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.
