Definitely some flashes of optimism in these RL numbers – most notable is that RL’s perennially shrinking digital business actually grew by 10%, and the US in total was up a whopping percent. Biggest plus is that Asia looked solid with a 14% top line, though Europe whiffed. But what bugged me about the tone of the call is how management seemed so complacent and borderline victorious in putting up a sub 2% top line growth rate, while guiding to flat for the year, and sitting at a negative 13% Sales/Inventory spread. I don’t understand how this name trades at 19x earnings (even after today’s sell off), while companies like TPR – which have a better brand portfolio in a fundamentally better business with more predictable growth – are trading at 14x earnings. The only reason I don’t have RL on my Best Ideas Short list is because it just lowballed the upcoming quarter on a ‘less bad’ revenue number – and retail shorts don’t work BIG when the top line is accelerating on the margin. But it’s hardly a slam dunk to model top line in the 3-5% range (mgmt LT guidance), which alone is not enough to build to an investable earnings algorithm. I think the upcoming quarter’s estimates are low by $0.20 – so a miss is not likely in the cards – and I’m not going to make a valuation short (those don’t work). But if I’m Captain long-only looking for a multi-year story, I’d avoid this one like the plague. I still think that management’s strategy is turning this company into the next Abercrombie. You can’t manage a fashion business for margin. Need to manage it for brand heat and share-gaining top line growth. RL ain’t going that route…and both the quarter and the guide prove it. Buy TPR or PVH instead. Or don’t. But whatever the case please don’t buy RL.
