative on the top-line.
  2. FY: Company took revs up in-line with beat, but the change in operating margin guidance (increased 50bps to down 50-100bps from down 150-100bps) was not commensurate with the Q1 beat which improved full year profitability by 75bps. While this implies the company is taking a more conservative stance on the back half, this too appears to be conservative. Management’s guidance implies EPS of $6.15-$6.85, the Street was at $6.32 – numbers are headed higher.

 RL: Q1 Quick Take - RL S 8 11

 

Casey Flavin

Director


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