RL: Duration Setup Into 2Q

 

Conclusion: RL won't make you rich at $155, but if you own it for the 'uber-premium brand & company that can consistently crank out 20%+ organic annual cash flow growth over 3-yrs' factor, then look no further. 

 

TRADE (3-weeks or less):

After posting its first earnings miss in nearly 4-years two quarters ago, the company posted blowout numbers in Q1 and we expect another beat Wednesday albeit with more modest upside.

  • As good as wholesale results were last quarter retail sales and profitability was even more impressive and we expect retail performance to be the key driver of both top and bottom-line results again in Q2. 
  • We expect retail sales to account for +10-11% of RL's consolidated top-line growth driven primarily by the incremental contribution of Korea (+3%) as well as new store growth of +4% in addition to existing comps up +4% with the remaining ~7% from wholesale. 
  • While there is some question over how much of Q1 wholesale demand was buy-in ahead of price increases versus stronger underlying trends given ~$30mm of sales pulled forward adding +2.5% to total revenue growth (we expect some was pre-bought), we think there is less variability here relative to basic categories (a la HBI). In addition, we think concerns over demand out of Asia has been tempered in light of Hermes’ results last week reflecting robust results out of the region (+32%). Furthermore, RL's business in Asia has so many asymmetric factors that should allow it to grow despite the current climate. 

The key difference between our numbers and the Street for Q2 is that we are slightly lighter on revenues (by ~2%), but are assuming better margins as the company implemented select price increases intra-quarter. Keep in mind that RL is going with more of a hi-low strategy, where it is taking up prices on the mid-high end to more than offset sharper (and in certain cases lower) prices at the low end.

 

TREND (3-months or more):

There are a lot of moving parts here over the intermediate-term between calendar shifts, new store/e-commerce contributions and the addition of the Korean business, but the full-year trajectory looks decidedly positive. 

 

With new categories and regions coming on during the quarter from the launch of e-commerce in France and Germany, to the company’s new Denim & Supply line in August and bedding and bath businesses, we are shaking out at over 19% revenue growth for the year. 

 

In addition, we expect Q2 margin results to prove management’s guidance conservative as the company began taking price in the quarter. We expect the company will eat some portion of the cost increases, but also expect little to no acceleration in promotionally activity given considerably more favorable inventory compares over the coming quarters. Take a look at the SIGMA. We expect further improvement in the sales/inventory spread after four straight quarters of being negative.

 

TAIL (3-years or less):

No change to our view here. We think that RL has $10 in earnings power in 3 years as RL grows from being a $15bn global brand, to better than $20bn now that RL has complete control of its geographic, distribution, and product licenses. It's actually a rather boring story -- but boring is good in this tape for a mid (bordering on large) cap premium brand that can consistently grow its top line double digit and leverage it to 20% growth in cash flow. 

 

 

RL: Duration Setup Into 2Q - RL SIGMA 11 7 11

 

RL: Duration Setup Into 2Q - RL Sentiment 11 7 11

 

 

 


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more