Better than decent quarter for RL. While the 16 cent sandbag/beat is typical for RL, the company gave a glimmer of hope that pushing through higher AURs through price and mix could actually drive a point or two in top line growth in 3Q and 4Q. The growth algorithm here is very CPG-ish, with 0.9% top line growth, 2% gross profit, 7.8% EBIT (flat SG&A), and 12.6% EPS growth due to share repo. To say the brand is dead would be an unfair and oversimplified statement. But the reality is that the only way this name will get a real multiple is if it shows real top line growth – and I don’t mean 1-2% -- I mean mid to high single digits. That’s a pipe dream for RL. The brand has lost too much relevance and faces too high a hurdle with its wholesale distribution base (US Wholesale was down 6% this quarter and pressured margins). From a modeling perspective, the company sangbagged 2H by about $0.25 per share based on our math. This name is on my short bench, so I’ll be looking to get involved short side as it beats 2H. Does that mean it’s a long? For a TRADE perhaps. But I’m not going there. Again, fashion businesses that put up packaged goods algorithms don’t work over a sustained duration, and RL management is taking a victory lap over getting back to 2% top line growth in 2H and putting up 2% NA digital growth in the quarter – not nearly enough for me. I want to see this company meaningfully up its SG&A and capex to invest in the brand – that’s something that would get me more excited about making a bigger call on this name long-side. And while marketing spend is up in 3Q, the company is too focused on a capital-light business model to reaccelerate growth to a rate worth paying for. Until it shows it can grow, or will take down estimates (and potentially increase leverage) to invest for growth, 13-14x pe and 7-8x EBITDA is about right. This is one I want to short on strength.
North America
- North America comped up 2% both in e-commerce and brick and mortar stores.
- My concern with the comp is digital comping up only 2%. It did improve sequentially from flat despite a 11% points more difficult comparison, but the comparison will be 12% points more difficult in Q3.
- Wholesale’s 6% decline in the Q was behind the 100bps contraction in the region’s operating margins. That gets to our largest concern that wholesale’s secular decline in North America will pressure margins that the company can not make up in the retail channel while e-commerce demand is anemic.
- Contrast that to Nike which we have on our best idea list where e-commerce growth is robust and margin accretive.
Asia
- Hong Kong protests led to 48 days of store closure and an unquantified drop in traffic. Hong Kong’s sales declines negatively impacted the Asia region comps by 3%. The impact was similar at Capri.
- Mainland China sales were up more than 20% offsetting Hong Kong and total China revenue was up modestly, but decelerated from nearly 30% sequentially.
- US goods sourced from China have decreased from 40% to 22% by year end.
Europe
- AUR saw a strong 6% increase in DTC on top of an 8% increase last year. AUR also accelerated sequentially from +2% in Q1 against a 9% comparison in the previous year.
- Wholesale accelerated from 5% in Q1 to 7% in Q2. Ralph Lauren has opened new wholesale brick & mortar and digital accounts driving that growth.
- Digital comps should decelerate in the 2H (esp. in Q4) as the company anniversaries the re-platforming of the website.
